<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 April 4, 1999
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 May 14, 1999, the number of outstanding shares of Common Stock, par
value $.0001 per share, of the Registrant was 19,885,648.
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<PAGE>
POWERWAVE TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at April 4, 1999 (Unaudited)
and January 3, 1999 3
Consolidated Statements of Operations (Unaudited) for the three months ended
April 4, 1999 and March 29, 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the three months ended
April 4, 1999 and March 29, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
</TABLE>
This Quarterly Report on Form 10-Q includes certain forward-looking statements
as defined within the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on beliefs of and estimates made by and
information currently available to the Company's management. Such statements are
subject to certain risks, uncertainties and assumptions which could cause actual
results to differ materially from those projected or implied. The realization of
such forward-looking statements may be impacted by certain important factors
which are discussed in "Additional Factors That May Affect Future Results" under
Item 2, "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
2
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
------------- -------------
ASSETS: (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................................................... $ 54,008 $ 13,307
Accounts receivable, net of allowance for doubtful accounts of $1,270
at April 4, 1999 and January 3, 1999.......................................... 29,979 31,212
Inventories, net................................................................ 30,581 28,583
Prepaid expenses and other current assets....................................... 1,563 1,633
Deferred tax assets............................................................. 3,303 3,303
-------- --------
Total current assets......................................................... 119,434 78,038
Property and equipment............................................................ 27,889 26,286
Less accumulated depreciation and amortization.................................... (7,116) (5,838)
-------- --------
Net property and equipment...................................................... 20,773 20,448
-------- --------
Assets held for sale, net......................................................... 8,122 8,122
Intangible assets, net............................................................ 17,018 17,916
Deferred tax assets............................................................... 4,254 4,254
Other non-current assets.......................................................... 3,032 3,207
-------- --------
TOTAL ASSETS...................................................................... $172,633 $131,985
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable................................................................ $ 21,358 $ 18,667
Accrued expenses and other liabilities.......................................... 13,448 13,918
Current portion of long-term debt............................................... 512 6,528
Income taxes payable............................................................ 3,078 3,715
-------- --------
Total current liabilities.................................................... 38,396 42,828
Long-term debt, net of current portion............................................ 12 17,621
Other non-current liabilities..................................................... 498 466
-------- --------
Total liabilities............................................................ 38,906 60,915
-------- --------
Shareholders' Equity:
Preferred Stock, $.0001 par value, 5,000 shares authorized and no shares
Outstanding................................................................... -- --
Common Stock, $.0001 par value, 40,000 shares authorized, 19,776 shares
issued and outstanding at April 4, 1999 and 17,956 shares
issued and 17,250 shares outstanding at January 3, 1999....................... 115,177 65,027
Retained earnings............................................................... 30,781 28,729
Less treasury stock at cost..................................................... (12,231) (22,686)
-------- --------
Total shareholders' equity................................................... 133,727 71,070
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................ $172,633 $131,985
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
April 4, March 29,
1999 1998
----------------- ------------
<S> <C> <C>
Net sales.............................................................. $56,024 $22,650
Cost of sales.......................................................... 41,010 13,795
------- -------
Gross profit........................................................... 15,014 8,855
Operating expenses:
Sales and marketing.................................................. 3,578 2,031
Research and development............................................. 5,295 2,957
General and administrative........................................... 2,691 1,236
------- -------
Total operating expenses............................................... 11,564 6,224
Operating income....................................................... 3,450 2,631
Other income (expense), net............................................ (219) 845
------- -------
Income before income taxes............................................. 3,231 3,476
Provision for income taxes............................................. 1,179 1,269
------- -------
Net income............................................................. $ 2,052 $ 2,207
======= =======
Basic earnings per share............................................... $.11 $.13
======= =======
Diluted earnings per share............................................. $.11 $.13
======= =======
Basic weighted average common shares................................... 18,005 17,136
======= =======
Diluted weighted average common shares................................. 18,584 17,353
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 4, March 29,
1999 1998
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 2,052 $ 2,207
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................... 2,175 620
Provision for doubtful accounts......................................... -- 108
Provision for inventory reserves........................................ 200 866
Compensation costs related to stock options............................. 8 10
Changes in current assets and liabilities:
Accounts receivable..................................................... 1,233 (210)
Inventories............................................................. (2,198) (1,571)
Prepaid expenses and other current assets............................... 70 113
Accounts payable........................................................ 2,691 (3,548)
Accrued expenses and other liabilities.................................. (470) (3,240)
Income taxes payable.................................................... 973 (718)
Other non-current assets.................................................. 175 67
Other non-current liabilities............................................. 32 69
------------- -----------
Net cash provided by (used in) operating activities................... 6,941 (5,227)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (1,602) (1,597)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................................... (23,625) (123)
Issuance of Common Stock.................................................. 58,129 273
Repurchase of Common Stock................................................ -- (3,741)
Proceeds from exercise of stock options................................... 858 395
------------- -----------
Net cash provided by (used in) financing activities................... 35,362 (3,196)
------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 40,701 (10,020)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 13,307 67,433
------------- -----------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 54,008 $ 57,413
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................ $ 936 $ 53
============= ===========
Income taxes............................................................ $ 258 $ 1,835
============= ===========
NON CASH ITEMS:
Tax benefit related to stock option exercises........................... $ 1,529 $ 377
============= ===========
Tax benefit related to issuance of Common Stock under the Employee
Stock Purchase Plan.................................................... $ 81 $ 8
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
5
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 4, 1999
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit (except for balance sheet information as of January 3,
1999) 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 January 3, 1999.
