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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, 2001.
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 May
24, 2001 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 May 24, 2001, registrant had outstanding 11,578,568 shares of
Common Stock exclusive of treasury 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 2001 Annual Meeting of
Stockholders.
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SPECTRIAN CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED MARCH 31, 2001
Page
PART I
Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 15
Item 3. Legal Proceedings................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......... 17
Item 6. Selected Consolidated Financial Data.............................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 37
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......................................................................................... 44
2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, including the information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All of the statements contained in this Annual Report on Form 10-K, other
than statements of historical fact, should be considered forward looking
statements, including, but not limited to, those regarding the expansion of the
market for wireless communications; the growth of new digital PCS networks; the
new opportunities created by the attempt of traditional mobile communications
systems providers to provide high Internet access speeds; the demand for
amplifier hardware; the Company's pursuit of new opportunities with single
carrier designs; the potential for wireless communications in countries without
reliable or extensive wireline systems; the future use of wireless systems by
multicarrier power amplifiers; the Company's expectation to incur future pricing
pressures from its customers; the Company's expectation of the importance of
international sales; the Company's pricing commitments to OEM customers to
achieve manufacturing cost reductions; customers' demanding specifications for
the Company's products and the Company's devotion of resources to research and
development programs. There can be no assurance that these expectations will
prove to have been correct. Certain important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
this Annual Report on Form 10-K, including, without limitation, in the section
entitled "Factors Affecting Future Operating Results" in Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operation and this
section. All subsequent written and oral forward looking statements by or
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
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.
General
Spectrian Corporation ("Spectrian" or "the Company") designs,
manufacturers and markets high-power radio frequency ("RF") amplifiers 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" and "CDMA2000"), Personal Communications System ("PCS"),
Global System for Mobil Communications ("GSM"), Wireless Local Loop ("WLL"),
Universal Mobile Telephone Service ("UMTS"), 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.
On December 29, 2000, the Company completed the sale of substantially
all of the assets and external liabilities comprising its semiconductor
division, UltraRF, to Cree Inc. ("Cree") pursuant to the Asset Purchase
Agreement dated as of November 20, 2000 (the "Asset Purchase Agreement") among
Cree, Zoltar Acquisition, Inc. ("Zoltar") and the Company for 1,815,402 shares
of common stock of Cree plus common stock with a guaranteed realizable value of
$30 million, less $1,141,000 owed by the Company to Cree due to a change in the
net assets of UltraRF between October 1, 2000 and December 29, 2000. As part of
the definitive agreement, the Company and Cree entered into a two-year supply
agreement under which Spectrian is obligated to purchase from Cree an aggregate
of $58 million
3
of semiconductors. UltraRF operated its own wafer fabrication facility that
utilized bipolar and laterally diffused metal oxide semiconductor ("LDMOS")
technologies to produce high-power, high-performance RF power semiconductors for
use in the design and manufacture of second and third generation wireless
infrastructure equipment.
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
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. 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 modulation formats 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
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. 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' 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
4
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.
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. Spectrian
has been involved in initial deployments of early wireless Internet systems such
as CDMA2000 or 1xRTT systems in Korea, wireless local loop systems, and field
trials of 1xEV-DO systems. Initial consumer acceptance of wireless Internet
services in Japan has indicated a growing demand for wireless data equipment.
The growth of infrastructure equipment purchases is, however, impacted
by the industry's focus on price reductions. Cellular Telecommunications
Industry Association ("CTIA") indicates that minutes of use has increased by 31%
in the United States during 2000; however, 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. Therefore the demand for amplifier
hardware is growing rapidly but the power amplifier market experiences severe
price pressures.
The Spectrian Solution
Spectrian 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
Company's amplifiers provide significant advantages to its customers, including:
High Linearity and Efficiency. The Company has developed the multiple
technological competencies and disciplines required to achieve high linearity
and efficiency 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 Company's power amplifiers enables its customers to furnish
wireless 3G services with high capacity base station equipment at low capital
cost per subscriber. In addition, Spectrian believes that the high efficiency of
the Company's power amplifiers reduce its customers' operating costs.
Time to Market and Volume Manufacturing. The Company's design processes
aid it in addressing wireless infrastructure equipment suppliers' quantity and
time to market requirements for power amplification products. The Company
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 Company's experience with automated testing, which
is faster than manual testing with replicable results, enables the Company 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.
5
Standards Independence. The Company's technologies support every major
wireless modulation standard, and its multicarrier power amplifiers support
several standards simultaneously, including 3G modulation standards. Certain of
the Company's single carrier products support both analog and digital standards
in a dual mode format. The Company believes that this breadth of product
functionality is important to wireless service providers as they upgrade their
cellular infrastructure equipment and implement digital systems in an
environment characterized by evolving industry standards and new spectrum
allocation.
Quality and Reliability. The Company strives to design its power
amplifiers to be reliable in the field. The Company'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 Company has implemented a continuous process
improvement program throughout its operations and the Company is ISO 9001
certified.
Multicarrier Functionality. The Company 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 Company 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, high efficiency
multicarrier units can reduce service providers' equipment and maintenance costs
and space requirements, thereby lowering the total costs of ownership.
Spectrian Strategy
The Company's objectives in fiscal 2001 were to focus on growing
multicarrier power amplifier sales, to diversify its customer base, and to
maintain the Company's position in single-carrier power amplifier markets.
Focus on growing multicarrier power amplifier sales. With a new suite
of multicarrier power amplifiers, the Company 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. Spectrian increased
multicarrier amplifier sales from $32.2 million in fiscal 2000 to $58.7 million
in fiscal 2001.
Diversify the customer base. In fiscal 2001, the Company diversified
its customer base by adding new network operators in North and South America and
OEM customers, such as Samsung.
Maintain its market position in single carrier power amplifiers. In
fiscal 2001, the Company maintained its market position in single carrier power
amplifiers through volume manufacturing with outsource partners while making
minimal redesigns for cost reductions. Generally, the single carrier market is
declining, but from time to time, the Company will pursue new opportunities with
single carrier designs if the return on investment is competitive with
multicarrier or broadband opportunities.
Outsource power amplifier manufacturing. From fiscal 1999 through the
third quarter of fiscal 2001, the Company transferred the manufacturing of its
power amplifiers to a contract manufacturer in Thailand. This transition allowed
the Company to lower overhead spending through a reduction in fixed costs and
labor rates while maintaining its manufacturing and quality standards.
Markets
Wireless systems have historically employed analog transmission
formats, certain of which have been adopted as industry standards. The need to
accommodate a growing wireless customer base within a finite amount of spectrum
has, however, encouraged a worldwide transition from analog standards to various
digital technologies which are significantly more efficient. Current analog
standards include
6
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").
The following chart illustrates these existing and developing standards
for wireless communications, and the shaded areas represent markets and/or
regions served and standards supported by the Company's current product
offerings.
- --------------------------------------------------------------------------------------------------------------------
Major Wireless Standards by Region (frequencies in MHZ)
- --------------------------------------------------------------------------------------------------------------------
Americas Europe Asia Pacific Japan
(MHZ) (MHZ) (MHZ) (MHZ)
- --------------------- -------------------------- ------------------- ------------------------- ---------------------
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) EDGE CDMA 2000 (800, 1900) JDC (800)
GSM (800) GSM (900) CDMA (800)
EDGE EDGE HDR
TDMA (450, 800)
- --------------------- -------------------------- ------------------- ------------------------- ---------------------
PCS CDMA (1900) GSM (1800) CDMA(1900)&(1800) PHS (1900)
CDMA 2000 (800, 1900) EDGE CDMA 2000 (800, 1900)
TDMA (1900) GSM (1800)
GSM (1900) EDGE
EDGE
- --------------------- -------------------------- ------------------- ------------------------- ---------------------
Wideband CDMA (800) UMTS (2.1 GHz) IMT-2000 (2.1 GHz) IMT-2000 (2.1 GHz)
3G & WCDMA CDMA (1900) Korean WLL (2.4 GHz)
WCS (2.3 GHz)
- --------------------- -------------------------- ------------------- ------------------------- ---------------------
The Company 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 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
The Company designs highly linear power amplifiers that address the
specific requirements of its OEM customers and the market in general. The
Company'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
Company currently provides in its single carrier amplifiers:
7
- -----------------------------------------------------------------------------------------------------
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 17,25
GSM 1900 1930-1990 30
CDMA 1805-1870 25
- -------------------------------------------------------------- ------------------ -------------------
WCS:
32-QAM 2305-2360 63
- -------------------------------------------------------------- ------------------ -------------------
WLL:
Wideband CDMA 2370-2400 10,20,40
- -------------------------------------------------------------- ------------------ -------------------
While many existing wireless systems use single carrier power
amplifiers, the Company believes that more wireless systems will use
multicarrier power amplifiers in the future. To meet this potential market
trend, the Company also offers multicarrier amplification products. The
following table provides a list of the standards for multicarrier amplifiers
offered by the Company:
- -----------------------------------------------------------------------------------------------------
Spectrian Multicarrier Amplifier Configurations
- -----------------------------------------------------------------------------------------------------
Standard Frequency Power Typical
(MHZ) (Watts) Linearity
(dBc)*
- --------------------------------------------------- --------------- ------------- -------------------
AMPS
TDMA
CDMA
CDPD 869-894 60-500 -60
CDMA 2000/1xEV
- --------------------------------------------------- --------------- ------------- -------------------
CDMA 1805-1990 30-60 -55
TDMA
CDMA 2000/1xEV
- --------------------------------------------------- --------------- ------------- -------------------
CDMA 1930-1990 30-80 -60
TDMA
CDMA2000/1xEV
GSM/EDGE
- --------------------------------------------------- --------------- ------------- -------------------
IMT-2000/UMTS 2110-2170 30-60 -60
- --------------------------------------------------- --------------- ------------- -------------------
<FN>
*Carrier to Intermodulation Distortion Ratio.
</FN>
The Company's amplifiers can be configured as either separate plug-in
amplifier units or integrated subsystems and range in price from approximately
$500 to $100,000. 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
Company's products are integrated into base station systems designed and/or
manufactured by its OEM customers, and therefore must be engineered to be
compatible with industry standards, as well as customer specifications including
frequency, power and linearity.
8
OEM and Network Operator Customers, Sales and Marketing
Network operators obtain their equipment from a concentrated group of
large wireless infrastructure OEMs. The Company believes that Lucent
Technologies, Inc. ("Lucent"), Ericsson Wireless Communications, Inc.
("Ericsson"), Motorola Corporation ("Motorola"), LG Information and
Communications Limited ("LGIC"), Siemens AG ("Siemens"), Samsung Electronics
Co., Ltd. ("Samsung"), Nortel Networks Corporation ("Nortel"), and Nokia OY
("Nokia") supplied over 80% of the wireless infrastructure equipment installed
worldwide in 2000 according to Allied Business Intelligence. 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.
The Company sells power amplifiers to a limited number of OEMs in North
America, Europe and Asia principally through its direct sales organization.
Other current customers include worldwide operators of wireless networks such as
AT&T Wireless Services ("AT&T Wireless"), Cingular Wireless ("Cingular"), a
joint venture between the wireless divisions of SBC Communications Inc. and
BellSouth Corporation, and Verizon Communications ("Verizon"). 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.
During the year ended March 31, 2001 ("fiscal 2001"), Nortel, Verizon and
Samsung accounted for approximately 59%, 18%, and 13% of net revenues,
respectively. 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.
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 customer 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 affects the Company's ability to efficiently manage production schedules
and inventory levels and to accurately forecast product sales. There can be no
assurance that the Company will not experience such fluctuations in the future.
If the Company is unable to find customers to generate demand for its new
products, the Company's revenues may be materially adversely affected. If the
Company were to lose Nortel, Verizon, Samsung or any other major customer, or if
orders by Nortel, Verizon, Samsung or any other major 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. The market for the Company's products is becoming increasingly
competitive. The Company is selling its power amplifier products in South Korea,
as well as directly to cellular service providers where its competitors are
already established as suppliers. In addition, the Company competes with at
least one merchant amplifier manufacturer for business from Nortel. This
competition has resulted in, and will continue to result in reduced average
selling prices for the Company's products, which accordingly will negatively
impact gross margins. 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."
9
Sales and Marketing
The Company employs a customer focused, team based direct sales
approach to satisfy the power amplification needs of its customers. Sales to
large OEM customers require close account management by Company personnel and
relationships at multiple levels of its customers' organizations, including
management, engineering and purchasing personnel. In addition, the Company's
application specific amplification products require experienced sales personnel
to match the customer's amplification requirements to the Company's product
capabilities. The Company believes that close technical collaboration with the
customer during the design phase of new wireless infrastructure equipment is
critical to the integration of its amplification products into the new
equipment. This allows the Company'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 Company began
to sell multicarrier amplifier systems (including filters and combiners)
directly to service providers in fiscal 1997. The Company recognizes that these
sales may be in conflict with potential or current OEM sales and is willing to
work with its OEM equipment suppliers so that the service provider receives a
Spectrian power amplifier system directly or through the OEM. There can be no
assurance that the Company's direct sales to service providers will not cause
its OEM equipment suppliers to reduce orders or terminate their relationship
with the Company. Any such reduction or termination could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also markets its products with the assistance of
independent sales representatives in various parts of the world. The Company has
one independent sales representative in the United States; four sales
representatives in Europe covering Austria, Finland, France, Germany, Italy,
Sweden and Switzerland; six sales representatives in South America covering
Argentina, Brazil, Colombia, Chile, Venezuela; one sales representative
dedicated to each of Canada, Japan, Israel and China and a sales support
organization in South Korea. The Company continuously evaluates whether to
establish direct sales forces or to utilize independent representatives in a
particular region or for a given potential customer depending upon the scope of
potential sales opportunities. The Company's direct sales staff provides sales
direction and support to its international sales representatives. Sales outside
of the United States represented 78%, 87% and 84% of net revenues in fiscal
2001, fiscal 2000, and fiscal 1999, respectively. Sales outside of the United
States are denominated in U.S. dollars in order to reduce the risks associated
with the fluctuations of foreign currency exchange rates. The Company expects
that international sales will continue to account for a significant portion of
its revenues.
