<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-21507
POWERWAVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2723423
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2026 McGaw Avenue
Irvine, California 92614
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (714) 757-0530
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of October 27, 1997, the number of outstanding shares of Common Stock,
par value $.0001 per share, of the Registrant was 17,773,338.
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<PAGE>
POWERWAVE TECHNOLOGIES, INC.
INDEX
Part I. Financial Information
<TABLE>
<CAPTION> Page
----
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets at September 28, 1997 (Unaudited)
and December 29, 1996 3
Consolidated Statements of Income (Unaudited) for the three and nine months ended
September 28, 1997 and September 29, 1996 4
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended
September 28, 1997 and September 29, 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-22
Part II. Other Information
Item 2. Change in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
This Quarterly Report on Form 10-Q includes certain forward-looking statements
as defined within the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those projected or implied. The
realization of such forward-looking statements may be impacted by certain
important factors which are discussed in "Additional Factors That May Affect
Future Results" under Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
2
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 29,
ASSETS: 1997 1996
-------------- -------------
Current Assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 70,133,596 $ 32,386,331
Accounts receivable, net of allowance for doubtful
accounts of $500,590 and $485,368 at September 28,
1997 and December 29, 1996, respectively 9,511,210 3,324,699
Inventories, net 8,345,319 4,707,545
Prepaid expenses and other current assets 823,797 327,816
Deferred tax assets 1,875,572 1,875,572
------------ ------------
Total current assets 90,689,494 42,621,963
Property and equipment 9,311,384 5,211,764
Accumulated depreciation and amortization (2,126,978) (1,011,132)
------------ ------------
Net property and equipment 7,184,406 4,200,632
------------ ------------
Other assets 681,729 109,606
------------ ------------
TOTAL ASSETS $ 98,555,629 $ 46,932,201
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 9,429,862 $ 3,588,885
Accrued expenses and other liabilities 7,967,762 3,878,396
Current portion of long-term debt 369,839 253,747
Income taxes payable 1,906,182 1,658,019
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Total current liabilities 19,673,645 9,379,047
Deferred tax liabilities 189,432 189,432
Other non-current liabilities 148,113 -
Long-term debt 916,511 520,399
------------ ------------
TOTAL LIABILITIES 20,927,701 10,088,878
------------ ------------
Commitments and contingency
Shareholders' Equity:
Preferred Stock, $.0001 par value, 5,000,000 shares
authorized and no shares outstanding - -
Common Stock, $.0001 par value, 40,000,000 shares
authorized, 17,702,527 and 15,862,497 shares issued
and outstanding at September 28, 1997 and December 29, 1996 63,466,310 33,570,573
Retained earnings 26,392,998 15,504,130
Less treasury stock at cost (12,231,380) (12,231,380)
------------ ------------
Total shareholders' equity 77,627,928 36,843,323
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 98,555,629 $ 46,932,201
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $34,348,637 $14,486,996 $81,950,958 $43,594,547
Cost of sales 20,564,797 8,142,386 48,949,665 25,371,134
----------- ----------- ----------- -----------
Gross profit 13,783,840 6,344,610 33,001,293 18,223,413
Operating expenses:
Sales and marketing 2,341,062 1,156,145 6,062,878 3,314,715
Research and development 3,341,570 1,583,607 7,937,823 4,034,140
General and administrative 1,360,628 720,592 3,321,944 2,003,390
----------- ----------- ----------- -----------
Total operating expenses 7,043,260 3,460,344 17,322,645 9,352,245
----------- ----------- ----------- -----------
Operating income 6,740,580 2,884,266 15,678,648 8,871,168
Other income, net 719,838 154,435 1,763,719 333,041
Income before income taxes 7,460,418 3,038,701 17,442,367 9,204,209
Provision for income taxes 2,760,357 1,245,864 6,553,499 3,773,725
----------- ----------- ----------- -----------
Net income $ 4,700,061 $ 1,792,837 $10,888,868 $ 5,430,484
=========== =========== =========== ===========
Net income and pro forma net
income per share $.26 $.12 $.63 $.37
Weighted average and pro forma
weighted average common shares 18,071,665 14,475,481 17,218,415 14,475,481
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
September 28, September 29,
1997 1996
------------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,888,868 $ 5,430,484
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,166,617 246,311
Changes in assets and liabilities:
Accounts receivable (6,186,511) (2,064,078)
Inventories (3,637,774) 229,041
Income tax refund receivable - 609,550
Prepaid expenses and other current assets (495,982) (114,826)
Accounts payable 5,840,979 402,920
Accrued expenses and other liabilities 4,237,479 2,301,711
Compensation costs related to stock options 31,254 -
Other assets (572,123) (101,219)
Income taxes payable 3,778,498 265,363
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Net cash provided by operating activities 15,051,305 7,205,257
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,153,628) (2,872,361)
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Net cash used in investing activities (5,153,628) (2,872,361)
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CASH FLOW FROM FINANCING ACTIVITIES:
(Principal payments) borrowings on long-term debt (332,067) (54,274)
Increase (decrease) in amounts due to
shareholders - (50,000)
Proceeds from sale of assets 1,847,508 -
Issuance of Common Stock 24,895,815 300,000
Proceeds from exercise of stock options 1,438,332 -
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Net cash provided by financing activities 27,849,588 195,726
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 37,747,265 4,528,622
CASH AND CASH EQUIVALENTS, beginning 32,386,331 5,860,785
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CASH AND CASH EQUIVALENTS, ending $70,133,596 $10,389,407
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 72,380 $ 13,751
=========== ===========
Income taxes $ 2,775,000 $ 2,924,000
=========== ===========
NON-CASH ITEMS:
Tax benefit related to stock options $ 3,530,336 $ -
=========== ===========
Acquisition of property through capital leases $ 804,591 $ -
=========== ===========
Preferred dividends payable $ - $ 1,350,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 1997
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit (except for balance sheet information as of December 29,
1996) in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying consolidated financial statements do not
include certain footnotes and financial presentations normally required under
generally accepted accounting principles and, therefore, should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 29,
1996. The accounting policies followed by the Company are set forth in Note 2
of the Notes to Consolidated Financial Statements in the Company's Annual Report
on Form 10-K for the fiscal year ended December 29, 1996.
The results of operations for the three and nine months ended September 28,
1997, are not necessarily indicative of the results to be expected for the
entire fiscal year ended December 28, 1997 (fiscal year 1997). For further
information on additional factors that may affect future results, please refer
to the "Management Discussion and Analysis of Financial Condition and Results of
Operations" under Item 2, the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1996, and the Company's Form S-1 filed with the Securities
and Exchange Commission on July 1, 1997.
Net Income and Pro Forma Net Income Per Share and Shareholders' Equity
Net income and pro forma net income per share amounts are based upon the
weighted average number of common shares and dilutive common equivalent shares
for each period presented and the pro forma conversion of preferred stock into
common stock up to the date of such conversion. Weighted average and pro forma
weighted average common and common equivalent shares include common stock, stock
options using the treasury stock method and the conversion of outstanding shares
of Series A Preferred Stock into shares of common stock. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin Topic 4D, stock options
granted during the twelve months prior to the date of the initial filing of the
Company's Form S-1 Registration Statement relating to the Company's initial
public offering have been included in the calculation of common equivalent
shares using the treasury stock method.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Early adoption of the statement is
not permitted. When adopted, all previously reported earnings per share amounts
must be restated based on the provisions of the new standard. Pro forma basic
and diluted earnings per share calculated in accordance with SFAS No. 128 are
provided below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic earnings per share $ .27 $ .13 $ .65 $ .39
===== ===== ===== =====
Diluted earnings per share $ .26 $ .12 $ .63 $ .37
===== ===== ===== =====
</TABLE>
6
<PAGE>
For the fiscal years beginning after December 28, 1997, the Company will adopt
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information." The Company is
reviewing the impact of such statements on its financial statements.
Stock Option Plans
The following is a summary of stock option transactions under the Company's
stock option plans, including the 1995 Stock Option Plan, the 1996 Stock
Incentive Plan, and the 1996 Director Stock Option Plan, for the nine months
ended September 28, 1997:
<TABLE>
<CAPTION>
Number of
Options
Exercisable
Number of Price per as of
Shares Share September 28, 1997
---------- -------------- ------------------
<S> <C> <C> <C>
Balance at December 29, 1996 1,919,252 $ 2.47-11.50
Granted 269,550 $14.50-40.50
Exercised (439,148) $ 2.47-11.50
Canceled (145,354) $ 2.47-33.00
---------
Balance at September 28, 1997 1,604,300 393,877
========= =======
</TABLE>
Employee Stock Purchase Plan
The first offering period under the Company's Employee Stock Purchase Plan
(the "Purchase Plan") concluded on July 31, 1997, with the purchase of 40,882
shares of the Company's Common Stock purchased under the Purchase Plan. At
September 28, 1997 there were rights to purchase approximately 3,300 shares of
Common Stock outstanding under the Purchase Plan's second offering, which will
conclude on January 31, 1998.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. This discussion may contain forward-
looking statements, the realization of which may be impacted by certain
important factors including, but not limited to, those discussed in "Additional
Factors That May Affect Future Results".
Results of Operations
The following table summarizes the Company's results of operations as a
percentage of net sales for the three and nine months ended September 28, 1997
and September 29, 1996.
<TABLE>
<CAPTION>
Percentage of Total Revenue
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
-------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.9 56.2 59.7 58.2
----- ----- ----- -----
Gross profit 40.1 43.8 40.3 41.8
Operating expenses:
Sales and marketing 6.8 8.0 7.4 7.6
Research and development 9.7 10.9 9.7 9.3
General and administrative 4.0 5.0 4.1 4.6
----- ----- ----- -----
Total operating expenses 20.5 23.9 21.2 21.5
----- ----- ----- -----
Operating income 19.6 19.9 19.1 20.3
Other income, net 2.1 1.1 2.2 0.8
----- ----- ----- -----
Income before income taxes 21.7 21.0 21.3 21.1
Provision for income taxes 8.0 8.6 8.0 8.7
----- ----- ----- -----
Net income 13.7% 12.4% 13.3% 12.4%
===== ===== ===== =====
</TABLE>
Three months ended September 28, 1997 and September 29, 1996
Net Sales
The Company's net sales are derived primarily from the sale of RF power
amplifiers for use in wireless communications networks. Sales increased by
137.1% to $34.3 million for the quarter ended September 28, 1997 from $14.5
million for the quarter ended September 29, 1996. The growth in revenue was
primarily attributable to volume shipments of the Company's new single carrier
PCS amplifier products (which began volume shipments in the second quarter of
fiscal 1997), as well as increased sales of the Company's cellular multi-carrier
amplifiers. The Company's single carrier PCS amplifiers are being utilized in
the deployment of the new PCS networks in South Korea and the Company's cellular
multi-carrier amplifiers are being utilized in the continued deployment of the
digital cellular CDMA system in South Korea, as well as in cellular systems of
operators in the United States and other countries.
For the quarter ended September 28, 1997, cellular multi-carrier amplifiers
(including racks) accounted for approximately 52.5% of revenues or $18.0
million, compared to approximately 83.9% or $12.1 million for the quarter ended
September 29, 1996. PCS products (including racks) accounted for approximately
43.3% of revenues or $14.9 million for the third quarter of 1997, compared to
.6% or $.1 million for the third quarter in 1996. Sales of Land Mobile Radio
("LMR") (previously referred to as Specialized Mobile Radio or "SMR") amplifiers
accounted for approximately 4.2% of revenues or $1.4 million for the quarter
ended September 28, 1997, compared to approximately 9.4% of revenues or $1.4
million for the quarter ended September 29, 1996. There were no sales of air-
to-ground amplifiers for the quarter ended September 28, 1997 compared to
approximately $.9 million or 6.1%
8
<PAGE>
of sales for the quarter ended September 29, 1996. International sales,
primarily to a small number of customers in South Korea, accounted for 87.3% of
revenues for the quarter ended September 28, 1997, compared with 78.7% for the
quarter ended September 29, 1996. See "Additional Factors That May Affect Future
Results - Customer Concentration."
Gross Profit
Cost of sales consists primarily of raw materials, assembly and test labor,
overhead, warranty costs and royalties. Gross profit margins for the third
quarter of fiscal 1997 and 1996 were 40.1% and 43.8%, respectively. The
decrease in gross margins is primarily due to increased shipments of lower
priced single carrier PCS amplifiers which also have lower gross margins. While
the Company continues to strive for manufacturing cost reductions to offset
pricing pressures on its products, there can be no assurance that these cost
reduction efforts will continue to keep pace with price declines. If the
Company is unable to continue to obtain cost reductions, its gross margins and
profitability will be adversely affected. For a discussion of the effects of
declining average sales prices on the Company's business, see "Additional
Factors That May Affect Future Results - Declining Average Sales Prices."
The wireless communications infrastructure 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. Due to these competitive
pressures, the Company expects that the average sales prices of its products
will continue to decrease. The Company has introduced new products at lower
sales prices which has impacted the average sales prices of the Company's
products. Future pricing actions by the Company and its competitors may also
adversely impact the Company's gross profit margins and profitability, which
could also result in decreased liquidity and adversely affect the Company's
business, results of operations and financial condition. For a discussion of the
impact of new products on the Company's business, see "Additional Factors That
May Affect Future Results - Rapid Technological Change; Dependence on New
Products."
Operating Expenses
Sales and marketing expenses consist primarily of sales commissions,
salaries, other expenses for sales and marketing personnel, travel expenses,
reserves for credit losses and trade show expenses. Sales and marketing expenses
increased by 102.5% to $2.3 million for the quarter ended September 28, 1997
from $1.2 million for the quarter ended September 29, 1996. As a percentage of
sales, sales and marketing expenses were 6.8% and 8.0%, respectively. The
increase in actual sales and marketing expenses was primarily attributable to
increases in the sales and marketing staff, sales commissions related to
increased product sales.
Research and development expenses include ongoing amplifier design and
development expenses, as well as those design expenses associated with reducing
the cost and improving the manufacturability of existing amplifiers. Research
and development expenses increased by 111.1% to $3.3 million for the quarter
ended September 28, 1997 from $1.6 million for the quarter ended September 29,
1996. Research and development expenses as a percentage of sales were 9.7% and
10.9%, respectively. The increase in actual research and development expenses
was primarily attributable to increased staffing and associated engineering
costs related to continued new and existing product development, including the
continued development of amplifiers for PCS networks which initially began
during the third quarter of 1996. The Company intends to continue to emphasize
investment in research and development programs in future periods with current
programs covering both PCS and cellular products.
General and administrative expenses consist primarily of salaries and other
expenses for management, finance, facilities maintenance and human resources.
General and administrative expenses increased by 88.8% to $1.4 million for the
quarter ended September 28, 1997, from $.7 million for the quarter ended
September 29, 1996. General and administrative expenses as a percentage of
sales were 4.0% and 5.0%, respectively. The increase in actual general and
administrative expenses was primarily attributable to increased staffing costs
associated with supporting the Company's increased revenues.
9
<PAGE>
Other Income
The Company earned other income, net, of $.7 million in the third quarter
of 1997 compared to $.2 million for the third quarter of 1996. Other income
consists primarily of interest income, net of any interest expense. The increase
in other income is attributable to the Company's increased cash position
maintained during the third quarter of 1997 compared to the cash balances
maintained during the third quarter of 1996. The larger cash balances are due to
the Company's initial public offering of Common Stock which was completed in
December 1996, the secondary Common Stock offering completed in July 1997, as
well as cash flow generated from operations. The larger cash balances were
invested in short-term money market instruments.
Provision for Income Taxes
The Company's effective tax rate was 37.0% and 41.0% for the quarters ended
September 28, 1997 and September 29, 1996, respectively.
Nine months ended September 28, 1997 and September 29, 1996
Net Sales
Sales increased by 88.0% to $82.0 million for the nine months ended
September 28, 1997 from $43.6 million for the nine months ended September 29,
1996. The growth in revenues was primarily attributable to initial sales of
single carrier PCS amplifiers, as well as increased sales of cellular multi-
carrier linear amplifiers, offset by a decrease in sales of LMR amplifiers along
with no sales of air-to-ground amplifiers. The first nine months of fiscal 1997
experienced continued demand for cellular multi-carrier amplifiers by the
Company's South Korean customers as they continued deployment of the digital
cellular CDMA system in South Korea, as well as initial volume shipments of the
Company's single carrier PCS amplifiers for implementation in the new Korean PCS
network. The Company currently expects sales of cellular multi-carrier
amplifiers for deployment in South Korea to begin to decline during 1997 with
full deployment estimated to be completed during 1998.
