-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EorLA7zPTLH7+ng+6EYYDOMrBgZohjGUf3Cx/JgE7b9jYCP+leTIlDVUfKuAhdsw 8knUTDdCyfIXIHliafzbhw== 0000950005-99-000091.txt : 19990210 0000950005-99-000091.hdr.sgml : 19990210 ACCESSION NUMBER: 0000950005-99-000091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRIAN CORP /CA/ CENTRAL INDEX KEY: 0000925054 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770023003 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24360 FILM NUMBER: 99526201 BUSINESS ADDRESS: STREET 1: 350 WEST JAVA DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087455400 MAIL ADDRESS: STREET 1: 350 WEST JAVA DRIVE STREET 2: C/O CORPORATE CONTROLLER CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 FORM 10-Q ================================================================================ 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 period ended December 27, 1998 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 incorporation or organization) Identification Number) 350 West Java Drive Sunnyvale, California 94089 (Address of principal executive offices) 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 December 27, 1998 there were 10,343,433 shares of the Registrant's Common Stock outstanding. ================================================================================ SPECTRIAN CORPORATION Form 10-Q INDEX Page No. Cover Page 1 Index 2 PART I - Financial Information ITEM 1 - Condensed consolidated financial statements Condensed consolidated balance sheets - December 27, 1998 and March 31, 1998 3 Condensed consolidated statements of operations - three months and nine months ended December 27, 1998 4 and December 28, 1997 Condensed consolidated statements of cash flows - nine months ended December 27, 1998 and December 28, 1997 5 Notes to condensed consolidated financial statements 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk PART II - Other Information ITEM 1 - Legal Proceedings 20 ITEM 6 - Exhibits and Reports on Form 8-K 21 Signatures 22 2 SPECTRIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (unaudited)
December 27, March 31, 1998 1998 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 21,364 $ 31,460 Short-term investments 49,593 68,128 Accounts receivable, less allowance for doubtful accounts of $385 and $376, respectively 19,008 21,123 Inventories 16,503 15,362 Prepaid expenses and other current assets 4,793 6,202 ------------- ------------- Total current assets 111,261 142,275 Property and equipment, net 31,529 32,776 ------------- ------------- $ 142,790 $ 175,051 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current portion of debt obligations $ 1,553 $ 1,360 Accounts payable 8,241 10,456 Accrued liabilities 9,309 12,981 ------------- ------------- Total current liabilities 19,103 24,797 Debt obligations, net of current portion 5,020 5,912 ------------- ------------- Total liabilities 24,123 30,709 ------------- ------------- Stockholders' equity: Common stock, $0.001 par value, 20,000,000 shares authorized; 11,019,333 and 10,904,077 shares issued, respectively; 10,343,433 and 10,904,077 shares outstanding, respectively. 10 10 Additional paid-in capital 148,844 146,827 Treasury stock, 675,900 shares of common stock (9,709) -- Deferred compensation expense -- (609) Accumulated other comprehensive income 261 121 Accumulated deficit (20,739) (2,007) ------------- ------------- Total stockholders' equity 118,667 144,342 ------------- ------------- $ 142,790 $ 175,051 ============= ============= See accompanying notes to condensed consolidated financial statements.
3 SPECTRIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited)
Three months ended Nine months ended ---------------------------- ---------------------------- December 27, December 28, December 27, December 28, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $ 20,723 $ 47,158 $ 78,376 $ 141,165 ------------- ------------- ------------- --------------- Costs and expenses: Cost of sales 21,374 33,702 69,731 100,233 Research and development 7,242 5,074 19,745 13,455 Selling, general and administrative 3,263 3,429 10,890 9,936 ------------- ------------- ------------- --------------- 31,879 42,205 100,366 123,624 ------------- ------------- ------------- --------------- Operating income (loss) (11,156) 4,953 (21,990) 17,541 Interest income, net 862 1,429 3,258 2,006 Other income, net -- -- -- 1,530 ------------- ------------- ------------- --------------- Income (loss) before income taxes (10,294) 6,382 (18,732) 21,077 Income taxes -- -- -- 1,988 ------------- ------------- ------------- --------------- Net income (loss) $ (10,294) $ 6,382 $ (18,732) $ 19,089 ============= ============= ============= =============== Net income (loss) per share Basic $ (0.98) $ 0.59 $ (1.75) $ 2.00 Diluted $ (0.98) $ 0.56 $ (1.75) $ 1.83 Shares used in computing per share amounts: Basic 10,466 10,744 10,702 9,531 Diluted 10,466 11,491 10,702 10,423 See accompanying notes to condensed consolidated financial statements.
4 SPECTRIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Nine months ended --------------------------------- December 27, December 28, 1998 1997 ---- ----- Cash flows from operating activities: Net income (loss) $ (18,732) $ 19,089 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Gain on sale of subsidiary -- (1,530) Depreciation and amortization 10,020 6,913 Loss on disposal of equipment 739 -- Stock compensation expense 1,647 -- Tax benefit associated with stock options -- 1,378 Changes in operating assets and liabilities: Accounts receivable 2,115 (19,281) Inventories (1,141) (4,405) Prepaid expenses and other assets 1,409 760 Accounts payable (2,215) 5,796 Accrued liabilities (3,672) 3,704 -------------- -------------- Net cash provided by (used for) operating activities (9,830) 12,424 -------------- -------------- Cash flows from investing activities: Purchase of short-term investments (57,630) (102,843) Proceeds from sale of short-term investments 76,306 5,048 Purchase of property and equipment (9,535) (11,639) Proceeds from sale of subsidiary -- 4,016 -------------- -------------- Net cash provided by (used for) investing activities 9,141 (105,418) -------------- -------------- Cash flows from financing activities: Repayment of debt and capital lease obligations (698) (1,264) Repurchase of common stock (9,709) -- Proceeds from issuances of common stock, net 1,000 90,735 -------------- -------------- Net cash provided by (used for) financing activities (9,407) 89,471 -------------- -------------- Net decrease in cash and cash equivalents (10,096) (3,523) Cash and cash equivalents, beginning of period 31,460 6,240 ============== ============== Cash and cash equivalents, end of period $ 21,364 $ 2,717 ============== ============== See accompanying notes to condensed consolidated financial statements.