Manufacturing
In Sunnyvale, California, the Company services its power amplifier
products. In September 2000, the Company completed the transfer of its power
amplifier production to a contract manufacturer located in Thailand on a turnkey
basis. 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.
Demands of its customers drive the Company to frequently introduce and
rapidly expand volume of the manufacture of new products. This has caused the
Company to experience high materials and manufacturing costs, including high
scrap and material waste, significant material obsolescence, labor
inefficiencies and overtime expenses, inefficient material procurement and an
inability to realize economies of scale. These high manufacturing costs and
production interruptions have had an adverse effect on the Company's results of
operations. In addition, the Company has made and expects to continue to make
pricing commitments to OEM customers in anticipation of achieving manufacturing
cost reductions.
10
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. Products as complex as those offered by the
Company often encounter development delays and may contain undetected defects or
failures when first introduced or after commencement of commercial shipments.
The Company has from time to time in the past experienced product quality,
performance or reliability problems. In addition, multicarrier power amplifiers
have a higher probability of malfunction than single carrier power amplifiers
because of their greater complexity. See "MD&A - Factors Affecting Future
Operating Results - Product Quality, Performance and Reliability."
Amplifier Assembly and Test. During fiscal 2000, the Company completed
the transfer of the production of power amplifiers to a contract manufacturer in
Thailand. Regardless of whether the Company assembles an amplifier in house or
relies on a turnkey contractor, each of the Company's products receives
extensive in process and final quality inspections and tests. The Company
attempts to utilize standard parts and components that are available from
multiple vendors. However, certain components used in the Company's products are
currently available only from single sources, and other components are available
from only a limited number of sources. Despite the risks associated with
purchasing components from single sources or from a limited number of sources,
the Company has made the strategic decision to select single source or limited
source suppliers in order to obtain lower pricing, receive more timely delivery
and maintain quality control. After the sale of UltraRF to Cree in December
2000, the Company no longer manufactures LDMOS RF semiconductors, which are one
critical component in the Company's power amplifier products. As part of the
Asset Purchase Agreement, the Company and Cree entered into a two-year supply
agreement under which the Company is obligated to purchase from Cree an
aggregate of $58 million of semiconductors. Consequently, Cree is the Company's
sole source vendor of certain bipolar and LDMOS RF power semiconductors. If the
Company were unable to obtain sufficient quantities of components, delays or
reductions in product shipments could occur which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "MD&A - Factors Affecting Future Operations - Sole or Limited Sources of
Materials and Services."
Research and Development
The Company's research and development organization designs high
performance low cost, highly manufacturable power amplifiers. The Company'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 Company uses an automated design environment to model
amplifiers. This design environment, together with the Company's modular product
architecture and configurable core technologies, allow it to rapidly define,
develop and deliver on a timely basis the new and enhanced products demanded by
its OEM customers.
The Company historically has devoted a significant portion of its
resources to research and development programs and expects to continue to do so.
The Company's research and development expenses were $20,762,000, $22,488,000
and $26,735,000 for fiscal 2001, 2000 and 1999, respectively.
Competition
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, Fujitsu, Mitsubishi, NEC Corporation and Powerwave
Technologies. Certain of these competitors have, and potential future
competitors could have, substantially greater technical, financial, marketing,
distribution and other resources than the Company and have, or could have,
greater name recognition and market acceptance of their products and
technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features compared to the
Company's products. To the extent that OEMs increase their reliance on external
sources for their power amplification needs, more competitors could be
11
attracted to the market. The Company expects its competitors to offer new and
existing products at prices necessary to gain or retain market share. The
Company has experienced significant price competition, which has in the past
affected gross margins. Certain of the Company's competitors have substantial
financial resources which may enable them to withstand sustained price
competition or downturns in the power amplification market. There can be no
assurance that the Company will not be subject to increased price competition or
that the Company will be able to compete successfully in the future. See "MD&A -
Factors Affecting Future Operating Results - Internal Amplifier Design and
Production Capabilities of OEMs" and "Market for the Company's Products is
Highly Competitive."
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 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 a 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. See "MD&A - Factors Affecting Future Operating
Results - Internal Amplifier Design and Production Capabilities of OEMs" and
"Market for the Company's Products is Highly Competitive."
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 23 United States patents
and no foreign patents, has 2 United States patents and 1 foreign patent that
have been allowed and has 9 United States patent and 21 foreign patent
applications pending. The data presented excludes 20 United States patents and 4
foreign patents that were awarded to the Company and assigned to Cree at the
time of the sale of UltraRF, to which the Company has been granted a
royalty-free license. The Company generally enters into confidentiality and
nondisclosure agreements with its employees, suppliers, OEM customers, and
potential customers and limits access to and distribution of its proprietary
technology. However, there can be no assurance that such measures will provide
adequate protection for the Company's trade secrets or other proprietary
information, or that the Company's trade secrets or proprietary technology will
not otherwise become known or be independently developed by competitors. The
failure of the Company to protect its proprietary technology could have a
12
material adverse effect on its business, financial condition and results of
operations. See "MD&A - Factors Affecting Future Operating Results - 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, to indemnify its customers, to cease the
manufacture, use and sale of infringing products, to expend significant
resources to develop noninfringing technology, to discontinue the use of certain
processes or to obtain licenses to the infringing technology. See "MD&A -
Factors Affecting Future Operating Results - 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 Affecting Future Operating Results - Risk of Third
Party Claims of Infringement
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, 2001, the Company had a total of 318 employees. The
Company's future success will depend, in part, on its ability to continue to
attract, retain and motivate highly qualified technical and management
personnel. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company experienced any work stoppage. The
Company considers its relations with its employees to be good.
13
Executive Officers of the Registrant
The executive officers of the Company are and certain information about
them as of May 15, 2001 is as follows:
Name Age Position
---- --- --------
Thomas H. Waechter................ 48 President, Chief Executive Officer and Director
Garrett A. Garrettson............. 57 Chairman of the Board of Directors
Michael D. Angel.................. 45 Executive Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
Warren Dumanski................... 37 Vice President, Sales
Tim Jones......................... 46 Vice President, Human Resources
Joseph Madden..................... 34 Vice President, Marketing
Christopher A. Menicou............ 42 Vice President, Operations
Harry Oh.......................... 44 Vice President and General Manager, Asia Pacific
David S. Piazza................... 37 Vice President, Development
Mr. Waechter joined the Company in March 2000 as its President and
Chief Executive Officer, and as a Director. From January 2000 until he joined
the Company, Mr. Waechter was employed by Asyst Technologies, Inc., a company
that provides mini-environment and manufacturing automation systems, as its
Senior Vice President of Global Business Operations. From September 1986 until
January 2000, Mr. Waechter was employed by Schlumberger Ltd., a company
providing oilfield services, natural resource management, smart card-based
technology and associated systems, and semiconductor test equipment, 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. Garrettson joined the Company in April 1996 and is currently its
Chairman of the Board of Directors. From April 1996 to March 2000, Mr.
Garrettson served as President, Chief Executive Officer and a Director of the
Company. From March 1993 until he joined the Company, Mr. Garrettson was
President and Chief Executive Officer of Censtor Corporation, a company that
designs and sells technology related to magnetic recording heads for the disk
drive industry. Mr. Garrettson has also held various executive management
positions with Control Data Corporation, a computer system company, from
November 1986 to October 1989, and then with Seagate Technology Inc., a company
that designs and manufactures disk drives, from October 1989 to March 1993. From
October 1973 to November 1986, Mr. Garrettson also held various engineering
management positions with Hewlett Packard Laboratories, a division of Hewlett
Packard Company, a company providing computing and imaging products. Mr.
Garrettson also serves on the boards of directors of the San Jose Symphony and
HealthHelper Corporation. Mr. Garrettson holds a B.S. and an M.S. in Engineering
Physics and a Ph.D. in Mechanical Engineering from Stanford University.
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, a company that designs and manufactures semiconductor
products, in various management positions, most recently as its Director of
Finance of Worldwide Manufacturing and Central Technology Operations. Mr. Angel
has also held various positions with Hitachi Data Systems, a manufacturer of
mainframe computers, storage systems, open systems hardware and software, and
PricewaterhouseCoopers LLP, an accounting and professional consulting firm. Mr.
Angel holds a B.S. degree in Business Administration with a concentration in
Accounting from California State University, Chico.
14
Mr. Dumanski joined the Company in September 1997 and is currently its
Vice President, Sales. From September 1991 until he joined Spectrian, Mr.
Dumanski was employed by Nortel Networks, a global supplier of networking
solutions and services, in various management positions, most recently as its
Accounting Manager responsible for Sprint PCS account. Mr. Dumanski holds a
Bachelors of Science degree in Engineering from University of Waterloo in Canada
and a M.B.A. from McMaster University in Canada.
Mr. Jones joined the Company in April 2001 as its Vice President, Human
Resources. From December 1999 until he joined Spectrian, Mr. Jones was employed
by GN Resound, Inc., a manufacturer of high-technology hearing instruments, as
its Senior Vice President of Global Human Resources. Mr. Jones has also held
various positions with TriStrata Corporation, a company that develops internet
security technology, from February to August 1999 and with Forte/Sun
Microsystems, a provider of computer systems, high speed microprocessors and
high performance software, from August 1997 to February 1999. Mr. Jones holds a
Bachelors degree in Psychology from Baldwin-Wallace College and a Masters of
Science degree from Iowa State University.
Mr. Madden joined the Company in June 1997 and is currently its Vice
President, Marketing. From May 1992 until he joined Spectrian, Mr. Madden was
employed by Superconductor Technologies, Inc., a manufacturer of high
performance filters for the mobile wireless telecommunications industry, in
various management positions, most recently as its Director of Product
Management. Mr. Madden holds a Bachelors degree in Physics from University of
California, Los Angeles.
Mr. Menicou joined the Company in January 1998 and is currently its
Vice President, Operations. Prior to the current position, Mr. Menicou was Vice
President, Quality of the Company. From February 1997 until he joined Spectrian,
Mr. Menicou was employed by Credence Systems Corporation, a company that designs
and manufactures equipment for testing semiconductor integrated circuits, as
Vice President of Quality. Mr. Menicou has also held Quality and Operations
Management positions with LTX Corporation, a company that designs and
manufactures test equipment for the semiconductor industry. Mr. Menicou holds a
Bachelors of Science degree in Business Management from San Jose State
University.
Mr. Oh joined the Company in May 2000 as its Vice President and General
Manager, Asia Pacific. From April 1996 to May 2000, Mr. Oh was the Company's
senior advisor for Far East Sales and Executive Managing Director in Asia
Pacific with a consultant status. From February 1989 until he joined Spectrian,
Mr. Oh was self-employed as President of Capitalend Corporation. Mr. Oh holds a
Bachelors of Science degree in Industrial & System Engineering from University
of Southern California.
Mr. Piazza joined the Company in February 1990 and is currently its
Vice President, Development. Mr. Piazza has held various positions since joining
the Company including General Manager, Semiconductor Division and Vice
President, Semiconductor Research and Development. Mr. Piazza holds a Bachelors
of Science degree in Electrical Engineering from University of California,
Davis.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering and repair
facilities are located in one building of approximately 91,400 square feet in
Sunnyvale, California. In connection with the sale of UltraRF in December 2000,
the Company subleased another building of approximately 49,600 in Sunnyvale,
California, to Cree for a term of 11 years (with three options to extend the
lease an additional five years) under the substantially the same terms and
conditions as the Company's lease. In November 1996, the Company entered into
several agreements in connection with a transaction with respect to these two
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
15
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 third quarter of fiscal 2001, the Company signed an
agreement to lease a facility of approximately 13,400 square feet in Folsom,
California, commencing in the first quarter of fiscal 2002 and terminating in
April 2008. This facility will be used for research and development functions.
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)
from May 2000 and this lease expires in April 2002.
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. The Company leases
approximately 21,500 square feet of a facility on a month-to-month basis in
Seoul, South Korea for administrative, development, manufacturing and repair
functions for the Asia Pacific region.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
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, 2001 High Low
---- ---
Fourth Quarter $24.750 $12.031
Third Quarter $19.563 $11.688
Second Quarter $20.250 $12.813
First Quarter $22.500 $13.438
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
The reported last sale price of the Company's Common Stock on the
Nasdaq National Market on May 24, 2001 was $19.17. The approximate number of
holders of record of the shares of the Company's Common Stock was 212 as of May
24, 2001. 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 6,000 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.
17
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended March 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
NET Revenues ................................. $ 179,752 $ 163,567 $ 99,331 $ 168,798 $ 88,252
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues ........................... 145,055 129,998 96,880 132,684 65,322
Research and development ................... 20,762 22,488 26,735 18,644 17,230
Selling, general and administrative ........ 21,602 19,337 16,315 13,014 9,299
Restructuring (1) .......................... (100) 1,032 -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses ................ 187,319 172,855 139,930 164,342 91,851
--------- --------- --------- --------- ---------
Operating income (loss) ...................... (7,567) (9,288) (40,599) 4,456 (3,599)
Interest income .............................. 2,850 3,344 4,540 4,045 210
Interest expense ............................. (162) (473) (853) (710) (602)
Other income, net ............................ 18,371 624 -- 1,530 --
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............ 13,492 (5,793) (36,912) 9,321 (3,991)
Income taxes ................................. 12 30 59 399 --
--------- --------- --------- --------- ---------
Net income (loss) ............................ $ 13,480 $ (5,823) $ (36,971) $ 8,922 $ (3,991)
========= ========= ========= ========= =========
Net income (loss) per share:(2)
Basic .................................... $ 1.21 $ (0.56) $ (3.50) $ 0.90 $ (0.49)
========= ========= ========= ========= =========
Diluted .................................. $ 1.19 $ (0.56) $ (3.50) $ 0.83 $ (0.49)
========= ========= ========= ========= =========
Shares used in computing per share amounts:(2)
Basic .................................... 11,113 10,426 10,568 9,881 8,150
========= ========= ========= ========= =========
Diluted .................................. 11,343 10,426 10,568 10,701 8,150
========= ========= ========= ========= =========
March 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital .......................... $104,936 $ 79,400 $ 72,399 $117,478 $ 24,062
Total assets ............................. 188,023 131,275 128,412 175,051 66,633
Debt and capital lease obligations, net of
current portion(3) ....................... -- 1,351 4,899 5,912 7,057
Total stockholders' equity ............... $ 98,502 $ 98,985 $ 95,968 $144,342 $ 42,466
<FN>
(1) See Note 13 of Notes to Consolidated Financial Statements herein for details
of the restructuring.