For the nine months ended September 28, 1997, cellular multi-carrier
amplifiers (including racks) accounted for approximately 58.0% of revenues or
$47.5 million, compared to approximately 75.0% or 32.7 million for the first
nine months of fiscal 1996. The first nine months of 1997 saw an increase in
the demand for PCS single carrier products with initial volume shipments of such
products. PCS products (including racks) accounted for approximately 36.3% of
revenues or $29.8 million for the first nine months of 1997 compared to .2% or
$.1 million for the first nine months in 1996. The Company anticipates that PCS
products will continue to account for a significant percentage of the Company's
net sales. LMR (or SMR) amplifiers accounted for approximately 5.7% or $4.6
million of revenues for the nine months ended September 28, 1997, compared to
approximately 12.8% or $5.6 million of revenues for the nine months ended
September 29, 1996. There were no sales of air-to-ground amplifiers for the
first nine months of 1997 compared to approximately $5.2 million or 12.0% of
sales for the nine months ended September 29, 1996. In January 1997, In-Flight
Phone Corporation, one of the Company's major customers for air-to-ground
amplifiers, filed for Chapter 11 Bankruptcy protection. The Company had
previously fully reserved its accounts receivable exposure to this customer and
does not expect this bankruptcy filing to have any material impact on the
Company's financial condition. International sales, primarily to customers in
South Korea, accounted for 87.5% of revenues for the nine months ended September
28, 1997, compared with 72.5% for the nine months ended September 29, 1996.
Gross Profit
Gross profit margins for the first nine months of fiscal 1997 and 1996 were
40.3% and 41.8% respectively. The decrease in gross margins was primarily
attributable to the introduction and volume shipments of the new single carrier
PCS product line which has lower prices and gross margins. The Company
anticipates that its sales of single carrier PCS amplifiers, which have lower
sales prices and lower gross margins, will continue to account for a significant
portion of revenues which will accordingly impact the Company's total gross
margins. For a discussion of the effects of declining average sales prices on
the Company's business, see "Additional Factors that May Affect Future Results--
Declining Average Sales Prices."
10
<PAGE>
Operating Expenses
Sales and marketing expenses increased by 82.9% to $6.1 million for the
nine months ended September 28, 1997 from $3.3 million for the nine months ended
September 29, 1996. As a percentage of sales, sales and marketing expenses were
7.4% and 7.6%, respectively. The increase in actual sales and marketing expenses
was primarily attributable to increases in the sales and marketing staff and
sales commissions related to increased product sales.
Research and development expenses increased by 96.8% to $7.9 million for
the nine months ended September 28, 1997 from $4.0 million for the nine months
ended September 29, 1996. Research and development expenses as a percentage of
sales were 9.7% and 9.3%, respectively. The increase in research and development
expenses was primarily attributable to increased staffing and associated
engineering costs related to continued new and existing product development,
including the continued development of amplifiers for PCS networks which
initially began during the third quarter of 1996. There was no PCS development
during the first two quarters of 1996. The Company intends to continue to
emphasize investments in research and development programs in future periods
with current programs covering both PCS and cellular products.
General and administrative expenses increased by 65.8% to $3.3 million for
the nine months ended September 28, 1997 from $2.0 million for the nine months
ended September 29, 1996. General and administrative expenses as a percentage of
sales were 4.1% and 4.6%, respectively. The increase in actual general and
administrative expenses was primarily attributable to increased staffing costs
associated with supporting the Company's increased revenues.
Other Income
The Company earned other income of $1.8 million in the first nine months of
1997 compared to $.3 million for the first nine months of 1996. Other income
consists primarily of interest income, net of any interest expense. The
increase in net interest income is attributed to the Company's increased cash
position maintained during the first nine months of 1997 compared to the cash
balances maintained during the first nine months of 1996. The larger cash
balances were due to both the Company's initial public offering of Common Stock
and secondary Common Stock offering, as well as cash flow generated from
operations. The larger cash balances were invested in short-term money market
instruments.
Provision for Income Taxes
The Company's effective tax rate was 37.6% and 41.0% for the nine month
periods ended September 28, 1997 and September 29, 1996, respectively.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through a
combination of cash on hand, cash provided from operations, equipment lease
financings, available borrowings under its bank line of credit and both private
and public equity offerings. As of September 28, 1997, the Company had working
capital of $71.0 million, including $70.1 million in cash and cash equivalents
as compared with working capital of $33.2 million at December 29, 1996. The
increase in cash balances for the first nine months of 1997 compared to the
prior period was primarily attributed to the Company's initial public offering
of Common Stock which was completed in December 1996 and provided the Company
with additional cash of $18.3 million (net of expenses), the sale of the over-
allotment common shares which added an additional $3.9 million in January 1997,
and the secondary offering of Common Stock completed in July 1997 which provided
additional cash of $20.6 million (net of expenses).
Net accounts receivable were approximately $9.5 million at September 28,
1997, compared with $3.3 million at December 29, 1996. This increase in accounts
receivable was primarily due to increased revenues during the third quarter of
1997 when compared to the fourth quarter of 1996. Net inventory increased to
$8.3 million at September 28, 1997, from $4.7 million at December 29, 1996. This
increase is largely attributed to the production of the new single carrier PCS
product line and increased production of multi-carrier cellular amplifiers.
Inventory turns as of September 28, 1997 were 9.9 compared to 8.0 at the end of
fiscal 1996. Accounts payable increased to $9.4 million
11
<PAGE>
at September 28, 1997, from $3.6 million at December 29, 1996. The increase in
accounts payable was primarily due to increased inventory levels, increased
production levels and increased capital spending.
Cash provided by operations was approximately $15.1 million for the nine
months ended September 28, 1997, compared to $7.2 million for the nine months
ended September 29, 1996. Cash provided by financing activities was
approximately $27.8 million for the first nine months of 1997 compared with $.2
million for the first nine months of 1996. The majority of the cash provided by
financing activities for the first nine months of 1997 resulted from the
secondary offering of 1,000,000 shares of Common Stock which provided net
proceeds of $20.6 million. In addition, the sale of 360,000 shares of Common
Stock in January 1997 provided the Company with net proceeds of $3.9 million and
was associated with the Company's December 1996 initial public offering of
Common Stock. During the first nine months of 1997, the Company sold $1.8
million of purchased test equipment to a bank leasing company, which leased the
equipment back to the Company for a three-year period.
Capital expenditures were approximately $5.2 million for the first nine
months 1997 compared with $2.9 million in the first nine months of 1996.
Approximately $.8 million of capital expenditures for the first nine months of
1997 were financed through capital leases. The majority of the capital spending
during the first nine months of 1997 represents spending on electronic test
equipment utilized in both the Company's manufacturing and research and
development areas.
On May 30, 1996, the Company entered into a $5 million unsecured committed
revolving credit agreement which expired on May 31, 1997. On August 21, 1997,
the Company entered into a new $10 million unsecured revolving credit agreement.
The credit agreement contains covenants regarding certain financial ratios and
activities of the Company. The Company is required to pay a commitment fee
equal to .1% per annum on the average daily unused portion of the facility. The
commitment fee is payable quarterly in arrears. The agreement allows the
Company to borrow at the bank's reference rate (8.5% at September 28, 1997) or
the bank's LIBOR rate plus 1.25% per annum, all at the Company's option. The
Company was in compliance with all covenants at September 28, 1997 and no
amounts were outstanding under the facility. The agreement terminates on July
31, 1998.
On July 7, 1997 the Company completed the sale of 3,737,500 shares of
Common Stock (with 1,000,000 shares being sold by the Company and the balance by
selling shareholders), at a price of $22 per share of Common Stock. Net proceeds
received by the Company were approximately $20.6 million.
The Company had cash and cash equivalents of $70.1 million at September 28,
1997, compared with $32.4 million at December 29, 1996. The Company regularly
reviews its cash funding requirements and attempts to meet those requirements
through a combination of cash on hand, cash provided by operations, available
borrowings under any credit facilities, financing through equipment lease
transactions and possible future public or private debt and/or equity offerings.
The Company invests its excess cash in investment grade short-term money market
instruments.
The Company believes that existing cash balances and funds expected to be
generated from operations will provide the Company with sufficient funds to
finance its operations for at least the next 12 months. The Company has
utilized both operating and capital lease financing for certain equipment used
in its manufacturing and research and development operations and expects to
continue to selectively do so in the future. The Company may in the future
require additional funds to support its working capital requirements or for
other purposes, and may seek to raise such additional funds through the sale of
public or private equity and/or debt financings or from other sources. No
assurance can be given that additional financing will be available in the future
or that, if available, such financing will be obtainable on terms favorable to
the Company or its shareholders when the Company may require it.
Additional Factors That May Affect Future Results
Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include worldwide
economic and political conditions, industry specific factors, the Company's
ability to finance its activities and maintain its financial liquidity, the
Company's ability to timely develop and produce commercially
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viable products at competitive prices, the availability and cost of components,
the Company's ability to produce products which meet the quality standards of
both existing and potential new customers, the ability of the Company's products
to operate and be compatible with various OEMs base station equipment, the
Company's ability to manage expense levels, and the Company's ability to
accurately anticipate customer demand.
Customer Concentration
A small number of customers account for a substantial majority of the
Company's net sales. Although the Company is attempting to expand its customer
base, the Company expects that a limited number of customers will continue to
represent a substantial portion of the Company's net sales for the foreseeable
future. The Company believes that its future success depends upon its ability
to broaden its customer base. The Company's three largest customers include, in
alphabetical order, Hyundai Electronics Industries Co., Ltd. ("Hyundai"), LG
Information & Communications Co., Ltd. ("LGIC") and Samsung Electronics Co. Ltd.
("Samsung"). For the nine months ended September 28, 1997, these customers,
each of which accounted for at least 10% of the Company's net sales for such
period, accounted for approximately 86% of the Company's net sales in the
aggregate. For fiscal 1996, these customers accounted for approximately 75% of
the Company's net sales. Hyundai, LGIC and Samsung currently purchase products
primarily for implementation in the South Korean digital cellular telephone
network and the new South Korean digital PCS network which began initial
operation in October 1997. The Company expects that these three customers will
account for a substantial majority of the Company's PCS product sales for the
foreseeable future. In addition, the Company currently believes that the South
Korean digital cellular network is more than 65% completed and that the build-
out phase of this network has begun declining during 1997 with full deployment
estimated to be completed by the end of 1998. The delay, termination or early
completion of the implementation of the South Korean digital cellular or PCS
communications networks would have a material adverse effect on the Company's
business, results of operations and financial condition.
A limited number of large OEMs account for a majority of RF power amplifier
purchasers in the wireless infrastructure market, and the Company's success will
be dependent upon its ability to establish and maintain relationships with these
types of customers. There can be no assurance that a major customer will not
reduce, delay or eliminate its purchases from the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, major customers also have significant
leverage and may attempt to change the terms, including pricing and product
delivery schedules, upon which the Company and such customers do business,
thereby adversely affecting the Company's business, results of operations and
financial condition. Further, one or more of these customers may determine to
manufacture amplifiers internally, thus reducing or eliminating its purchases
from the Company and possibly becoming a direct competitor of the Company. See
"--Internal Amplifier Production Capabilities of OEMs." As a result, the
Company's success will depend upon its ability to expand its customer base and,
in particular, to successfully market its products to OEMs for wireless networks
and have its products chosen over any internally designed or manufactured
products.
The Company currently sells to its major customers under purchase orders
which are usually placed with short-term delivery requirements. As such, while
the Company receives periodic order forecasts from its major customers, such
customers have no obligation to purchase the forecasted amounts and may cancel
orders, change delivery schedules or change the mix of products ordered with
minimal notice. Nonetheless, the Company maintains significant work-in-progress
and raw materials inventory as well as maintaining increased levels of technical
production staff to meet order forecasts. To the extent its major customers
purchase less than the forecasted amounts, the Company will have higher levels
of inventory than otherwise needed, increasing the risk of obsolescence, and the
Company will have increased levels of production staff to support such
forecasted orders. Such higher levels of inventory and increased employee levels
would reduce the Company's liquidity and could have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, in the event the Company's major customers desire to purchase products
in excess of the forecasted amounts, the Company may not have sufficient
inventory or manufacturing capacity to fill such increased orders, which could
have a material adverse effect on the Company's relationships and future
business with its customers.
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Reliance upon South Korean Market and Growth of Wireless Services Market
Three of the Company's customers, Hyundai, LGIC and Samsung, collectively
accounted for approximately 86% of the Company's net sales for the nine months
of fiscal 1997, and approximately 75% of the Company's net sales for fiscal
1996. These customers are expected to continue to account for a substantial
majority of the Company's sales during the remainder of 1997. These customers
supply equipment for implementation in the South Korean digital cellular and PCS
networks. During fiscal 1995, 1996 and the first nine months of 1997, Hyundai,
LGIC and Samsung purchased multi-carrier linear RF power amplifiers for
installation in the build out of the South Korean digital cellular network. The
delay or termination of the continued implementation of the South Korean digital
cellular network would have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company
currently believes that the South Korean digital cellular network is more than
65% completed and that the build-out phase of this network has begun declining
during 1997 with full deployment estimated to be completed by the end of 1998.
Accordingly, the Company's sales directly related to the South Korean digital
cellular network are anticipated to decrease significantly over the same time
period.
In contrast to the South Korean digital cellular network, the build-out of
the South Korean PCS network began in the first quarter of 1997. During the
first nine months of 1997, the Company began shipping in volume PCS single
carrier amplifiers for use in the new PCS network being built in South Korea.
Sales to the Company's Korean customers for the Korean PCS network represented
substantially all of the Company's PCS sales. The delay, termination or early
completion of the infrastructure build-out of the South Korean PCS network would
have a material adverse effect on the Company's business, results of operations
and financial condition. Further, even if this network is developed as
anticipated, there can be no assurance that the Company's PCS products will
achieve market acceptance outside of Korea, or be capable of being manufactured
at competitive prices in sufficient volumes, In the event that the Company's PCS
products are not timely developed or do not gain market acceptance or are not
capable of being manufactured at competitive costs, the Company's business,
results of operations and financial condition would be materially adversely
affected.
Hyundai, LGIC and Samsung also have begun marketing wireless infrastructure
equipment for installation in networks outside of the South Korean market.
There can be no assurance that such customers will be successful in obtaining
new business outside of South Korea or that, if successful, they will continue
to purchase amplifiers from the Company. Any significant decrease in the
Company's sale of amplifiers to these customers, without an offsetting increase
in sales to other customers, would have a material adverse effect on the
Company's business, results of operations and financial condition.
A substantial majority of the Company's revenues are derived from the sale
of RF power amplifiers for wireless communications networks, and the future
success of the Company depends to a considerable extent upon the continued
growth and increased availability of cellular and other wireless communications
services, including PCS, in the United States and internationally. There can be
no assurance that either subscriber use or the implementation of wireless
communications services will continue to grow, or that such factors will create
demand for the Company's products. The Company believes that continued growth in
the use of wireless communications services depends on significant reductions in
infrastructure capital equipment cost per subscriber and corresponding
reductions in wireless service pricing. While in the United States the Federal
Communications Commission ("FCC") has adopted regulations requiring local phone
companies to reduce the rates charged to cellular carriers for connection to
their wireline networks, it is anticipated that wireless service rates will
remain higher than rates charged by traditional wireline companies. The growth
in the implementation of wireless communications services is dependent upon both
developed countries, such as the United States, allowing continued deployment of
new networks, and less developed foreign countries deploying wireless
communications networks as opposed to constructing wireline infrastructures.
Foreign countries or local government authorities may decline to construct
wireless communications systems, place moratoriums on building base stations or
terminate or delay construction of such systems for a variety of reasons,
including environmental issues, political unrest, economic downturns, the
availability of favorable pricing for other communications services, the
availability and cost of related equipment or other delays in the implementation
of these systems, in which event demand for the Company's products will be
similarly reduced or delayed, which would materially adversely affect the
Company's business, results of operations and financial condition. See "--Risks
of Doing Business in International Markets."
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Risks of Doing Business in International Markets
For the fiscal years 1995, 1996 and the first nine months of fiscal 1997,
international revenues accounted for approximately 67%, 77% and 88%,
respectively, of the Company's net sales. The Company expects that
international revenues will continue to account for a significant percentage of
the Company's net sales for the foreseeable future. As a result, the Company is
subject to various risks, including political and economic instability, the
difficulty of administering business globally, compliance with multiple and
potentially conflicting regulatory requirements such as export requirements,
tariffs and other barriers, differences in intellectual property protections,
health and safety requirements, difficulties in staffing and managing foreign
operations, longer accounts receivable cycles, currency fluctuations,
restrictions against the repatriation of earnings, export control restrictions,
overlapping or differing tax structures, political and economic instability and
general trade restrictions. If any of these risks materializes, it could have a
material adverse effect on the Company's business, results of operations and
financial condition. In particular, 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
communications 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 are delayed for any of a variety of
reasons, 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. In recent years, a substantial majority
of the Company's net sales resulted from the sale of products to a small number
of companies in South Korea, where future sales may be dependent upon continuing
favorable business and economic conditions, as well as trade relations with the
United States and a lack of political conflicts with North Korea. During the
last month, economic conditions have deteriorated throughout the Asia-Pacific
region, causing reductions in local exchange rates throughout the region and
general financial market uncertainty. In addition, during the last six months,
there have been press reports of deteriorating living conditions within North
Korea, which could lead to civil unrest possibly resulting in potential military
conflicts with South Korea. There have also been press reports of military
conflicts between North and South Korea, which could potentially escalate into a
large scale conflict. Any conflict, either political or military, between North
and South Korea could have a material adverse impact on the Company's business,
results of operations and financial condition. Any significant change in the
South Korean economy or the deterioration of United States trade relations or
the economic or political stability of other foreign locations in which the
Company sells its products would have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's foreign sales are generally invoiced in U.S. dollars.
