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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________.
Commission file number: 0-24360
SPECTRIAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0023003
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
350 West Java Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)
Telephone Number (408) 745-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of October 27, 2000 there were 11,007,632 shares of the Registrant's Common
Stock outstanding.
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2
SPECTRIAN CORPORATION
FORM 10-Q
INDEX
FOR QUARTER ENDED OCTOBER 1, 2000
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - October 1, 2000
and September 26, 1999........................................ 3
Condensed Consolidated Statements Of Operations - Three Months
and Six Months Ended October 1, 2000 and September 26, 1999... 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended October 1, 2000 and September 26, 1999.................. 5
Notes to Condensed Consolidated Financial Statements............ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 26
ITEM 4. Submission of Matters to a Vote of Security Holders............. 26
ITEM 6. Exhibits and Reports on Form 8-K................................ 27
Signatures...................................................... 28
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
October 1, March 31,
2000 2000 (1)
---- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,011 $ 11,553
Short-term investments 28,211 36,027
Accounts receivable, less allowance for doubtful
accounts of $420 and $420, respectively 23,998 23,817
Inventories 28,059 34,542
Prepaid expenses and other current assets 8,154 4,400
-------- --------
Total current assets 104,433 110,339
Property and equipment, net 18,465 19,668
Other assets 1,268 1,268
-------- --------
Total assets $124,166 $131,275
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,222 $ 16,416
Accrued liabilities 11,373 13,793
Current portion of debt and capital lease
Obligations 1,227 730
-------- --------
Total current liabilities 29,822 30,939
Debt and capital lease obligations, net of
current portion 573 1,351
-------- --------
Total liabilities 30,395 32,290
-------- --------
Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000
shares authorized; none issued and outstanding,
respectively -- --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 12,006,843 and 11,859,507 shares
issued, respectively; 11,006,843 and 10,859,507
shares outstanding, respectively 12 12
Additional paid-in capital 161,379 160,117
Treasury stock, 1,000,000 shares of common stock
held (14,789) (14,789)
Deferred compensation expense (84) (937)
Accumulated other comprehensive loss (281) (617)
Accumulated deficit (52,466) (44,801)
-------- --------
Total stockholders' equity 93,771 98,985
Total liabilities and stockholders' equity $124,166 $131,275
======== ========
<FN>
(1) Derived from the March 31, 2000 audited balance sheet included in the 2000
Annual Report on Form 10-K of Spectrian Corporation.
</FN>
See accompanying notes to condensed consolidated financial statements.
3
4
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
----------------------- -----------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
NET REVENUES $41,916 $42,967 $84,106 $74,451
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of revenues 34,714 32,676 69,982 58,568
Research and development 5,341 5,529 10,942 10,406
Selling, general and
Administrative 6,206 4,533 11,866 8,827
------- ------- ------- -------
Total costs and expenses 46,261 42,738 92,790 77,801
------- ------- ------- -------
OPERATING INCOME (LOSS) (4,345) 229 (8,684) (3,350)
INTEREST INCOME 523 728 1,120 1,875
INTEREST EXPENSE (43) (143) (89) (301)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES (3,865) 814 (7,653) (1,776)
INCOME TAXES -- 26 12 58
------- ------- ------- -------
NET INCOME (LOSS) $(3,865) $ 788 $(7,665) $(1,834)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic $ (0.35) $ 0.08 $ (0.70) $ (0.18)
======= ======= ======= =======
Diluted $ (0.35) $ 0.07 $ (0.70) $ (0.18)
======= ======= ======= =======
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 10,974 10,249 10,945 10,223
======= ======= ======= =======
Diluted 10,974 10,632 10,945 10,223
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
4
5
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
October 1, September 26,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,665) $ (1,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,722 6,788
Loss on sale of property and equipment, net 23 95
Stock option compensation expense 146 239
Changes in operating assets and liabilities:
Accounts receivable (181) (11,814)
Inventories 6,483 (3,449)
Prepaid expenses and other current assets (3,754) (570)
Accounts payable 806 3,488
Accrued liabilities (2,420) (4,395)
-------- --------
Net cash used in operating activities (840) (11,452)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (22,689)
Proceeds from sale and maturities of
short-term investments 8,152 22,702
Purchase of property and equipment (4,637) (2,485)
Proceeds from sale of property and equipment 95 46
-------- --------
Net cash provided by (used in) investing
activities 3,610 (2,426)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations (281) (558)
Proceeds from sales of common stock, net 1,969 1,929
-------- --------
Net cash provided by financing activities 1,688 1,371
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,458 (12,507)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,553 26,254
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,011 $ 13,747
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 89 $ 301
======== ========
Cash paid for income taxes $ 12 $ 58
======== ========
See accompanying notes to condensed consolidated financial statements.
5
6
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of
Spectrian Corporation and subsidiaries ("Spectrian" or the "Company") have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments (which are of a normal and recurring nature)
necessary for the fair presentation of the financial information set forth
therein. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as set forth on pages F-1
through F-22 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2000. The interim results presented herein are not necessarily
indicative of the results of operations that may be expected for the full
fiscal year ending March 31, 2001, or any other future period.
Reclassifications
Certain items have been reclassified to be consistent with current
presentation. The reclassifications have no effect on previously disclosed net
income or stockholders' equity.
2. BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
October 1, March 31,
2000 2000
---- ----
Inventories:
Raw materials $18,587 $16,763
Work in progress 4,670 10,353
Finished goods 4,802 7,426
------- -------
$28,059 $34,542
======= =======
Property and equipment:
Machinery and equipment $60,557 $58,322
Software 5,147 4,248
Leasehold improvements 3,948 3,781
------- -------
69,652 66,351
Less accumulated depreciation and amortization 51,187 46,683
------- -------
$18,465 $19,668
======= =======
Accrued liabilities:
Employee compensation and benefits $ 4,241 $ 4,310
Warranty 6,508 7,123
Restructuring 100 996
Other accrued liabilities 524 1,364
------- -------
$11,373 $13,793
======= =======
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SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivative and hedging activities. In July, 1999 the Financial
Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS
133 until the first fiscal year beginning after June 15, 2000. SFAS 133 is not
expected to have a material impact on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101A and 101B, which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The Company is currently assessing the impact of
this new Staff Accounting Bulletin on its consolidated financial position,
liquidity and results of operations.
4. SHORT-TERM INVESTMENTS
The Company considers all liquid investments with an original maturity of
three months or less to be cash equivalents. The cash equivalents consisted of
investment grade, interest-bearing commercial paper and money market funds as
of October 1, 2000.
The Company has classified its investments in certain debt securities as
"available-for-sale," and records such investments at fair market value, with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses are determined using the specific
identification method. Interest income is recorded using an effective interest
rate, with the associated premium or discount amortized to interest income.
As of October 1, 2000 and March 31, 2000, short-term investments
classified as available-for-sale securities were as follows (in thousands):
Amortized Unrealized Fair
As of October 1, 2000 Cost Gain (Loss) Value
--------------------- ---- ----------- -----
Government bonds & notes $10,104 $ (70) $10,034
Corporate bonds & notes 23,091 (211) 22,880
------- ----- -------
33,195 (281) 32,914
Less amounts classified as cash Equivalents 4,703 -- 4,703
------- ----- -------
Short-term investments $28,492 $(281) $28,211
======= ===== =======
Contractual maturity dates:
1 to 5 years $28,211
=======
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SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Amortized Unrealized Fair
As of March 31, 2000 Cost Gain (Loss) Value
-------------------- ---- ----------- -----
Government bonds & notes $14,599 $(166) $14,433
Commercial paper 29,545 (451) 29,094
------- ----- -------
44,144 (617) 43,527
Less amounts classified as cash equivalents 7,500 -- 7,500
------- ----- -------
Securities available for sale $36,644 $(617) $36,027
======= ===== =======
Contractual maturity dates:
Less than 1 year $ 3,500
1 to 5 years 32,527
-------
$36,027
=======
5. PER SHARE COMPUTATION
Basic net income (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted net income (loss) per share
is computed using the weighted average number of common and potentially
dilutive common shares outstanding during the period using the treasury stock
method. Potentially dilutive common shares include the effect of stock
options. For the three and six months ended October 1, 2000, 3,064,478 stock
options were not included for the calculation of diluted net loss per share as
they were considered antidilutive due to the net loss the Company experienced
in these fiscal periods. For the six months ended September 26, 1999, 3,050,860
stock options were not included for the calculation of diluted net loss per
share as they were considered antidilutive due to the net loss the Company
experienced in the fiscal period.
