UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
Commission file number: 0-24360
SPECTRIAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0023003
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
350 West Java Drive, Sunnyvale, California 94089
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (408) 745-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Series A Participating Preferred Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on May 18,
1998 as reported on the Nasdaq National Market, was approximately $124,769,768.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of May 18, 1998, registrant had outstanding 10,907,605 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 1998 Annual Meeting
of Stockholders to be held June 26, 1998.
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such forward looking statements involve risks
and uncertainties. When used in this Report, the words "expects," "anticipates,"
and "estimates" and similar expressions are intended to identify forward looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include those discussed below and those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" or
documents incorporated by reference herein. Spectrian Corporation undertakes no
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date this Report is filed with the
Securities and Exchange Commission or to reflect the occurrence of unanticipated
events.
Spectrian Corporation (the "Company" or "Spectrian") designs, manufactures
and markets highly linear radio frequency ("RF") power amplifiers that address
the needs of wireless infrastructure original equipment manufacturers ("OEMs")
and their service provider customers. The Company's amplifiers have been
deployed in wireless networks in over 35 countries worldwide. Spectrian's
amplifiers deliver high linearity, are cost-effectively produced in volume,
support multiple transmission standards and demonstrate high field reliability.
These attributes enable service providers to improve spectrum efficiency
resulting in reduced cost per subscriber, to rapidly deploy new services and to
offer enhanced quality and reliability of service.
Industry Background
The market for cellular, personal communications services ("PCS") and
wireless local loop ("WLL") communications services (collectively known as
"wireless" services) has grown significantly during the past decade, fueled by
decreasing prices for wireless handsets, a more favorable regulatory
environment, increasing competition among service providers and a greater
availability of services and RF spectrum. In addition, several developing
countries are installing wireless telephone networks as an alternative to
installing, expanding or upgrading traditional wireline networks. Emerging
bidirectional wireless data applications have the potential to further expand
the market for wireless communications by allowing service providers to increase
revenue generating traffic on their networks. The Strategis Group estimates that
the number of wireless subscribers worldwide will grow from 205 million in 1997
to 675 million in 2002.
The growth in wireless communications has required, and will continue to
require, substantial investment by service providers in infrastructure
equipment. The Yankee Group estimates that spending by wireless service
providers on infrastructure equipment was approximately $32 billion in 1997 and
will rise to approximately $93 billion in 2002. A typical wireless
communications system comprises a geographic region containing a number of
cells, each of which contains a cell site (or "base station"), which are
networked to form a service provider's coverage area. Each base station houses
the equipment that receives incoming telephone calls from the switching office
of the local wireline telephone company and broadcasts calls to the wireless
users within the cell. A base station contains a fixed number of RF channels; in
a single carrier system, each separate channel requires a separate transceiver,
single channel power amplifier and tunable cavity filter, along with an antenna
to transmit the outgoing signal to the wireless telephone user. Most existing
wireless systems use single channel power amplifiers. The power amplifier
receives a relatively weak signal from the transceiver and significantly boosts
the power of that signal so that it can be broadcast throughout the cell, which
typically covers a geographic area up to five miles in radius. The RF power
levels necessary to transmit the signal over the required range must be achieved
without distorting the modulation characteristics of the signal.
Traditional cellular systems are capable of carrying only one call per
channel of spectrum and are based on analog technology. This limitation combined
with the continuing growth of the wireless communications market has resulted in
the crowding of transmissions within the available RF spectrum.
1
Because the radio frequencies assigned to transmissions are fixed, service
providers are seeking new methods to use the RF spectrum more efficiently to
increase capacity. Analog systems are being supplanted by digital systems, which
convert voice transmissions into bits of electronic information and thereby use
the finite RF spectrum allocated to wireless transmissions to serve growing
demand. Three dominant digital transmission modulation formats have emerged for
cellular and PCS networks that are known as Time Division Multiple Access
("TDMA"), Code Division Multiple Access ("CDMA") and Global System for Mobile
Communication ("GSM"). These transmission modulation formats allow a digital
network to have a call capacity of three to eight times the number of voice
conversations as an analog network. Existing analog cellular networks are in the
process of upgrading to digital formats that operate at frequencies between 800
MHZ and 1000 MHZ, and new digital cellular networks are being constructed around
the world as new licenses are being awarded. In addition to the growth in
digital cellular networks, 1997 was a year of significant growth for new digital
PCS networks that may be more desirable to wireless service providers, because
such networks also allow a higher volume of calls in a given RF spectrum than
analog cellular networks. PCS networks operate in the 1800 MHZ to 2000 MHZ
frequency range but typically have a smaller coverage area per base station than
their cellular counterparts. Thus PCS networks need two to three times as many
base stations (and power amplifiers) as digital cellular networks. Service
providers are upgrading their cellular networks to digital and deploying new PCS
networks, trends which the Company believes will increase rapidly. The
implementation of digital and PCS networks, in conjunction with the continued
growth in analog networks, has resulted in an increased demand for network
infrastructure equipment.
Wireless carriers are also increasing system capacity by implementing
dynamic channel allocation, which allows the service provider to automatically
move available unused channels from less active base stations to busier adjacent
base stations as the demand load moves, such as during commuter rush hours.
Systems with dynamic channel allocation are more easily implemented with
multicarrier power amplifiers, which can simultaneously broadcast signals using
multiple transmission standards over a variable number of channels. The need to
increase system capacity, combined with the development of multicarrier power
amplifiers, has also encouraged wireless carriers to transition from "macrocell"
base stations (which typically have a five mile radius) to microcells. When the
number of subscribers within the macrocell exceeds the capacity of its
equipment, the cell can be split into several smaller microcells to avoid a
degradation in service. The geographic range of these microcells is smaller and
requires equipment that consumes less power and is less expensive at each base
station, but more microcells are required in order to increase the capacity of
the overall system.
Wireless carriers' ability to more effectively manage scarce spectrum
resources and accommodate a larger number of subscribers is dependent on their
ability to broadcast signals with high "linearity." Linearity is the degree to
which amplified signals remain within their prescribed band of the spectrum with
low distortion or interference from adjacent channels. In current systems, the
RF power amplifier is generally the source of the greatest amount of signal
distortion. Consequently, obtaining RF power amplifiers with high linearity is
critical to a service provider's ability to reduce interference levels and
thereby increase system capacity. For example, higher linearity amplifiers are
required as the industry transitions from analog to digital technologies without
significant improvements in power amplifier linearity relative to that required
for analog networks. Multiple conversations on a single channel would lead to
unacceptable channel interference. Consequently, high linearity is even more
critical in digital networks than in analog networks. Multicarrier power
amplifiers, which are critical to the use of dynamic channel allocation and
microcells, require leading edge linearity technology to function properly.
Substantial investment and technical expertise are required to design and
manufacture RF power amplifiers with high linearity.
Wireless service providers compete in dynamic markets characterized by
evolving and competing industry standards, technologies and applications, and
those wireless service providers that are able to increase the efficiency and
lower the cost of new and existing systems will compete most effectively.
Wireless service providers must anticipate evolving industry standards and
invest in infrastructure equipment that both maximizes efficiency in the
management of the limited spectrum licensed to them and is available in volume
for rapid deployment.
2
Service providers obtain their equipment from a concentrated group of large
OEMs. The Company believes that Lucent Technologies, Inc. ("Lucent"), Ericsson
Telephone Company ("Ericsson"), Motorola Corporation ("Motorola"), Northern
Telecom Limited ("Northern Telecom"), Nortel Matra Communications ("Nortel
Matra"), in which Northern Telecom has an equity interest, and Nokia OY
("Nokia") supplied over 80% of the wireless infrastructure equipment installed
worldwide in 1997. Most of these OEMs manufacture base station components
internally. However, in response to competition and as the performance
requirements of certain components increase, many of these OEMs have begun to
rely on independent sources for certain system components, such as power
amplifiers, that must meet unique technical requirements. To succeed in
capturing orders from these OEMs, power amplifier suppliers must rapidly bring
to market products that are highly linear, can be produced in volume
cost-effectively, support multiple standards and are reliable in the field.
The Spectrian Solution
Spectrian Corporation designs, manufactures and markets highly linear RF
power amplifiers that address the needs of wireless infrastructure OEMs and
their service provider customers. The Company's amplifiers provide significant
advantages to its customers, including:
High Linearity. Spectrian has developed the multiple technological
competencies and disciplines required to achieve high linearity in its
amplifiers. These competencies and disciplines include RF semiconductor
technology, solid state device physics, thermal and mechanical packaging design,
advanced circuit design, amplifier linear correction technologies, advanced
signal processing techniques, control systems and computer aided design and
modeling. The Company believes that its combined strengths in these areas
provide it with an important competitive advantage in maintaining technological
leadership. The high degree of linearity of the Company's amplifiers enables
Spectrian's OEM customers to furnish wireless service providers with high
capacity base station equipment at low capital cost per subscriber.
Rapid Time to Market and Volume Manufacturing. The vertical integration of
Spectrian's design and production processes is a key element of the Company's
ability to address wireless infrastructure equipment suppliers' quantity and
time to market requirements for power amplification products. The Company's
ability to design and manufacture its RF semiconductors in-house is critical to
rapidly and cost-effectively introducing new products that meet OEMs' evolving
needs. Spectrian also designs its amplifiers to be manufactured in high volumes
at low cost, which the Company believes has been a competitive advantage in
securing orders from its OEM customers because power amplifiers have
historically been difficult to manufacture in high volumes based upon the labor
intensive nature of the manufacturing process and the complexities of RF power
technology. Finally, the Company's use of automated testing reduces overall
manufacturing cycle times and enables the Company to deliver products in volume
more rapidly.
Standards Independence. Spectrian's technologies support every major
wireless modulation standard, and its multicarrier power amplifiers support
several standards simultaneously. Certain of the Company's single carrier
products support both analog and digital standards in a dual mode format. The
Company believes that this breadth of product functionality is important to
wireless service providers as they upgrade their cellular infrastructure
equipment and implement digital systems in an environment characterized by
evolving industry standards and the proliferation of spectrum allocation.
High Quality and Reliability. Spectrian designs its power amplifiers to be
highly reliable in the field. Spectrian's integrated design and manufacturing
processes are important factors contributing to its ability to develop and
produce highly reliable power amplifiers. In order to further address customer
requirements for amplifier quality and reliability and to ensure process quality
control, Spectrian has implemented a continuous process improvement program
throughout the Company and is ISO 9001 certified.
Multicarrier Functionality. Spectrian develops and supplies multicarrier
amplifiers that integrate the functions of multiple single carrier power
amplifiers into a single smaller unit while simultaneously eliminating the need
for cavity filters. The Company believes that the distortion reduction
performance of its multicarrier amplifiers will provide it with an important
competitive advantage. The ability of the Company's multicarrier products to
combine multiple digital and analog channel schemes enables carriers
3
to maintain backward compatibility as they add digital transmission and
implement dynamic channel allocation solutions. In addition, multicarrier units
can potentially reduce service providers' equipment and maintenance costs and
space requirements, thereby facilitating the implementation of microcells.
Spectrian Strategy
Spectrian's objective is to strengthen its position as the leading merchant
supplier of highly linear power amplifiers to wireless infrastructure equipment
manufacturers and service providers worldwide. The Company's strategy
incorporates the following key elements:
Capitalize on Vertical Integration in Design and Manufacturing. The Company
has historically pursued a strategy of vertical integration of its design and
manufacturing processes, from design and development of the semiconductor die
through assembly and automated testing with proprietary software and systems
that minimize manufacturing cycle times. During fiscal 1998, the Company began
outsourcing some of its printed circuit board assemblies but continues to exert
control over each of the design and manufacturing steps which further
contributes to improved amplifier linearity, shortens the Company's time to
market, reduces unit costs and increases quality and reliability. In addition,
operating a wafer fabrication facility improves the Company's access to a supply
of RF semiconductors even in periods of high industry demand for semiconductors
and intense competition for wafer fabrication capacity.
Expand Relationships with Leading Worldwide Manufacturers of Wireless
Infrastructure Equipment. The Company has developed relationships with certain
large wireless OEMs, including Northern Telecom, Nortel Matra, LG Information
and Communications Limited ("LGIC") and QUALCOMM Incorporated ("QUALCOMM"), as
well as certain emerging manufacturers including Harris, Tellabs and Watkins
Johnson. The Company markets its products worldwide, and as of March 31, 1998,
its power amplifiers had been installed in over 35 countries. In fiscal 1997,
Spectrian also began to establish direct relationships with certain wireless
service providers, allowing the Company to address previously unavailable
markets. The Company's strategy is to form lasting customer relationships by
working closely with OEM customers to develop insight into their amplifier
requirements and to design specific products that meet their needs, by rapidly
delivering product designs and volume production and by maintaining the
confidentiality of customer technology.
Leverage Product Platforms to Provide Rapid Time to Market. The Company
provides customized or "application specific" amplification products to address
the particular technical and time to market requirements of each of its
customers. The Company leverages its modular product architecture, configurable
core technologies and product platforms, as well as its ability to design
products for all RF modulation schemes, to rapidly and cost effectively develop
and deliver application specific solutions to its customers.
Pursue Standards and Systems Independence. The Company's products are
compatible with wireless communications systems provided by various
infrastructure suppliers and operate under every major domestic and
international standard. By pursuing both standards and systems independence, the
Company believes that it will benefit from the continuing growth of both
existing and emerging wireless communications systems while reducing the risks
associated with relying on the success of one or a limited number of systems or
existing or emerging industry standards. In addition to supporting every major
cellular standard, the Company has developed, and is continuing to develop,
products that address the needs of the PCS and WLL markets.
Strengthen Leadership Position in Amplification Technology. The Company
intends to maintain and expand its technological leadership position by
continuing to invest significant resources in research and development of
amplification technology. The Company believes that its RF amplifier research
and development team is among the largest and most skilled in the merchant RF
power amplifier industry. To maintain a technological leadership position, the
Company believes that numerous integrated technical capabilities are required,
including semiconductor design and fabrication, unique packaging concepts and
components, customized linearization and correction technologies and expert RF
circuit design. The Company's strategy is to continue to invest significant
resources to support the Company's technology leadership in amplifier linearity,
power and efficiency.
4
Markets
Wireless systems have historically employed analog transmission formats,
certain of which have been adopted as industry standards. The need to
accommodate a growing wireless customer base within a finite amount of spectrum
has, however, encouraged a worldwide transition from analog standards to various
digital technologies which are significantly more efficient. Current analog
standards include Advanced Mobile Phone Services ("AMPS") in the Americas and
Total Access Communications System ("TACS") and Nordic Mobile Telephone ("NMT")
in Europe. Current digital standards include TDMA, CDMA, Personal Digital
Cellular ("PDC") in Japan and GSM.
The Company offers amplifiers that support the AMPS and TACS analog
standards and the TDMA, CDMA and GSM digital standards for cellular systems. The
Company has elected not to support the NMT analog standard in Europe, because it
believes that NMT has a lower potential for growth than the GSM digital
standard. To date, the Company has not invested significant development
resources to incorporate the PDC standard into its product offerings, because
such standard has not developed to any great degree outside of Japan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Rapid Technological
Change; Evolving Industry Standards; Dependence on New Products."
In addition to the analog and digital cellular systems discussed above, the
market for PCS systems is expanding rapidly. The FCC has reallocated spectrum in
the 1.85 to 1.99 gigahertz range for the provision of PCS and has conducted six
rounds of auctions for the PCS spectrum. The success of PCS as a wireless
service will depend in part on whether infrastructure manufacturers and service
providers can reduce system manufacturing and service costs and prices
sufficiently to increase significantly the rate of market penetration of
potential subscribers.
The following chart illustrates these existing and developing standards for
wireless communications, and the shaded areas represent markets served and
standards supported by the Company's current product offerings.