(2) See Note 10 of Notes to Consolidated Financial Statements herein for
information concerning the per share computations.
(3) See Note 6 of Notes to Consolidated Financial Statements herein for a
description of the Company's debt and lease obligations.
</FN>
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in the following discussion 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, but are not limited to: the statements in
the second paragraph of "Overview" regarding the recognition in the future of
gains on the sale of UltraRF and the effect of the sale of UltraRF on the
Company's semiconductor cost, in the third paragraph regarding the impact on the
Company of a loss of a major OEM customer, in the fourth paragraph regarding
international sales as a percentage of future revenues and the impact of
currency fluctuations on future revenues, and in the last paragraph regarding
average selling prices and gross margins; the statements in the second paragraph
under "Results of Operations - Cost of Revenues" regarding the gross margin as a
percentage of net revenues; the statements under "Results of Operations -
Research and Development" regarding new product development initiatives; the
statements in the second paragraph under "Liquidity and Capital Resources"
concerning renewal of a line of credit and the statements in the last paragraph
regarding the availability of the line of credit, the anticipated spending for
capital additions for the next twelve months, the sufficiency of the Company's
available resources to meet cash requirements and the factors which will
determine the Company's future cash requirements; and the statements in "Factors
Affecting Future Operating Results." Results could differ materially based on
various factors including, but not limited to, those described below, under the
heading "Factors Affecting Future Operating Results" and elsewhere in this
Annual Report on Form 10-K. Among such factors, those which could cause results
to differ materially in the case of the above-referenced forward-looking
statements include, but are not limited to: the risks of international sales;
fluctuations in operating results; customer concentration; the highly
competitive market for the Company's products; declining average sales prices;
rapid technological change, evolving industry standards, and dependence on new
products; and product quality, performance and reliability.
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.
Overview
Spectrian designs, manufacturers and markets high-power RF amplifiers,
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, IMT-2000, CDMA2000 and UMTS. 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.
On December 29, 2000, the Company completed the sale of substantially
all of the assets and external liabilities comprising its semiconductor
division, UltraRF, to Cree pursuant to the Asset Purchase Agreement dated as of
November 20, 2000 (the "Asset Purchase Agreement") among Cree, Zoltar
Acquisition, Inc. ("Zoltar") and the Company for 1,815,402 shares of common
stock of Cree plus common stock with a guaranteed realizable value of $30
million, less $1,141,000 owed by the Company to Cree due
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to a change in the net assets of UltraRF between October 1, 2000 and December
29, 2000. As part of the definitive agreement, the Company and Cree entered into
a two-year supply agreement under which Spectrian is obligated to purchase from
Cree an aggregate of $58 million of semiconductors. In the event Spectrian fails
to make these purchases, it is obligated to purchase excess inventory that it
may never utilize or to pay Cree the amount of the shortfall. Accordingly,
Spectrian deferred $58 million of the gain on sale of UltraRF and is recognizing
it in periods as the related purchase commitments to Cree are being fulfilled.
During the quarter ended March 31, 2001, Spectrian fulfilled its purchase
obligation under the contract and recognized $6.8 million of the deferred gain.
Spectrian and Cree entered into a one-year joint development agreement to
develop advanced technologies related to laterally diffused metal oxide
semiconductors ("LDMOS"), linear high gain LDMOS driver modules, high efficiency
LDMOS power modules and SiC MESFET components. Following the close of the sale
of UltraRF, the Company no longer has revenues related to the sale of UltraRF
products to third party customers. Additionally, as a result of the sale, the
Company's cost of semiconductors used in the manufacturing of amplifier products
have increased because purchases from UltraRF are at fair market value rather
than at manufacturing cost as has historically been the case.
For the year ended March 31, 2001 ("fiscal 2001"), Nortel, Verizon and
Samsung accounted for approximately 59%, 18% and 13% of net revenues,
respectively. 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. 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 affects the Company's ability to efficiently manage production schedules
and inventory levels and to accurately forecast product sales. 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 customer
requirements. In fiscal 1999, the first and fourth quarters of fiscal 2000,
product orders from Nortel fell sharply and in the first and second quarters of
fiscal 2001, the Company did not receive any revenues from Nortel for several of
its products which adversely affected the Company's revenues and earnings in
those fiscal periods. There can be no assurance that the Company will not
experience such fluctuations in the future. If the Company is unable to find
customers to generate demand for its new products, the Company's revenues may be
materially adversely affected. If the Company were to lose Nortel, Verizon,
Samsung or any other major customer, or if orders by Nortel, Verizon, Samsung or
any other major 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 2001, 2000 and 1999, sales outside of the United States
were 78%, 87% and 84% 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 Canada,
South Korea and France, may have a material adverse effect on the Company's
sales of its products. Furthermore, because the Company's products are priced in
U.S. dollars, currency fluctuations and 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 services its power amplifier
products. In September 2000, the Company completed the transfer of its power
amplifier production to a contract manufacturer located in
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Thailand on a turnkey basis. 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 were higher than the savings from costs of products, which
adversely affected the Company's gross margins from January 1999 to November
2000. As a result of its infrastructure, the Company has a high level of fixed
costs and is dependent upon substantial revenue to achieve and maintain
profitability.
The market for the Company's products is becoming increasingly
competitive. The Company is selling its power amplifier products in South Korea,
as well as directly to cellular service providers where its competitors are
already established as suppliers. In addition, the Company competes with at
least one merchant amplifier manufacturer for business from Nortel. This
competition has resulted in, and will continue to result in reduced average
selling prices for the Company's products, which accordingly will negatively
impact gross margins.
Results of Operations
The following table sets forth for the periods indicated certain
statement of operations data of the Company expressed as a percentage of total
revenues and gross margin on sales.
Fiscal Year Ended March 31,
-------------------------------------
2001 2000 1999
---- ---- ----
NET REVENUES......................................... 100.0% 100.0% 100.0%
---------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues.................................. 80.7 79.5 97.6
Research and development.......................... 11.6 13.7 26.9
Selling, general and administrative............... 12.0 11.8 16.4
Restructuring .................................... (0.1) 0.6 --
---------- --------- ---------
Total costs and expenses........................ 104.2 105.6 140.9
---------- --------- ---------
Operating LOSS ...................................... (4.2) (5.6) (40.9)
INTEREST INCOME...................................... 1.6 2.0 4.6
INTEREST EXPENSE..................................... (0.1) (0.3) (0.9)
OTHER INCOME, NET ................................... 10.2 0.4 --
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................... 7.5 (3.5) (37.2)
INCOME TAXES......................................... -- -- --
---------- ---------- ----------
NET INCOME (LOSS).................................... 7.5% (3.5)% (37.2)%
========== ========== ==========
Gross margin on REVENUES............................. 19.3% 20.5% 2.4%
========== ========== ==========
Years Ended March 31, 2001 and 2000
Net Revenues. The Company's net revenues increased 10% to $179.8
million for fiscal 2001 from $163.6 million for fiscal 2000. The growth in net
revenue was primarily due to higher demand in the multi-channel power amplifier
("MCPA") product line and Broadband product line, partially offset by a decline
in
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the single carrier power amplifier ("SCPA") product line, sold primarily to
Nortel. MCPA revenues increased 81% to $58.7 million for fiscal 2001 from $32.2
million for fiscal 2000. Broadband revenues increased 221% to $11.1 million for
fiscal 2001 from $3.5 million for fiscal 2000. Broadband revenues were
recognized primarily in the first and second quarters of fiscal 2001. SCPA
revenues decreased 19% to $102.8 million for fiscal 2001 from $126.4 million for
fiscal 2000 on lower average selling prices and volumes.
Cost of Revenues. Cost of revenues consists primarily of turnkey
amplifier costs for the Company's products, internal amplifier assembly and test
costs, radio frequency ("RF") semiconductor fabrication, assembly and test
costs, raw materials, manufacturing overhead and warranty costs. The Company's
cost of revenues increased by 12% to $145.1 million for fiscal 2001 from $130.0
million for fiscal 2000. The increase on a dollar basis for fiscal year 2001 was
due primarily to higher production volumes associated with the increased
revenues, especially the increase in MCPA production volumes, lower yields on
semiconductor production and higher inventory obsolescence expense.
Gross margin on sales was 19% for fiscal 2001 as compared to 21% for
fiscal 2000. The decrease in gross margin reflected lower average selling
prices, lower yields on semiconductor production, higher inventory obsolescence
expense, and higher semiconductor prices in the fourth quarter of fiscal 2001,
partially offset by decreased manufacturing costs due to the increased use of
contract manufacturing and product mix. The Company anticipates that gross
margin as a percentage of net revenues will decrease as a result of the sale of
the UltraRF division to Cree as the Company is required to purchase the LDMOS RF
semiconductor parts at market price rather than recognizing the cost of revenues
at the actual cost of production and continued lower average selling prices.
Research and Development. Research and development ("R&D") expenses
include the cost of designing, developing or reducing the manufacturing cost of
amplifiers and RF semiconductors. The Company's R&D expenses decreased by 8% to
$20.8 million in fiscal 2001 from $22.5 million in fiscal 2000. As a percentage
of net revenues, R&D expenses represented 12% of net revenues for fiscal 2001 as
compared to 14% of net revenues for fiscal 2000. The decrease in R&D expenses on
both a dollar and percentage of net revenues basis reflected higher revenue
levels on a year-to-year basis, reduced expenses associated with completion of
the initial products in the new MCPA product line in early fiscal 2000, the sale
of UltraRF, and the use of a product development methodology that allows for the
reuse of designs in several products. The Company anticipates spending at the
current or higher levels on new product development initiatives which the
Company believes are required to meet current and future market and customer
requirements.
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 12% to $21.6 million in fiscal 2001 from
$19.3 million in fiscal 2000. As a percentage of net revenues, SG&A expenses
represented 12% of net revenues for fiscal 2001 as compared to 12% of net
revenues for fiscal 2000. The increase in SG&A expenses on a dollar basis for
fiscal 2001 was principally due to increased commissions, marketing efforts to
diversify the customer base, creation of the UltraRF sales force and network,
increased sales and marketing activities in South Korea, and costs incurred to
evaluate strategic alternatives for UltraRF.
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
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. In fiscal 2001, the Company reversed $100,000
of unused restructuring charge due to changes in the restructuring plan.
Approximately 60 employees engaged in manufacturing and production related
functions were terminated as a result of the restructuring during fiscal 2001.
The transfer of production to Thailand was completed during the third quarter of
fiscal 2001.
Interest Income. Interest income decreased to $2.9 million in fiscal
2001 from $3.3 million in fiscal 2000. 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 $0.2 million in fiscal
2001 from $0.5 million in fiscal 2000. The decrease in interest expense for the
year was a result of substantially reduced average borrowing levels due to
repayments made in association with the sale of property in December 1999 and
the sale of UltraRF in December 2000.
Other Income. Other income increased to $18.4 million in fiscal 2001
from $0.6 million in fiscal 2000. Other income for fiscal 2001 represents an
$18.9 million gain recognized on sale of UltraRF recognized in the third and
fourth quarter of fiscal 2001 and a $0.5 million realized loss on the sale of
Cree common stock in the fourth quarter of fiscal 2001. Other income for fiscal
2000, represents a $0.6 million gain on the sale of a light industrial building
in December 1999.
Income Taxes. Due to the losses incurred by the Company in years prior
to fiscal 2001 and the related net operating loss carryforwards available to the
Company, the Company did not record income tax expense except for foreign taxes
in fiscal 2001 and foreign taxes and the minimum state income tax expense in
fiscal 2000. 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 valuation allowance
against deferred tax assets where the realization is uncertain. The valuation
allowance reduces the net deferred tax asset to the amount that is estimated may
be recovered through carryback from future periods. The Company will continue to
evaluate positive and negative evidence on 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.
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 SCPA product line from Nortel
and achieving volume shipments of the new 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 in fiscal 2000 from none in fiscal 1999.
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 21% 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,
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. 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. This decrease reflects reduced
expenses associated with completion of the initial products in the new MCPA
product line in early fiscal 2000. As a percentage of net revenues, R&D expenses
represented 14% of net revenues for fiscal 2000 as compared to 27% of net
revenues for fiscal 1999. The decrease in R&D expenses as percentage of net
revenues basis reflected substantially higher revenue levels on a year-to-year
basis.
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 19% 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. The transfer of production to Thailand was 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 fiscal 2000
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.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Segment Information
The Company operated and reported its financial information as one
vertical integrated unit in the fiscal year ended 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. Under the management approach, the Company divided its business into two
divisions based upon product type: Amplifier Division and Semiconductor
Division, which operated under the tradename of UltraRF. UltraRF derived
virtually all of its net revenues from sales to the Amplifier Division. The
Company allocated operating expenses to these segments but did not allocate
interest income and expense. Corporate expenses were allocated to the operating
segments based on predetermined annual allocation methods. Appropriate
intersegment eliminations were made in the consolidation of the Company's
consolidated financial statements. Following the sale of UltraRF on December 29,
2000, the Company began operating as one vertical integrated unit. See Note 2 to
the Condensed Consolidated Financial Statements "Sale of UltraRF". Segment
information for fiscal 2001 and fiscal 2000 is as follows (in thousands):
Consolidated Statement of Operations Data - Fiscal 2001:
Year Ended March 31, 2001
------------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
Net revenues, external...................... $ 178,671 $ 1,081 $ -- $ 179,752
Net revenues, intersegment.................. -- 23,487 (23,487) --
Amortization and depreciation............... 5,290 2,185 2,950 10,425
Income (loss) before income taxes........... (7,605) 313 20,784 13,492
Consolidated Statement of Operations Data - Fiscal 2000:
Year Ended March 31, 2000
------------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
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........... (13,401) 4,113 3,495 (5,793)
<FN>
*Data in the "Other" column represents the elimination of intersegment revenues,
interest income and expense, other income, the provision for income taxes,
certain unallocated corporate expenses and corporate amortization and
depreciation that is subsequently allocated to the operating segments.
