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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JULY 1, 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 of (I.R.S. Employer Identification Number)
ncorporation or organization)
350 West Java Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)
Telephone Number (408) 745-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of July 30, 2001 there were 11,586,600 shares of the Registrant's Common
Stock outstanding.
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SPECTRIAN CORPORATION
FORM 10-Q
INDEX
FOR QUARTER ENDED JULY 1, 2001
Page
PART I - FINANCIAL INFORMATION
item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 1, 2001 and March 31, 2001..................... 3
Condensed Consolidated Statements Of Operations - Three Months Ended July 1, 2001 and
July 2, 2000......................................................................... 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended July 1, 2001 and July
2, 2000................................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 31
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................................................ 32
Signatures.................................................................................................. 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
July 1, March 31,
2001 2001 (1)
---- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,761 $ 36,397
Restricted cash 3,213 6,354
Short-term investments 64,540 73,512
Accounts receivable, less allowance for doubtful
accounts of $460 and $460, respectively 14,953 27,587
Inventories 26,779 22,221
Deferred tax asset 3,818 3,818
Prepaid expenses and other current assets 6,033 4,918
--------- ---------
Total current assets 171,097 174,807
Property and equipment, net 10,813 11,632
Other assets 1,573 1,584
--------- ---------
Total assets $183,483 $188,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,373 $ 23,613
Accrued liabilities 14,477 13,958
Income taxes payable 697 750
Deferred gain, current portion 30,600 31,550
Current portion of debt and capital lease obligations 124 --
--------- ---------
Total current liabilities 60,271 69,871
Deferred gain, net of current portion 13,100 19,650
Debt and capital lease obligations, net of current portion 45 --
--------- ---------
Total liabilities 73,416 89,521
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none
issued and outstanding, respectively -- --
Common stock, $0.001 par value, 20,000,000 shares authorized;
12,583,060 and 12,501,026 shares issued, respectively; 11,583,060
and 11,501,026 shares outstanding, respectively 13 13
Additional paid-in capital 168,446 167,524
Treasury stock, 1,000,000 shares of common stock held (14,789) (14,789)
Deferred compensation expense (62) (69)
Accumulated other comprehensive loss (7,994) (22,856)
Accumulated deficit (35,547) (31,321)
--------- ---------
Total stockholders' equity 110,067 98,502
--------- ---------
Total liabilities and stockholders' equity $183,483 $188,023
========= =========
<FN>
(1) Derived from the March 31, 2001 audited balance sheet included in the 2001
Annual Report on Form 10-K of Spectrian Corporation.
See accompanying notes to condensed consolidated financial statements.
</FN>
3
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
---------------------
July 1, July 2,
2001 2000
-------- --------
REVENUES $ 30,440 $ 42,190
-------- --------
COSTS AND EXPENSES:
Cost of revenues 29,852 35,268
Research and development 5,932 5,601
Selling, general and administrative 4,708 5,660
Restructuring costs 686 --
-------- --------
Total costs and expenses 41,178 46,529
-------- --------
OPERATING LOSS (10,738) (4,339)
INTEREST INCOME 887 597
INTEREST EXPENSE (8) (46)
OTHER INCOME, NET 5,154 --
-------- --------
LOSS BEFORE INCOME TAXES (4,705) (3,788)
INCOME TAXES 15 12
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (4,720) (3,800)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -
ADOPTION OF SFAS 133 494 --
-------- --------
NET LOSS $ (4,226) $ (3,800)
-------- --------
NET LOSS PER SHARE:
Basic and diluted loss per share before cumulative effect
of change in accounting principle $ (0.41) $ (0.35)
Cumulative effect of change in accounting principle 0.04 --
-------- --------
Basic and diluted net loss per share $ (0.37) $ (0.35)
======== ========
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic and diluted 11,552 10,916
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
4
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
---------------------
July 1, July 2,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,226) $ (3,800)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in accounting principle (494) --
Changes in fair value of equity options (1,772)
Depreciation and amortization 1,342 2,928
Gain on the sale of UltraRF (7,500) --
Loss on sale of short-term investments 4,104
Loss on sale and write-off of property and equipment, net 483 5
Stock option compensation expense 7 139
Decrease in income tax payable (53) --
Changes in operating assets and liabilities:
Accounts receivable 12,634 (3,511)
Inventories (4,558) (42)
Prepaid expenses and other assets (1,104) (1,762)
Accounts payable (9,240) 2,900
Accrued liabilities 519 (983)
-------- --------
Net cash used in operating activities (9,858) (4,126)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (13,023) --
Proceeds from sale and maturities of short-term investments 34,947 4,922
Release of restricted cash 3,213 --
Purchase of property and equipment (837) (2,245)
-------- --------
Net cash provided by investing activities 24,300 2,677
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations -- (140)
Proceeds from sales of common stock, net 922 1,215
-------- --------
Net cash provided by financing activities 922 1,075
-------- --------
Net increase (decrease) in cash and cash equivalents 15,364 (374)
Cash and cash equivalents, beginning of period 36,397 11,553
-------- --------
Cash and cash equivalents, end of period $ 51,761 $ 11,179
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 8 $ 46
======== ========
Cash paid for income taxes $ 68 $ 12
======== ========
Acquisition of equipment under capital lease obligations $ 169 $ --
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
5
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements
of Spectrian Corporation and subsidiaries ("Spectrian" or the "Company") have
been prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments (which are of a normal and recurring nature)
necessary for the fair presentation of the financial information set forth
therein. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as set forth on pages F-1
through F-26 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2001. The interim results presented herein are not necessarily
indicative of the results of operations that may be expected for the full fiscal
year ending March 31, 2002, or any other future period.
