<PAGE>
================================================================================
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 June 28, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 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: (949) 757-0530
---------------
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 August 7, 1998, the number of outstanding shares of Common Stock, par
value $.0001 per share, of the Registrant was 17,179,833.
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<PAGE>
POWERWAVE TECHNOLOGIES, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 28, 1998
(Unaudited) and December 28, 1997 2
Consolidated Statements of Income (Unaudited) for
the three and six months ended June 28, 1998 and
June 29, 1997 3
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 28, 1998 and
June 29, 1997 4
Notes to Consolidated Financial Statements
(Unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-25
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Change in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
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.
1
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POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 28, December 28,
ASSETS: 1998 1997
------------ ------------
<S> <C> <C>
Current Assets: (Unaudited)
Cash and cash equivalents $ 53,133,233 $ 67,433,168
Accounts receivable, net of allowance for doubtful
accounts of $868,825 and $769,068 at June 28,
1998 and December 28, 1997, respectively 14,355,568 11,967,327
Inventories, net 8,556,288 8,844,177
Prepaid expenses and other current assets 1,331,365 1,221,426
Deferred tax assets 3,082,977 3,082,977
------------ ------------
Total current assets 80,459,431 92,549,075
------------ ------------
Property and equipment 13,566,645 11,019,767
Accumulated depreciation and amortization (3,856,294) (2,643,022)
------------ ------------
Net property and equipment 9,710,351 8,376,745
------------ ------------
Other assets 3,219,956 757,235
------------ ------------
TOTAL ASSETS $ 93,389,738 $101,683,055
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 5,574,391 $ 9,607,335
Accrued expenses and other liabilities 5,912,157 10,249,125
Income taxes payable 3,295,301 4,674,027
Current portion of long-term debt 513,029 507,140
------------ ------------
Total current liabilities 15,294,878 25,037,627
Long-term debt 392,009 658,630
Deferred tax liabilities 289,426 289,426
Other non-current liabilities 356,933 217,720
------------ ------------
TOTAL LIABILITIES 16,333,246 26,203,403
------------ ------------
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, 17,955,748 shares issued and 17,145,748 shares
outstanding at June 28, 1998 and 17,773,713 shares issued
and 17,263,713 shares outstanding at December 28, 1997 66,031,756 64,800,529
Retained earnings 35,781,466 31,695,283
Less treasury stock at cost (24,756,730) (21,016,160)
------------ ------------
Total shareholders' equity 77,056,492 75,479,652
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 93,389,738 $101,683,055
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $21,098,851 $27,359,581 $43,748,964 $47,602,321
Cost of sales 12,567,173 16,856,949 26,362,314 28,384,868
----------- ----------- ----------- -----------
Gross profit 8,531,678 10,502,632 17,386,650 19,217,453
Operating expenses:
Sales and marketing 2,163,183 2,141,191 4,193,831 3,721,816
Research and development 2,949,994 2,384,848 5,907,246 4,596,253
General and administrative 1,204,092 1,018,428 2,440,371 1,961,316
----------- ----------- ----------- -----------
Total operating expenses 6,317,269 5,544,467 12,541,448 10,279,385
----------- ----------- ----------- -----------
Operating income 2,214,409 4,958,165 4,845,202 8,938,068
Other income, net 744,869 571,104 1,589,732 1,043,881
----------- ----------- ----------- -----------
Income before income taxes 2,959,278 5,529,269 6,434,934 9,981,949
Provision for income taxes 1,080,136 2,101,119 2,348,751 3,793,142
----------- ----------- ----------- -----------
Net income $ 1,879,142 $ 3,428,150 $ 4,086,183 $ 6,188,807
=========== =========== =========== ===========
Basic earnings per share $.11 $.21 $.24 $.38
Diluted earnings per share $.11 $.20 $.24 $.37
Weighted average common
shares - basic 17,139,547 16,275,048 17,137,682 16,247,050
Weighted average common
shares - diluted 17,466,444 16,855,583 17,409,912 16,791,796
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
June 28, June 29,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,086,183 $ 6,188,807
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,283,507 706,760
Change in provision for doubtful accounts receivable 99,757 (170,368)
Change in provision for inventory reserves 533,797 482,545
Compensation costs related to stock options 17,593 23,493
Changes in current assets and current liabilities:
Accounts receivable (2,487,998) (2,266,881)
Inventories (245,908) (2,102,396)
Prepaid expenses and other current assets (109,939) (671,955)
Accounts payable (4,032,944) 2,576,753
Accrued expenses and other liabilities (4,336,968) 2,037,193
Income taxes payable (901,753) 1,108,142
Other non-current assets 37,279 (236,568)
Other non-current liabilities 139,213 96,305
------------ -----------
Net cash (used in) provided by operating activities (5,918,181) 7,771,830
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,617,113) (3,821,764)
Purchase of long-term investments (2,500,000) -
------------ -----------
Net cash used in investing activities (5,117,113) (3,821,764)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (260,732) (152,280)
Proceeds from sale of property and equipment - 1,830,866
Issuance of Common Stock 272,896 3,884,019
Repurchase of Common Stock (3,740,570) -
Proceeds from exercise of stock options 463,765 676,888
------------ -----------
Net cash (used in) provided by financing activities (3,264,641) 6,239,493
------------ -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (14,299,935) 10,189,559
CASH AND CASH EQUIVALENTS, beginning 67,433,168 32,386,331
------------ -----------
CASH AND CASH EQUIVALENTS, ending $ 53,133,233 $42,575,890
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 79,913 $ 43,037
============ ===========
Income taxes $ 3,250,493 $ 2,685,000
============ ===========
NON-CASH ITEMS:
Tax benefit related to stock options $ 439,760 $ 1,494,157
============ ===========
Acquisition of property and equipment
through capital leases - $ 804,591
===========
Tax benefit related to sale of shares purchased under
the Employee Stock Purchase Plan $ 37,213 -
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 28, 1998
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit (except for balance sheet information as of December 28,
1997) 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 28,
1997. 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 28, 1997.
The results of operations for the three and six months ended June 28, 1998,
are not necessarily indicative of the results to be expected for the entire
fiscal year ended January 3, 1999, (fiscal year 1998). 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 and the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 1997.
Earnings Per Share
Effective December 28, 1997, the Company has adopted SFAS No. 128, Earnings
per Share, which 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. Prior periods have been restated to
reflect the change in presentation.
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share are based upon the weighted
average number of common and potential common shares for each period presented.
Potential common shares include stock options using the treasury stock method.
New Accounting Pronouncements
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, for the
quarterly periods beginning in fiscal year 1998. For the three and six month
periods ended June 28, 1998, the Company has no reportable differences between
net income and comprehensive income. Therefore, no statement of comprehensive
income has been presented.
For the current fiscal year ending January 3, 1999 the Company will adopt SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 131, which is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major customers and
the material countries in which the entity holds assets and reports revenue.
The Company is reviewing the impact of such disclosures on its consolidated
financial statements.