</FN>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The standard, as amended by Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, an amendment of FASB Statement No. 133, and Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to
hereafter as "FAS 133"), is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (April 1, 2001 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
hedging relationship. For fair-value hedges in which the Company is hedging
changes in an asset's fair value, the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. The ineffective portion of all hedges will be recognized in
current-period earnings.
While FAS 133 provides a significant change in the accounting guidance
related to derivative instruments and hedging activities, the Company has
determined that the more stringent accounting and documentation requirements
under FAS 133 will not cause any significant changes in its overall risk
management strategy and in its overall hedging activities.
On April 1, 2001, the Company adopted FAS 133 and accordingly recorded
a net-of-tax cumulative-effective-type gain adjustment of less than $1 million.
Liquidity and Capital Resources
The Company has financed its growth through sales of common stock,
private sales of equity securities, capital equipment leases, bank lines of
credit and cash flows from operations. Principal sources of liquidity at March
31, 2001 consisted of cash and cash equivalents, restricted cash and short-term
debt investments of $81.7 million, investment in Cree common stock and options
of $34.6 million and bank borrowing arrangements.
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 was
scheduled to expire on June 30, 2001. In May 2001, the Company renewed the line
of credit for one additional year with terms substantially similar to the old
line. Under the terms of the master agreement governing this credit instrument,
as amended, 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. In February 2001, the Company was in default of certain covenants and
the bank has granted a waiver of the default. The Company was in compliance with
all debt covenants as of March 31, 2001. The amount available to borrow at March
31, 2001 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, 2001 was 8% and 6.9%, respectively. The Company
had no borrowings under the line of credit at March 31, 2001.
In January 1997, the Company borrowed $6.0 million under a term loan
collateralized by certain capital equipment. The Company paid off the
outstanding principal balance of this term loan in December 2000.
The Company's working capital increased by $25.5 million to $104.9
million as of March 31, 2001 from $79.4 million as of March 31, 2000. The
increase was primarily attributable to the $93.4 million in proceeds received
for the sale of UltraRF, less the unrealized loss on the market value of Cree
common stock of $23.1 million and the short-term portion of the deferred gain on
the sale of UltraRF of $31.6 million at March 31, 2001, a $3.8 million increase
in accounts receivable, and the recognition of a deferred tax asset of $3.8
million, which were partially offset by a decrease in inventories of $12.3
million due to the transfer of manufacturing to a subcontract manufacturer in
Thailand and the sale of UltraRF and an increase in accounts payable, accrued
liabilities and income taxes payable of $8.1 million. The Company's short-term
debt investments were principally invested in investment grade, interest-bearing
securities. The Company's working capital increased by $7 million to $79.4
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.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Cash provided by operations was $10.2 million for fiscal 2001 compared
to cash used by operations of $14.9 million and $12.3 million for fiscal 2000
and fiscal 1999, respectively. Cash provided by operations in fiscal 2001 was
principally the result of a $13.5 million net income, depreciation and
amortization of $10.4 million, a $7.1 million decrease in net inventories due to
the transfer of manufacturing to a subcontract manufacturer in Thailand and the
write down of inventory, a $7.7 million increase in accounts payable due to the
timing of purchases to support the higher revenue level, a $0.7 million increase
in income taxes payable, which were partially offset by a recognized $18.9
million non-cash gain on the sale of UltraRF net assets, a $3.8 million increase
in deferred tax assets, a $3.8 million increase in accounts receivable due to
the higher revenue levels and the timing of shipments in the quarter, a $2.5
million decrease in accrued liabilities due to lower payroll and commission
related accruals primarily due to the decrease in headcount and the utilization
of the restructuring reserve which was partially offset by the increase in the
warranty reserve and a $1.1 million increase in prepaid expenses and other
current assets. Cash used by operations in fiscal 2000 was principally the
result of a $13.7 million net 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 $10.9 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 $4.1 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 provided cash of approximately $8.5
million as compared to using cash of $4.6 million during fiscal 2000 and
providing cash of $20.9 million during fiscal 1999. Cash provided by investment
activities during fiscal 2001 resulted primarily from $45.4 million proceeds
from sale and maturities of short-term investments which were partially offset
by $17.4 million in purchases of short-term investments, $9.6 million in
additions to property and equipment and $9.8 million in payments for transaction
costs associated with the sale of UltraRF. Proceeds from sale of short-term
investments in fiscal 2001 included the liquidation of Cree common stock with a
guaranteed realizable value of $30 million, which was part of the consideration
received for the sale of UltraRF to Cree. Capital additions during fiscal 2001
included manufacturing test and production equipment required to support new
products and test equipment to support various research and development
projects. Cash used for investing activities during fiscal 2000 resulted
primarily from $7.7 million of additions to property and equipment, partially
offset by $3.5 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 $6.1
million in fiscal 2001 as compared to providing cash of $4.8 million during
fiscal 2000, and using cash of $13.8 million in fiscal 1999. Cash provided by
financing activities during fiscal 2001 was the result of $8.1 million 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
$2.0 million in repayments of debt and capital lease obligations. 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.
As part of the sale of UltraRF, the Company has committed to purchase
$58.0 million of semiconductors over a two-year period starting from the fourth
quarter of fiscal 2001. The Company met its quarterly purchase commitment for
the quarter ended March 31, 2001. The Company anticipates spending approximately
$5 million over the next twelve months for capital additions primarily to
support manufacturing production and test requirements, development projects and
facilities improvements. Based on the Company's current working capital position
and the available line of credit, the Company believes
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
that sufficient resources will be available to meet the Company's cash
requirements for at least the next twelve months. Cash requirements for future
periods will depend on the Company's profitability, timing and level of capital
expenditures, working capital requirements and rate of growth.
Factors Affecting Future Operating Results
Customer Concentration; Dependence on Nortel and Verizon. The wireless
infrastructure equipment market is dominated by a small number of large OEMs and
wireless service providers, including Ericsson, Lucent, Motorola, Nortel,
Verizon and Siemens. The Company's revenues are derived primarily from sales to
a limited number of these customers, in particular, Nortel and Verizon.
Furthermore, a substantial portion of revenues from Nortel in the past has
resulted from sales of a limited number of the Company's products. The Company's
business, financial condition and results of operations have been materially
adversely affected in the past by anticipated orders failing to materialize and
by deferrals or cancellations of orders as a result of changes in customer
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
affects the Company's ability to efficiently manage production schedules and
inventory levels and to accurately forecast product sales. Any reduction in the
level of purchases of the Company's amplifiers by Nortel, Verizon or Samsung, 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. For example, in the first and second quarters of fiscal
2001 product orders from Nortel fell drastically and as a result the Company's
revenues and earnings were adversely affected. 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, Verizon or Samsung or any other major customer,
the Company's business, financial condition and results of operations would be
materially adversely affected. In addition, wireless infrastructure equipment
OEMs have come under increasing price pressure from wireless service providers,
which in turn has resulted in downward pricing pressure on the Company's
products. The Company expects to incur increasing pricing pressures from Nortel,
Verizon, Samsung and other major customers in future periods, which could result
in declining average sales prices and gross margins for the Company's products.
Fluctuations in Operating Results. The Company's quarterly and annual
results have in the past been, and will continue to be, subject to significant
fluctuations due to a number of factors, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the Company's results of operations are likely to
vary due to: the timing, cancellation, delay or rescheduling of OEM customer
orders and shipments; the timing of announcements or introductions of new
products by the Company, its competitors or their respective OEM customers; the
acceptance of such products by wireless equipment OEMs and their customers;
relative variations in manufacturing efficiencies 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 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
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 or that the Company will experience in the future the same annual
revenue growth that it did in fiscal 2000 and 2001. The Company establishes its
expenditure levels for product development and other operating expenses based on
its expected revenues, and expenses are relatively fixed in the short term. As a
result, variations in timing of revenues can cause significant variations in
quarterly results of operations. There can be no assurance that the Company will
be profitable on a quarter-to-quarter basis in the future. The Company believes
that period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Due to all the foregoing factors, it is likely that in some future quarter or
quarters the Company's revenues or operating results will not meet the
expectations of public stock market analysts or investors. In such event, the
market price of the Company's Common Stock would be materially adversely
affected.
Declining Average Sales Prices. The Company has experienced, and
expects to continue to experience, declining average sales prices for its
products, especially in the market for its single carrier power amplifiers.
Wireless infrastructure equipment manufacturers have come under increasing price
pressure from wireless service providers, which in turn has resulted in downward
pricing pressure on the Company's products. In addition, competition has
increased the downward pricing pressure on the Company's products. Since
wireless infrastructure equipment manufacturers frequently negotiate supply
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its products before it is aware of how, or if, cost
reductions can be obtained. To offset declining average sales prices, the
Company believes that it must achieve manufacturing cost reductions. If the
Company is unable to achieve such cost reductions, the Company's gross margins
will decline, and such decline will have a material adverse effect on the
Company's business, financial condition and results of operations.
Product Quality, Performance and Reliability. The Company expects that
its customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. Power
amplifiers as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures. The Company
has from time to time in the past experienced product quality, performance and
reliability problems. In addition, a multicarrier power amplifier has a higher
probability of malfunction than a single carrier power amplifier because of its
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
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
customers will continue to rely, or increase their reliance, on the Company as
an external source of supply for their power amplifiers, or that other wireless
equipment OEMs will become customers of the Company. If the major wireless
infrastructure equipment suppliers do not purchase or continue to purchase their
power amplifiers from merchant suppliers, the Company's business, results of
operations and financial condition will be materially adversely affected.
Rapid Technological Change; Evolving Industry Standards; Dependence on
New Products. The markets in which the Company and its OEM customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. In particular, because the
Company's strategy of rapidly bringing to market products customized for
numerous and evolving modulation standards requires developing and achieving
volume production of a large number of distinct products, the Company's ability
to rapidly design and produce individual products for which there is significant
OEM customer demand will be a critical determinant of the Company's future
success. A softening of demand in the markets served by the Company or a failure
of modulation standard in which the Company has invested substantial development
resources may have a material adverse effect on the Company's business,
financial condition and results of operations. No assurance can be given that
the Company's product development efforts will be successful, that its new
products will meet customer requirements and be accepted or that its OEM
customers' product offerings will achieve customer acceptance. If a significant
number of development projects, including the Company's new multicarrier
products, do not result in substantial volume production or if technologies or
standards supported by the Company's or its customers' products become obsolete
or fail to gain widespread commercial acceptance, the Company's business may be
materially adversely affected.
Purchase and Supply Agreement with Cree. In connection with the
Company's completion of the sale of UltraRF to Cree, the Company entered into a
Purchase and Supply Agreement, dated as of December 29, 2000 by and between the
Company and Zoltar (subsequently renamed "UltraRF, Inc."). Pursuant to the
Purchase and Supply Agreement, the Company committed to purchase and accept
delivery from UltraRF, Inc. certain components at a minimum aggregate purchase
price. The Company's need for UltraRF, Inc. components during a calendar quarter
may be insufficient to satisfy its minimum commitments for such calendar
quarter. In such event, the Company would be obligated to purchase excess
inventory that it may never utilize or to pay a shortfall surcharge, either of
which could have a material adverse effect on the Company's business, financial
condition, and cash flows.
Arm's-Length Relationship. The Company relies on UltraRF for the supply
of a substantial amount of components used in the manufacture of its products.
When the Company operated UltraRF as a separate division, it may have obtained
more favorable terms for semiconductor products than through negotiations with
unaffiliated third parties. With the sale of UltraRF, the Company must now deal
with UltraRF on an arm's-length basis. Accordingly, the prices and other terms
for UltraRF semiconductor products may now be less favorable to the Company.
Sole or Limited Sources of Products, Materials and Services. The
Company currently procures from single sources power amplifier assemblies,
certain specialized semiconductors, components and services for its products.
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. During
fiscal 2000, the Company completed the transfer of the production of power
amplifiers to a contract manufacturer in Thailand. As a result of this transfer,
the Company no longer has significant manufacturing capacity. 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. On December 29, 2000, the Company
completed the sale of substantially all of the assets and liabilities comprising
the Company's
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
semiconductor division, UltraRF, pursuant to the Asset Purchase Agreement dated
as of November 20, 2000 to Cree. As a result, the Company no longer manufactures
bipolar and LDMOS RF power semiconductors, which are critical components in the
Company's power amplifier products. As part of the definitive agreement, the
Company and Cree entered into a two-year supply agreement under which the
Company is obligated to purchase from Cree an aggregate of $58 million of
semiconductors. Consequently, Cree is the Company's sole source vendor of
certain bipolar and LDMOS RF power semiconductors. The Company's reliance on
sole sources for certain components and its migration to an outsourced, turnkey
manufacturing strategy entail certain risks including reduced control over the
price, timely delivery, reliability and quality of the components. If the
Company were to change any of its sole source vendors or contract manufacturer,
the Company would be required to requalify the components with each new vendor
or contract manufacturer, respectively. Any inability of the Company to obtain
timely deliveries of components or assembled amplifiers of acceptable quality in
required quantities or a significant increase in the prices of components for
which the Company does not have alternative sources could materially and
adversely affect the Company's business, financial condition and results of
operations. The Company has occasionally experienced difficulties in obtaining
some components, and no assurance can be given that shortages will not occur in
the future.
