===============================================================================
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 DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
Commission file number: 0-24360
SPECTRIAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0023003
(State or other jurisdiction 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 February 9, 2001 there were 11,478,986 shares of the Registrant's Common
Stock outstanding.
==============================================================================
SPECTRIAN CORPORATION
FORM 10-Q
INDEX
FOR QUARTER ENDED DECEMBER 31, 2000
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2000
and March 31, 2000............................................... 3
Condensed Consolidated Statements Of Operations - Three Months and
Nine Months Ended December 31, 2000 and December 26, 1999........ 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
December 31, 2000 and December 26, 1999.......................... 5
Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......... 28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 29
ITEM 6. Exhibits and Reports on Form 8-K................................... 29
Signatures......................................................... 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 31, March 31,
2000 2000 (1)
---- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,218 $ 11,553
Short-term investments 118,077 36,027
Restricted short-term investment 6,790 --
Accounts receivable, less allowance for doubtful
accounts of $420 and $420, respectively 27,784 23,817
Inventories 22,508 34,542
Deferred tax asset 4,800 --
Prepaid expenses and other current assets 5,584 4,400
-------- --------
Total current assets 203,761 110,339
Property and equipment, net 10,994 19,668
Other assets 1,268 1,268
-------- --------
Total assets $216,023 $131,275
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,437 $ 16,416
Accrued liabilities 20,416 13,773
Income taxes payable 4,820 20
Deferred gain, current portion 31,800 --
Current portion of debt and capital lease
Obligations -- 730
-------- --------
Total current liabilities 79,473 30,939
Deferred gain, net of current portion 26,200 --
Debt and capital lease obligations, net of
current portion -- 1,351
-------- --------
Total liabilities 105,673 32,290
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000
shares authorized; none issued and outstanding,
respectively -- --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 12,243,465 and 11,859,507 shares
issued, respectively; 11,243,465 and 10,859,507
shares outstanding, respectively 12 12
Additional paid-in capital 164,316 160,117
Treasury stock, 1,000,000 shares of common stock held (14,789) (14,789)
Deferred compensation expense (76) (937)
Accumulated other comprehensive loss (57) (617)
Accumulated deficit (39,056) (44,801)
-------- --------
Total stockholders' equity 110,350 98,985
-------- --------
Total liabilities and stockholders' equity $216,023 $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
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ----
NET REVENUES $51,398 $49,144 $135,504 $123,595
COSTS AND EXPENSES:
Cost of revenues 39,490 37,195 109,472 95,763
Research and development 5,422 5,633 16,364 16,039
Selling, general and
Administrative 5,267 5,173 17,133 14,000
------- ------- -------- --------
Total costs and expenses 50,179 48,001 142,969 125,802
------- ------- -------- --------
OPERATING INCOME (LOSS) 1,219 1,143 (7,465) (2,207)
INTEREST INCOME 563 711 1,683 2,586
INTEREST EXPENSE (73) (118) (162) (419)
OTHER INCOME 11,701 624 11,701 624
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 13,410 2,360 5,757 584
INCOME TAXES -- 16 12 74
------- ------- -------- --------
NET INCOME $13,410 $ 2,344 $ 5,745 $ 510
======= ======= ======== ========
NET INCOME PER SHARE:
Basic $ 1.20 $ 0.22 $ 0.52 $ 0.05
======= ======= ======== ========
Diluted $ 1.19 $ 0.20 $ 0.51 $ 0.05
======= ======= ======== ========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 11,154 10,519 11,014 10,316
======= ======= ======== ========
Diluted 11,270 11,774 11,251 10,939
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
4
SPECTRIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------
December 31, December 26,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,745 $ 510
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 8,294 10,086
Loss on sale of short-term investments 7 --
Gain on the sale of UltraRF (11,701) --
(Gain) loss on sale of property and equipment, net 48 (595)
Stock option compensation expense 154 239
Increase in deferred tax asset (4,800) --
Increase in income tax payable 4,800 --
Changes in operating assets and liabilities:
Accounts receivable (3,967) (20,442)
Inventories 6,858 (5,435)
Prepaid expenses and other current assets (1,415) (1,185)
Accounts payable 2,991 10,096
Accrued liabilities (57) (6,590)
-------- --------
Net cash provided by (used in) operating
activities 6,957 (13,316)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (2,966) (31,148)
Proceeds from sale and maturities of short-term
Investments 9,182 30,743
Purchase of property and equipment (6,757) (5,239)
Costs associated with sale of UltraRF (2,791) --
Proceeds from sale of property and equipment 98 3,362
-------- --------
Net cash used in investing activities (3,234) (2,282)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations (1,964) (4,239)
Proceeds from sales of common stock, net 4,906 6,746
-------- --------
Net cash provided by financing activities 2,942 2,507
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,665 (13,091)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,553 26,254
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $18,218 $13,163
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 162 $ 419
======== ========
Cash paid for income taxes $ 12 $ 74
======== ========
See accompanying notes to condensed consolidated financial statements.
5
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Principles of Consolidation
---------------------------
The accompanying unaudited condensed consolidated financial statements of
Spectrian Corporation and subsidiaries ("Spectrian" or the "Company") have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments (which are of a normal and recurring nature)
necessary for the fair presentation of the financial information set forth
therein. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as set forth on pages F-1
through F-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. SALE OF ULTRARF
On December 29, 2000, the Company completed the sale of substantially all
of the assets and liabilities comprising the Company's semiconductor division,
UltraRF, pursuant to the Asset Purchase Agreement dated as of November 20, 2000
(the "Asset Purchase Agreement") among Cree, Inc. ("Cree"), Zoltar Acquisition,
Inc. ("Zoltar") and the Company for 1,815,402 shares of Cree common stock
valued at $64,503,000, based upon the per share price at the date of closing,
plus common stock of Cree with a guaranteed realizable value of $30 million,
less $1,034,000 owed by the Company to Cree due to a change in the net assets
of UltraRF between October 1, 2000 and December 29, 2000. Of the total
consideration received, 191,094 shares of Cree common stock valued at
$6,790,000 were placed in escrow to secure the Company's representations,
warranties and covenants under the Asset Purchase Agreement for a period of up
to 12 months. Accordingly, the value of Cree common stock under escrow was
classified as restricted investment in Cree common stock in the financial
statements.