5 SPECTRIAN CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Basis of Presentation The accompanying financial statements 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 the 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 set forth on pages F-1 through F-15 of the Company's Annual Report on Form 10-K for fiscal year ended March 31, 1998. 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, 1999, or any other future period. NOTE 2: Balance Sheet Components Balance sheet components are as follows: December 27, March 31, 1998 1998 ---------------- ---------------- (In thousands) Inventories: Raw materials $ 7,709 $ 7,395 Work in progress 6,764 5,538 Finished goods 2,030 2,429 ---------------- ---------------- $16,503 $15,362 ================ ================ Property and equipment Machinery and equipment $57,942 $51,091 Land, building and improvements 2,750 2,829 Furniture and fixtures 1,420 1,382 Leasehold improvements 1,873 1,633 ---------------- ---------------- 63,985 56,935 Less accumulated depreciation and amortization 32,456 24,159 ---------------- ---------------- $31,529 $32,776 ================ ================ Accrued liabilities: Employee compensation and benefits $ 2,737 $ 2,958 Warranty 4,681 7,326 Other accrued liabilities 1,891 2,697 ---------------- ---------------- $ 9,309 $12,981 ================ ================ 6 NOTE 3: Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The Company has not yet determined the impact of SFAS No. 133 on its financial condition or results of operations. NOTE 4: Short Term Investments The Company has classified its investments in certain debt securities as "available-for-sale." Such investments are recorded at fair market value, with unrealized gains and losses reported as a component of other comprehensive income. Interest income is recorded using an effective interest rate, with the associated premium or discount amortized to interest income. As of December 27, and March 31, 1998, cash equivalents and short-term investments classified as available-for-sale securities were as follows: December 27, March 31, 1998 1998 ---------------- -------------- (In thousands) Commercial paper $ 55,389 $ 63,341 U.S. government securities 12,124 28,158 ---------------- -------------- $ 67,513 $ 91,499 ================ ============== As of December 27, and March 31, 1998 the estimated fair value of each investment approximated the amortized cost and, therefore, there were no significant unrealized gains or losses. At December 27, and March 31, 1998 all securities held were due in less than one year and were classified as follows: December 27, March 31, 1998 1998 ---------------- -------------- (In thousands) Cash equivalents $ 17,921 $ 23,371 Short-term investments 47,592 68,128 ---------------- -------------- $ 67,513 $ 91,499 ================ ============== NOTE 5: Earnings Per Share Computation Basic earnings per share ("EPS") excludes potentially dilutive securities and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes potentially dilutive securities and is computed by dividing net income available to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the three months and nine months ended December 27, 1998, common equivalent shares were not included for the calculation of diluted EPS as they were considered antidilutive due to the net loss the Company experienced in those periods. 7 A reconciliation of basic and diluted earnings per share calculations follows: (In thousands except per share data)
Three months ended Three months ended December 27, 1998 December 28, 1997 ---------------------------------- ---------------------------------- Net Per Share Net Per Share Loss Shares Amount Income Shares Amount ----------- ---------- ----------- ------------ --------- ------------ Basic $(10,294) 10,466 $(0.98) $ 6,382 10,744 $ 0.59 Effect of dilutive securities -- -- -- -- 747 -- ----------- ---------- ----------- ------------ --------- ------------ Diluted $(10,294) 10,466 $(0.98) $ 6,382 11,491 $ 0.56 =========== ========== =========== =========== ========= ============ Nine months ended Nine months ended December 27, 1998 December 28, 1997 ---------------------------------- ---------------------------------- Net Per Share Net Per Share Loss Shares Amount Income Shares Amount ----------- ---------- ----------- ------------ --------- ------------ Basic $(18,732) 10,702 $(1.75) $ 19,089 9,531 $ 2.00 Effect of dilutive securities -- -- -- -- 892 -- ----------- ---------- ----------- ------------ --------- ------------ Diluted $(18,732) 10,702 $(1.75) $ 19,089 10,423 $ 1.83 =========== ========== =========== =========== ========= ============
NOTE 6: Legal Proceedings Since December 23, 1997, a number of complaints have been filed against the Company and certain of its officers in the Federal Court for the Northern District of California that allege violations of the federal securities laws. Similar complaints have been filed in California state court that allege violations of California state securities laws and California common law. The complaints have been consolidated in the federal and state courts, respectively. The plaintiffs in both the federal and state lawsuits purport to represent a class of persons who purchased the Company's securities during the period of July 17, 1997 through October 23, 1997. The complaints allege that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. The Company believes that the allegations are completely without merit and will vigorously defend itself. 