Reconciliation of weighted average shares used in computing net income per
share is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------ ------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
Weighted average common
shares outstanding 10,974 10,249 10,945 10,223
Dilutive effect of stock
options outstanding, using
the treasury stock method -- 383 -- --
------ ------ ------ ------
Shares used in computing diluted
net income per share 10,974 10,632 10,945 10,223
====== ====== ====== ======
6. SEGMENT INFORMATION
Under the management approach, the Company has broken down its business
into two operating segments based upon product type: Amplifier Division and
Semiconductor Division, which operates under the tradename of UltraRF. UltraRF
derives substantially all of its revenues from sales to the Amplifier Division.
The Company allocates operating expenses to these segments but does not
allocate interest income and expense, other income, net, the provision for
income taxes and certain corporate operating expenses. Corporate expenses that
are allocated to the operating segments are allocated based on predetermined
annual allocation methods. Appropriate intersegment eliminations are made in
the consolidation of the Company's consolidated financial statements. Segment
assets, which include inventories and property and equipment, are reported upon
by operation. No other assets and liabilities are reported separately.
8
9
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidated Statement of Operations Data - Fiscal 2001:
Three Months Ended October 1, 2000
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $41,517 $ 399 $ -- $41,916
Net revenues, intersegment -- 7,441 (7,441) --
Amortization and depreciation 1,196 792 806 2,794
Income (loss) before income taxes $(1,133) $(1,651) $(1,081) $(3,865)
Six Months Ended October 1, 2000
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $83,454 $ 652 $ -- $84,106
Net revenues, intersegment -- 14,627 (14,627) --
Amortization and depreciation 2,636 1,482 1,604 5,722
Income (loss) before income taxes $(5,608) $(1,154) $ (891) $(7,653)
Consolidated Statement of Operations Data - Fiscal 2000:
Three Months Ended September 26, 1999
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $42,779 $ 55 $ 133 $42,967
Net revenues, intersegment -- 6,802 (6,802) --
Amortization and depreciation 1,406 656 1,353 3,415
Income (loss) before income taxes $ (864) $ 569 $ 1,141 $ 846
Six Months Ended September 26, 1999
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $74,116 $ 68 $ 267 $74,451
Net revenues, intersegment -- 10,890 (10,890) --
Amortization and depreciation 2,778 1,284 2,726 6,788
Income (loss) before income taxes $(4,898) $ 297 $ 2,825 $(1,776)
*Data in the "Other" column represents the elimination of intersegment
revenues, interest income and expense, other income, net, the provision for
income taxes, certain unallocated corporate expenses and corporate amortization
and depreciation that is subsequently allocated to the operating segments.
Consolidated Balance Sheet Data:
October 1, 2000
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Segment assets $28,582 $12,835 $ 5,107 $46,524
Expenditures for additions to
long-lived assets $ 967 $ 3,415 $ 255 $ 4,637
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SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
March 31, 2000
------------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Segment assets $32,142 $13,605 $8,463 $54,210
Geographic Segment Data:
Revenue from unaffiliated customers by geographic region as a percentage of
revenues were as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
Canada 46% 51% 40% 53%
United States 28% 5% 31% 6%
France 15% 28% 20% 26%
South Korea 7% 16% 6% 15%
Other countries 4% -- 3% --
The Company's long-lived assets are located in the following countries (in
thousands):
October 1, March 31,
2000 2000
---- ----
United States $16,442 $18,226
Thailand 1,051 1,218
South Korea 972 224
------- -------
$18,465 $19,668
======= =======
7. DISCONTINUED MANUFACTURING OPERATIONS AND RELATED RESTRUCTURING CHARGES
During fiscal 1999, the Company transitioned the assembly and test of its
higher volume single carrier power amplifier products to a contract
manufacturer located in Thailand on a turnkey basis. During the fourth quarter
of fiscal 2000, the Company decided to transfer the remaining power amplifier
production in Sunnyvale, California, to the contract manufacturer. In
connection with the decision, the Company recognized in fiscal 2000 an
approximately $1.0 million restructuring charge for estimated severance costs
related to organizational changes and a planned reduction in work force.
Approximately 90 employees engaged in manufacturing and production related
functions are anticipated to be terminated as a result of the restructuring.
The Company anticipates that the restructuring will be substantially completed
in the fourth quarter of fiscal 2001. The following table represents the
restructuring activity that took place up to October 1, 2000 (in thousands):
Reduction in
Workforce
---------
Balance at March 31, 2000 $ 996
Cash payment of severance costs (896)
-----
Balance at October 1, 2000 $ 100
=====
The balance of the restructuring accrual is included in current
liabilities on the condensed consolidated balance sheets.
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SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
8. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130 ("SFAS 130") "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components. The following are the components of
comprehensive income (loss) (in thousands):
Three Months Ended Six Months Ended
------------------------ ------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) $(3,865) $788 $(7,665) $(1,834)
Unrealized gain (loss) on
marketable securities 221 74 336 (467)
------- ---- ------- -------
Comprehensive income (loss) $(3,644) $862 $(7,329) $(2,301)
======= ==== ======= =======
The components of accumulated other comprehensive loss are as follows (in
thousands):
October 1, March 31,
2000 2000
---- ----
Unrealized loss on marketable securities $(281) $(617)
===== =====
9. LITIGATION
On December 23, 1997, a purported class action complaint, Russ Warye et al
v. Spectrian Corporation et al, Case No. C97-04672, was filed in the United
States District Court for the Northern District of California against Spectrian
and certain of its officers and directors. The complaint alleged that
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, by making false and misleading
statements about Spectrian's business and prospects between July 17, 1997
through October 23, 1997.
On February 5, 1998, a virtually identical complaint, Bernstein et al v.
Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for
the State of California, County of Santa Clara. The state court complaint
alleged that Spectrian and certain of its officers and directors violated
California state securities and common law and was based on the same
allegations as the complaint filed in federal court.
A final settlement has been reached by the parties which encompasses both
the federal and state actions. Pursuant to the Private Securities Litigation
Reform Act, the federal court approved the settlement on October 20, 2000 and
dismissed the federal action. The Company anticipates that the state action
will be dismissed in the near future. The terms of the settlement will not
have a material adverse effect on the Company's financial position or results
from operations.
10. LINE OF CREDIT
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of credit
expires on June 30, 2001. Under the terms of the master agreement governing
this credit instrument, as amended, the Company is required to maintain certain
minimum working capital, net worth, profitability and other specific financial
ratios. The master agreement also has certain restrictions on other
indebtedness and the payment of dividends. The Company was in compliance with
all debt covenants at October 1, 2000. The amount available to borrow at
October 1, 2000 was $10.0 million. At October 1, 2000, the Company can borrow
at either (i) a variable rate equal to the prime rate (9.5%) or (ii) a fixed
rate equal to 200 basis points above the LIBOR rate (totaling 8.82%). The
Company had no borrowings under the line of credit at October 1, 2000.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the ''Securities Act'') and Section 21E of
the Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding Spectrian Corporation's ("the Company") expectations, hopes,
intentions or strategies regarding the future. When used herein, the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of the Securities Act and the Exchange Act.
Forward-looking statements include: statements regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. All forward-
looking statements included in this document are based on information available
to the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995. Factors that could cause or contribute to such differences
include, but are not limited to, those described below, under the heading
"Factors Affecting Future Operating Results" and elsewhere in this Quarterly
Report on Form 10-Q.
Overview
- --------
Spectrian designs, manufacturers and markets high-power RF amplifiers and
semiconductor devices, for the global wireless communications industry. The
Company's power amplifiers support a broad range of transmission standards,
including AMPS, TDMA, CDMA, PCS, GSM, WLL, IMT-2000, CDMA2000 and UMTS.