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 January 3, 1999.
The results of operations for the three months ended April 4, 1999, are not
necessarily indicative of the results to be expected for the entire fiscal year
ended January 2, 2000, (fiscal year 1999). 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 January 3, 1999.
Earnings Per Share
Effective December 28, 1997, the Company adopted SFAS No. 128, Earnings per
Share. In accordance with SFAS No. 128, 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 adopted SFAS No. 130, Reporting Comprehensive Income for the
quarterly periods beginning in fiscal 1998. For the three-month periods
presented, the Company has no differences between net income and comprehensive
income. Therefore, no statement of comprehensive income has been presented.
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the
Company has disclosed below certain information about operating segments and
certain information about the Company's products, geographic areas to which the
Company sells its products, and major customers.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company is required to adopt effective in its fiscal year 2000. SFAS
133 will require the Company to record all derivatives on the balance sheet at
fair value. The Company does not currently engage in hedging activities and will
continue to evaluate the effects of adopting SFAS No. 133. The Company will
adopt SFAS No. 133 in its fiscal year 2000.
6
<PAGE>
Segment Information
Utilizing the management approach, the Company has broken down its business
based upon the RF frequency in which the product is utilized in, i.e., cellular,
PCS, LMR and WLL and other. The Company does not allocate operating expenses to
these segments, nor does it allocate specific assets to these segments.
Therefore, segment information reported includes only net sales, cost of sales
and gross profit (loss).
<TABLE>
<CAPTION>
Business Segments
--------------------------------------------------------------
(in thousands)
WLL and
Cellular PCS LMR Other Total
---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Three months ended April 4, 1999
Net sales............................................... $38,953 $16,802 $ 269 $ -- $56,024
Cost of sales........................................... 27,933 12,134 943 -- 41,010
---------- ------------ ----------- ----------- ----------
Gross profit (loss)..................................... $11,020 $ 4,668 $(674) $ -- $15,014
========== ============ =========== =========== ==========
Three months ended March 29, 1998
Net sales............................................... $19,788 $ 1,919 $ 936 $ 7 $22,650
Cost of sales........................................... 10,624 2,121 983 67 13,795
---------- ------------ ----------- ----------- ----------
Gross profit (loss)..................................... $ 9,164 $ (202) $ (47) $(60) $ 8,855
========== ============ =========== =========== ==========
</TABLE>
The following schedule presents an analysis of the Company's net sales based
upon the country to which a product was shipped. North American sales include
sales to the United States, Canada and Mexico. International sales include sales
to all other foreign countries.
<TABLE>
<CAPTION>
North
American International Total
--------------- ---------------- ------------
<S> <C> <C> <C>
Sales for the three months ended April 4, 1999.................. $39,294 $16,730 $56,024
Sales for the three months ended March 29, 1998................. $11,447 $11,203 $22,650
</TABLE>
For the three months ended April 4, 1999 and March 29, 1998, sales to the
Company's South Korean customers accounted for approximately $9.8 million and
$10.2 million, respectively.
The Company's product sales have historically been concentrated in a small
number of customers. During the three months ended April 4, 1999 and March 29,
1998 sales to four customers (five customers for the three months ended March
29, 1998) totaled $48.3 million, and $18.8 million, or 86% and 83% of total
sales, respectively.
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 three months
ended April 4, 1999:
<TABLE>
<CAPTION>
Number of
Options
Exercisable
Number of Price per as of
Shares Share April 4, 1999
--------- -------------- -------------
<S> <C> <C> <C>
Balance at January 3, 1999 2,715,102 $ 2.47-$31.75
Granted 437,600 $ 18.38-$28.59
Exercised (194,845) $ 2.47-$17.63
Canceled (36,182) $ 4.00-$19.19
---------
Balance at April 4, 1999 2,921,675 $ 2.47-$31.75 742,714
=========
</TABLE>
7
<PAGE>
Employee Stock Purchase Plan
The fourth offering under the Company's Employee Stock Purchase Plan (the
"Purchase Plan") concluded on January 31, 1999, with 31,789 shares of the
Company's Common Stock purchased under the Purchase Plan. At April 4, 1999
there were rights to purchase approximately 10,500 shares of Common Stock
outstanding under the Purchase Plan's fifth offering, which will conclude on
July 31, 1999.