5
<PAGE>
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 six months
ended June 28, 1998:
<TABLE>
<CAPTION>
Number of
Options
Exercisable
Number of Price per as of
Shares Share June 28, 1998
--------- ------------- -------------
<S> <C> <C> <C>
Balance at December 28, 1997 1,698,614 $ 2.47-$40.56
Granted 1,206,850 $12.94-$19.56
Exercised (158,579) $ 2.47-$16.25
Canceled (373,192) $ 4.67-$40.56
---------
Balance at June 28, 1998 2,373,693 $ 2.47-$31.75 565,656
=========
</TABLE>
Employee Stock Purchase Plan
At June 28, 1998 there were rights to purchase approximately 28,000 shares of
Common Stock outstanding under the Company's Employee Stock Purchase Plan's
third offering, which will conclude on July 31, 1998.
6
<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 contains 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 six months ended June 28, 1998 and
June 29, 1997.
<TABLE>
<CAPTION>
Percentage of Net Sales
Three Months Ended Six Months Ended
------------------ ------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.6 61.6 60.3 59.6
----- ----- ----- -----
Gross profit 40.4 38.4 39.7 40.4
Operating expenses:
Sales and marketing 10.2 7.8 9.5 7.8
Research and development 14.0 8.7 13.5 9.7
General and administrative 5.7 3.8 5.6 4.1
----- ----- ----- -----
Total operating expenses 29.9 20.3 28.6 21.6
----- ----- ----- -----
Operating income 10.5 18.1 11.1 18.8
Other income, net 3.5 2.1 3.6 2.2
----- ----- ----- -----
Income before income taxes 14.0 20.2 14.7 21.0
Provision for income taxes 5.1 7.7 5.4 8.0
----- ----- ----- -----
Net income 8.9% 12.5% 9.3% 13.0%
===== ===== ===== =====
</TABLE>
Three months ended June 28, 1998 and June 29, 1997
Net Sales
The Company's net sales are derived primarily from the sale of radio frequency
("RF") power amplifiers for use in wireless communications networks. Sales
decreased by 22.9% to $21.1 million for the quarter ended June 28, 1998 from
$27.4 million for the quarter ended June 29, 1997. The decrease in revenue was
primarily attributable to decreased sales of the Company's personal
communications services ("PCS") products, which was partially offset by an
increase in sales of the Company's cellular multi-carrier amplifiers. This
decrease in PCS sales was mainly due to the ongoing economic crisis in South
Korea, which has significantly reduced South Korean wireless service operators'
demand for the Company's products. For the quarter ended June 28, 1998, cellular
multi-carrier amplifiers (including racks) accounted for approximately 87.9% of
revenues or $18.6 million, compared to approximately 45.7% or $12.5 million for
the quarter ended June 29, 1997. PCS products (including racks) accounted for
approximately 8.3% of revenues or $1.8 million for the second quarter of 1998,
compared to 47.9% or $13.1 million for the second quarter of 1997. Sales of
Land Mobile Radio ("LMR") amplifiers accounted for approximately 3.7% of
revenues or $0.8 million for the quarter ended June 28, 1998, compared to
approximately 6.4% of revenues or $1.8 million for the quarter ended June 29,
1997.
For 1997 and the first six months of 1998, the majority of the Company's
single carrier PCS amplifiers were being utilized in the deployment of the new
PCS networks being built in South Korea and a majority of the Company's cellular
multi-carrier amplifiers sold during 1997 were also being utilized in the
continued deployment
7
<PAGE>
of the digital cellular CDMA networks in South Korea. During the first six
months of 1998, the percentage of the Company's multi-carrier amplifiers sold
for use in cellular systems of wireless network operators in both North America
and other international markets outside of Asia continued to increase as
compared to the first six months of 1997. Due to the economic and financial
crisis that has impacted South Korea and Asia in general, the deployments of
both the digital cellular CDMA networks and the PCS networks in South Korea have
been significantly delayed during the first six months of 1998. Given the
current unstable economic environment within South Korea and Asia in general,
the Company is unable to estimate the level of future deployments of these
networks or when such deployments can be expected to be completed. The reduction
and stoppage of these deployments during the first six months of 1998 did have
an adverse effect on the Company's revenue and business with its South Korean
customers and its results of operations. The continued delay or cancellation of
these deployments will have an adverse effect on the Company's business, results
of operations and financial condition. For additional information see
"Additional Factors That May Affect Future Results -Customer Concentration;
Reliance upon South Korean Market and Growth of Wireless Services Market and
Risks of Doing Business in International Markets"
Total international sales (excluding North American sales), primarily to
customers in South Korea, accounted for approximately 33.6% of revenues or $7.1
million for the quarter ended June 28, 1998, compared with approximately 89.2%
or $24.4 million for the quarter ended June 29, 1997. Total sales to customers
in South Korea accounted for approximately 31.6% of revenues or $6.7 million for
the quarter ended June 28, 1998 compared to approximately 88.2% of revenues or
$24.1 million for sales to South Korean customers for the quarter ended June 29,
1997. The decrease in sales to customers in South Korea is a result of the
ongoing economic crisis in South Korea and Asia in general, which has reduced
South Korean wireless service operators' demand for the Company's products.
During the first six months of 1998, the Company has experienced postponed,
rescheduled and cancelled orders from its South Korean customers. At this time,
the Company is unable to predict when, if ever, its South Korean customers will
take delivery of their postponed and rescheduled orders. Due to these issues
and the overall economic crisis in Asia, the Company currently anticipates that
its percentage of revenues from South Korean sales will continue to decline.
See "Additional Factors That May Affect Future Results - Customer Concentration;
Reliance upon South Korean Market and Growth of Wireless Services Market and
Risks of Doing Business in International Markets "
Sales to customers in countries outside of South Korea, primarily in North
America, increased approximately 346.0% to $14.4 million for the quarter ended
June 28, 1998 from $3.2 million for the quarter ended June 29, 1997. Sales to
three customers in North America, (in alphabetical order) BellSouth Cellular
Corp., Metawave Communications Corporation and Northern Telecom Limited, each of
which accounted for more than 10% of the Company's sales, collectively accounted
for $11.6 million or 55.2% of revenues for the second quarter of 1998, compared
to $0.9 million or 3.2% for the same three customers in the second quarter of
1997. There can be no assurance that the Company will continue to be successful
in both attracting new customers as well as retaining and or increasing business
with existing non-Korean customers. In addition, the Company believes that a
significant portion of its business with original equipment manufacturers
("OEMs"), such as LM Ericsson Telephone Company, Metawave Communications
Corporation and Northern Telecom Limited, is dependent upon the deployment
schedules of wireless network operators who are purchasing infrastructure
equipment from such OEMs. These are for both North American and international
deployments, including deployments in South America. A number of factors may
cause delays in wireless infrastructure deployments, including such factors as
economic or political problems in the wireless operator's operating region;
delays in government approvals required for system deployment; and reduced
subscriber demand for wireless services. Due to the possible uncertainties
associated with wireless infrastructure deployments, the Company may experience
significant fluctuations in demand from its OEM customers. Such fluctuations
could cause a significant reduction in revenues which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Additional Factors That May Affect Future Results - Customer
Concentration; Risks of Doing Business in International Markets and Fluctuations
in Quarterly Results."