Accordingly, the Company does not currently engage in foreign currency hedging
transactions. However, as the Company continues to expand its international
operations, the Company may be paid in foreign currencies and exposure to losses
in foreign currency transactions may increase. The Company may choose to limit
such exposure by the purchase of forward foreign exchange contracts or similar
hedging strategies. There can be no assurance that a currency hedging strategy
would be successful in avoiding exchange-related losses. In addition, if the
relative value of the U.S. dollar in comparison to the currency of the Company's
foreign customers should increase, the resulting effective price increase of the
Company's products to such foreign customers could result in decreased sales
which could have a material adverse impact on the Company's business, results of
operations and financial condition.
Fluctuations in Quarterly Results
The Company experiences, and expects to continue to experience, significant
fluctuations in sales and operating results from quarter to quarter. Quarterly
results fluctuate due to a number of factors, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In particular, the Company's quarterly results of operations can
vary due to the timing, cancellation, or rescheduling of customer orders and
shipments; variations in manufacturing capacities, efficiencies and costs; the
availability and cost of components; capacity and production constraints
associated with single source component suppliers; the timing, availability and
sale of new products by the Company; product failures and associated in-field
service support costs; changes in the mix of products having differing gross
margins; warranty expenses; changes in average sales prices; long sales cycles
associated with the Company's products; economic slowdowns in the Company's
customers' operating regions; and variations in product development and other
operating expenses. The Company's quarterly
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<PAGE>
revenues are also affected by volume discounts given to certain customers for
large volume purchases over a given period of time. In addition, the Company's
quarterly results of operations are influenced by competitive factors, including
pricing, availability and demand for the Company's and competing amplifier
products. A large portion of the Company's expenses are fixed and difficult to
reduce in a short period of time. If net sales do not meet the Company's
expectations, the Company's fixed expenses would exacerbate the effect of such
net sales shortfall. Furthermore, announcements by the Company or its
competitors regarding new products and technologies could cause customers to
defer purchases of the Company's products. In addition, while the Company
receives periodic order forecasts from its major customers, such customers have
no binding obligation to purchase the forecasted amounts. See "--Customer
Concentration." Order deferrals and cancellations by the Company's customers,
declining average sales prices, changes in the mix of products sold, delays in
the Company's introduction of new products and longer than anticipated sales
cycles for the Company's products have in the past adversely affected the
Company's quarterly results of operations. There can be no assurance that the
Company's quarterly results of operations will not be similarly adversely
affected in the future.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance.
There can be no assurance that the Company will maintain its current
profitability in the future or that future revenues and operating results will
not be below the expectations of public market analysts and investors. In
either case, the price of the Company's Common Stock could be materially
adversely affected. See "--Possible Volatility of Stock Price."
Declining Average Sales Prices
The Company has experienced, and expects to continue to experience,
declining average sales prices for its products. Wireless infrastructure OEMs
have come under increasing price pressure from cellular service providers and
PCS service providers, which in turn has resulted in downward pricing pressure
on the Company's products. In addition, competition among third-party suppliers
has increased the downward pricing pressure on the Company's products. Since
wireless infrastructure OEMs frequently negotiate supply arrangements far in
advance of delivery dates, the Company must often commit to price reductions for
its products before it knows how, or if, cost reductions can be obtained. In
addition, average sales prices are affected by price discounts negotiated for
large volume purchases by certain customers over a given period of time. To
offset declining average sales prices, the Company believes that in the near
term it must achieve manufacturing cost reductions, and in the longer term the
Company must develop new products that incorporate advanced features and that
can be manufactured at lower cost or sold at higher average sales prices. If,
however, the Company is unable to achieve such cost reductions or product
improvements, the Company's gross margins could decline, and such decline could
have a material adverse effect on the Company's business, results of operations
and financial condition.
In the fourth quarter of 1996, the Company introduced single carrier
amplifiers for PCS networks, and such products have accounted for an increasing
percentage of the Company's net sales during the first nine months of 1997.
Since that time sales of single carrier amplifiers have been subject to intense
price competition and tend to carry lower gross margins than multi-carrier
amplifier products. In addition, while the Company has increased the production
level of its single carrier PCS products, the Company has had difficulty
reducing the cost of materials for such products during this ramp-up. In the
event that the Company is unable to reduce the manufacturing costs of its single
carrier amplifiers and such amplifiers continue to account for a significant
percentage of net sales, the Company's overall gross margins will be materially
adversely affected.
Management of Growth; Dependence Upon Key Personnel
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's management and
operations. The Company's ability to compete effectively and to manage future
expansion of its operations, if any, will require the Company to continue to
improve its financial and management controls, reporting systems and procedures
on a timely basis and effectively expand, train and manage its work force. In
particular, the Company must carefully manage production and inventory levels
and product quality to meet increasing product demand and new product
introductions. Inaccuracies in demand forecasts in the environment in which the
Company operates can quickly result in either insufficient or excessive
inventories and
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<PAGE>
disproportionate overhead expenses. Any degradation in product quality could
adversely impact production rates, product delivery schedules and overhead
expenses associated with product support. The Company continues to implement a
number of new financial and management controls, reporting systems and
procedures. The Company has recently hired a significant number of employees,
including engineers, production technicians and sales and marketing employees,
and plans to further increase its total employee base to meet demand forecasts.
In the event that the Company's new personnel are unable to work effectively as
a team or achieve desired production levels and product quality or if the
Company's demand forecasts are incorrect, the Company's business, results of
operations and financial condition could be materially adversely affected.
There can be no assurance that the Company will be able to continue to attract
and retain qualified personnel necessary for the development of its business.
The Company's failure to manage growth effectively would have a material adverse
effect on the Company's business, results of operations and financial condition.
Due to the specialized nature of the Company's business, the Company is
highly dependent on the continued services of, and on its ability to attract and
retain, qualified technical, marketing and managerial personnel. Competition for
such personnel, particularly qualified engineers, is intense, and the loss of a
significant number of such persons, as well as the failure to recruit and train
additional technical personnel in a timely manner, could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Single Sources for Key Components
The Company currently procures, and expects to continue to procure, certain
components from single source manufacturers due to unique component designs as
well as certain quality and performance requirements. In addition, in order to
take advantage of volume pricing discounts, the Company purchases certain
customized components for its products from single sources. The Company has
experienced, and may in the future experience, shortages of single-sourced
components. In such event, the Company may have to make adjustments to both
product designs and production schedules. If such single-sourced components
were to become unavailable in sufficient quantities or were to become available
only on terms unsatisfactory to the Company, the Company would be required to
purchase comparable components from other sources and "retune" its products to
function properly with the replacement components or redesign its products to
use other components, either of which could result in delays in production and
delivery. If for any reason the Company could not obtain comparable replacement
components in sufficient volume from other sources or could not expeditiously
retune its products to operate with the replacement components, or redesign its
products to use other components, the Company's business, results of operations
and financial condition could be adversely affected. In addition, if the
Company were unable to obtain sufficient quantities of single-sourced components
used in the manufacture of its RF power amplifiers, resulting delays or
reductions in product shipments could occur and could have a material adverse
affect on the Company's business, results of operations and financial condition,
including a material adverse effect on the Company's relationships with its
customers as well as potential customers.
Competition
The wireless infrastructure equipment industry is extremely competitive and
is characterized by rapid technological change, new product development, product
obsolescence, evolving industry standards and significant price erosion over the
life of a product. The principal elements of competition in the Company's market
include performance, functionality, reliability, pricing, quality, the ability
to design products which can be efficiently manufactured in volume production,
time-to-market delivery capabilities and standards compliance. While the Company
believes that overall it competes favorably with respect to the foregoing
elements, there can be no assurance that it will be able to continue to do so.
Currently, the Company competes primarily with Avantek (a division of
Hewlett-Packard), AML Communications, Inc., M/A-COM, Inc. (a subsidiary of AMP,
Inc.), Microwave Power Devices, Inc. and Spectrian Corporation, in addition to
the amplifier manufacturing operations captive within certain of the leading
wireless infrastructure OEMs. Certain of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing,
sales, marketing and other resources than the Company and have achieved greater
name recognition for their existing products and technologies than has the
Company.
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The Company's success depends in part upon the rate at which wireless
infrastructure OEMs incorporate the Company's products into their systems. The
Company believes that a substantial portion of the present worldwide production
of amplifiers is captive within the internal manufacturing operations of a small
number of wireless infrastructure OEMs and that the amplifiers manufactured by
these OEMs are offered for sale as part of their wireless systems. These OEMs
include, among others, LM Ericsson Telephone Company ("Ericsson"), Lucent
Technologies Incorporated ("Lucent"), Motorola Corporation ("Motorola"), Nokia
Corporation ("Nokia") and Northern Telecom Limited ("Nortel"). In addition,
Samsung, a significant customer of the Company, manufacturers power amplifiers
in addition to purchasing such components from the Company. The Company
believes that these OEMs, as well as other customers of the Company,
continuously evaluate whether to manufacture their own RF power amplifiers
rather than purchase them from third-party vendors such as the Company. These
and other large manufacturers of wireless infrastructure equipment could also
determine to offer and sell their power amplifiers to other OEMs or customers of
the Company and compete directly with the Company. In addition, these or other
OEMs may enter into joint ventures or strategic relationships with the Company's
competitors, in which event the Company's ability to sell products to such OEMs
could be reduced or eliminated. See "--Internal Amplifier Production
Capabilities of OEMs."
The Company has experienced significant price competition and expects price
competition in the sale of RF power amplifiers to increase. 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. The Company expects its competitors to
offer new and existing products at prices necessary to gain or retain market
share. Several of the Company's competitors have substantial financial
resources, which may enable them to withstand sustained price competition or a
downturn in the market. There can be no assurance that the Company will be able
to compete successfully in the pricing of its products, or otherwise, in the
future.
Rapid Technological Change; Dependence on New Products
The markets in which the Company and its customers compete are
characterized by rapidly changing technology, evolving industry standards and
communications protocols, and continuous improvements in products and services.
The Company's future success depends on its ability to enhance its current
products and to develop and introduce in a timely manner new products that keep
pace with technological developments, industry standards and communications
protocols, compete effectively on the basis of price, performance and quality,
adequately address OEM customer and end-user customer requirements and achieve
market acceptance. The Company believes that to remain competitive in the future
it will need to continue to develop new products, which will require the
investment of significant financial resources in new product development. During
the nine months of fiscal 1997, the Company continued to invest significant
resources in the development and manufacture of RF power amplifiers for PCS
networks and expects to continue to invest significant resources in this area.
There can be no assurance that the deployment of PCS networks will not be
delayed or that the Company's PCS-based products will achieve widespread market
acceptance or be capable of being manufactured at competitive prices in
sufficient volumes. In the event the Company's PCS products are not timely and
economically developed and are not produced in sufficient quantities or do not
gain widespread market acceptance, the Company's business, results of operations
and financial condition would be materially adversely affected.
In addition to its PCS development efforts, the Company continues to
develop improvements and additions to its cellular line of amplifier products,
including the Company's next-generation multi-carrier linear cellular amplifier.
Any delays in commencement of commercial shipments of these products may result
in customer dissatisfaction and delay or loss of product revenues, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. No assurance can be given that the Company's product
development efforts will be successful, or that its new products will achieve
customer acceptance or that its customers' products and services will achieve
market acceptance. If a significant number of development projects do not result
in manufacturable new products or product enhancements within anticipated time-
frames, the Company's business, results of operations and financial condition
could be materially adversely affected. Any failure by the Company to anticipate
or respond adequately to technological developments and customer requirements,
or any significant delays in product development, introduction or deliveries,
could result in a loss of competitiveness and reduced net sales. While the
Company maintains an active development program to attempt to improve its
product offerings, there can be no assurance that such efforts will be
successful or that other companies
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<PAGE>
or institutions will not develop and commercialize products based on new
technologies that are superior in performance or cost-effectiveness to the
Company's products. There can also be no assurance that the Company's products
will not be rendered obsolete by the introduction and acceptance of new
communications protocols.
No Assurance of Product Manufacturability, Quality or Reliability
Manufacturing the Company's products is an extremely complex process and
requires significant time and expertise to tune the products to meet customers'
specifications. The ability of the Company to cost-effectively manufacture its
RF power amplifier products in volume is substantially dependent upon the
Company's ability to tune these products to meet specifications in an efficient
manner. In this regard, the Company is dependent upon its staff of trained
technicians and engineers. If the Company is unable to design its products to
minimize the manual tuning process or if the Company were unable to attract
additional trained technicians, or were to lose the services of a number of its
trained technicians, the Company's business, results of operations and financial
condition would be materially adversely affected. The Company has been required
to replace certain components in some of its products in accordance with
warranty provisions under which the products were sold. The Company recently
introduced single carrier RF power amplifiers for PCS networks and anticipates
that it will continue to introduce new-generation RF power amplifiers products
for both cellular and PCS networks. Companies involved in the development and
manufacture of new products which contain complex technologies often encounter
difficulties in performance and reliability and encounter delays in product
introduction and volume shipments. The Company believes that customers will
demand increasingly stringent product performance, quality and reliability. The
Company has in the past experienced, and may from time to time in the future
experience, quality problems with its products. If any of these problems were
to occur on a significant level, the Company could experience increased costs,
delays in or cancellations of, or rescheduling of, orders or deliveries and
product returns, any of which could damage relationships with current customers
and have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the
Company's product designs will continue to be successful or will keep pace with
technological developments, evolving industry standards and communications
protocols, and allow for continuous improvements in product quality and meet the
quality standards of customers. Any potential design problems could damage
relationships with both existing and prospective customers and, in particular,
could limit the Company's ability to market its products to large OEMs, many of
which manufacture power amplifiers internally and have stringent quality control
standards. See "--Internal Amplifier Production Capabilities of OEMs."
Internal Amplifier Production Capabilities of OEMs
Many of the leading wireless infrastructure equipment manufacturers
internally manufacture their own RF power amplifiers, and the Company believes
that its existing customers continuously evaluate whether to manufacture their
own amplifiers. Certain customers of the Company have produced internally
designed amplifiers in an attempt to replace products manufactured by the
Company. The Company expects that this practice will continue. In addition,
LGIC, one of the Company's customers, has entered into a joint venture
manufacturing arrangement with one of the Company's competitors. In the event
that customers of the Company do manufacture their own amplifiers, such
customers could eliminate or reduce their purchases of the Company's products.
There can be no assurance that the Company's current customers will continue to
rely, or expand their reliance, on the Company as an external source of supply
for their RF power amplifiers, or that other wireless telecommunications OEMs
such as Lucent, Ericsson, Motorola, Nokia and Nortel will become and remain
customers of the Company. OEMs with internal manufacturing capabilities could
also sell amplifiers externally to other OEMs, thereby competing directly with
the Company. In addition, even if the Company were successful in selling its
products to these OEMs, it is anticipated that such OEMs would demand price and
other concessions based on their ability to manufacture amplifiers internally.
There can be no assurance that the Company will continue to enter into supply
contracts with OEMs on terms that are acceptable to the Company, if at all, or
that such contracts will not be terminated on short notice. Any significant loss
of sales to current customers, not offset by sales to other customers, would
have a material adverse effect on the Company's business, results of operations
and financial condition. If, for any reason, the Company's major customers
decide to produce their RF power amplifiers internally or through joint ventures
with other competitors, or require the Company to participate in joint venture
manufacturing with such OEM, the Company's business, results of operations and
financial condition could be materially adversely affected.
19
<PAGE>
The Company's customers and other wireless infrastructure equipment
manufacturers are protective of their intellectual property, which may
contribute to certain manufacturers deciding to not seek RF power amplifiers
from external sources. While the Company takes measures to ensure the
confidentiality of intellectual property disclosed to the Company by its
customers or developed by the Company for such customers, the appearance of a
close working relationship with a particular customer may adversely affect the
Company's ability to establish or maintain a relationship with, or sell products
to, competitors of the particular customer. If the Company's major customers
decide not to purchase products from the Company due to the Company's
relationship to other customers, the Company's business, results of operations
and financial condition could be materially adversely affected.
Proprietary Technology; Risk of Third-Party Claims of Infringement
The Company relies primarily upon trade secrets to protect its intellectual
property. The Company generally enters into confidentiality and non-disclosure
agreements with its employees and limits access to and distribution of its
proprietary information. In addition, the Company has applied for a U.S. patent
for its proprietary implementation of feedforward technology and regularly
examines various aspects of its technology for possible patent applications.
The Company believes that its success depends upon the knowledge and experience
of its management and technical personnel and its ability to market its existing
products and to develop new products.
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 upon the rights of others. There can
be no assurance that the Company will be able to successfully protect its
intellectual property or that the Company's intellectual property or proprietary
technology will not otherwise become known or be independently developed by
competitors. In addition, the laws of certain countries in which the Company's
products are or may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. The inability of the Company to protect its intellectual property and
proprietary technology could have a material adverse effect on its business,
results of operations and financial condition. As the number of patents,
copyrights and other intellectual property rights in the Company's industry
increases, and as the coverage of these rights and the functionability of the
products in the market further overlap, the Company believes that its products
may increasingly become the subject of infringement claims. The Company may in
the future be notified that it is infringing upon certain patent or other
intellectual property rights of others. Although the Company has not received
any such notification to date and there are no pending or threatened
intellectual property lawsuits against the Company, there can be no assurance
that such litigation or infringement claims will not occur in the future. Such
litigation or claims could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
results of operations and financial condition. A third party claiming
infringement may also be able to obtain an injunction or other equitable relief,
which could effectively block the ability of the Company or its customers to
distribute, sell or import into the United States allegedly infringing products.