The HP Acquisition
On October 9, 1998, the Company completed the purchase of Hewlett-Packard
Company's ("HP") RF power amplifier business and its manufacturing and research
and development facility in Folsom, California and its production equipment and
manufacturing lines located in Malaysia, for a total purchase price of
approximately $65.9 million (the "HP Acquisition). Approximately $57.4 million
of the total purchase price was paid to HP in cash, approximately $1.1 million
was in acquisition costs and the balance related to assumed liabilities. This
business was part of HP's Wireless Infrastructure Division and was focused on
the design and manufacture of RF power amplifiers for wireless communications,
including cellular, PCS and WLL. Since the acquisition date, the Company has
transferred the Malaysian production equipment and manufacturing lines to its
Irvine, California facility. The Company is also in the process of transferring
the Folsom facility manufacturing lines to its Irvine facility and currently
excepts to complete the closure of the Folsom manufacturing facility in the
second half of 1999. The Company also intends to maintain a research and
development location in the Folsom area. The Company is currently in the
process of negotiating the sale of the Folsom facility to a third party.
The HP Acquisition included certain assets, liabilities, operations and
business related to the design, manufacture and marketing of RF power amplifiers
for use in wireless communications. Powerwave purchased all intellectual
property rights to the products as well as in-process research and development
activities. The products acquired cover a broad range of wireless transmission
protocols, including CDMA, TDMA and GSM.
The HP Acquisition was accounted for as a purchase and, accordingly, the total
purchase price was allocated to the assets acquired and liabilities assumed at
their estimated fair values in accordance with Accounting Principles Board
Opinion No. 16. The purchase price was allocated to tangible assets acquired of
approximately $34.7 million, developed technology of $11.5 million, in-process
research and development of $12.4 million, other intangible assets of $2.7
million and goodwill of approximately $4.6 million. The Company's financial
statements for the year ended January 3, 1999 include a charge of $12.4 million
for the write-off of acquired in-process research and development expenses
associated with the HP Acquisition. The in-process research and development
expenses arose from new product projects that were under development at the date
of the acquisition and expected to eventually lead to new products but had not
yet established technological feasibility and for which no future alternative
use was identified. The valuation of the in-process research and development
projects was based upon the discounted expected future net cash flows of the
products over the products expected life, reflecting the estimated stage of
completion of the projects and an estimate of the costs to complete the
projects. For more information on the HP Acquisition, please refer to Note 16
of Notes to Consolidated Financial Statements of the Company for the fiscal year
ended January 3, 1999.
8
<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 months ended April 4, 1999 and March 29,
1998.
<TABLE>
<CAPTION>
As a Percentage of Net Sales
Three Months Ended
------------------------------
April 4, March 29,
1999 1998
-------------- --------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 73.2 60.9
----- -----
Gross profit 26.8 39.1
Operating expenses:
Sales and marketing 6.4 9.0
Research and development 9.4 13.1
General and administrative 4.8 5.4
----- -----
Total operating expenses 20.6 27.5
----- -----
Operating income 6.2 11.6
Other income (expense), net (0.4) 3.7
----- -----
Income before income taxes 5.8 15.3
Provision for income taxes 2.1 5.6
----- -----
Net income 3.7% 9.7%
===== =====
</TABLE>
Three months ended April 4, 1999 and March 29, 1998
Net Sales
The Company's net sales are derived primarily from the sale of RF power
amplifiers for use in wireless communications networks. Sales increased by 147%
to $56.0 million for the quarter ended April 4, 1999 from $22.7 million for the
quarter ended March 29, 1998. The growth in revenue was due to increased sales
of the Company's cellular and PCS products. The quarter ended April 4, 1999
also includes revenues from the sales of products acquired in the HP Acquisition
in October 1998. For the quarter ended April 4, 1999, total sales of cellular
products (including both single and multi-carrier RF power amplifiers and racks)
accounted for approximately 70% of revenues or $39.0 million, compared to
approximately 87% of revenues or $19.8 million for the quarter ended March 29,
1998. Sales of RF power amplifiers and associated products for PCS networks
(consisting mainly of single carrier RF power amplifiers) accounted for
approximately 30% of revenues or $16.8 million for the first quarter of 1999,
compared to approximately 9% or $1.9 million for the first quarter in 1998.
Sales of Land Mobile Radio ("LMR") amplifiers accounted for less than 1% of
revenues or $0.3 million for the quarter ended April 4, 1999, compared to
approximately 4% of revenues or $0.9 million for the quarter ended March 29,
1998.