- --------------------------------------------------------------------------------
Major Wireless Standards by Region
- --------------------------------------------------------------------------------
Americas Europe Asia Pacific Japan
(MHZ) (MHZ) (MHZ) (MHZ)
-------------------------------------------------------------------
Analog AMPS (800) NMT (450, 900) NMT (450, 900) NTT (800)
Cellular TACS (900) AMPS (800) JTACS (800)
AMPS (800) TACS (900)
- --------------------------------------------------------------------------------
Digital CDMA (800) GSM (900) CDMA (800, 900) PDC (1500)
Cellular TDMA (800) GSM (900) JDC (800)
TDMA (450, 800) CDMA (800)
- --------------------------------------------------------------------------------
PCS CDMA (1900) GSM (1800) CDMA (1900) PHS (1900)
TDMA (1900) GSM (1800)
GSM (1900) CDMA (1800)
- --------------------------------------------------------------------------------
The Company believes that the potential for wireless communications in
countries without reliable or extensive wireline systems may be even greater
than in countries with developed telecommunications systems. The cost of
building and maintaining a wireless network is generally less than the cost of
building and maintaining a comparable wireline network. Thus, in many less
developed countries, wireless service may provide the primary service platform
for both mobile and fixed telecommunications. In addition, if technological
advances and price decreases continue to occur, a market in the United States
and other developed countries for wireless service to be used in conjunction
with, or in place of, traditional wireline ("local loop") service may emerge for
a variety of applications. For example, WLL networks could provide local loop
service and direct access to the long distance carriers.
5
Products
The Company designs highly linear amplifiers that address the specific
requirements of each of its OEM customers. The Company's product strategy is to
support multiple wireless systems and standards. Most existing wireless systems
use single carrier power amplifiers. The following table provides a list of
standards for which the Company develops single carrier amplifiers:
---------------------------------------------------
Spectrian Single Carrier Amplifier Configurations
---------------------------------------------------
Frequency Power
Standard (MHZ) (Watts)
---------------------------------------------------
Analog Cellular:
AMPS, CDPD 869-894 45,65
TACS 917-950 65
---------------------------------------------------
Digital Cellular:
TDMA 485-495 50
TDMA 869-894 25,50
CDMA 869-894 25
GSM 925-960 30
---------------------------------------------------
PCS:
GSM 1800 1805-1880 30
CDMA 1930-1990 20,25
GSM 1900 1930-1990 30
CDMA 1805-1870 25
---------------------------------------------------
WLL:
Wideband CDMA 2370-2400 10,20,40
---------------------------------------------------
The Company also offers multicarrier application specific amplification
products. Multicarrier power amplifiers require significantly higher linearity
than single carrier designs. The following table provides a list of the
standards for which the Company develops multicarrier amplifiers:
---------------------------------------------------------------------
Spectrian Multicarrier Amplifier Configurations
---------------------------------------------------------------------
Typical
Frequency Power Linearity
Standard (MHZ) (Watts) (dBc)*
-------------------------------- ----------- --------- ----------
AMPS, TDMA, CDMA, CDPD 869-894 30-175 -70
ETACS 917-950 25 -50
CDMA 1805-1870 25-100 -65
---------------------------------------------------------------------
- ------------
*Carrier to Intermodulation Distortion Ratio.
The Company's amplifiers can be configured as either modules or pallets,
separate plug-in amplifier units or integrated subsystems and range in price
from approximately $500 to $30,000. A pallet represents the lowest level of
amplifier complexity and consists of RF semiconductors mounted on a printed
circuit board without a housing. A plug-in amplifier unit consists of a cast
housing, which provides for thermal management and low cost of production, and
contains a RF amplifier pallet combined with a digital control interface module.
A power amplifier subsystem consists of multiple cast housings and adds signal
processing to enhance linearity. The Company's products are integrated into base
station systems designed and/or manufactured by its OEM customers, and therefore
must be engineered to be com-patible with industry standards, as well as certain
customer specifications including frequency, power and linearity.
OEM Customers, Sales and Marketing
The Company sells power amplifiers to a limited number of OEMs in North
America, Europe and Asia principally through its direct sales organization. The
Company's customers include many of the
6
world's largest manufacturers of wireless infrastructure equipment, including
Northern Telecom, Nortel Matra, LGIC and QUALCOMM. During fiscal 1998, Northern
Telecom, Nortel Matra and LGIC accounted for approximately 57%, 22% and 14% of
revenues, respectively. During fiscal 1997, Northern Telecom and Nortel Matra
accounted for approximately 63% and 12% of revenues, respectively. During fiscal
1996, Northern Telecom and Nortel Matra accounted for approximately 58% and 17%
of revenues, respectively. While Northern Telecom continues to be the Company's
dominant customer due to Northern Telecom's growth and diversification into new
markets, the products the Company supplies to Northern Telecom and the regions
in which they are deployed have become more diverse. The Company expects that
sales of its products will continue to be concentrated among a limited number of
customers. In addition, the recent financial market turmoil and economic
downturn in Korea may have a material adverse effect on the Company's sales of
its products to LGIC, an OEM based in Korea, because a majority of the Company's
products ordered by LGIC to date relate to the build-out of the Korean PCS
system. In addition, because the Company's products are priced in U.S. dollars,
the currency instability in the Korean and other Asian financial markets may
have the effect of making the Company's products more expensive to LGIC than
those of other manufacturers whose products are priced in one of the affected
Asian currencies, and, therefore, LGIC may reduce future purchases of the
Company's products. In addition, wireless infrastructure OEMs have come under
increasing price pressure from wireless service providers, which in turn has
resulted in downward pricing pressure on the Company's products. Therefore, the
Company expects to incur increasing price pressures from Northern Telecom and
its other major OEM customers in future periods which could result in declining
average sales prices for the Company's products. The Company's business,
financial condition and results of operations have been materially adversely
affected in the past by the failure of anticipated orders to materialize and by
deferrals or cancellations of orders by its customers. If the Company were to
lose Northern Telecom or any other major customer as a customer, or if orders by
Northern Telecom or any other major OEM customer were to otherwise decrease, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Customer Concentration; Dependence on Northern Telecom."
The Company employs a customer focused, team based direct sales approach to
satisfy the power amplification needs of its customers. Sales to large OEM
customers require close account management by Company personnel and
relationships at multiple levels of its customers' organizations, including
management, engineering and purchasing personnel. In addition, the Company's
application specific amplification products require experienced sales personnel
to match the customer's amplification requirements to the Company's product
capabilities. The Company believes that close technical collaboration with the
customer during the design phase of new communications equipment is critical to
the integration of its amplification products into the new equipment. The
Company's integrated sales approach involves a team consisting of a senior
account manager, a program manager and members of the Company's engineering
department. This sales approach allows the Company's engineering personnel to
work closely with their counterparts at the OEM customer to assure compliance of
the product to the customer's specification. The Company's executive officers
are also involved in all aspects of the Company's relationships with its major
customers and work closely with their senior management. As of March 31, 1998,
the Company had a direct sales staff of six people. The Company warrants its new
products against defects in design, materials and workmanship, typically for a
period of 12 to 18 months.
As part of the effort to diversify its product base, in fiscal 1997 the
Company began to sell multicarrier amplifier systems (including filters and
combiners) directly to service providers. To date, these sales have been to
providers in the United States and Israel. The Company recognizes that these
sales may be in conflict with potential or current OEM sales and is willing to
work with its OEM equipment suppliers so that the service provider receives a
Spectrian power amplifier system directly or through the OEM. There can be no
assurance that the Company's direct sales to service providers will not cause
its OEM equipment suppliers to reduce orders or terminate their relationship
with the Company. Any such reduction or termination could have a material
adverse effect on the Company's business, financial condition and
7
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Operating
Results--Customer Concentration; Dependence on Northern Telecom."
The Company markets its products overseas with the assistance of
independent sales representatives in various parts of the world. The Company has
one independent sales representative in the United States, three sales
representatives in Europe covering Austria, Finland, France, Germany, Italy,
Sweden and Switzerland, one sales representative dedicated to each of Japan and
Israel and a representative organization in South Korea. The Company
continuously evaluates whether to establish direct sales forces or to utilize
independent representatives in a particular region or for a given potential
customer depending upon the scope of potential sales opportunities. The
Company's direct sales staff provides sales direction and support to its
international sales representatives. Sales outside of the United States
represented 95%, 73% and 72% of revenues in fiscal 1998, fiscal 1997 and fiscal
1996, respectively. Sales outside of the United States are denominated in U.S.
dollars in order to reduce the risks associated with the fluctuations of foreign
currency exchange rates. The Company expects that international sales will
continue to account for a significant portion of its revenues. Sales outside of
the United States involve a number of inherent risks, including reduced
protection for intellectual property rights in some countries, the impact of
recessionary environments in economies outside the United States, generally
longer receivables collection periods, unexpected changes in regulatory
requirements, tariffs and other trade barriers. In addition, because
substantially all of the Company's foreign sales are denominated in U.S.
dollars, increases in the value of the dollar relative to the local currency
would increase the price of the Company's products in foreign markets and make
the Company's products relatively more expensive and less price competitive than
competitors' products that are priced in local currencies. There can be no
assurance that these factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
business, financial condition and results of operations. The Company anticipates
that the recent turmoil in Asian financial markets and the recent deterioration
of the underlying economic conditions in certain Asian countries may have an
impact on its sales to customers located in or whose projects are based in those
countries due to the impact of currency fluctuations on the relative price of
the Company's products and restrictions on government spending imposed by the
International Monetary Fund (the "IMF") on those countries receiving the IMF's
assistance. In addition, customers in those countries may face reduced access to
working capital to fund component purchases, such as the Company's products, due
to higher interest rates, reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or its bank's financial condition
or the inability to access local equity financing. A substantial majority of the
Company's products are sold to OEMs who incorporate the Company's products into
systems sold and installed to end-user customers. These OEMs are not required by
contract and do not typically provide the Company with information regarding the
location and identity of their end-user customers, and, therefore, the Company
is not able to determine what portion of its product sales have been or future
orders will be incorporated into OEM sales to end-users in those Asian countries
currently experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers and
potential new customers are servicing new markets in developing countries that
the Company's customers expect will deploy wireless communication networks as an
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
political turmoil, such delays could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Risks of International
Sales."
Manufacturing
The Company assembles, tests, packages and ships amplifier products at its
manufacturing facilities located in Sunnyvale, California. The Company's
manufacturing facilities consist of a 4 inch wafer fabrication and semiconductor
assembly and test facility and an amplifier assembly and test facility. The
8
Company's manufacturing product engineering group, comprised of 37 engineers, is
devoted to improving product manufacturability by minimizing assembly and test
cycle times, improving product test yields and reducing overall manufacturing
costs.
Wafer Fabrication. As part of its strategy of vertical integration, the
Company operates its own wafer fabrication facility for the production of the RF
semiconductor, the most important component utilized in the Company's
amplifiers. The Company has an eight person semiconductor process engineering
group responsible for continuous improvement of semiconductor processes. The
Company believes that control of the semiconductor manufacturing process allows
it to reduce unit costs, control quality, improve time to market delivery and
most importantly increase the linearity of the RF semiconductors used in its
amplifiers.
The Company's operation of its manufacturing facilities entails a number of
risks, including a high level of fixed and variable costs, the management of
complex processes, dependence on a single source of supply and a strict
regulatory environment. Fixed costs consist primarily of occupancy costs,
investment in manufacturing equipment, repair, maintenance and depreciation
costs related to equipment and fixed labor costs related to manufacturing and
process engineering. During periods of low demand, high fixed wafer fabrication
costs are likely to have a material adverse effect on the Company's results of
operations.
The Company's strategy of frequently introducing and rapidly expanding the
manufacture of new products to meet evolving OEM customer and service provider
needs has caused the Company to experience high materials and manufacturing
costs, including high scrap and material waste, significant material
obsolescence, labor inefficiencies and overtime expenses, inefficient material
procurement and an inability to realize economies of scale. These high
manufacturing costs and production interruptions have had an adverse effect on
the Company's results of operations. In addition, the Company has made and
expects to continue to make pricing commitments to OEM customers in anticipation
of achieving such manufacturing cost reductions. Any failure to achieve such
manufacturing cost reductions could have a material adverse effect on the
Company's business, financial condition and results of operations.
The design and fabrication of RF semiconductors is a complex and precise
process. Such manufacturing is sensitive to a wide variety of factors, including
variations and impurities in the raw materials, difficulties in the fabrication
process, performance of the manufacturing equipment, defects in the masks used
to print circuits on a wafer and the level of contaminants in the manufacturing
environment. As a result of these and other factors, semiconductor manufacturing
yields from time to time in the past have suffered, and there can be no
assurance that the Company will be able to achieve acceptable production yields
in the future. In addition, the Company's wafer fabrication facility represents
a single point of failure in its manufacturing process that would be costly and
time-consuming to replace if its operation were interrupted. The interruption of
wafer fabrication operations or the loss of employees dedicated to the wafer
fabrication facility could have a material adverse effect on the Company's
business, financial condition and results of operations. Any failure to maintain
acceptable wafer production levels, either from the Company's facility or from a
third party wafer supplier, will have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's operation of its wafer fabrication facility subjects the
Company to a variety of local, state and federal governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture the
Com-pany'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. However, 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. In addition, compliance with
such regulations could require the Company to acquire expensive remediation
equipment or to incur substantial expenses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Operating Results--Risks Associated with Internal Wafer Fabrication."
The Company expects that its customers will continue to establish demanding
specifications for quality, performance and reliability that must be met by the
Company's products. RF semiconductors as
9
complex as those offered by the Company often encounter development delays and
may contain undetected defects or failures when first introduced or after
commencement of commercial shipments. The Company has from time to time in the
past experienced product quality, performance or reliability problems, although
no such problems have had a material adverse effect on the Company's business,
financial condition and results of operations. In addition, multicarrier power
amplifiers have a higher probability of malfunction because of their greater
complexity. There can be no assurance that defects or failures will not occur in
the future relating to the Company's product quality, performance and
reliability that may have a material adverse effect on the Company's business,
financial condition and results of operations. If such defects or failures
occur, the Company could experience lost revenue, increased costs (including
warranty expense, costs associated with customer support and other product
liability related costs), delays in or cancellations or rescheduling of orders
or shipments and product returns or discounts, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Operating
Results--Product Quality, Performance and Reliability."
Semiconductor Assembly and Test. Once a wafer is processed, it is tested
and diced into chips that are attached to a special ceramic package, wire bonded
and encapsulated. The packages are designed for optimal thermal and electrical
performance that are critical during high power RF operation. These processes
require precision for performance of the semiconductor to meet the Company's
strict standards but must also be suited to manufacturing in large volumes. The
Company utilizes patented packaging techniques to improve the performance of its
semiconductors and amplifiers as well as the automated assembly techniques for
semiconductors. In addition, the Company utilizes a specialized surface mount
packaging process to improve transistor assembly volume that also enhances
thermal performance, lowers costs and improves reliability. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results."
Amplifier Assembly and Test. The Company's amplifier manufacturing
activities consist of purchasing components, assembling and testing components
and subassemblies, and integrating subassemblies into finished products. The
Company's amplifiers are comprised of a variety of subassemblies and components
designed or specified by the Company, including housings, harnesses, cables,
packaged RF semiconductors, semiconductor integrated circuits and printed
circuit boards. Except for the RF semiconductors, these components and
subassemblies are manufactured by third parties and are shipped to the Company
for final assembly. During the third quarter of fiscal 1998, the Company began
outsourcing some of the assembly of its higher volume components consisting of
the integration of printed circuit boards and the RF semiconductors manufactured
by the Company on a turnkey basis. Regardless of whether the Company assembles a
component in house or relies on a turnkey contractor, each of the Company's
products receives extensive in process and final quality inspections and tests.
The Company attempts to utilize standard parts and components that are
available from multiple vendors. However, certain components used in the
Company's products are currently available only from single sources, and other
components are available from only a limited number of sources. Despite the
risks associated with purchasing components from single sources or from a
limited number of sources, the Company has made the strategic decision to select
single source or limited source suppliers in order to obtain lower pricing,
receive more timely delivery and maintain quality control. If the Company were
unable to obtain sufficient quantities of components, delays or reductions in
product shipments could occur which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results--Sole or Limited Sources
of Materials and Services."
The Company continues to initiate actions to reduce its manufacturing
costs. The Company has negotiated master purchase agreements with its vendors to
have substantially all of its parts bid on an annual basis rather than on a
monthly basis, which it believes has generated significant volume discounts. The
Company is also implementing standardized automated test processes and material
handling
10
throughout the manufacturing area which is also designed to reduce costs. In the
third quarter fiscal 1998, the Company also began utilizing the services of a
turnkey contractor to assemble certain of its high volume printed circuit board
components. There can be no assurance that these activities will reduce costs as
quickly as anticipated reductions in average selling prices of the Company's
products. Any failure to achieve continued manufacturing cost reductions could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results-- Fluctuations in Operating Results" and "--Declining Average
Sales Prices."