Risks of International Sales. The Company operates in an international
market and expects that international sales will continue to account for a
significant percentage of the Company's total revenues for the foreseeable
future. These sales involve a number of inherent risks, including imposition of
government controls, currency exchange fluctuations, potential insolvency of
international distributors, representatives and customers, reduced protection of
intellectual property rights in some countries, the impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivables collection periods, as well as tariffs and other
trade barriers. In addition, because substantially all of the Company's foreign
sales are denominated in U.S. dollars, increases in the value of the dollar
relative to the local currency would increase the price of the Company's
products in foreign markets and make the Company's products relatively more
expensive and less price competitive than competitors' products that are priced
in local currencies. There can be no assurance that these factors will not have
a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
The Company anticipates that turmoil in financial markets and the
deterioration of the underlying economic conditions in certain countries where
the Company has significant sales may have an impact on its sales to customers
located in or whose projects are based in those countries due to the impact of
currency fluctuations on the relative price of the Company's products and
restrictions on government spending imposed by the International Monetary Fund
(the "IMF") on those countries receiving the IMF's assistance. In addition,
customers in those countries may face reduced access to working capital to fund
component purchases, such as the Company's products, due to higher interest
rates, reduced funding of wireless infrastructure by domestic governments,
reduced bank lending due to contractions in the money supply or the
deterioration in the customer's or its bank's financial condition or the
inability to access equity financing. A substantial majority of the Company's
products are sold to OEMs who incorporate the Company's products into systems
sold and installed to end-user customers. These OEMs are not required by
contract and do not typically provide the Company with information regarding the
location and identity of their end-user customers, and, therefore, the Company
is not able to determine what portion of its product sales have been or future
orders will be incorporated into OEM sales to end-users in countries
experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers and
potential new customers are servicing new markets in developing countries that
the Company's customers expect will deploy wireless communication networks as an
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 and network operators 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 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, Fujitsu, Mitsubishi 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. In addition, the
Company assigned 20 of its United States patents and 4 of its foreign patents to
Cree in connection with the sale of UltraRF. The Company has been granted by
Cree a non-exclusive, royalty-free license to each of these patents, however,
there can be no assurance that Cree will adequately protect this proprietary
information and any such failure could adversely affect the Company's business,
financial condition and results of operations. The Company generally enters into
confidentiality and nondisclosure agreements with its employees, suppliers, OEM
customers, and potential customers and limits access to and distribution of its
proprietary technology. However, there can be no assurance that such measures
will provide adequate protection for the Company's trade secrets or other
proprietary information, or that the Company's trade secrets or proprietary
technology will not otherwise become known or be
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
independently developed by competitors. The failure of the Company to protect
its proprietary technology could have a material adverse effect on its business,
financial condition and results of operations.
Risk of Third Party Claims of Infringement. The communications
equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected.
Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation by or
against the Company could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation results in a favorable determination for the Company. In
the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, indemnify its customers, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop noninfringing technology, discontinue the use of certain processes or
obtain licenses to the infringing technology.
Government Regulation of Communications Industry. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith
are regulated in the United States, Canada and throughout the rest of the world.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by wireless service providers
to operate the Company's products. The United States Federal Communications
Commission (the "FCC") and regulatory authorities abroad constantly review RF
emission issues and promulgate standards based on such reviews. If more
stringent RF emission regulations are adopted, the Company and its OEM customers
may be required to alter the manner in which radio signals are transmitted or
otherwise alter the equipment transmitting such signals, which could materially
adversely affect the Company's products and markets. The enactment by federal,
state, local or international governments of new laws or regulations or a change
in the interpretation of existing regulations could also materially adversely
affect the market for the Company's products. Although deregulation of
international communications industries along with radio frequency spectrum
allocations made by the FCC have increased the potential demand for the
Company's products by providing users of those products with opportunities to
establish new wireless personal communications services, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
will continue or that other future regulatory changes will have a positive
impact on the Company. The increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused, and may in the future cause, the cancellation,
postponement or rescheduling of the installation of communications systems by
the
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. As a
result of the plan to discontinue manufacturing operations in Sunnyvale,
California, and the Company's other restructuring activities, several key
executives have ceased 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. The Company can give no assurance that it will be able
to manage its growth effectively. Failure to manage growth effectively would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may, from time to time, pursue the
acquisition of other companies, technology, assets or product lines that
complement or expand its existing business. The Company may also, from time to
time, pursue divestitures of existing operations, technology or assets.
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 fluctuation of operating
results due to the timing of charges for costs associated with acquisitions or
divestitures, the difficulty of combining and assimilating the operations and
personnel of the acquired companies, the difficulty of separating a divested
operation from the remaining operations, 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 or divestiture. 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.
Risk of Business Interruption. The Company's operations are vulnerable
to interruption by fire, earthquake, power loss, telecommunications failure and
other events beyond the Company's control. The Company does not have a detailed
disaster recovery plan and its facilities in the State of California are
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
currently subject to electrical blackouts as a consequence of a shortage of
available electrical power. In the event these blackouts continue or increase in
severity, they could disrupt the operations of the Company's facilities in
California and increase the Company's operating costs. In addition, the Company
does not carry sufficient business interruption insurance to compensate it for
losses that may occur and any losses or damages incurred could have a material
adverse effect on the Company's business.
Volatility of Stock Price. The market price of the shares of Common
Stock has been and is likely to continue to be highly volatile, and is affected
significantly by factors such as fluctuations in the Company's quarterly and
annual operating results, customer concentration, the timing difference between
Nortel's requested delivery dates and its vendor purchase commitments to support
the customer's delivery requirements, reliance on international markets, the
absence of the economies of scale achieved by some of its competitors,
announcements of technological innovations, new customer contracts or new
products by the Company or its competitors, announcements by the Company's
customers regarding their business or prospects, changes in analysts'
expectations, estimates and recommendations, news reports regarding the Company,
its competitors and its markets, governmental regulatory action, developments
with respect to patents or proprietary rights, announcements of significant
acquisitions or strategic partnerships by the Company or its competitors,
announcements of significant divestitures of existing businesses or product
lines, the market price of the shares of the common stock of Cree, concentration
of stock ownership by a few entities resulting in a low float of the Company's
common stock in the public market, 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.
Volatility of Cree's Common Stock Price. Pursuant to the Asset Purchase
Agreement, the Company received as partial consideration for the sale of
UltraRF, 1,815,402 shares of common stock of Cree. In January 2001, the Company
sold 191,094 shares, which were held in escrow, for approximately $6,309,000 and
realized a loss of approximately $481,000 from the sale of these securities. In
May 2001, the Company sold 524,000 shares of Cree common stock for approximately
$15.4 million and recognized a loss of approximately $3.2 million. Between
January to May 2001, the Company entered into various option arrangements, known
as a cashless collar, expiring from July 2001 to May 2002, to hedge the
remaining 1,100,000 shares of Cree common stock on hand. As a result, the
Company is able to realize an average of $25.32 per share ("the floor price")
for the 1,100,000 hedged shares if the share price of Cree is lower than $25.32
when the options expire. If the Cree stock price exceeds an average of $41.14
("the ceiling price) when the options expire, the Company may sell its hedged
shares at $41.14 or settle the options for a cash amount equal to the difference
between the Cree stock price and the option price. Until the options expire, the
Company will be restricted from disposing of the hedged shares. The Company
faces a number of risks due to the size of its ownership in Cree including the
risk that its financial statements and results of operations reflect the
Company's ownership stake in Cree, which impacts the Company's stock price. At
March 31, 2001, the unrealized loss on the Company's investments in Cree common
stock and option was approximately $23.1 million. The market price of the shares
of Cree's common stock has been and is likely to continue to be highly volatile.
Although the 1,100,000 shares of Cree common stock on hand have been hedged, the
Company's investment in Cree common stock is subject to price fluctuation
between the floor and ceiling prices of the option arrangements. Such volatility
in the market price of Cree's common stock and the resulting impact on investors
and analysts' perceptions of the change of the Company's valuation due to the
size of its holdings in Cree common stock may adversely affect the market price
of the Company's common stock.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Escrow Shares. Of the total consideration paid under the Asset Purchase
Agreement, approximately $6 million is currently held in escrow to secure the
Company's representations, warranties and covenants under the Asset Purchase
Agreement over a 12-month period, ending in December 2001. If any claims for
indemnification are made against the Company anytime during this 12 month
period, whether meritorious or not, the Company may be delayed or precluded from
realizing the proceeds placed in escrow.
Shareholder Rights Plan; Issuance of Preferred Stock. The Board of
Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the
"Original Agreement"). On August 9, 2000, pursuant to section 27 of the Original
Agreement, the Company's Board of Directors agreed to restate the dividend that
it had declared under the Original Agreement in a Second Amended and Restated
Preferred Shares Rights Agreement dated August 14, 2000 (the "Prior Agreement").
On January 18, 2001, pursuant to section 27 of the Prior Agreement, the
Company's Board of Directors agreed to amend the triggering event threshold
applicable to Kopp Investment Advisors, Inc. and State of Wisconsin Investment
Board to thirty percent (30%) and twenty percent (20%), respectively. Under the
Prior Agreement, each right (a "Right," and collectively the "Rights") entitles
the registered holder to purchase from the Company one one-thousandth of a share
of Series A Preferred at an exercise price of $126.00 (the "Purchase Price"),
subject to adjustment. The Rights become exercisable upon the occurrence of
certain events, including the announcement of a tender offer or exchange offer
for the Company's Common Stock or the acquisition of a specified percentage of
the Company's Common Stock by a third party. The exercise of the Rights could
have the effect of delaying, deferring or preventing a change in control of the
Company, including, without limitation, discouraging a proxy contest or making
more difficult the acquisition of a substantial block of the Company's Common
Stock. These provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock. The Board
of Directors has the authority to issue up to 5,000,000 shares of undesignated
Preferred Stock and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued shares of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the Company's stockholders. For example, in connection
with the Company's Shareholder Rights Plan, the Board of Directors designated
20,000 shares of Preferred Stock as Series A Participating Preferred Stock
although none of such shares have been issued. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those of
the holders of Common Stock. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying, deferring or preventing a
change in control of the Company.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and markets its
products in North America, South 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 except for the
option arrangements to hedge one million shares of the Cree common stock on
hand. 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 up to five years. The table below presents
the amounts and related weighted interest rates of the Company's short-term
investments at March 31, 2001 and 2000 (dollars in thousands).
March 31, March 31,
2001 2000
---- ----
Average fixed interest rate 5.5% 6.0%
======= =======
Amortized cost $38,655 $36,644
======= =======
Fair value $38,919 $36,027
======= =======
Contractual maturity dates:
Less than 1 year $8,931 $ 3,500
1 to 5 years 29,988 32,527
-------- --------
$38,919 $36,027
======= =======
Pursuant to the Asset Purchase Agreement, the Company received as
partial consideration for the sale of UltraRF, 1,815,402 shares of common stock
of Cree. In January 2001, the Company sold 191,094 shares, which were held in
escrow, for approximately $6,309,000 and realized a loss of approximately
$481,000 from the sale of these securities. In May 2001, the Company sold
524,000 shares of Cree common stock for approximately $15.4 million and realized
a loss of approximately $3.2 million, which will be recognized in the quarter
ending July 1, 2001. Between January to May 2001, the Company entered into
various option arrangements, known as a cashless collar, expiring from July 2001
to May 2002, to hedge the remaining 1,100,000 shares of Cree common stock on
hand. As a result, the Company is able to realize an average of $25.32 per share
for the 1,100,000 hedged shares if the share price of Cree is lower than $25.32
when the options expire. If the Cree stock price exceeds an average of $41.14
when the options expire, the Company may sell its hedged shares at $41.14 or
settle the options for a cash amount equal to the difference between the Cree
stock price and the option price. Until the options expire, the Company will be
restricted from disposing of the hedged shares. A 20% adverse change in the fair
value of Cree common stock as of March 31, 2001, assuming the hedging had not
been in place, would result in an approximate $4.9 million decrease in the fair
value of the Company's available for sale securities.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS-- UNAUDITED
(in thousands, except per share data)
Three Months Ended
-----------------------------------------
July 2, Oct. 1, Dec. 31, Mar. 31,
2000 2000 2000 2001
---- ---- ---- ----
Net revenues .............................. $ 42,190 $ 41,916 $ 51,398 $ 44,248
Cost of revenues .......................... $ 35,268 $ 34,714 $ 39,490 $ 35,583
Gross profit .............................. $ 6,922 $ 7,202 $ 11,908 $ 8,665
Net income (loss) (1) ..................... $ (3,800) $ (3,865) $ 13,410 $ 7,735
Net income (loss) per share:
Basic ................................. $ (0.35) $ (0.35) $ 1.20 $ 0.68
Diluted ............................... $ (0.35) $ (0.35) $ 1.19 $ 0.67
Shares used in computing per share amounts:
Basic ................................. 10,916 10,974 11,154 11,416
Diluted ............................... 10,916 10,974 11,270 11,627
Three Months Ended
-----------------------------------------
June 27, Sept. 26, Dec. 26, Mar. 31,
1999 1999 1999 2000
---- ---- ---- ----
Net revenues .............................. $ 31,484 $ 42,967 $ 49,144 $ 39,972
Cost of revenues .......................... $ 25,892 $ 32,676 $ 37,195 $ 34,235
Gross profit .............................. $ 5,592 $ 10,291 $ 11,949 $ 5,737
Net income (loss) ......................... $ (2,622) $ 788 $ 2,344 $ (6,333)
Net income (loss) per share:
Basic ................................. $ (0.26) $ 0.08 $ 0.22 $ (0.59)
Diluted ............................... $ (0.26) $ 0.07 $ 0.20 $ (0.59)
Shares used in computing per share amounts:
Basic ................................. 10,176 10,249 10,519 10,734
Diluted ............................... 10,176 10,632 11,774 10,734
<FN>
Note (1): Consolidated financial results for the quarters ended December 31,
2000 and March 31, 2001 reflect a gain of $11.7 million and $7.2 million,
respectively, related to the sale of UltraRF to Cree on December 29, 2000. See
Note 2 of Notes to Consolidated Financial Statements herein regarding the sale
of UltraRf.
</FN>
The Company's consolidated financial statements and the independent
accountants' reports appear on pages F-1 through F-26 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.
38
During the Company's year ended March 31, 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 to the subject matter of the disagreements in connection with its
reports on the Company's financial statements for the year ended March 31, 1999.
In addition, KPMG's report on the financial statements of the Company for the
year ended March 31, 1999 contained an unqualified opinion.