As part of the definitive agreement, the Company and Cree entered into a
two-year supply agreement under which Spectrian is obligated to purchase from
Cree an aggregate of $58 million of semiconductors. In the event Spectrian
fails to make these purchases it is obligated to pay Cree the amount of the
shortfall. Accordingly, the Company deferred $58 million of the gain on sale of
UltraRF and will recognize it in future periods as the related purchase
commitments to Cree are fulfilled. In addition, Spectrian and Cree entered into
a one-year joint development agreement to develop advanced technologies related
to laterally diffused metal oxide semiconductors ("LDMOS"), linear high gain
LDMOS driver modules, high efficiency LDMOS power modules and SiC MESFET
components, under which Spectrian will pay to Cree a development fee of $2.4
million in four quarterly installments of $600,000 beginning in April 2001. The
Company also subleased one of the facilities in Sunnyvale, California, to Cree
for a term of 11 years (with three options to extend the lease an additional
five years) with similar terms as the lease agreement between the Company and
its landlord.
The Company realized an aggregate net gain of $69.7 million from the sale
of UltraRF assets, of which $58.0 million was deferred as noted above, with the
balance of $11.7 million being recognized during the quarter ended December 31,
2000.
6
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Summarized below are the unaudited pro forma results of the Company as
though UltraRF had been sold at April 1, 1999 (in thousands, except per share
data):
Nine
Months Year
Ended Ended
December 31, March 31,
2000 2000
---- ----
Total revenue $134,423 $162,687
======== ========
Net loss $ (9,501) $(13,914)
======== ========
Net loss per share basic and diluted $ (0.86) $ (1.33)
======== ========
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had the
disposal taken place at the beginning of fiscal 2000 or of future results of
operations of the Company. The gain on sale of UltraRF has not been included in
the pro forma results above because it is non-recurring and directly related to
the sale.
3. BALANCE SHEET COMPONENTS
Balance sheet components are as follows (in thousands):
December 31, March 31,
2000 2000
---- ----
Inventories:
-----------
Raw materials $15,219 $16,763
Work in progress 1,913 10,353
Finished goods 5,376 7,426
------- -------
$22,508 $34,542
======= =======
Property and equipment:
----------------------
Machinery and equipment $45,148 $58,322
Software 3,980 4,248
Leasehold improvements 2,568 3,781
------- -------
51,696 66,351
Less accumulated depreciation and
amortization 40,702 46,683
------- -------
$10,994 $19,668
======= =======
Accrued liabilities:
-------------------
Employee compensation and benefits $ 6,500 $ 4,310
Warranty 9,800 7,123
Restructuring 100 996
Other accrued liabilities 4,016 1,344
------- -------
$20,416 $13,773
======= =======
7
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
4. 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. The Company is
currently assessing the impact of SFAS 133 on its consolidated financial
position, liquidity and results of operations.
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.
5. 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 December 31, 2000.
The Company has classified its investments in certain debt securities and
common stock investments in Cree as "available-for-sale," and records such
investments at fair market value, with unrealized gains and losses reported as
a separate component of stockholders' equity. Realized gains and losses are
determined using the specific identification method. Interest income is
recorded using an effective interest rate, with the associated premium or
discount amortized to interest income.
As of December 31, 2000 and March 31, 2000, short-term investments
classified as available-for-sale securities were as follows (in thousands):
Amortized Unrealized Fair
As of December 31, 2000 Cost Gain (Loss) Value
----------------------- ---- ----------- -----
Government bonds & notes $ 10,107 $ 12 $ 10,119
Corporate bonds & notes 23,778 (69) 23,709
Common stock investments 94,503 -- 94,503
-------- ---- --------
128,388 (57) 128,331
Less amounts classified as
cash equivalents 3,464 -- 3,464
-------- ---- --------
Short-term investments $124,924 $(57) $124,867
======== ==== ========
Contractual maturity dates of
bonds and notes:
Less than 1 year $ 2,463
1 to 5 years 27,901
--------
$ 30,364
========
8
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
========
6. PER SHARE COMPUTATION
Basic net income per share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted net income per share is computed using the weighted
average number of common and potentially dilutive common shares outstanding
during the period using the treasury stock method. Potentially dilutive common
shares include the effect of stock options. For the three and nine months ended
December 31, 2000, options to purchase 2,222,079 and 1,499,300 common shares
were outstanding, but were not included in the computation of diluted net
income per share because the exercise prices of the options were greater than
the average market price of the common shares. For the three and nine months
ended December 26, 1999, options to purchase 227,547 and 538,015 common shares
were outstanding, but were not included in the computation of diluted net
income per share because the exercise prices of the options were greater than
the average market price of the common shares.
Reconciliation of weighted average shares used in computing net income per
share is as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ -------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ----
Weighted average common
shares outstanding 11,154 10,519 11,014 10,316
Dilutive effect of stock
options outstanding,
using the treasury stock
method 116 1,255 237 623
------ ------ ------ ------
Shares used in computing
diluted net income per share 11,270 11,774 11,251 10,939
====== ====== ====== ======
9
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. SEGMENT INFORMATION
Prior to December 29, 2000, the Company divided its business into two
operating segments based upon product type under the management approach:
Amplifier Division and Semiconductor Division, which operated under the
tradename of UltraRF. UltraRF derived substantially all of its revenues from
sales to the Amplifier Division. The Company allocated operating expenses to
these segments but did not allocate interest income and expense, other income,
the provision for income taxes and certain corporate operating expenses.
Corporate expenses that were allocated to the operating segments were allocated
based on predetermined annual allocation methods. Appropriate intersegment
eliminations were made in the consolidation of the Company's consolidated
financial statements. Segment assets, which included inventories and property
and equipment, were reported upon by operation. No other assets and
liabilities were reported separately. Following the sale of UltraRF on December
29, 2000, the Company began operating as one vertical integrated unit. See Note
2 to the Condensed Consolidated Financial Statements "Sale of UltraRF".