8 SPECTRIAN CORPORATION AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this "Management Discussion and Analysis of Financial Condition and Results of Operations" are forward looking statements. These forward looking statements include, but are not limited to: the statements in the first paragraph of "Overview" regarding outsourcing and in the second paragraph of "Overview" regarding customer orders and the impact of currency fluctuations on future revenues; the statements under "Revenues" regarding future revenue growth; the statements in the last paragraph under "Liquidity and Capital Resources" regarding the anticipated spending for capital additions in fiscal 1999 and beyond, and the sufficiency of the Company's available resources to meet working capital and capital expenditure requirements; and the statements in "Factors Affecting Future Operating Results." The forward looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward looking statements, including those risks and uncertainties set forth below under "Factors Affecting Future Operating Results." Overview The Company designs, manufactures and markets highly linear single carrier and multicarrier radio frequency ("RF") power amplifiers that support a broad range of worldwide analog and digital wireless transmissions standards, including AMPS, TDMA, CDMA and GSM. The Company, founded in 1984 to perform design and engineering services, first entered the commercial amplifier market in 1988 and shipped its first cellular power amplifiers in 1990. The Company's revenues are now derived primarily from sales to a limited number of original equipment manufacturers ("OEMs") in the wireless infrastructure equipment market, in particular Northern Telecom Limited ("Northern Telecom"). Prior to the third quarter of fiscal 1998, the Company pursued a strategy of vertical integration in both its design and manufacturing processes. During the third quarter of fiscal 1998 the Company began outsourcing some of its higher volume printed circuit board sub-assemblies on a turnkey basis. During the second quarter of fiscal 1999, the Company made a decision to outsource its higher volume single channel power amplifiers on a turnkey basis from an offshore manufacturer and shipped its first outsourced amplifier units in the third quarter of fiscal 1999. The Company anticipates that this change in manufacturing strategy will eventually have a favorable effect on its variable versus fixed manufacturing cost ratio. However, there can be no guarantee that the shift to offshore turnkey manufacturing will have a favorable effect on the Company's gross margins. Even if the Company successfully outsources some of its manufacturing operations, the Company will continue to operate its own 4-inch wafer fabrication facility and will incur a high level of fixed costs connected to that facility. As a result, the Company will continue to depend upon substantial manufacturing volume to generate sufficient revenue to achieve profitability. In the first three quarters of fiscal 1999 and the fourth quarter of fiscal 1998, product orders fell sharply resulting in substantial losses in those quarters. There can be no assurance that the Company will not experience such fluctuations in the future. For example, the significant reduction in product revenue the Company experienced in the first three quarters of fiscal 1999 and the fourth quarter of fiscal 1998 reflects the impact of fluctuations in demand due to the softening demand in the TDMA and GSM markets and delays in build-out of the Korean PCS systems due to the unstable Asian financial markets and general economic conditions in Korea and other countries. Based on these factors, the Company anticipates lower product revenues over the next two to three quarters as compared to the average revenues realized during the first three quarters of fiscal 1998 and the Company anticipates that revenues for fiscal 1999 and possibly fiscal 2000 will be lower than revenues for fiscal 1998. During the nine months ended December 27, 1998, Northern Telecom, Nortel Matra Communications ("Nortel Matra"), an affiliate of Northern Telecom, QUALCOMM Incorporated ("QUALCOMM"), and LG Information and Communications Limited ("LGIC") accounted for approximately 64%, 13%, 10% and 10% of revenues, respectively. During fiscal 1998, Northern Telecom, Nortel Matra and LGIC accounted for approximately 57%, 22% and 14% of revenues, respectively. The Company's business, financial condition and results of operations 9 have been materially adversely affected in the past by anticipated orders failing to materialize and by deferrals or cancellations of orders as a result of changes in OEM requirements. If the Company were to lose Northern Telecom or any other major OEM customer, or if orders by Northern Telecom or any other major OEM customer were to otherwise materially decrease either in unit quantity or in price, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the recent financial market turmoil and economic downturn in Korea may have a material adverse effect on the Company's sales of its products to LGIC, an OEM based in Korea. In addition, because the Company's products are priced in U.S. dollars, the currency instability in the Korean and other financial markets may have the effect of making the Company's products more expensive to LGIC than those of other manufacturers whose products are priced in one of the affected currencies, and, therefore, LGIC or other OEMs may reduce future purchases of the Company's products. The Company's vertical integration strategy in its semiconductor operations entails a number of risks, including a high level of fixed and variable costs, the management of complex processes, dependence on a single source of supply and a strict regulatory environment. During periods of low demand, high fixed wafer fabrication costs are likely to have a material adverse effect on the Company's operations. In addition, the Company's strategy of frequently introducing and rapidly expanding the manufacture of new products to meet evolving OEM customer and wireless service provider needs has caused the Company to experience high materials and manufacturing costs, including high scrap and material waste, significant material obsolescence, labor inefficiencies, inefficient material procurement and an inability to realize economies of scale. The market for the Company's products is becoming increasingly competitive. The Company sells some of its power amplifier products in South Korea, as well as directly to cellular service providers in other countries, where its competitors are already established as suppliers. In addition, the Company competes with at least one other independent amplifier manufacturer for some of the product business received from Northern Telecom. This competition has resulted in, and will continue to result in, reduced average selling prices for the Company's products, which accordingly will negatively impact gross margins. Results of Operations The following table sets forth for the periods indicated certain statement of operations data of the Company expressed as a percentage of total revenues and gross margin on sales.