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 audit role. During the year
ended March 31, 1999 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 also 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
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 2001 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 -- Executive Officers of the
Registrant" 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
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
Report of Independent Accountants - KPMG LLP............................................. F-3
Consolidated Balance Sheets as of March 31, 2001 and 2000................................ F-4
Consolidated Statements of Operations for the Years ended
March 31, 2001, 2000 and 1999......................................................... F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the Years ended March 31, 2001, 2000 and 1999..................................... F-6
Consolidated Statements of Cash Flows for the Years ended
March 31, 2001, 2000, and 1999........................................................ 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
2.1(27) Asset Purchase Agreement dated as of November 20, 2000
among Cree, Inc., a North Carolina corporation, Zoltar
Acquisition, Inc., a North Carolina corporation and
Spectrian Corporation, a Delaware corporation.
3.5(15) Certificate of Incorporation of Registration.
3.6(23) Amended and Restated Bylaws of Spectrian Corporation (a
Delaware Corporation) dated June 9, 2000
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(22) Letter Agreement to amend Preferred Shares Rights
Agreement dated as of February 16, 2000 between Kopp
Investment Advisors, Inc. and Registrant.
10.2(29) 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 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.
41
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.
10.39(22) Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and Registrant.
10.39.1(22) Loan Modification Agreement between Silicon Valley Bank
and Registrant dated November 24, 1999.
10.39.2(22) Loan Modification Agreement between Silicon Valley Bank
and Registrant dated January 31, 2000.
10.39.3(22) Loan Modification Agreement between Silicon Valley Bank
and Registrant dated May 2, 2000.
10.40(22) Form of Change of Control Severance Agreement between
the Registrant and Michael D. Angel, Garrett A.
Garrettson, Tim Jones, Christopher A. Menicou and
Thomas H. Waechter.
10.41(22) Master Lessor's Consent to Sublease between North
American Resort Properties, Inc and Registrant.
10.41.1(22) Agreement and Assumption of Sublease between North
American Resort Properties, Inc. and The Gap, Inc.
10.42(22) Closing documents regarding 165 Gibraltar Court,
Sunnyvale, California.
10.43(22) Summary of Lease Contract between Ensung Building and
Registrant.
10.44(22) Contract to Lease between Ellington Development
Incorporated and Registrant.
10.45(22) Manufacturing Agreement between GSS/Array Technology
and Registrant.
10.46(23) Sublease Agreement between American Microwave
Technology and Registrant dated May 31, 2000.
10.47(25) Loan Modification Agreement between the Company and
Silicon Valley Bank dated August 15, 2000.
10.48(+26) Purchase and Supply Agreement dated as of December 29,
2000 by and between Spectrian Corporation, a Delaware
corporation and Zoltar Acquisition, Inc., a North
Carolina corporation.
10.49(26) Sublease Agreement dated as of December 29, 2000
between Zoltar Acquisition, Inc., a North Carolina
corporation, and Spectrian Corporation, a Delaware
corporation.
10.50(26) Payment and Performance Guaranty of Sublease dated
December 29, 2000, by Cree, Inc., a North Carolina
corporation in favor of Spectrian Corporation, a
California corporation.
10.51(26) Standard Industrial/Commercial Net Lease dated December
12, 2000 by and between CSS Properties II, LLC and
Spectrian Corporation.
10.52 Loan Modification Agreement between the Company and
Silicon Valley Bank dated May 23, 2001.
23.1.1 Consent of PricewaterhouseCoopers LLP.
23.1.2 Consent of KPMG LLP.
24.1 Power of Attorney (included on page 44).
- ---------------------
+ Confidential treatment has been requested or granted with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
4 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
42
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 the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996.
10 Incorporated by reference to the Registrant's Form 8-K dated November 19,
1996.
11 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (File No. 000-24360) as filed with the Securities and
Exchange Commission on January 17, 1997.
13 Incorporated by reference to exhibits filed with Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8
(File No. 333-25435) as filed with the Securities and Exchange Commission
on October 21, 1997.
15 Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K dated October 10, 1997.
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 21, 1998.
18 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 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 June 14, 1999.
22 Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 2000 as filed with the Securities
and Exchange Commission on June 29, 2000.
23 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 2, 2000.
25 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 1, 2000.
26 Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2000.
27 Incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K
filed by the Registrant on January 16, 2001.
28 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on form S-8 as filed with the Securities and Exchange Commission
on August 17, 2000.
29 Incorporated by reference to exhibits filed with Registrant's Registration
Statement on form S-8 as filed with the Securities and Exchange Commission
on March 30, 2001.
30 Incorporated by reference to exhibits filed with the Registrants' Amended
Registration Statement on Form 8-A12G/A as filed with the Securities and
Exchange Commission on January 30, 2001.
(b) Reports on Form 8-K. On January 16, 2001, the Registrant filed a Current
Report on Form 8-K regarding the completion of the sale of the Company's
UltraRF division to Cree on December 29, 2000.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
43
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 4, 2001
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas H. Waechter President, Chief Executive Officer and Director June 4, 2001
- -------------------------------------------- (Principal Executive Officer)
Thomas H. Waechter
/s/ Michael D. Angel Executive Vice President, Finance and June 4, 2001
- ------------------------------------------ Administration, Chief Financial Officer and
Michael D. Angel Secretary (Principal Financial and Accounting
Officer)
/s/ Garrett A. Garrettson Director and Chairman June 4, 2001
- ------------------------------------------
Garrett A. Garrettson
/s/ Martin Cooper Director June 4, 2001
- ------------------------------------------
Martin Cooper
/s/ Charles D. Kissner Director June 4, 2001
- ------------------------------------------
Charles D. Kissner
/s/ Henry C. Montgomery Director June 4, 2001
- ------------------------------------------
Henry C. Montgomery
/s/ Robert W. Shaner Director June 4, 2001
- ------------------------------------------
Robert W. Shaner
/s/ Robert C. Wilson Director June 4, 2001
- ------------------------------------------
Robert C. Wilson
44
SPECTRIAN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants - PricewaterhouseCoopers LLP..................................... F-2
Report of Independent Accountants - KPMG LLP....................................................... F-3
Consolidated Balance Sheets........................................................................ F-4
Consolidated Statements of Operations.............................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss.................. F-6
Consolidated Statements of Cash Flows.............................................................. F-7
Notes to Consolidated Financial Statements......................................................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Spectrian Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and comprehensive
loss and of cash flows, present fairly, in all material respects, the financial
position of Spectrian Corporation and its subsidiaries at March 31, 2001 and
March 31, 2000, and the results of their operations and their cash flows for
each of the two years in the period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. 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 audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
April 17, 2001 except for Note 14, which is as of May 23, 2001
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Spectrian Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Spectrian Corporation and subsidiaries
for the year 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Spectrian Corporation and subsidiaries for the year 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
SPECTRIAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31,
----------------------
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 36,397 $ 11,553
Restricted cash .................................................................. 6,354 --
Short-term investments ........................................................... 73,512 36,027
Accounts receivable, less allowance for doubtful accounts
of $460 and $420, respectively ................................................. 27,587 23,817
Inventories ...................................................................... 22,221 34,542
Deferred tax asset ............................................................... 3,818 --
Prepaid expenses and other current assets ........................................ 4,918 4,400
--------- ---------
Total current assets ........................................................... 174,807 110,339
Property and equipment, net ......................................................... 11,632 19,668
Other assets ........................................................................ 1,584 1,268
--------- ---------
Total assets ................................................................... $ 188,023 $ 131,275
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 23,613 $ 16,416
Accrued liabilities .............................................................. 13,958 13,773
Income taxes payable ............................................................. 750 20
Deferred gain, current portion ................................................... 31,550 --
Current portion of debt and capital lease obligations ............................ -- 730
--------- ---------
Total current liabilities ...................................................... 69,871 30,939
Deferred gain, net of current portion ............................................... 19,650 --
Debt and capital lease obligations, net of current portion .......................... -- 1,351
--------- ---------
Total liabilities .............................................................. 89,521 32,290
--------- ---------
Commitments (Notes 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued and
outstanding .................................................................... -- --
Common stock, $0.001 par value, 20,000,000 shares authorized; 12,501,026
and 11,859,507 shares issued, respectively; 11,501,026 and 10,859,507 shares
outstanding, respectively ...................................................... 13 12
Additional paid-in capital ....................................................... 167,524 160,117
Treasury stock, 1,000,000 shares of common stock held ............................ (14,789) (14,789)
Deferred compensation expense .................................................... (69) (937)
Accumulated other comprehensive loss ............................................. (22,856) (617)
Accumulated deficit .............................................................. (31,321) (44,801)
--------- ---------
Total stockholders' equity ..................................................... 98,502 98,985
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 188,023 $ 131,275
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-4
SPECTRIAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended March 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
NET REVENUES .............................. $ 179,752 $ 163,567 $ 99,331
--------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues ....................... 145,055 129,998 96,880
Research and development ............... 20,762 22,488 26,735
Selling, general and administrative .... 21,602 19,337 16,315
Restructuring .......................... (100) 1,032 --
--------- --------- ---------
Total costs and expenses ............. 187,319 172,855 139,930
--------- --------- ---------
OPERATING LOSS ............................ (7,567) (9,288) (40,599)
INTEREST INCOME ........................... 2,850 3,344 4,540
INTEREST EXPENSE .......................... (162) (473) (853)
OTHER INCOME, NET ......................... 18,371 624 --
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ......... 13,492 (5,793) (36,912)
INCOME TAXES .............................. 12 30 59
--------- --------- ---------
NET INCOME (LOSS) ......................... $ 13,480 $ (5,823) $ (36,971)
========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic .................................. $ 1.21 $ (0.56) $ (3.50)
========= ========= =========
Diluted ................................ $ 1.19 $ (0.56) $ (3.50)
========= ========= =========
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic .................................. 11,113 10,426 10,568
========= ========= =========
Diluted ................................ 11,343 10,426 10,568
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
SPECTRIAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands, except share data)
Common Stock Paid-In Treasury
Shares Amount Capital Stock
---------- ---------- ---------- ----------
Balances as of April 1, 1998 .... 10,904,077 $ 10 $ 146,827 $ --
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 --
Stock-based compensation expense -- -- -- --
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 --
Stock-based compensation expense -- -- -- --
Net loss ........................ -- -- -- --
Unrealized losses on investments -- -- -- --
Comprehensive loss .............. -- -- -- --
---------- ---------- ---------- ----------
Balances as of March 31, 2000 .. 11,859,507 12 160,117 (14,789)
Exercise of stock options ....... 510,806 1 6,458 --
Employee stock purchase plan .... 130,713 -- 1,607 --
Deferred stock-based compensation -- -- (658) --
Stock-based compensation expense -- -- -- --
Net income ...................... -- -- -- --
Unrealized losses on investments -- -- -- --
Comprehensive loss .............. -- -- -- --
---------- ---------- ---------- ----------
Balances as of March 31, 2001 .. 12,501,026 $ 13 $ 167,524 $ (14,789)
========== ========== ========== ==========
Accumulated
Deferred Other Total
Compensation Accumulated Comprehensive Stockholders'
Expense Income (Loss) Income (Loss) Equity
---------- ---------- ---------- ----------
Balances as of April 1, 1998 .... $ (609) $ (2,007) $ 121 $ 144,342
Exercise of stock options ....... -- -- -- 1,223
Employee stock purchase plan .... -- -- -- 541
Purchase of treasury stock ...... -- -- -- (14,789)
Deferred stock-based compensation (997) -- -- --
Stock-based compensation expense 1,606 -- -- 1,606
Net loss ........................ -- (36,971) --
Unrealized gains on investments . -- -- 16
Comprehensive loss .............. -- -- -- (36,955)
---------- ---------- ---------- ----------
Balances as of March 31, 1999 .. -- (38,978) 137 95,968
Exercise of stock options ....... -- -- -- 7,421
Employee stock purchase plan .... -- -- -- 1,763
Deferred stock-based compensation (1,347) -- -- --
Stock-based compensation expense 410 -- -- 410
Net loss ........................ -- (5,823) --
Unrealized losses on investments -- -- (754)
Comprehensive loss .............. -- -- -- (6,577)
---------- ---------- ---------- ----------
Balances as of March 31, 2000 .. (937) (44,801) (617) 98,985
Exercise of stock options ....... -- -- -- 6,459
Employee stock purchase plan .... -- -- -- 1,607
Deferred stock-based compensation 658 -- -- --
Stock-based compensation expense 210 -- -- 210
Net income ...................... -- 13,480 --
Unrealized losses on investments -- -- (22,239)
Comprehensive loss .............. -- -- -- (8,759)
---------- ---------- ---------- ----------
Balances as of March 31, 2001 .. $ (69) $ (31,321) $ (22,856) $ 98,502
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-6
SPECTRIAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................ $ 13,480 $ (5,823) $(36,971)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Gain on sale of UltraRF ........................................ (18,853) -- --
(Gain) loss on sale of property and equipment, net ............. 61 (624) --
Depreciation and amortization .................................. 10,425 13,255 13,715
Equipment retirements, net ..................................... -- 375 1,409
Provision for doubtful accounts receivable ..................... 40 32 12
Provision for excess and obsolete inventories and write-down to
market ..................................................... 4,297 1,468 1,360
Stock compensation expense ..................................... 210 410 1,606
Loss on sale of short-term investments ......................... 488 -- --
Changes in deferred tax assets ................................. (3,818) -- --
Increase in income tax payable ................................. 730 -- --
Changes in operating assets and liabilities
(in fiscal 2001, net of the effect of sale of UltraRF):
Accounts receivable .......................................... (3,810) (10,866) 8,128
Inventories .................................................. 2,848 (15,184) (6,824)
Prepaid expenses and other assets ............................ (1,065) (2,204) 2,738
Accounts payable ............................................. 7,673 8,358 (2,398)
Accrued liabilities .......................................... (2,513) (4,091) 4,903
-------- -------- --------
Net cash provided by (used for) operating activities ....... 10,193 (14,894) (12,322)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments .............................. (17,434) (15,975) (45,868)
Proceeds from sale and maturities of short-term investments ...... 45,371 15,611 77,595
Costs associated with sale of UltraRF ............................ (9,844) -- --
Purchase of property and equipment ............................... (9,642) (7,731) (11,284)
Proceeds from sale of property and equipment ..................... 98 3,525 468
-------- -------- --------
Net cash provided by (used for) investing activities ....... 8,549 (4,570) 20,911
-------- -------- --------
Cash flows from financing activities:
Repayments of debt and capital lease obligations ................. (1,964) (4,421) (770)
Purchase of treasury stock ....................................... -- -- (14,789)
Proceeds from sales of common stock, net ......................... 8,066 9,184 1,764
-------- -------- --------
Net cash provided by (used for) financing activities ....... 6,102 4,763 (13,795)
-------- -------- --------
Net decrease in cash and cash equivalents .................. 24,844 (14,701) (5,206)
Cash and cash equivalents, beginning of year ............... 11,553 26,254 31,460
-------- -------- --------
Cash and cash equivalents, end of year ..................... $ 36,397 $ 11,553 $ 26,254
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................... $ 162 $ 473 $ 853
======== ======== ========
Taxes paid during the year ....................................... $ 3,100 $ 67 $ 59
======== ======== ========
Noncash investing and financing activities:
Exchange of short-term investments for restricted cash ......... $ 6,309 $ -- $ --
======== ======== ========
Deferred stock option compensation ............................. $ (658) $ 1,347 $ 997
======== ======== ========
Cree stock received for sale of UltraRF ........................ $ 94,503 $ -- $ --
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-7
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Spectrian Corporation and subsidiaries ("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, manufacture and marketing of high-power radio frequency
("RF") amplifiers for the global wireless communications industry. Prior to the
sale of its semiconductor division, that operated under the trade name UltraRF,
to Cree Inc. ("Cree") on December 29, 2000, the Company also produced
semiconductor devices for use in the design and manufacture of second and third
generation wireless infrastructure equipment. 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.