Gross Profit
Cost of sales consists primarily of raw materials, assembly and test labor,
overhead and warranty costs. Gross profit margins for the second quarter of
fiscal 1998 and 1997 were 40.4% and 38.4%, respectively. The increase in gross
margins is a result of the decrease in the percentage of sales of PCS products
and an increase in sales of
8
<PAGE>
cellular multi-carrier products. The Company's single carrier PCS products
typically have lower gross margins than its cellular multi-carrier products. The
Company has experienced increased labor and overhead costs associated with the
significant reduction in sales to the Company's South Korean customers. The
Company anticipates that in the near-term it will continue to experience
significant labor and overhead costs due to its reduced sales level. These costs
are currently anticipated to have a negative impact on the Company's future
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 keep pace with price declines
and cost increases. If the Company is unable to obtain cost reductions, its
gross margins and profitability will continue to 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. In addition, with
expected slowdowns in demand for wireless infrastructure equipment from the
Asian markets, pricing competition among suppliers to the remaining world
markets is expected to intensify. 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 1.0% to $2.2 million for the quarter ended June 28, 1998 from $2.1 million
for the quarter ended June 29, 1997. As a percentage of sales, sales and
marketing expenses were 10.2% and 7.8% for the quarters ended June 28, 1998 and
June 29, 1997, respectively. The increase in sales and marketing expenses as a
percentage of sales is primarily attributable to the reduced level of sales for
the second quarter of 1998 compared to the second quarter of 1997.
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 23.7% to $2.9 million for the quarter
ended June 28, 1998 from $2.4 million for the quarter ended June 29, 1997.
Research and development expenses as a percentage of sales were 14.0% and 8.7%,
respectively. The increase in actual research and development expenses was
primarily attributable to increased staffing and associated engineering costs
related to continued new product development and existing product enhancement.
The Company intends to continue to emphasize investment in research and
development programs in future periods with current programs covering PCS,
cellular and wireless local loop 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 18.2% to $1.2 million for the
quarter ended June 28, 1998, from $1.0 million for the quarter ended June 29,
1997. General and administrative expenses as a percentage of sales were 5.7%
and 3.8%, respectively. The increase in actual general and administrative
expenses was primarily attributable to increased staffing costs associated with
supporting the Company's increased personnel. While the Company currently
anticipates that its revenues from South Korea will be significantly reduced
from levels obtained in 1997, to date the Company has chosen to maintain its
overall workforce to enable it to maintain its overall production capacity.
While this decision will continue to be reviewed by the Company, to date it has
caused and is anticipated to cause the Company's operating expenses to remain
increased as a percentage of sales.
9
<PAGE>
Other Income
The Company earned other income, net, of $0.7 million in the second quarter of
1998 compared to $0.6 million for the second quarter of 1997. 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 second quarter of 1998 compared to the cash
balances maintained during the second quarter of 1997. The larger cash balances
are due to the Company's secondary Common Stock offering completed in July 1997.
The larger cash balances were invested in short-term, investment-grade money
market instruments.
Provision for Income Taxes
The Company's effective tax rate was 36.5% and 38.0% for the quarters ended
June 28, 1998 and June 29, 1997, respectively.
Six months ended June 28, 1998 and June 29, 1997
Net Sales
Sales decreased 8.1% to $43.8 million for the six months ended June 28, 1998
from $47.6 million for the six months ended June 29, 1997. The decrease in
revenue was primarily attributable to decreased sales of the Company's products
to its South Korean customers, due to the ongoing economic crisis in South Korea
and Asia in general. Sales of PCS products decreased 75.3% to $3.7 million for
the six months ended June 28, 1998 from $14.9 million for the six months ended
June 28, 1997. This decrease in PCS sales was mainly due to a reduction in
South Korean wireless service operators' demand for the Company's products. LMR
sales decreased from $3.2 million in the first six months of 1997 to $1.7
million in the first six months of 1998. Sales of cellular multi-carrier
amplifiers increased 29.9% to $38.3 million for the six months ended June 28,
1998 from $29.5 million for the six months ended June 28, 1997. The increase in
sales of cellular multi-carrier amplifiers was due to an increase in sales to
non-Korean wireless network operators and OEMs, offset by a decrease in sales to
the Company's Korean customers. For the six months ended June 28, 1998,
cellular multi-carrier amplifiers (including racks) accounted for approximately
87.6% of revenues or $38.3 million, compared to approximately 62.0% or $29.5
million for the six months ended June 29, 1997. PCS products (including racks)
accounted for approximately 8.4% of revenues or $3.7 million for the first six
months of 1998, compared to 31.2% or $14.9 million for the first six months in
1997. Sales of LMR amplifiers accounted for approximately 3.9% of revenues or
$1.7 million for the six months ended June 28, 1998, compared to approximately
6.8% of revenues or $3.2 million for the six months ended June 29, 1997.
Total international sales (excluding North American sales), primarily to
customers in South Korea, accounted for 41.8% of revenues or $18.3 million for
the six months ended June 28, 1998, compared with 87.3% or $41.5 million for the
six months ended June 29, 1997. Total sales to customers outside of South Korea
increased approximately 304.3% to $26.9 million for six months ended June 28,
1998 from $6.7 million for the six months ended June 29, 1997. Sales to three
customers in North America, (in alphabetical order) BellSouth Cellular Corp.,
Metawave Communications Corporation and Northern Telecom Limited, each of which
accounted for more than 10% of the Company's sales, collectively accounted for
$20.8 million or 47.6% of revenues for the first six months of 1998, compared to
$1.7 million or 3.5% for the same three customers in the first six months of
1997. See "Additional Factors That May Affect Future Results - Customer
Concentration."
Gross Profit
The gross profit margins as a percentage of sales for six months ended June
28, 1998 and June 29, 1997 were 39.7% and 40.4%, respectively. The decrease in
gross margins during the first six months of 1998 is primarily due to declining
average sales prices as well as increased labor and overhead costs associated
with the significant reduction in sales to the Company's South Korean customers
and the Company's decision to not materially reduce its employment levels. The
Company anticipates that in the near-term it will continue to experience
significant labor and overhead costs due to its reduced sales level. These
costs are currently anticipated to have a negative impact on the Company's
future 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."
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Operating Expenses
Sales and marketing expenses increased by 12.7% to $4.2 million for the six
months ended June 28, 1998 from $3.7 million for the six months ended June 29,
1997. As a percentage of sales, sales and marketing expenses were 9.5% and 7.8%
for the six months ended June 28, 1998 and June 29, 1997, respectively. The
increase in sales and marketing expenses was primarily attributable to increases
in sales commission costs.