Spectrian's power amplifiers are utilized as part of the infrastructure for
both wireless voice and data networks. The Company's power amplifiers boost
the power of a signal so that it can reach a wireless phone or other device
within a designated geography. The Company's semiconductor devices are key
components of a power amplifier.
UltraRF, the tradename for the Company's semiconductor division, operates
its own wafer fabrication facility that utilizes bipolar and LDMOS
technologies. This facility is capable of processing MOS devices with gold
metallization. Using this fabrication facility, UltraRF produces high-power,
high-performance LDMOS RF power semiconductors, which are one critical enabling
component in the design and manufacture of second and third generation wireless
infrastructure equipment. In addition to its own unique designs, UltraRF
produces functional equivalents to some devices provided by other
manufacturers.
For the six months ended October 1, 2000, Nortel Networks Corporation
("Nortel") and Verizon Communications ("Verizon"), formed by the merger of Bell
Atlantic and GTE Corporation, accounted for approximately 63% and 24% of net
revenues, respectively. For the six months ended September 26, 1999, Nortel
accounted for approximately 80% of net revenues. The Company's business,
financial condition and results of operations have been materially adversely
affected in the past by anticipated orders failing to materialize and by
deferrals or cancellations of orders as a result of changes in customer
requirements. In the year ended March 31, 1999 ("fiscal 1999") and the first
and fourth quarters of the year ended March 31, 2000 ("fiscal 2000"), product
orders fell sharply resulting in substantial losses in those fiscal periods.
There can be no assurance that the Company will not experience such
fluctuations in the future. In September 1999, the Company announced that it
expected that it would not be developing new products for Nortel but would
continue to supply Nortel with existing products. If the Company is unable to
find new customers to generate demand for its new products, the Company's
revenues may be materially adversely affected. If the Company were to lose
Nortel, Verizon or any other major customer, or if orders by Nortel, Verizon or
any other major customer were to otherwise materially decrease either in unit
quantity or in price, the Company's business, financial condition and results
of operations would be materially adversely affected.
During the six months ended October 1, 2000 and September 26, 1999, sales
outside of the United States were 69% and 94%, respectively. The Company
expects that international sales will continue to account for a significant
percentage of the Company's net revenues for the foreseeable future. Financial
market turmoil, economic downturn, consolidation or merger of customers, and
other changes in business conditions in any of the Company's current or future
markets, such as South Korea and France, may have a material adverse effect on
the Company's sales of its products. Furthermore, because the Company's
products are priced in U.S. dollars, currency fluctuations and instability in
the financial markets that are served by the Company may have the effect of
making the Company's products more
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
expensive than those of other manufacturers whose products are priced in the
local currency of the customer and may result in reduced revenues for the
Company.
In Sunnyvale, California, the Company services all of its power amplifier
products and operates a four-inch semiconductor wafer fabrication facility and
semiconductor assembly and testing operation. As of September 2000, the Company
has transferred its entire power amplifier production to a contract
manufacturer located in Thailand on a turnkey basis. The Company utilizes
contract manufacturing to decrease the Company's manufacturing overhead and
costs of its products, to increase flexibility to respond to fluctuations in
product demand and to leverage the strengths of the contract manufacturer's
focus on high volume, high quality manufacturing. The cost of transitioning
manufacturing activities to the contract manufacturer in fiscal 1999 were
higher than the savings from costs of products, which adversely affected the
Company's gross margin for fiscal 1999. The Company's gross margin has been
adversely affected in fiscal 2001 during the transition of the remaining power
amplifier production to the contract manufacturer. As a result of its wafer
fabrication facility and other manufacturing and development infrastructure,
the Company has a high level of fixed costs and is dependent upon substantial
revenue to achieve and maintain profitability.
The Company's semiconductor fabrication facilities entail a number of
risks, including a high level of fixed and variable costs, the management of
complex processes, dependence on a single source of supply for certain
components and services, and a strict regulatory environment. During periods of
low demand, high fixed wafer fabrication costs are likely to have a material
adverse effect on the Company's operations. In addition, the Company's strategy
of frequently introducing and rapidly expanding the manufacture of new products
to meet evolving OEM customer and wireless service provider needs has caused
the Company to experience high materials and manufacturing costs, including
high scrap and material waste, low yields, significant material obsolescence,
labor inefficiencies, high overtime hours, inefficient material procurement and
an inability to realize economies of scale.
The market for the Company's products is becoming increasingly
competitive. The Company is selling its power amplifier products in South
Korea, as well as directly to cellular service providers where its competitors
are already established as suppliers. In addition, the Company competes with
at least one merchant amplifier manufacturer for business from Nortel. This
competition has resulted in, and will continue to result in reduced average
selling prices for the Company's products, which accordingly will negatively
impact gross margins.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain statement
of operations data of the Company expressed as a percentage of total revenues
and gross margin on sales.
Three Months Ended Six Months Ended
------------------------ ------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
NET REVENUES 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of revenues 82.8 76.0 83.2 78.7
Research and development 12.7 12.9 13.0 14.0
Selling, general and
Administrative 14.8 10.6 14.1 11.8
----- ----- ----- -----
Total costs and expenses 110.3 99.5 110.3 104.5
----- ----- ----- -----
OPERATING INCOME (LOSS) (10.3) 0.5 (10.3) (4.5)
INTEREST INCOME 1.2 1.7 1.3 2.5
INTEREST EXPENSE (0.1) (0.3) (0.1) (0.4)
----- ----- ----- -----
INCOME (LOSS) BEFORE
INCOME TAXES (9.2) 1.9 (9.1) (2.4)
INCOME TAXES -- 0.1 -- 0.1
----- ----- ----- -----
NET INCOME (LOSS) (9.2)% 1.8% (9.1)% (2.5)%
===== ===== ===== =====
GROSS MARGIN ON SALES 17.2% 24.0% 16.8% 21.3%
===== ===== ===== =====
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net Revenues. The Company's net revenues decreased 2% to $41.9 million
------------
for the three months ended October 1, 2000 from $43.0 million for the three
months ended September 26, 1999. The Company's net revenues increased 13% to
$84.1 million for the six months ended October 1, 2000 from $74.5 million for
the six months ended September 26, 1999. The decline in net revenues compared
to the three months ended September 26, 1999 is due to lower average selling
prices and volumes in the single carrier power amplifier ("SCPA") products
which was partially offset by higher volumes in the Broadband, a SCPA product,
and multi-channel power amplifier ("MCPA") products. The growth in net
revenues compared to the six months ended September 26, 1999 is due to
Broadband and MCPA products, which combined for net revenues of $7.7 million
for the six months ended September 26, 1999 and for revenues of $27.7 million
for the six months ended October 1, 2000. UltraRF revenues from external
customers increased to $0.7 million from none for the six months ended October
1, 2000 and September 26, 1999, respectively.
Cost of Revenues. Cost of revenues consists primarily of turnkey amplifier
----------------
costs for the Company's higher volume products, internal amplifier assembly and
test costs for its lower volume and new products, radio frequency ("RF")
semiconductor fabrication, assembly and test costs, raw materials,
manufacturing overhead and warranty costs. The Company's cost of sales
increased by 6% to $34.7 million for the three months ended October 1, 2000
from $32.7 million for the three months ended September 26, 1999. The Company's
cost of sales increased by 20% to $70.0 million for the six months ended
October 1, 2000 from $58.6 million for the six months ended September 26, 1999.
The increases on a dollar and percentage basis for the three and six months
ended October 1, 2000 were due to higher sales unit volumes and lower yields on
semiconductor production.
Gross margin on sales was 17% for the three months ended October 1, 2000
as compared to 24% for the three months ended September 26, 1999. Gross margin
on sales was 17% for the six months ended October 1, 2000 as compared to 21%
for the six months ended September 26, 2000. The decrease in gross margin was
primarily a result of declining average sales prices in all products and lower
yields on semiconductor production.