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
Revenues from product sales and repair and service transactions are
generally recognized when persuasive evidence of an arrangement exists, the
price is fixed or determined, collection is reasonably assured and delivery of
product or service has occurred. Reserves are provided for estimated returns.
Concentration of Credit Risk and Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including
cash and cash equivalents, restricted cash, short-term investments, equity
options, accounts receivable and long-term debt approximates fair market value,
since marketable equity securities have been valued at market, 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, restricted cash,
short-term investments, equity options and trade accounts receivable. Management
believes the financial risks associated with these financial instruments are
minimal. The Company maintains its cash and cash equivalents, restricted cash
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.
By using derivative financial instruments to hedge exposures to changes
in share prices for its marketable equity securities, the Company exposes itself
to credit risk and market risk. Credit risk is the risk that the counterparty
might fail to fulfill its performance obligations under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Company, which creates repayment risk for the Company.
When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, does not assume repayment risk. The Company
minimizes its credit (or repayment) risk in derivative instruments by (1)
entering into transactions with high-quality counterparties, (2) limiting the
amount of its exposure to each counterparty, and (3) monitoring the financial
condition of its counterparties. The Company also maintains a policy of
F-8
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
requiring that all derivative contracts be governed by an International Swaps
and Derivatives Association Master Agreement.
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, 2001.
The Company has classified its investments in certain debt securities,
equity options and common stock investments in Cree 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, 2001, the unrealized losses
on the Company's investments aggregated to $22,856,000.
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.
F-9
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
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.
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 undiscounted 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 and Comprehensive Loss.
Warranty
The Company's products are generally subject to warranty and the
Company provides for the estimated 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 (loss) or stockholders' equity.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The standard, as amended by Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, an amendment of FASB Statement No. 133, and Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to
hereafter as "FAS 133"), is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (April 1, 2001 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of
F-10
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
hedging relationship. For fair-value hedges in which the Company is hedging
against changes in an asset's fair value, the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. The ineffective portion of all hedges will be
recognized in current-period earnings.
While FAS 133 provides a significant change in the accounting guidance
related to derivative instruments and hedging activities, the Company has
determined that the more stringent accounting and documentation requirements
under FAS 133 will not cause any significant changes in its overall risk
management strategy and in its overall hedging activities.
On April 1, 2001, the Company adopted FAS 133 and accordingly recorded
a net-of-tax cumulative-effective-type gain adjustment of less than $1 million.
2. SALE OF ULTRARF
On December 29, 2000, the Company completed the sale of substantially
all of the assets and liabilities comprising the Company's semiconductor
division, UltraRF, pursuant to the Asset Purchase Agreement dated as of November
20, 2000 (the "Asset Purchase Agreement") among Cree, Zoltar Acquisition, Inc.
("Zoltar") and the Company for 1,815,402 shares of Cree common stock valued at
$64,503,000, based upon the per share price at the date of closing, plus common
stock of Cree with a guaranteed realizable value of $30 million, less $1,141,000
owed by the Company to Cree due to a change in the net assets of UltraRF between
October 1, 2000 and December 29, 2000. Of the total consideration received,
191,094 shares of Cree common stock were placed in escrow to secure the
Company's representations, warranties and covenants under the Asset Purchase
Agreement over a 12-month period. In January 2001, the Company sold all the
shares held in escrow for approximately $6,309,000 and recognized a loss of
approximately $481,000 from the sale of these securities. Accordingly, the cash
proceeds received from the sale of escrow shares plus interest earned totaling
$6,354,000 was classified as restricted cash in the financial statements.
As part of the definitive agreement, the Company and Cree entered into
a two-year supply agreement under which Spectrian is obligated to purchase from
Cree an aggregate of $58 million of semiconductors. In the event Spectrian fails
to make these purchases, it is obligated to pay Cree the amount of the
shortfall. Accordingly, the Company deferred $58 million of the gain on sale of
UltraRF and is recognizing it in periods as the related purchase commitments to
Cree are being fulfilled. In addition, Spectrian and Cree entered into a
one-year joint development agreement to develop advanced technologies related to
laterally diffused metal oxide semiconductors ("LDMOS"), linear high gain LDMOS
driver modules, high efficiency LDMOS power modules and SiC MESFET components,
under which Spectrian will pay to Cree a development fee of $2.4 million in four
quarterly installments of $600,000 beginning in April 2001. The Company also
subleased one of the facilities in Sunnyvale, California, to Cree for a term of
11 years (with three options to extend the lease an additional five years) with
similar terms as the lease agreement between the Company and its landlord.
The Company realized an aggregate gain of $69.7 million from the sale
of UltraRF assets, of which $58.0 million was deferred as noted above, with the
balance of $11.7 million being recognized as other income during third quarter
of fiscal 2001. During the fourth quarter fiscal 2001, Spectrian recognized a
gain of $7.2 million as other income.
Summarized below are the unaudited pro forma results of the Company as
though UltraRF had been sold at April 1, 1999 (in thousands, except per share
data):
F-11
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Year Ended March 31
2001 2000
Total revenue $ 178,671 $ 162,687
========== =========
Net loss $ (8,436) $ (13,914)
========== =========
Net loss per share basic and diluted $ (0.76) $ (1.33)
========== =========
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had the
disposal taken place at the beginning of fiscal 2000 or of future results of
operations of the Company. The gain on sale of UltraRF has not been included in
the pro forma results above because it is non-recurring and directly related to
the sale.
3. EQUITY OPTION CONTRACTS
The Company has an investment in the common stock of Cree (see Note 2
above). The Company's investment exposes it to a risk related to the effects of
changes in price of Cree common stock. This financial exposure is monitored and
managed by the Company. The Company's risk-management focuses on the
unpredictability of financial markets and seeks to reduce the potentially
adverse effects that the volatility of these markets may have on the Company.
The Company uses cashless collars, which are a combination of option contracts,
to hedge this risk.
In January 2001, the Company entered into various option arrangements
known as a cashless collar, expiring from July 2001 to October 2001, to hedge
one million shares of the Cree common stock on hand. As a result, the Company
should be able to realize an average of $25.25 per share for the one million
hedged shares if the share price of Cree common stock is lower than
approximately $25.25 per share when the options expire. If the Cree common stock
price exceeds an average of $41.68 per share when the options expire, the
Company may sell its hedged shares at approximately $41.68 or settle the options
for a cash amount equal to the difference between the Cree common stock price
and the option price. Until the options expire, the Company will be restricted
from disposing of the one million shares.
F-12
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
4. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Available-for-sale securities at March 31, 2001 and 2000 were as
follows (in thousands):
Amortized Unrealized Gain Fair
As of March 31, 2001 Cost (Loss) Value
-------------------- ---- ------ -----
Government bonds and notes................................... $ 23,355 $ 120 $ 23,475
Corporate bonds and notes.................................... 41,164 144 $ 41,308
Common stock investments..................................... 57,713 (33,397) 24,316
Equity options............................................... -- 10,277 10,277
--------- --------- ---------
122,232 (22,856) 99,376
Less amounts classified as cash equivalents.................. 25,864 -- 25,864
--------- --------- ---------
Short-term investments....................................... $ 96,368 $ (22,856) $ 73,512
========= ========= =========
Contractual maturity dates of bonds and notes:
Less than 1 year........................................ $ 8,931
1 to 5 years............................................ 29,988
---------
$ 38,919
=========
Amortized Unrealized Gain Fair
As of March 31, 2000 Cost (Loss) Value
-------------------- ---- ------ -----
Government bonds and notes................................... $ 14,599 $ (166) $ 14,433
Corporate bonds and notes.................................... 29,545 (451) 29,094
--------- --------- ---------
44,144 (617) 43,527
Less amounts classified as cash equivalents.................. 7,500 -- 7,500
--------- --------- ---------
Short-term investments....................................... $ 36,644 $ (617) $ 36,027
========= ========= =========
Contractual maturity dates of bonds and notes:
Less than 1 year........................................ $ 3,500
1 to 5 years............................................ 32,527
---------
$ 36,027
=========
5. BALANCE SHEET COMPONENTS
Balance sheet components at March 31, 2001 and 2000 are as follows (in
thousands):
March 31,
2001 2000
---- ----
Inventories:
Raw materials..................................... $ 11,185 $ 16,763
Work in progress.................................. 5,699 10,353
Finished goods.................................... 5,337 7,426
---------- --------
$ 22,221 $ 34,542
========== ========
F-13
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
March 31,
2001 2000
---- ----
Property and equipment:
Machinery and equipment........................... $ 47,341 $ 58,322
Software.......................................... 3,819 4,248
Leasehold improvements............................ 2,673 3,781
-------- --------
53,833 66,351
Less accumulated depreciation and amortization.... 42,201 46,683
-------- --------
$ 11,632 $ 19,668
======== ========
Depreciation expense was $10,374,000, $13,154,000 and $13,614,000 for
fiscal 2001, 2000 and 1999, respectively. Amortization expense was $51,000,
$101,000 and $101,000 for fiscal 2001, 2000 and 1999, respectively.
Accrued liabilities:
Employee compensation and benefits................. $ 2,839 $ 4,310
Warranty........................................... 9,800 7,123
Restructuring...................................... -- 996
Other accrued liabilities.......................... 1,319 1,344
-------- -------
$ 13,958 $13,773
======== ======
6. 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. It is anticipated that the Company will renew the line
of credit. Under the terms of the master agreement governing this credit
instrument, as amended, 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. In February 2001, the Company was in default of certain
covenants and the bank has granted a waiver of the default. The Company was in
compliance with all debt covenants as of March 31, 2001. The amount available to
borrow at March 31, 2001 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, 2001 was 8% and 6.9%,
respectively. The Company had no borrowings under the line of credit at March
31, 2001.
Purchase Commitments
As described in Note 2, the Company has signed a two-year supply
agreement with Cree on December 29, 2000 to purchase $58.0 million of
semiconductors. The Company fulfilled its purchase obligation for the fourth
quarter of fiscal 2001 and recognized $6.8 million of the deferred gain. As of
March 31, 2001, the Company has an obligation to purchase an additional $51.2
million of semiconductors from Cree under the supply agreement, of which $31.6
million of purchases are required to be made in fiscal 2002 and $19.6 million of
purchases are required to be made in fiscal 2003.
F-14
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
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.
During the third quarter of fiscal 2001, the Company paid off the outstanding
principal balance of this term loan.
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, which was sold to Cree in connection with the sale of UltraRF. See Note 2.
During fiscal 1997, the Company sold its principal facilities in
Sunnyvale, California 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. In
connection with the sale of UltraRF to Cree in December 2000, the Company
subleased one of the two facilities under the aforementioned operating lease to
Cree for the remaining term of the lease under substantially the same term and
conditions as the Company's lease.
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.
The Company also leases facilities in Folsom, California; Qunicy,
Illinois; and Korea to support its administrative, development, manufacturing,
repair, sales and marketing activities.
Future minimum lease payments under all noncancelable operating leases
and sublease income under these operating leases as of March 31, 2001 are as
follows (in thousands):
Lease Payments Sublease Income
-------------- ---------------
2002 .......................... $ 2,821 $ 1,341
2003 .......................... 2,762 1,349
2004 .......................... 2,319 1,020
2005 .......................... 2,237 907
2006 .......................... 2,241 907
Thereafter..................... 11,906 5,140
--------- ----------
$ 24,286 $ 10,664
======== ========
Rent expense was $2,859,000, $2,300,000 and $3,323,000 for the years
ended March 31, 2001, 2000 and 1999, respectively. Sublease rental income was
$615,000 and $310,000 for the year ended March 31, 2001 and 2000, respectively,
and none for the year ended March 31, 1999.
F-15
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
7. 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"), amended and restated in January 1997,
August 2000 and January 2001. 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 plans, 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.
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. In August 2000, an
additional 400,000 shares were reserved 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.
F-16
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
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, 25,000 shares were granted and 45,000 shares were cancelled during fiscal
2001.
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. In the second quarter of fiscal 2001, 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.
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 Stock Plan. In fiscal 1998, one officer and two employees were granted a
combined total of 90,000 options outside of the Plans at exercise prices ranging
from $16.88 to $56.38, which are subject to the same vesting schedule as that of
the 1992 Stock Plan. During fiscal 1999, 91,667 options were cancelled. In
fiscal 2000, two officers and one employee were granted a combined total of
410,000 options outside of the Plans at an exercise price ranging from $11.38 to
$23.06, which are subject to the same vesting schedule as that of the 1992 Plan.