Consolidated Statement of Operations Data - Fiscal 2001 (in thousands):
Three Months Ended December 31, 2000
---------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $ 50,969 $ 429 $ -- $ 51,398
Net revenues, intersegment -- 8,860 (8,860) --
Amortization and depreciation 1,119 703 750 2,572
Income (loss) before income taxes $ (244) $ 1,467 $12,187 $ 13,410
Nine Months Ended December 31, 2000
---------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $134,423 $ 1,081 $ -- $135,504
Net revenues, intersegment -- 23,487 (23,487) --
Amortization and depreciation 3,755 2,185 2,354 8,294
Income (loss) before income taxes $ (5,852) $ 313 $11,296 $ 5,757
Consolidated Statement of Operations Data - Fiscal 2000 (in thousands):
Three Months Ended December 26, 1999
---------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $ 48,973 $ 171 $ -- $ 49,144
Net revenues, intersegment -- 7,760 (7,760) --
Amortization and depreciation 1,379 625 1,294 3,298
Income (loss) before income taxes $ 301 $ 1,680 $ 379 $ 2,360
Nine Months Ended December 26, 1999
---------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Net revenues, external $123,356 $ 239 $ -- $123,595
Net revenues, intersegment -- 18,650 (18,650) --
Amortization and depreciation 4,157 1,909 4,020 10,086
Income (loss) before income taxes $ (4,597) $ 1,977 $ 3,204 $ 584
10
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
*Data in the "Other" column represents the elimination of intersegment
revenues, interest income and expense, other income, the provision for income
taxes, certain unallocated corporate expenses and corporate amortization and
depreciation that is subsequently allocated to the operating segments.
Consolidated Balance Sheet Data (in thousands):
December 31, 2000
---------------------------------------
Amplifier UltraRF Other* Total
--------- ------- ------ -----
Segment assets $29,325 $ -- $ 4,177 $ 33,502
Expenditures for additions to
long-lived assets $ 2,590 $ 3,478 $ 689 $ 6,757
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 Nine Months Ended
------------------------ -------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ----
Canada 40% 42% 41% 47%
United States 23% 14% 27% 16%
France 8% 22% 16% 20%
South Korea 28% 22% 15% 17%
Other countries 1% -- 1% --
The Company's long-lived assets are located in the following countries (in
thousands):
December 31, March 31,
2000 2000
---- ----
United States $ 7,243 $18,226
Thailand 2,767 1,218
South Korea 984 224
------- -------
$10,994 $19,668
======= =======
8. 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
11
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 through December 31, 2000 (in
thousands):
Reduction in
Workforce
---------
Balance at March 31, 2000 $ 996
Cash payment of severance costs (896)
-----
Balance at December 31, 2000 $ 100
=====
The balance of the restructuring accrual is included in current
liabilities on the condensed consolidated balance sheets.
9. 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 Nine Months Ended
------------------------ -------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ----
Net income $13,410 $2,344 $5,745 $ 510
Unrealized gain (loss) on
marketable securities 224 (239) 560 (706)
------- ------ ------ ------
Comprehensive income (loss) $13,634 $2,105 $6,305 $ (196)
======= ====== ====== ======
The components of accumulated other comprehensive loss are as follows (in
thousands):
December 31, March 31,
2000 2000
---- ----
Unrealized loss on marketable securities $(57) $(617)
==== =====
10. COMMITMENTS AND CONTINGENCIES
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. On December 4, 2000, the state court approved
the settlement and dismissed the state action. The terms of the settlement
did not have a material adverse effect on the Company's financial position or
results from operations.
Commitment
----------
As described in Note 2, the Company has a $58.0 million commitment to
purchase semiconductors over the next two years.
12
SPECTRIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
11. 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 December 31, 2000. The amount available to borrow at
December 31, 2000 was $10.0 million. At December 31, 2000, the Company can
borrow at either (i) a variable rate equal to the prime rate (9.0%) or (ii) a
fixed rate equal to 200 basis points above the LIBOR rate (totaling 8.40%). The
Company had no borrowings under the line of credit at December 31, 2000.
12. SUBSEQUENT EVENTS
In January 2001, the Company liquidated the portion of its Cree common
stock with a guaranteed realizable value of $30 million and invested the
proceeds in government and corporate bonds and notes. The Company also sold
the 191,094 shares held in escrow for approximately $6,309,000 and realized a
loss of approximately $481,000 from the sale of these securities. The $6.3
million will remain in escrow for a period of up to 12 months. In addition,
the Company entered into various option arrangements known as a cashless
collar, expiring from July 2001 to October 2001, to hedge one million shares of
the remaining 1,624,308 shares of Cree common stock on hand. As a result, the
Company is able to realize an average of $25.25 per share for the one million
hedged shares if the share price of Cree common stock is lower than
approximately $25.25 per share when the options expire. If the Cree common
stock price exceeds an average of $41.68 per share when the options expire, the
Company may sell its hedged shares at approximately $41.68 or settle the
options for a cash amount equal to the difference between the Cree common stock
price and the option price. Until the options expire, the Company will be
restricted from disposing of the one million shares.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the ''Securities Act'') and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including
statements regarding Spectrian Corporation's ("the Company") expectations,
hopes, intentions or strategies regarding the future. When used herein, the
words "may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of the Securities Act and the Exchange Act.
Forward looking statements include, but are not limited to: the statements in
the second paragraph of "Overview" regarding the recognition in the future of
gains on the sale of UltraRF, the development agreement with Cree , and the
effect of the sale of UltraRF on the Company's semiconductor cost, in the third
paragraph regarding the impact on the Company of a loss of a major OEM
customer, in the fourth paragraph regarding international sales as a percentage
of future revenues and the impact of currency fluctuations on future revenues,
in the fifth paragraph regarding outsourcing, and in the last paragraph
regarding average selling prices and gross margins; the statements under
"Results of Operations - Research and Development" regarding new product
development initiatives; the statements in the last paragraph under "Liquidity
and Capital Resources" concerning availability of the line of credit, the
anticipated spending for capital additions for the next twelve months and the
sufficiency of the Company's available resources to meet cash requirements; and
the statements in "Factors Affecting Future Operating Results." Results could
differ materially based on various factors including, but not limited to, those
described below, under the heading "Factors Affecting Future Operating Results"
and elsewhere in this Quarterly Report on Form 10-Q. Among such factors, those
which could cause results to differ materially in the case of the above-
referenced forward-looking statements include, but are not limited to: the
risks of international sales; fluctuations in operating results; customer
concentration; the highly competitive market for the Company's products;
declining average sales prices; rapid technological change, evolving industry
standards, and dependence on new products; and product quality, performance and
reliability.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. Investors
are cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.
Overview
- - --------
Spectrian designs, manufacturers and markets high-power RF amplifiers, for
the global wireless communications industry. The Company's power amplifiers
support a broad range of transmission standards, including AMPS, TDMA, CDMA,
PCS, GSM, WLL, IMT-2000, CDMA2000 and UMTS. Spectrian's power amplifiers are
utilized as part of the infrastructure for both wireless voice and data
networks. The Company's power amplifiers boost the power of a signal so that
it can reach a wireless phone or other device within a designated geography.