Three months ended Nine months ended December 27, December 28, December 27, December 28, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% ----------------------------- ----------------------------- Costs and expenses: Cost of sales 103.1 71.5 89.0 71.0 Research and development 34.9 10.8 25.2 9.5 Selling, general and administrative 15.8 7.2 13.9 7.0 ----------------------------- ----------------------------- Total costs and expenses 153.8 89.5 128.1 87.5 ----------------------------- ----------------------------- Operating income (loss) (53.8) 10.5 (28.1) 12.5 ----------------------------- ----------------------------- Interest income, net 4.1 3.0 4.2 1.4 Other income -- -- -- 1.0 ----------------------------- ----------------------------- Income (loss) before income taxes (49.7) 13.5 (23.9) 14.9 Income taxes -- -- -- 1.4 ----------------------------- ----------------------------- Net income (loss) (49.7)% 13.5% (23.9)% 13.5% ============================= ============================= Gross margin on sales (3.1)% 28.5% 11.0 % 29.0%
Revenues. The Company's revenues decreased by 56% to $20.7 million for the three months ended December 27, 1998 from $47.2 million for the three months ended December 28, 1997. The Company's revenues decreased by 10 44% to $78.4 million for the nine months ended December 27, 1998 from $141.2 million for the nine months ended December 28, 1997. The decrease in revenues for both the three months and nine months ended December 27, 1998 when compared with the same periods of a year ago reflects decreased demand for GSM, TDMA and Korean CDMA PCS products. Cost of Sales. Cost of sales consists primarily of raw materials, RF semiconductor fabrication costs, amplifier assembly and test costs (including turnkey assembly services), overhead and warranty costs. The Company's cost of sales decreased by 37% to $21.4 million for the three months ended December 27, 1998 from $33.7 million for the three months ended December 28, 1997. The Company's cost of sales decreased by 30% to $69.7 million for the nine months ended December 27, 1998 from $100.2 million for the nine months ended December 28, 1997. A gross margin loss on sales of 3.1% was incurred for the three months ended December 27, 1998 as compared to a gross margin profit of 28.5% for the three months ended December 28, 1997. Gross margin profit on sales was 11.0% for the nine months ended December 27, 1998 as compared to 29.0% for the nine months ended December 28, 1997. The decline in gross margin for the three months and nine months ended December 27, 1998 primarily reflect insufficient absorption of fixed costs at the lower shipment volume levels and declining average sales prices. Research and Development. Research and development ("R&D") expenses include the cost of designing, developing or reducing the manufacturing cost of amplifiers and RF semiconductors. The Company's R&D expenses increased by 43% to $7.2 million in the three months ended December 27, 1998 from $5.1 million in the three months ended December 28, 1997. The Company's R&D expenses increased by 46% to $19.7 million in the nine months ended December 27, 1998 from $13.5 million in the nine months ended December 28, 1997. The increase in R&D spending in the three months ended December 27, 1998 reflects higher R&D headcount with its associated expenses, material expenditures for the prototype phase of several new products and increased investment in semiconductor R&D activities. R&D expenses as a percentage of revenues increased to 34.9% in the three months ended December 27, 1998 from 10.8% for the three months ended December 28, 1997, reflecting substantially lower revenue levels and higher absolute dollar spending in the three months ended December 27, 1998. R&D expenses as a percentage of revenues increased to 25.2% in the nine months ended December 27, 1998 from 9.5% for the nine months ended December 28, 1997, also reflecting substantially lower revenue levels and higher absolute dollar spending in the nine months ended December 27, 1998. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses include compensation and benefits for sales, marketing, senior management and administrative personnel, commissions paid to independent sales representatives, professional fees, information systems costs and other expenses. The Company's SG&A expenses decreased by 4.8% to $3.3 million for the three months ended December 27, 1998 from $3.4 million for the three months ended December 28, 1997. The decline in SG&A spending for the three months ended December 27, 1998 was the result of lower outside commissions earned on lower product revenues and was partially offset by increases in depreciation expense and support costs related to upgrading the Company's internal information systems. The Company's SG&A expenses increased to $10.9 million for the nine months ended December 27, 1998 from $9.9 million for the nine months ended December 28, 1997. SG&A expenses as a percentage of revenues increased to 15.7% for the three months ended December 27, 1998 from 7.2% for the three months ended December 28, 1997 and increased to 13.9% for the nine months ended December 27, 1998 from 7.0% for the nine months ended December 28, 1997. The increase of SG&A expenses as a percentage of sales was primarily due to substantially lower revenue levels when compared to the same periods of a year ago. Interest Income, net. Interest income, net for the three months ended December 27, 1998 was $862,000 compared to net interest income of $1.4 million for the three months ended December 28, 1997. The decrease in net interest income for the three months ended December 27, 1998 from the same period of a year ago was the result of lower interest earned due to lower cash balances. Interest income increased to $3.3 million for the nine months ended December 27, 1998 from $2.0 million for the nine months ended December 28, 1997. The increase in net interest income for the nine months ended December 27, 1998 was attributable to interest income earned on substantially higher cash balances and short-term investments as the result of the investment of the proceeds of the Company's August 1997 public offering. 11 Other Income, net. Other income of $1.5 million for the nine months ended December 28, 1997 represented the net gain realized from the cash sale of the Company's wholly owned subsidiary, AMT, to the management group and employees of AMT in April 1997. No other expense or other income was recorded during the nine months ended December 27, 1998. Income Taxes. Due to the losses incurred in the first three quarters of fiscal 1999, the Company did not record an income tax expense for the nine months ended December 27, 1998. Factors Affecting Future Operating Results Customer Concentration. The wireless infrastructure equipment market is dominated by a small number of large original equipment manufacturers ("OEMs"), including Alcatel Network Systems, Inc., LM Ericsson Telephone Company ("Ericsson"), Hyundai Electronics Industries Co., Ltd., LGIC, Lucent Technologies, Inc. ("Lucent"), Motorola Corporation ("Motorola"), NEC America, Inc. ("NEC"), Northern Telecom, Nortel Matra, Nokia OY ("Nokia"), QUALCOMM, Samsung Electronics Co., Ltd., and Siemens AG ("Siemens"). The Company's revenues are derived primarily from sales to a limited number of these OEMs. During the three months ended December 27, 1998, Northern Telecom, Nortel Matra and LGIC accounted for approximately 60%, 17% and 10% of the Company's revenues, respectively. During the nine months ended December 27, 1998, Northern Telecom, Nortel Matra, QUALCOMM and LGIC accounted for 64%, 13%, 10% and 10% of revenues, respectively. Furthermore, a substantial portion of revenues from these customers in the three and nine months ended December 27, 1998 resulted from sales of a limited number of the Company's products. The Company's top five customers accounted for 97% of its sales for the nine months ended December 27, 1998. The Company, Northern Telecom and Nortel Matra have an agreement, renegotiated annually, pursuant to which Northern Telecom and Nortel Matra, a company in which Northern Telecom has an equity investment, commit to purchase a certain volume of their annual power amplifier requirements for specified prices from the Company. There can be no assurance that Northern Telecom and Nortel Matra will continue to enter into contracts with the Company in the future or otherwise agree to purchase the same or similar levels of their power