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, Inc. ("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.
On June 29, 2001, one-half of the cash proceeds from the sale of escrow shares
plus interest earned in the amount of $3,213,000 was released from escrow. The
remaining amount of approximately $3,213,000 held in escrow on July 1, 2001 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
6
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
income during third quarter of fiscal 2002. During the first quarter fiscal
2001, Spectrian recognized a gain of $7.5 million as other income as the related
purchase commitment was fulfilled by the Company.
3. ADOPTION OF SFAS 133
The Company adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, 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 "SFAS 133"), on April 1, 2001. In accordance with
the transition provisions of SFAS 133, the Company recorded an approximate
$494,000 gain cumulative effect adjustment in earnings as of April 1, 2001.
Accounting for Derivatives and Hedging Activities
All derivatives are recognized on the balance sheet at their fair
value. On the date that the Company enters into a derivative contract, it
designates the derivative as (1) a hedge of the fair value of a recognized asset
or liability or (2) an instrument that is held for trading or non-hedging
purposes (a "trading" or "non-hedging" instrument). Since April 1, 2001, the
Company has designated all derivative contacts as a fair value hedge and has not
entered into derivatives for the purposes of trading. Changes in the fair value
of a derivative that is highly effective as - and that is designated and
qualifies as - a fair-value hedge, along with changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, are recorded
in current-period earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value hedges to specific
assets on the balance sheet. The Company also formally assesses (both at the
hedge's inception and on an ongoing basis) whether the derivatives that are used
in hedging transactions have been highly effective in offsetting changes in the
fair value of hedged items and whether those derivatives may be expected to
remain highly effective in future periods. When it is determined that a
derivative is not (or has ceased to be) highly effective as a hedge, the Company
discontinues hedge accounting prospectively.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value of a hedged item; (2) the derivative expires or is sold,
terminated, or exercised; or (3) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
Derivative Instruments and Hedging Activities
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 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 its operating
results. The Company uses cashless collars, which are combinations of option
contracts to hedge this risk. The Company generally hedges 60 to 100 percent of
investments in Cree common stock. The Company excludes from its assessment of
hedge effectiveness the gain or loss associated with the time value of the
options.
7
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
At July 1, 2001, 885,000 shares of Cree common stock were hedged and
these option arrangements will expire from August 2001 to May 2002. Accordingly,
the Company should realize an average of $25.34 per share for the hedged shares
if the share price of Cree common stock is lower than approximately $25.34 per
share when the options expire. If the Cree common stock price exceeds an average
of approximately $41.21 per share when the options expire, the Company may sell
its hedged shares at $41.21 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 hedged
shares unless it also disposes of the associated options.
For the quarter ended July 1, 2001, the Company recognized a net gain
of $1.8 million, (included in other income in the statement of operations),
which represented the time value of the options.
By using derivative financial instruments to hedge exposures to changes
in share prices, 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 requiring that all derivative contracts
be governed by an International Swaps and Derivatives Association Master
Agreement.
4. OTHER INCOME, NET
Other income, net included (in thousands):
Three Months Ended
------------------
July 1, July 2,
2001 2000
---- ----
Gain on sale of UltraRF $7,500 $ --
Loss on sale of Cree, Inc. common stock and options (4,118) --
Gain on Cree, Inc. common stock options 1,772 --
------ -----
Other income, net $5,154 $ --
====== =====
8
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
July 1, March 31,
2001 2001
---- ----
Inventories:
Raw materials $10,609 $11,185
Work in progress 2,737 5,699
Finished goods 13,433 5,337
------- -------
$26,779 $22,221
======= =======
Property and equipment:
Machinery and equipment $42,704 $47,341
Software 3,839 3,819
Leasehold improvements 2,711 2,673
------- -------
49,254 53,833
Less accumulated depreciation and amortization 38,441 42,201
------- -------
$10,813 $11,632
======= =======
Accrued liabilities:
Employee compensation and benefits $ 3,035 $ 2,839
Warranty 9,300 9,800
Restructuring 518 --
Other accrued liabilities 1,624 1,319
------- -------
$14,477 $13,958
======= =======
6. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS 141
will not have a significant impact on their financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is
effective for fiscal years beginning after December 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the testing for impairment
of existing goodwill and other intangibles. The Company is currently assessing
but has not yet determined the impact of SFAS 142 on their financial position
and results of operations. The Company will adopt SFAS 142 in the quarter
beginning April 1, 2002.