Research and development expenses increased by 28.5% to $5.9 million for the
six months ended June 28, 1998 from $4.6 million for the six months ended June
29, 1997. Research and development expenses as a percentage of sales were 13.5%
and 9.7%, respectively. The increase in research and development expenses was
primarily attributable to increased staffing and associated engineering costs
related to continued new product development and existing product enhancement
efforts.
General and administrative expenses increased by 24.4% to $2.4 million for the
six months ended June 28, 1998, from $2.0 million for the six months ended June
29, 1997. General and administrative expenses as a percentage of sales were
5.6% and 4.1%, respectively. The increase in general and administrative
expenses was primarily attributable to increased staffing costs associated with
supporting the Company's increased personnel.
Other Income
The Company earned other income, net, of $1.6 million for the six months ended
June 28, 1998 compared to $1.0 million for the six months ended June 29, 1997.
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 first six months of 1998 compared to the cash
balances maintained during the first six months of 1997. The larger cash
balances are due to the Company's secondary Common Stock offering completed in
July 1997. The larger cash balances were invested in short-term, investment-
grade money market instruments.
Provision for Income Taxes
The Company's effective tax rate was 36.5% and 38.0% for the six months ended
June 28, 1998 and June 29, 1997, 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 June 28, 1998, the Company had working
capital of $65.2 million, including $53.1 million in cash and cash equivalents
as compared with working capital of $67.5 million at December 28, 1997, which
included $67.4 million in cash and cash equivalents. Net accounts receivable
increased to $14.4 million at June 28, 1998 from $12.0 million at December 28,
1997. During the first six months of 1998, the Company sold a larger percentage
of its products to its non-Korean customers, primarily in North America. These
customers typically pay on longer payment terms than the Company's South Korean
customers have historically paid. In addition, due to the Asian economic
crisis, the Company has provided extended payment terms to its South Korean
customers. The Company anticipates that its accounts receivable collection
periods will continue to increase with the reduction in revenue from its South
Korean customers and the expansion of its Non-Korean customer base. Net
inventory decreased to $8.6 million at June 28, 1998, from $8.8 million at
December 28, 1997.
Cash used in operations was approximately $5.9 million for the six months
ended June 28, 1998, compared with cash provided by operations of $7.8 million
for the six months ended June 29, 1997. The negative cash flow from operations
for the first six months of 1998 is primarily attributable to an increase in
accounts receivable from December 28, 1997 to June 28, 1998, as well as a
decrease in accounts payable, other accrued liabilities and income taxes
payable.
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Capital expenditures were approximately $2.6 million for the first six months
of 1998 compared with $3.8 million in the first six months of 1997. No amounts
were financed through capital leases in the first six months of 1998 compared to
approximately $.8 million in the first six months of 1997. The majority of the
capital spending during both periods represents spending on electronic test
equipment utilized in the Company's manufacturing and research and development
areas.
On April 28, 1998 the Company purchased $2.5 million of 13.75% Senior Secured
Bridge Notes due April 28, 2000 ("The Notes") from Metawave Communications
Corporation in a private offering. The total amount raised in the offering was
$29.0 million. The Notes initially accrue interest at a rate of 13.75% per
annum and interest is payable semi-annually. The Notes contain provisions to
increase the rate of interest during the life of the Notes if the Notes are not
repaid prior to maturity. The Notes are secured by certain assets of Metawave
Communications Corporation and mature on April 28, 2000. For the first six
months of 1998, Metawave Communications Corporation accounted for more than 10%
of the Company's revenues.
Cash used in financing activities was $3.3 million for the first six months
of 1998 compared with $6.2 million provided by financing activities for the
first six months of 1997. The majority of cash used in financing activities for
the first six months of 1998 was for the repurchase of 300,000 shares of the
Company's Common Stock at a total cost of $3.7 million. As of June 28, 1998, the
Company had repurchased a total of 810,000 shares of its Common Stock at a total
cost of approximately $12.5 million. The Company is authorized to repurchase up
to one million shares of its Common Stock. The majority of the cash provided by
financing activities for the first six months of 1997 resulted from the sale of
360,000 shares of Common Stock in January 1997, which 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.
On August 21, 1997, the Company entered into a $10 million unsecured revolving
credit agreement. This 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
June 28, 1998) or the bank's LIBOR rate plus 1.25% per annum, all at the
Company's option. Effective December 11, 1997, the Company amended the credit
agreement to allow for repurchases of the Company's Common Stock by the Company
in amounts up to $25 million. On April 28, 1998, the Company amended the credit
agreement to allow for the investment of up to $3 million in the Senior Secured
Bridge Notes of Metawave Communications Corporation. The Company was in
compliance with all covenants contained in the amended credit agreement at June
28, 1998 and no amounts were outstanding under the facility. On July 28, 1998,
the Company amended the credit agreement to extend the termination date of the
agreement from July 31, 1998 to September 30, 1998.
The Company had cash and cash equivalents of $53.1 million at June 28, 1998,
compared with $67.4 million at December 28, 1997. 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 short-term, investment-grade money market
instruments.
The Company currently believes that its 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.
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Disclosure About Foreign Currency Risk
Historically, a majority of the Company's revenues have been derived from
international sources, with the Company's customers in South Korea accounting
for the significant majority of such revenues. With the reduction in sales to
customers in South Korea, the Company is pursuing new customers in various
domestic and international locations where new deployments or upgrades to
existing wireless communication networks are planned. Such international
locations include South America, where there has been instability in several of
the region's currencies. While the Company currently invoices all of its
customers in U.S. dollars, changes in the value of the U.S. dollar versus the
local currency in which the Company's products are sold, along with the economic
and political conditions of such foreign countries, could adversely affect the
Company's business, results of operations and financial condition. In addition,
the weakening of an international customer's local currency and banking market
may negatively impact such customer's ability to meet their payment obligations
to the Company. While the Company currently believes that its international
customers have the ability to meet all of their obligations to the Company,
there can be no assurance that they will continue to be able meet such
obligations. The Company regularly monitors the credit worthiness of its
international customers and makes credit decisions based on both prior sales
experience with such customers as well as current financial performance and
overall economic conditions. Due to competitive reasons, the Company may decide
in the future to offer certain foreign customers extended payment terms and/or
sell certain products or services in the local currency of such customers.
Certain countries in Asia, including South Korea, continue to experience
weaknesses in their currencies, banking systems and equity markets. These
weaknesses have adversely affected South Korean wireless service operators'
demand for the Company's products. The Company's foreign customers pay for the
Company's products with U.S. dollars. As such, the recent strengthening of the
U.S. dollar as compared to such foreign currencies as the South Korean Won, has
effectively increased the cost of the Company's products by as much as 100% or
more for its South Korean customers. The significant increase in the local
currency based cost of such products makes them less attractive to such
customers. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, may negatively impact the Company's future
sales and gross margins. For further discussion of the risks associated with
the Company's international sales, see "Additional Factors That May Affect
Future Results Risks of Doing Business in International Markets."