Research and Development
The mission of the Company's research and development organization is to
rapidly design low cost, highly manufacturable RF power amplifiers with industry
leading performance. The Company's research and development staff is organized
into a semiconductor group and an amplifier group. The semiconductor group
focuses on the rapid design of RF semiconductors that are low cost and highly
efficient to provide improved RF performance. The semiconductor group also
performs advanced research in device modeling and semiconductor process
development to support the amplifier engineering group's efforts. The amplifier
engineering group focuses on rapid development of new RF power amplifiers that
are manufacturable in high volumes at low cost and achieve industry leading
performance. This group creates new product platforms and leverages existing
ones, reuses existing circuit topologies and introduces into production new
correction, control and amplification concepts created by the group. The Company
uses an automated design environment to model RF semiconductors and amplifiers.
This design environment, together with the Company's modular product
architecture and configurable core technologies, allow it to rapidly define,
develop and deliver on a timely basis the new and enhanced products demanded by
its OEM customers.
The Company has historically devoted a significant portion of its resources
to research and development programs and expects to continue to do so. As of
March 31, 1998, the Company had 119 people engaged in research and development.
The Company's research and development expenses in fiscal 1998, fiscal 1997 and
fiscal 1996 were $18.6 million, $17.2 million and $14.5 million, respectively,
and represented 11%, 19% and 20%, respectively, of total revenues in those
periods.
The markets in which the Company and its customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. The Company's future success
depends upon, among other things, its ability to develop new products in a
timely manner that compete effectively on the basis of price and performance and
that adequately address the needs of its OEM customers. No assurance can be
given that the Company's product development efforts will be successful, that
its new products will achieve customer acceptance or that such OEMs' products
will achieve customer acceptance. In addition, as is characteristic of the
wireless communications equipment industry, the average sales prices of the
Company's products have historically decreased over the products' lives and are
expected to continue to do so. To offset declining average sales prices, the
Company believes that in the near term it must develop new products that
incorporate advanced features and can be sold at higher average sales prices. To
the extent that new products are not developed in a timely manner, do not
achieve customer acceptance or do not generate higher sales prices and margins,
the Company's business, financial condition and results of operations would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Rapid Technological Change; Evolving Industry Standards;
Dependence on New Products" and "--Declining Average Sales Prices."
Patents and Proprietary Technology
The Company's ability to compete successfully and achieve future revenue
growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company has
a policy of seeking patents on inventions resulting from its ongoing research
and development activities. The Company has been awarded 16 United States
patents, and has 22 United States patent applications pending, including five
that have been allowed but not yet formally issued. The
11
Company also has been awarded four foreign patents and has ten foreign patent
applications pending. There can be no assurance that the Company's pending
patent applications will be allowed or that the issued or pending patents will
not be challenged or circumvented by competitors. Notwithstanding the Company's
active pursuit of patent protection, the Company believes that the success of
its business depends more on the collective value of its patents,
specifications, computer aided design and modeling tools, technical processes
and employee expertise. The Company generally enters into confidentiality and
nondisclosure agreements with its employees, suppliers, OEM customers, and
potential customers and limits access to and distribution of its proprietary
technology. However, there can be no assurance that such measures will provide
adequate protection for the Company's trade secrets or other proprietary
information, or that the Company's trade secrets or proprietary technology will
not otherwise become known or be independently developed by competitors. The
failure of the Company to protect its proprietary technology could have a
material adverse effect on its business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Operating Results--Uncertain
Protection of Intellectual Property."
The communications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights or positions, which have
resulted in significant and often protracted and expensive litigation. Although
there is currently no pending intellectual property litigation against the
Company, the Company or its suppliers may from time to time be notified of
claims that the Company may be infringing patents or other intellectual property
rights owned by third parties. If it is necessary or desirable, the Company may
seek licenses under such patents or other intellectual property rights. However,
there can be no assurance that licenses will be offered or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company or otherwise
secure rights to use such technology could cause the Company to incur
substantial liabilities, to suspend the manufacture of products or expend
significant resources to develop noninfringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms or a "design around" is not
practicable, if at all. In the event that any third party makes a successful
claim against either the Company or its customers and a license is not made
available to the Company on commercially reasonable terms, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Operating Results--Risk of Third Party Claims of Infringement."
Competition
The wireless communications equipment industry is extremely competitive and
is characterized by rapid technological change, new product development and
product obsolescence, evolving industry standards and significant price erosion
over the life of a product. The ability of the Company to compete successfully
and sustain profitability depends in part upon the rates at which wireless
equipment OEMs incorporate the Company's products into their systems and the
Company captures market share from other merchant suppliers. The Company's major
OEM customers, including Northern Telecom, Nortel Matra, LGIC and QUALCOMM,
continuously evaluate whether to manufacture their own amplification products or
purchase them from outside sources such as the Company. There can be no
assurance that these OEM customers will incorporate the Company's products into
their systems or that in general they will continue to rely, or expand their
reliance, on external sources of supply for their power amplifiers. These
customers and other large manufacturers of wireless communications equipment
could also elect
12
to enter into the merchant market and compete directly with the Company, and at
least one OEM, NEC Corporation ("NEC") has already done so. Such increased
competition could materially adversely affect the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting Future
Operating Results--Internal Amplifier Design and Production Capabilities of
OEMs" and "--Market for the Company's Products is Highly Competitive."
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, Hewlett-Packard Wireless Infrastructure Division,
M/A-COM (a subsidiary of AMP), Microwave Power Devices, NEC and Powerwave
Technologies. Certain of these competitors have, and potential future
competitors could have, substantially greater technical, financial, marketing,
distribution and other resources than the Company and have, or could have,
greater name recognition and market acceptance of their products and
technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features compared to the
Company's products. To the extent that OEMs increase their reliance on external
sources for their power amplification needs, more competitors could be attracted
to the market. The Company expects its competitors to offer new and existing
products at prices necessary to gain or retain market share. The Company has
experienced significant price competition, which has in the past affected gross
margins. Certain of the Company's competitors have substantial financial
resources which may enable them to withstand sustained price competition or
downturns in the power amplification market. There can be no assurance that the
Company will not be subject to increased price competition or that the Company
will be able to compete successfully in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Operating Results--Market for the Company's Products is Highly
Competitive."
Backlog
The Company does not believe that its backlog as of any particular date is
representative of actual sales for any succeeding period. As part of the
Company's close working relationships with its major customers, such customers
expect the Company to respond quickly to changes in the volume and delivery
schedule of their amplifiers, and if necessary, to inventory products at the
Company's facilities for just in time delivery. Therefore, although contracts
with such customers typically specify aggregate dollar volumes of products to be
purchased over an extended time period, such contracts also provide that
scheduled shipment dates of particular volumes are generally released to the
Company only a few days or weeks prior to the actual required delivery dates. In
addition, the Company's customers may cancel or defer orders without significant
penalty.
American Microwave Technology, Inc.
In April 1997, the Company sold its wholly owned subsidiary, AMT, to the
management group and employees of AMT for approximately $4.0 million in cash,
realizing a gain of approximately $1.5 million after disposition of AMT's net
assets. The Company decided to divest AMT, which designs, develops and
manufactures RF power amplifier systems for selected wireless, scientific and
application specific markets, after concluding that AMT's market focus had
become less synergistic with the Company's core business. In fiscal 1997 and
fiscal 1996, AMT accounted for approximately 10% and 7%, respectively, of the
Company's revenues.
Employees
As of March 31, 1998, the Company had a total of 688 regular, temporary and
contract employees, including 502 in manufacturing, 119 in research and
development, 26 in sales and 41 in administration. The Company's future success
will depend, in part, on its ability to continue to attract, retain and motivate
highly qualified technical and management personnel. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced any work stoppage. The Company considers its relations with
its employees to be good.
13
Year 2000 Compliance
Many installed computer programs were written using a two digit date field
rather than four digit fields to define the applicable year. Such computer
programs utilizing a two digit date fields may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). The Year 2000
Issue could potentially result in a system failure or in miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in other similar normal
business activities. The Company has identified Year 2000 Issues in certain of
its internal operating systems and is in the process of installing a new
computer software system which will increase operational and financial
efficiencies and information analysis. The new enterprise system recognizes
dates beyond December 31, 1999 and addresses the substantial portion of the Year
2000 Issue that may impact the Company. The cost of this project, as it relates
to the Year 2000 Issue, is not expected to have a material effect on the
operations of the Company and will be funded through operating cash flows. The
Company has not completed an audit of its remaining internal systems or products
with respect to Year 2000 Issues.
Management
The executive officers of the Company and certain information about them as
of March 31, 1998 are as follows:
Name Age Position
- ----------------------- ----- ----------------------------------------------
Garrett A. Garrettson 54 President, Chief Executive Officer and Director
Stephen B. Greenspan 56 Executive Vice President of Operations and
Chief Operating Officer
Bruce R. Wright 49 Executive Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
Timothy Heyboer 48 Vice President, Amplifier Engineering
David Piazza 34 Vice President, Semiconductor R&D
Joseph M. Veni 46 Senior Vice President, Sales and Marketing
William Zucker 40 Vice President, Marketing
Garrett A. Garrettson joined the Company in April 1996 as President, Chief
Executive Officer and a Director. Between March 1993 and March 1996, he served
as President and Chief Executive Officer of Censtor Corporation ("Censtor"),
which designs and sells technology related to magnetic recording heads for the
disk drive industry. From 1986 to March 1993, he served as a Vice President of
Imprimis Technology Incorporated ("Imprimis"), a wholly owned subsidiary of
Control Data Corporation, and subsequently as a Vice President of Seagate
Technology, Inc. ("Seagate") following its acquisition of Imprimis in 1989.
Prior to 1986, Mr. Garrettson held a variety of positions with Hewlett-Packard
Company and served in the United States Navy. Mr. Garrettson also serves on the
Boards of Directors of RedLake Imaging and Benton Oil and Gas Company. He
received his B.S. and M.S. in Engineering Physics and his Ph.D. in Mechanical
Engineering from Stanford University.
Stephen B. Greenspan joined the Company in May 1996 as Executive Vice
President of Operations and was named Chief Operating Officer in April 1997.
From November 1991 to February 1996, he served as Senior Vice President, Quality
and Customer Service at Seagate. Mr. Greenspan also held a variety of positions
at Seagate including Vice President of Process Development and Vice President of
Domestic and Far East Operations. From March 1986 to August 1987, Mr. Greenspan
served as Vice President of Operations at Tandon Corporation, a manufacturer of
personal computers. From 1967 to 1986, Mr. Greenspan held a variety of
management positions at IBM Corporation related to semiconductor and circuit
technologies, personal computer manufacturing and supplier management. He
received his B.S.E.E. degree from New Jersey Institute of Technology and his
M.S.E.E. degree from Syracuse University.
Bruce R. Wright joined the Company on May 1, 1997 as Executive Vice
President of Finance and Administration, Chief Financial Officer and Secretary.
Prior to joining the Company, he was Chief
14
Financial Officer at Tencor Instruments from December 1991 to April 1997. From
January 1988 to July 1991, he was Chief Financial Officer at Teknekron
Corporation. Mr. Wright also served with Atlantic Richfield Company and the U.S.
Air Force. He received his B.A. in Physics from Pomona College, his B.S. in
Mechanical Engineering from California Institute of Technology and his S.M. in
Management from the Massachusetts Institute of Technology ("MIT").
Tim Heyboer joined the Company in 1986 as Director of Engineering and
served in a variety of departments including product line management and the now
discontinued military division. In August 1996, Mr. Heyboer was named Vice
President of Amplifier Engineering of the Company. Prior to joining Spectrian,
Mr. Heyboer was employed at Narda Western Operations, a passive microwave
components company, most recently as director of engineering. Mr. Heyboer
received his B.S.E.E. degree and his M.S.E.E. degree from University of
Michigan, Ann Arbor.
David Piazza joined the Company in 1990 as a Project Engineer. In September
1996, Mr. Piazza was named Vice President, Semiconductor R&D for the Company. He
has served in various management positions at the Company, including Director of
Engineering, PCS Amplifier Products, Engineering Manager, Amplifier Products and
Project Engineer. Mr. Piazza received his B.S.E.E. degree from the University of
California at Davis.
Joseph M. Veni joined the Company in April 1992 as Vice President of Sales
and in June 1996 was named Senior Vice President, Sales and Marketing. From 1987
to April 1992, he was Vice President of Sales and Marketing at TTI-General
Signal. From 1985 to 1987, Mr. Veni worked at Cushman Electronics, Inc. Prior to
that time, Mr. Veni was employed by Halcyon Communications, Inc., ICS Group,
Inc. and Western Union Telegraph Co. in various marketing and sales positions.
Mr. Veni received his Associates Degree in Electronics Technology from Mt. San
Antonio College.
William Zucker joined the Company in October 1995 as Vice President of
Engineering. In August 1996, Mr. Zucker became Vice President of Product Line
Management. In April 1997, he was named Vice President of Marketing. Prior to
joining the Company, Mr. Zucker held several positions at AT&T/AT&T Bell Labs,
including director of product management from July 1994 to October 1995 and
director of development from November 1991 to July 1994. Mr. Zucker received his
B.S.E.E. degree from Manhattan College and his S.M. in Electrical Engineering
from MIT.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering and manufacturing
facilities are located in two buildings of approximately 141,000 square feet in
Sunnyvale, California. In November 1996, the Company entered into several
agreements in connection with a transaction with respect to these properties.
Pursuant to these agreements, the Company sold these properties to SPEC (CA) QRS
12-20, Inc. ("SPEC"), and pursuant to the terms of a lease agreement, SPEC
agreed to lease these properties to the Company for a term of 15 years (with two
options to extend the lease for up to an additional ten years). This lease
agreement also provides that the Company shall have the right of first refusal
to purchase the properties from SPEC upon the occurrence of certain conditions.
During the first quarter of fiscal 1999, the Company entered into operating
leases for an ancillary 40,000 square foot manufacturing facility in Rocklin,
California and a 7,750 square foot engineering design center in Quincy,
Illinois. The Rocklin facility has a sixty-two month term and expires in July
2003, and the Quincy facility has a twelve month term and expires in March 1998.
In March 1997, through means of a limited liability company of which the Company
owns 91.5%, the Company purchased a building of approximately 39,000 square feet
in Sunnyvale, California located between the Company's two occupied buildings.
The Company is currently sharing occupancy of this building with a third party
to whom it subleases space under month to month lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
Since December 23, 1997, a number of complaints have been filed against the
Company and certain of its officers in the Federal Court for the Northern
District of California that allege violations of the federal securities laws.
Similar complaints have been filed in California state court that allege
violations
15
of California state securities laws and California common law. The complaints
have been consolidated in the federal and state courts, respectively. The
plaintiffs in both the federal and state lawsuits purport to represent a class
of persons who purchased the Company's securities during the period of July 17,
1997 through October 23, 1997. The complaints allege that the Company and
certain of its officers misled the investing public regarding the financial
prospects of the Company. The Company believes that the allegations are
completely without merit and will vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF SPECTRIAN COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "SPCT" since August 4, 1994. The following table sets forth for
the period indicated the high and low sale prices for the Common Stock, as
reported by the Nasdaq National Market.
High Low
----------- ----------
Fiscal Year Ended March 31, 1997
First Quarter $25 1/2 $13
Second Quarter 15 1/4 7
Third Quarter 13 7 3/8
Fourth Quarter 14 3/8 7 5/8
Fiscal Year Ended March 31, 1998
First Quarter 37 3/4 10 3/4
Second Quarter 64 1/4 36 1/4
Third Quarter 66 3/8 16 3/4
Fourth Quarter 20 1/2 14 5/8
On May 18, 1998, the last reported sale price of the Company's Common Stock
on the Nasdaq National Market was $16.125 per share. As of May 18, 1998 there
were approximately 305 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company has
entered into a bank line of credit and the Company's agreement with such lender
prohibits the payment of cash dividends without the prior written consent of the
lender.