9
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. SHORT-TERM INVESTMENTS
The Company considers all liquid investments with an original maturity
of three months or less to be cash equivalents. As of July 1, 2001, the cash
equivalents consisted of commercial paper and U.S. government securities.
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. Unrealized unhedged gains and
losses on debt securities and common stock investments in Cree are reported as a
separate component of stockholders' equity. Realized gains and losses are
determined using the specific identification method. Interest income is recorded
using an effective interest rate, with the associated premium or discount
amortized to interest income.
As of July 1, 2001 and March 31, 2001, short-term investments
classified as available-for-sale securities were as follows (in thousands):
Amortized Unrealized Gain Fair
As of July 1, 2001 Cost (Loss) Value
- ---------------------------------------------------------------- ---------------- ----------------- -----------------
Government bonds and notes................................... $ 26,136 $ 125 $ 26,261
Corporate bonds and notes.................................... 31,249 191 31,440
Cree, Inc. common stock...................................... 31,456 (8,310) 23,146
Cree, Inc. common stock options ............................. -- 2,266 2,266
-------- -------- --------
88,841 (5,728) 83,113
Less amounts classified as cash equivalents.................. 18,573 -- 18,573
-------- -------- --------
Short-term investments....................................... $ 70,268 $ (5,728) $ 64,540
======== ======== ========
Contractual maturity dates of short-term investment in bonds and notes:
Less than 1 year........................................ $ 14,607
1 to 5 years............................................ 24,521
---------
$ 39,128
========
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
Cree, Inc. common stock...................................... 57,713 (33,397) 24,316
Cree, Inc. common stock 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 short-term investment in bonds and notes:
Less than 1 year........................................ $ 8,931
1 to 5 years............................................ 29,988
---------
$ 38,919
========
10
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
8. PER SHARE COMPUTATION
Basic net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share is computed using the weighted average number of common and
potentially dilutive common shares outstanding during the period using the
treasury stock method. Potentially dilutive common shares include the effect of
stock options. For the three months ended July 1, 2001 and July 2, 2000,
2,849,491 and 3,215,017 stock options were not included in the calculation of
diluted net loss per share as they were considered antidilutive due to the net
loss the Company experienced in these fiscal periods.
9. SEGMENT INFORMATION
Geographic Segment Data:
Revenue from unaffiliated customers by geographic region as a
percentage of revenues were as follows:
Three Months Ended
------------------
July 1, July 2,
2001 2000
---- ----
Canada 37% 35%
United States 35% 34%
China 13% --
South Korea 11% 5%
France 2% 25%
Other countries 2% 1%
----- -----
Total 100% 100%
===== =====
The Company's long-lived assets are located in the following countries
(in thousands):
July 1, March 31,
2001 2001
---- ----
United States $ 6,766 $ 7,966
Thailand 2,630 2,707
South Korea 1,417 959
-------- --------
$ 10,813 $ 11,632
======== ========
10. RESTRUCTURING COSTS
During the first quarter of fiscal 2002, the Company decided to
transfer its power amplifier repair operations in Sunnyvale, California, to a
contract manufacturer located in Thailand. In connection with the decision, the
Company recognized in the first quarter of fiscal 2002 an approximately $686,000
restructuring charge for estimated severance costs related to organizational
changes and a planned reduction in work force and to write off property and
equipment that have no future value to the Company. Approximately 60 employees
engaged in the repair operations are anticipated to be terminated as a result of
11
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
the restructuring. The Company anticipates that the restructuring will be
substantially completed in the second quarter of fiscal 2002. The following
table represents the restructuring activity that took place up through July 1,
2001 (in thousands):
Asset Reduction in
Write-offs Workforce Other
(Non Cash) (Cash) (Cash) Total
---------- ------ ------ -----
Accrual for restructuring charges $ 161 $ 485 $ 40 $ 686
Cash payment of severance costs -- (7) -- (7)
Write-off of property and equipment (161) -- -- (161)
----- ----- ------ -----
Balance at July 1, 2001 $ -- $ 478 $ 40 $ 518
===== ===== ====== =====
The balance of the restructuring accrual is included in accrued
liabilities on the condensed consolidated balance sheets.
11. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130 ("SFAS 130")
"Reporting Comprehensive Income" establishes rules for the reporting and display
of comprehensive income and its components. The following are the components of
comprehensive income (loss) (in thousands):
Three Months Ended
------------------
July 1, July 2,
2001 2000
------- -------
Net loss $(4,226) $(3,800)
Unrealized gain (loss) on marketable securities 14,862 115
------- -------
Comprehensive income (loss) $10,636 $(3,685)
======= =======
The components of accumulated other comprehensive loss are as follows
(in thousands):
July 1, March 31,
2001 2001
------- -------
Unrealized loss on marketable securities $(7,994) $(22,856)
======= ========
12. COMMITMENTS
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 first
quarter of fiscal 2002 and recognized $7.5 million of the deferred gain. As of
July 1, 2001, the Company has an obligation to purchase an additional $43.7
million of semiconductors from Cree under the supply agreement, of which $30.6
million of purchases are required to be made over the next 12 months and $13.1
million of purchases are required to be made starting the second quarter of
fiscal 2003.
12
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
13. LINE OF CREDIT
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of credit
expires on June 30, 2002. Under the terms of the master agreement governing this
credit instrument, as amended, the Company is required to maintain certain
minimum working capital, profitability and other specific financial ratios. The
master agreement also has certain restrictions on other indebtedness and the
payment of dividends. At July 1, 2001, the Company was in default of certain
covenants and the bank has granted a waiver of the default for the quarter ended
July, 1 2001. The amount available to borrow at July 1, 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 July
1, 2001 was 6.8% and 5.8%, respectively. The Company had no borrowings under the
line of credit at July 1, 2001.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding Spectrian Corporation's ("the Company") expectations, hopes,
intentions or strategies regarding the future. When used herein, the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of the Securities Act and the Exchange Act.
Forward looking statements include, 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 and the future fluctuations of Nortel
product orders, in the fourth paragraph regarding international sales as a
percentage of future revenues and the impact of currency fluctuations on future
revenues in the fifth paragraph regarding the timing of the transfer of power
amplifier repair operations, 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 statement under
"Results of Operations - Income Taxes" regarding the recoverability and the
recording of the net deferred tax asset; the statements in the last paragraph
under "Liquidity and Capital Resources" concerning 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
Quarterly Report on Form 10-Q.
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 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
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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. In the quarter ended July 1, 2001,
Spectrian fulfilled its purchase obligation under the contract and recognized
$7.5 million of the deferred gain. Spectrian and Cree also 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 three months ended July 1, 2001, Nortel Networks Corporation
("Nortel") and Verizon Communications ("Verizon"), accounted for approximately
76% and 10% of net revenues, respectively. For the three months ended July 2,
2000, Nortel and Verizon accounted for approximately 61% and 28% 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 the past, product orders from Nortel have fluctuated sharply
and the Company does not currently sell any multicarrier products to Nortel,
which has adversely affected the Company's revenues and earnings in prior fiscal
periods. There can be no assurance that the Company will not experience such
fluctuations in the future or that the Company will receive any orders for
multicarrier products from Nortel in the future. If the Company is unable to
find other customers to generate demand for its new and existing 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 the three months ended July 1, 2001 and July 2, 2000, sales
outside of the United States were 65% and 66%, 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, China 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company currently services its power amplifier products in
Sunnyvale, California. During the quarter ended July 1, 2001, the Company began
to transition its power amplifier repair operations to a contract manufacturer
located in Thailand. The Company anticipates that the transfer of its power
amplifier repair operations will be substantially completed in the quarter ended
September 30, 2001. In September 2000, the Company completed the transfer of its
power amplifier production from Sunnyvale, California, to the same contract
manufacturer 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 several
merchant amplifier manufacturers 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
Three Months Ended
------------------
July 1, July 2,
2001 2000
------- ------
NET REVENUES 100.0% 100.0%
------ ------
COSTS AND EXPENSES:
Cost of revenues 98.1 83.6
Research and development 19.5 13.3
Selling, general and administrative 15.4 13.4
Restructuring costs 2.3 --
------- ------
Total costs and expenses 135.3 110.3
----- -----
Operating loss (35.3) (10.3)
INTEREST INCOME 2.9 1.4
INTEREST EXPENSE -- (0.1)
OTHER INCOME 16.9 --
------- ------
LOSS BEFORE INCOME TAXES (15.5) (9.0)
INCOME TAXES -- --
------- ------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (15.5) (9.0)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - ADOPTION OF SFAS 133 1.6 --
NET LOSS (13.9)% (9.0)%
======== =======
GROSS MARGIN ON SALES 1.9% 16.4%
======== =======
Net Revenues. The Company's net revenues decreased 28% to $30.4 million
for the three months ended July 1, 2001 from $42.2 million for the three months
ended July 2, 2000. The decrease in net revenues compared to the three months
ended July 2, 2000 is primarily due to lower demand in all product lines as a
result of delays and reductions in capital spending by the Company's customers
and a decline in the average selling prices of single carrier power amplifier
("SCPA") products. Multicarrier power amplifier ("MCPA") revenues decreased 32%
to $5.9 million for the three months ended July 1, 2001 from $8.7 million for
the three months ended July 2, 2000. SCPA revenues decreased 14% to $22.2
million for the three months ended July 1, 2001 from $25.8 million for the three
months ended July 2, 2000. Broadband revenues decreased 90% to $0.6 million for
the three months ended July 1, 2001 from $6.0 million for the three months ended
July 2, 2000.