9
<PAGE>
Total sales to North American (includes Canada and Mexico) customers accounted
for approximately 70% of revenues or $39.3 million for the quarter ended April
4, 1999, compared with approximately 51% or $11.4 million for the quarter ended
March 29, 1998. The Company's total international sales (excluding North
American sales) accounted for approximately 30% of revenues or $16.7 million for
the quarter ended April 4, 1999, compared with approximately 49% or $11.2
million for the quarter ended March 29, 1998. Total Asian sales (which
predominately includes sales to South Korea) decreased slightly to $9.8 million
for the quarter ended April 4, 1999 from $10.2 million for the quarter ended
March 29, 1998. Total Asian sales accounted for approximately 18% of revenues
in the first quarter of 1999 compared to approximately 45% of revenues in the
first quarter of 1998. During fiscal 1998, the Company experienced
postponement, rescheduling and cancellation of orders from its South Korean
customers which the Company believes was due to the economic crisis in South
Korea, and Asia in general, which reduced South Korean wireless service
operators demand for the Company's products. At this time, the Company is
unable to predict if such order fluctuations, including cancellations, will
continue to be experienced from its customers in Asia or any other areas that
have or may have economic and or financial crisis. See "Additional Factors That
May Affect Future Results - A Significant Amount of Our Revenues Comes from a
Few Customers; Our Success is Tied to the Growth of the Wireless Services
Market; There are Many Risks Associated With International Operations; and Over
the Last Three Years, We Have Had a Reliance upon the South Korean Market."
From 1995 through 1998, the Company obtained a significant percentage of its
revenues from sales to customers in the Asian marketplace, with specific
emphasis on the South Korean market. For fiscal year 1997, approximately 83% of
revenues or $99.3 million of sales came from customers in South Korea. For
fiscal year 1998, total sales to South Korean customers accounted for
approximately 30% of revenues or $30.2 million. The decrease in sales to
customers in South Korea, the Company believes, was a result of the Asian
economic and financial crisis which impacted South Korea, and Asia in general,
throughout 1998. The financial and economic crisis reduced South Korean
wireless service operator's demand for the Company's products. Given the
continuing unstable economic environment within South Korea and Asia in general,
the Company is unable to estimate the level of future deployments of both the
South Korean digital cellular CDMA and PCS networks or when such deployments can
be expected to be completed. The reduction and stoppage of these deployments
during the first quarter of 1998 did have an adverse effect on the Company's
revenues and business with its South Korean customers and its results of
operations. The Company is currently unable to predict when, if ever, its South
Korean customers' business will stabilize completely. The Company continues to
operate in South Korean and Asia and does not currently plan any reduction in
its operations in this region. Any future delay, rescheduling or cancellation
of these deployments or customer orders could 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 -
A Significant Amount of Our Revenues Comes from a Few Customers; Our Success is
Tied to the Growth of the Wireless Services Market; There are Many Risks
Associated With International Operations; and Over the Last Three Years, We Have
Had a Reliance upon the South Korean Market."
Sales to customers in countries outside of Asia, primarily in North America
and Europe, increased approximately 271% to $46.2 million for the quarter ended
April 4, 1999 from $12.5 million for the quarter ended March 29, 1998. For the
first quarter ended April 4, 1999, total sales to Northern Telecom Limited and
related entities ("Nortel") accounted for approximately 55% of revenues and
sales to Lucent Technologies, Inc. ("Lucent") accounted for over 10% of the
revenues for the quarter. As a comparison, for the first quarter ended March 29,
1998, the Company's five largest customers in alphabetical order were BellSouth
Cellular Corp. and related entities ("BellSouth"), LG Information &
Communications, Ltd. ("LGIC"), Metawave Communications Corporation ("Metawave"),
Nortel and Samsung Electronics Co. Ltd. ("Samsung"), each of which accounted for
more than 10% of the Company's net sales for the quarter, and in the aggregate
accounted for approximately $18.8 million or 83% of revenues for the first
quarter of 1998. As part of the HP Acquisition, the Company significantly
increased its sales to Nortel and added Lucent as a customer. There can be no
assurance that the Company will continue to be successful in attracting new
customers or retaining or increasing business with existing customers. In
addition, the Company believes that a significant portion of its business with
OEMs, such as LM Ericsson Telephone Company ("Ericsson"), Lucent and Nortel, is
dependent upon the development schedules of wireless network operators who are
purchasing infrastructure equipment from such OEMs and on such OEMs strategy
concerning the outsourcing of RF power amplifiers. A number of factors may cause
delays in wireless infrastructure deployment schedules for both North American
and international deployments, including deployments in Brazil, Asia, South
America and
10
<PAGE>
other areas. Such factors include 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 has experienced and expects to continue to 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, financial condition and results of operations. See
"Additional Factors That May Affect Future Results - A Significant Amount of Our
Revenues Comes from a Few Customers; There are Many Risks Associated With
International Operations; We Recently Acquired HP's RF Power Amplifier Business
and are Currently Integrating It With Our Existing Business; and Our Quarterly
Results Fluctuate Significantly."