Research and Development. Research and development ("R&D") expenses
------------------------
include the cost of designing, developing or reducing the manufacturing cost of
amplifiers and RF semiconductors. The Company's R&D expenses decreased by 3%
to $5.3 million in the three months ended October 1, 2000 from $5.5 million in
the three months ended September 26, 1999. The Company's R&D expenses increased
by 5% to $10.9 million for the six months ended October 1, 2000 from $10.4
million in the six months ended September 26, 1999. As a percentage of net
revenues, R&D expenses represented 13% for each of the three-month periods
ended October 1, 2000 and September 26, 1999. As a percentage of net revenues,
R&D expenses represented 13% for the six months ended October 1, 2000 as
compared to 14% of net revenues for the six months ended September 26, 1999.
The increase in R&D expenses on a dollar basis for the six months ended October
1, 2000 reflects new product development initiatives which the Company believes
are required to meet current and future market and customer requirements.
Selling, General and Administrative. Selling, general and administrative
-----------------------------------
("SG&A") expenses include compensation and benefits for sales, marketing,
senior management and administrative personnel, commissions paid to independent
sales representatives, professional fees and other expenses.
The Company's SG&A expenses increased by 37% to $6.2 million in the three
months ended October 1, 2000 from $4.5 million in the three months ended
September 26, 1999. The Company's SG&A expenses increased by 34% to $11.9
million for the six months ended October 1, 2000 from $8.8 million in the six
months ended September 26, 1999. As a percentage of net revenues, SG&A expenses
represented 15% for the three months ended October 1, 2000 as compared to 11%
of net revenues for the three months ended September 26, 1999. As a percentage
of net revenues, SG&A expenses represented 14% for the six months ended October
1, 2000 as compared to 12% of net revenues for the six months ended September
26, 1999. The increase in SG&A expenses on a dollar and percentage basis was
principally due to increased commissions, marketing efforts to diversify the
customer base, creation of the UltraRF sales force and network, increased sales
and marketing activities in Korea, costs incurred to evaluate strategic
alternatives for UltraRF, and added maintenance and support for the new
enterprise resource planning ("ERP") system. Furthermore, the Company has
incurred approximately $1.2 million in additional costs associated with the
evaluation of strategic alternatives for UltraRF that are included in Prepaid
Expenses and Other Current Assets on the Condensed Consolidated Balance Sheet
as of October 1, 2000. If these efforts do not result in a completed
transaction, these deferred costs will be immediately recognized as SG&A
expenses.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest Income. Interest income for the three months ended October 1,
---------------
2000 decreased to $0.5 million from $0.7 million for the three months ended
October 1, 2000. Interest income for the six months ended October 1, 2000
decreased to $1.1 million from $1.9 million for the six months ended September
26, 1999. The decrease in interest income resulted from lower interest-bearing
investment balances associated with reduced average cash and cash equivalent
balances.
Interest Expense. Interest expense, for the three months ended October 1,
----------------
2000 decreased to $43,000 from $143,000 for the three months ended September
26, 1999. Interest expense for the six months ended October 1, 2000 decreased
to $89,000 from $301,000 for the six months ended September 26, 1999. The
decrease in interest expense resulted from substantially reduced average
borrowings levels.
Income Taxes. Due to the losses incurred by the Company in prior years
------------
and the related net operating loss carryforwards available to the Company, the
Company did not record an income tax expense except for the minimum state
income tax expense for the three and six months ended October 1, 2000.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for
accounting for derivative and hedging activities. In July, 1999 the Financial
Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS
133 until the first fiscal year beginning after June 15, 2000. SFAS 133 is not
expected to have any material impact on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101A and 101B, which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The Company is currently assessing the impact of
this new Staff Accounting Bulletin on its consolidated financial position,
liquidity and results of operations.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its growth through sales of common stock, private
sales of equity securities, capital equipment leases, bank lines of credit and
cash flows from operations. Principal sources of liquidity at October 1, 2000
consisted of cash and short-term investments of $44.2 million and bank
borrowing arrangements.
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of credit
expires on June 30, 2001. Under the terms of the master agreement governing
this credit instrument, as amended, the Company is required to maintain certain
minimum working capital, net worth, profitability and other specific financial
ratios. The master agreement also has certain restrictions on other
indebtedness and the payment of dividends. The Company was in compliance with
all debt covenants as of October 1, 2000. The amount available to borrow at
October 1, 2000 was $10.0 million. The Company can borrow at either (i) a
variable rate equal to the prime rate or (ii) a fixed rate equal to 200 basis
points above the LIBOR rate, which at October 1, 2000 was 9.5% and 8.82%,
respectively. The Company had no borrowings under the line of credit at October
1, 2000.
In January 1997, the Company borrowed $6.0 million under a term loan
collaterized by certain capital equipment. Under the terms of the loan
agreement, which expires in January 2002, the Company is required to make a
series of uneven monthly principal payments ranging from $42,000 to $136,000,
plus interest at a rate of 9.1%, and must maintain certain minimum working
capital, net worth and other specific ratios with which the Company was in
compliance as of October 1, 2000.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company's working capital decreased by $4.8 million to $74.6 million
as of October 1, 2000 from $79.4 million as of March 31, 2000. The decrease was
primarily attributable to a $6.5 million decrease in net inventories, a $3.4
million decrease in cash, cash equivalents and short-term investments, a $0.8
million increase in accounts payable, which were partially offset by a $3.8
million increase in prepaid expenses and other current assets and a $2.4
million decrease in accrued liabilities. The Company's short-term investments
were principally invested in investment grade, interest-bearing securities.
Cash used by operations was $0.8 million for the six months ended October
1, 2000 compared to cash used by operations for the six months ended September
26, 1999 of $11.5 million. Cash used by operations for the six months ended
October 1, 2000 was principally the result of a $7.7 million net loss, a $3.8
million increase in prepaid expenses and other current assets and a $2.4
million reduction in accrued liabilities which were offset by a $6.2 million
decrease in inventories, a $0.8 million increase in accounts payable, which
increased proportionately with production levels, and depreciation and
amortization of $5.7 million.
The Company's investing activities during the six months ended October 1,
2000 provided cash of approximately $3.6 million as compared to cash used of
$2.4 million during the comparable period in the prior year. Cash provided by
investing activities during the six months ended October 1, 2000 resulted
primarily from $8.2 million in proceeds from sale and maturities of short-term
investments which were partially offset by $4.6 million in additions to
property and equipment. Capital additions for the six months ended October 1,
2000 included manufacturing test and production equipment required to support
new products and test equipment to support various research and development
projects.
The Company's financing activities during the six months ended October 1,
2000 provided cash of approximately $1.7 million as compared to providing $1.4
million of cash during the comparable period in the prior year. Cash provided
by financing activities during the six months ended October 1, 2000 was the
result of $2.0 million in proceeds from the issuance of common stock, through
the exercise of employee stock options and employee stock purchase plan
activity, which was partially offset by $0.3 million in repayments of debt and
capital lease obligations.
The Company anticipates spending approximately $17.0 million over the next
twelve months for capital additions primarily to support manufacturing
production and test requirements and development projects. Based on the
Company's current working capital position, the cash flows the Company expects
to generate from the remainder of fiscal 2001 operations, and the available
line of credit, the Company believes that sufficient resources will be
available to meet the Company's cash requirements for at least the next twelve
months. Cash requirements for future periods will depend on the Company's
profitability, timing and level of capital expenditures, working capital
requirements and rate of growth.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Factors Affecting Future Operating Results
- ------------------------------------------
Customer Concentration; Dependence on Nortel and Verizon. The wireless
--------------------------------------------------------
infrastructure equipment market is dominated by a small number of large OEMs
and wireless service providers, including Ericsson, Lucent, Motorola, Nortel,
Verizon and Siemens. The Company's revenues are derived primarily from sales to
a limited number of these customers, in particular, Nortel and Verizon.