16
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of the years in the five-year period ended March 31, 1998, are derived
from the consolidated financial statements of Spectrian Corporation and its
subsidiaries, which financial statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The results for the fiscal year ended March 31, 1998
are not necessarily indicative of the results for any future period. The
selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements as of March 31, 1998 and
March 31, 1997 and for each of the years in the three year period ended March
31, 1998 and notes thereto set forth on Pages F-1 to F-15 and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
Fiscal Year Ended March 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues ....................................... $168,798 $ 88,252 $ 72,113 $ 62,478 $ 37,859
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales ................................. 132,684 65,322 45,355 39,068 22,154
Research and development ...................... 18,644 17,230 14,548 11,374 10,058
Selling, general and administrative ........... 13,014 9,299 7,450 6,784 5,529
-------- -------- -------- -------- --------
Total costs and expenses .................... 164,342 91,851 67,353 57,226 37,741
-------- -------- -------- -------- --------
Operating income (loss) ..................... 4,456 (3,599) 4,760 5,252 118
Interest income (expense), net ................. 3,335 (392) 889 391 (667)
Other income, net .............................. 1,530 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes ............. 9,321 (3,991) 5,649 5,643 (549)
Income tax expense ............................. 399 -- 169 170 --
-------- -------- -------- -------- --------
Net income (loss) ............................. $ 8,922 $ (3,991) $ 5,480 $ 5,473 $ (549)
======== ======== ======== ======== ========
Net income (loss) per share:(1)
Basic ......................................... $ 0.91 $ (0.49) $ 0.71 $ 0.87 $ (0.39)
Diluted ....................................... $ 0.83 $ (0.49) $ 0.66 $ 0.70 $ (0.39)
Shares used in computing per share
amounts:(1)
Basic ......................................... 9,881 8,150 7,684 6,300 1,399
Diluted ....................................... 10,701 8,150 8,363 7,764 1,399
March 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital .................................. $117,478 $ 24,062 $ 12,710 $ 28,317 $ 7,859
Total assets ..................................... 175,051 66,633 55,922 45,070 20,965
Debt and capital lease obligations, net of
current portion(2) .............................. 5,912 7,057 -- -- 3,634
Total stockholders' equity ....................... 144,342 42,466 44,838 37,056 9,765
<FN>
- ------------
(1) See Note 1 of Notes to Consolidated Financial Statements contained on pages
F-1 to F-15 of this Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 for information concerning the per share computations.
(2) See Note 4 of Notes to Consolidated Financial Statements herein for a
description of the Company's debt and lease obligations.
</FN>
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These forward looking statements include, but are not limited to: the statements
in the first paragraph of "Overview" regarding future revenues; second paragraph
of "Overview" regarding the impact on the Company of a loss of a major OEM
customer; the statements in the analysis of "--Years ended March 31, 1998 and
1997" under "--Cost of Sales" regarding anticipated product introductions,
related cost improvements and trends offsetting such cost improvements; the
statements in the second paragraph of "--Liquidity and Capital Resources"
concerning renewal of the revolving line of credit to this the statements in the
last paragraph under "--Liquidity and Capital Resources" regarding the
anticipated spending for capital additions in fiscal 1999 and the sufficiency of
the Company's available resources to meet working capital and capital
expenditure requirements; and the statements in "Factors Affecting Future
Operating Results." The forward looking statements contained herein are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from these expressed in such forward looking
statements.
Overview
The Company designs, manufactures and markets highly linear single carrier
and multicarrier power amplifiers that support a broad range of worldwide analog
and digital wireless transmissions standards, including AMPS, TDMA, CDMA, TACS
and GSM. The Company, founded in 1984 to perform design and engineering
services, first entered the commercial amplifier market in 1988 and shipped its
first cellular power amplifiers in 1990. The Company's revenues are now derived
primarily from sales to a limited number of OEMs in the wireless infrastructure
equipment market, in particular Northern Telecom. The Company pursues a strategy
of vertical integration in its design and manufacturing processes, including
operating its own 4 inch wafer fabrication facility. As a result, the Company
has a higher level of fixed costs and is dependent upon substantial revenue to
achieve profitability. In the fourth quarter of fiscal 1998, first quarter of
fiscal 1997 and third quarter of fiscal 1996, product orders fell sharply
resulting in substantial losses in those quarters. There can be no assurance
that the Company will not experience such fluctuations in the future. For
example, the significant reduction in product revenue the Company experienced in
the fourth quarter of fiscal 1998 reflects the impact of fluctuations in demand
with a cost structure that is relatively fixed in the short term from the
softening demand in the TDMA markets and delays in build-out of the Korean PCS
systems due to the unstable Asian financial markets and general economic
conditions in Korea and other Asian countries. The Company also anticipates
lower product revenues over the next two to three quarters as a result of such
factors and anticipates that revenues for fiscal 1999 may not equal, and will
not exceed, revenues for fiscal 1998.
During fiscal 1998, Northern Telecom, Nortel Matra and LGIC accounted for
approximately 57%, 22% and 14% of revenues, respectively. During fiscal 1997,
Northern Telecom and Nortel Matra accounted for approximately 63% and 12% of
revenues, respectively. During fiscal 1996, Northern Telecom and Nortel Matra
accounted for approximately 58% and 17% of revenues, respectively. The Company's
business, financial condition and results of operations have been materially
adversely affected in the past by anticipated orders failing to materialize and
by deferrals or cancellations of orders as a result of changes in OEM
requirements. If the Company were to lose Northern Telecom or any other major
OEM customer, or if orders by Northern Telecom or any other major OEM customer
were to otherwise materially decrease either in unit quantity or in price, the
Company's business, financial condition and results of operations would be
materially adversely affected. In addition, the recent financial market turmoil
and economic downturn in Korea may have a material adverse effect on the
Company's sales of its products to LGIC, an OEM based in Korea, because a
majority of the Company's products ordered by LGIC to date relate to the
build-out of the Korean PCS system. In addition, because the Company's products
are priced in U.S. dollars, the currency instability in the Korean and other
Asian financial markets may have the effect of making the Company's products
more expensive to LGIC than those of other manufacturers whose products are
priced in one of the affected Asian currencies, and, therefore, LGIC may reduce
future purchases of the Company's products.
18
The Company's vertical integration strategy entails a number of risks,
including a high level of fixed and variable costs, the management of complex
processes, dependence on a single source of supply and a strict regulatory
environment. During periods of low demand, high fixed wafer fabrication costs
are likely to have a material adverse effect on the Company's operations. In
addition, the Company's strategy of frequently introducing and rapidly expanding
the manufacture of new products to meet evolving OEM customer and wireless
service provider needs has caused the Company to experience high materials and
manufacturing costs, including high scrap and material waste, significant
material obsolescence, labor inefficiencies, high overtime hours, inefficient
material procurement and an inability to realize economies of scale.
The market for the Company's products is becoming increasingly competitive.
The Company has recently begun selling its power amplifier products in South
Korea, as well as directly to cellular service providers where its competitors
are already established as suppliers. In addition, the Company competes with at
least one amplifier manufacturer for business from Northern Telecom. This
competition has resulted in, and will continue to result in reduced average
selling prices for the Company's products, which accordingly will negatively
impact gross margins.
Results of Operations
The following table sets forth for the periods indicated certain statement
of operations data of the Company expressed as a percentage of total revenues
and the gross margin on sales.
Fiscal Year ended March 31,
------------------------------
1998 1997 1996
----- ----- -----
Revenues .................................. 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of sales ............................ 78.6 74.0 62.9
Research and development ................. 11.0 19.6 20.2
Selling, general and administrative ...... 7.8 10.5 10.3
----- ----- -----
Total costs and expenses ............... 97.4 104.1 93.4
----- ----- -----
Operating income (loss) ................ 2.6 (4.1) 6.6
Interest income (expense), net ............ 2.0 (0.4) 1.2
Other income, net ......................... 0.9 -- --
----- ----- -----
Income (loss) before income taxes ........ 5.5 (4.5) 7.8
Income tax expense ........................ 0.2 -- 0.2
----- ----- -----
Net income (loss) ........................ 5.3% (4.5)% 7.6%
===== ===== =====
Gross margin on sales ..................... 21.4% 26.0 % 37.1%
Years Ended March 31, 1998 and 1997
Revenues. The Company's revenues increased by 91% to $168.8 million for the
fiscal year ending March 31, 1998 ("fiscal 1998") from $88.3 million for the
fiscal year ending March 31, 1997 ("fiscal 1997"). The sizable increase in
revenues for fiscal 1998 reflects a significant increase in demand in the first
three fiscal quarters of 1998, primarily by Northern Telecom, for the Company's
second generation GSM and multicarrier products, single carrier TDMA products
and Korean PCS CDMA products. In the fourth quarter of fiscal 1998, the
Company's revenues decreased substantially to $27.6 million from $47.2 million
in the immediately preceding quarter due to reduced orders from OEM customers
stemming in part from the impact of the financial market and economic turmoil in
parts of Asia, particularly Korea. The Company believes that it is unlikely that
demand for the Company's products will return to prior levels in calendar 1998,
if ever. As a result of this factor and others as well as the difficulties in
predicting the Company's future revenue, the Company believes that the revenues
in fiscal 1999 may not meet, and will not exceed, fiscal 1998 revenues.
Cost of Sales. Cost of sales consists primarily of raw materials, RF
semiconductor fabrication costs, amplifier assembly and test costs (including
turnkey assembly services), overhead and warranty costs. The
19
Company's cost of sales increased by 103% to $132.7 million for fiscal 1998 from
$65.3 million for fiscal 1997. Included in the cost of sales were costs
associated with the rapid increase in manufacturing volume for new products and
costs associated with discontinuing older products. Gross margin on sales was
21% for fiscal 1998 as compared to 26% for fiscal 1997. The decline in gross
margin for fiscal 1998 primarily reflects costs associated with steep new
product volume manufacturing growth including investment in overhead
infrastructure and automated test equipment, premium costs associated with
materials procurement and logistics, excess and obsolete inventories and product
warranty costs. In the fourth quarter of fiscal 1998, the Company had negative
gross margin of 17.4% as compared to positive gross margins of 28.5% and 27.2%
in the third quarter of fiscal 1998 and the fourth quarter of fiscal 1997,
respectively. The decline in the gross margin for the fourth quarter of fiscal
1998 was attributable to increased material, warranty, excess and obsolete
inventory costs that were not reduced proportionately to revenues. The Company
anticipates that the use of turnkey contractors to assemble certain high volume
printed circuit board components may reduce the growth of manufacturing costs in
future periods.
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 8% to
$18.6 million in fiscal 1998 from $17.2 million in fiscal 1997. R&D spending in
fiscal 1997 included development costs for the Company's 4 inch wafer
fabrication facility. The increase in R&D spending in fiscal 1998 reflects
increased spending in both amplifier and semiconductor R&D for personnel
expenses and project development expenses. R&D expenses as a percentage of
revenues decreased to 11.0% in fiscal 1998 from 19.6% in fiscal 1997, reflecting
the substantially higher revenue levels in fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, commissions paid to independent sales
representatives, professional fees and other expenses. The Company's SG&A
expenses increased by 39.9% to $13.0 million for fiscal 1998 from $9.3 million
for fiscal 1997. SG&A expenses as a percentage of revenues decreased to 7.8% for
fiscal 1998 from 10.5% for fiscal 1997. The increase in SG&A expenses was
primarily due to outside commissions paid for South Korean sales, MIS investment
in new infrastructure, increases in sales and administrative headcount, and to a
lesser extent the maintenance of a South Korean sales support office. The
decrease of SG&A expenses as a percentage of sales was a result of the
substantially higher revenue level in that period.
Interest Income (Expense), net. Interest income, net for fiscal 1998 was
$3.3 million compared to net interest expense of $392,000 for fiscal 1997. The
increase in net interest income was the result of interest income earned on
substantially higher cash balances and short-term investments reflecting
primarily the investment of the proceeds of the Company's August 1997 public
offering.
Other Income, net. Other income of $1.5 million was recorded in the first
quarter of fiscal 1998 representing the net gain realized from the cash sale of
the Company's wholly owned subsidiary, AMT, to the management group and
employees of AMT. No other expense or other income was recorded during fiscal
1997.
Income Taxes. The Company recorded income tax expense for fiscal 1998 of
$399,000. The combined effective tax rate of 4.3% for fiscal 1998 reflects the
use of net operating loss carryforwards ("NOLs"). The Company's ability to use
its NOLs against taxable income may be subject to restrictions and limitations
under Section 382 of the Internal Revenue Code of 1986, as amended, in the event
of a change in ownership of the Company as defined therein.
Years Ended March 31, 1997 and 1996
Revenues. The Company's revenues increased by 22.4% to $88.3 million in
fiscal 1997 from $72.1 million in fiscal 1996. The increase was due primarily to
increasing volume in sales of PCS products, reflecting the build-out of the U.S.
PCS network infrastructure, and continued strong GSM product sales.
Cost of Sales. The Company's cost of sales increased by 44.0% to $65.3
million in fiscal 1997 from $45.4 million in fiscal 1996. Gross margin on sales
in fiscal 1997 declined to 26.0% from 37.1% in fiscal 1996. During fiscal 1997
the Company introduced 14 new products into manufacturing to meet customer and
20
market demands. The need to produce many of these products in high volumes
during their manufacturing infancy resulted in much higher costs for the related
material, labor and overhead. The heavy new product volume had a detrimental
effect on the Company's fiscal 1997 gross margins and profitability.
Research and Development. The Company's R&D expenses increased 18.4% to
$17.2 million in fiscal 1997 from $14.5 million in fiscal 1996. As a percentage
of revenues, R&D expenses declined slightly to 19.6% in fiscal 1997 from 20.2%
in fiscal 1996. The increase in R&D expenses primarily reflected nine months of
development expenses for the Company's 4 inch wafer fabrication facility as
compared to only three months in fiscal 1996 as well as increased R&D hiring and
the associated recruiting and salary costs.
Selling, General and Administrative. The Company's SG&A expenses increased
by 24.8% to $9.3 million in fiscal 1997 from $7.5 million in fiscal 1996. SG&A
expenses as a percentage of revenues increased slightly to 10.5% in fiscal 1997
from 10.3% in fiscal 1996. The increase in SG&A expenses from fiscal 1996 to
fiscal 1997 was primarily attributable to increases in sales and marketing
headcount and the related salaries and expense benefits, as well as outside
commissions expenses required to support the Company's expanding customer base
and product portfolio.
Interest Income (Expense), net. Net interest expense for fiscal 1997 was
$392,000, compared to net interest income of $889,000 in fiscal 1996. The change
between fiscal 1997 and fiscal 1996 primarily reflects decreased interest income
as a result of lower average cash balances in fiscal 1997 and the interest
expense incurred as a result of the Company utilizing various debt financing
instruments during fiscal 1997.
Income Taxes. The Company did not record a provision for income taxes in
fiscal 1997 because the Company incurred a net loss. An income tax provision of
$169,000 was recorded in fiscal 1996, an effective tax rate of 3% after use of
NOLs from prior periods.
Liquidity and Capital Resources
The Company has financed its growth through its initial public offering in
August 1994, a public equity offering in August 1997, private sales of equity
securities, capital equipment leases, bank lines of credit and cash flows from
operations. Cash provided by operations was $16.6 million in fiscal 1998, while
cash used by operations in fiscal 1997 was $8.1 million. The cash provided by
operations for fiscal 1998 was principally generated by the Company's profits
over the first three quarters of the fiscal year. The cash used by operations in
fiscal 1997 was principally for purchasing inventory to support production
growth for increasing product shipment volumes.
As of March 31, 1998, the Company had working capital of $117.5 million
including $99.6 million in cash, cash equivalents and short-term investments. In
addition, the Company has a revolving line of credit of $10.0 million with a
bank secured by the majority of the Company's assets. Under the terms of the
master agreement governing this credit instrument, the Company is required to
maintain certain minimum working capital, net worth, profitability and other
specific financial ratios. As of March 31, 1998, the Company was in compliance
with all of these financial covenants with the exception of the profitability
covenant with respect to which covenant the lender granted a waiver to the
Company. There were no borrowings outstanding against this line of credit as of
March 31, 1998.
In April 1998, the Company announced a repurchase program (the "1998
Repurchase Program") pursuant to which it may acquire up to one million shares
of Common Stock in open market purchases. To date, no shares have been
repurchased under the 1998 Repurchase Program.