On December 29, 2000, the Company completed the sale of substantially all
of the assets and external liabilities comprising its semiconductor division,
UltraRF, to Cree, Inc. ("Cree") pursuant to the Asset Purchase Agreement dated
as of November 20, 2000 (the "Asset Purchase Agreement") among Cree, Zoltar
Acquisition, Inc. ("Zoltar") and the Company for 1,815,402 shares of common
stock of Cree plus common stock with a guaranteed realizable value of $30
million, less $1,034,000 owed by the Company to Cree due to a change in the
net assets of UltraRF between October 1, 2000 and December 29, 2000. As part
of the definitive agreement, the Company and Cree entered into a two-year
supply agreement under which Spectrian is obligated to purchase from Cree an
aggregate of $58 million of semiconductors. In the event Spectrian fails to
make these purchases, it is obligated to pay Cree the amount of the shortfall.
Accordingly, Spectrian deferred $58 million of the gain on sale of UltraRF and
will recognize it in future periods as the related purchase commitments to Cree
are fulfilled. Spectrian and Cree have also entered into a one-year joint
development agreement to develop advanced technologies related to laterally
diffused metal oxide semiconductors ("LDMOS"), linear high gain LDMOS driver
modules, high efficiency LDMOS power modules and SiC MESFET components.
Following the close of the sale of UltraRF, the Company will no longer have
revenues related to the sale of the UltraRF products to third party customers.
Additionally, as a result of the sale, the Company's cost of semiconductors
used in the manufacturing of amplifier products will increase because future
purchases from UltraRF will include a gross margin component.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the nine months ended December 31, 2000, Nortel Networks Corporation
("Nortel") and Verizon Communications ("Verizon"), formed by the merger of Bell
Atlantic and GTE Corporation, accounted for approximately 60% and 20% of net
revenues, respectively. For the nine months ended December 26, 1999, Nortel
accounted for approximately 75% of net revenues. The Company and Nortel have a
supply agreement, renegotiated annually, pursuant to which Nortel commits to
purchase a certain volume of its annual power amplifier requirements for
specified prices from the Company. This agreement allows Nortel to change the
product mix requirements, which can significantly affect the Company's gross
margins, and to change requested delivery dates without significant financial
consequences to Nortel, which affects the Company's ability to efficiently
manage production schedules and inventory levels and to accurately forecast
product sales. The Company's business, financial condition and results of
operations have been materially adversely affected in the past by anticipated
orders failing to materialize and by deferrals or cancellations of orders as a
result of changes in customer requirements. In the year ended March 31, 1999
("fiscal 1999"), the first and fourth quarters of the year ended March 31, 2000
("fiscal 2000") and the first and second quarters of the year ended March 31,
2001 ("fiscal 2001"), product orders fell resulting in substantial losses in
those fiscal periods. There can be no assurance that the Company will not
experience such fluctuations in the future. If the Company is unable to find
customers to generate demand for its new products, the Company's revenues may
be materially adversely affected. If the Company were to lose Nortel, Verizon
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 nine months ended December 31, 2000 and December 26, 1999,
sales outside of the United States were 73% and 84%, respectively. The Company
expects that international sales will continue to account for a significant
percentage of the Company's net revenues for the foreseeable future. Financial
market turmoil, economic downturn, consolidation or merger of customers, and
other changes in business conditions in any of the Company's current or future
markets, such as Canada, South Korea and France, may have a material adverse
effect on the Company's sales of its products. Furthermore, because the
Company's products are priced in U.S. dollars, currency fluctuations and
instability in the financial markets that are served by the Company may have
the effect of making the Company's products more expensive than those of other
manufacturers whose products are priced in the local currency of the customer
and may result in reduced revenues for the Company.
In Sunnyvale, California, the Company services all of its power amplifier
products. As of September 2000, the Company has transferred its high volume
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 were higher than the savings from costs of products,
which adversely affected the Company's gross margin from January 1999 to
November 2000. As a result of its 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 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Three Months Ended Nine Months Ended
------------------------ -------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ----
NET REVENUES 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of revenues 76.8 75.7 80.8 77.5
Research and development 10.5 11.5 12.1 13.0
Selling, general and
Administrative 10.3 10.5 12.6 11.3
----- ----- ----- -----
Total costs and expenses 97.6 97.7 105.5 101.8
----- ----- ----- -----
OPERATING INCOME (LOSS) 2.4 2.3 (5.5) (1.8)
INTEREST INCOME 1.1 1.4 1.2 2.1
INTEREST EXPENSE (0.1) (0.2) (0.1) (0.3)
OTHER INCOME 22.7 1.3 8.6 0.5
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 26.1 4.8 4.2 0.5
INCOME TAXES -- -- -- 0.1
----- ----- ----- -----
NET INCOME 26.1% 4.8% 4.2% 0.4%
===== ===== ===== =====
GROSS MARGIN ON SALES 23.2% 24.3% 19.2% 22.5%
===== ===== ===== =====
Net Revenues. The Company's net revenues increased 5% to $51.4 million
------------
for the three months ended December 31, 2000 from $49.1 million for the three
months ended December 26, 1999. The Company's net revenues increased 10% to
$135.5 million for the nine months ended December 31, 2000 from $123.6 million
for the nine months ended December 26, 1999. The increase in net revenues
compared to the three months ended December 26, 1999 is due to higher average
selling prices and volumes in the multi-channel power amplifier ("MCPA")
products which was partially offset by lower volumes and average selling prices
in the single carrier power amplifier ("SCPA") products. The growth in net
revenues compared to the nine months ended December 26, 1999 is due to higher
volumes in the Broadband and MCPA products, which combined for net revenues of
$20.5 million for the nine months ended December 26, 1999 and for revenues of
$50.1 million for the nine months ended December 31, 2000 which was partially
offset by lower average selling prices and volumes in SCPA products. UltraRF
revenues from external customers increased to $1.1 million from $0.2 million
for the nine months ended December 31, 2000 and December 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 $39.5 million for the three months ended December 31, 2000
from $37.2 million for the three months ended December 26, 1999. The Company's
cost of sales increased by 14% to $109.5 million for the nine months ended
December 31, 2000 from $95.8 million for the nine months ended December 26,
1999. The increases on a dollar and percentage basis for the three and nine
months ended December 31, 2000 were due to higher MCPA unit volumes, lower
yields on semiconductor production and higher inventory obsolescence expense.