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 sales decreased by 15% to $29.9 million for the three months ended July
1, 2001 from $35.3 million for the three months ended July 2, 2000. The decrease
on a dollar and percentage basis for the three months ended July 1, 2001 were
due to lower sales.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Gross margin on sales was 2% for the three months ended July 1, 2001 as
compared to 16% for the three months ended July 2, 2000. The decrease in gross
margin was due to a higher per unit manufacturing costs for SCPA products, lower
production volumes to absorb fixed overhead costs, and a decline in the average
selling prices of SCPA products. The Company anticipates that gross margin as a
percentage of net revenues will continue to be adversely effected 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 declining
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 increased by 6% to
$5.9 million in the three months ended July 1, 2001 from $5.7 million in the
three months ended July 2, 2000. As a percentage of net revenues, R&D expenses
represented 20% of net revenues for the three months ended July 1, 2001 as
compared to 13% of revenues for the three months ended July 2, 2000. The
increase in R&D expenses on a dollar basis for the three months ended July 1,
2001 reflects new product development initiatives which the Company believes are
required to meet current and future market and customer requirements and the
cost of the development agreement between the Company and Cree. The increase in
R&D expenses as a percentage of net revenues for the three months ended July 1,
2001 was due to higher R&D expense on a dollar basis and lower revenues as
compared to the similar period in the prior year.
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 decreased by 17% to $4.7 million in the three months
ended July 1, 2001 from $5.6 million in the three months ended July 2, 2000. As
a percentage of net revenues, SG&A expenses represented 15% of net revenues for
the three months ended July 1, 2001 as compared to 13% of net revenues for the
three months ended July 2, 2000. The decrease in SG&A expenses on a dollar basis
was primarily due to lower commissions associated with lower sales as compared
to the similar period in the prior year and reduced general and administrative
spending as a result of the sale of UltraRF in December 2000. The increase in
SG&A expenses as a percentage of net revenues for the three months ended July 1,
2001 was due to lower revenues as compared to the similar period in the prior
year.
Restructuring Costs. During the first quarter of fiscal 2002, the
Company decided to transfer its power amplifier repair operations in Sunnyvale,
California, to a contract manufacturer located in Thailand. In connection with
the decision, the Company recognized in the first quarter of fiscal 2002 an
approximately $686,000 restructuring charge for estimated severance costs
related to organizational changes and a planned reduction in work force and to
write off property and equipment that have no future value to the Company.
Approximately 60 employees engaged in the repair operations are anticipated to
be terminated as a result of the restructuring. The Company anticipates that the
restructuring will be substantially completed in the second quarter of fiscal
2002.
Interest Income. Interest income for the three months ended July 1,
2001 increased to $0.9 million from $0.6 million for the three months ended July
2, 2000. The increase in interest income resulted from higher interest-bearing
investment balances associated with higher average cash and cash equivalent
balances.
Interest Expense. Interest expense for the three months ended July 1,
2001 decreased to $8,000 from $46,000 for the three months ended July 2, 2000.
The decrease in interest expense was a result of substantially reduced average
borrowing levels due to repayments of debt and capital lease obligations made in
association with the sale of UltraRF in December 2000.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Other Income. Other income for the three months ended July 1, 2001
increased to $5.2 million from none for the three months ended July 2, 2000.
Other income for the three months ended July 1, 2001 includes a $7.5 million
gain recognized on sale of UltraRF in December 2000, a $1.8 million gain
associated with the increase in value of Cree stock options, partially offset by
a $4.1 million realized loss on sale of a portion of Cree common stock
investments.
Income Taxes. The Company did not record income tax expense except for
minimum state taxes and foreign taxes in the three months ended July 1, 2001 and
July 2, 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.
Cumulative Effect of Change in Accounting Principle - Adoption of
SFAS133. The Company adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, 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 "SFAS 133"), on April 1, 2001. In the three months
ended December 31, 2000 and the three months ended July 1, 2001, the Company
entered into various option arrangements known as a cashless collar, to hedge
its investment in Cree common stock, which was acquired through the sale of
UltraRF. The Company has designated these option arrangements as fair value
hedges under SFAS 133. In accordance with the transition provisions of SFAS 133,
the Company recorded an approximate $494,000 gain cumulative effect adjustment
in earnings as of April 1, 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS 141
will not have a significant impact on their financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is
effective for fiscal years beginning after December 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the testing for impairment
of existing goodwill and other intangibles. The Company is currently assessing
but has not yet determined the impact of SFAS 142 on their financial position
and results of operations. The Company will adopt SFAS 142 in the quarter
beginning April 1, 2002.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company has financed its growth through sales of common stock,
private sales of equity securities, capital equipment leases, bank lines of
credit and cash flows from operations. Principal sources of liquidity at July 1,
2001 consisted of cash and cash equivalent, restricted cash, short-term debt
investments, investment in Cree common stock and options which total $119.5
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
expires on June 30, 2002. Under the terms of the master agreement governing this
credit instrument, as amended, the Company is required to maintain certain
minimum working capital, profitability and other specific financial ratios. The
master agreement also has certain restrictions on other indebtedness and the
payment of dividends. The Company was in default of certain debt covenants as of
July 1, 2001 and the bank has granted a waiver of the default for the quarter
ended July 1, 2001. The amount available to borrow at July 1, 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 July 1, 2001 was 6.8% and 5.8%, respectively. The Company had no borrowings
under the line of credit at July 1, 2001.