In January 1997, the Company borrowed $6.0 million under a term loan
secured by certain capital equipment. The loan, which expires in January 2002,
requires the payment of monthly principal plus interest and is subject to
certain minimum working capital, net worth and other specific financial ratios.
The Company was in compliance with these covenants as of March 31, 1998. In
March 1997, the Company also secured a $3.2 million real estate loan, which
expires in April 2007, for the purchase of a light industrial building for its
future facilities expansion.
Additions to property and equipment were $18.0 million for fiscal 1998 and
$16.3 million in fiscal 1997. Capital additions for fiscal 1998 included the
purchase of new corporate management information
21
systems software, manufacturing test and production equipment required to
support new products and increase factory capacity, and test equipment to
support various research and development projects.
The Company anticipates spending approximately $18 million over the next 12
months for capital additions primarily to support manufacturing capacity
requirements, development projects and facilities expansion. Based on the
Company's current working capital position, the cash flows the Company expects
to generate from fiscal 1999 operations and the available line of credit the
Company expects to renew, the Company believes that sufficient resources will be
available to meet the Company's cash requirements for at least the next twelve
months. Cash requirements for periods beyond the next twelve months depend on
the Company's profitability, timing and level of capital expenditures, working
capital requirements and rate of growth.
Factors Affecting Future Operating Results
Customer Concentration; Dependence on Northern Telecom. The wireless
infrastructure equipment market is dominated by a small number of large OEMs,
including Ericsson, Lucent, Motorola, Northern Telecom, Nortel Matra and Siemens
AG. The Company's revenues are derived primarily from sales to a limited number
of these OEMs, particularly Northern Telecom and Nortel Matra. During fiscal
1998 Northern Telecom, Nortel Matra and LGIC accounted for approximately 57%,
22% and 14% of revenues, respectively. During fiscal 1997, Northern Telecom and
Nortel Matra accounted for approximately 63% and 12% of revenues, respectively.
During fiscal 1996, Northern Telecom and Nortel Matra accounted for
approximately 58% and 17% of revenues, respectively. Furthermore, a substantial
portion of revenues from Northern Telecom and Nortel Matra in fiscal 1998,
fiscal 1997 and fiscal 1996 resulted from sales of a limited number of the
Company's products. The Company's business, financial condition and results of
operations have been materially adversely affected in the past by anticipated
orders failing to materialize and by deferrals or cancellations of orders as a
result of changes in OEM requirements. The Company, Northern Telecom and Nortel
Matra have an agreement, renegotiated annually, pursuant to which Northern
Telecom and Nortel Matra commit to purchase a certain volume of their annual
power amplifier requirements for specified prices from the Company. The renewal
of the Company's agreement with Northern Telecom and Nortel Matra for calendar
year 1998 was finalized in October 1997. Based on lower RF amplifier volume
commitments and reduced pricing contained in this agreement, the recent slowdown
in demand for TDMA products and delays in the Korean PCS system build-out, as
well as other factors, the Company expects that the Company's recent significant
growth in revenues will not be sustainable. The Company also anticipates that
the Company's fiscal 1999 revenues may not meet, and will not exceed, fiscal
1998 revenues. In addition, there can be no assurance that Northern Telecom and
Nortel Matra will enter into a contract as favorable to the Company, if any, in
the future otherwise agree to purchase the same or similar levels of their power
amplifier requirements at the same or similar pricing. Any reduction in the
level of purchases of the Company's amplifiers by Northern Telecom and Nortel
Matra, or any material reduction in pricing without significant offsets, would
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, if the Company were to lose Northern Telecom
or any other major OEM customer, or if orders by Northern Telecom or any other
major OEM customer were to otherwise materially decrease, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the recent financial market turmoil and
economic downturn in Korea may have a material adverse effect on the Company's
sales of its products to LGIC, an OEM based in Korea, because a majority of the
Company's products ordered by LGIC to date relate to the build-out of the Korean
PCS system. In addition, because the Company's products are priced in U.S.
dollars, the currency instability in the Korean and other Asian financial
markets may have the effect of making the Company's products more expensive to
LGIC than those of other manufacturers whose products are priced in one of the
affected Asian currencies, and, therefore, LGIC may reduce future purchases of
the Company's products. In addition, wireless infrastructure equipment OEMs have
come under increasing price pressure from wireless service providers, which in
turn has resulted in downward pricing pressure on the Company's products. The
Company expects to incur increasing pricing pressures from Northern Telecom and
other major OEM customers in future periods, which could result in declining
average sales prices for the Company's products. See "Business--OEM Customers,
Sales and Marketing."
22
Fluctuations in Operating Results. The Company's quarterly and annual
results have in the past been, and will continue to be, subject to significant
fluctuations due to a number of factors, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the Company's results of operations are likely to
vary due to the timing, cancellation, delay or rescheduling of OEM customer
orders and shipments; the timing of announcements or introductions of new
products by the Company, its competitors or their respective OEM customers; the
acceptance of such products by wireless equipment OEMs and their customers;
relative variations in manufacturing efficiencies, yields and costs; competitive
factors such as the pricing, availability, and demand for competing
amplification products; changes in average sales prices and product mix;
variations in operating expenses; changes in manufacturing capacity and
variations in the utilization of this capacity; shortages of key supplies; the
long sales cycles associated with the Company's customer specific products; the
timing and level of product and process development costs; and changes in
inventory levels; and most recently, the relative strength or weakness of
international financial markets. Anticipated orders from the Company's OEM
customers have in the past failed to materialize and delivery schedules have
been deferred or canceled as a result of changes in OEM customer requirements
and the Company expects this pattern to continue as customer requirements
continue to change and industry standards continue to evolve. Reduced demand for
wireless infrastructure equipment in the latter part of fiscal 1996 and the
early part of fiscal 1997, driven partly by delays in the build-out of PCS
infrastructure, caused significant fluctuations in the Company's product sales
during that period of time. There can be no assurance that the Company will not
experience such fluctuations in the future, and, in fact, the Company
experienced a significant reduction in product revenue in the fourth quarter of
fiscal 1998 and anticipates lower product revenues over the next two to three
quarters as a result of softening demand in the TDMA markets and delays in
Korean PCS demand due to the unstable Asian financial markets and general
economic conditions in Korea and other Asian countries. The Company establishes
its expenditure levels for product development and other operating expenses
based on its expected revenues, and expenses are relatively fixed in the short
term. As a result, variations in timing of revenues can cause significant
variations in quarterly results of operations. There can be no assurance that
the Company will be profitable on a quarter to quarter basis in the future. The
Company believes that period to period comparisons of its financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. Due to all the foregoing factors, it is likely that in some
future quarter or quarters the Company's revenues or operating results will not
meet the expectations of public stock market analysts or investors. In such
event, the market price of the Company's Common Stock would be materially
adversely affected.
Internal Amplifier Design and Production Capabilities of OEMs. The Company
believes that a majority of the present worldwide production of power amplifiers
is captive within the manufacturing operations of wireless equipment OEMs, many
of which have chosen not to purchase amplifiers from outside suppliers. The
Company also believes that those OEMs that purchase from third party amplifier
vendors are reluctant to switch once committed to a particular merchant vendor.
Consequently, the Company has only limited opportunities to increase revenues by
replacing internal OEM amplifier production or displacing other merchant
amplifier suppliers. Moreover, given the limited opportunities for merchant RF
amplifier suppliers, any decision by an OEM to employ a second source merchant
supplier for a product currently purchased from a merchant supplier may reduce
the existing merchant supplier's ability to maintain a given level of product
sales to such OEM or, possibly, to retain the OEM as a customer due to price
competition from the second source merchant supplier. There can be no assurance
that the Company's major OEM customers will continue to rely, or increase their
reliance, on the Company as an external source of supply for their power
amplifiers, or that other wireless equipment OEMs will become customers of the
Company. If the major wireless infrastructure equipment suppliers do not
purchase or continue to purchase their power amplifiers from merchant suppliers,
the Company's business, results of operations and financial condition will be
materially adversely affected. See "Business--OEM Customers, Sales and
Marketing."
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
23
technology, evolving industry standards and continuous improvements in products
and services. In particular, because the Company's strategy of rapidly bringing
to market products customized for numerous and evolving RF modulation standards
requires developing and achieving volume production of a large number of
distinct products, the Company's ability to rapidly design and produce
individual products for which there is significant OEM customer demand will be a
critical determinant of the Company's future success. For example, continued
softening of demand in the TDMA market or failure of another modulation standard
in which the Company has invested substantial development resources may have a
material adverse effect on the Company's business, financial condition and
results of operations. No assurance can be given that the Company's product
development efforts will be successful, that its new products will meet customer
requirements and be accepted or that its OEM customers' product offerings will
achieve customer acceptance. If a significant number of development projects do
not result in substantial volume production or if technologies or standards
supported by the Company's or its customers' products become obsolete or fail to
gain widespread commercial acceptance, the Company's business may be materially
adversely affected. See "Business--OEM Customers, Sales and Marketing,"
"--Manufacturing" and "--Research and Development."
Risks Associated with Internal Wafer and Device Fabrication. The Company's
operation of its wafer and device fabrication facilities entails a number of
risks, including a high level of fixed and variable costs, the management of
complex processes, dependence on a single source of supply and a strict
regulatory environment. During periods of low demand, high fixed wafer
fabrication costs are likely to have a material adverse effect on the Company's
business, financial condition and results of operations. The design and
fabrication of RF semiconductors is a complex and precise process. Such
manufacturing is sensitive to a wide variety of factors, including variations
and impurities in the raw materials, quality control of the packages,
difficulties in the fabrication process, performance of the manufacturing
equipment, defects in the masks used to print circuits on a wafer and the level
of contaminants in the manufacturing environment. As a result of these and other
factors, semiconductor manufacturing yields from time to time in the past have
suffered, and there can be no assurance that the Company will be able to achieve
acceptable production yields in the future. In addition, the Company's wafer and
device fabrication facility represents a single point of failure in its
manufacturing process that would be costly and time consuming to replace if its
operation were interrupted. The interruption of wafer fabrication operations or
the loss of employees dedicated to the wafer and device fabrication facilities
could have a material adverse effect on the Company's business, financial
condition and results of operations. Any failure to maintain acceptable wafer
and device production levels, will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing" and "--Facilities."
Product Quality, Performance and Reliability. The Company expects that its
customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. RF
semiconductors as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures when first
introduced or after commencement of commercial shipments. The Company has from
time to time in the past experienced product quality, performance or reliability
problems. In addition, multicarrier power amplifiers have a higher probability
of malfunction than single carrier power amplifiers because of their greater
complexity. There can be no assurance that defects or failures will not occur in
the future relating to the Company's product quality, performance and
reliability that may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Manufacturing."
Sole or Limited Sources of Materials and Services. The Company currently
procures from single sources certain components and services for its products
including cast housings, printed circuit boards, specialized RF components and
specialized subassemblies. The Company purchases these 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. Although the Company is currently identifying potential alternative
sources of these components, its reliance on sole sources entails certain risks,
including reduced control over the price, timely delivery, reliability and
quality of the components. If the Company were to change any of its sole source
vendors, the Company would be
24
required to requalify the components with each new vendor. Any inability of the
Company to obtain timely deliveries of components 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
these components, and no assurance can be given that shortages will not occur in
the future. See "Business--Manufacturing."
Declining Average Sales Prices. The Company has experienced, and expects to
continue to experience, declining average sales prices for its products.
Wireless infrastructure equipment manufacturers have come under increasing price
pressure from wireless service providers, which in turn has resulted in downward
pricing pressure on the Company's products. In addition, competition among
merchant suppliers has increased the downward pricing pressure on the Company's
products. Since wireless infrastructure equipment manufacturers frequently
negotiate supply arrangements far in advance of delivery dates, the Company
often must commit to price reductions for its products before it is aware of
how, or if, cost reductions can be obtained. To offset declining average sales
prices, the Company believes that it must achieve manufacturing cost reductions.
If the Company is unable to achieve such cost reductions, the Company's gross
margins will decline, and such decline will have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing."
Risks of International Sales. Sales outside of the United States were 95%,
73% and 72% of revenues in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. The Company expects that international sales will continue to
account for a significant percentage of the Company's total revenues for the
foreseeable future. These sales involve a number of inherent risks, including
imposition of government controls, currency exchange fluctuations, potential
insolvency of international distributors and representatives or customers,
reduced protection for intellectual property rights in some countries, the
impact of recessionary environments in economies outside the United States,
political instability and generally longer receivables collection periods, as
well as tariffs and other trade barriers. In addition, because substantially all
of the Company's foreign sales are denominated in U.S. dollars, increases in the
value of the dollar relative to the local currency would increase the price of
the Company's products in foreign markets and make the Company's products
relatively more expensive and less price competitive than competitors' products
that are priced in local currencies. There can be no assurance that these
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition and results of operations. The Company anticipates that the recent
turmoil in Asian financial markets and the recent deterioration of the
underlying economic conditions in certain Asian countries may have an impact on
its sales to customers located in or whose projects are based in those countries
due to the impact of currency fluctuations on the relative price of the
Company's products and restrictions on government spending imposed by the IMF on
those countries receiving the IMF's assistance. In addition, customers in those
countries may face reduced access to working capital to fund component
purchases, such as the Company's products, due to higher interest rates, reduced
bank lending due to contractions in the money supply or the deterioration in the
customer's or its bank's financial condition or the inability to access local
equity financing. A substantial majority of the Company's products are sold to
OEMs who incorporate the Company's products into systems sold and installed to
end-user customers. These OEMs are not required by contract and do not typically
provide the Company with information regarding the location and identity of
their end-user customers, and, therefore, the Company is not able to determine
what portion of its product sales have been or future orders will be
incorporated into OEM sales to end-users in those Asian countries currently
experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers and
potential new customers are servicing new markets in developing countries that
the Company's customers expect will deploy wireless communication networks as an
alternative to the construction of a wireline infrastructure. If such countries
decline to construct wireless communication systems, or construction of such
systems is delayed for any reason, including business and economic conditions
and changes in economic stability due to factors such as increased inflation and
political turmoil, such delays could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--OEM Customers, Sales and Marketing."
25
Reliance upon Growth of Wireless Services. Sales of power amplifiers to
wireless infrastructure equipment suppliers have in the past accounted, and are
expected in the future to account, for substantially all of the Company's
product sales. Demand for wireless infrastructure equipment is driven by demand
for wireless service. Although demand for power amplifiers has grown in recent
years, if demand for wireless services fails to increase or increases more
slowly than the Company or its OEM customers currently anticipate, the Company's
business, financial condition and results of operations would be materially and
adversely affected. See "Business--Industry Background."
Market for the Company's Products Is Highly Competitive. The wireless
communications equipment industry is extremely competitive and is characterized
by rapid technological change, new product development and product obsolescence,
evolving industry standards and significant price erosion over the life of a
product. The ability of the Company to compete successfully and sustain
profitability depends in part upon the rates at which wireless equipment OEMs
incorporate the Company's products into their systems and the Company captures
market share from other merchant suppliers. The Company's major OEM customers,
including Northern Telecom, Nortel Matra, LGIC and QUALCOMM, continuously
evaluate whether to manufacture their own amplification products or purchase
them from outside sources. There can be no assurance that these OEM customers
will incorporate the Company's products into their systems or that in general
they will continue to rely, or expand their reliance, on external sources of
supply for their power amplifiers. These customers and other large manufacturers
of wireless communications equipment could also elect to enter the merchant
market and compete directly with the Company, and at least one OEM, NEC, has
already done so. Such increased competition could materially adversely affect
the Company's business, financial condition and results of operations. See
"--Internal Amplifier Design and Production Capabilities of OEMs."
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, Hewlett-Packard Wireless Infrastructure Division,
M/A--COM (a subsidiary of AMP), Microwave Power Devices, NEC and Powerwave
Technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features compared to the
Company's products. See "Business--Competition."
Uncertain Protection of Intellectual Property. The Company's ability to
compete successfully and achieve future revenue growth will depend, in part, on
its ability to protect its proprietary technology and operate without infringing
the rights of others. The Company has a policy of seeking patents on inventions
resulting from its ongoing research and development activities. The Company has
been awarded 16 United States patents, and has 22 United States patent
applications pending, including five that had been allowed but not yet formally
issued. The Company also has been awarded four foreign patents and has ten
foreign patent applications pending. There can be no assurance that the
Company's pending patent applications will be allowed or that the issued or
pending patents will not be challenged or circumvented by competitors.