Gross margin on sales was 23% for the three months ended December 31, 2000
as compared to 24% for the three months ended December 26, 1999. Gross margin
on sales was 19% for the nine months ended December 31, 2000 as compared to 23%
for the nine months ended December 26, 1999. The decrease in gross margin was
primarily a result of declining average sales prices in all products and lower
yields on semiconductor production. The Company anticipates that gross margin
as a percentage of net revenues will decrease as a result of the sale of the
UltraRF division to Cree as the Company is required to purchase the LDMOS RF
semiconductor parts at market price rather than recognizing the cost of
revenues at the actual cost of production.
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 4%
to $5.4 million in the three months ended December 31, 2000 from $5.6 million
in the three months ended December 26, 1999. The Company's R&D expenses
increased by 2% to $16.4 million for the nine months ended
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
December 31, 2000 from $16 million in the nine months ended December 26, 1999.
As a percentage of net revenues, R&D expenses represented 11% of revenues for
the three months ended December 31, 2000 as compared to 12% of revenues for the
three months ended December 26, 1999. As a percentage of net revenues, R&D
expenses represented 12% for the nine months ended December 31, 2000 as
compared to 13% of net revenues for the nine months ended December 26, 1999.
The increase in R&D expenses on a dollar basis for the nine months ended
December 1, 2000 reflects new product development initiatives which the Company
believes are required to meet current and future market and customer
requirements. The decrease in R&D expenses as a percentage of net revenues for
the three and nine months ended December 31, 2000 was due to the
proportionately greater increase in net revenues than R&D expenses as compared
to the similar periods in the prior year.
Selling, General and Administrative. Selling, general and administrative
-----------------------------------
("SG&A") expenses include compensation and benefits for sales, marketing,
senior management and administrative personnel, commissions paid to independent
sales representatives, professional fees and other expenses.
The Company's SG&A expenses increased by 2% to $5.3 million in the three
months ended December 31, 2000 from $5.2 million in the three months ended
December 26, 1999. The Company's SG&A expenses increased by 22% to $17.1
million for the nine months ended December 31, 2000 from $14 million in the
nine months ended December 26, 1999. As a percentage of net revenues, SG&A
expenses represented 10% for the three months ended December 31, 2000 as
compared to 11% of net revenues for the three months ended December 26, 1999.
As a percentage of net revenues, SG&A expenses represented 13% for the nine
months ended October 1, 2000 as compared to 11% of net revenues for the nine
months ended December 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 South Korea, costs
incurred to evaluate strategic alternatives for UltraRF, and added maintenance
and support for the new enterprise resource planning ("ERP") system.
Interest Income. Interest income for the three months ended December 31,
---------------
2000 decreased to $0.6 million from $0.7 million for the three months ended
December 26, 1999. Interest income for the nine months ended December 31, 2000
decreased to $1.7 million from $2.6 million for the nine months ended December
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 December
----------------
31, 2000 decreased to $73,000 from $118,000 for the three months ended December
26, 1999. Interest expense for the nine months ended December 31, 2000
decreased to $162,000 from $419,000 for the nine months ended December 26,
1999. The decrease in interest expense resulted from substantially reduced
average borrowing levels.
Other Income. Other income for the three and nine months ended December
------------
31, 2000 increased to $11.7 million from $0.6 million for the three and nine
months ended December 29, 1999. Other income for the three and nine months
ended December 31, 2000 represents a $11.7 million gain recognized on sale of
UltraRF in December 2000. Other income for the three and nine months ended
December 26, 1999, represents a $0.6 million gain on the sale of a light
industrial building in December 1999.
Income Taxes. Due to the losses incurred by the Company in prior years and
------------
the related net operating loss carryforwards available to the Company, the
Company did not record any income tax expense except for the minimum state
income tax expense for the three and nine months ended December 31, 2000.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. The Company is
currently assessing the impact of SFAS 133 on its consolidated financial
position, liquidity and results of operations.
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 December 31, 2000
consisted of cash and short-term investments of $48.6 million, investment in
Cree common stock of $94.5 million and bank borrowing arrangements.
The Company has a revolving line of credit of $10.0 million with a bank
collateralized by the majority of the Company's assets. The line of credit
expires on June 30, 2001. It is anticipated that the Company will renew the
line of credit. Under the terms of the master agreement governing this credit
instrument, as amended, the Company is required to maintain certain minimum
working capital, net worth, profitability and other specific financial ratios.
The master agreement also has certain restrictions on other indebtedness and
the payment of dividends. The Company was in compliance with all debt covenants
as of December 31, 2000. The amount available to borrow at December 31, 2000
was $10.0 million. The Company can borrow at either (i) a variable rate equal
to the prime rate or (ii) a fixed rate equal to 200 basis points above the
LIBOR rate, which at December 31, 2000 was 9% and 8.4%, respectively. The
Company had no borrowings under the line of credit at December 31, 2000.
In January 1997, the Company borrowed $6.0 million under a term loan
collateralized by certain capital equipment. During the three months ended
December 31, 2000, the Company paid off the outstanding principal balance of
this term loan.
The Company's working capital increased by $44.9 million to $124.3 million
as of December 31, 2000 from $79.4 million as of March 31, 2000. The increase
was primarily attributable to a $94.5 million increase in investment in Cree
common stock which was the consideration received for the sale of UltraRF, a $4
million increase in accounts receivable, a $1.2 million increase in prepaid
expenses and other current assets, a $1 million increase in cash, cash
equivalents and short-term investments and a $0.7 million decrease in current
portion of debt and capital lease obligations, which were partially offset by a
$31.8 million increased in current portion of deferred gain on the sale of
UltraRF, a $12 million decrease in net inventories, a $6 million increase in
accounts payable and a $6.6 million increased in accrued liabilities.
Cash provided by operations was $7 million for the nine months ended
December 31, 2000 compared to cash used by operations for the nine months ended
December 26, 1999 of $13.3 million. Cash provided by operations for the nine
months ended December 31, 2000 was principally the result of a $5.7 million net
income, depreciation and amortization of $8.3 million, a $6.9 million decrease
in net inventories, a $3 million increase in accounts payable, which were
partially offset by a $11.7 million noncash gain on the sale of UltraRF net
assets, a $4 million increase in accounts receivable as a result of higher
sales in the current quarter and a $1.4 million increase in prepaid expenses
and other current assets. Cash used by operations for the nine months ended
December 26, 1999 was principally the result of a $20.4 million increase in
accounts receivable, which increased proportionately with revenue growth,
combined
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
with a $6.6 million reduction in accrued liabilities and $5.4 million increase
in inventories which were partially offset by a $0.5 million net income, $10.1
million in depreciation and amortization expense and a $10.1 million increase
in accounts payable, which increased proportionately with production levels.