If it appears necessary or desirable, the Company may seek licenses under
patents or other rights from third parties covering intellectual property that
the Company is allegedly infringing. No assurance can be given, however, that
any such licenses could be obtained on terms acceptable to the Company, if at
all. The failure to obtain the necessary licenses or other rights could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Risks Associated with Developing Technologies; Product Liability
If wireless telecommunications systems or other systems or devices that
rely on or incorporate the Company's products are determined, perceived or
alleged to create a health risk, the Company could be named as a defendant, and
held liable, in product liability lawsuits commenced by individuals alleging
that the Company's products harmed them. The occurrence of any such event could
have a material adverse effect on the Company's business, results of operations
and financial condition. Any alleged health or environmental risk could also
lead to a delay or prohibition against the installation of wireless networks
which could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, an inability to maintain
insurance at an acceptable cost or to otherwise protect against potential
product liability could inhibit the commercialization of the Company's products
and have a material adverse effect on the Company's business, results of
operations and financial condition. Further, the installation of base stations
for wireless networks may be delayed or prohibited by
20
<PAGE>
various environmental regulations. Any such delay or prohibition would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Environmental Regulations
The Company is subject to a variety of local, state and federal government
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. Certain of the Company's products are also
subject to regulation of emissions by the FCC and similar government agencies.
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 and licenses to conduct its business. 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. Corrective action may 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 up,
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, results of operations and financial condition. In addition, the
installation of base stations by wireless service providers may be delayed or
restricted by various environmental regulations, land use restrictions and
zoning ordinances. Any such delay or restriction could have a material adverse
effect on the Company's business, results of operations and financial condition.
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
internationally. Regulatory approvals generally must be obtained by the Company
in connection with the manufacture and sale of its products, and by the
Company's customers to operate the Company's products. The FCC has adopted new
regulations that impose more stringent radio frequency emissions standards on
the communications industry and there can be no assurance that the Company and
its customers will not 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
Company is also subject to regulatory requirements in international markets
where the Company is less prominent than local competitors and may have fewer
opportunities to participate in the formation of regulatory and standards
policies. The enactment by federal, state, local or international governments
of new laws or regulations or a change in the interpretation of existing
regulations could adversely affect the market for the Company's products.
Although recent liberalization 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 PCS networks, there can be no
assurance that the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded wireless 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 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
customers. These delays could have a material adverse effect on the Company's
business, results of operations and financial condition.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies, and the market prices for securities of technology
companies have been especially volatile. These broad market fluctuations have
and may continue to adversely affect the market price of the Company's Common
Stock. Factors such as fluctuations in the Company's results of operations,
failure of such results of operations to meet the expectations of stock market
analysts and investors, change in stock market analyst recommendations regarding
the Company and or its competitors, the timing and announcements of
technological innovations or new products by the Company, or its competitors,
developments
21
<PAGE>
with respect to patents and proprietary rights, timing and announcements of
developments related to the Company's customers, results of operations of
certain of the Company's competitors, government regulation, political or
economic instability in countries in which the Company sells its products,
changes in the wireless communications industry generally and general market
conditions may have a significant adverse effect on the market price of the
Company's Common Stock.
22
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(f) Use of Proceeds
On December 6, 1996, the Company completed its initial public offering of
Common Stock (the "IPO") by selling a total of 2,400,000 shares of Common Stock,
which included 1,800,000 shares sold by the Company and 600,000 shares sold by
the Selling Shareholders. The initial price to the public of the Company's
Common Stock was $11.50 per share, less underwriting discounts and commissions
of $.805 per share. The Company received net proceeds of $19.3 million from the
sale of the Common Shares before deducting offering expenses. The Company did
not receive any of the proceeds from the sale of shares by the Selling
Shareholders. Effective upon the closing of the IPO, the 3,375,900 shares of
Series A Convertible Preferred Stock of the Company were converted into
5,063,850 shares of Common Stock and all accrued dividends payable thereon were
reversed and eliminated.
On January 3, 1997, the underwriters of the Company's IPO exercised their
option to purchase an additional 360,000 shares of Common Stock directly from
the Company at a price of $11.50 per share, less underwriting discounts and
commissions of $.805 per share. The Company received net proceeds of $3.9
million from the sale of the Common Stock pursuant to the exercise of such
option.
In conjunction with completing the IPO, the Company incurred total direct
offering expenses payable to unrelated third parties of approximately $.9
million. Total net proceeds to the Company from the IPO and the over-allotment
exercise after deducting total expenses and underwriting discounts and
commissions was $22.2 million.
The Company has used approximately $5.2 million of the net proceeds from
the IPO for capital expenditures, all of which were paid directly to unrelated
third parties. The remaining net proceeds of $17.0 million have been invested in
short-term investment grade money market instruments.
On June 30, 1997, the Company completed a secondary offering of Common
Stock by selling a total of 3,250,000 shares of Common Stock, which included
750,000 shares sold by the Company and 2,500,000 shares sold by the Selling
Shareholders. The price to the public of the Company's Common Stock was $22.00
per share, less underwriter's discounts and commissions of $1.10 per share. The
underwriters exercised their option to purchase an additional 487,500 shares of
Common Stock (with 250,000 shares sold by the Company and the remaining 237,500
sold by the Selling Shareholders) at a price of $22.00 per share, less
underwriting discounts and commissions of $1.10 per share. The Company received
net proceeds of $20.9 million from the sale of shares in the secondary offering
before deducting offering expenses. The Company did not receive any of the
proceeds from the sale of shares by the Selling Shareholders. The Company
incurred total direct offering expenses payable to unrelated third parties of
approximately $.3 million in conjunction with the secondary offering of Common
Stock. The net proceeds after deducting total offering expenses and underwriting
discounts and commissions from the secondary offering were $20.6 million and
have been invested in short-term investment grade money market instruments.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
10.1 Credit Agreement dated as of August 1, 1997 between Powerwave
Technologies, Inc. and Bank of America NT & SA.
11.1 Computation of pro forma net income and net income per share.
27.1 Financial Data Schedule.
</TABLE>
(b) No reports have been filed on Form 8-K for the quarter for which this
report is filed.
24
<PAGE>
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.
POWERWAVE TECHNOLOGIES, INC.
Date: October 31, 1997 By: /s/ KEVIN T. MICHAELS
----------------------------------------
Kevin T. Michaels
Vice President, Finance and Chief
Financial Officer
25
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
- ------ --------
<C> <S>
10.1 Credit Agreement dated as of August 1, 1997 between Powerwave
Technologies, Inc. and Bank of America NT & SA.
11.1 Computation of pro forma net income and net income per share.
27.1 Financial Data Schedule.
</TABLE>
26
<PAGE>
EXHIBIT 10.1
===============================================================================
CREDIT AGREEMENT
Dated as of August 1, 1997
between
POWERWAVE TECHNOLOGIES, INC.,
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
<S> <C>
ARTICLE I DEFINITIONS AND FINANCIAL REQUIREMENTS...................... 1
1.01 Definitions.................................................. 1
1.02 Financial Requirements....................................... 6
ARTICLE II THE CREDIT FACILITIES...................................... 6
2.01 The Revolving Facility....................................... 6
2.02 Advances Under the Revolving Facility........................ 6
2.03 Facility Fee................................................. 8
2.04 Commitment Fee............................................... 8
2.05 Default Rate................................................. 8
2.06 Early Termination of Commitment.............................. 8
2.07 Optional Prepayments......................................... 8
ARTICLE III EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS.. 9
3.01 Requests for Credit.......................................... 9
3.02 Disbursements and Payments................................... 9
3.03 Branch Accounts.............................................. 9
3.04 Evidence of Indebtedness..................................... 9
3.05 Interest Calculation......................................... 9
3.06 Late Payments; Compounding................................... 9
3.07 Business Day................................................. 10
3.08 Taxes and Other Charges...................................... 10
3.09 Illegality................................................... 11
3.10 Increased Costs.............................................. 12
3.11 Funding Losses............................................... 13
3.12 Inability to Determine Rates................................. 13
3.13 Certificate of the Bank...................................... 13
3.14 Survival..................................................... 13
ARTICLE IV CONDITIONS TO AVAILABILITY OF CREDIT....................... 14
4.01 Conditions to First Extension of Credit...................... 14
4.02 Conditions to Each Extension of Credit....................... 14
ARTICLE V REPRESENTATIONS AND WARRANTIES.............................. 15
5.01 Corporate Existence and Power................................ 15
5.02 Authorization................................................ 15
5.03 Enforceability............................................... 16
5.04 Compliance with Laws......................................... 16
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
5.05 Permits, Franchises.......................................... 16
5.06 Litigation................................................... 16
5.07 No Event of Default.......................................... 16
5.08 Other Obligations............................................ 16
5.09 Tax Returns.................................................. 16
5.10 Information Submitted........................................ 16
5.11 No Material Adverse Effect................................... 17
5.12 ERISA Compliance............................................. 17
5.13 Environmental Matters........................................ 17
5.14 Swap Obligations............................................. 18
ARTICLE VI AFFIRMATIVE COVENANTS...................................... 18
6.01 Notices of Certain Events.................................... 18
6.02 Financial and Other Information.............................. 18
6.03 Books, Records, Audits and Inspections....................... 19
6.04 Use of Facility.............................................. 19
6.05 Insurance.................................................... 20
6.06 Compliance with Laws......................................... 20
6.07 Change in Name, Structure or Location........................ 20
6.08 Existence and Properties..................................... 20
ARTICLE VII NEGATIVE COVENANTS........................................ 20
7.01 Other Indebtedness........................................... 21
7.02 Liens........................................................ 21
7.03 Acquisitions................................................. 22
7.04 Dividends.................................................... 22
7.05 Loans........................................................ 22
7.06 Liquidations and Mergers..................................... 23
7.07 Sale of Assets............................................... 23
7.08 Business Activities.......................................... 23
7.09 Regulations G, T, U, and X................................... 23
7.10 Quick Ratio.................................................. 24
7.11 Tangible Net Worth........................................... 24
7.12 Total Liabilities to Tangible Net Worth...................... 24
7.13 Consecutive Quarterly Losses; Losses in One Quarter.......... 24
ARTICLE VIII EVENTS OF DEFAULT........................................ 24
8.01 Events of Default............................................ 24
(a) Failure to Pay........................................... 24
(b) Breach of Representation or Warranty..................... 24
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
(c) Specific Defaults........................................ 24
(d) Other Defaults........................................... 24
(e) Judgments................................................ 25
(f) Failure to Pay Debts; Voluntary Bankruptcy............... 25
(g) Involuntary Bankruptcy................................... 25
(h) Default of Other Financial Obligations................... 25
(i) Default of Other Bank Obligations........................ 26
(j) Material Adverse Effect.................................. 26
(k) ERISA.................................................... 26
(l) Change of Control........................................ 26
8.02 Remedies..................................................... 26
ARTICLE IX MISCELLANEOUS.............................................. 27
9.01 Successors and Assigns....................................... 27
9.02 Consents and Waivers......................................... 27
9.03 Governing Law................................................ 28
9.04 Costs and Attorneys' Fees.................................... 28
9.05 Integration; Amendment....................................... 28
9.06 Borrower's Documents......................................... 28
9.07 Participations............................................... 28
9.08 General Indemnification...................................... 28
9.09 Confidentiality.............................................. 29
9.10 Notices...................................................... 30
9.11 Headings; Interpretation..................................... 30
9.12 Severability................................................. 31
9.13 Counterparts................................................. 31
9.14 Waiver of Jury Trial......................................... 31
</TABLE>
Schedules
- ---------
Schedule 5.13 Environmental Matters
Schedule 7.01 Existing Indebtedness
Schedule 7.02 Existing Liens
EXHIBITS
- --------
Exhibit A Form of Compliance Certificate
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Agreement") is entered into as of August
1, 1997, between POWERWAVE TECHNOLOGIES, INC., a Delaware corporation (the
"Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"Bank").
In consideration of the mutual covenants and agreements contained
herein, the Borrower and the Bank agree as follows:
ARTICLE I
Definitions and Financial Requirements
--------------------------------------
1.01 Definitions. The following terms (including plural and singular
-----------
versions thereof) have the meanings indicated:
"Advance": an advance hereunder.
-------
"Availability Period": the period commencing on the date of this Agreement
-------------------
and ending on the date that is the earlier to occur of (a) July 31, 1998, and
(b) the date on which the Bank's commitment to extend credit hereunder
terminates.
"Business Day": any day other than a Saturday, a Sunday, or other day on
------------
which commercial banks in San Francisco, California, are authorized or required
by law to close and, if the applicable Business Day relates to any Offshore Rate
Advance, means such a day on which dealings are carried on in the applicable
offshore interbank market.
"Closing Date": the date on which all conditions to the initial extension
------------
of credit hereunder are satisfied.
"Code": the Internal Revenue Code of 1986, as amended, and the rules and
----
regulations promulgated thereunder as from time to time in effect.
"Compliance Certificate": a compliance certificate in the form of
----------------------
Exhibit A.
- ---------
"Credit Documents": collectively, this Agreement and each other agreement,
----------------
documents and instrument now or hereafter delivered to the Bank in connection
with the credits established herein and the transactions contemplated hereby.
"Credit Limit": the amount $10,000,000.
------------
"Default": any event or circumstance which, with the giving of notice, the
-------
lapse of time, or both, would (if not cured or otherwise remedied during such
time) constitute an Event of Default.
<PAGE>
"Dollars", "dollars" and "$": each, lawful money of the United States.
------- ------- -
"Environmental Laws": any foreign, federal, state, local, or municipal
------------------
laws, rules, orders, regulations, statutes, ordinances, codes, decrees,
requirements of any governmental authority, any and all requirements of law and
any and all common law requirements, rules, and bases of liability regulating,
relating to, or imposing liability or standards of conduct concerning pollution
or protection of human health or the environment or Hazardous Substances or any
activity involving Hazardous Substances, as now or may at any time hereafter may
be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended,
-----
and the rules and regulations promulgated thereunder as from time to time in
effect.
"ERISA Event": (a) a Reportable Event with respect to a Pension Plan;
-----------
(b) a withdrawal by the Borrower from a Pension Plan subject to Section 4063 of
ERISA during a plan year in which it was a substantial employer (as defined in
Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as
such a withdrawal under Section 4062(e) of ERISA; (c) the filing of a notice of
intent to terminate, the treatment of a plan amendment as a termination under
Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to
terminate a Pension Plan subject to Title IV of ERISA; (d) a failure by the
Borrower to make required contributions to a Pension Plan or other Plan subject
to Section 412 of the Code; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan; (f) the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA, upon the Borrower; or (g) an
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code with respect to any Pension Plan.
"Event of Default": any event listed in Article VIII of this Agreement.
----------------
"FDIC": the Federal Deposit Insurance Corporation, or any entity
----
succeeding to any of its principal functions.
"Floating Rate": specified in subsection 2.02(a).
-------------
"FRB": the Board of Governors of the Federal Reserve System, or any entity
---
succeeding to any of its principal functions.
2
<PAGE>
"Hazardous Substance": any hazardous or toxic substance, material,
-------------------
pollutant, waste or similar designation, defined, listed, classified, or
regulated as such in or under any Environmental Laws, including asbestos,
petroleum, or petroleum products (including gasoline, crude oil, or any fraction
thereof), polychlorinated biphenyls, and urea-formaldehyde insulation.
"IRS": the Internal Revenue Service or any entity succeeding to any of its
---
principal functions under the Code.
"Material Adverse Effect": (a) a material adverse change in, or a material
-----------------------
adverse effect upon, the operations, business, properties, condition (financial
or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries
taken as a whole; (b) a material impairment of the ability of the Borrower to
perform under any Credit Document; or (c) a material adverse effect upon the
legality, validity, binding effect or enforceability of any Credit Document.
"Offshore Rate": for each Offshore Rate Interest Period, the rate of
-------------
interest (rounded upward to the next 1/16th of 1%) determined pursuant to the
following formula:
Offshore Rate = Offered Rate
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where:
"Offered Rate" means the rate of interest at which deposits in
Dollars in the approximate amount of the Offshore Rate Advance to be
made and having a maturity comparable to such Offshore Rate Interest
Period would be offered by the Bank's London Branch (or such other
office as may be designated for such purpose by the Bank) to major
banks in the London interbank market upon request of such banks at
approximately 11:00 a.m. (London, England time) two Business Days
prior to the first day of such Offshore Rate Interest Period.
"Eurodollar Reserve Percentage" means, for any Offshore Rate
Interest Period, the maximum reserve percentage (expressed as a
decimal, rounded upward to the next 1/100th of 1%) in effect on the
first day of such Offshore Rate Interest Period under regulations
applicable to the Bank issued from time to time by the FRB for
determining the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect to
Eurocurrency funding (currently referred to as "Eurocurrency
3
<PAGE>
liabilities") having a term comparable to such Offshore Rate Interest
Period.