The Company's working capital increased by $5.9 million to $110.8
million as of July 1, 2001 from $104.9 million as of March 31, 2001. The
increase was primarily attributable to a $9.2 million decrease in accounts
payable due to lower production volumes associated with lower sales as compared
with the three months ended March 31, 2001, a $1.0 million decrease in
short-term deferred gain as a result of fulfilling the $7.5 million purchase
commitments to Cree in the three months ended July 1, 2001, partially offset by
the reclassification of $6.5 million from long-term deferred gain to short-term
deferred gain, a $4.6 million increase in net inventory due to increased
finished goods caused by lower than expected revenues compared with the
Company's revenue outlook, a $1.1 million increase in prepaid expenses and other
assets and a $3.3 million increase in cash and short-term investments, which
were partially offset by a $12.6 million decrease in accounts receivable as a
result of lower sales and improved days-outstanding ratio and a $0.5 million
increase in accrued liabilities primarily due to the reserve for restructuring
charges. The Company's short-term debt investments were principally invested in
investment grade, interest-bearing securities.
Cash used by operations was $9.9 million for the three months ended
July 1, 2001 compared to cash used by operations for the three months ended July
2, 2000 of $4.1 million. Cash used by operations for the three months ended July
1, 2001 was principally the result of a $4.2 million net loss, a $0.5 million
non-cash cumulative-effect gain related to the adoption of SFAS 133 on April 1,
2001, a $1.8 million non-cash gain associated with changes in fair value of Cree
stock options not related to their hedging function, a $7.5 million recognized
non-cash gain from the sale of UltraRF, a $9.2 million decrease in accounts
payable due to lower production volumes associated with lower sales, a $4.6
million increase in net inventory due to increased finished goods caused by a
lower than expected revenue compared with the Company's revenue outlook, a $1.1
million increase in prepaid expenses and other assets, which were partially
offset by a $12.6 million decrease in accounts receivable as a result of lower
sales and improved days-outstanding ratio, a $4.1 million realized loss on the
sale of Cree common stock, a $1.3 million depreciation and amortization expense,
a $0.5 million loss on the sale and write-off of property and equipment and a
$0.5 million increase in accrued liabilities primarily due to the reserve for
restructuring charges.
Cash used by operations for the three months ended July 2, 2000 was
principally the result of a $3.8 million net loss, a $3.5 million increase in
accounts receivable, which increased as a result of the timing of shipments late
in the quarter, a $1.8 million increase in prepaid expenses and other current
assets and a $1.0 million reduction in accrued liabilities which were partially
offset by a $2.9 million increase in
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
accounts payable, which increased proportionately with production levels, and
depreciation and amortization of $2.9 million.
The Company's investing activities during the three months ended July
1, 2001 provided cash of approximately $24.3 million as compared to providing
cash of $2.7 million during the comparable period in the prior year. Cash
provided by investing activities during the three months ended July 1, 2001
resulted primarily from $35.0 million proceeds from sale and maturities of
short-term investments, which included approximately $22.2 million generated
from the sale of 739,000 shares of Cree common stock, and $3.2 million from the
release of restricted cash, which represented one-half of the amount held in
escrow to secure the Company's representations, warranties and covenants related
to the sale of UltraRF to Cree, partially offset by $13.0 million in purchases
of short-term investments and $0.8 million in additions to property and
equipment. Capital additions for the three months ended July 1, 2001 included
manufacturing test and production equipment required to support new products and
test equipment to support various research and development projects.
Cash provided by investing activities during the three months ended
July 2, 2000 resulted primarily from $4.9 million in proceeds from sale and
maturities of short-term investments which were partially offset by $2.2 million
in additions to property and equipment. Capital additions for the three months
ended July 2, 2000 included manufacturing test and production equipment required
to support new products and test equipment to support various research and
development projects.
The Company's financing activities during the three months ended July
1, 2001 provided cash of approximately $0.9 million as compared to providing
$1.1 million of cash during the comparable period in the prior year. Cash
provided by financing activities during the three months ended July 1, 2001 was
the result of $0.9 million proceeds from the issuance of common stock, through
the exercise of employee stock options and employee stock purchase plan
activity.
Cash provided by financing activities during the three months ended
July 2, 2000 was the result of $1.2 million in proceeds from the issuance of
common stock, through the exercise of employee stock options, which was
partially offset by $0.1 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 the two-year period ending December 2002.