Year 2000 Compliance
In the next two years, many companies will face a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the Year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has examined
its computer systems and contacted its software providers to determine whether
the Company's software applications are compliant with the Year 2000. The
Company has completed an upgrade to its computer operating system such that the
Company has now been assured by its software providers that its computer systems
are fully compliant with the Year 2000. It is not possible to quantify the
aggregate cost to the Company of such upgrades since they were part of the
software and hardware providers normal upgrades to the Company's systems.
While the Company believes that its systems are fully Year 2000 compliant, the
Company intends to continue to review its information systems for any possible
problems as well as monitor its key customers and suppliers for any impact that
the Year 2000 may have on their information systems which could then impact the
Company. During the remainder of 1998, the Company intends to contact all of
its significant suppliers to request verification that such suppliers are Year
2000 compliant. Software sold with the Company's products is Year 2000
compliant. The Company does not currently anticipate that the Year 2000
programming issue will have a material impact on its business, results of
operations or financial condition.
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 and
regional economic and political conditions, industry specific factors, the
Company's ability to add new customers to reduce its dependence on existing
customers, the Company's ability to finance its activities and maintain its
financial liquidity, the Company's ability to timely develop and produce
commercially viable products
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at competitive prices, 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 availability and cost of components, 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. For the six months ended June 28, 1998, the
Company's four South Korean customers, Hyundai Electronics Industries Co.
("Hyundai"), LG Information & Communications, Ltd. ("LGIC"), Samsung Electronics
Co. Ltd. ("Samsung") and SK Global Co., Ltd. ("SK Global") accounted for $16.8
million or approximately 38.4% of the Company's net sales, which was down
significantly from the comparable six month period in 1997 when net sales to
three South Korean customers (Hyundai, LGIC and Samsung) accounted for $41.0
million or approximately 86.0% of net sales. Demonstrating the risks associated
with the Company's dependence on a limited number of customers, the Company's
reduction in revenues to South Korean-based customers of approximately $24.2
million during the first six months of 1998, as compared to the first six months
of 1997, accounted for approximately 55% of the Company's total revenues during
the first six months of 1998. If the Company is unable to continue to replace
the revenues of its South Korean based customers with those from other non-Asian
based customers, such failure will have a material adverse effect on the
Company's business, results of operations and financial condition. While the
Company has had some success in replacing its lost South Korean business during
the first six months of 1998, there can be no assurance that the Company will
continue to be successful in attracting and retaining new customers. As part of
the Company's efforts to expand its customer base, and reflecting the
significant reduction in the Company's South Korean revenues, the Company had
three non-Korean customers each accounting for more than 10% of revenues for the
first six months of 1998. These customers are, in alphabetical order, BellSouth
Cellular Corp., Metawave Communications Corporation and Northern Telecom
Limited. For the six months ended June 28, 1998, these three customers in total
accounted for approximately $20.8 million or 47.6% of the Company's net sales.
There can be no assurance that these customers will continue to purchase the
same quantities of product from the Company or that they will increase their
purchases from the Company. If any of these three customers significantly
reduce their purchases from the Company, such reduction could 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. The Company believes that a significant portion of its
business with OEMs, such as LM Ericsson Telephone Company, Metawave
Communications Corporation and Northern Telecom Limited, is dependent upon the
deployment schedules of wireless network operators who are purchasing
infrastructure equipment from such OEMs. Therefore, continued purchases of the
Company's products by such OEMs is dependent upon the OEMs current view of the
deployment and could be significantly reduced due to any delays of such
deployments. A number of factors may cause delays in wireless infrastructure
deployments, including such factors as economic or political problems in the
wireless operator's operating region; delays in government approvals required
for system deployment; and reduced subscriber demand for wireless services. In
addition, from time to time OEMs may also purchase products on a large quantity
basis over a short period of time which may cause demand for the Company's
products to fluctuate significantly. Due to the possible uncertainties
associated with wireless infrastructure deployments and OEMs purchasing
strategies, the Company may experience significant fluctuations in demand from
its OEM customers. Such fluctuations could cause a significant reduction in
revenues which could have a material adverse effect on the Company's business,
results of operations and financial condition. 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, payment 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
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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 products 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. In spite of these limitations, the Company maintains
significant work-in-progress and raw materials inventory as well as maintaining
increased levels of technical production staff to meet estimated order
forecasts. The recent significant reduction in sales to the Company's South
Korean customers has caused the Company to maintain higher levels of inventory
than it originally planned and to maintain employee levels above the level
required for current production requirements. While the Company currently
believes that it has managed these increases effectively, there can be no
assurance that it will continue to be able to do so. To the extent its major
customers purchase less than the forecasted amounts or cancel or delay existing
purchase orders, 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.
Reliance upon South Korean Market and Growth of Wireless Services Market
Four of the Company's customers, Hyundai, LGIC, Samsung and SK Global
collectively accounted for approximately 38.4% of the Company's net sales for
the first six months of 1998 and three of these customers, Hyundai, LGIC and
Samsung accounted for approximately 86.0% of net sales for the first six months
of 1997. These customers have purchased products for deployment in the South
Korean digital cellular and PCS networks. During fiscal 1995, 1996, 1997, and
the first six months of 1998, Hyundai, LGIC and Samsung purchased multi-carrier
linear RF power amplifiers for installation in the build-out of the South Korean
digital cellular networks. The delay, postponement or cancellation of the
build-out of the South Korean digital cellular networks which occurred during
the first six month of 1998 has had an adverse effect on the Company's revenues
and results of operations during the first six months of 1998. The continued
delay or termination of the continued implementation of the South Korean digital
cellular networks 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 previously planned build-out phase of the
South Korean digital cellular networks has currently stopped. Full deployment
was originally estimated to be completed by the end of 1998. The Company is
currently unable to predict when, if ever, the originally scheduled build-out of
these networks will be completed. Accordingly, the Company's sales directly
related to the South Korean digital cellular networks are anticipated to
decrease significantly.
In contrast to the South Korean digital cellular networks, the build-out of
the South Korean PCS networks began in the first quarter of 1997. During 1997,
the Company began shipping, in volume, PCS single carrier amplifiers for use in
the new PCS networks being built in South Korea. Sales to the Company's South
Korean customers for the South Korean PCS networks represented substantially all
of the Company's PCS sales during 1997 and the first six months of 1998. The
delay, postponement and cancellation of the build-out of the South Korean PCS
networks which occurred during the first six months of 1998, did have an adverse
effect on the Company's revenues and results of operations during the first and
second quarters of 1998. The continued delay, termination or early completion
of the infrastructure build-out of the South Korean PCS networks would continue
to have a material adverse effect on the Company's business, results of
operations and financial condition. Further, even if these networks are
developed as originally anticipated, there can be no assurance that the
Company's PCS products will continued to be purchased by the Company's South
Korean customers or that such products will achieve market acceptance outside of
South 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
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competitive costs, the Company's business, results of operations and financial
condition would be materially adversely affected.