"Offshore Rate Advance": an Advance for which interest is based on
---------------------
the Offshore Rate.
"Offshore Rate Interest Period": for each Offshore Rate Advance the
-----------------------------
period commencing on the date the Offshore Rate Advance begins to bear interest
at a rate based on the Offshore Rate and ending one, two, three, or six months
thereafter, as requested by the Borrower, or such shorter periods as requested
by the Borrower at the time of the requested Offshore Rate Advance and agreed to
by the Bank in its sole discretion; provided, however, that the last day of each
Offshore Rate Interest Period shall be determined in accordance with the
practices of the applicable offshore interbank markets as from time to time in
effect, and provided further that no such interest period shall extend beyond
the last day of the Availability Period.
"PBGC": the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any of its principal functions under ERISA.
"Pension Plan": a pension plan (as defined in Section 3(2) of ERISA)
------------
subject to Title IV of ERISA which the Borrower sponsors, maintains, or to which
it makes, is making, or is obligated to make contributions, or in the case of a
multiple employer plan (as described in Section 4064(a) of ERISA) has made
contributions at any time during the immediately preceding five plan years.
"Permitted Swap Obligations": all obligations (contingent or
--------------------------
otherwise) of the Borrower or any Subsidiary existing or arising under Swap
Contracts, provided that each of the following criteria is satisfied: (a) such
obligations are (or were) entered into by such Person in the ordinary course of
business for the purpose of directly mitigating risks associated with
liabilities, commitments or assets held by such Person, or changes in the value
of securities issued by such Person in conjunction with a securities repurchase
program not otherwise prohibited hereunder, and not for purposes of speculation
or taking a "market view;" and (b) such Swap Contracts do not contain (i) any
provision ("walk-away" provision) exonerating the non-defaulting party from its
obligation to make payments on outstanding transactions to the defaulting party
or (ii) except in the case of a swap contract with the Bank or an affiliate of
the Bank, any provision creating or permitting the declaration of an event of
default, termination event or similar event upon the occurrence of an Event of
Default hereunder (other than an Event of Default under subsection 8.01(a)).
4
<PAGE>
"Person": an individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated association,
joint venture or governmental authority.
"Plan": an employee benefit plan (as defined in Section 3(3) of
----
ERISA) which the Borrower sponsors or maintains or to which the Borrower makes,
is making, or is obligated to make contributions and includes any Pension Plan.
"Reference Rate": for any day, the rate of interest in effect for
--------------
such day as publicly announced from time to time by the Bank in San Francisco,
California, as its "reference rate." It is a rate set by the Bank based upon
various factors including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate. Any change
in the reference rate announced by the Bank shall take effect at the opening of
business on the day specified in the public announcement of such change.
"Reference Rate Advance": an Advance that bears interest based on the
----------------------
Reference Rate.
"Reportable Event": any of the events set forth in Section 4043(c) of
----------------
ERISA or the regulations thereunder, other than any such event for which the 30-
day notice requirement under ERISA has been waived in regulations issued by the
PBGC.
"Revolving Facility": the line of credit described in Section 2.01.
------------------
"Subsidiary": of the Borrower, any corporation, association,
----------
partnership, joint venture, or other business entity of which more than 50% of
the voting stock or other equity interests (in the case of entities other than
corporations), is owned or controlled directly or indirectly by the Borrower or
one or more Subsidiaries of the Borrower or a combination thereof.
"Swap Contract": any agreement, whether or not in writing, relating
-------------
to any transaction that is a rate swap, basis swap, forward rate transaction,
commodity swap, commodity option, equity or equity index swap or option, bond,
note or bill option, interest rate option, forward foreign exchange transaction,
cap, collar or floor transaction, currency swap, cross-currency rate swap,
swaption, currency option or any other, similar transaction (including any
option to enter into any of the foregoing) or any combination of the foregoing,
and, unless the context otherwise clearly requires, any master agreement
relating to or governing any or all of the foregoing.
5
<PAGE>
"Tangible Net Worth": the gross book value of the assets of the
------------------
Borrower and its Subsidiaries on a consolidated basis (exclusive of goodwill,
patents, trademarks, trade names, organization expense, treasury stock,
unamortized debt discount and expense, deferred research and development costs,
deferred marketing expenses, other deferred charges, and other like intangibles
and monies due from affiliates, officers, directors, or shareholders of the
Borrower or its Subsidiaries) less (a) reserves applicable thereto, and (b) all
liabilities (including accrued and deferred income taxes and subordinated
liabilities).
"Unfunded Pension Liability": the excess of a Plan's benefit
--------------------------
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.
1.02 Financial Requirements. Unless otherwise specified in this Agreement,
----------------------
all accounting terms used in this Agreement shall be interpreted, all financial
computations required under this Agreement shall be made, and all financial
information required under this Agreement shall be prepared, in accordance with
generally accepted accounting principles in effect from time to time in the
United States, consistently applied.
ARTICLE II
The Credit Facilities
---------------------
2.01 The Revolving Facility. From time to time during the Availability
----------------------
Period, subject to the terms and provisions hereof, the Bank, on a revolving
basis, will make Advances denominated in dollars to the Borrower. The aggregate
of all Advances may not exceed at any one time the Credit Limit.
2.02 Advances Under the Revolving Facility. (a) Subject to the other
-------------------------------------
provisions of this Section, Advances under the Revolving Facility shall bear
interest at a rate per annum equal to the Reference Rate plus zero percentage
points per annum (the Reference Rate plus zero percentage points per annum is
referred to herein as the "Floating Rate"). The Borrower shall pay interest
-------------
quarterly, on the last day of each calendar quarter until the last day of the
Availability Period, on which date all accrued and unpaid interest shall be due
and payable. The Borrower shall repay the principal amount of each Reference
Rate Advance on the last day of the Availability Period.
(b) In lieu of the interest rate described above, the Borrower may
elect in its borrowing, conversion or continuation notice with respect to an
Advance during the Availability Period
6
<PAGE>
to have such Advance under the Revolving Facility bear interest at the Offshore
Rate plus 1.25% per annum during an Offshore Rate Interest Period, subject to
the following requirements:
(i) Each Offshore Rate Advance shall be for an amount not less
than $1,000,000.
(ii) The Borrower shall pay interest on each Offshore Rate Advance
on the last day of the Offshore Rate Interest Period for such Advance;
provided, however, that if any Offshore Rate Interest Period for a Offshore
-------- -------
Rate Advance exceeds three months, interest shall also be payable on the
date which falls three months after the beginning of such Offshore Rate
Interest Period and on each date which falls three months after any such
interest payment date. The Borrower shall repay the principal balance of
each Offshore Rate Advance on the last day of the Availability Period.
(iii) Any payment of an Offshore Rate Advance prior to the last
day of the Offshore Rate Interest Period for such Advance, whether
voluntary, by reason of acceleration or otherwise, including any mandatory
payments required under this Agreement and applied by the Bank to an
Offshore Rate Advance, shall be accompanied by the amount of accrued
interest on the amount repaid and by the amount (if any) required by
Section 3.11.
(c) (i) The Borrower may, upon irrevocable written notice to the
Bank, (x) elect, as of any Business Day, in the case of a Reference Rate
Advance, or as of the last day of the applicable Offshore Rate Interest
Period, in the case of or an Offshore Rate Advance, to convert any such
Advance (or any part thereof in an amount not less than $1,000,000) into a
Reference Rate Advance; or (y) elect, as of the last day of the applicable
Offshore Rate Interest Period, to continue an Offshore Rate Advance having
an Offshore Rate Interest Period expiring on such day (or any part thereof
in an amount not less than $1,000,000); provided, that if at any time the
--------
amount of any Offshore Rate Advance is reduced, by payment, prepayment, or
conversion of part thereof to be less than $1,000,000, such Offshore Rate
Advance shall automatically convert into a Reference Rate Advance, and on
and after such date the right of the Borrower to continue such Advance as,
and convert such Advance into, an Offshore Rate Advance, as the case may
be, shall terminate.
(ii) If upon the expiration of any Offshore Rate Interest Period
applicable to an Offshore Rate Advance, the Borrower has failed to select
timely a new Offshore Rate Interest Period to be applicable to such
Advance, or if any
7
<PAGE>
Default or Event of Default then exists, the Borrower shall be deemed to
have elected to convert such Advance into a Reference Rate Advance
effective as of the expiration date of such Offshore Rate Interest Period.
(iii) Unless the Bank otherwise consents, during the existence of
a Default or Event of Default, the Borrower may not elect to have an
Advance converted into or continued as an Offshore Rate Advance.
2.03 Facility Fee. The Borrower shall pay to the Bank a non-refundable
------------
facility fee of $7,500 on or before the Closing Date.
2.04 Commitment Fee. The Borrower shall pay to the Bank a commitment fee at
--------------
the rate of 0.10% per annum on the average daily unused portion of the credit
provided under this Agreement. The commitment fee shall be computed on a
calendar quarter basis, except for the first period which shall commence on the
Closing Date and end on September 30, 1997, and the last period which shall end
on the last day of the Availability Period. The commitment fee shall be payable
in arrears on September 30, 1997, on the last day of each successive calendar
quarter thereafter, and on the last day of the Availability Period.
2.05 Default Rate. Upon the occurrence and during the continuation of any
------------
Event of Default, and without constituting a waiver of any such Event of
Default, Advances under the Revolving Facility shall at the option of the Bank
bear interest at a rate per annum which is 2.00% per annum higher than the rate
of interest otherwise provided under this Agreement.
2.06 Early Termination of Commitment. The Borrower may at any time
-------------------------------
terminate the Bank's commitment to extend credit hereunder by giving no less
than five Business Days' prior notice to the Bank and paying in full the entire
amount of credit outstanding hereunder, together with any sums due under Section
3.11. All accrued commitment fees to, but not including the effective date of
any termination of the commitment, shall be paid on the effective date of such
termination.
2.07 Optional Prepayments. Subject to Section 3.11, the Borrower may, at
--------------------
any time or from time to time, upon not less than three Business Days'
irrevocable notice to the Bank, prepay Advances in whole or in part; provided
that, after giving effect to any prepayment of an Offshore Rate Advance, such
Advance is in a minimum amount of $1,000,000. Such notice of prepayment shall
specify the date and amount of such prepayment and the type of Advances to be
prepaid. If such notice is given by the Borrower, the Borrower shall make such
prepayment and the payment amount specified in such notice shall be due and
payable on the date
8
<PAGE>
specified therein, together with accrued interest to each such date on the
amount prepaid and any amounts required pursuant to Section 3.11.
ARTICLE III
Extensions of Credit, Payments and Interest Calculations
--------------------------------------------------------
3.01 Requests for Credit. Each request for an extension, conversion or
-------------------
continuation of credit shall be made in writing on a form acceptable to the Bank
or in any other manner acceptable to the Bank, and must be received by the Bank
no later than 9:00 a.m. (San Francisco time), (i) three Business Days prior to
the requested borrowing, conversion or continuation date in the case of a
borrowing or continuation of, or conversion to, an Offshore Rate Advance, and
(ii) on the requested borrowing or conversion date in the case of a borrowing
of, or conversion to, a Reference Rate Advance.
3.02 Disbursements and Payments. Each disbursement by the Bank and each
--------------------------
payment by the Borrower under this Agreement shall be made in the funds and at
such branch of the Bank as the Bank may from time to time select.
3.03 Branch Accounts. Each extension of credit under this Agreement shall
---------------
be made for the account of such branch, office, or affiliate of the Bank as the
Bank may from time to time select.
3.04 Evidence of Indebtedness. Principal, interest, and all other sums due
------------------------
to the Bank under this Agreement shall be evidenced by entries in records
maintained by the Bank, and, if required by the Bank, by a promissory note or
notes. Each payment on and any other credits with respect to principal,
interest, and all other sums due under this Agreement shall be evidenced by
entries to records maintained by the Bank. The loan accounts or records
maintained by the Bank shall be conclusive absent manifest error of the amount
of the credit extended hereunder and the interest and payments thereon. Any
failure to so record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Borrower hereunder to pay any amount
owing.
3.05 Interest Calculation. Interest based on the Reference Rate shall be
--------------------
computed on the basis of a 365/366-day year, actual days elapsed. All other
interest and fees payable under this Agreement shall be computed on the basis of
a 360 day year and actual days elapsed, which results in more interest or a
larger fee than if a 365-366 day year were used.
3.06 Late Payments; Compounding. Any sum payable by the Borrower hereunder
--------------------------
(including unpaid interest) if not paid when
9
<PAGE>
due shall bear interest (payable on demand) from its due date until payment in
full at a rate per annum equal to the Floating Rate plus 2.00% per annum. At the
option of the Bank, in each instance, any sum payable hereunder which is not
paid when due (including unpaid interest) may be added to principal of the
Revolving Facility and shall thereafter bear interest at the rate applicable to
principal.
3.07 Business Day. Any sum payable by the Borrower hereunder which becomes
------------
due on a day which is not a Business Day shall be due on the next Business Day
after such due date, unless, in the case of an Offshore Rate Advance, the result
of such extension would be to carry such Offshore Rate Interest Period into
another calendar month, in which event such Offshore Rate Interest Period shall
end on the immediately preceding Business Day. Any payments received by the Bank
on a day which is not a Business Day shall be deemed to be received on the next
Business Day after such date of receipt.
3.08 Taxes and Other Charges. (a) Any and all payments by the Borrower to
-----------------------
the Bank under this Agreement and any Credit Document shall be made free and
clear of, and without deduction or withholding for, any Taxes. In addition, the
Borrower shall pay all Other Taxes.
(b) If the Borrower shall be required by law to deduct or withhold any
Taxes, Other Taxes or Further Taxes from or in respect of any sum payable
hereunder to the Bank, then:
(i) the sum payable shall be increased as necessary so that,
after making all required deductions and withholdings (including deductions
and withholdings applicable to additional sums payable under this Section),
the Bank receives and retains an amount equal to the sum it would have
received and retained had no such deductions or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or
withheld to the relevant taxing authority or other authority in accordance
with applicable law; and
(iv) the Borrower shall also pay to the Bank, at the time
interest is paid, Further Taxes in the amount that the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if
such Taxes, Other Taxes or Further Taxes had not been imposed.
10
<PAGE>
(c) The Borrower agrees to indemnify and hold harmless the Bank for
the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the
amount that the Bank specifies as necessary to preserve the after-tax yield the
Bank would have received if such Taxes, Other Taxes or Further Taxes had not
been imposed, and any liability (including penalties, interest, additions to tax
and expenses) arising therefrom or with respect thereto, whether or not such
Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment
under this indemnification shall be made within 30 days after the date the Bank
makes written demand therefor.
(d) Within 30 days after the date of any payment by the Borrower of
Taxes, Other Taxes or Further Taxes, the Borrower shall furnish to the Bank the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Bank.
(e) If the Borrower is required to pay any amount to the Bank pursuant
to subsection (b) or (c) of this Section, then the Bank shall use reasonable
efforts (consistent with legal and regulatory restrictions) to change the
jurisdiction of its lending office so as to eliminate any such additional
payment by the Borrower which may thereafter accrue, if such change in the sole
judgment of the Bank is not otherwise disadvantageous to the Bank.
(f) For purposes of this Section, "Further Taxes" means any and all
-------------
present or future taxes, levies, assessments, imposts, duties, deductions, fees,
withholdings or similar charges (including, without limitation, net income taxes
and franchise taxes), and all liabilities with respect thereto, imposed by any
jurisdiction on account of amounts payable or paid pursuant to this Section;
"Other Taxes" means any present or future stamp, court or documentary taxes or
-----------
any other excise or property taxes, charges or similar levies which arise from
any payment made hereunder or from the execution, delivery, performance,
enforcement or registration of, or otherwise with respect to, this Agreement or
any other Credit Documents; and "Taxes" means any and all present or future
-----
taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or
similar charges, and all liabilities with respect thereto, excluding, in the
case of the Bank, taxes imposed on or measured by its net income by the
jurisdiction (or any political subdivision thereof) under the laws of which the
Bank is organized or maintains a lending office.
3.09 Illegality. (a) If the Bank determines that (i) the introduction of
----------
any law, rule, regulation, treaty, or determination of an arbitrator or court or
other governmental authority or any change in or in the interpretation or
administration thereof has made it unlawful, or that any central
11
<PAGE>
bank or other governmental authority has asserted that it is unlawful, for the
Bank to make or extend any Advance or other credit under this Agreement, or (ii)
any order, judgment, or decree of any governmental authority or arbitrator
purports by its terms to enjoin or restrain the Bank from making or extending
any Advance or other credit hereunder, then, on notice thereof by the Bank to
----
the Borrower, the obligation of the Bank to make or extend such Advance or other
credit shall be suspended until the Bank shall have notified the Borrower that
the circumstances giving rise to such determination no longer exist.