Gross Profit
Cost of sales consists primarily of raw materials, assembly and test labor,
overhead and warranty costs. Gross profit margins for the first quarter of
fiscal 1999 and 1998 were 26.8% and 39.1%, respectively. The decrease in gross
margins was a result of several factors, including increased labor and overhead
costs associated with operating the Folsom manufacturing facility which the
Company acquired in October 1998 as part of the HP Acquisition. In addition,
gross margins during the first quarter of 1999 were negatively impacted by the
significant increase in the sales of single carrier RF power amplifiers, which
traditionally carry lower gross margins than multi-carrier RF power amplifiers.
All of the products acquired by the Company in the HP Acquisition were single
carrier RF power amplifier products. The Company anticipates that, in the near-
term, it will continue to experience significant labor and overhead costs due to
its plans to transfer production from the Folsom manufacturing facility to the
Company's Irvine facility. The Company currently anticipates that the production
activities will be fully transferred in the second half of fiscal 1999. These
costs are currently anticipated to have a negative impact on the Company's
future gross margins. In addition, the Company currently expects that the sale
of single carrier RF power amplifier products will continue to account for a
significant portion of its business and that such products will have a negative
impact on the Company's future gross margins. While the Company continues to
strive for manufacturing and engineering cost reductions to offset pricing
pressures on its products, there can be no assurance that these cost reduction
or redesign efforts will keep pace with price declines and cost increases. If
the Company is unable to obtain cost reductions through its manufacturing and or
engineering efforts, 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--Our Average Sales Prices are Declining."
As part of the HP Acquisition, the Company completed an allocation of the
purchase price of the acquisition to both the tangible and intangible assets and
liabilities acquired in the acquisition. The purchase price allocation is
included in the Company's financial statements for the fiscal year ended January
3, 1999, and includes an allocation of $11.5 million to developed technology
acquired and $0.2 million to workforce. These amounts were capitalized and are
being amortized on a straight-line basis over five and ten years, respectively,
and are included in cost of sales. For the quarter ended April 4, 1999,
approximately $0.6 million was amortized and included in cost of sales. For
more information concerning the purchase price allocation associated with the HP
Acquisition, see Note 16 of the Notes to Consolidated Financial Statements for
the fiscal year ended January 3, 1999.
As an additional part of the HP Acquisition, the Company assumed certain
specific liabilities from HP related to the acquired business, including certain
warranty obligations. During the first quarter ended April 4, 1999, the Company
incurred approximately $0.1 million of warranty expenses which were offset
against specific liabilities assumed in the acquisition.
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 the
slowdowns in demand for wireless infrastructure equipment from the Asian
markets, pricing competition among suppliers to the remaining world markets is
expected to continue 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,
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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 - We Must Develop and Sell
New Products in Order to Keep Up With Rapid Technological Change."
Operating Expenses
Sales and marketing expenses consist primarily of sales commissions, salaries,
other expenses for sales and marketing personnel, travel expenses, charges for
customer demonstration units, reserves for credit losses and trade show
expenses. Sales and marketing expenses increased by 76% to $3.6 million for the
quarter ended April 4, 1999 from $2.0 million for the quarter ended March 29,
1998. As a percentage of sales, sales and marketing expenses were 6.4% and 9.0%
for the quarters ended April 4, 1999 and March 29, 1998, respectively. The
increase in actual sales and marketing expenses was primarily attributable to
increases in the sales and marketing staff, and increased sales commissions
related to increased product sales. In addition, as part of the purchase price
allocation of the HP Acquisition, an allocation of $2.0 million reflecting the
value of the customer list and $0.5 million reflecting the value of the non-
compete agreement with HP was capitalized on the Company's balance sheet. The
customer list and non-compete agreement are amortized over three and four years,
respectively, and included in sales and marketing expenses.
Research and development expenses include ongoing RF power amplifier design
and development expenses, as well as those design expenses associated with
reducing the cost and improving the manufacturability of existing RF power
amplifiers. Current programs include cellular, PCS and wireless local loop
("WLL") products. Research and development expenses increased by 79% to $5.3
million for the quarter ended April 4, 1999 from $3.0 million for the quarter
ended March 29, 1998. Research and development expenses as a percentage of
sales were 9.4% and 13.1%, respectively. The increase in actual research and
development expenses was primarily due to increased staffing and associated
engineering costs related to continued new product development and existing
product enhancement efforts. In addition, as part of the HP Acquisition, the
Company added additional engineers who are located in the Folsom facility. The
Company anticipates that it will continue operating at a higher expense level
for research and development because it intends to continue to emphasize
investment in research and development programs in future periods and continue
to pursue several existing programs acquired as part of the HP Acquisition.