Notwithstanding the Company's active pursuit of patent protection, the Company
believes that the success of its business depends more on the collective value
of its patents, specifications, computer aided design and modeling tools,
technical processes and employee expertise. The Company generally enters into
confidentiality and nondisclosure agreements with its employees, suppliers, OEM
customers, and potential customers and limits access to and distribution of its
proprietary technology. However, there can be no assurance that such measures
will provide adequate protection for the Company's trade secrets or other
proprietary information, or that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors. The failure of the Company to protect its proprietary technology
could have a material adverse effect on its business, financial condition and
results of operations. See "Business--Patents and Proprietary Technology."
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
26
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. See "Business--Patents and Proprietary Technology."
Government Regulation of Communications Industry. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States, Canada and throughout the rest of the world.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by wireless service providers
to operate the Company's products. The United States Federal Communications
Commission (the "FCC") and regulatory authorities abroad constantly review RF
emission issues and promulgate standards based on such reviews. If more
stringent RF emission regulations are adopted, the Company and its OEM customers
may be required to alter the manner in which radio signals are transmitted or
otherwise alter the equipment transmitting such signals, which could materially
adversely affect the Company's products and markets. The enactment by federal,
state, local or international governments of new laws or regulations or a change
in the interpretation of existing regulations could also materially adversely
affect the market for the Company's products. Although recent deregulation of
international communications industries along with recent radio frequency
spectrum allocations made by the FCC have increased the potential demand for the
Company's products by providing users of those products with opportunities to
establish new wireless personal communications services, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
will continue or that other future regulatory changes will have a positive
impact on the Company. The increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused, and may in the future cause, the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's OEM customers. These delays have had in the past, and in the
future may have, a material adverse effect on the sale of products by the
Company to such OEM customers.
Environmental Regulations. The Company is subject to a variety of local,
state and federal governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture the Company's products. The Company
believes that it is currently in compliance in all material respects with such
regulations and that it has obtained all necessary environmental permits to
conduct its business. Nevertheless, the failure to comply with current or future
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its manufacturing processes or cessation
of operations. Compliance with such regulations could require the Company to
acquire expensive remediation equipment or to incur substantial expenses. Any
failure by the Company to control the use, disposal, removal or storage of, or
to adequately restrict the discharge of, or assist in the cleanup of, hazardous
or toxic substances, could subject the Company to significant liabilities,
including joint and several liability under
27
certain statutes. The imposition of such liabilities could materially adversely
affect the Company's business, financial condition and results of operations.
See "Business--Manufacturing."
Year 2000 Compliance. Many installed computer programs were written using a
two digit date field rather than a four digit field to define the applicable
year. Such computer programs utilizing a two digit date field may recognize a
date using "00" as the year 1900 rather than the year 2000. The Year 2000 Issue
could potentially result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in other similar normal
business activities. The Company has identified Year 2000 Issues in certain of
its internal operating systems and is in the process of installing a new
computer software system which will increase operational and financial
efficiencies and information analysis. The new enterprise system recognizes
dates beyond December 31, 1999 and addresses the substantial position of the
Year 2000 Issue that impact the Company. The cost of this project, as it relates
to the Year 2000 Issue, is not expected to have a material effect on the
operations of the Company and will be funded through operating cash flows. The
Company has not completed an audit of its remaining internal systems or products
with respect to Year 2000 Issues.
Management of Growth; Dependence on Key Personnel. The growth in the
Company's business has placed, and is expected to continue to place, a
significant strain on the Company's personnel, management and other resources.
The Company's ability to manage any future growth effectively will require it to
attract, train, motivate, manage and retain new employees successfully, to
integrate new employees into its overall operations and in particular its
manufacturing operations, to retain the continued service of its key technical,
marketing and management personnel, and to continue to improve its operational,
financial and management information systems. Although the Company has
employment contracts with several of its executive officers, these agreements do
not obligate such individuals to remain in the employment of the Company. The
Company does not maintain key person life insurance on any of its key technical
personnel. The competition for such personnel is intense, and the loss of key
employees could have a material adverse effect on the Company. See
"Business--Employees" and "Management."
Volatility of Stock Price. The market price of the shares of Common Stock
has recently been and is likely to continue to be highly volatile, and is
affected significantly by factors such as fluctuations in the Company's
operating results, announcements of technological innovations, new customer
contracts or new products by the Company or its competitors, announcements by
the Company's customers regarding their business or prospects, changes in
analysts' expectations, governmental regulatory action, developments with
respect to patents or proprietary rights, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of the Company's Common
Stock has fluctuated substantially during fiscal 1998, from a low of $10.75 on
April 1, 1997 to a high of $66.375 on October 1, 1997. On May 18, 1998, the last
reported sale price of the Common Stock as reported on the Nasdaq National
Market was $16.125. See "Market for Registrant's Common Equity and Related
Stockholder Matters."
Pending Litigation. Since December 23, 1997, a number of complaints have
been filed against the Company and certain of its officers in the Federal Court
for the Northern District of California that allege violations of the federal
securities laws. Similar complaints have been filed in California state court
that allege violations of California state securities laws and California common
law. The complaints have been consolidated in the federal and state courts,
respectively. The plaintiffs in both the federal and state lawsuits purport to
represent a class of persons who purchased the Company's securities during the
period of July 17, 1997 through October 23, 1997. The complaints allege that the
Company and certain of its officers misled the investing public regarding the
financial prospects of the Company. The Company believes that the allegations
are completely without merit and will vigorously defend itself. Certain
provisions of the Company's Certificate of Incorporation and indemnification
agreements between the Company and its officers require the Company to advance
to such officers ongoing legal expenses of defending the suits and may require
the Company to indemnify them against judgments rendered on certain claims. The
Company expects to incur significant legal expenses on its behalf and on behalf
of such officers in connection with this litigation. In addition, defending this
litigation has resulted and will likely continue to result in the diversion of
management's attention from the day to day operations of the
28
Company's business. Although the Company does not believe that it or any of its
officers has engaged in any wrongdoing, there can be no assurance that this
stockholder litigation will be resolved in the Company's favor. An adverse
result, settlement or prolonged litigation could have a material adverse effect
on the Company's business, financial condition or results of operations.
Shareholder Rights Plan; Issuance of Preferred Stock. The Board of
Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the
"Rights Plan"). Pursuant to the Rights Plan, the Board declared a dividend of
one Preferred Stock Purchase Right per share of Common Stock (the "Rights") and
each such Right has an exercise price of $126.00. The Rights become exercisable
upon the occurrence of certain events, including the announcement of a tender
offer or exchange offer for the Company's Common Stock or the acquisition of a
specified percentage of the Company's Common Stock by a third party. The
exercise of the Rights could have the effect of delaying, deferring or
preventing a change in control of the Company, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. The Board of Directors has the authority to issue
up to 5,000,000 shares of undesignated Preferred Stock and to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued shares of
undesignated Preferred Stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by
the Company's stockholders. For example, in connection with the Company's
Shareholder Rights Plan, the Board of Directors designated 20,000 shares of
Preferred Stock as Series A Participating Preferred Stock although none of such
shares have been issued. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
Common Stock. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying, deferring or preventing a change in control of the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the independent
auditors' report appear on pages F-1 through F-15 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement related to the 1998 Annual Meeting of Stockholders to
be held June 26, 1998, to be filed by the Company with the Securities and
Exchange Commission within 120 days of the end of the Company's fiscal year
pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement").
Certain information required by this item concerning executive officers is set
forth in Part I of this Report in "Business--Management" and certain other
information required by this item is incorporated by reference from the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" contained in
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" contained in the Proxy Statement.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements are incorporated by
reference in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets, March 31, 1998 and 1997
Consolidated Statements of Operations for the years ended March 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended March 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves (see page
S-1)
Independent Auditors' Report (see page F-2)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(a)(3) Exhibits
3.1(4) Restated Articles of Incorporation of Registrant.
3.4(1) Bylaws of Registrant.
3.5(14) Certificate of Incorporation of Registrants.
3.6(15) Bylaws of Registrant.
4.1(11) Amended and Restated Preferred Shares Rights Agreement of
January 15, 1997, between the Registrant and ChaseMellon
Shareholder Services, L.L.C., as amended, including the form
of Rights Certificate and the Certificate of Determination,
the Summary of Rights attached thereto as Exhibits A, B and C,
respectively.
4.1.1(11) Letter Agreement to amend Preferred Shares Rights Agreement
dated as of January 15, 1997 between the Registrant and Kopp
Investment Advisors, Inc.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(8) 1992 Stock Plan, as amended.
10.3(8) 1994 Employee Stock Purchase Plan, as amended, and form of
agreement thereunder.
10.4(8) 1994 Director Option Plan and form of agreement thereunder.
10.5(1) Amended and Restated Registration Rights Agreement dated as of
August 9, 1993 by and among Registrant and certain individuals
and entities named therein.
10.6.1(1) Lease between Registrant and Portola Land Company dated March
28, 1984, as amended.
10.6.2(1) Lease between Registrant and 465 Mountain View Properties
Incorporated dated May 15, 1990, as amended.
10.6.3(1) Standard Industrial Lease-Multiple-Tenant between American
Microwave Technology, Inc. and Enterprise Business Center-Brea
dated December 19, 1990.
10.7.1(1) Business Loan Agreement between Registrant and Silicon Valley
Bank dated May 21, 1992, as amended, and ancillary documents
thereto.
10.7.2(1) Amendment to Business Loan Agreement between Registrant and
Silicon Valley Bank dated June 27, 1994.
10.7.3(14) Amended and Restated Business Loan Agreement between
Registrant and Silicon Valley Bank dated February 11, 1997 and
ancillary documents thereto.
10.8+(1) Supply Agreement between Registrant and Northern Telecom
Canada Limited dated July 16, 1993.
10.9+(1) Agreement between Registrant and Matra Communication dated
March 24, 1993.
31
10.10.1+(1) Agreement among Registrant and Ericsson GE Mobile
Communications, Inc., Ericsson Radio Access AB, Ericsson
Mobile Communications AB and Ericsson Radio Systems AB dated
July 21, 1993 (collectively "Ericsson").
10.10.2+(1) Addendum to Agreement among Registrant and Ericsson dated June
29, 1994.
10.10.3+(1) Addendum to Agreement among Registrant and Ericsson dated June
29, 1994.
10.11+(2) Hardware Development Agreement dated July 6, 1994 between
Northern Telecom Limited and Registrant.
10.12+(3) Hardware Development Agreement dated October 18, 1994 between
Northern Telecom Limited and Registrant.
10.13+(4) Hardware Supply Agreement dated April 6, 1995 between Northern
Telecom Limited and Registrant
10.14(4) Employment Agreement dated January 6, 1992 between Registrant
and C. Woodrow Rea, Jr.
10.15(4) Employment Agreement dated January 6, 1992 between Registrant
and David S. Wisherd.
10.16(5) Purchase and Sale Agreement between Metropolitan Life
Insurance Company and Registrant.
10.17+(6) Development and Supply Agreement between QUALCOMM Incorporated
and Registrant.
10.18+(7) Purchasing Agreement between Airnet Communications Corporation
and Registrant.
10.19(8) Employment Agreement between Garrett A. Garrettson and
Registrant.
10.20(8) Employment Agreement between Stephen B. Greenspan and
Registrant.
10.21(9) Term Loan Agreement between Silicon Valley Bank and Registrant
10.22(10) Lease Agreement dated November 19, 1996 between the Registrant
and SPEC (CA) QRS 12-20, Inc.
10.23(10) Bill of Sale dated November 19, 1996 by the Registrant to SPEC
(CA) QRS 12-20, Inc.
10.24(12) Employment Agreement dated March 11, 1997 between the
Registrant and Bruce R. Wright.
10.25(12) Letter Agreement dated November 6, 1996 between the Company
and Edward Supplee.
10.26(13) Stock Option Agreement dated November 26, 1997 between
Registrant and Garrett A. Garrettson.
10.27(13) Stock Option Agreement dated November 26, 1997 between
Registrant and Garrett A. Garrettson.
10.28(13) Stock Option Agreement dated November 26, 1997 between
Registrant and Garrett A. Garrettson.
10.29(13) Stock Option Agreement dated March 24, 1997 between Registrant
and Bruce Wright.
10.30(13) Stock Option Agreement dated March 20, 1997 between Registrant
and Michael Morrione.
10.31(13) Stock Option Agreement dated March 20, 1997 between Registrant
and Stephen B. Greenspan.
10.32(15) Form of Indemnification Agreement with directors and officers.
10.33(16) 1998 Nonstatutory Stock Option Plan.
10.34 1998 Employee Stock Purchase Plan.
10.35 Lease Agreement dated December 19, 1997 between Registrant and
Stanford Ranch I, LLC.
10.36(17) Stock Option Agreement dated December 15, 1997 between the
Registrant and John Rottenburg.
10.37 First Amendment to Lease dated February 19, 1998 between
Registrant and Stanford Ranch I, LLC.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included on page 41).
27.1 Financial Data Schedule.
- ---------------
+ Confidential treatment has been requested or granted with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 33-79952) as declared effective by the Securities and Exchange
Commission August 2, 1994.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended October 1, 1994.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994.
32
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1995.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995.
(8) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-38561) as filed with the
Securities and Exchange Commission on October 23, 1997.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1996
(10) Incorporated by reference to the Registrant's Form 8-K dated November 19,
1996.
(11) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (File No. 000-24360) as filed with the Securities and
Exchange Commission on January 17, 1997.
(12) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1997.
(13) Incorporated by reference to exhibits filed with Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8
(File No. 333-25435) as filed with the Securities and Exchange Commission
on October 21, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997.
(15) Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K dated October 10, 1997.
(16) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-49081) as filed with the Securities and
Exchange Commission on April 1, 1998.
(17) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-53079) as filed with the Securities and
Exchange Commission on May 19, 1998.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three months ended March 31, 1998.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SPECTRIAN CORPORATION
By: /s/ Garrett A. Garrettson
-------------------------------------
Garrett A. Garrettson
President, Chief Executive Officer
and Director
Date: May 21, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Garrett A. Garrettson and Bruce R.