During the fourth quarter of 1997, certain Asian countries, including South
Korea, began to experience weaknesses in their currencies, banking systems and
equity markets. The deteriorating economic and currency conditions throughout
Asia led South Korea, along with several other Asian countries, including
Indonesia and Thailand, to request economic support from the International
Monetary Fund in December 1997. During this time, the Company's South Korean
customers continued to order and take delivery of products from the Company and
continued to make timely payments to the Company for amounts owed. However,
during the first six months of 1998, economic and currency conditions in Asia
and South Korea have continued to deteriorate which has negatively impacted
overall market conditions within South Korea. As a result, the Company has
experienced postponed, rescheduled and cancelled orders from its South Korean
customers for both the cellular and PCS networks in South Korea.
The weakness in the equivalent U.S. dollar value of the South Korean Won has
adversely affected South Korean wireless service operators' demand for the
Company's products. The Company's South Korean customers pay for the Company's
products with U.S. dollars. As such, the strengthening of the U.S. dollar as
compared to the South Korean Won, which began in the fourth quarter of 1997 and
has continued during the first six months of 1998, has increased the effective
cost of the Company's products by as much as 100% or more for its South Korean
customers. This increase in cost to the Company's South Korean OEM customers is
being passed along to the South Korean wireless service providers in the form of
increased costs for infrastructure equipment. The significant increase in the
local currency cost of such products makes them less attractive to such
customers. Additionally, due to the economic problems facing the South Korean
banking network, it has become more difficult for local operating companies to
raise additional financing to support the increased costs of their
infrastructure buildout.
Therefore, the Company currently believes that the completion of the buildout
of the South Korean wireless networks is dependent upon a stabilization of
economic, currency and banking conditions within South Korea. It is currently
anticipated that the continued deployment of both the cellular and PCS digital
networks will be delayed until such time that economic conditions become
stabilized from a long-term perspective. Accordingly, the Company is unable to
predict when, if ever, these networks will be completed pursuant to the South
Korean wireless network operators' original build-out projections. In any
event, sales related to these networks are anticipated to continue to decrease
significantly during the remainder of 1998.
Hyundai, LGIC and Samsung have also 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,
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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."
Risks of Doing Business in International Markets
For fiscal years 1995, 1996 and 1997, and the first six months of 1998,
international revenues (excluding North American sales) accounted for
approximately 67%, 77%, 84% and 42% respectively, of the Company's net sales.
The Company expects that international revenues and revenues derived from sales
to OEMs for infrastructure deployments in international locations 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 exchange 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 or may
require upgrades to existing wireless communication networks. Such
international locations include both South America and Asia. 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, delays in government or administrative approvals or 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 three companies in South Korea, where future sales are dependent
upon favorable business and economic conditions, as well as trade relations with
the United States and a lack of political conflicts with North Korea.
Beginning during the fourth quarter of 1997 and continuing during the first
six months of 1998, economic conditions deteriorated throughout the Asia-Pacific
region, causing reductions in local exchange rates throughout the region and
general financial market uncertainty. Countries in Asia, including South Korea,
have experienced weaknesses in their currencies, banking systems and equity
markets. During the first six months of 1998, these weaknesses have adversely
affected both the Company's South Korean customers' demand for the Company's
products and their ability to pay for the products in U.S. dollars. The
Company's foreign customers pay for the Company's products with U.S. dollars.
As such, the recent strengthening of the U.S. dollar as compared to such foreign
currencies as the South Korean Won, has effectively increased the local currency
price of the Company's products by as much as 100% or more for its South Korean
customers. The significant increase in the local currency cost of such products
makes them less attractive to such customers. Additionally, due to the economic
problems facing the South Korean banking system, it has become more difficult
for South Korean operating companies to raise additional US dollar financing to
support the increased costs of purchasing the Company's products. Accordingly,
changes in exchange rates, and in particular a strengthening of the U.S. dollar,
may negatively impact the Company's future sales, gross margins, results of
operations and financial condition.
In addition, during the last year, 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. Recently,
with the deteriorating economic conditions within South Korea, there have been
press reports of protesting and striking South Korean workers. Any conflict,
either political or military, between North and South Korea or within South
Korea alone, could have a material adverse effect 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
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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.
During the first six months of 1998, the Company has increased its sales
efforts to both potential customers in South America and to OEMs for possible
deployment to customers in South America. There has been instability in several
of the region's currencies and political governments, which could cause delays
or cancellations of planned deployments in the region. Any significant delay in
the deployments of wireless networks due to these factors could 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 further expands 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. The increasing value of the U.S. dollar in
comparison of the weakening of an international customer's local currency and
associated weakening of such customer's local banking system, may negatively
impact such customer's ability to meet their payment obligations to the Company.
During a time of uncertain economic and banking conditions, such as the current
situation in South Korea, there can be no assurance that such customers will
continue to be able meet such obligations. The Company regularly monitors the
credit worthiness of its international customers and makes credit decisions
based on both prior sales experience with such customers as well as current
financial performance and overall economic conditions. Due to competitive
reasons, the Company may decide to offer certain foreign customers extended
payment terms and or sell certain products or services in the local currency of
such customers. There can be no assurance that the Company's review of its
customers credit worthiness will be accurate or that such review will prevent
the Company from incurring significant losses if such customers default on their
payment obligations to the Company. If the Company's international customers
default on payment terms or are unable to make payment to the Company in U.S.
dollars, the resulting payment shortages would have a material adverse effect on
the Company's business, results of operations and financial condition.
Fluctuations in Quarterly Results
The Company has experienced, 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; cancellations or rescheduling of customer orders and
shipments due to economic slowdowns in the Company's customers' operating
regions, such as South Korea or South America; cancellations or rescheduling of
customer orders and shipments due to excess inventory levels caused by changes
in demand or deployment schedules at the customer; 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;
and variations in product development and other operating expenses. The
Company's quarterly 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 competitor's 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
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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 would decline, and such decline could
have a material adverse effect on the Company's business, results of operations
and financial condition.
During the fourth quarter of 1997 and continuing through the first six months
of 1998, countries in Asia, including South Korea, experienced weaknesses in
their currencies, banking systems and equity markets. This continued market
uncertainty and economic instability in South Korea has significantly impacted
demand for the Company's products within South Korea during the first six months
of 1998. As a result, the Company experienced postponed, rescheduled and
cancelled orders from its South Korean customers during the first and second
quarters of 1998. If the Company's remaining outstanding orders with its South
Korean customers or any other major customers are significantly reduced, delayed
or cancelled, the resulting loss of volume purchasing could adversely effect the
Company's ability to achieve manufacturing cost reductions in the form of price
discounts for large volume purchases of components. Any reduction in the
Company's ability to obtain manufacturing cost reductions would have a material
adverse affect on the Company's business, results of operations and financial
condition.