During fiscal 2001, 22,917 options were cancelled.
F-17
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
The following table summarizes option activity under the Company's
various plans:
Weighted
Average
Available for Options Exercise
Grant Outstanding Price
----- ----------- -----
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
Additional shares reserved................................... 650,000 -- --
Granted...................................................... (1,221,950) 1,221,950 15.12
Exercised.................................................... -- (510,806) 12.65
Canceled (1)................................................. 1,089,096 (1,112,013) 20.46
---------- ----------
Outstanding as of March 31, 2001................................ 602,719 2,870,667 $17.34
=========== ==========
<FN>
- ------------------
(1) 91,667 shares which were outside of the Plans were cancelled in fiscal 1999
and 22,917 shares which were outside of the Plans were cancelled in fiscal
2001 and were not available for re-grant.
</FN>
The following tables summarize information about stock options
outstanding at March 31, 2001:
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 2001 Life (Years) Price 2001 Price
------ ---- ------------ ----- ---- -----
$ 0.20 - $ 12.56 460,037 8.81 $11.24 119,598 $8.46
$12.75 - $ 14.25 471,116 8.84 13.12 106,399 13.06
$14.38 - $ 14.75 463,387 6.15 14.58 378,643 14.55
$14.88 - $ 18.75 486,611 8.97 16.60 77,163 15.98
$19.00 - $ 22.50 507,150 8.54 21.30 156,602 21.68
$22.56 - $ 36.00 410,833 8.89 23.77 109,777 24.27
$36.63 - $ 64.13 71,533 6.31 42.37 65,808 42.10
--------- ---------
$0.20 - $ 64.13 2,870,667 8.31 $17.34 1,013,990 $17.73
========= =========
Using the Black-Scholes Option-Pricing Model, the per share weighted
average fair market value of stock options granted during fiscal 2001, fiscal
2000 and fiscal 1999 were $11.14, $15.32 and $10.86, respectively, on the date
of grant. Assumptions used with the Black-Scholes Option-Pricing Model were as
follows:
F-18
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Fiscal Year
-----------------------------------
2001 2000 1999
---- ---- ----
Risk-free interest rate........ 5.8% 5.8% 5.4%
Expected term of options....... 5.5 years 5.3 years 4.4 years
Expected volatility............ 89.7% 86.2% 81.0%
Expected dividend yield........ 0.0% 0.0% 0.0%
Stock-Based Compensation
Under the 1998 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. The Company has also granted certain consultants stock options
under the 1992 Plan and 1998 Plan. In fiscal 2001, the Company granted one
consultant 7,500 shares under the 1998 Plan at an exercise price of $15.50,
which were fully vested at the date of grant. Stock-based compensation expense
related to grant of stock options to employees and 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. Accordingly during fiscal 2001, due to a decline in the
share price, the Company recorded a net reduction in deferred compensation
expense of $658,000. In connection with the grant of stock options to these
employees and consultants, the Company recorded stock-based compensation expense
of $210,000, $410,000 and $1,606,000 for fiscal 2001, 2000 and 1999,
respectively. As of March 31, 2001, the Company expects to amortize stock-based
compensation expense of $29,000 in fiscal 2002, $29,000 in fiscal 2003, $11,000
and in fiscal 2004.
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 six-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 286,188 shares of Common Stock available for issuance as of
March 31, 2001. During the fiscal years ended March 31, 2001 and 2000, shares
totaling 130,713 and 191,233 were acquired under the Purchase Plan at an average
per share price of $12.30 and $9.22, 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:
F-19
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Fiscal Year
---------------------------------
2001 2000 1999
---- ---- ----
Risk-free interest rate............. 5.6% 5.0% 5.4%
Expected term of options............ 0.5 years 0.5 years 0.4 years
Expected volatility................. 110.3% 86.2% 81.0%
Expected dividend yield............. 0.0% 0.0% 0.0%
The per share weighted average fair market value of those purchase
rights granted in fiscal 2001, fiscal 2000 and fiscal 1999 was $6.50, $6.08 and
$3.87, 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):
Year Ended March 31,
---------------------------------------
2001 2000 1999
----------- ----------- ----------
Net income (loss):
As reported ........... $ 13,480 $ (5,823) $ (36,971)
=========== =========== ==========
Pro forma ............. $ 3,325 $ (15,099) $ (40,972)
=========== =========== ==========
Earnings (loss) per share:
Basic:
As reported ......... $ 1.21 $ (0.56) $ (3.50)
=========== =========== ==========
Pro forma ........... $ 0.30 $ (1.45) $ (3.88)
=========== =========== ==========
Diluted:
As reported ......... $ 1.19 $ (0.56) $ (3.50)
=========== =========== ==========
Pro forma ........... $ 0.29 $ (1.45) $ (3.88)
=========== =========== ==========
Pro forma net income (loss) reflects only the options granted since
April 1, 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options granted
prior to April 1, 1995 is not considered.
F-20
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
8. 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 2001, 2000 and 1999, the Company contributed $514,000, $148,000 and
$209,000, respectively, in contributions to the Benefit Plan.
9. INCOME TAXES
The components of the provision for (benefit from) income taxes in the
statement of operations are as follows (in thousands):
Year Ended March 31,
----------------------------------
2001 2000 1999
------- ------- -------
Current:
Federal ............................. $ 3,713 $ -- $ --
State ............................... 105 10 59
Foreign ............................. 12 20 --
------- ------- -------
Total current ..................... 3,830 30 59
------- ------- -------
Deferred:
Federal ............................. (3,245) -- --
State ............................... (573) -- --
Foreign ............................. -- -- --
------- ------- -------
Total deferred .................... (3,818) -- --
------- ------- -------
Total provision for income taxes ....... $ 12 $ 30 $ 59
======= ======= =======
Income tax expense for the years ended March 31, 2001, 2000 and 1999
differs from the amount computed by applying the federal income tax rate of 34%
to pretax income (loss) from operations as a result of the following (in
thousands):
Year Ended March 31,
---------------------------------
2001 2000 1999
-------- -------- ---------
Federal tax (benefit) at statutory rate .... $ 4,587 $ (1,970) $(12,550)
State tax, net of Federal benefit .......... 283 10 59
Alternative minimum tax .................... 295 -- --
FSC tax expense ............................ 12 20 --
Change in valuation allowance .............. (5,290) 2,299 12,093
Other ...................................... 125 (329) 457
-------- -------- --------
Income tax expense ......................... $ 12 $ 30 $ 59
======== ======== ========
F-21
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
The components of significant portions of the deferred tax assets and
liabilities are presented below (in thousands):
March 31,
---------------------
Deferred tax assets: 2001 2000
-------- --------
Various accruals and reserves ..................... $ 6,706 $ 4,893
Net operating loss carryforwards .................. -- 22,411
Credit carryforwards .............................. 4,364 7,180
Property and equipment depreciation differences ... 607 --
Unrealized loss on available for sale securities .. 7,561 --
Deferred gain ..................................... 20,634 --
-------- --------
Total gross deferred tax assets ................. 39,872 34,484
Less valuation allowance .......................... (36,054) (33,783)
-------- --------
Total deferred tax assets ....................... $ 3,818 $ 701
-------- --------
Deferred tax liabilities:
Property and equipment depreciation differences ... $ -- $ (701)
-------- --------
Total gross deferred tax liabilities .............. -- (701)
-------- --------
Net deferred tax assets .............................. $ 3,818 $ --
======== ========
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 valuation allowance against
deferred tax assets where the realization is uncertain. The valuation allowance
reduces the net deferred tax asset to the amount that is estimated may be
recovered through carryback from future periods. The Company will continue to
evaluate positive and negative evidence on 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.
The Company has approximately $2.3 million of Federal and California
research credit carryforwards. If not utilized, the Federal carryforwards will
expire in various amounts beginning 2003. The California research credit can be
carried forward indefinitely. The Company also has an alternative minimum tax
credit of approximately $2.1 million which can be carried forward indefinitely
and offset against regular tax.
Included in the deferred tax assets is approximately $15.5 million of
assets relating to the stock option compensation which will be credited to
equity when realized and $7.6 million related to unrealized loss on available
for sale securities which will be credited to accumulated other comprehensive
loss in equity if the valuation allowance is reduced in the future.
10. PER SHARE COMPUTATION
For fiscal 2001, options to purchase 1,451,242 common shares were
outstanding, but were not included in the computation of diluted net income per
share because the exercise prices of the options were greater than the average
market price of the common shares. 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.
F-22
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
A reconciliation of the basic and diluted per share calculation
follows:
Year ended March 31,
------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------- --------------------------------
Per Per Per
Net Share Net Share Net Share
Income Shares Amount Loss Shares Amount Loss Shares Amount
------ ------ ------ ---- ------ ------ ---- ------ ------
Basic ................. $ 13,480 11,113 $ 1.21 $ (5,823) 10,426 $ (0.56) $(36,971) 10,568 $ (3.50)
Effect of stock options -- 230 (0.02) -- -- -- -- -- --
-------- ------ -------- -------- ------ -------- -------- ------ --------
Diluted ............... $ 13,480 11,343 $ 1.19 $ (5,823) 10,426 $ (0.56) $(36,971) 10,568 $ (3.50)
======== ====== ======== ======== ====== ======== ======== ====== ========
11. CUSTOMER CONCENTRATIONS
For the year ended March 31, 2001, three customers accounted for
approximately 59%, 18% and 13% of net revenues. 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. Three customers accounted for an aggregated of 90%
of accounts receivable at March 31, 2001 and two customers accounted for an
aggregate of 86% of accounts receivable at March 31, 2000. The Company has
written off bad debts of $40,000 in fiscal years 2001, and none for the fiscal
years of 2000 and 1999, respectively.
12. SEGMENT INFORMATION
The Company operated and reported its financial information as one
vertical integrated unit in the fiscal year ended 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. Under the management approach, the Company divided its business into two
divisions based upon product type: Amplifier Division and Semiconductor
Division, which operated under the tradename of UltraRF. UltraRF derived
virtually all of its net revenues from sales to the Amplifier Division. The
Company allocated operating expenses to these segments but did not allocate
interest income and expense. Corporate expenses were allocated to the operating
segments based on predetermined annual allocation methods. Appropriate
intersegment eliminations were made in the consolidation of the Company's
consolidated financial statements. Following the sale of UltraRF on December 29,
2000, the Company began operating as one vertical integrated unit. See Note 2.
Segment information for fiscal 2001 and fiscal 2000 is as follows:
Consolidated Statement of Operations Data - Fiscal 2001 (in thousands):
Year Ended March 31, 2001
--------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
Net revenues, external .......... $ 178,671 $ 1,081 $ -- $ 179,752
Net revenues, intersegment ...... -- 23,487 (23,487) --
Amortization and depreciation ... 5,290 2,185 2,950 10,425
Income (loss) before income taxes (7,605) 313 20,784 13,492
F-23
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Consolidated Statement of Operations Data - Fiscal 2000 (in thousands):
Year Ended March 31, 2000
-----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
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........... (13,401) 4,113 3,495 (5,793)
<FN>
*Data in the "Other" column represents the elimination of intersegment revenues,
interest income and expense, other income, the provision for income taxes,
certain unallocated corporate expenses and corporate amortization and
depreciation that is subsequently allocated to the operating segments.
</FN>
Consolidated Balance Sheet Data (in thousands):
March 31, 2001
-----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
Segment Assets........................................ $ 30,235 $ -- $3,618 $33,853
Expenditures for additions to long-lived assets....... $ 5,228 $3,478 $ 936 $ 9,642
March 31, 2000
-----------------------------------------------------------
Amplifier UltraRF Other Total
--------- ------- ----- -----
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
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 were as follows:
Year ended March 31,
--------------------------------
2001 2000 1999
---- ---- ----
SCPA ........................... 63% 77% 90%
MCPA ........................... 33% 20% 4%
Other........................... 4% 3% 6%
----- ----- -----
Total Revenue................... 100% 100% 100%
===== ===== =====
F-24
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Geographic Segment Data:
Revenue from unaffiliated customers by geographic region as a
percentage of net revenues were as follows:
Year Ended March 31,
--------------------------------
2001 2000 1999
---- ---- ----
Canada......................... 42% 42% 57%
South Korea.................... 18% 16% 14%
United States.................. 22% 13% 16%
France......................... 12% 26% 13%
Other.......................... 6% 3% --%
The Company's long-lived assets are located in the following countries
(in thousands):
March 31,
-------------------------
2001 2000
---- ----
United States .......................... $ 7,966 $18,226
Thailand ............................... 2,707 1,218
Korea .................................. 959 224
------- -------
$11,632 $19,668
======= =======
13. 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 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. In
fiscal 2001, the Company reversed $100,000 of unused restructuring charge due to
changes in the restructuring plan. Approximately 60 employees engaged in
manufacturing and production related functions were terminated as a result of
the restructuring during fiscal 2001. The transfer of production to Thailand was
completed during the third quarter of fiscal 2001. The following table
represents the restructuring activity that took place up to March 31, 2001 (in
thousands):
Reduction in
Workforce
---------
Reserve for estimated severance costs................... $ 1,032
Cash payment of severance costs......................... (932)
Reversal of estimated severance costs................... (100)
--------
Balance at March 31, 2001 $ --
========
F-25
SPECTRIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
14. SUBSEQUENT EVENTS
Cree Common Stock and Option Transactions
In May 2001, the Company sold 524,000 shares of Cree common stock for
about $15.4 million and recognized a loss of approximately $3.2 million. In
addition, the Company entered into various option arrangements, known as
cashless collar, expiring in May 2002, to hedge the remaining 100,000 shares of
Cree stock on hand. As a result, the Company should be able to realize $26.05
per share for 100,000 shares if the share price of Cree common stock is lower
than $26.05 per share when the options expire. If the Cree common stock price
exceeds of $36.25 per share when the options expire, the Company may sell its
hedged shares at approximately $36.25 or settle the options for a cash amount
equal to the difference between the Cree common stock price and the option
price. Until the options expire, the Company will be restricted from disposing
of the 100,000 shares.
Line of Credit
In May 2001, the Company renewed its line of credit expiring in June
2001 for one year at terms substantially similar to the old line.
F-26