(b) If the Bank determines that it has become unlawful for it to
maintain any Offshore Rate Advance hereunder, the Borrower shall prepay in full
all Offshore Rate Advances then outstanding, together with interest accrued
thereon, either on the last day of the applicable Offshore Rate Interest Period
if the Bank may lawfully continue to maintain such Advances to such day and such
loans have an interest period, or immediately, if the Bank may not lawfully
continue to maintain such Advances or such loans have no interest period,
together with any amounts required to be paid in connection therewith pursuant
to Section 3.11.
3.10 Increased Costs. (a) If the Bank shall determine that, due to either
---------------
(i) the introduction of or any change (other than any change by way of
imposition of or increase in reserve requirements included in the Eurodollar
Reserve Percentage included in the calculation of the Offshore Rate) in or in
the interpretation of any law or regulation or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), in each case, announced after the date
hereof, there shall be any increase in the cost to the Bank of agreeing to make
or making, funding or maintaining any credit hereunder, then the Borrower shall
be liable for, and shall from time to time, within 30 days after written demand
therefor by the Bank, pay to the Bank, additional amounts as are sufficient to
compensate it for such increased costs.
(b) If the Bank shall have determined that the introduction of any
applicable law, rule, regulation or guideline regarding capital adequacy, or any
change therein or any change in the interpretation or administration thereof by
any central bank or other governmental authority charged with the interpretation
or administration thereof, or compliance by the Bank or any corporation
controlling the Bank, with any request, guideline or directive regarding capital
adequacy (whether or not having the force of law) of any such central bank or
other authority, in each case, announced after the date hereof, affects or would
affect the amount of capital required or expected to be maintained by the Bank
or any corporation controlling the Bank, and the Bank (taking
12
<PAGE>
into consideration the Bank's or such corporation's policies with respect to
capital adequacy and the Bank's desired return on capital) determines that the
amount of such capital is increased as a consequence of the Bank's obligation
under this Agreement, then, within 30 days after written demand therefor by the
Bank, the Borrower shall pay to the Bank, from time to time as specified by the
Bank, additional amounts sufficient to compensate the Bank for such increase.
3.11 Funding Losses. The Borrower shall reimburse the Bank and hold the
--------------
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of the failure of the Borrower to make any payment or prepayment of
principal of any Advance hereunder made at a rate of interest related to the
Offshore Rate (including payments made after any acceleration thereof), or to
borrow, continue or convert at such a rate, or the prepayment of an Advance
which bears interest at such a rate on a day which is not the last day of the
interest period with respect thereto (including payments made after any
acceleration thereof or because the total amount of credit exceeds the
limitations set forth herein), including any such loss or expense arising from
the liquidation or reemployment of funds obtained by it to maintain its Advances
made at a rate related to the Offshore Rate hereunder or from fees payable to
terminate any deposits from which such funds were obtained or deemed obtained.
3.12 Inability to Determine Rates. The Bank has no obligation to accept an
----------------------------
election for an Offshore Rate Advance if (a) deposits in the applicable currency
and in the principal amount, and for the period equal to the interest period,
for such Advance are not available in the applicable funding market; or (b) the
Offshore Rate does not accurately reflect the cost of such Advance. Nothing
contained herein shall, however, obligate the Bank to obtain the funds for any
Advance in any particular manner.
3.13 Certificate of the Bank. If the Bank claims any reimbursement or
-----------------------
compensation pursuant to Section 3.10 or Section 3.11, then the Bank shall
deliver to the Borrower a certificate setting forth in reasonable detail the
amount payable to the Bank thereunder and such certificate shall be conclusive
and binding on the Borrower in the absence of manifest error.
3.14 Survival. The agreements and obligations of the Borrower under
--------
Sections 3.08 through 3.11 shall survive the expiration or termination of the
commitment to extend credit hereunder and the payment of all other obligations
of the Borrower hereunder.
13
<PAGE>
ARTICLE IV
Conditions to Availability of Credit
------------------------------------
The Bank's obligation to extend credit under this Agreement is subject to
the Bank's receipt of the following, each in form and substance satisfactory to
the Bank:
4.01 Conditions to First Extension of Credit. Before the first extension of
---------------------------------------
credit:
(a) This Agreement, executed by the Borrower;
(b) Satisfactory evidence of due authorization of the execution,
delivery, and performance by the Borrower of this Agreement and any other Credit
Documents, including certified resolutions, incumbency certificate, articles of
incorporation and bylaws;
(c) An opinion of Stradling, Yocca, Carlson & Rauth, counsel for the
Borrower, with respect to such legal matters relating hereto as the Bank may
request;
(d) Certificates of state officials showing that the Borrower is in
good standing or qualified to conduct business under the laws of the state of
its organization and, if requested by the Bank, in any other state in which the
Borrower is required to be so qualified;
(e) A certificate of an appropriate officer of the Borrower as to the
matters set forth in Section 4.02(a) and (b);
(f) Payment of any fee or expense required hereunder prior to the
first extension of credit, including the facility fee referenced in
Section 2.03; and
(g) Such other approvals, opinions, documents or instruments as the
Bank may reasonably request.
4.02 Conditions to Each Extension of Credit. Before each extension,
--------------------------------------
conversion or continuation of credit, including the first:
(a) The representations and warranties of the Borrower contained in
Article V shall be true and correct in all material respects on and as of the
date of such borrowing, conversion or continuation (except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they shall be true and correct in all material respects as of such earlier
date; and
14
<PAGE>
(b) Immediately prior to and immediately after giving effect to such
extension, conversion or continuation of credit, no Default or Event of Default
shall exist.
Each request for an extension, conversion or continuation of credit
hereunder shall constitute a representation and warranty by the Borrower, as of
the date of each such request and as of the date of each extension, conversion
or continuation of credit, that the conditions in this Section are satisfied.
ARTICLE V
Representations and Warranties
------------------------------
The Borrower represents and warrants that:
5.01 Corporate Existence and Power. The Borrower and each of its
-----------------------------
Subsidiaries: (a) is a corporation duly organized and existing under the laws of
the jurisdiction of its organization; (b) has the power and authority and all
governmental licenses, authorizations, consents, and approvals to own its
assets, carry on its business, and to execute, deliver, and perform its
obligations under, the Credit Documents to which it is a party; and (c) is duly
qualified and properly licensed and in good standing under the laws of each
jurisdiction where its ownership, lease, or operation of property or the conduct
of its business requires such license or qualification, except where the failure
to so qualify would not have a Material Adverse Effect.
5.02 Authorization. The execution, delivery, and performance by the
-------------
Borrower of this Agreement and any other Credit Document, have been duly
authorized by all necessary corporate action, and do not and will not:
(a) contravene the terms of any organizational or charter documents;
(b) conflict with or result in any breach or contravention of, or the
creation of any lien, security interest, or charge under, any agreement,
contract, indenture, document, or instrument to which the Borrower is a
party or by which any property is bound, or any order, injunction, writ, or
decree of any governmental authority to which the Borrower or any of its
property is subject; or
(c) violate any law, rule, regulation, or determination of an
arbitrator or of a court or other governmental authority, in each case
applicable to or binding upon the Borrower or any of its property.
15
<PAGE>
5.03 Enforceability. This Agreement is a legal, valid, and binding
--------------
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and the other Credit Documents and any other instrument or agreement
required under this Agreement, when executed and delivered, will be legal,
valid, binding, and enforceable in accordance with its terms against the
Borrower.
5.04 Compliance with Laws. The Borrower and each of its Subsidiaries is in
--------------------
compliance with all foreign, federal, state and local laws, rules, regulations
and determinations of arbitrators, courts and other governmental authorities
materially affecting the business, operations or property of the Borrower and
its Subsidiaries (including Environmental Laws).
5.05 Permits, Franchises. The Borrower and its Subsidiaries possess all
-------------------
permits, memberships, franchises, contracts, and licenses required and all
trademark rights, trade name rights, patent rights, and fictitious name rights
necessary to enable the Borrower and its Subsidiaries to conduct the businesses
in which they are now engaged.
5.06 Litigation. There is no litigation, tax claim, proceeding,
----------
governmental or administrative action, investigation, arbitration proceeding or
dispute pending, or, to the knowledge of the Borrower, threatened, against or
affecting the Borrower or any of its Subsidiaries or any of their properties,
the adverse determination of which would result in a Material Adverse Effect.
5.07 No Event of Default. There exists no Default or Event of Default.
-------------------
5.08 Other Obligations. As of the Closing Date, the Borrower and its
-----------------
Subsidiaries are not in default under any other agreement involving the
borrowing of money, the extension of credit, or the lease of real or personal
property, to which the Borrower or any of its Subsidiaries is a party as
borrower, guarantor, installment purchaser, or lessee, except as disclosed in
writing to the Bank prior to the Closing Date.
5.09 Tax Returns. The Borrower has no knowledge of any material pending
-----------
assessments or adjustments with respect to its or its Subsidiaries' income tax
liabilities for any year, except as disclosed in writing to the Bank prior to
the Closing Date.
5.10 Information Submitted. All financial and other information that has
---------------------
been submitted by the Borrower or any of its Subsidiaries to the Bank, including
the Borrower's financial statement delivered to the Bank most recently prior to
the Closing Date: (a) in the case of financial statements, is
16
<PAGE>
prepared in accordance with generally accepted accounting principles
consistently applied; and (b) is true and correct in all material respects and
is complete insofar as may be necessary to give the Bank true and accurate
knowledge of the subject matter thereof.
5.11 No Material Adverse Effect. Since December 31, 1996, there has been no
--------------------------
Material Adverse Effect.
5.12 ERISA Compliance. Except as specifically disclosed to the Bank in
----------------
writing prior to the Closing Date: (a) each Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law; (b) there are no pending, or to the best knowledge of
Borrower, threatened claims, actions or lawsuits, or action by any governmental
authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a Material Adverse Effect; (c) there has been no
prohibited transaction or other violation of the fiduciary responsibility rule
with respect to any Plan which could reasonably result in a Material Adverse
Effect; (d) no ERISA Event has occurred or is reasonably expected to occur with
respect to any Pension Plan; (e) no Pension Plan has any Unfunded Pension
Liability; (f) the Borrower has not incurred, nor does it reasonably expect to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (g) no
trade or business (whether or not incorporated under common control with the
Borrower within the meaning of Section 414(b), (c), (m) or (o) of the Code)
maintains or contributes to any Pension Plan or other Plan subject to Section
412 of the Code; and (h) neither the Borrower or entity under common control
with the Borrower in the preceding sentence has ever contributed to any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.
5.13 Environmental Matters. Except as disclosed on Schedule 5.13,
--------------------- -------------
(a) (i) the properties of the Borrower and its Subsidiaries do not contain and
have not previously contained (at, under, or about any such property) any
Hazardous Substances or other contamination (A) in amounts or concentrations
that constitute or constituted a violation of, or could give rise to liability
under, any Environmental Laws, (B) which could interfere with the continued use,
occupation or operation of such property, (C) which could impair the fair market
value thereof, or (D) in levels or concentrations requiring cleanup or other
management under applicable standards or guidelines of foreign, federal, state,
or local environmental agencies; and (ii) there has been no transportation or
disposal of Hazardous Substances from, nor any release or threatened release of
Hazardous Substances at or from, any property of the Borrower or any of its
Subsidiaries in
17
<PAGE>
violation of or in any manner which could give rise to liability under any
Environmental Laws.
(b) Neither the Borrower nor any of its Subsidiaries has received or
is aware of any material claim or notice of material violation, alleged material
violation, non-compliance, liability or potential liability regarding
environmental matters, Hazardous Substances or compliance with Environmental
Laws with regard to the properties or operations of the Borrower or any of its
Subsidiaries, nor does the Borrower have knowledge or reason to believe that any
such action is being contemplated, considered, or threatened.
5.14 Swap Obligations. Neither the Borrower nor any of its Subsidiaries has
----------------
incurred any outstanding obligations under any Swap Contracts, other than
Permitted Swap Obligations.
ARTICLE VI
Affirmative Covenants
---------------------
So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's obligations under this Agreement and any
other Credit Document:
6.01 Notices of Certain Events. The Borrower shall promptly give written
-------------------------
notice to the Bank of:
(a) all litigation, proceedings or actions affecting the Borrower or
its Subsidiaries where the amount claimed is $1,000,000 or more;
(b) any dispute which may exist between the Borrower and any
governmental regulatory body or law enforcement authority which could have in a
Material Adverse Effect;
(c) any Default or Event of Default;
(d) any of the representations and warranties in Article V ceases to
be true and correct; and
(e) any other matter which has resulted or could reasonably be
expected to result in a Material Adverse Effect.
6.02 Financial and Other Information. The Borrower shall deliver to the
-------------------------------
Bank in form and detail satisfactory to the Bank, and in such number of copies
as the Bank may request:
(a) Within 120 days after the end of each fiscal year, the Borrower's
consolidated financial statements for such year
18
<PAGE>
audited by a certified public accountant, together with an unqualified opinion
of such certified public accountant, and including, at a minimum, the Borrower's
balance sheet and statements of income, retained earnings, and cash flow;
(b) Within 45 days after the end of each fiscal quarter, the
Borrower's consolidated financial statements for such period prepared by the
Borrower and including, at a minimum, the Borrower's balance sheet and
statements of income and cash flow;
(c) Concurrently with the delivery of the financial statements
referred to in subsections 6.02(a) and (b), a completed Compliance Certificate
executed by the chief financial officer or treasurer of the Borrower or other
officer having substantially the same authority and responsibility;
(d) Within 10 days after the date of filing with the Securities and
Exchange Commission, copies of any of the Borrower's Form 10-K Annual Reports,
Form 10-Q Quarterly Reports and Form 8-K Current Reports; and
(e) Promptly upon request, such other materials and information
relating to the Borrower or its Subsidiaries as the Bank may reasonably request.
6.03 Books, Records, Audits and Inspections. The Borrower shall, and shall
--------------------------------------
cause its Subsidiaries to, maintain adequate books, accounts and records, and
prepare all financial statements required hereunder in accordance with generally
accepted accounting principles consistently applied, and in compliance with the
regulations of any governmental regulatory body having jurisdiction over the
Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses.
The Borrower shall permit, and shall cause each Subsidiary to permit,
representatives and independent contractors of the Bank to visit and inspect any
of their respective properties, to examine their respective corporate, financial
and operating records, and make copies thereof or abstracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
directors, officers, and independent public accountants, all at the expense of
the Bank and at such reasonable times during normal business hours and as often
as may be reasonably desired, upon reasonable advance notice to the Borrower;
provided, however, when an Event of Default exists the Bank may do any of the
- -------- -------
foregoing at the expense of the Borrower at any time during normal business
hours and without advance notice.
6.04 Use of Facility. The Borrower shall use the credit facility provided
---------------
herein solely for working capital and other
19
<PAGE>
general corporate purposes not in contravention of any requirement of law.
6.05 Insurance. The Borrower shall, and shall cause its Subsidiaries to,
---------
maintain and keep in force insurance of the types and in amounts customarily
carried in lines of businesses similar to those of the Borrower and its
Subsidiaries, including fire, extended coverage, public liability (including
coverage for contractual liability), property damage (including use and
occupance), business interruption, and workers' compensation, all carried by
insurers and in amounts satisfactory to the Bank, with loss payable endorsements
on such types of insurance as the Bank may reasonably request, and deliver to
the Bank from time to time, at the Bank's request, a certificate of insurance
setting forth all insurance then in effect.
6.06 Compliance with Laws. The Borrower shall at all times comply in all
--------------------
material respects with, and cause its Subsidiaries to comply in all material
respects with, all laws, statutes (including any fictitious name statute),
rules, regulations, orders, and directions of any governmental authority having
jurisdiction over the Borrower or any of its Subsidiaries or the business of the
Borrower or any of its Subsidiaries (including all Environmental Laws).
6.07 Change in Name, Structure or Location. The Borrower shall notify the
-------------------------------------
Bank in writing prior to any change in (a) the Borrower's name, (b) the
Borrower's business or legal structure, or (c) the Borrower's place of business
or chief executive office if the Borrower has more than one place of business.
6.08 Existence and Properties. The Borrower shall, and shall cause each of
------------------------
its Subsidiaries to, maintain and preserve its existence and all rights,
privileges, and franchises now enjoyed, conduct its business in an orderly,
efficient, and customary manner, keep all the its properties in good working
order and condition, and from time to time make all needed repairs, renewals, or
replacements thereto and thereof so that the efficiency of such property shall
be fully maintained and preserved.
ARTICLE VII
Negative Covenants
------------------
So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's obligations under this Agreement and any
other Credit Document:
20
<PAGE>
7.01 Other Indebtedness. The Borrower shall not, and shall not suffer or
------------------
permit any Subsidiary to, create, incur, assume, or permit to exist any
indebtedness or liabilities for or resulting from borrowed money, loans, or
advances, or for the deferred purchase price of property under capital leases,
or under or in connection with any Swap Contract, whether secured or unsecured,
matured or unmatured, liquidated or unliquidated, joint or several, or become
liable as a surety, guarantor, accommodation endorser, or otherwise for or upon
the obligation of any other Person; provided, however, that this Section shall
not prohibit:
(a) indebtedness and guarantees in favor of the Bank or any affiliate
of the Bank;
(b) indebtedness, liabilities, and guarantees outstanding as of the
date of this Agreement and specifically disclosed in Schedule 7.01;
-------------
(c) the acquisition of goods, supplies, or merchandise on normal trade
credit;
(d) the execution of bonds or undertakings in the ordinary course of
its business;
(e) the endorsement of negotiable instruments received in the ordinary
course of its business;
(f) indebtedness secured by liens permitted under subsection 7.02(f)
and indebtedness in connection with sale-leaseback transactions permitted under
subsection 7.07(d);
(g) Permitted Swap Obligations; and
(h) other unsecured indebtedness and guarantees not to exceed at any
one time outstanding the amount (including, without duplication, the amount
guaranteed, in the case of a guaranty) of $2,000,000.