Due to the economic problems facing Asia, the Company currently anticipates
that demand for wireless infrastructure equipment throughout Asia will continue
to decrease during 1998. Any additional reduction in demand could cause
suppliers of wireless infrastructure equipment, including RF power amplifiers,
to increase their sales and marketing efforts in the remaining markets outside
of Asia. Any possible increase in competition in the sale of RF power
amplifiers could cause increased price competition which could lead to further
declining average sales prices for the Company's products. If the Company is
unable to offset further declining average sales prices of its products through
cost reductions or product improvements, the Company's gross margins will
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 accounted for an increased
percentage of the Company's net sales during 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.
Although the sale of PCS amplifiers accounted for a smaller percentage of sales
during the first six months of 1998 compared to 1997, the Company believes that
single carrier amplifier products
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will eventually account for a larger portion of the Company's net sales in 1998.
An increase in the percentage of single carrier products in the Company's
overall sales mix will have an adverse effect on the Company's gross margins. In
addition, with the Company's reduced sales and production level of its single
carrier PCS products, the Company has had difficulty reducing the cost of
materials for such products. In the event that the Company is unable to reduce
the manufacturing costs of its single carrier amplifiers and such amplifiers
account for an increased 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 or abrupt changes in customer orders in the
environment in which the Company operates can quickly result in either
insufficient or excessive inventories and disproportionate overhead expenses.
Any degradation in product quality could adversely impact production rates,
product delivery schedules and overhead expenses associated with product
support. While the Company works to implement a number of new financial and
management controls and attempts to improve reporting systems and procedures,
there can be no assurance that such actions will prevent the Company from
encountering inappropriate inventory levels, disproportionate overhead expenses
and reductions in product quality and production rates. During the last twelve
months, the Company has hired a significant number of employees, including
engineers, production technicians and sales and marketing employees 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, or the Company's
customers cancel or delay existing orders, 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
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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.
Due to the Company's reliance on certain single-sourced customized components,
if the Company experiences an abrupt reduction in customer demand, the Company
may end up with excess inventories of such components due to the nature of the
volume purchasing agreements that the Company enters to obtain component cost
reductions. If the Company is unable to utilize such components in a timely
manner and is unable to sell such components due to their customized nature, the
resulting negative impact on the Company's liquidity and resulting increased
inventory levels could have a material adverse effect on the Company's business,
results of operations and financial condition.
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.
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
lower prices or superior 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
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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 first six months of 1998, 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 or 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 multi-carrier linear cellular amplifiers. 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 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
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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 reduce or
eliminate 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.
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 several U.S.
patents for its proprietary 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
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the functionality 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 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
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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, changes in the economic outlook of the markets into
which the Company sells it products (such as South Korea), changes 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 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company may be subject, from time to time, to various legal proceedings
relating to claims arising out of its operations in the ordinary course of its
business. On July 16, 1998, a lawsuit was filed in the United States District
Court for the Central District of California, Southern Division, by a
shareholder of the Company, against the Company and certain of its present
directors and officers. A similar suit was filed on July 29, 1998. The
shareholder in each suit purports to represent a class consisting of all persons
who purchased Common Stock of the Company between June 4, 1997 and January 16,
1998. These lawsuits allege, among other things, that the defendants violated
federal securities laws by making alleged misrepresentations which the
plaintiffs claim were designed to artificially inflate the Company's stock price
and enable the individual defendants to sell their stock at artificially
inflated prices. The Company, its directors and officers deny the allegations
of wrong doing in the complaints and intend to vigorously defend against the
claims made in the lawsuits.
The Company is not currently a party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, management believes
would have a material adverse effect on the business, financial condition or
results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
(f) Use of Proceeds
The Company has fully utilized the $22.2 million of net proceeds from its
December 6, 1996 Initial Public Offering ("IPO") of Common Stock. The Company
used approximately $9.7 million of the net proceeds for capital expenditures,
all of which were paid directly to unrelated third parties. The Company has
also utilized $12.5 million of the proceeds to repurchase shares of its Common
Stock in open market transactions.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as a part of this report:
Exhibit
Number Description
- ------- -----------
10.22.2 Second Amendment to Credit Agreement, dated as of April 28, 1998
between Powerwave Technologies, Inc. and Bank of America National
Trust and Savings Association.
10.22.3 Third Amendment to Credit Agreement, dated as of July 28, 1998 between
Powerwave Technologies, Inc. and Bank of America National Trust and
Savings Association.
11.1 Computation of net income per share.
27.1 Financial Data Schedule.
(b) No reports have been filed on Form 8-K for the quarter for which
this report is filed.
26
<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: August 10, 1998 By: /s/ Kevin T. Michaels
-------------------------------------------
Kevin T. Michaels
Vice President, Finance and Chief Financial Officer
27
<PAGE>
EXHIBIT 10.22.2
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
---------
April 28, 1998, is entered into by and between POWERWAVE TECHNOLOGIES, INC. (the
"Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
--------
"Bank").
- -----
RECITALS
--------
A. The Borrower and the Bank are parties to a Credit Agreement dated as of
August 1, 1997, as amended by a First Amendment to Credit Agreement dated as of
December 11, 1997 (as so amended, the "Credit Agreement"), pursuant to which the
----------------
Bank has extended certain credit facilities to the Borrower.
B. The Borrower has requested that the Bank agree to a certain amendment
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
-------------
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendment to Credit Agreement. Section 7.05 of the Credit Agreement is
-----------------------------
hereby amended by (i) deleting the word "and" at the end of clause (e), (ii)
replacing the period at the end of clause (f) with "; and", and (iii) adding the
following clause (g) at the end thereof:
"(g) loans to or other investments in Metawave Communications
Corporation not to exceed the aggregate amount of $3,000,000 at any one
time outstanding."
3. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any governmental authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of the Borrower,
enforceable against it in accordance with its respective terms, without defense,
counterclaim or offset.
1
<PAGE>
(c) All representations and warranties of the Borrower contained in
the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Bank or any
other Person.
4. Effective Date. This Amendment will become effective as of the date
--------------
first above written, provided that the Bank has received from the Borrower a
-------- ----
duly executed original (or, if elected by the Bank, an executed facsimile copy)
of this Amendment.
5. Reservation of Rights. The Borrower acknowledges and agrees that the
---------------------
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to execute similar
amendments under the same or similar circumstances in the future.
6. Miscellaneous.
-------------
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their respective successors and assigns. No
third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Borrower
shall bind the Borrower with the same force and effect as the delivery of a hard
copy original. Any failure by the Bank to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document which hard copy
page was not received by the Bank
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior
drafts and communications with respect thereto.
2
<PAGE>
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) Borrower covenants to pay to or reimburse the Bank, upon demand, for
all reasonable costs and expenses (including allocated costs of in-house
counsel) incurred in connection with the development, preparation, negotiation,
execution and delivery of this Amendment.
3
<PAGE>
IN WITNESS WHEREOF, parties hereto have executed and delivered this
Amendment as of the date first above written.
POWERWAVE TECHNOLOGIES, INC.