The Company anticipates spending approximately $5.0 million over the next twelve
months for capital additions primarily to support manufacturing production and
test requirements and development projects. Based on the Company's current
working capital position and the available line of credit, the Company believes
that sufficient resources will be available to meet the Company's cash
requirements for at least the next twelve months. Cash requirements for future
periods will depend on the Company's profitability, timing and level of capital
expenditures, working capital requirements and rate of growth.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Factors Affecting Future Operating Results
Customer Concentration; Dependence on Nortel and Verizon. The wireless
infrastructure equipment market is dominated by a small number of large OEMs and
wireless service providers, including Ericsson, Lucent, Motorola, Samsung,
Nortel, Verizon and Siemens. The Company's revenues are derived primarily from
sales to a limited number of these customers, in particular, Nortel, Verizon and
Samsung. 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 the Company does not
currently sell any multicarrier amplifier products to Nortel, which has
adversely affected the Company's business. There can be no assurance that the
Company will receive any product orders for multicarrier amplifier products from
Nortel in the future. 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 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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 a significant volume of
amplifiers from outside suppliers. In addition, these manufacturers could decide
to sell amplifiers to other wireless equipment OEMs. If this should occur, the
competition for power amplifiers would significantly increase and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company also believes that those OEMs that purchase from third
party amplifier vendors are reluctant to switch once committed to a particular
merchant vendor. Consequently, the Company has only limited opportunities to
increase revenues by replacing internal OEM amplifier production or displacing
other merchant amplifier suppliers. Moreover, given the limited opportunities
for merchant power amplifier suppliers, any decision by an OEM to employ a
second source merchant supplier for a product currently purchased from a
merchant supplier may reduce the existing merchant supplier's ability to
maintain a given level of product sales to such OEM or, possibly, to retain the
OEM as a customer due to price competition from the second source merchant
supplier. There can be no assurance that the Company's major OEM customers will
continue to rely, or increase their reliance, on the Company as an external
source of supply for their power amplifiers, or that other wireless equipment
OEMs will become customers of the Company.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. ("UltraRF") of $58 million of semiconductors over a
two-year period starting January 2001. The quarterly commitments to purchase and
accept delivery of semiconductor components from UltraRF range from
approximately $6.6 million to $9.2 million. The Company's need for UltraRF
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 are less favorable to the Company than prior
to the sale of UltraRF to Cree.
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. In fiscal
2001, 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. In addition, the Company began the
process of transferring its power amplifier repair operations to the same
contract manufacturer in Thailand in the quarter ended July 1, 2001 and expects
to substantially complete this transfer in the
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
quarter ended September 30, 2001. 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 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 and repair services strategy entail certain
risks including reduced control over the price, timely delivery, reliability and
quality of the components and reliance on the financial strength and continued
relationship with the contract manufacturer. 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, repair services 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
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
political turmoil, such delays could have a material adverse effect on the
Company's business, financial condition and results of operations.
Reliance upon Growth of Wireless Services. Sales of power amplifiers to
wireless infrastructure equipment suppliers 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, Paradigm Communications, Inc.
and Powerwave Technologies Inc.. 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
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
measures will provide adequate protection for the Company's trade secrets or
other proprietary information, or that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors. The failure of the Company to protect its proprietary
technology could have a material adverse effect on its business, financial
condition and results of operations.
Risk of Third Party Claims of Infringement. The communications
equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company or otherwise secure rights to
use such technology could cause the Company to incur substantial liabilities, to
suspend the manufacture of products or expend significant resources to develop
noninfringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, if at all. In the event that any third party makes a
successful claim against the Company or its customers and either a license is
not made available to the Company on commercially reasonable terms or a "design
around" is not practicable, the Company's business, financial condition and
results of operations would be materially adversely affected.
Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation by or
against 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. For example, recently enacted laws
and regulations which prohibit the use of hand held cellular telephones while
operating a motor vehicle may have a material adverse affect on 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
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to adopt new standards for such products, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process have in the past caused, and may
in the future cause, the cancellation, postponement or rescheduling of the
installation of communications systems by the Company's OEM customers. These
delays have had in the past, and in the future may have, a material adverse
effect on the sale of products by the Company to such OEM customers.
Environmental Regulations. The Company is subject to a variety of
local, state and federal governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
Company believes that it is currently in compliance in all material respects
with such regulations and that it has obtained all necessary environmental
permits to conduct its business. Nevertheless, the failure to comply with
current or future regulations could result in the imposition of substantial
fines on the Company, suspension of production, alteration of its manufacturing
processes or cessation of operations. Compliance with such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Any failure by the Company to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous or toxic substances, could subject the Company to
significant liabilities, including joint and several liabilities under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, financial condition and results of operations. In
addition, the Company is liable for any potential claim, loss or expense
incurred by Cree as a result of any inaccuracy or breach of the environmental
representations and warranties made by the Company in connection with the sale
of UltraRF. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors Affecting Future Operating Results - Escrow
Funds."