The Company's investing activities during the nine months ended December
31, 2000 used cash of approximately $3.2 million as compared to cash used of
$2.3 million during the comparable period in the prior year. Cash used by
investing activities during the nine months ended December 31, 2000 resulted
primarily from $6.8 million in additions to property and equipment, $2.8
million in payments for transaction costs associated with the sale of UltraRF,
and $3 million in purchases of short-term investments which were partially
offset by $9.2 million proceeds from sale and maturates of short-term
investments. Capital additions for the nine months ended December 31, 2000
included manufacturing test and production equipment required to support new
products and test equipment to support various research and development
projects. Cash used for investing activities during the nine months ended
December 26, 1999 resulted primarily from $5.2 million additions to property
And equipment, partially offset by $3.3 million in proceeds from the sale of
a light industrial building by the Company. Capital additions for the nine
months ended December 26, 1999 included manufacturing and test equipment
required to support new products, test equipment to support various research
and development projects, and the ERP system.
The Company's financing activities during the nine months ended December
31, 2000 provided cash of approximately $2.9 million as compared to providing
$2.5 million of cash during the comparable period in the prior year. Cash
provided by financing activities during the nine months ended December 31, 2000
was the result of $4.9 million proceeds from the issuance of common stock,
through the exercise of employee stock options and employee stock purchase plan
activity, which was partially offset by $2 million in repayments of debt and
capital lease obligations. Cash provided by financing activities during the
nine months ended December 26, 1999 was the result of $6.7 million in proceeds
from the issuance of common stock, through the exercise of employee stock
options and employee stock plan activity, which was partially offset by $4.2
million in repayments of debt and capital lease obligations.
As part of the sale of UltraRF, the Company has committed to purchase
$58.0 million of semiconductors over the next two years. The Company
anticipates spending approximately $7.0 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.
Factors Affecting Future Operating Results
- - ------------------------------------------
Customer Concentration; Dependence on Nortel and Verizon. The wireless
--------------------------------------------------------
infrastructure equipment market is dominated by a small number of large OEMs
and wireless service providers, including Ericsson, Lucent, Motorola, Nortel,
Verizon and Siemens. The Company's revenues are derived primarily from sales to
a limited number of these customers, in particular, Nortel and Verizon.
Furthermore, a substantial portion of revenues from Nortel in the past has
resulted from sales of a limited number of the Company's products. The
Company's business, financial condition and results of operations have been
materially adversely affected in the past by anticipated orders failing to
materialize and by deferrals or cancellations of orders as a result of changes
in customer requirements. The Company and Nortel have a supply agreement,
renegotiated annually, pursuant to which Nortel commits to purchase a certain
volume of its annual power amplifier requirements for specified prices from the
Company. This agreement allows Nortel to change the product mix requirements,
which can significantly affect the Company's gross margins, and to change
requested delivery dates without significant financial consequences to Nortel,
which affects the Company's ability to efficiently manage production schedules
and inventory levels and to accurately forecast product sales. Any reduction
in the level of purchases of the Company's amplifiers by Nortel 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. 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 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 or that the
Company will experience in the future the same annual revenue growth that it
did in fiscal 2000. The Company establishes its expenditure levels for product
development and other operating expenses based on its expected revenues, and
expenses are relatively fixed in the short term. As a result, variations in
timing of revenues can cause significant variations in quarterly results of
operations. There can be no assurance that the Company will be profitable on a
quarter-to-quarter basis in the future. The Company believes that period-to-
period comparisons of its financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance. Due to all
the foregoing factors, it is likely that in some future quarter or quarters the
Company's revenues or operating results will not meet the expectations of public
stock market analysts or investors. In such event, the market price of the
Company's Common Stock would be materially adversely affected.
Declining Average Sales Prices. The Company has experienced, and expects
------------------------------
to continue to experience, declining average sales prices for its products.
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
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
Purchase and Supply Agreement with Cree. In connection with the Company's
---------------------------------------
completion of the sale of UltraRF to Cree, the Company entered into a Purchase
and Supply Agreement, dated as of December 29, 2000 by and between the Company
and Zoltar (subsequently renamed "UltraRF, Inc."). Pursuant to the Purchase
and Supply Agreement, the Company committed to purchase and accept delivery
from UltraRF, Inc. certain components at a minimum aggregate purchase price.
The Company's need for UltraRF, Inc. components during a calendar quarter may
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
be insufficient to satisfy its minimum commitments for such calendar quarter.
In such event, the Company would be obligated to purchase excess inventory that
it may never utilize or to pay a shortfall surcharge, either of which could
have a material adverse effect on the Company's business, financial conditions,
and cash flows.
Arm's-Length Relationship. The Company relies on UltraRF for the supply
-------------------------
of a substantial amount of components used in the manufacture of its products.
When the Company operated UltraRF as a separate division, it may have obtained
more favorable terms for semiconductor products than through negotiations with
unaffiliated third parties. With the sale of UltraRF, the Company must now
deal with UltraRF on an arm's-length basis. Accordingly, the prices and other
terms for UltraRF semiconductor products may now be less favorable to the
Company.
Sole or Limited Sources of Products, Materials and Services. The Company
-----------------------------------------------------------
currently procures from single sources power amplifier assemblies, certain
specialized semiconductors, components and services for its products. The
Company purchases these products, components and services on a purchase order
basis, does not carry significant inventories of these components and does not
have any long-term supply contracts with its sole source vendors. During
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. On December 29,
2000, the Company completed the sale of substantially all of the assets and
liabilities comprising the Company's semiconductor division, UltraRF, pursuant
to the Asset Purchase Agreement dated as of November 20, 2000 to Cree. As a
result, the Company no longer manufactures LDMOS RF power semiconductors, which
are one critical component in the Company's power amplifier products. As part
of the definitive agreement, the Company and Cree entered into a two-year
supply agreement under which the Company is obligated to purchase from Cree an
aggregate of $58 million of semiconductors. Consequently, Cree becomes a sole
source vendor to supply LDMOS RF power semiconductors to the Company. 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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 and network operators have in the
past accounted, and are expected in the future to account, for substantially
all of the Company's product sales. Demand for wireless infrastructure
equipment is driven by demand for wireless service. Although demand for power
amplifiers has grown in recent years, if demand for wireless services fails to
increase or increases more slowly than the Company or its customers currently
anticipate, the Company's business, financial condition and results of
operations would be materially and adversely affected.