Furthermore, a substantial portion of revenues from Nortel in the past has
resulted from sales of a limited number of the Company's products. The
Company's business, financial condition and results of operations have been
materially adversely affected in the past by anticipated orders failing to
materialize and by deferrals or cancellations of orders as a result of changes
in customer requirements. The Company and Nortel have a supply agreement,
renegotiated annually, pursuant to which Nortel commits to purchase a certain
volume of its annual power amplifier requirements for specified prices from the
Company. This agreement allows Nortel to change the product mix requirements,
which can significantly affect the Company's gross margins, and to change
requested delivery dates without significant financial consequences to Nortel,
which affect the Company's ability to efficiently manage production schedules
and inventory levels and to accurately forecast product sales. In September
1999, the Company announced that it expected that it would not be developing
products for Nortel but that it will continue to supply Nortel with existing
products. There can be no assurance that Nortel will purchase existing
products from the Company in the future or otherwise agree to purchase the same
or similar levels of its power amplifier requirements from the Company or
purchase its power amplifier requirements at the same or similar pricing. Any
reduction in the level of purchases of the Company's amplifiers by Nortel or
Verizon, or any material reduction in pricing without significant offsets,
would have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company's current or new customers
do not generate sufficient demand for the Company's new products replacing
prior demand from Nortel, the Company's business, financial condition and
results of operations could be materially adversely affected. Further, if the
Company were to lose Nortel or any other major customer, or if orders by Nortel
or Verizon or any other major customer were to otherwise materially decrease,
the Company's business, financial condition and results of operations would be
materially adversely affected. In addition, wireless infrastructure equipment
OEMs have come under increasing price pressure from wireless service providers,
which in turn has resulted in downward pricing pressure on the Company's
products. The Company expects to incur increasing pricing pressures from
Nortel, Verizon and other major customers in future periods, which could result
in declining average sales prices and gross margins for the Company's products.
Fluctuations in Operating Results. The Company's quarterly and annual
---------------------------------
results have in the past been, and will continue to be, subject to significant
fluctuations due to a number of factors, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the Company's results of operations are likely to
vary due to: the timing, cancellation, delay or rescheduling of OEM customer
orders and shipments; the timing of announcements or introductions of new
products by the Company, its competitors or their respective OEM customers; the
acceptance of such products by wireless equipment OEMs and their customers;
relative variations in manufacturing efficiencies, yields and costs;
competitive factors such as the pricing, availability, and demand for competing
amplification products; changes in average sales prices and related gross
margins which vary significantly based upon product mix; subcontractor
performance; variations in operating expenses; changes in manufacturing
capacity and variations in the utilization of this capacity; shortages of key
supplies; the long sales cycles associated with the Company's customer specific
products; the timing and level of product and process development costs;
changes in inventory levels; and the relative strength or weakness of
international financial markets. Anticipated orders from the Company's OEM
customers have in the past failed to materialize and delivery schedules have
been deferred or canceled as a result of changes in OEM customer requirements
and the Company expects this pattern to continue as customer requirements
continue to change and industry standards continue to evolve. Reduced demand
for wireless infrastructure equipment in the past has caused significant
fluctuations in the Company's product sales. There can be no assurance that
the Company will not experience such fluctuations in the future. The Company
does not believe that it will have the annual revenue growth it experienced in
fiscal 2000, in the future. 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.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Declining Average Sales Prices. The Company has experienced, and expects
------------------------------
to continue to experience, declining average sales prices for its products.
Wireless infrastructure equipment manufacturers have come under increasing
price pressure from wireless service providers, which in turn has resulted in
downward pricing pressure on the Company's products. In addition, competition
has increased the downward pricing pressure on the Company's products. Since
wireless infrastructure equipment manufacturers frequently negotiate supply
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its products before it is aware of how, or if, cost
reductions can be obtained. To offset declining average sales prices, the
Company believes that it must achieve manufacturing cost reductions. If the
Company is unable to achieve such cost reductions, the Company's gross margins
will decline, and such decline will have a material adverse effect on the
Company's business, financial condition and results of operations.
Product Quality, Performance and Reliability. The Company expects that
--------------------------------------------
its customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. Power
amplifiers as complex as those offered by the Company often encounter
development delays and may contain undetected defects or failures. The Company
has from time to time in the past experienced product quality, performance and
reliability problems. In addition, multicarrier power amplifiers have a higher
probability of malfunction than single carrier power amplifiers because of
their greater complexity. There can be no assurance that defects or failures
relating to the Company's product quality, performance and reliability will not
occur in the future that may have a material adverse effect on the Company's
business, financial condition and results of operations.
Internal Amplifier Design and Production Capabilities of OEMs. The
-------------------------------------------------------------
Company believes that a majority of the present worldwide production of power
amplifiers is captive within the manufacturing operations of wireless equipment
OEMs, many of which have chosen not to purchase amplifiers from outside
suppliers. In addition, these manufacturers could decide to sell amplifiers to
other wireless equipment OEMs. If this should occur, the competition for power
amplifiers would significantly increase and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company also believes that those OEMs that purchase from third party
amplifier vendors are reluctant to switch once committed to a particular
merchant vendor. Consequently, the Company has only limited opportunities to
increase revenues by replacing internal OEM amplifier production or displacing
other merchant amplifier suppliers. Moreover, given the limited opportunities
for merchant power amplifier suppliers, any decision by an OEM to employ a
second source merchant supplier for a product currently purchased from a
merchant supplier may reduce the existing merchant supplier's ability to
maintain a given level of product sales to such OEM or, possibly, to retain the
OEM as a customer due to price competition from the second source merchant
supplier. There can be no assurance that the Company's major OEM customers will
continue to rely, or increase their reliance, on the Company as an external
source of supply for their power amplifiers, or that other wireless equipment
OEMs will become customers of the Company. If the major wireless
infrastructure equipment suppliers do not purchase or continue to purchase
their power amplifiers from merchant suppliers, the Company's business, results
of operations and financial condition will be materially adversely affected.
Rapid Technological Change; Evolving Industry Standards; Dependence on New
--------------------------------------------------------------------------
Products. The markets in which the Company and its OEM customers compete are
- --------
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. In particular, because the
Company's strategy of rapidly bringing to market products customized for
numerous and evolving modulation standards requires developing and achieving
volume production of a large number of distinct products, the Company's ability
to rapidly design and produce individual products for which there is
significant OEM customer demand will be a critical determinant of the Company's
future success. A softening of demand in the markets served by the Company or
a failure of modulation standard in which the Company has invested substantial
development resources may have a material adverse effect on the Company's
business, financial condition and results of operations. No assurance can be
given that the Company's product development efforts will be successful, that
its new products will meet customer requirements and be accepted or that its
OEM customers' product offerings will achieve customer acceptance. If a
significant number of development projects, including the Company's new
multicarrier products, do not result in substantial volume production or if
technologies or standards supported by the Company's or its customers' products
become obsolete or fail to gain widespread commercial acceptance, the Company's
business may be materially adversely affected.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Sole or Limited Sources of Products, Materials and Services. The Company
-----------------------------------------------------------
currently procures from single sources power amplifier assemblies, certain
specialized components and services for its products. The Company purchases
these products, components and services on a purchase order basis, does not
carry significant inventories of these components and does not have any long-
term supply contracts with its sole source vendors. During calendar 2000, the
Company completed the transfer of the production of power amplifiers to a
contract manufacturer in Thailand. As a result of this transfer, the Company
no longer has significant manufacturing capacity. The Company issues non-
cancelable purchase orders to the contract manufacturer 60 days in advance of
requested delivery which is greater than the committed delivery schedule of
some of its customers, such as Nortel. The Company's reliance on sole sources
for certain components and its migration to an outsourced, turnkey
manufacturing strategy entail certain risks including reduced control over the
price, timely delivery, reliability and quality of the components. If the
Company were to change any of its sole source vendors or contract manufacturer,
the Company would be required to requalify the components with each new vendor
or contract manufacturer, respectively. Any inability of the Company to obtain
timely deliveries of components or assembled amplifiers of acceptable quality
in required quantities or a significant increase in the prices of components
for which the Company does not have alternative sources could materially and
adversely affect the Company's business, financial condition and results of
operations. The Company has occasionally experienced difficulties in obtaining
some components, and no assurance can be given that shortages will not occur in
the future.