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.
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
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company does not have a detailed disaster recovery plan and its facilities in
the State of California are 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, reliance on single source
vendors, 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
the first quarter of fiscal 2002, the Company sold 739,000 shares of Cree common
stock for approximately $22.2 million and recognized a loss of approximately
$4.1 million. Between January to May 2001, the Company entered into various
option arrangements, known as a cashless collar, expiring from August 2001 to
May 2002, to hedge the remaining 885,000 shares of Cree common stock on hand. As
a result, the Company is able to realize an average of $25.34 per share ("the
floor price") for the 885,000 hedged shares if the share price of Cree is lower
than the floor price when the options expire. If the Cree stock price exceeds an
average of $41.21 ("the ceiling price") when the options expire, the Company may
sell its hedged shares at the ceiling price or settle the options for a cash
amount equal to the difference between the Cree stock price and the ceiling
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 July 1, 2001, the unrealized loss on the Company's
investments in Cree common stock was approximately $8.3 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 885,000 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.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Escrow Funds. Of the total consideration paid under the Asset Purchase
Agreement, 191,094 shares of Cree common stock, valued at approximately $6.8
million on December 29, 2000, was 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. On June 29, 2001, $3.2 million
representing one-half of the proceeds from the sale of escrow shares plus
interest earned was released from the escrow account. If any claims for
indemnification are made against the Company anytime prior to December 29, 2001,
whether meritorious or not, the Company may be delayed or precluded from
realizing the remaining $3.2 million proceeds placed in escrow. In addition, the
funds placed in escrow do not cover any potential claims, losses or expenses
incurred by Cree as a direct or indirect result of any inaccuracy or breach of
the intellectual property, taxes or environmental representations and warranties
made by the Company in connection with the sale of UltraRF. The Company's
liability with respect to any such potential claim, loss or expense incurred by
Cree is unlimited and the filing of any such claim could materially adversely
affect the Company's business, results of operations and financial condition. As
of July 1, 2001, no claims for indemnification had been filed against the
Company.
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.
30
ITEM 3. 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 885,000 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 July 1, 2001 and March 31, 2001 (dollars in thousands).
July 1, March 31,
2001 2001
---- ----
Average fixed interest rate 5.1% 5.5%
======= =======
Amortized cost $38,812 $38,655
======= =======
Fair value $39,128 $38,919
======= =======
Contractual maturity dates:
Less than 1 year $14,607 $ 8,931
1 to 5 years 24,521 29,988
------- --------
$39,128 $38,919
======= =======
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 the first quarter of fiscal 2002,
the Company sold 739,000 shares of Cree common stock for approximately $22.2
million and realized a loss of approximately $4.1 million. Between January to
May 2001, the Company entered into various option arrangements, known as a
cashless collar, expiring from August 2001 to May 2002, to hedge the remaining
885,000 shares of Cree common stock on hand. As a result, the Company is able to
realize an average of $25.34 per share for the 885,000 hedged shares if the
share price of Cree is lower than $25.34 when the options expire. If the Cree
stock price exceeds an average of $41.21 when the options expire, the Company
may sell its hedged shares at $41.21 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 unless it also disposes of the associated options. Following the adoption
of SFAS 133 on April 1, 2001, the Cree common stock options were valued at
approximately $2.3 million and included in the Company's short term investments
at July 1, 2001. The value of these options will fluctuate with the share price
of Cree. A fall in the fair value of Cree common stock below approximately
$25.34 at the expiration of the option arrangements would result in an
approximate $3.0 million loss compared to the fair value of Cree related
investments at July 1, 2001.
31
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
10.40.1 Form of Change in Control Severance Agreement between the
Registrant and Joseph M. Madden, Harry W. Oh, and David S.
Piazza.
10.40.2 Change in Control Severance Agreement between the
Registrant and Thomas H. Waechter.
10.40.3 Change in Control Severance Agreement between the
Registrant and Michael D. Angel.
10.53 Loan Modification Agreement between the Company and Silicon
Valley Bank dated August 2, 2001.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended July 1, 2001.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRIAN CORPORATION
(Registrant)
Dated: August 3, 2001 By: /s/ MICHAEL D. ANGEL
---------------------------
Michael D. Angel
Executive Vice President,
Finance and Administration,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial and Accounting Officer)
33
INDEX TO EXHIBITS
Exhibit
Number Description
10.40.1 Form of Change in Control Severance Agreement between the
Registrant and Joseph M. Madden, Harry W. Oh, and David S.
Piazza.
10.40.2 Change in Control Severance Agreement between the
Registrant and Thomas H. Waechter.
10.40.3 Change in Control Severance Agreement between the
Registrant and Michael D. Angel.
10.53 Loan Modification Agreement between the Company and Silicon
Valley Bank dated August 2, 2001.
34