By: /s/ Bruce C. Edwards
-------------------------------------
Name: Bruce C. Edwards
Title: President and Chief Executive Officer
By: /s/ Kevin T. Michaels
-------------------------------------
Name: Kevin T. Michaels
Title: Vice President, Finance and
Chief Financial Officer
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: /s/ Debra G. Staiger
-------------------------------------
Name: Debra G. Staiger
Title: Vice President
4
<PAGE>
EXHIBIT 10.22.3
THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment") dated as of July
---------
28, 1998, is entered into by and between POWERWAVE TECHNOLOGIES, INC. (the
"Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
- ---------
"Bank").
- -----
RECITALS
--------
A. The Borrower and the Bank are parties to a Credit Agreement dated as of
August 1, 1997, as amended by a First Amendment to Credit Agreement dated as of
December 11, 1997, and as amended by a Second Amendment to Credit Agreement
dated as of April 28, 1998 (as so amended, the "Credit Agreement"), pursuant to
which the Bank has extended certain credit facilities to the Borrower.
B. The Borrower has requested that the Bank agree to a certain amendment
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
-------------
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendment to Credit Agreement. Section 1.01 of the Credit Agreement
-----------------------------
is hereby amended at the defined term "Availability Period" by amending and
restating such defined term in its entirety as follows:
"`Availability Period': the period commencing on the date of this
-------------------
Agreement and ending on the date that is earlier to occur of (a) September
30, 1998, and (b) the date on which the Bank's commitment to extend credit
hereunder terminates."
3. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants to the Bank as follows:
(a) No default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any governmental authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal,
1
<PAGE>
valid and binding obligations of the Borrower, enforceable against it in
accordance with its respective terms, without defense, counterclaim or offset.
(c) All representations and warranties of the Borrower contained in the
Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Bank or any
other Person.
4. Effective Date. This Amendment will become effective as of the date
--------------
first above written, provided that the Bank has received from the Borrower a
-------------
duly executed original (or, if elected by the Bank, an executed facsimile copy)
of this Amendment.
5. Reservation of Rights. The Borrower acknowledges and agrees that the
---------------------
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to execute similar
amendments under the same or similar circumstances in the future.
6. Miscellaneous.
--------------
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein and in the other Credit Documents to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and a part of the,
Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. No third party
beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts, each
of which shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing or a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Borrower
shall bind the Borrower with the same force and effect as the delivery of a hard
copy original. Any failure by the Bank to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document which hard copy
page was not received by the Bank.
2
<PAGE>
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior
drafts and communications with respect thereto.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
POWERWAVE TECHNOLOGIES, INC.
By: /s/ Bruce C. Edwards
-----------------------------------------
Name: Bruce C. Edwards
Title: President and Chief Executive Officer
By: /s/ Kevin T. Michaels
-----------------------------------------
Name: Kevin T. Michaels
Title: Vice President, Finance and
Chief Financial Officer
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: /s/ Debra G. Staiger
-----------------------------------------
Name: Debra G. Staiger
Title: Vice President
3
<PAGE>
EXHIBIT 11.1
POWERWAVE TECHNOLOGIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
EPS CALCULATION AS OF JUNE 29, 1997
<S> <C> <C> <C> <C>
Shares issued and outstanding at March 30, 1997
and December 29, 1996.............................. 16,241,324 16,223,999
Options exercised during the period................. 213,202 33,724 232,029 23,051
----------- -----------
Weighted average common shares - basic.............. 16,275,048 16,247,050
Weighted average options issued
and outstanding as of June 29, 1997................ 1,162,126 1,155,400
Proceeds............................................ $ 5,144,174 $5,460,601
Assumed buyback price............................... $ 23.25 $20.438
----------- ----------
Shares bought back with proceeds.................... 225,779 276,777
Assumed shares bought back with non-qualified tax
benefit utilizing 38% tax rate..................... 355,812 333,877
Potential common shares............................. 580,535 544,746
----------- -----------
Total weighted average common shares - diluted...... 16,855,583 16,791,796
Net income at June 29, 1997......................... $ 3,428,150 $ 6,188,807
----------- -----------
Diluted net income per share........................ $ 0.20 $0.37
=========== ===========
Basic net income per share.......................... $ 0.21 $0.38
=========== ===========
<CAPTION>
EPS CALCULATION AS OF JUNE 28, 1998
Shares issued and outstanding at March 29, 1998
and December 28, 1997.............................. 17,133,373 17,263,713
Shares issued under the Employee Stock..............
Purchase Plan...................................... - - 23,456 19,203
Options exercised during the period................. 12,375 6,174 158,579 129,613
Shares repurchased during the period................ - (300,000) (274,847)
----------- -----------
Weighted average common shares - basic.............. 17,139,547 17,137,682
Weighted average options issued
and outstanding as of June 28, 1998................ 1,362,492 1,126,078
Proceeds............................................ $15,060,857 $11,455,935
Assumed buyback price............................... $ 17.77 $ 20.438
----------- -----------
Shares bought back with proceeds.................... 847,694 710,870
Assumed shares bought back with non-qualified tax
benefit utilizing 36.5% tax rate................... 187,901 156,479
Potential common shares............................. 326,897 272,230
----------- -----------
Total weighted average common shares - diluted...... 17,466,444 17,409,912
Net income at June 28, 1998......................... $ 1,879,142 $ 4,086,183
----------- -----------
Diluted net income per share........................ $ 0.11 $ 0.24
=========== ===========
Basic net income per share.......................... $ 0.11 $ 0.24
=========== ===========
</TABLE>
28
<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> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-03-1999 DEC-28-1997
<PERIOD-START> DEC-29-1997 DEC-30-1996
<PERIOD-END> JUN-28-1998 JUN-29-1997
<CASH> 53,133,233 42,575,890
<SECURITIES> 0 0
<RECEIVABLES> 14,355,568 5,761,948
<ALLOWANCES> 868,825 315,000
<INVENTORY> 8,556,288 6,327,396
<CURRENT-ASSETS> 80,459,431 57,540,576
<PP&E> 13,566,645 7,982,834
<DEPRECIATION> 3,856,294 1,693,473
<TOTAL-ASSETS> 93,389,738 64,176,111
<CURRENT-LIABILITIES> 15,294,878 13,744,983
<BONDS> 0 0
0 0
0 0
<COMMON> 66,031,756 39,649,130
<OTHER-SE> 11,024,736 9,461,555
<TOTAL-LIABILITY-AND-EQUITY> 93,389,738 64,176,111
<SALES> 43,748,964 47,602,321
<TOTAL-REVENUES> 43,748,964 47,602,321
<CGS> 26,362,314 28,384,868
<TOTAL-COSTS> 38,903,762 38,664,253
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,434,934 9,981,949
<INCOME-TAX> 2,348,751 3,793,142
<INCOME-CONTINUING> 4,086,183 6,188,807
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,086,183 6,188,807
<EPS-PRIMARY> .24 .38
<EPS-DILUTED> .24 .37
</TABLE>