Risks of International Sales. The Company operates in an international
----------------------------
market and expects that international sales will continue to account for a
significant percentage of the Company's total revenues for the foreseeable
future. These sales involve a number of inherent risks, including imposition
of government controls, currency exchange fluctuations, potential insolvency of
international distributors, representatives and customers, reduced protection
of intellectual property rights in some countries, the impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivables collection periods, as well as tariffs and other
trade barriers. In addition, because substantially all of the Company's
foreign sales are denominated in U.S. dollars, increases in the value of the
dollar relative to the local currency would increase the price of the Company's
products in foreign markets and make the Company's products relatively more
expensive and less price competitive than competitors' products that are priced
in local currencies. There can be no assurance that these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
The Company anticipates that turmoil in financial markets and the
deterioration of the underlying economic conditions in certain countries where
the Company has significant sales may have an impact on its sales to customers
located in or whose projects are based in those countries due to the impact of
currency fluctuations on the relative price of the Company's products and
restrictions on government spending imposed by the International Monetary Fund
(the "IMF") on those countries receiving the IMF's assistance. In addition,
customers in those countries may face reduced access to working capital to fund
component purchases, such as the Company's products, due to higher interest
rates, reduced funding of wireless infrastructure by domestic governments,
reduced bank lending due to contractions in the money supply or the
deterioration in the customer's or its bank's financial condition or the
inability to access equity financing. A substantial majority of the Company's
products are sold to OEMs who incorporate the Company's products into systems
sold and installed to end-user customers. These OEMs are not required by
contract and do not typically provide the Company with information regarding
the location and identity of their end-user customers, and, therefore, the
Company is not able to determine what portion of its product sales have been or
future orders will be incorporated into OEM sales to end-users in countries
experiencing financial market turmoil and/or deterioration of economic
conditions. Furthermore, a large portion of the Company's existing customers
and potential new customers are servicing new markets in developing countries
that the Company's customers expect will deploy wireless communication networks
as an alternative to the construction of a wireline infrastructure. If such
countries decline to construct wireless communication systems, or construction
of such systems is delayed for any reason, including business and economic
conditions and changes in economic stability due to factors such as increased
inflation and political turmoil, such delays could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Reliance upon Growth of Wireless Services. Sales of power amplifiers to
-----------------------------------------
wireless infrastructure equipment suppliers have in the past accounted, and are
expected in the future to account, for substantially all of the Company's
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
product sales. Demand for wireless infrastructure equipment is driven by
demand for wireless service. Although demand for power amplifiers has grown in
recent years, if demand for wireless services fails to increase or increases
more slowly than the Company or its OEM customers currently anticipate, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
Market for the Company's Products Is Highly Competitive. The wireless
-------------------------------------------------------
communications equipment industry is extremely competitive and is characterized
by rapid technological change, new product development and product
obsolescence, evolving industry standards and significant price erosion over
the life of a product. The ability of the Company to compete successfully and
sustain profitability depends in part upon the rates at which wireless
equipment OEMs incorporate the Company's products into their systems and the
Company captures market share from other merchant suppliers.
The Company's major OEM customers continuously evaluate whether to
manufacture their own amplification products or purchase them from outside
sources. There can be no assurance that these OEM customers will incorporate
the Company's products into their systems or that in general they will continue
to rely, or expand their reliance, on external sources of supply for their
power amplifiers. These customers and other large manufacturers of wireless
communications equipment could also elect to enter the merchant market and
compete directly with the Company, and at least one OEM, NEC, has already done
so. Such increased competition could materially adversely affect the Company's
business, financial condition and results of operations.
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, Fujitsu, Microwave Power Devices, NEC and Powerwave
Technologies. No assurance can be given that the Company's competitors will not
develop new technologies or enhancements to existing products or introduce new
products that will offer superior price or performance features compared to the
Company's products.
Uncertain Protection of Intellectual Property. The Company's ability to
---------------------------------------------
compete successfully and achieve future revenue growth will depend, in part, on
its ability to protect its proprietary technology and operate without
infringing the rights of others. The Company has a policy of seeking patents on
inventions resulting from its ongoing research and development activities.
There can be no assurance that the Company's pending patent applications will
be allowed or that the issued or pending patents will not be challenged or
circumvented by competitors. Notwithstanding the Company's active pursuit of
patent protection, the Company believes that the success of its business
depends more on the collective value of its patents, specifications, computer
aided design and modeling tools, technical processes and employee expertise.
The Company generally enters into confidentiality and nondisclosure agreements
with its employees, suppliers, OEM customers, and potential customers and
limits access to and distribution of its proprietary technology. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, or that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors. The failure of the Company
to protect its proprietary technology could have a material adverse effect on
its business, financial condition and results of operations.
Risk of Third Party Claims of Infringement. The communications equipment
------------------------------------------
industry is characterized by vigorous protection and pursuit of intellectual
property rights or positions, which have resulted in significant and often
protracted and expensive litigation. Although there is currently no pending
intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses under
such patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company or otherwise secure
rights to use such technology could cause the Company to incur substantial
liabilities, to suspend the manufacture of products or expend significant
resources to develop noninfringing technology. There can be no assurance that
the Company would be successful in such development or that such licenses would
be available on reasonable terms, if at all. In the event that any third party
makes a successful claim against the Company or its customers and either a
license is not made available to the Company on commercially reasonable terms
or a "design around" is not practicable, the Company's business, financial
condition and results of operations would be materially adversely affected.
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish
the validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation results in a favorable determination for the Company. In the
event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, indemnify its customers, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop noninfringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology.
Government Regulation of Communications Industry. Radio frequency
------------------------------------------------
transmissions and emissions, and certain equipment used in connection therewith
are regulated in the United States, Canada and throughout the rest of the
world. Regulatory approvals generally must be obtained by the Company in
connection with the manufacture and sale of its products, and by wireless
service providers to operate the Company's products. The United States Federal
Communications Commission (the "FCC") and regulatory authorities abroad
constantly review RF emission issues and promulgate standards based on such
reviews. If more stringent RF emission regulations are adopted, the Company
and its OEM customers may be required to alter the manner in which radio
signals are transmitted or otherwise alter the equipment transmitting such
signals, which could materially adversely affect the Company's products and
markets. The enactment by federal, state, local or international governments
of new laws or regulations or a change in the interpretation of existing
regulations could also materially adversely affect the market for the Company's
products. Although deregulation of international communications industries
along with radio frequency spectrum allocations made by the FCC have increased
the potential demand for the Company's products by providing users of those
products with opportunities to establish new wireless personal communications
services, there can be no assurance that the trend toward deregulation and
current regulatory developments favorable to the promotion of new and expanded
personal communications services will continue or that other future regulatory
changes will have a positive impact on the Company. The increasing demand for
wireless communications has exerted pressure on regulatory bodies worldwide to
adopt new standards for such products, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process have in the past caused, and may
in the future cause, the cancellation, postponement or rescheduling of the
installation of communications systems by the Company's OEM customers. These
delays have had in the past, and in the future may have, a material adverse
effect on the sale of products by the Company to such OEM customers.
Environmental Regulations. The Company is subject to a variety of local,
-------------------------
state and federal governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture the Company's products. The Company
believes that it is currently in compliance in all material respects with such
regulations and that it has obtained all necessary environmental permits to
conduct its business. Nevertheless, the failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations. Compliance with such regulations could require the
Company to acquire expensive remediation equipment or to incur substantial
expenses. Any failure by the Company to control the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or assist in the
cleanup of, hazardous or toxic substances, could subject the Company to
significant liabilities, including joint and several liabilities under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, financial condition and results of operations.