amplifier requirements from the Company or purchase their power amplifier requirements at the same or similar pricing. Any reduction in the level of purchases of the Company's amplifiers by Northern Telecom and Nortel Matra, or any material reduction in pricing without significant offsets, would have a material adverse effect on the Company's business, financial condition and results of operations. Further, if the Company were to lose Northern Telecom or any other major OEM customer, or if orders by Northern Telecom or any other major OEM customer were to otherwise materially decrease, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the recent financial market turmoil and economic downturn in Korea may have a material adverse effect on the Company's sales of its products to LGIC, an OEM based in Korea. Due to the Company's products being priced in U.S. dollars, the currency instability in Korean and other financial markets may have the effect of making the Company's products more expensive to LGIC than those of other manufacturers whose products are priced in one of the affected currencies, and, therefore, LGIC may reduce future purchases of the Company's products. In addition, wireless infrastructure equipment OEMs have come under increasing price pressure from wireless service providers, which in turn has resulted in downward pricing pressure on the Company's products. The Company expects to incur increasing pricing pressures from Northern Telecom and other major OEM customers in future periods which will result in declining average sales prices for the Company's products. Fluctuations in Operating Results. The Company's quarterly and annual results have in the past been, and will continue to be, subject to significant fluctuations due to a number of factors, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the Company's results of operations are likely to vary due to the timing, cancellation, delay or rescheduling of OEM customer orders and shipments; the timing of announcements or introductions of new products by the Company, its competitors or their respective OEM customers; the acceptance of such products by wireless equipment OEMs and their customers; relative variations in manufacturing efficiencies, yields and costs; competitive factors such as the pricing, availability, and demand for competing amplification products; changes in average sales prices and product mix; variations in operating expenses; changes in manufacturing capacity and variations in the utilization of this capacity; shortages of key supplies; the long sales cycles associated with the Company's customer specific products; the timing and level of product and process development costs; and changes in inventory levels; and the relative strength or weakness of international financial markets. Anticipated orders from the Company's OEM 12 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. There can be no assurance that the Company will not experience demand fluctuations in the future, and, in fact, the Company has experienced reductions in product revenues in both the fourth quarter of fiscal 1998 and the first three quarters of fiscal 1999. The Company anticipates lower product revenues over the next two to three quarters when compared to the average revenue realized during the first three quarters of fiscal 1998 as a result of softening demand in the TDMA and GSM markets and delays in Korean PCS demand due to general economic conditions in Korea and other Asian countries. Although the Company recently began to outsource certain of its manufacturing operations, the Company still operates its own 4-inch wafer fabrication facility which contributes a significant amount of fixed costs to its ongoing operating expense levels. The Company establishes its expenditure levels for product development and other operating expenses based on its expected revenues, and these 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 the foregoing factors, it is likely that in some future quarter or quarters the Company's revenues or operating results will not meet the expectations of public stock market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. Internal Amplifier Design and Production Capabilities of OEMs. The Company believes that a majority of the present worldwide production of power amplifiers is captive within the manufacturing operations of wireless equipment OEMs, many of which have chosen not to purchase amplifiers from outside suppliers. The Company also believes that those OEMs that purchase from third party amplifier vendors are sometimes reluctant to switch once committed to a particular merchant vendor. Consequently, the Company may have only limited opportunities to increase revenues by replacing internal OEM amplifier production or displacing other merchant amplifier suppliers. Moreover, given the limited opportunities for merchant RF amplifier suppliers, any decision by an OEM to employ a second source merchant supplier for a product currently purchased from a merchant supplier may reduce the existing merchant supplier's ability to maintain a given level of product sales to such OEM or, possibly, to retain the OEM as a customer due to price competition from the second source merchant supplier. There can be no assurance that the Company's major OEM customers will continue to rely, or increase their reliance, on the Company as an external source of supply for their power amplifiers, or that other wireless equipment OEMs will become customers of the Company. If the major wireless infrastructure equipment suppliers do not purchase or continue to purchase their power amplifiers from merchant suppliers, the Company's business, results of operations and financial condition will be materially adversely affected. For example, the failure of the Company to reach an agreement with Northern Telecom and Nortel Matra that provides for similar levels of purchases could have a material adverse effect on the Company. 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 RF modulation standards requires developing and achieving volume production of a large number of distinct products, the Company's ability to rapidly design and produce individual products for which there is significant OEM customer demand will be a critical determinant of the Company's future success. For example, softening of demand in the TDMA and GSM markets or failure of another modulation standard in which the Company has invested substantial development resources may have a material adverse effect on the Company's business, financial condition and results of operations. No assurance can be given that the Company's product development efforts will be successful, that its new products will meet customer requirements and be accepted or that its OEM customers' product offerings will achieve customer acceptance. If a significant number of development projects do not result in substantial volume production or if technologies or standards supported by the Company's or its customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. Risks Associated with Internal Wafer and Device Fabrication. The Company's operation of its wafer and device fabrication facilities entails a number of risks, including a high level of fixed and variable costs, the management of complex processes, dependence on a single source of supply and a strict regulatory environment. During periods of low demand, high fixed wafer fabrication costs are likely to have a material adverse effect on 13 the Company's business, financial condition and results of operations. The design and fabrication of RF semiconductors is a complex and precise process. Such manufacturing is sensitive to a wide variety of factors, including variations and impurities in the raw materials, quality control of the packages, difficulties in the fabrication process, performance of the manufacturing equipment, defects in the masks used to print circuits on a wafer and the level of contaminants in the manufacturing environment. As a result of these and other factors, semiconductor manufacturing yields from time to time in the past have suffered, and there can be no assurance that the Company will be able to achieve acceptable production yields in the future. In addition, the Company's wafer and device fabrication facility represents a single point of failure in its manufacturing process that would be costly and time consuming to replace if its operation were interrupted. The interruption of wafer fabrication operations or the loss