As part of the HP Acquisition, the Company acquired new product projects that
were under development at the date of the acquisition and expected to eventually
lead to new products but had not yet established technological feasibility and
for which no future alternative use was identified at the time of the
acquisition. New product development projects underway at HP at the time of the
acquisition included, among others, single carrier CDMA technology, ultra-linear
technology for use in multi-carrier RF power amplifiers and advanced linear
power module technology for use in next generation wireless communications. The
Company estimated that these projects were approximately 75% complete at the
date of the acquisition and estimated that the cost to complete these projects
will aggregate approximately $2.5 million and will be incurred over a two-year
period. The Company incurred approximately $0.2 million of research and
development expenses related to these projects during the first quarter of 1999,
and since the date of the acquisition has incurred a total of $0.4 million of
research and development expenses related to these projects. As of April 4,
1999, the Company believes that these projects are approximately 80% complete.
Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly, continued economic feasibility of developed technologies, failure to
convert technology into a repetitively manufacturable product, customer
acceptance, customer demand and customer qualification of such new technology,
and general competitive conditions in the industry. There can be no assurance
that the in-process research and development projects will be successfully
completed and commercially introduced.
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 118% to $2.7 million for the
quarter ended April 4, 1999, from $1.2 million for the quarter ended March 29,
1998. General and
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administrative expenses as a percentage of sales were 4.8% and 5.4%,
respectively. The increase in actual general and administrative expenses was
primarily attributable to increased staffing costs associated with supporting
the Company's increased revenues and personnel. In addition, as part of the HP
Acquisition, the Company is incurring additional administration and facilities
costs related to the Folsom facility. Also, as part of the purchase price
allocation of the HP Acquisition, an allocation of approximately $4.6 million,
reflecting the value of goodwill acquired, was capitalized on the Company's
balance sheet. This amount is amortized over ten years and included in general
and administrative expenses.
As an additional part of the HP Acquisition, the Company assumed certain
specific liabilities related to the acquired business, including certain
retention bonuses for contracted HP employees. During the first quarter of 1999,
the Company paid approximately $35,000 for these retention bonuses. These
retention bonuses will be paid over the period of the Folsom manufacturing
facility closure, which is expected to be completed in the second half of 1999.
As part of the purchase price allocation, the Company recorded liabilities
related to moving and relocation costs associated with the planned closure of
the Folsom manufacturing facility. During the first quarter ended April 4, 1999,
the Company paid approximately $0.1 million related to these moving and
relocation costs. The Company currently expects to complete the closure of the
Folsom manufacturing facility in the second half of 1999.
Other Income (Expense)
The Company incurred $0.2 million of other expense, net, in the first quarter
of 1999 compared to earning $0.8 million of other income, net, for the first
quarter of 1998. Other expense consists primarily of interest expense, net of
any interest income. As part of the HP Acquisition, the Company borrowed $25.0
million under a secured credit facility. During the first quarter of 1999, the
Company had interest expense of approximately $0.6 million related primarily to
the debt incurred to fund the HP Acquisition. The acquisition debt was
completely retired on March 31, 1999 with the proceeds from the Company's sale
of shares of its Common Stock during the first quarter of 1999.
Provision for Income Taxes
The Company's effective tax rate was 36.5% for the quarters ended April 4,
1999 and March 29, 1998.
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 April 4, 1999, the Company had working
capital of $81.0 million, including $54.0 million in cash and cash equivalents
as compared with working capital of $35.2 million, including $13.3 million in
cash and cash equivalents at January 3, 1999. The Company received net proceeds
of approximately $57.8 million from a Common Stock offering which was completed
during the first quarter ended April 4, 1999. The Company utilized
approximately $22.8 million of these proceeds to retire the bank debt related to
the HP Acquisition. Net accounts receivable decreased to $30.0 million at April
4, 1999 from $31.2 million at January 3, 1999. During the first quarter of
1999, the Company was able to improve its days sales outstanding with its South
Korean customers. However, the Company's OEM customer base typically require
longer payment terms than the Company has historically experienced. Therefore,
the Company expects that its accounts receivables may increase. Net inventory
increased to $30.6 million at April 4, 1999, from $28.6 million at January 3,
1999. The increase in net inventory is due to the increased production levels
obtained during the first quarter of 1999. The Company believes that it will be
able to increase its inventory turn rate once it completes consolidation of its
manufacturing facilities.
Cash provided by operations was approximately $6.9 million for the three
months ended April 4, 1999, compared with cash used in operations of $5.2
million for the three months ended March 29, 1998. The positive cash flow from
operations for the first quarter of 1999 is primarily attributable to a decrease
in accounts receivable from January 3, 1999 to April 4, 1999, as well as an
increase in accounts payable.