Sole or Limited Sources of Products, Materials and Services. The Company
-----------------------------------------------------------
currently procures from single sources power amplifier assemblies, certain
specialized components and services for its products. The Company purchases
these products, components and services on a purchase order basis, does not
carry significant inventories of these components and does not have any long-
term supply contracts with its sole source vendors. During calendar 2000, the
Company completed the transfer of the production of power amplifiers to a
contract manufacturer in Thailand. As a result of this transfer, the Company
no longer has significant manufacturing capacity. The Company issues non-
cancelable purchase orders to the contract manufacturer 60 days in advance of
requested delivery which is greater than the committed delivery schedule of
some of its customers, such as Nortel. The Company's reliance on sole sources
for certain components and its migration to an outsourced, turnkey
manufacturing strategy entail certain risks including reduced control over the
price, timely delivery, reliability and quality of the components. If the
Company were to change any of its sole source vendors or contract manufacturer,
the Company would be required to requalify the components with each new vendor
or contract manufacturer, respectively. Any inability of the Company to obtain
timely deliveries of components or assembled amplifiers of acceptable quality
in required quantities or a significant
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
increase in the prices of components for which the Company does not have
alternative sources could materially and adversely affect the Company's
business, financial condition and results of operations. The Company has
occasionally experienced difficulties in obtaining some components, and no
assurance can be given that shortages will not occur in the future.
Management of Growth; Dependence on Key Personnel. The Company's business
-------------------------------------------------
and growth has placed, and is expected to continue to place, a significant
strain on the Company's personnel, management and other resources. The
Company's ability to manage any future growth effectively will require it to
attract, motivate, manage and retain new employees successfully, especially in
the highly competitive northern California job market, to integrate new
employees into its overall operations and to retain the continued service of
its key technical, marketing and management personnel, and to continue to
improve its operational, financial and management information systems.
Although the Company has employment contracts with several of its executive
officers, these agreements do not obligate such individuals to remain in the
employment of the Company. The Company does not maintain key person life
insurance on any of its key technical personnel. The competition for such
personnel is intense. The Company has experienced loss of key employees in the
past and could in the future. Such losses could have a material adverse effect
on the Company. On March 31, 2000, the Company employed Mr. Thomas H. Waechter
as its President and Chief Executive Officer. There can be no assurance that
Mr. Waechter will operate effectively with existing management nor that he will
be able to retain or attract additional executive officers as needed. As a
result of the plan to discontinue manufacturing operations in Sunnyvale,
California, and the other restructuring activities, several key executives have
ceased to be employees of the Company.
The Company's ability to manage its growth will require it to continue to
invest in its operational, financial and management information systems,
procedures and controls. The Company can give no assurance that it will be able
to manage its growth effectively. Failure to manage growth effectively would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may, from time to time, pursue the
acquisition of other companies, assets or product lines that complement or
expand its existing business. The Company may also, from time to time, pursue
divestitures of existing operations. Acquisitions and divestitures involve a
number of risks that could adversely affect the Company's operating results.
These risks include the diversion of management's attention from day-to-day
business, the fluctuation of operating results due to the timing of charges for
costs associated with acquisitions or divestitures, the difficulty of combining
and assimilating the operations and personnel of the acquired companies,
charges to the Company's earnings as a result of the purchase of intangible
assets, and the potential loss of key employees as a result of an acquisition.
Should any acquisition take place, we can give no assurance that this
acquisition will not materially and adversely affect the Company or that any
such acquisition will enhance the Company's business.
Volatility of Stock Price. The market price of the shares of Common Stock
-------------------------
has been and is likely to continue to be highly volatile, and is affected
significantly by factors such as fluctuations in the Company's quarterly and
annual operating results, customer concentration, the timing difference between
Nortel's requested delivery dates and its vendor purchase commitments to
support the customer's delivery requirements, reliance on international
markets, the absence of the economies of scale achieved by some of its
competitors, announcements of technological innovations, new customer contracts
or new products by the Company or its competitors, announcements by the
Company's customers regarding their business or prospects, changes in analysts'
expectations, estimates and recommendations, news reports regarding the
Company, its competitors and its markets, governmental regulatory action,
developments with respect to patents or proprietary rights, announcements of
significant acquisitions or strategic partnerships by the Company or its
competitors, announcements of significant divestitures of existing businesses
or product lines, general market conditions and other factors. In addition,
the stock market in general, and the market prices for power amplifier
manufacturers in particular, have experienced extreme volatility that is often
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the price of the Company's
common stock, regardless of actual operating performance. The market price of
the Company's Common Stock has fluctuated significantly in the past.
Legal Proceedings. On December 23, 1997, a purported class action
-----------------
complaint, Russ Warye et al v. Spectrian Corporation et al, Case No. C97-04672,
was filed in the United States District Court for the Northern District of
California against Spectrian and certain of its officers and directors. The
complaint alleged that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
thereunder, by making false and misleading statements about Spectrian's
business and prospects between July 17, 1997 through October 23, 1997.
On February 5, 1998, a virtually identical complaint, Bernstein et al v.
Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for
the State of California, County of Santa Clara. The state court complaint
alleged that Spectrian and certain of its officers and directors violated
California state securities and common law and was based on the same
allegations as the complaint filed in federal court.
A final settlement has been reached by the parties which encompasses both
the federal and state actions. Pursuant to the Private Securities Litigation
Reform Act, the federal court approved the settlement on October 20, 2000 and
dismissed the federal action. The Company anticipates that the state action
will be dismissed in the near future. The terms of the settlement will not
have a material adverse effect on the Company's financial position or results
from operations.
Shareholder Rights Plan; Issuance of Preferred Stock. The Board of
----------------------------------------------------
Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the
"Previous Agreement"). On August 9, 2000, pursuant to section 27 of the
Previous Agreement, the Company's Board of Directors agreed to restate the
dividend that it had declared under the Previous Agreement in a Second Amended
and Restated Preferred Shares Rights Agreement dated August 14, 2000 (the
"Rights Agreement"). Under the Rights Agreement, the Company's Board of
Directors amended the Previous Agreement to amend the dividend of one right (a
"Right," and collectively the "Rights") to purchase one one-thousandth share of
the Company's Series A Preferred for each outstanding share of Common Stock,
par value $0.001 per share ("Common Shares"), of the Company. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Preferred at an exercise price of $126.00 (the "Purchase
Price"), subject to adjustment. The Rights become exercisable upon the
occurrence of certain events, including the announcement of a tender offer or
exchange offer for the Company's Common Stock or the acquisition of a specified
percentage of the Company's Common Stock by a third party. The exercise of the
Rights could have the effect of delaying, deferring or preventing a change in
control of the Company, including, without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. These provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Board of Directors has the authority to issue up to
5,000,000 shares of undesignated Preferred Stock and to determine the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued shares of undesignated Preferred
Stock and to fix the number of shares constituting any series and the
designation of such series, without any further vote or action by the Company's
stockholders. For example, in connection with the Company's Shareholder Rights
Plan, the Board of Directors designated 20,000 shares of Preferred Stock as
Series A Participating Preferred Stock although none of such shares have been
issued. The Preferred Stock could be issued with voting, liquidation, dividend
and other rights superior to those of the holders of Common Stock. The issuance
of Preferred Stock under certain circumstances could have the effect of
delaying, deferring or preventing a change in control of the Company.
Additional Factors Affecting Future Operating Results of UltraRF
- ----------------------------------------------------------------
Capacity Constraints. UltraRF's facilities have a level of capacity beyond
--------------------
which it cannot cost effectively produce its products. Although UltraRF is not
currently approaching those constraints, it may be unable to further expand its
business if it fails to plan and build sufficient capacity. UltraRF may attempt
to increase its capacity by converting its existing facility to accommodate
equipment that processes six-inch wafers. UltraRF does not have any experience
processing six-inch wafers in UltraRF's fabrication facilities. UltraRF may be
required to modify its processes and procedures substantially to accommodate
the larger wafers. As a result, implementing additional capacity for six-inch
wafers may take longer than planned, which could harm UltraRF's results of
operations. The process of converting to six-inch wafers must begin
substantially prior to receiving actual customer demand for products. If the
customer demand for products is not realized or implementation takes longer
than planned, the results will have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with UltraRF's Wafer and Device Fabrication. UltraRF's
------------------------------------------------------------
operation of its wafer and device fabrication facilities entails a number of
risks, including a high level of fixed and variable costs, the management of
complex processes, dependence on a single source of supply for certain
components and services, and a strict
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
regulatory environment. During periods of low demand, high fixed wafer
fabrication costs are likely to have a material adverse effect on UltraRF's
business, financial condition and results of operations. The design and
fabrication of RF semiconductors is a complex and precise process. Such
manufacturing is sensitive to a wide variety of factors, including variations
and impurities in the raw materials, quality control of the packages,
difficulties in the fabrication process, performance of the manufacturing
equipment, defects in the masks used to print circuits on a wafer and the level
of contaminants in the manufacturing environment. As a result of these and
other factors, semiconductor manufacturing yields from time to time in the past
have suffered, and there can be no assurance that UltraRF will be able to
achieve acceptable production yields in the future. In addition, UltraRF's
wafer and device fabrication facility represents a single point of failure in
its manufacturing process that would be costly and time consuming to replace if
its operation were interrupted. The interruption of wafer fabrication
operations, the loss of key employees dedicated to the wafer and device
fabrication facilities, or any failure to maintain acceptable wafer and device
production levels could have a material adverse effect on UltraRF's business,
financial condition and results of operations.