of employees dedicated to the wafer and device fabrication facilities could have a material adverse effect on the Company's business, financial condition and results of operations. Any failure to maintain acceptable wafer and device production levels will have a material adverse effect on the Company's business, financial condition and results of operations. Product Quality, Performance and Reliability. The Company expects that its customers will continue to establish demanding specifications for quality, performance and reliability that must be met by the Company's products. RF semiconductors as complex as those offered by the Company often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments. The Company has from time to time in the past experienced product quality, performance or reliability problems and from time to time has repaired or replaced products that malfunction due to previously undetected defects or that do not meet customers' expectations for performance although the product is within specifications. In addition, multicarrier power amplifiers have a higher probability of malfunction than single carrier power amplifiers because of their greater complexity. There can be no assurance that defects or failures will not occur in the future relating to the Company's product quality, performance and reliability that may have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's use of contract manufacturers to produce certain of its products may increase the difficulty of controlling the quality of the Company's products. Sole or Limited Sources of Materials and Services. The Company currently procures from single sources certain components and services for its products including cast housings, printed circuit boards, specialized RF components and specialized subassemblies. The Company purchases these components and services on a purchase order basis. The Company does not carry significant inventories of these components and does not have any long-term supply contracts with its sole source vendors. Furthermore, the Company began outsourcing some of its higher volume power amplifiers at an offshore independent subcontractor's facility during the third fiscal quarter of 1999. The Company's reliance on its existing sole sources and its migration to an outsource turnkey manufacturing strategy entails certain risks, including reduced control over the price, timely delivery, reliability and quality of the components. If the Company were to change any of its sole source vendors or its turnkey subcontractors, the Company would be required to requalify the components or amplifiers with new vendors or subcontractors, respectively. Any inability of the Company to obtain timely deliveries of its components or its 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 these components, and no assurance can be given that shortages will not occur in the future. In addition, there is no assurance that the Company will be able to retain turnkey subcontractors on a cost effective basis. Declining Average Sales Prices. The Company has experienced, and expects to continue to experience, declining average sales prices for its products. Wireless infrastructure equipment manufacturers have come under increasing price pressure from wireless service providers, which in turn has resulted in downward pricing pressure on the Company's products. In addition, competition among merchant suppliers has increased the downward pricing pressure on the Company's products. Since wireless infrastructure equipment manufacturers frequently negotiate supply arrangements far in advance of delivery dates, the Company often must commit to price reductions for its products before it is aware of how, or if, cost reductions can be obtained. To offset declining average sales prices, the Company believes that it must achieve manufacturing cost reductions. If the Company is unable to achieve such cost reductions, the Company's gross margins will decline, and such decline will have a material adverse effect on the Company's business, financial condition and results of operations. 14 Risks of International Sales. Sales outside of the United States were 91%, 88% and 95% of revenues for the three months ended December 27, 1998, the nine months ended December 27, 1998 and fiscal 1998, respectively. The Company expects that international sales will continue to account for a significant percentage of the Company's total revenues for the foreseeable future. These sales involve a number of inherent risks, including imposition of government controls, currency exchange fluctuations, potential insolvency of international distributors and representatives or customers, reduced protection for intellectual property rights in some countries, impact of recessionary environments in economies outside the United States, political instability and generally longer receivables collection periods, as well as tariffs and other trade barriers. In addition, because substantially all of the Company's foreign sales are denominated in U.S. dollars, increases in the value of the dollar relative to the local currency would increase the price of the Company's products in foreign markets and make the Company's products relatively more expensive and less price competitive than competitors' products that are priced in local currencies. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. The Company anticipates that the recent turmoil in foreign financial markets and the recent deterioration of the underlying economic conditions in certain foreign countries will continue to 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 ("IMF") on those countries receiving the IMF's assistance. In addition, customers in those countries may face reduced access to working capital to fund component purchases, such as the Company's products, due to higher interest rates, reduced bank lending due to contractions in the money supply or the deterioration in the customer's or its bank's financial condition or the inability to access local equity financing. A substantial majority of the Company's products are sold to OEMs who incorporate the Company's products into systems sold and installed to end-user customers. These OEMs are not required by contract and do not typically provide the Company with information regarding the location and identity of their end-user customers, and, therefore, the Company is not able to determine what portion of its product sales have been or future orders will be incorporated into OEM sales to end-users in those countries currently experiencing financial market turmoil and/or deterioration of economic conditions. Furthermore, a large portion of the Company's existing customers and potential new customers are servicing new markets in developing countries that the Company's customers expect will deploy wireless communication networks as an alternative to the construction of a wireline infrastructure. If such countries decline to construct wireless communication systems, or construction of such systems is delayed for any reason, including business and economic conditions and changes in economic stability due to factors such as increased inflation and political turmoil, such delays could have a material adverse effect on the Company's business, results of operations and financial condition. Market for the Company's Products Is Highly Competitive. The wireless communications equipment industry is extremely competitive and is characterized by rapid technological change, new product development and product obsolescence, evolving industry standards and significant price erosion over the life of a product. The ability of the Company to compete successfully and sustain profitability depends in part upon the rates at which wireless equipment OEMs incorporate the Company's products into their systems and the Company captures market share from other merchant suppliers. The Company's major OEM customers, including Northern Telecom, Nortel Matra, LGIC and QUALCOMM, continuously evaluate whether to manufacture their own amplification products or purchase them from outside sources. There can be no assurance that these OEM customers will incorporate the Company's products into their systems or that in general they will continue to rely, or expand their reliance, on external sources of supply for their power amplifiers. These customers and other large manufacturers of wireless communications equipment could also elect to enter the merchant market and compete directly with the