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Capital expenditures were approximately $1.6 million for the first three
months of 1999 and 1998. 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, a supplier of "smart" antennas to the wireless communications
market and a customer of the Company, 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. The
interest rate on the notes at April 4, 1999 was 13.75% per annum. For 1998,
Metawave Communications Corporation accounted for approximately 8% of the
Company's revenues. For the first quarter of 1999, Metawave accounted for less
than 1% of the Company's revenues.
Cash provided by financing activities was approximately $35.4 million for the
first three months of 1999 compared with $3.2 million of cash used in financing
activities for the first three months of 1998. On March 11, 1999, the Company
completed the sale of two million shares of Common Stock in a public offering at
an offering price of $26.75 per share. The underwriters also exercised their
right to purchase an additional 300,000 shares from the Company at the $26.75
offering price on March 22, 1999. Total net proceeds to the Company after the
reduction for the underwriting discount and offering expenses were approximately
$57.8 million.
On September 30, 1998, in connection with the HP Acquisition, the Company
entered into a $35 million credit agreement secured by a pledge of all of the
Company's assets with two commercial banks. The credit agreement consists of
three credit facilities; an $18 million term loan (the "Term Loan"), a $7
million purpose loan associated with the Folsom manufacturing and research and
development facility (the "Purpose Loan") and a $10 million revolving credit
agreement (the "Revolving Credit Facility"). The Company was required to pay a
commitment fee ranging from .25% to .50% per annum on the average daily unused
portion of the Revolving Credit Facility. The rate of the commitment fee was
based upon a debt leverage ratio for the Company. At March 31, 1999, the
commitment fee rate was .375% per annum. The Commitment fee was payable
quarterly in arrears. Each of the credit facilities allowed for borrowings
based either upon the bank's prime rate (7.75% at March 31, 1999) plus a margin
of 0% or .25% per annum, based upon a debt leverage ratio for the Company, or
the bank's LIBOR rate plus a margin of 1.50% to 2.25% per annum, based upon a
debt leverage ratio for the Company, all at the Company's option. The credit
agreement contained customary affirmative covenants, negative covenants
including limitations on future indebtedness, restricted payments, transactions
with affiliates, liens, dividends, mergers, transfers of assets and conditions
of borrowing. The Company was in compliance with all covenants contained in the
credit agreement at March 31, 1999. The full $10 million of the Revolving Credit
Facility, which is based upon a percentage of certain accounts receivable, was
available to the Company at March 31, 1999. The Term Loan is a three-year loan
with equal monthly principal repayments of $500,000 payable on the last business
day of each month, with the final principal payment due on September 30, 2001.
The Purpose Loan is payable in full upon the earlier of (i) January 5, 2000 or
(ii) 10 days following the close of escrow for the sale of the Company's Folsom
manufacturing facility. As of March 31, 1999, no amounts had been drawn under
the Revolving Credit Facility.
On March 31, 1999, the Company utilized a total of $22.8 million of the
proceeds from its secondary Common Stock offering to repay all of the
outstanding bank debt associated with the HP Acquisition. This included the
Term Loan and the Purpose Loan. The outstanding balances at the time of
repayment were $15.5 million for the Term Loan with a weighted average interest
rate of 6.75% per annum at the time of repayment. The Purpose Loan had a
balance of $7.0 million with an interest rate of 6.81% per annum at the time of
repayment. The remaining $0.3 million was for accrued interest due on the
loans. The Term Loan, Purpose Loan and Revolving Credit Agreement were all
cancelled by the Company on March 31, 1999. The Company intends to obtain a new
bank revolving credit agreement and has currently initiated discussions with its
banks regarding such new agreement.
As part of the HP Acquisition, the Company acquired HP's manufacturing and
research and development facility in Folsom California. Of the purchase price,
a total net value of $8.1 million was allocated to land, land
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improvements and buildings. The Company has begun the process of transferring
production from the Folsom manufacturing facility to the Company's Irvine
facility and expects to complete this transfer in the second half of 1999. At
April 4, 1999, the Company was unable to determine whether a sale will be
completed by the end of fiscal 1999. As a result, the Company has included $8.1
million in long-term assets as assets held for sale.
The Company had cash and cash equivalents of $54.0 million at April 4, 1999,
compared with $13.3 million at January 3, 1999. 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 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.
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 Europe and South America, where there has been instability in
several of the region's currencies, including the Brazilian Real. Although 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, financial
condition and results of operations. 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.
Although 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. 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, have experienced 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. In addition, Brazil has recently experienced significant
weakness in its currency and equity markets. Such weaknesses could negatively
impact demand for wireless services and thereby reduce demand for the Company's
products in Brazil. Such a reduction in demand for the Company's products could
have a negative impact on the Company's future sales and gross margins. The
Company's foreign customers currently pay for the Company's products with U.S.