Risks Associated with Development of LDMOS RF. UltraRF's business could
---------------------------------------------
be adversely affected by its failure to develop and market its LDMOS RF power
transistors competitively. UltraRF sells its products in an industry
characterized by rapid technological changes, frequent new product and service
introductions and evolving industry standards. UltraRF can provide no assurance
that its development efforts will result in commercially successful LDMOS
products in a timely or cost-effective manner, if at all. UltraRF's competitors
are also expected to develop and sell devices suitable for these markets and
may produce devices with superior performance to UltraRF's planned
developments. Failure by UltraRF to develop competitive devices could
adversely affect its business.
Risks Associated with Relationship with the Company. UltraRF's close
---------------------------------------------------
relationship with the Company could limit UltraRF's potential to do business
with the Company's competitors. The Company currently is UltraRF's largest
customer, and UltraRF expects to have a variety of ongoing contractual
relationships with the Company. UltraRF cannot predict whether existing or
potential customers who are competitors of the Company will be deterred by the
existence of such a relationship between the Company and UltraRF. If they are
deterred, UltraRF's future growth could be hindered.
Risks Associated with the Cyclical Nature of the Semiconductor Industry.
-----------------------------------------------------------------------
From time to time, the semiconductor industry has experienced significant
downturns and wide fluctuations in product supply and demand. This cyclicality
has led to significant imbalances in demand and production capacity. It has
also accelerated the decrease of average selling prices per unit. UltraRF may
experience periodic fluctuations in its future financial results because of
these or other industry-wide conditions.
24
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and markets its
products in North America, Europe and the Asia-Pacific region. Thus, the
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make the Company's products less competitive in foreign markets.
The Company's exposure to market rate risk for changes in interest rates
relate primarily to its investment portfolio. The Company does not hold
derivative financial instruments in its investment portfolio. The Company
places its investments with high quality institutions and limits the amount of
credit exposure to any one issuer. The Company is averse to principal loss and
ensures the safety and preservation of its invested funds by limiting default,
market and reinvestment risk. The Company classifies its short-term
investments as "fixed-rate" if the rate of return on such instruments remains
fixed over their term. These "fixed-rate" investments include fixed-rate U.S.
government securities and corporate obligations with contractual maturity dates
ranging from less than one year to greater than 10 years. The table below
presents the amounts and related weighted interest rates of the Company's
short-term investments at October 1 and March 31, 2000 (dollars in thousands).
October 1, March 31,
2000 2000
---- ----
Average fixed interest rate 5.9% 6.0%
======= =======
Amortized cost $28,492 $36,644
======= =======
Fair value $28,211 $36,027
======= =======
Contractual maturity dates:
Less than 1 year $ -- $ 3,500
1 to 5 years 28,211 32,527
------- -------
$28,211 $36,027
======= =======
25
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 23, 1997, a purported class action complaint, Russ Warye et al
v. Spectrian Corporation et al, Case No. C97-04672, was filed in the United
States District Court for the Northern District of California against Spectrian
and certain of its officers and directors. The complaint alleged that
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, by making false and misleading
statements about Spectrian's business and prospects between July 17, 1997
through October 23, 1997.
On February 5, 1998, a virtually identical complaint, Bernstein et al v.
Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for
the State of California, County of Santa Clara. The state court complaint
alleged that Spectrian and certain of its officers and directors violated
California state securities and common law and was based on the same
allegations as the complaint filed in federal court.
A final settlement has been reached by the parties which encompasses both
the federal and state actions. Pursuant to the Private Securities Litigation
Reform Act, the federal court approved the settlement on October 20, 2000 and
dismissed the federal action. The Company anticipates that the state action
will be dismissed in the near future. The terms of the settlement will not
have a material adverse effect on the Company's financial position or results
from operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on August 30, 2000 at 10:00 a.m. local time, at 160 Gibraltar Court,
Sunnyvale, California. The Annual Meeting was held for the purpose of (a)
electing six directors to serve for the ensuing year and until their successors
are duly elected and qualified, (b) approval of an amendment to the Company's
1992 Stock Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 400,000 shares, (c) ratifying and approving the
appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the fiscal year ending March 31, 2001 and (d) transacting such
other business as may properly come before the Annual Meeting.
Proposal No. 1 - Election of Six Members of the Board of Directors:
------------------------------------------------------------------
The following persons were duly elected to the Board by the shareholders
for a one year term and until their successors are elected and qualified:
NOMINATION FOR ABSTAINED
---------- --- ---------
Garrett A. Garrettson 9,366,920 585,032
Martin Cooper 9,373,876 578,076
Charles D. Kissner 9,381,151 570,801
Robert W. Shaner 9,380,137 571,815
Thomas H. Waechter 9,381,331 570,621
Robert C. Wilson 9,374,551 577,401
Proposal No. 2 - Approval of an Amendment to the Company's 1992 Stock Plan
--------------------------------------------------------------------------
to increase the number of shares reserved for issuance thereunder by 400,000
- ----------------------------------------------------------------------------
shares:
- ------
FOR AGAINST ABSTAINED
--- ------- ---------
8,416,189 1,466,616 69,147
26
27
Proposal No. 3 - Ratification of the Appointment of PricewaterhouseCoopers
--------------------------------------------------------------------------
LLP as the Company's Independent Accountants for the Fiscal Year Ending March
- -----------------------------------------------------------------------------
31, 2001:
- --------
NOMINATION FOR AGAINST ABSTAINED
---------- --- ------- ---------
PricewaterhouseCoopers LLP 9,916,479 26,671 8,802
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------ -----------
4.1.3(1) Second Amended and Restated Preferred Shares Rights Agreement, dated
as of August 14, 2000, by and between the Company and ChaseMellon
Shareholder Services, including the Amended and Restated Certificate
of Incorporation, the form of Rights Certificate and the Summary of
Rights attached thereto as Exhibits A, B, and C, respectively.
10.47 Loan Modification Agreement between the Company and Silicon Valley
Bank dated August 15, 2000.
27.1 Financial Data Schedule.
<FN>
(1) Incorporated by reference to exhibits filed with the Registrant's Amended
Registration Statement on Form 8-A12G/A (File No. 000-24360) as filed with
the Securities and Exchange Commission on August 29, 2000.
</FN>
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
-------------------
during the quarter ended October 1, 2000.
27
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRIAN CORPORATION
---------------------
(Registrant)
Dated: November 2, 2000 By: /s/ MICHAEL D. ANGEL
-------------------------
Michael D. Angel
Executive Vice President,
Finance and Administration,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial and Accounting Officer)
28
29
INDEX TO EXHIBITS
Sequentially
Exhibits Description Numbered Page
- -------- ----------- -------------
4.1.3(1) Second Amended and Restated Preferred Shares Rights
Agreement, dated as of August 14, 2000, by and between
the Company and ChaseMellon Shareholder Services,
including the Amended and Restated Certificate of
Incorporation, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B,
and C, respectively. __
10.47 Loan Modification Agreement between the Company and
Silicon Valley Bank dated August 15, 2000. __
27.1 Financial Data Schedule. __
<FN>
(1) Incorporated by reference to exhibits filed with the Registrant's Amended
Registration Statement on Form 8-A12G/A (File No. 000-24360) as filed with
the Securities and Exchange Commission on August 29, 2000.
</FN>
29
30