Company, and at least one OEM, NEC, has already done so. Such increased competition could materially adversely affect the Company's business, financial condition and results of operations. The Company's principal competitors in the market for wireless amplification products provided by merchant suppliers currently include AML Communications, Amplidyne, Microwave Power Devices, NEC and Powerwave Technologies. No assurance can be given that the Company's competitors will not develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features compared to the Company's products. Uncertain Protection of Intellectual Property. The Company's ability to compete successfully and achieve future revenue growth will depend, in part, on its ability to protect its proprietary technology and operate without 15 infringing the rights of others. The Company has a policy of seeking patents on inventions resulting from its ongoing research and development activities. The Company has been awarded twenty-four United States patents, and has twenty-three United States patent applications pending, including one that has been allowed but not yet formally issued. The Company also has been awarded four foreign patents and has sixteen foreign patent applications pending. There can be no assurance that the Company's pending patent applications will be allowed or that the issued or pending patents will not be challenged or circumvented by competitors. Notwithstanding the Company's active pursuit of patent protection, the Company believes that the success of its business depends more on the collective value of its patents, specifications, computer aided design and modeling tools, technical processes and employee expertise. The Company generally enters into confidentiality and nondisclosure agreements with its employees, suppliers, OEM customers, and potential customers and limits access to and distribution of its proprietary technology. However, there can be no assurance that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, or that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors. The failure of the Company to protect its proprietary technology could have a material adverse effect on its business, financial condition and results of operations. 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 such 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 recent deregulation of international communications industries along with recent radio frequency spectrum allocations made by the FCC have increased the potential demand for the Company's products by providing users of those products with opportunities to establish new wireless personal communications services, there can be no assurance that the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded personal communications services will continue or that other future regulatory changes will have a positive impact on the Company. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such 16 products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused, and may in the future cause, the cancellation, postponement or rescheduling of the installation of communications systems by the Company's OEM customers. These delays have had in the past, and in the future may have, a material adverse effect on the sale of products by the Company to such OEM customers. Environmental Regulations. The Company is subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, financial condition and results of operations. Year 2000 Compliance. Many installed computer programs were written using a two digit date field rather than a four digit date field to define the applicable year. Such computer programs utilizing a two digit date field may recognize a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). The Year 2000 Issue could potentially result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in other similar normal business activities. The Company is currently taking steps to address the Year 2000 Issue in the following three areas: 1) the Company's internal systems, 2) the Company's products and 3) the Company's suppliers. The Company installed a new enterprise wide computer software system in July 1998 that is Year 2000 compliant and which the Company believes will increase operational and financial efficiencies and information analysis. The Company also initiated a project in September 1998 to assess the extent of the Year 2000 Issue in the remaining business systems and in the embedded systems used in its product development and manufacturing operations. Until very recently the Company's products did not contain embedded systems to which Year 2000 compliance would be necessary. With the release of some of the Company's latest products this situation has changed and date-dependency may exist. However, all of the new products are being manufactured using only hardware, software, or firmware that is currently Year 2000 compliant. In addition, certain of the materials and supplies critical to production and delivery of the Company's products are furnished by a limited number of suppliers, and in some cases a sole supplier. Part of the Company's Year 2000 Issue assessment project will identify key suppliers and assess their Year 2000 vulnerability and readiness. At this time, the Company estimates that the costs of the Year 2000 Issue assessment and required remedial work will be less than $400,000 in total. Completion of the assessment is planned for February 1999 and any necessary remedial work is planned to be completed by the end of September 1999. The Company believes that failure to adequately complete all remedial work necessary to resolve the Year 2000 Issue could have a material impact on operating expenses, but that the effect on revenues would not be material. The most likely effect of failures related to the Year 2000 Issue would be: 1) Business systems--Overtime work required of Company employees and the temporary use of outside resources, to repair failed software and process transactions manually until repairs are completed. 2) Embedded systems--Overtime work required of Company employees to shift work from machines and processes with failures to machines that continue to operate properly, and the temporary use of outside resources to repair failed processors. Also, there could be delays in product delivery where a product is dependent on a single production line. 3) Company products--Overtime work required of Company employees to deliver corrections to any new or existing products. The Company believes these failures to be unlikely, and has made no estimate of the potential costs, but plans to do so during February 1999. Periodic updates regarding the Year 2000 status are provided to both the Company's 17 executive staff and the Audit Committee of the Board of Directors. The Company also recognizes the need for contingency planning, and expects to have such plans in place by September 1999. These plans could include stockpiling of components or semi-finished products to avoid product shipment delays Dependence on Key Personnel. The Company's ability to manage any future growth effectively will require attracting, training, motivating, managing and retaining new employees successfully as well as retaining the continued service of its key technical, marketing and management personnel. Although the Company has employment contracts with several of its executive officers, these agreements do not obligate such individuals to remain in the employment of the Company. The Company does not maintain key person life insurance on any of its key technical personnel. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company. 