7.02 Liens. The Borrower shall not, and shall not suffer or permit any of
-----
its Subsidiaries to, create, assume, or suffer to exist any security interest,
deed of trust, mortgage, lien (including the lien of an attachment, judgment, or
execution), or encumbrance, securing a charge or obligation, on or of any of its
or their property, real or personal, whether now owned or hereafter acquired,
except: (a) security interests and deeds of trust in favor of the Bank;
(b) liens, security interests, and encumbrances in existence as of the date of
this Agreement and specifically disclosed in Schedule 7.02; (c) liens for
-------------
current taxes, assessments, or other governmental charges which are not
delinquent or remain payable without any penalty or which are
21
<PAGE>
being contested in good faith and by appropriate proceedings, and as to which to
no foreclosure or forfeiture proceeding has been commenced, or, if commenced,
which has been stayed, and as to which adequate reserves in accordance with
generally accepted accounting principles consistently applied are being
maintained by the Borrower or the applicable Subsidiary; (d) liens in connection
with workers' compensation, unemployment insurance, or other social security
obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or
other like liens arising in the ordinary and normal course of business with
respect to obligations which are not due; and (f) purchase money security
interests in personal or real property hereafter acquired when the security
interest does not extend beyond the property purchased.
7.03 Acquisitions. The Borrower shall not, and shall not suffer or permit
------------
any of its Subsidiaries to, acquire or purchase control of, or the assets or
business of, any other Person unless (i) no consideration other than the stock
of the Borrower is given in connection with such acquisition or purchase;
provided that such acquisitions or purchases may involve cash or debt
consideration not in excess of the aggregate, cumulative amount of $10,000,000
from and after the date hereof, (ii) immediately after giving effect to any such
acquisition or purchase, there shall not exist any Default or Event of Default,
(iii) any such acquisition or purchase is undertaken in accordance with all
applicable requirements of law, and (iv) the prior, effective written consent or
approval to such acquisition or purchase of the board of directors or equivalent
governing body of such Person is obtained.
7.04 Dividends. The Borrower shall not, and shall not suffer or permit any
---------
of its Subsidiaries that is not wholly-owned by the Borrower to, declare or pay
any dividends or distributions on any of its shares now or hereafter existing,
or purchase, redeem or otherwise acquire for value any of its shares, or create
any sinking fund in relation thereto, except: (a) dividends payable solely in
its capital stock; and (b) repurchases of the Borrower's stock not to exceed
$2,000,000 from and after the date hereof.
7.05 Loans. The Borrower shall not, and shall not suffer or permit any of
-----
its Subsidiaries to, make any loans, advances, or other extensions of credit to
any of the Borrower's or such Subsidiary's executives, officers, or directors or
shareholders (or any relatives of any of the foregoing), or make loans, advances
or other extensions of credit to or invest in any other Person, other than
(a) investments in cash equivalents; (b) extensions of credit in the nature of
accounts receivable or notes receivable arising from the sale or lease of goods
or services in the ordinary course of business; (c) extensions of credit by the
Borrower to any of its wholly-owned Subsidiaries or by any of its wholly-owned
Subsidiaries to another of its wholly-owned
22
<PAGE>
Subsidiaries; (d) investments constituting Permitted Swap Obligations or
payments or advances under Swap Contracts relating to Permitted Swap
Obligations; (e) investments incurred in order to consummate acquisitions or
purchases otherwise permitted under subsection 7.03; and (f) loans to directors,
officers or employees in the ordinary course of business (such as relocation
loans) not to exceed in the aggregate principal amount outstanding at any one
time the amount of $750,000.
7.06 Liquidations and Mergers. The Borrower shall not, and shall not suffer
------------------------
or permit any of its Subsidiaries to, liquidate or dissolve or enter into any
consolidation, merger, partnership, joint venture, or other combination, except
that any Subsidiary may merge (i) with the Borrower, provided that the Borrower
shall be the continuing or surviving corporation, or (ii) with any one or more
Subsidiaries, provided that if any transaction shall be between a Subsidiary and
a wholly-owned Subsidiary, the wholly-owned Subsidiary shall be the continuing
or surviving corporation.
7.07 Sale of Assets. The Borrower shall not, and shall not suffer or permit
--------------
any of its Subsidiaries to, (a) sell, lease, or otherwise dispose of its
business or assets as a whole or such as in the opinion of the Bank constitutes
a substantial portion of its business or assets; (b) sell or otherwise dispose
of any of its accounts receivable except in connection with the collection of
same in the ordinary course of business; (c) sell or otherwise dispose of any of
its assets except for full, fair and reasonable consideration; or (d) enter into
any sale and leaseback agreement covering any of its fixed or capital assets;
provided, that the Borrower and its Subsidiaries shall not be prohibited from
- --------
entering into sale and leaseback agreements with respect to equipment financing
in the ordinary course of business.
7.08 Business Activities. The Borrower shall not, and shall not suffer or
-------------------
permit any of its Subsidiaries to, engage in any business activities or
operations substantially different from or unrelated to present business
activities and operations.
7.09 Regulations G, T, U, and X. The Borrower shall not, and shall not
--------------------------
suffer or permit any of its Subsidiaries to, use any portion of the proceeds of
any Advances or extensions of credit hereunder, directly or indirectly, (i) to
purchase or carry margin stock (within the meanings of Regulations G, T, U, and
X of the FRB), (ii) to repay or otherwise refinance indebtedness of the Borrower
or others incurred to purchase or carry any such margin stock, (iii) to extend
credit for the purpose of purchasing or carrying any such margin stock, or (iv)
to acquire any security in any transaction that is subject to Section 13 or 14
of the Securities Exchange Act of 1934, as amended.
23
<PAGE>
7.10 Quick Ratio. The Borrower shall not permit at any time on a
-----------
consolidated basis the sum of unencumbered cash, short-term cash investments,
marketable securities not classified as long-term investments and net accounts
receivable to be less than 1.25 times current liabilities (which shall include
all Advances hereunder).
7.11 Tangible Net Worth. The Borrower shall not permit at any time on a
------------------
consolidated basis its Tangible Net Worth to be less than 90% of its
consolidated Tangible Net Worth as of March 30, 1997.
7.12 Total Liabilities to Tangible Net Worth. The Borrower shall not permit
---------------------------------------
at any time on a consolidated basis the Borrower's total liabilities (which
shall include all Advances hereunder) to exceed 0.80 times Tangible Net Worth.
7.13 Consecutive Quarterly Losses; Losses in One Quarter. The Borrower on a
---------------------------------------------------
consolidated basis shall not incur (a) any quarterly net or operating loss in
any two consecutive fiscal quarters or (b) any quarterly net or operating loss
in excess of 5% of Tangible Net Worth.
ARTICLE VIII
Events of Default
-----------------
8.01 Events of Default. The occurrence of any of the following events shall
-----------------
constitute an "Event of Default" under this Agreement:
----------------
(a) Failure to Pay. The Borrower fails to pay, when due, any
--------------
installment of principal, or within two Business Days after the date when due
any interest, fee or any other sum due under this Agreement or any other Credit
Document in accordance with the terms hereof or thereof.
(b) Breach of Representation or Warranty. Any representation or
------------------------------------
warranty herein or in any other Credit Document proves to have been false or
misleading in any material respect when made.
(c) Specific Defaults. The Borrower fails to perform or observe any
-----------------
term, covenant or agreement contained in Section 6.01, 6.02 or 6.03 or
Article VII.
(d) Other Defaults. The Borrower fails to perform or observe any other
--------------
term or covenant contained in this Agreement or any Credit Document, and such
default shall continue unremedied for a period of 20 days after the earlier of
(i) the date upon
24
<PAGE>
which the chief executive or chief financial officer of the Borrower knew or
should have known of such failure or (ii) the date upon which written notice
thereof is given to the Borrower by the Bank.
(e) Judgments. One or more judgments or arbitration awards are entered
---------
against the Borrower or any of its Subsidiaries, or the Borrower or any of its
Subsidiaries enters into any settlement agreement with respect to any litigation
or arbitration, in the aggregate amount of $1,000,000 or more on a claim or
claims not covered by insurance.
(f) Failure to Pay Debts; Voluntary Bankruptcy. The Borrower or any
------------------------------------------
Subsidiary (i) fails to pay the Borrower's or such Subsidiary's debts generally
as they come due, or (ii) files any petition, proceeding, case, or action for
relief under any bankruptcy, reorganization, insolvency, or moratorium law, or
any other law or laws for the relief of, or relating to, debtors.
(g) Involuntary Bankruptcy. An involuntary petition is filed under any
----------------------
bankruptcy or similar statute against the Borrower or any Subsidiary, or a
receiver, trustee, liquidator, assignee, custodian, sequestrator, or other
similar official is appointed to take possession of the properties of the
Borrower or any Subsidiary; provided, however, that such Event of Default shall
be deemed cured if such petition or appointment is set aside or withdrawn or
ceases to be in effect within 60 days from the date of said filing or
appointment.
(h) Default of Other Financial Obligations. (i) Any default occurs
--------------------------------------
under any other agreement involving the borrowing of money or the extension of
credit having an aggregate principal amount (including undrawn committed or
available amounts and including amounts owing to all creditors under any
combined or syndicated credit arrangement) of more than $1,500,000 (including,
without limitation, under the $6,000,000 lease financing with BankAmerica
Leasing) to which the Borrower or any Subsidiary may be a party as borrower,
guarantor, or installment purchaser, if such default consists of the failure to
pay any obligation when due or if such default gives to the holder of the
obligation concerned the right to accelerate the obligation or (ii) there occurs
under any Swap Contract an Early Termination Date resulting from (1) any event
of default under such Swap Contract as to which the Borrower or any Subsidiary
is the Defaulting Party or (2) any Termination Event as to which the Borrower or
any Subsidiary is an Affected Party, and, in either event, the Swap Termination
Value owed by the Borrower or such Subsidiary as a result thereof is greater
than $1,500,000. For purposes of this clause (ii), the terms "Early Termination
Date", "Defaulting Party", "Termination Event", "Affected Party" and "Swap
Termination Value" shall have
25
<PAGE>
the meanings assigned to them in the relevant Swap Contract, it being understood
that such definitions contemplate Swap Contracts documented on International
Swaps and Derivatives Association ("ISDA") standard forms; if such Swap Contract
is not documented on an ISDA standard form, such terms shall be given similar or
analogous meanings as used in such non-ISDA standard agreements.
(i) Default of Other Bank Obligations. Any default occurs under any
---------------------------------
other obligation of the Borrower or any Subsidiary to the Bank or to any
affiliate of the Bank.
(j) Material Adverse Effect. There occurs a Material Adverse Effect.
-----------------------
(k) ERISA. (i) An ERISA Event shall occur with respect to a Pension
-----
Plan which has resulted or could reasonably be expected to result in liability
of the Borrower under Title IV of ERISA to the Pension Plan or PBGC in an
aggregate amount in excess of $500,000; (ii) the commencement or increase of
contributions to, or the adoption of or the amendment of a Pension Plan by the
Borrower which has resulted or could reasonably be expected to result in an
increase in Unfunded Pension Liability among all Pension Plans in an aggregate
amount in excess of $500,000; or (iii) any of the representations and warranties
contained in Section 5.12 shall cease to be true and correct which, individually
or in combination, has resulted or could reasonably be expected to result in a
Material Adverse Effect.
(l) Change of Control. (i) any Person or two or more Persons acting in
-----------------
concert shall acquire beneficial ownership, directly or indirectly, of
securities of the Borrower (or other securities convertible into such
securities) representing 40% or more of the combined voting power of all
securities of the Borrower entitled to vote in the election of directors; or
(ii) during any period of up to 12 consecutive months, commencing after the
Closing Date, individuals who at the beginning of such 12-month period were
directors of the Borrower shall cease for any reason to constitute a majority of
the Board of Directors of the Borrower unless the persons replacing such
individuals were nominated by the Board of Directors of the Borrower; or
(iii) any Person or two or more Persons acting in concert acquiring by contract
or otherwise, or entering into a contract or arrangement which upon consummation
will result in its or their acquisition of, or control over, securities of the
Borrower (or other securities convertible into such securities) representing 40%
or more of the combined voting power of all securities of the Borrower entitled
to vote in the election of directors.
8.02 Remedies. If any Event of Default occurs,
--------
26
<PAGE>
(a) any indebtedness of the Borrower under any of the Credit
Documents, any term thereof to the contrary notwithstanding, shall at the Bank's
option (but automatically upon the occurrence of an Event of Default described
in subsection 8.01(f)(ii) or subsection 8.01(g)) and without notice become
immediately due and payable without presentment, demand, protest, or notice of
dishonor, or any other notice, all of which are hereby expressly waived by the
Borrower to the full extent permitted by law;
(b) the obligation, if any, of the Bank to make further loans or
extensions of credit hereunder shall immediately cease and terminate, and
(c) the Bank shall have all rights, powers, and remedies available
under each of the Credit Documents, or accorded by law, including the right to
resort to any or all security for any credit accommodation described herein, and
to exercise any or all of the rights of a beneficiary or secured party pursuant
to applicable law.
All rights, powers, and remedies of the Bank may be exercised at any time by the
Bank and from time to time after the occurrence of an Event of Default. All
rights, powers, and remedies of the Bank in connection with each of the Credit
Documents are cumulative and not exclusive and shall be in addition to any other
rights, powers, or remedies provided by law or equity.
ARTICLE IX
Miscellaneous
-------------
9.01 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Borrower shall not assign this Agreement or any
other Credit Document or any of the rights, duties or obligations of the
Borrower hereunder without the prior written consent of the Bank.
9.02 Consents and Waivers. No failure to exercise and no delay in
--------------------
exercising, on the part of the Bank, any right, remedy, power, or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power, or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power,
or privilege. No consent or waiver under this Agreement shall be effective
unless in writing. No waiver of any breach or default shall be deemed a waiver
of any breach or default thereafter occurring.
27
<PAGE>
9.03 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of California.
9.04 Costs and Attorneys' Fees. The Borrower shall, whether or not the
-------------------------
transactions contemplated hereby shall be consummated, pay or reimburse the Bank
on demand for all reasonable costs and expenses incurred by the Bank in
connection with the development, preparation, delivery, administration, and
execution of, and any amendment, supplement, waiver or modification to, this
Agreement and any other Credit Document and the consummation of the transactions
contemplated hereby and thereby, including reasonable attorney fees and
disbursements and the allocated cost of internal counsel and disbursements,
incurred by the Bank with respect thereto; and in connection with the
enforcement, attempted enforcement or preservation of any rights or remedies
hereunder or under any Credit Document, including any "workout" or restructuring
under this Agreement, including attorney fees and disbursements and the
allocated cost of internal counsel and disbursements. The agreements and
obligations of the Borrower under this Section shall survive the expiration or
termination of the commitment to extend credit hereunder and the payment of all
other obligations of the Borrower hereunder.
9.05 Integration; Amendment. This Agreement, together with the other Credit
----------------------
Documents, embodies the entire agreement and understanding between the Borrower
and the Bank. This Agreement may be amended or modified only in writing, signed
by the Borrower and the Bank.
9.06 Borrower's Documents. The Bank shall be under no obligation to return
--------------------
any schedules, invoices, statements, budgets, forecasts, reports or other papers
delivered by the Borrower and shall destroy or otherwise dispose of same at such
time as the Bank, in its discretion, deems appropriate.
9.07 Participations. The Bank may at any time sell, assign, grant
--------------
participations in, or otherwise transfer to any other Person (a "Participant")
-----------
all or part of the obligations of the Borrower under this Agreement and any
other Credit Document. The Borrower authorizes the Bank and each Participant,
upon the occurrence of an Event of Default, to proceed directly by right of
setoff, banker's lien, or otherwise, against any assets of the Borrower which
may be in the hands of the Bank or such Participant, respectively. The Borrower
authorizes the Bank to disclose to any prospective Participant and any
Participant any and all information in the Bank's possession concerning the
Borrower and its Subsidiaries, this Agreement or any other Credit Document.