Market for the Company's Products Is Highly Competitive. The wireless
-------------------------------------------------------
communications equipment industry is extremely competitive and is characterized
by rapid technological change, new product development and product
obsolescence, evolving industry standards and significant price erosion over
the life of a product. The ability of the Company to compete successfully and
sustain profitability depends in part upon the rates at which wireless
equipment OEMs incorporate the Company's products into their systems and the
Company captures market share from other merchant suppliers.
The Company's major OEM customers continuously evaluate whether to
manufacture their own amplification products or purchase them from outside
sources. There can be no assurance that these OEM customers will incorporate
the Company's products into their systems or that in general they will continue
to rely, or expand their reliance, on external sources of supply for their
power amplifiers. These customers and other large manufacturers of wireless
communications equipment could also elect to enter the merchant market and
compete directly with the Company, and at least one OEM, NEC, has already done
so. Such increased competition could materially adversely affect the Company's
business, financial condition and results of operations.
The Company's principal competitors in the market for wireless
amplification products provided by merchant suppliers currently include AML
Communications, Amplidyne, Fujitsu, Mitsubishi and Powerwave Technologies. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products
that will offer superior price or performance features compared to the
Company's products.
Uncertain Protection of Intellectual Property. The Company's ability to
---------------------------------------------
compete successfully and achieve future revenue growth will depend, in part, on
its ability to protect its proprietary technology and operate without
infringing the rights of others. The Company has a policy of seeking patents on
inventions resulting from its ongoing research and development activities.
There can be no assurance that the Company's pending patent applications will
be allowed or that the issued or pending patents will not be challenged or
circumvented by competitors. Notwithstanding the Company's active pursuit of
patent protection, the Company believes that the success of its business
depends more on the collective value of its patents, specifications, computer
aided design and modeling tools, technical processes and employee expertise.
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.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Risk of Third Party Claims of Infringement. The communications equipment
------------------------------------------
industry is characterized by vigorous protection and pursuit of intellectual
property rights or positions, which have resulted in significant and often
protracted and expensive litigation. Although there is currently no pending
intellectual property litigation against the Company, the Company or its
suppliers may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses under
such patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company or otherwise secure
rights to use such technology could cause the Company to incur substantial
liabilities, to suspend the manufacture of products or expend significant
resources to develop noninfringing technology. There can be no assurance that
the Company would be successful in such development or that such licenses would
be available on reasonable terms, if at all. In the event that any third party
makes a successful claim against the Company or its customers and either a
license is not made available to the Company on commercially reasonable terms
or a "design around" is not practicable, the Company's business, financial
condition and results of operations would be materially adversely affected.
Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish
the validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation results in a favorable determination for the Company. In the
event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, indemnify its customers, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop noninfringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology.
Government Regulation of Communications Industry. Radio frequency
------------------------------------------------
transmissions and emissions, and certain equipment used in connection therewith
are regulated in the United States, Canada and throughout the rest of the
world. Regulatory approvals generally must be obtained by the Company in
connection with the manufacture and sale of its products, and by wireless
service providers to operate the Company's products. The United States Federal
Communications Commission (the "FCC") and regulatory authorities abroad
constantly review RF emission issues and promulgate standards based on such
reviews. If more stringent RF emission regulations are adopted, the Company
and its OEM customers may be required to alter the manner in which radio
signals are transmitted or otherwise alter the
equipment transmitting such signals, which could materially adversely affect
the Company's products and markets. The enactment by federal, state, local or
international governments of new laws or regulations or a change in the
interpretation of existing regulations could also materially adversely affect
the market for the Company's products. Although deregulation of international
communications industries along with radio frequency spectrum allocations made
by the FCC have increased the potential demand for the Company's products by
providing users of those products with opportunities to establish new wireless
personal communications services, there can be no assurance that the trend
toward deregulation and current regulatory developments favorable to the
promotion of new and expanded personal communications services will continue or
that other future regulatory changes will have a positive impact on the
Company. The increasing demand for wireless communications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused, and may in the future cause, the cancellation,
postponement or rescheduling of the installation of communications systems by
the 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.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Management of Growth; Dependence on Key Personnel. The Company's business
-------------------------------------------------
and growth has placed, and is expected to continue to place, a significant
strain on the Company's personnel, management and other resources. The
Company's ability to manage any future growth effectively will require it to
attract, motivate, manage and retain new employees successfully, especially in
the highly competitive northern California job market, to integrate new
employees into its overall operations and to retain the continued service of
its key technical, marketing and management personnel, and to continue to
improve its operational, financial and management information systems.
Although the Company has employment contracts with several of its executive
officers, these agreements do not obligate such individuals to remain in the
employment of the Company. The Company does not maintain key person life
insurance on any of its key technical personnel. The competition for such
personnel is intense. The Company has experienced loss of key employees in the
past and could in the future. Such losses could have a material adverse effect
on the Company. As a result of the plan to discontinue manufacturing operations
in Sunnyvale, California, and the Company's other restructuring activities,
several key executives have ceased to be employees of the Company.
The Company's ability to manage its growth will require it to continue to
invest in its operational, financial and management information systems,
procedures and controls. The Company can give no assurance that it will be able
to manage its growth effectively. Failure to manage growth effectively would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may, from time to time, pursue the
acquisition of other companies, 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, the
difficulty of separating a divested operation from the remaining operation,
charges to the Company's earnings as a result of the purchase of intangible
assets, and the potential loss of key employees as a result of an acquisition
or divestiture. Should any acquisition take place, we can give no assurance
that this acquisition will not materially and adversely affect the Company or
that any such acquisition will enhance the Company's business.