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 operating results, announcements of technological innovations, new customer contracts or new products by the Company or its competitors, announcements by the Company's customers regarding their business or prospects, changes in analysts' expectations, governmental regulatory action, developments with respect to patents or proprietary rights, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of the Company's Common Stock fluctuated substantially during fiscal 1998, from a low of $10.75 on April 1, 1997 to a high of $66.375 on October 1, 1997. During the first nine months of fiscal 1999, the Company's stock fluctuated from a high of $19.00 in April 1998 to a low of $8.00 in October 1998. As of December 27, 1998, the last reported sale price of the Common Stock as reported on the Nasdaq National Market was $13.875. Pending Litigation. Since December 23, 1997, a number of complaints have been filed against the Company and certain of its officers in the Federal Court for the Northern District of California that allege violations of the federal securities laws. Similar complaints have been filed in California state court that allege violations of California state securities laws and California common law. The complaints have been consolidated in the federal and state courts, respectively. The plaintiffs in both the federal and state lawsuits purport to represent a class of persons who purchased the Company's securities during the period of July 17, 1997 through October 23, 1997. The complaints allege that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. The Company believes that the allegations are completely without merit and will vigorously defend itself. Certain provisions of the Company's Certificate of Incorporation and indemnification agreements between the Company and its officers require the Company to advance to such officers ongoing legal expenses of defending the suits and may require the Company to indemnify them against judgments rendered on certain claims. The Company expects to incur significant legal expenses on its behalf and on behalf of such officers in connection with this litigation. In addition, defending this litigation has resulted, and will likely continue to result, in the diversion of management's attention from the day to day operations of the Company's business. Although the Company does not believe that it or any of its officers has engaged in any wrongdoing, there can be no assurance that this stockholder litigation will be resolved in the Company's favor. An adverse result, settlement or prolonged litigation could have a material adverse effect on the Company's business, financial condition or results of operations. Shareholder Rights Plan; Issuance of Preferred Stock. The Board of Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the "Rights Plan"). Pursuant to the Rights Plan, the Board declared a dividend of one Preferred Stock Purchase Right per share of Common Stock (the "Rights") and each such Right has an exercise price of $126.00. The Rights become exercisable upon the occurrence of certain events, including the announcement of a tender offer or exchange offer for the Company's Common Stock or the acquisition of a specified percentage of the Company's Common Stock by a third party. The exercise of the Rights could have the effect of delaying, deferring or preventing a change in control of the Company, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Board of Directors has the authority to issue up to 5,000,000 shares of undesignated Preferred Stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by 18 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. Liquidity and Capital Resources The Company has financed its growth through its initial public offering in August 1994, a public equity offering in August 1997, private sales of equity securities, capital equipment leases, bank lines of credit and cash flows from operations. Cash used by operations was $9.8 million for the nine months ended December 27, 1998 while cash provided by operations in the corresponding period of fiscal 1998 was $12.4 million. Cash flow from operations for the nine months ended December 27, 1998 was negatively impacted by the reduced level and timing of shipments and slower collections from the Company's international customers. As of December 27, 1998, the Company had working capital of $92.2 million including $71.0 million in cash, cash equivalents and short-term investments. In addition, the Company has a revolving line of credit of $10.0 million with a bank secured by the majority of the Company's assets. Under the terms of the master agreement governing this credit instrument, the Company is required to maintain certain minimum working capital, net worth, profitability and other specific financial ratios. As of December 27, 1998, the Company was in compliance with all of these financial covenants. There were no borrowings outstanding against this line of credit as of December 27, 1998. In April 1998, the Company announced a repurchase program (the "1998 Repurchase Program") pursuant to which it may acquire up to one million shares of Common Stock in open market purchases. During the nine months ended December 27, 1998, the Company repurchased a total of 675,900 shares on the open market for a total of $9.7 million. In January 1997, the Company borrowed $6.0 million under a term loan secured by certain capital equipment. The loan, which expires in January 2002, requires the payment of monthly principal plus interest and is subject to certain minimum working capital, net worth and other specific financial ratios. The Company was in compliance with these covenants as of December 27, 1998. In March 1997, the Company also secured a $3.2 million real estate loan, which expires in April 2007, for the purchase of a light industrial building. Additions to property and equipment were $9.5 million for the nine months ended December 27, 1998 as compared to $11.6 million for the nine months ended December 28, 1997. Purchases of equipment and other capital assets for the nine months ended December 27, 1998 included the purchase of new management information systems, manufacturing test equipment to support new products and engineering test equipment to support various research and development projects. The Company anticipates spending approximately $10 million over the next twelve months for capital additions primarily to complete its information systems infrastructure upgrades, set up automated test stations for new products and upgrade its engineering test equipment as required for new development projects. Based on the Company's current working capital position and the available line of credit the Company expects to renew, the Company believes that sufficient resources will be available to meet the Company's cash requirements for at least the next twelve months. Cash requirements for periods beyond the next twelve months depend on the Company's profitability, timing and level of capital expenditures, working capital requirements and rate of growth. ITEM 3: Quantitative and Qualitative Disclosures about Market Risk The Company does not engage in any foreign currency hedging transactions and therefore, does not believe it is subject to exchange rate risk. In compliance with the Company's cash investment policy, the Company limits its cash investments in terms of type of financial instrument, concentration limit, credit quality and marketability with the highest priority being preservation of principal. The Company does not consider itself exposed with respect to any material market risk. 19 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings Since December 23, 1997, a number of complaints have been filed against the Company and certain of its officers in the Federal Court for the Northern District of California that allege violations of the federal securities laws. Similar complaints have been filed in California state court that allege violations of California state securities laws and California common law. The complaints have been consolidated in the federal and state courts, respectively. The plaintiffs in both the federal and state lawsuits purport to represent a class of persons who purchased the Company's securities during the period of July 17, 1997 through October 23, 1997. The complaints allege that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. The Company believes that the allegations are completely without merit and will vigorously defend itself. 20 ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule 21 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. Dated: February 9, 1999 SPECTRIAN CORPORATION (Registrant) /S/ BRUCE R. WRIGHT ----------------------------------------------------- Bruce R. Wright Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary Principal Financial and Accounting Officer) INDEX TO EXHIBITS Exhibits Sequentially Numbered Page 27.1 Financial Data Schedule 23 22 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000925054 SPECTRIAN CORP /DE/ 1,000 3-MOS MAR-31-1998 SEP-28-1998 DEC-27-1998 21,364 49,593 19,008 385 16,503 111,261 63,985 32,456 142,790 19,103 5,020 0 0 139,145 (20,478) 142,790 20,723 20,723 31,879 31,879 10,505 0 (862) (10,294) 0 (10,294) 0 0 0 (10,294) (0.98) (0.98)
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