9.08 General Indemnification. The Borrower shall pay and indemnify the
-----------------------
Bank, the Bank's parent company, and each of their
28
<PAGE>
respective officers, directors, employees, counsel, agents and attorneys-in-fact
(each, an "Indemnified Person") harmless from and against any and all
------------------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, charges, expenses, or disbursements (including attorneys' fees and
disbursements and the allocated costs of internal counsel) of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance,
and administration of this Agreement and any other Credit Documents, or the
transactions contemplated hereby and thereby, and with respect to any
investigation, litigation, or proceeding related to this Agreement, any
violation of any Environmental Law by the Borrower or its Subsidiaries, any use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence (whether actual or alleged) of a Hazardous
Substance on, under or about the property or operations of or property leased to
the Borrower or any of its Subsidiaries, any transportation from or other off-
site management of any Hazardous Substance generated or used by the Borrower or
any of its Subsidiaries, or the loans and other extensions of credit hereunder
or the use of the proceeds thereof, whether or not any Indemnified Person is a
party thereto (all the foregoing, collectively, the "Indemnified Liabilities");
-----------------------
provided, that the Borrower shall have no obligation hereunder to any
- --------
Indemnified Person with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of such Indemnified Person. The
agreements and obligations of the Borrower under this Section shall survive the
expiration or termination of the commitment to extend credit hereunder and the
payment of all other obligations of the Borrower hereunder.
9.09 Confidentiality. The Bank agrees to take normal and reasonable
---------------
precautions and exercise due care to maintain the confidentiality of all
information identified as "confidential" or "secret" by the Borrower and
provided to it by the Borrower or any Subsidiary, under this Agreement or any
other Credit Document, including pursuant to Section 6.03 hereof, and the Bank
shall not use any such information other than in connection with or in
enforcement of this Agreement and the other Credit Documents or in connection
with other business now or hereafter existing or contemplated with the Borrower
or any Subsidiary; except to the extent such information (i) was or becomes
generally available to the public other than as a result of disclosure by the
Bank, or (ii) was or becomes available on a non-confidential basis from a source
other than the Borrower, provided that such source is not bound by a
confidentiality agreement with the Borrower known to the Bank; provided,
however, that the Bank may disclose such information (A) at the request or
pursuant to any requirement of any governmental authority to which the Bank is
subject or in connection with an examination of the Bank by any such authority;
(B) pursuant to subpoena or other court process; (C) when required
29
<PAGE>
to do so in accordance with the provisions of any applicable requirement of law;
(D) to the extent reasonably required in connection with any litigation or
proceeding to which the Bank or may be party; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Credit Document; (F) to the Bank's independent auditors and other
professional advisors; (G) to any Participant, actual or potential, provided
that such Participant agrees in writing to keep such information confidential to
the same extent required of the Bank hereunder; (H) as expressly permitted under
the terms of any other document or agreement regarding confidentiality to which
the Borrower or any Subsidiary is party or is deemed party with the Bank; and
(I) to its affiliates.
9.10 Notices (a) All notices, requests and other communications provided
-------
for hereunder shall be in writing and mailed or delivered to a party at its
address specified on the signature pages hereof, or to such other address as
shall be designated by such party in a written notice to the other parties.
(b) All such notices and communications shall, when transmitted by
overnight delivery, be effective when delivered for overnight delivery, or if
personally delivered, upon such personal delivery, except that notices pursuant
to Article II shall not be effective until actually received by the Bank. The
Borrower acknowledges and agrees that any agreement of the Bank pursuant to
Article II to receive notices by telephone or facsimile is solely for the
convenience and at the request of the Borrower. Telephone requests may be made
by any individual identified in writing to the Bank on a form acceptable to the
Bank as being authorized to make such requests. The Bank shall be entitled to
rely upon any written or telephone request from persons it reasonably believes
to be authorized by the Borrower to make such requests without making
independent inquiry. The Borrower assumes the full risk of, and the Bank shall
not be responsible for, any delays or errors in transmission, and the obligation
of the Borrower to repay the loans and other extensions of credit hereunder
shall not be affected in any way or to any extent by any failure by the Bank to
receive written confirmation of any telephonic or facsimile notice or the
receipt by the Bank of a confirmation which is at variance with the terms
understood by the Bank to be contained in the telephonic or facsimile notice.
9.11 Headings; Interpretation. Article, section, and paragraph headings are
------------------------
for reference only and shall not affect the interpretation or meaning of any
provisions of this Agreement. The meaning of defined terms shall be equally
applicable to the singular and plural forms of the defined terms. The words
"hereof", "herein", "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole
30
<PAGE>
and not to any particular provision of this Agreement; and Article, subsection,
section, schedule and exhibit references are to this Agreement unless otherwise
specified. The term "including" is not limiting and means "including without
limitation." In the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including"; the words "to"
and "until" each mean "to but excluding", and the word "through" means "to and
including."
9.12 Severability. The illegality or unenforceability of any provision of
------------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
9.13 Counterparts. This Agreement may be executed in as many counterparts
------------
as may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
9.14 Waiver of Jury Trial. THE BORROWER AND THE BANK WAIVE THEIR RESPECTIVE
--------------------
RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT
CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO
A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE
THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS
OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE
OTHER CREDIT DOCUMENTS.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
POWERWAVE TECHNOLOGIES, INC.
By: /s/ BRUCE C. EDWARDS
--------------------------------
Name: Bruce C. Edwards
------------------------------
Title: President and CEO
------------------------------
By: /s/ KEVIN T. MICHAELS
--------------------------------
Name: Kevin T. Michaels
------------------------------
Title: Vice President, Finance & CFO
------------------------------
Address where notices to
Borrower are to be sent:
2026 McGaw Avenue
Irvine, CA 92614
Attn: Kevin Michaels, Chief
Financial Officer
Telecopier: 714-757-6675
Telephone: 714-757-6608
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ DEBRA G. STAIGER
---------------------------------
Name: Debra G. Staiger
------------------------------
Title: Vice President
------------------------------
Address where notices to
Bank are to be sent:
530 Lytton Avenue
Palo Alto, CA 94301
Attn: Debra Staiger
Vice President
Telecopier: 415-853-4476
Telephone: 415-853-4480
32
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
SCHEDULE 7.01 - EXISTING INDEBTEDNESS
AS OF AUGUST 1, 1997
<TABLE>
<CAPTION>
Lessor Lease # Description Equip. Value
<S> <C> <C> <C>
CAPITAL LEASES:
B of A Leasing Capital Corp. 001 Test Equipment 101,024.82
002 Test Equipment 85,661.34
003 Test Equipment 516,857.35
004 Test Equipment 235,832.86
005 Test Equipment 568,758.36
Bank of the West (Balboa) 1923 Test Equipment 77,318.00
Santa Barbara Bank and Trust (Balboa) 2222 Test Equipment 61,552.00
--------------
TOTAL CAPITAL LEASES 1,647,004.73
==============
</TABLE>
Page 1
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
SCHEDULE 7.02 - EXISTING LIENS
AS OF AUGUST 1, 1997
<TABLE>
<CAPTION>
Lessor Lease # Description Equip. Value Description
<S> <C> <C> <C> <C>
(1) BUILDING FACILITY LEASE:
CNH, LLC Building Rent 2026 McGaw Ave Ten year operating lease commenced
Irvine, CA 92614 on July 15, 1996
(2) CAPITAL LEASES:
B of A Leasing Capital Corp. 001 Test Equipment 101,024.82
002 Test Equipment 85,661.34
003 Test Equipment 516,857.35
004 Test Equipment 235,832.86
005 Test Equipment 568,758.36
Bank of the West (Balboa) 1923 Test Equipment 77,318.00
Santa Barbara Bank and Trust (Balboa) 2222 Test Equipment 61,552.00
--------------
TOTAL CAPITAL LEASES 1,647,004.73
==============
(3) Operating leases on equipment in the normal course of business
(4) Mission Viejo Imports SN NDBFA67E9SF123130 Mercedes Benz SL500R 91,400.00 Three year lease commencing on
September 17, 1995
</TABLE>
Page 1
<PAGE>
EXHIBIT A
POWERWAVE TECHNOLOGIES, INC.
----------------------------
COMPLIANCE CERTIFICATE
----------------------
Date: ________, 199
Pursuant to that Credit Agreement dated as of August 1, 1997 (as
amended, modified or supplemented from time to time, the "Credit Agreement";
capitalized terms not otherwise defined herein being used herein as defined in
the Credit Agreement) between Powerwave Technologies, Inc. (the "Borrower") and
Bank of America National Trust and Savings Association (the "Bank"), the
undersigned certifies that he/she is the chief financial officer of the
Borrower, and that, as such, he/she is authorized to execute and deliver this
Certificate, and that:
[Use this paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 6.02(a) of the Credit
Agreement.]
1. Attached as Schedule 1 hereto is a true and correct copy of the
Borrower's audited consolidated balance sheet as at the end of the fiscal year
ended _____________, 199_ and the related consolidated statements of income,
retained earnings and cash flow for such fiscal year, setting forth in each case
in comparative form the figures for the previous fiscal year, and accompanied by
the unqualified opinion of ________________ [independent certified public
accounting firm].
or
[Use this paragraph if this Certificate is delivered in connection with the
financial statements required by subsection 6.02(b) of the Credit Agreement.]
1. Attached as Schedule 1 hereto is a true and correct copy of the
unaudited consolidated balance sheet of the Borrower for the fiscal quarter
ended __________, 199_ and the related consolidated statements of income and
cash flows for the period commencing on the first day and ending on the last day
of such quarter and for the portion of the fiscal year ending on the last day of
such quarter.
2. The attached financial statements are complete and correct and
fairly present, in accordance with GAAP, the financial position and results of
operations of the Borrower and the Borrower's consolidated Subsidiaries.
3. The undersigned has reviewed and is familiar with the terms of the
Credit Agreement and has made, or has caused to be made under his/her
supervision, a detailed review of the
A-1
<PAGE>
transactions and conditions of the Borrower during the accounting period covered
by the attached financial statements.
4. To the best of the undersigned's knowledge, the Borrower, during
such period, has observed, performed or satisfied all of its covenants and other
agreements, and satisfied every condition in the Credit Agreement to be
observed, performed or satisfied by the Borrower, and the undersigned has no
knowledge of any Default or Event of Default.
5. The following financial covenant analyses and information set forth
on Schedule 2 attached hereto are true and accurate on and as of the date of
this Certificate. All amounts and ratios in Schedule 2 refer to the financial
statements attached as Schedule 1 hereto and are determined in accordance with
the specifications set forth in the Credit Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
_________________, 199_.
POWERWAVE TECHNOLOGIES, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
A-2
<PAGE>
SCHEDULE 2
----------
To the Compliance Certificate
($ in 000's)/1/
Date: __________, 199__
For the fiscal quarter/year
Ended __________, 199__
<TABLE>
<CAPTION>
Actual Required/Permitted
------ ------------------
<S> <C> <C>
1. Section 7.01(h) Other
---------------------
Unsecured Indebtedness.
----------------------
Unsecured Indebtedness (other than types listed
in 7.01(a) through (g)) Not to exceed $2,000,000
==========
2. Section 7.03 Acquisitions.
-------------------------
Cash and debt consideration paid for
acquisitions made from and after August 1, 1997 Not to exceed $10,000,000
==========
3. Section 7.04(b) Stock Repurchases.
---------------------------------
Stock repurchases from and after August 1, 1997 Not to exceed $2,000,000
==========
4. Section 7.10 Quick Ratio.
------------------------
The ratio of:
A. the sum of unemcumbered:
(i) cash
----------
plus
----
(ii) short-term investments
----------
plus
----
(iii) marketable securities not
classified as long-term
investments ----------
plus
----
(iv) current accounts receivable (net
of bad debt reserves) ----------
(i)+(ii)+(iii)+(iv) =
==========
B. current liabilities (including
Advances under the Credit
Agreement)
A
---
B = Not less than 1.25 to 1.00
==========
</TABLE>
- --------------------------
/1/ All amounts determined on a consolidated basis and computed in accordance
with GAAP, consistently applied.
S-1
<PAGE>
<TABLE>
<CAPTION>
5. Section 7.11 Tangible Net Worth.
-------------------------------
<S> <C>
Not to be less than the sum of:
Tangible Net Worth: Tangible Net Worth as of 3/30/97:
(i) gross book value of assets (i) gross book value of assets
---------- ----------
less less
---- ----
(ii) goodwill, patents, (ii) goodwill, patents,
trademarks, trade names, trademarks, trade names,
organization expense, organization expense, treasury
treasury stock, unamortized stock, unamortized debt discount
debt discount and expense, and expense, deferred research
deferred research and and development costs, deferred
development costs, deferred marketing expenses, other
marketing expenses, other deferred charges and other like
deferred charges and other intangibles
like intangibles
---------- ----------
less less
---- ----
(iii) monies due from (iii) monies due from affiliates,
affiliates, officers, officers, directors, or
directors, or shareholders of the Borrower
shareholders of the or its Subsidiaries
Borrower or its
Subsidiaries
---------- ----------
less less
---- ----
(iv) reserves applicable to (iv) reserves applicable
assets (including to assets (including reserves
reserves for depreciation for depreciation and
and amortization) amortization)
---------- ----------
less less
---- ----
(v) all liabilities (v) all liabilities (including
(including accrued and accrued and deferred income
deferred income taxes and taxes and subordinated
subordinated liabilities) liabilities)
---------- ----------
(i)-(ii)-(iii)-(iv)-(v) = (i)-(ii)-(iii)-(iv)-(v) = 2
========== ==========
</TABLE>
- -------------------
/2/ Calculation will need to be done for first compliance certificate only;
thereafter, this number will be inserted.
S-2
<PAGE>
<TABLE>
<S> <C>
6. Section 7.12 Total
------------------
Liabilities to Tangible Net
---------------------------
Worth.
-----
The ratio of
A. Total liabilities
(including Advances
under the Credit
Agreement)
B. Tangible Net Worth: __________
(from #5 above) __________
A Not greater than 0.80 to 1.00
--- =
B ==========
7. Section 7.13 Consecutive
------------------------
Quarterly Losses; Losses in
---------------------------
One Quarter.
-----------
A. Operating income (loss) No loss if loss in immediately preceding
for fiscal quarter ========== fiscal quarter; no loss in excess of 5%
times Tangible Net Worth (from #5 above)
B. Net income (loss) for No loss if loss in immediately
fiscal quarter ========== preceding fiscal quarter; no loss in excess of 5%
times Tangible Net Worth (from #5 above)
</TABLE>
S-3
<PAGE>
EXHIBIT 11.1
POWERWAVE TECHNOLOGIES, INC.
COMPUTATION OF PRO FORMA NET INCOME AND NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- -------------------------------------
EPS CALCULATION AS OF SEPTEMBER 29, 1996
<S> <C> <C> <C> <C>
Shares issued and outstanding...................... 8,998,650 8,998,650
Preferred shares converted upon IPO................ 5,063,850 5,063,850
----------- -----------
Pro forma shares outstanding....................... 14,062,500 14,062,500
Weighted average options issued within one year
of IPO...................................... 982,500 982,500
Proceeds........................................... $ 3,249,128 $ 3,249,128
Assumed buyback price.............................. $ 11.50 $ 11.50
----------- -----------
Shares bought back................................. 282,533 282,533
Non-qualified tax benefit utilizing 41% tax rate... 286,986 286,986
Common equivalent shares........................... 412,981 412,981
----------- -----------
Total weighted average Common Shares............... 14,475,481 14,475,481
Net income at September 29, 1996................... $ 1,792,825 $ 5,430,484
----------- -----------
Pro forma net income per share..................... $ 0.12 $ 0.37
=========== ===========
</TABLE>
EPS CALCULATION AS OF SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Shares issued and outstanding at June 29, 1997
and December 29, 1996, respectively............. 16,454,526 15,862,497
Shares issued in Secondary Offering and IPO............ 1,000,000 994,505 1,360,000 686,227
Shares issued under the Employee Stock Purchase Plan... 40,882 26,955 40,882 8,985
Options exercised during the period.................... 207,119 173,042 439,148 156,666
----------- -----------
Weighted average shares outstanding.................... 17,649,028 16,714,375
Weighted average options issued and outstanding
during period ending September 28, 1997......... 786,864 1,032,554
Weighted Proceeds...................................... $4,760,264 $5,227,155
Assumed end of period buyback price.................... $ 41.25 $ 27.375
---------- ----------
Shares bought back..................................... 116,028 223,194
Non-qualified tax benefit utilizing 37% tax rate....... 248,209 305,320
Weighted average common equivalent shares.............. 422,627 504,040
----------- -----------
Total weighted average common shares................... 18,071,655 17,218,415
Net income at September 28, 1997....................... $ 4,700,061 $10,888,868
----------- -----------
Net income per share................................... $ 0.26 $ 0.63
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS AND BALANCE SHEETS OF POWERWAVE TECHNOLOGIES,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 70,133,596
<SECURITIES> 0
<RECEIVABLES> 9,511,210
<ALLOWANCES> 500,590
<INVENTORY> 8,345,319
<CURRENT-ASSETS> 90,689,494
<PP&E> 9,311,384
<DEPRECIATION> 2,126,978
<TOTAL-ASSETS> 98,555,629
<CURRENT-LIABILITIES> 19,673,645
<BONDS> 0
0
0
<COMMON> 63,466,310
<OTHER-SE> 14,161,618
<TOTAL-LIABILITY-AND-EQUITY> 98,555,629
<SALES> 81,950,958
<TOTAL-REVENUES> 81,950,958
<CGS> 48,949,665
<TOTAL-COSTS> 66,272,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,442,367
<INCOME-TAX> 6,553,499
<INCOME-CONTINUING> 10,888,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,888,868
<EPS-PRIMARY> .65
<EPS-DILUTED> .63
</TABLE>