Volatility of Stock Price. The market price of the shares of Common Stock
-------------------------
has been and is likely to continue to be highly volatile, and is affected
significantly by factors such as fluctuations in the Company's quarterly and
annual operating results, customer concentration, the timing difference between
Nortel's requested delivery dates and its vendor purchase commitments to
support the customer's delivery requirements, reliance on international
markets, the absence of the economies of scale achieved by some of its
competitors, announcements of technological innovations, new customer contracts
or new products by the Company or its competitors, announcements by the
Company's customers regarding their business or prospects, changes in analysts'
expectations, estimates and recommendations, news reports regarding the
Company, its competitors and its markets, governmental regulatory action,
developments with respect to patents or proprietary rights, announcements of
significant acquisitions or strategic partnerships by the Company or its
competitors, announcements of significant divestitures of existing businesses
or product lines, the market price of the shares of the common stock of Cree,
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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Volatility of Cree's Common Stock Price. Pursuant to the Asset Purchase
---------------------------------------
Agreement, the Company received as partial consideration for the sale of
UltraRF, 1,815,402 shares of common stock of Cree. In January 2001, the
Company sold 191,094 shares, which were held in escrow for approximately
$6,309,000 and realized a loss of approximately $481,000 from the sale of these
securities. In addition, the Company entered into various option arrangements,
expiring from July 2001 to October 2001, to hedge one million shares of the
remaining 1,624,308 shares of Cree common stock on hand. As a result, the
Company is able to realize an average of $25.25 per share for the one million
hedged shares if the share price of Cree is lower than this when the options
expire. If the Cree stock price exceeds an average of $41.68 when the options
expire, the Company may sell its hedged shares at this price or settle the
options for a cash amount equal to the difference between the Cree stock price
and the option price. Until the options expire, the Company will be restricted
from disposing of the one million shares. The Company is currently holding the
remaining 624,308 shares of Cree common stock, which are not subject to such
option arrangements. The Company faces a number of risks due to the size of
its ownership in Cree including the risk that its financial statements and
results of operations reflect the Company's ownership stake in Cree which
impacts the Company's stock price. The market price of the shares of Cree's
common stock has been and is likely to continue to be highly volatile. Such
volatility in the market price of Cree's common stock and the resulting impact
on investors and analysts' perceptions of the change of the Company's valuation
due to the size of its holdings in Cree common stock may adversely affect the
market price of the Company's common stock.
Escrow Shares. Of the total consideration paid under the Asset Purchase
-------------
Agreement, approximately $6 million is currently held in escrow to secure the
Company's representations, warranties and covenants under the Asset Purchase
Agreement for a period of 12 months. If any claims for indemnification are
made against the Company anytime during this 12 month period, whether
meritorious or not, the Company may be delayed or precluded from realizing the
proceeds placed in escrow.
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 was 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. On December 4, 2000, the state court approved
the settlement and dismissed the state action. The terms of the settlement
did 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
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
27
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 five years. The table below
presents the amounts and related weighted interest rates of the Company's
short-term investments at December 31 and March 31, 2000 (dollars in
thousands).
December 31, March 31,
2000 2000
---- ----
Average fixed interest rate 5.7% 6.0%
======= =======
Amortized cost $30,421 $36,644
======= =======
Fair value $30,364 $36,027
======= =======
Contractual maturity dates:
Less than 1 year $ 2,463 $ 3,500
1 to 5 years 27,901 32,527
------- -------
$30,364 $36,027
======= =======
Pursuant to the Asset Purchase Agreement, the Company received as partial
consideration for the sale of UltraRF, 1,815,402 shares of common stock of
Cree. In January 2001, the Company sold 191,094 shares, which were held in
escrow for approximately $6,309,000 and realized a loss of approximately
$481,000 from the sale of these securities. In addition, the Company entered
into various option arrangements, expiring from July 2001 to October 2001, to
hedge one million shares of the remaining 1,624,308 shares of Cree common stock
on hand. As a result, the Company is able to realize an average of $25.25 per
share for the one million hedged shares if the share price of Cree is lower
than this when the options expire. If the Cree stock price exceeds an average
of $41.68 when the options expire, the Company may sell its hedged shares at
this price or settle the options for a cash amount equal to the difference
between the Cree stock price and the option price. Until the options expire,
the Company will be restricted from disposing of the one million shares. The
Company is currently holding the remaining 624,308 shares of Cree common stock,
which are not subject to such option arrangements. A 20% adverse change in the
value of Cree common stock as of December 31, 2000, assuming the hedging had
not been in place, would result in an approximate $12.9 million decrease in the
fair value of the Company's available for sale securities.
28
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. On December 4, 2000, the state court approved
the settlement and dismissed the state action. The terms of the settlement
will not have a material adverse effect on the Company's financial position or
results from operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------ -----------
2.1++ Asset Purchase Agreement dated as of November 20, 2000 among
Cree, Inc., a North Carolina corporation, Zoltar Acquisition,
Inc., a North Carolina corporation and Spectrian Corporation,
a Delaware corporation.
10.48 Purchase and Supply Agreement dated as of December 29, 2000
by and between Spectrian Corporation, a Delaware corporation
and Zoltar Acquisition, Inc., a North Carolina corporation.
10.49 Sublease Agreement dated as of December 29, 2000 between
Zoltar Acquisition, Inc., a North Carolina corporation, and
Spectrian Corporation, a Delaware corporation.
10.50 Payment and Performance Guaranty of Sublease dated December
29, 2000, by Cree, Inc., a North Carolina corporation in
favor of Spectrian Corporation, a California corporation.
10.51 Standard Industrial/Commercial Net Lease dated December 12,
2000 by and between CSS Properties II, LLC and Spectrian
Corporation.
_____________________________
++ Incorporated by reference to Exhibit 2.1 of Current Report on
Form 8-K filed by the Registrant on January 16, 2001.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K
-------------------
with the Securities and Exchange Commission on December 5, 2000
regarding the Company's entering into an Asset Purchase Agreement with
Cree, Inc. and Zoltar Acquisition, Inc. for the sale of the Company's
UltraRF division.
29
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: February 14, 2001 By: /s/ MICHAEL D. ANGEL
----------------------------
Michael D. Angel
Executive Vice President,
Finance and Administration,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial and Accounting Officer)
30
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
2.1++ Asset Purchase Agreement dated as of November 20, 2000
among Cree, Inc., a North Carolina corporation, Zoltar
Acquisition, Inc., a North Carolina corporation and
Spectrian Corporation, a Delaware corporation. __
10.48 Purchase and Supply Agreement dated as of December 29,
2000 by and between Spectrian Corporation, a Delaware
corporation and Zoltar Acquisition, Inc., a North
Carolina corporation. __
10.49 Sublease Agreement dated as of December 29, 2000 between
Zoltar Acquisition, Inc., a North Carolina corporation,
and Spectrian Corporation, a Delaware corporation. __
10.50 Payment and Performance Guaranty of Sublease dated
December 29, 2000, by Cree, Inc., a North Carolina
corporation in favor of Spectrian Corporation, a
California corporation. __
10.51 Standard Industrial/Commercial Net Lease dated December
12, 2000 by and between CSS Properties II, LLC and
Spectrian Corporation. __
_____________________________
++ Incorporated by reference to Exhibit 2.1 of Current
Report on Form 8-K filed by the Registrant on January
16, 2001.
31