Wright, and each of them, his true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, to sign any and all
amendments (including post-effective amendments) to this Annual Report on Form
10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- ------------------------------ -------------------------------------- -------------
/s/ Garrett A. Garrettson President, Chief Executive Officer and May 21, 1998
- --------------------------- Director (Principal Executive Officer)
Garrett A. Garrettson
/s/ Bruce R. Wright Executive Vice President, Finance and May 21, 1998
- --------------------------- Administration, Chief Financial
Bruce R. Wright Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ James A. Cole Director May 21, 1998
- ---------------------------
James A. Cole
/s/ Robert C. Wilson Director May 21, 1998
- ---------------------------
Robert C. Wilson
/s/ Eric A. Young Director May 21, 1998
- ---------------------------
Eric A. Young
/s/ Martin Cooper Director May 21, 1998
- ---------------------------
Martin Cooper
/s/ Charles D. Kissner Director May 21, 1998
- ---------------------------
Charles D. Kissner
34
INDEX TO FINANCIAL STATEMENTS
Page
-----
Independent Auditors' Report ........................................ F-2
Consolidated Balance Sheets ......................................... F-3
Consolidated Statements of Operations ............................... F-4
Consolidated Statements of Cash Flows ............................... F-5
Consolidated Statements of Changes in Stockholders' Equity .......... F-6
Notes to Consolidated Financial Statements .......................... F-7
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Spectrian Corporation:
We have audited the accompanying consolidated balance sheets of Spectrian
Corporation (the Company) and subsidiaries as of March 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Item 14(a). These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spectrian
Corporation and subsidiaries as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
/s/KPMG Peat Marwick LLP
Mountain View, California
April 22, 1998
F-2
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31,
----------------------
1998 1997
--------- ---------
Assets
Current assets:
Cash and cash equivalents ........................... $ 31,460 $ 6,240
Short-term investments .............................. 68,128 --
Accounts receivable, less allowance for doubtful
accounts of $376 and $365, respectively ........... 21,123 15,825
Inventories ......................................... 15,362 17,301
Prepaid expenses and other current assets ........... 6,202 1,806
--------- ---------
Total current assets .............................. 142,275 41,172
Property and equipment, net .......................... 32,776 25,461
--------- ---------
$ 175,051 $ 66,633
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................... $ 10,456 $ 8,101
Accrued liabilities ................................. 12,981 7,421
Current portion of debt obligations ................. 1,360 1,588
--------- ---------
Total current liabilities ......................... 24,797 17,110
Debt obligations, net of current portion ............. 5,912 7,057
--------- ---------
Total liabilities ................................. 30,709 24,167
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 10,904,077 and 8,265,230 shares
issued and outstanding, respectively .............. 10 8
Additional paid-in capital .......................... 146,827 53,387
Deferred compensation expense ....................... (609) --
Unrealized gains on investments ..................... 121 --
Accumulated deficit ................................. (2,007) (10,929)
--------- ---------
Total stockholders' equity ........................ 144,342 42,466
--------- ---------
Commitments and contingencies
--------- ---------
$ 175,051 $ 66,633
========= =========
See accompanying notes to consolidated financial statements
F-3
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended March 31,
-------------------------------------------------
1998 1997 1996
-------- -------- --------
Revenues ............................................... $168,798 $ 88,252 $ 72,113
-------- -------- --------
Costs and expenses:
Cost of product sales ................................. 132,684 65,322 45,355
Research and development .............................. 18,644 17,230 14,548
Selling, general and administrative ................... 13,014 9,299 7,450
-------- -------- --------
164,342 91,851 67,353
-------- -------- --------
Operating income (loss) ............................. 4,456 (3,599) 4,760
Interest income (expense), net ......................... 3,335 (392) 889
Other income, net ...................................... 1,530 -- --
-------- -------- --------
Income (loss) before income taxes ................... 9,321 (3,991) 5,649
Income tax expense ..................................... 399 -- 169
-------- -------- --------
Net income (loss) ................................... $ 8,922 $ (3,991) $ 5,480
======== ======== ========
Net income (loss) per share:
Basic ............................................... $ 0.90 $ (0.49) $ 0.71
Diluted ............................................. $ 0.83 $ (0.49) $ 0.66
Shares used in computing per share amounts:
Basic ............................................... 9,881 8,150 7,684
Diluted ............................................. 10,701 8,150 8,363
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-4
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended March 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ............................................... $ 8,922 $ (3,991) $ 5,480
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Gain on sale of subsidiary .................................... (1,530) -- --
Depreciation and amortization ................................. 9,761 6,574 4,793
Stock compensation expense .................................... 609 182 (49)
Tax benefit associated with stock options ..................... -- -- 138
Changes in operating assets and liabilities:
Accounts receivable .......................................... (10,051) (3,845) (1,360)
Inventories .................................................. 362 (10,072) (2,444)
Prepaid expenses and other assets ............................ (412) (1,386) (26)
Accounts payable ............................................. 3,141 1,137 2,897
Accrued liabilities .......................................... 5,811 3,301 173
-------- -------- --------
Net cash provided by (used for) operating activities ....... 16,613 (8,100) 9,602
-------- -------- --------
Cash flows from investing activities:
Proceeds (purchases) of short-term investments, net ............. (68,008) 3,000 9,107
Proceeds from sale of subsidiary ................................ 4,016 -- --
Proceeds from sale of property .................................. -- 16,414 --
Purchase of property and equipment .............................. (17,953) (16,321) (28,182)
-------- -------- --------
Net cash provided by (used for) investing activities ....... (81,945) 3,093 (19,075)
-------- -------- --------
Cash flows from financing activities:
Proceeds from real estate loan .................................. -- 2,917 --
Proceeds from bank debt and equipment financing ................. -- 18,000 --
Repayments of debt and capital lease obligations ................ (1,672) (12,272) --
Proceeds from sales of common stock, net ........................ 92,224 1,439 2,216
-------- -------- --------
Net cash provided by financing activities .................. 90,552 10,084 2,216
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 25,220 5,077 (7,257)
Cash and cash equivalents, beginning of year ............... 6,240 1,163 8,420
-------- -------- --------
Cash and cash equivalents, end of year ..................... $ 31,460 $ 6,240 $ 1,163
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .......................... $ 457 $ 660 $ 31
Taxes paid during the year ...................................... $ 952 $ -- $ --
Noncash investing and financing activities:
Equipment recorded under capital lease obligations ............ $ 307 $ -- $ --
Deferred stock option compensation ............................ $ 1,218 $ -- $ (425)
Unrealized gain on investments ................................ $ 121 $ -- $ --
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-5
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share data)
Unrealized
Common Stock Deferred Gains Total
----------------------- Paid-In Compensation (Losses) on Accumulated Stockholders'
Shares Amount Capital Expense Investments Deficit Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances as of March 31, 1995 .... 7,155,800 $ 7 $ 50,020 $ (558) $ 5 $ (12,418) $ 37,056
Exercise of stock options ........ 761,778 1 1,160 -- -- -- 1,161
Employee stock purchase plan ..... 96,947 -- 1,055 -- -- -- 1,055
Deferred stock option
compensation .................... -- -- (425) 425 -- -- --
Stock option compensation ........ -- -- -- (49) -- -- (49)
Tax benefit associated with
stock options ................... -- -- 138 -- -- -- 138
Unrealized losses on investments . -- -- -- -- (3) -- (3)
Net income ....................... -- -- -- -- -- 5,480 5,480
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances as of March 31, 1996 .... 8,014,525 8 51,948 (182) 2 (6,938) 44,838
Exercise of stock options ........ 114,671 -- 276 -- -- -- 276
Employee stock purchase plan ..... 136,034 -- 1,163 -- -- -- 1,163
Stock option compensation ........ -- -- -- 182 -- -- 182
Unrealized losses on investments . -- -- -- -- (2) -- (2)
Net loss ......................... -- -- -- -- -- (3,991) (3,991)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances as of March 31, 1997 .... 8,265,230 8 53,387 -- -- (10,929) 42,466
Exercise of stock options ........ 431,470 -- 5,589 -- -- -- 5,589
Employee stock purchase plan ..... 207,377 -- 1,604 -- -- -- 1,604
Public offering, net of
$4,969 expenses ................. 2,000,000 2 85,029 -- -- -- 85,031
Deferred stock option
compensation .................... -- -- 1,218 (1,218) -- -- --
Stock compensation expense ....... -- -- -- 609 -- -- 609
Unrealized gain on investments ... -- -- -- -- 121 -- 121
Net income ....................... -- -- -- -- -- 8,922 8,922
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances as of March 31, 1998 .... 10,904,077 $ 10 $ 146,827 $ (609) $ 121 $ (2,007) $ 144,342
========== ========== ========== ========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements
</FN>
F-6
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue upon shipment and concurrently accrues for
expected warranty expenses. Repair and service revenues are recognized when the
service is performed.
Concentration of Credit Risk and Fair Value of Financial Instruments
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral on accounts receivable. When
required, the Company maintains allowances for credit losses and such losses
have been within management's expectations.
The recorded amounts of financial instruments approximate their fair market
values.
Cash Equivalents and Short-Term Investments
The Company considers all liquid investments with an original maturity of
three months or less to be cash equivalents. The cash equivalents consist of
commercial paper as of March 31, 1998.
The Company has classified its investments in certain debt securities as
"available-for-sale," and records such investments at fair market value, with
unrealized gains and losses reported as a separate component of stockholders'
equity. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income. At March 31, 1998
and 1997, the fair value of the Company's investments approximated cost.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the respective assets, generally three to five years. Assets recorded under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease terms or the estimated useful lives of the
respective assets.
Income Taxes
Income taxes are recorded using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded against deferred tax assets where their
realization is more likely than not.
Per Share Computations
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" effective December 28, 1997. SFAS No. 128 requires
presentation of basic earnings per share ("EPS") and, for companies with complex
capital structures, diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS includes
dilution and net income per share is
F-7
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
include the effect of the exercise of stock options. For the year ended March
31, 1997, common equivalent shares were not included for the calculation of
diluted EPS as they were considered antidilutive. The Company has restated net
income (loss) per share for all periods presented in the accompanying
consolidated financial statements to reflect net income (loss) per share on both
a basic and a diluted basis.
A reconciliation of the basic and diluted per share calculations follows:
Year ended Year ended
March 31, 1998 March 31, 1997
------------------------------ ---------------------------------
Per Per
Net Share Net Share
Income Shares Amount Loss Shares Amount
(In thousands, except per share data) ------ ------ ------ ---- ------ ------
Basic ...................................... $ 8,922 9,881 $ 0.90 $(3,991) 8,150 $ (0.49)
Effect of dilutive securities .............. -- 820 -- -- -- --
------- ------- ----- ------- ------- -----
Diluted .................................... $ 8,922 10,701 $ 0.83 $(3,991) 8,150 $ (0.49)
======= ======= ===== ======= ======= =====
Year ended
March 31, 1996
----------------------------------
Per
Net Share
Income Shares Amount
(In thousands, except per share data) ------ ------ ------
Basic ............................... $5,480 7,684 $ 0.71
Effect of dilutive securities ....... -- 679 --
------ ------ -----
Diluted ............................. $5,480 8,363 $ 0.66
====== ====== =====
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, revenues and expenses during
the reporting period. The most significant of these relate to the extent of
inventory obsolescence, the allowance for doubtful accounts and the warranty
accrual. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
The Company continues to account for its stock option plans using the
intrinsic value method.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value. To date
the Company has made no such adjustments.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Available-for-sale securities at March 31, 1998 and 1997 were as follows:
1998 1997
------- -------
(In thousands)
Commercial paper ............................. $63,341 $ --
Repurchase agreements ........................ -- 4,830
U.S. government securities ................... 28,158 128
------- -------
$91,499 $ 4,958
======= =======
F-8
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As of March 31, 1998 and 1997 the estimated fair value of each investment
approximated the amortized cost and, therefore, there were no significant
unrealized gains or losses. At March 31, 1998 and 1997 all securities held were
due in less than one year and were classified as follows (in thousands):
March 31,
-------------------------
1998 1997
------- -------
Cash equivalents ......................... $23,371 $ 4,958
Short-term investments ................... 68,128 --
------- -------
$91,499 $ 4,958
======= =======
3. BALANCE SHEET COMPONENTS
Balance sheet components at March 31, 1998 and 1997 are as follows (in
thousands):
March 31,
---------------------
1998 1997
------- -------
Inventories:
Raw materials .............................. $ 7,395 $ 9,315
Work in progress ........................... 5,538 6,699
Finished goods ............................. 2,429 1,287
------- -------
$15,362 $17,301
======= =======
Property and equipment:
Machinery and equipment .................... $51,091 $37,181
Land, building and improvements ............ 2,829 2,822
Furniture and fixtures ..................... 1,382 1,376
Leasehold improvements ..................... 1,633 867
------- -------
56,935 42,246
Less accumulated depreciation and
amortization ............................. 24,159 16,785
------- -------
$32,776 $25,461
======= =======
Accrued liabilities:
Employee compensation and benefits ......... $ 2,958 $ 3,772
Warranty ................................... 7,326 1,940
Deferred revenue and other ................. 2,697 1,709
------- -------
$12,981 $ 7,421
======= =======
4. DEBT AND LEASE COMMITMENTS
Lines of Credit
The Company maintains a revolving line of credit under a master credit
agreement with a bank. The master credit agreement contains certain financial
covenants and certain restrictions on other indebtedness and payment of
dividends. The line of credit, secured by a majority of the Company's assets,
expires on December 1, 1998, bears interest at the bank's prime rate, and
provides for borrowings and letters of credit aggregating up to $10,000,000
based on a specified percentage of eligible accounts receivable. As of March 31,
1998, the Company was in compliance with all but its quarterly profitability
financial covenant for which the Company has received a waiver from its bank. As
of March 31, 1998, the Company had $10,000,000 available under this line of
credit with no borrowings outstanding.
F-9
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Equipment and Real Estate Loans
In January 1997, the Company borrowed $6,000,000 secured by certain capital
equipment. Under the terms of the agreement, the Company is required to make a
series of uneven monthly principal payments through January 2002 ranging from
$42,000 to $136,000, plus interest at a rate equal to the Treasury Rate plus
2.75%, and must maintain certain minimum working capital, net worth and other
specific ratios for which the Company was in compliance as of March 31, 1998.
In March 1997, through means of a limited liability company in which the
Company is a majority owner, the Company purchased a 39,000 square foot building
and secured a real estate loan with an institutional lender in the amount of
$3,200,000 of which $2,917,000 was received by the Company in fiscal 1997. The
loan has an initial maturity date of April 2002 with an option to be extended to
April 2007. The Company makes monthly payments of principal and interest in
equal amounts which are amortized over two hundred forty months with the
remaining principal balance due on the maturity date. The interest rate is a
variable interest rate set at the LIBOR rate plus 3.25%.
Future minimum debt principal payments under these loans as of March 31,
1998 aggregated $7,272,000 including $1,360,000, $1,300,000, $889,000,
$1,472,000, and $178,000 for the fiscal years 1999, 2000, 2001, 2002 and 2003,
respectively, and $2,073,000, thereafter.
Lease Commitments
During fiscal 1997, the Company sold its principal facilities in Sunnyvale
for $16,414,000, and leased the facilities back under a lease that has been
classified as an operating lease. The lease expires in November 2011 and the
quarterly rent payments are subject to Consumer Price Index adjustments on a
tri-annual basis beginning in November 1999.
In 1998, the Company entered into operating leases for an ancillary 40,000
square foot manufacturing facility in Rocklin, California and a 7,750 square
foot engineering design center in Quincy, Illinois. The Rocklin facility has a
sixty-two month lease term commencing in June 1998 and expiring in July 2003.
The Quincy lease has a twelve-month lease term and expires in March 1999.
The Company leases these facilities and certain equipment under
noncancelable operating leases. Future minimum lease payments under these
noncancelable operating leases as of March 31, 1998 aggregated $26,494,000
including $2,202,000, $2,317,000, $2,317,000, $2,311,000 and $2,310,000 for the
fiscal years 1999, 2000, 2001, 2002 and 2003, respectively and $15,037,000,
thereafter. Rent expense was approximately $2,530,000, $819,000, and $778,000
for the years ended March 31, 1998, 1997 and 1996, respectively.
5. STOCKHOLDERS' EQUITY
Reincorporation
On September 11, 1997, the Company's shareholders approved the Company's
reincorporation in the state of Delaware, providing for 20,000,000 authorized
shares of Common Stock and 5,000,000 authorized shares of Preferred Stock, both
with par values of $.001 per share. On October 3, 1997, the reincorporation in
the state of Delaware was effected. The accompanying financial statements have
been restated to give effect to the reincorporation.
Preferred Stock
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated preferred stock and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued shares of undesignated preferred stock and to fix the
F-10
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
number of shares constituting any series and the designation of such series,
without any further vote or action by the Company's stockholders. The Board of
Directors has designated 20,000 shares of preferred stock as Series A
Participating Preferred Stock, although none of such shares have been issued.
Public Offering
On August 20, 1997, the Company completed a public offering of 2,000,000
shares of common stock and received net proceeds of $85,031,000.
Stock Option Plans
The Company has adopted stock option plans, (the "Plans"), pursuant to
which the Company's Board of Directors may grant stock options to selected
employees, directors, officers and consultants of the Company. Stock options are
generally granted with an exercise price equal to the fair market value of the
Company's stock at the date of grant. The options generally have 10-year terms
and vest 25% after one year from the grant date with the remaining options
vesting pro rata over the following 36 months.
A total of 186,380 shares of Common Stock have been reserved for issuance
under the 1992 Stock Plan as of March 31, 1998. Under the 1994 Director Option
Plan, 25,000 shares were granted during fiscal 1998, and 35,000 shares of Common
Stock were reserved for issuance as of March 31, 1998.
Outside of the 1992 Stock Plan and the 1994 Director Option Plan, two
officers and one employee of the Company were granted a combined total of
390,000 options during fiscal 1997, at exercise prices ranging from $9.50 to
$14.50, which are subject to the same vesting schedule as that of the Company's
1992 Stock Plan. In fiscal 1998, one officer and two employees were granted a
combined total of 90,000 options outside of the Plans at exercise prices ranging
from $16.88 to $56.38, which are subject to the same vesting schedule as that of
the 1992 Stock Plan.
In January 1998 the Company adopted the 1998 Nonstatutory Stock Option Plan
under which 400,000 shares were reserved. Under this plan, certain employees
were granted stock options with exercise prices ranging from $6.59 to $16.36
that were below the $17.25 fair market value of the stock on the day of grant
and were subject to a six-month vesting schedule. Stock compensation of $609,000
was recorded for these options in the fourth quarter of fiscal 1998. A total of
226,312 shares were reserved for issuance as of March 31, 1998.
F-11
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes option activity under the Company's various
plans:
Weighted
Average
Available for Exercise
Grant Options Price
---------- ---------- ------
Outstanding as of March 31, 1995 .......... 1,263,728 1,625,942 $ 4.34
Granted ................................ (444,743) 444,743 23.98
Exercised .............................. -- (761,791) 1.52
Canceled ............................... 372,306 (372,306) 4.13
---------- ---------- ------
Outstanding as of March 31, 1996 .......... 1,191,291 936,588 16.03
Additional shares reserved ............. 390,000 -- --
Granted at fair market value ........... (1,790,746) 1,790,746 14.91
Granted in excess of fair market value . (250,000) 250,000 14.50
Exercised .............................. -- (114,671) 2.50
Canceled ............................... 1,124,874 (1,124,874) 19.69
---------- ---------- ------
Outstanding as of March 31, 1997 .......... 665,419 1,726,753 $13.18
Additional shares reserved ................ 500,000 -- --
Granted ................................ (855,755) 855,755 25.91
Exercised .............................. -- (431,511) 12.87
Canceled ............................... 138,028 (138,028) 17.45
---------- ---------- ------
Outstanding as of March 31, 1998 .......... 447,692 2,024,005 $18.34
========== ========== ======
Using the Black-Scholes Option-Pricing Model, the per share weighted
average fair market value of stock options granted during fiscal 1998, fiscal
1997 and fiscal 1996 were $18.34, $9.41 and $17.69, respectively, on the date of
grant. Assumptions used with the Black-Scholes Option-Pricing Model were as
follows: for fiscal 1998, a stock price volatility of 83%, no expected
dividends, an average risk-free interest rate of 5.6% and an average expected
option term of 4.5 years; and for both fiscal 1997 and fiscal 1996, a stock
price volatility of 80%, no expected dividends, an average risk-free interest
rate of 6.0% and an average expected option term of 4.3 years.
F-12
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following tables summarize information about stock options outstanding
at March 31, 1998:
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- ----------------- ------------- ------------- ---------- ------------- -----------
$ 0.20 - 6.59 149,402 8.6 $ 5.46 38,957 $ 2.28
7.00 - 9.50 337,380 8.6 9.37 109,375 9.12
10.00 - 14.38 219,540 9.0 14.04 44,327 13.85
14.50 - 14.50 606,890 7.9 14.50 243,140 14.50
16.25 - 21.25 294,593 9.6 18.52 12,549 18.92
21.38 - 43.31 295,000 8.9 31.13 43,751 22.86
43.50 - 64.13 121,200 9.5 54.60 -- --
--------- -------
2,024,005 8.7 $ 18.34 492,099 $ 13.13
========= =======
Employee Stock Purchase Plan
In May 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan (the "Purchase Plan") which permitted eligible employees to
purchase the Company's Common Stock through payroll deductions. The Purchase
Plan consisted of consecutive and overlapping 24-month offering periods, each
divided into four 6-month purchase periods. The purchase price of the shares in
the Purchase Plan was 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or the end of each purchase
period. The Company reserved a total of 475,000 shares of common stock for
issuance under this plan, of which no remaining shares of Common Stock were
available for issuance as of March 31, 1998. During the year ended March 31,
1998, there were 207,377 shares acquired under the Purchase Plan at per share
prices ranging from $6.59 to $16.36.
Under SFAS No. 123, pro forma compensation cost is calculated for the fair
market value of the employees' purchase rights. The per share weighted average
fair market value of those purchase rights granted in fiscal 1998, fiscal 1997
and fiscal 1996, respectively, was $4.32, $5.14 and $6.54, using the
Black-Scholes Option-Pricing Model with the following assumptions: for fiscal
1998, a stock price volatility of 83%, no expected dividends, risk free interest
rate of 5.6% and an expected term of 0.5 years; for fiscal 1997, a stock price
volatility of 80%, no expected dividends, a risk free interest rate of 6.0% and
an expected term of 0.9 years; and for fiscal 1996, a stock price volatility of
80%, no expected dividends, a risk free interest rate of 6.0% and an expected
term of 0.8 years.
Pro Forma Fair Value Information
The Company accounts for its stock options using the intrinsic value
method. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income (loss) and related per share amounts would have been altered as indicated
in the pro forma amounts indicated below:
1998 1997 1996
----------------- ----------------- ----------------
Net income (loss) .......... As reported $ 8,922,000 $ (3,991,000) $ 5,480,000
Pro forma $ (1,870,000) $ (8,018,000) $ 2,339,000
Net income (loss) per share:
Basic ................... As reported $ 0.90 $ (0.49) $ 0.71
Pro forma $ (0.19) $ (0.98) $ 0.30
Diluted ................. As reported $ 0.83 $ (0.49) $ 0.66
Pro forma $ (0.19) $ (0.98) $ 0.28
F-13
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Pro forma net income (loss) reflects only the options granted in fiscal
1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is reflected
over the options' vesting period of four years and compensation cost for options
granted prior to April 1, 1995 is not considered.
6. INCOME TAXES
Income tax expense for the years ended March 31, 1998, 1997 and 1996
differs from the amount computed by applying the federal income tax rate of 34%
to pretax income (loss) from operations as a result of the following (in
thousands):
Year ended March 31,
-----------------------------
1998 1997 1996
------- ------- -------
Federal tax (benefit) at statutory rate $ 3,189 $(1,357) $ 1,921
Utilization of net operating loss
carryforwards ........................ (3,314) -- (1,921)
Unutilized net operating losses ....... -- 1,337 --
Alternative minimum tax ............... 183 -- 169
FSC tax expense ....................... 215 -- --
Unrealized benefit from LLC loss ...... 44 -- --
Other ................................. 82 20 --
------- ------- -------
Income tax expense .................... $ 399 $ -- $ 169
======= ======= =======
The Company is entitled to a deduction for federal and state tax purposes
with respect to employees' early disposition of stock acquired through employee
stock options. The net reduction in taxes otherwise payable arising from that
deduction has been credited to Common Stock.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
March 31,
----------------------
1998 1997
-------- --------
Deferred tax assets:
Various accruals and reserves ........... $ 6,999 $ 2,921
Net operating loss carryforwards ........ 7,986 10,266
Credit carryforwards .................... 6,604 4,721
-------- --------
Total gross deferred tax assets ...... 21,589 17,908
Less valuation allowance ............. (20,642) (17,313)
-------- --------
Net deferred tax assets .............. $ 947 $ 595
======== ========
Deferred tax liabilities:
Property and equipment depreciation
differences ............................ $ (947) $ (595)
-------- --------
Total gross deferred tax liabilities.. (947) (595)
-------- --------
Net deferred tax assets .............. $ -- --
======== ========
A valuation allowance is provided due to uncertainties relating to the
realization of deferred tax assets.
As of March 31, 1998, the Company has a net operating loss carryforward of
$23 million for federal income tax purposes. The Company has research credit
carryforwards of approximately $2 million and
F-14
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
$1.9 million for federal and California income tax purposes, respectively. If
not utilized, these carryforwards will expire in various amounts beginning in
1999. The Company also has an investment tax credit carryforward of
approximately $2.3 million for California income tax purposes which, if not
utilized, will expire in 2004 through 2006. Included in the deferred tax assets
is approximately $13.3 million of assets relating to the tax benefit associated
with stock option exercises which will be credited to equity when realized.
7. MAJOR CUSTOMERS
The following table summarizes the annual percentage contribution to
revenues by customers when sales to such customers exceeded 10% of such revenues
in fiscal 1998, 1997 and 1996, and the amounts due from these customers as a
percentage of total accounts receivable as of March 31, 1998 and 1997, follows:
Percentage of
Total Accounts
Receivable
Percentage of Revenues as of
Year Ended March 31, March 31,
------------------------ --------------
1998 1997 1996 1998 1997
------ ------ ------ ------ -----
Customer A ......... 57% 63% 58% 41% 51%
Customer B ......... 22% 12% 17% 33% 27%
Customer C ......... 14% -- -- 8% --
Customers A, B and C are major companies in the wireless infrastructure
equipment industry. Company A has an equity investment in Company B.
Export sales as a percentage of revenues were as follows:
Year ended March 31,
-------------------------
1998 1997 1998
------ ------ -------
Canada ................ 49% 57% 51%
Europe ................ 20% 13% 20%
Korea ................. 26% 2% --
Other ................. -- 1% 1%
-- -- --
Total exports ......... 95% 73% 72%
== == ==
8. LITIGATION
Since December 23, 1997, a number of complaints have been filed against the
Company and certain of its officers in the Federal Court for the Northern
District of California that allege violations of the federal securities laws.
Similar complaints have been filed in California state court that allege
violations of California state securities laws and California common law. The
complaints have been consolidated in the federal and state courts, respectively.
The plaintiffs in both the federal and state lawsuits purport to represent a
class of persons who purchased the Company's securities during the period of
July 17, 1997 through October 23, 1997. The complaints allege that the Company
and certain of its officers misled the investing public regarding the financial
prospects of the Company. The Company believes that the allegations are
completely without merit and will vigorously defend itself.
F-15
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Additions Balance at
Allowance for Doubtful Beginning Charged to End of
Accounts and Sales Returns: of Period Income Deductions Period
--------------------------- --------- ------ ---------- ------
1998 $365 $ 24 $ 13 $376
1997 $339 $ 36 $ 10 $365
1996 $454 $ 14 $129 $339
S-1
INDEX TO EXHIBITS
Sequentially
Exhibits Numbered Page
-------- -------------
3.1(4) Restated Articles of Incorporation of
Registrant.
3.4(1) Bylaws of Registrant.
3.5(14) Certificate of Incorporation of
Registrants.
3.6(15) Bylaws of Registrant.
4.1(11) Amended and Restated Preferred Shares
Rights Agreement of January 15, 1997,
between the Registrant and ChaseMellon
Shareholder Services, L.L.C., as amended,
including the form of Rights Certificate
and the Certificate of Determination, the
Summary of Rights attached thereto as
Exhibits A, B and C, respectively.
4.1.1(11) Letter Agreement to amend Preferred Shares
Rights Agreement dated as of January 15,
1997 between the Registrant and Kopp
Investment Advisors, Inc.
10.1(1) Form of Indemnification Agreement with
directors and officers.
10.2(8) 1992 Stock Plan, as amended.
10.3(8) 1994 Employee Stock Purchase Plan, as
amended, and form of agreement thereunder.
10.4(8) 1994 Director Option Plan and form of
agreement thereunder.
10.5(1) Amended and Restated Registration Rights
Agreement dated as of August 9, 1993 by
and among Registrant and certain
individuals and entities named therein.
10.6.1(1) Lease between Registrant and Portola Land
Company dated March 28, 1984, as amended.
10.6.2(1) Lease between Registrant and 465 Mountain
View Properties Incorporated dated May 15,
1990, as amended.
10.6.3(1) Standard Industrial Lease-Multiple-Tenant
between American Microwave Technology,
Inc. and Enterprise Business Center-Brea
dated December 19, 1990.
10.7.1(1) Business Loan Agreement between Registrant
and Silicon Valley Bank dated May 21,
1992, as amended, and ancillary documents
thereto.
10.7.2(1) Amendment to Business Loan Agreement
between Registrant and Silicon Valley Bank
dated June 27, 1994.
10.7.3(14) Amended and Restated Business Loan
Agreement between Registrant and Silicon
Valley Bank dated February 11, 1997 and
ancillary documents thereto.
10.8+(1) Supply Agreement between Registrant and
Northern Telecom Canada Limited dated July
16, 1993.
10.9+(1) Agreement between Registrant and Matra
Communication dated March 24, 1993.
10.10.1+(1) Agreement among Registrant and Ericsson GE
Mobile Communications, Inc., Ericsson
Radio Access AB, Ericsson Mobile
Communications AB and Ericsson Radio
Systems AB dated July 21, 1993
(collectively "Ericsson").
10.10.2+(1) Addendum to Agreement among Registrant and
Ericsson dated June 29, 1994.
10.10.3+(1) Addendum to Agreement among Registrant and
Ericsson dated June 29, 1994.
10.11+(2) Hardware Development Agreement dated July
6, 1994 between Northern Telecom Limited
and Registrant.
10.12+(3) Hardware Development Agreement dated
October 18, 1994 between Northern Telecom
Limited and Registrant.
10.13+(4) Hardware Supply Agreement dated April 6,
1995 between Northern Telecom Limited and
Registrant
10.14(4) Employment Agreement dated January 6, 1992
between Registrant and C. Woodrow Rea, Jr.
10.15(4) Employment Agreement dated January 6, 1992
between Registrant and David S. Wisherd.
10.16(5) Purchase and Sale Agreement between
Metropolitan Life Insurance Company and
Registrant.
Sequentially
Exhibits Numbered Page
-------- -------------
10.17+(6) Development and Supply Agreement between
QUALCOMM Incorporated and Registrant.
10.18+(7) Purchasing Agreement between Airnet
Communications Corporation and Registrant.
10.19(8) Employment Agreement between Garrett A.
Garrettson and Registrant.
10.20(8) Employment Agreement between Stephen B.
Greenspan and Registrant.
10.21(9) Term Loan Agreement between Silicon Valley
Bank and Registrant
10.22(10) Lease Agreement dated November 19, 1996
between the Registrant and SPEC (CA) QRS
12-20, Inc.
10.23(10) Bill of Sale dated November 19, 1996 by
the Registrant to SPEC (CA) QRS 12-20,
Inc.
10.24(12) Employment Agreement dated March 11, 1997
between the Registrant and Bruce R.
Wright.
10.25(12) Letter Agreement dated November 6, 1996
between the Company and Edward Supplee.
10.26(13) Stock Option Agreement dated November 26,
1997 between Registrant and Garrett A.
Garrettson.
10.27(13) Stock Option Agreement dated November 26,
1997 between Registrant and Garrett A.
Garrettson.
10.28(13) Stock Option Agreement dated November 26,
1997 between Registrant and Garrett A.
Garrettson.
10.29(13) Stock Option Agreement dated March 24,
1997 between Registrant and Bruce Wright.
10.30(13) Stock Option Agreement dated March 20,
1997 between Registrant and Michael
Morrione.
10.31(13) Stock Option Agreement dated March 20,
1997 between Registrant and Stephen B.
Greenspan.
10.32(15) Form of Indemnification Agreement with
directors and officers.
10.33(16) 1998 Nonstatutory Stock Option Plan.
10.34 1998 Employee Stock Purchase Plan.
10.35 Lease Agreement dated December 19, 1997
between Registrant and Stanford Ranch I,
LLC.
10.36(17) Stock Option Agreement dated December 15,
1997 between the Registrant and John
Rottenburg.
10.37 First Amendment to Lease dated February
19, 1998 between Registrant and Stanford
Ranch I, LLC.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included on page 41).
27.1 Financial Data Schedule.
- ------------
+ Confidential treatment has been requested or granted with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 33-70594) as declared effective by the Securities and Exchange
Commission December 13, 1993.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for quarter ended October 1, 1994.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for quarter ended December 31, 1994.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for fiscal year ended March 31, 1995.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1995.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995.
(8) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-38561) as filed with the
Securities and Exchange Commission on October 23, 1997.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1996.
(10) Incorporated by reference to the Registrant's Form 8-K dated November 19,
1996.
(11) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (File No. 000-24360) as filed with the Securities and
Exchange Commission on January 17, 1997.
(12) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1997.
(13) Incorporated by reference to exhibits filed with Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8
(File No. 333-25435) as filed with the Securities and Exchange Commission
on October 21, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997.
(15) Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K dated October 10, 1997.
(16) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333-49081) as filed with the Securities and
Exchange Commission on April 1, 1998.
(17) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (File No. 333- ) as filed with the Securities and
Exchange Commission on May 19, 1998.