Dollars. In the past year, the strengthening of the U.S. Dollar as compared to
the Brazilian Real or the South Korean Won, has effectively increased the cost
of the Company's products by as much as 100% or more for its Brazilian and 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--There are Many Risks
Associated With International Operations."
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European Monetary Union
Within Europe, the European Economic and Monetary Union (the "EMU") introduced
a new currency, the euro, on January 1, 1999. The new currency is in response to
the EMU's policy of economic convergence to harmonize trade policy, eliminate
business costs associated with currency exchange and to promote the free flow of
capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
The Company's transactions are recorded in U.S. Dollars and the Company does
not currently anticipate future transactions being recorded in the euro. Based
on the lack of transactions recorded in the euro, the Company does not believe
that the euro will have a material effect on the financial position, results of
operations or cash flows of the Company. In addition, the Company has not
incurred and does not expect to incur any significant costs from the continued
implementation of the euro, including any currency risk, which could materially
affect the Company's business, financial condition and results of operations.
The Company has not experienced any significant operational disruptions to
date and does not currently expect the continued implementation of the euro to
cause any significant operational disruptions.
Year 2000 Compliance
In the next year, 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 or machines which utilize
date dependent software to either shut down or provide incorrect data or
information. The Company has examined its computer and information systems and
contacted its software and hardware providers to determine whether the Company's
software applications and computer and information systems are compliant with
the Year 2000. The Company has completed an upgrade to its computer operating
system and the Company has been assured by its software and hardware providers
that its computer systems are fully compliant with the Year 2000. The Company
has also performed its own internal tests of its software and hardware to
confirm that they are Year 2000 compliant. 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. The
costs for upgrading the Company's information systems have been funded through
the Company's operating cash flows, and the Company estimates that it has spent
approximately $250,000 since 1996 for upgrades of its information systems and
services associated with such upgrades.
While the Company believes that its information 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 suppliers and customers for
any impact that the Year 2000 may have on their information systems which could
then impact the Company. The Company has contacted all of its key suppliers and
has been assured that such suppliers will not be impacted by the Year 2000.
During the remainder of 1999, the Company intends to contact all of its
significant customers to request verification that such customers are Year 2000
compliant. Embedded software sold with the Company's products is not date
dependent and therefore is Year 2000 compliant. In addition, the equipment
utilized by the Company in its manufacturing process is not date dependent.
During the remainder of 1999, the Company intends to conduct tests on its
manufacturing equipment to ensure that there are not any Year 2000 issues with
such equipment. To date, none of the Company's internal testing has identified
any significant Year 2000 compliance issues.
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The Company does not believe that there will be significant issues or costs
associated with its products related to Year 2000 compliance; however, there can
be no assurance that such products do not contain undetected errors or defects
associated with Year 2000 date functions or that there exists heretofore
undetected aspects of the Company's manufacturing process which could be
impacted by the Year 2000. Although the Company is not currently aware of any
material operational issues or costs associated with preparing its products,
manufacturing processes or internal information systems for the Year 2000, there
can be no assurance that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its products, manufacturing processes or internal information
systems, which are comprised predominantly of third party software and hardware.
The Company does not currently anticipate that the Year 2000 programming issue
will have a material impact on its business, financial condition or results of
operations.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the result could be a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, manufacture products, send
invoices or engage in similar normal business activities at the Company or its
vendors and suppliers. The Company believes that under a worse case scenario, it
could continue the majority of its normal business activities on a manual basis.
The Company does not currently have a contingency plan with respect to potential
Year 2000 failures of its suppliers or customers.
The Company has evaluated the information systems, equipment and software
included in the HP Acquisition for its Year 2000 compliance. The Company has
completed a transition of the computer information and operating systems to the
Company's existing systems so that the Folsom facility is now operating on a
Year 2000 compliant system. The Company is disposing of any computer equipment
acquired in the HP Acquisition which is not Year 2000 compliant. The Company is
upgrading the telephone system at the Folsom facility to a new Year 2000
compliant system. This was completed in May 1999. The costs for upgrading the
Company's Folsom operations to be Year 2000 complaint were approximately
$100,000.
Additional Factors That May Affect Our Future Results
Our future operating results may be impacted by a number of factors that could
cause our actual results to differ materially from those stated herein, which
reflect our current expectations. These factors include the following:
. worldwide and regional economic downturns and unfavorable political
conditions;
. industry specific factors, including slowdown in demand for RF power
amplifiers;
. the ability to add new customers to reduce our dependence on existing
customers;
. the ability to consolidate and transfer the acquired HP Folsom
manufacturing operations;
. the ability to achieve re-qualification from customers of the products
previously manufactured by HP;
. the ability to finance our activities and maintain our financial liquidity;
. the ability to timely develop and produce commercially viable products at
competitive prices;
. the ability to produce products which meet the quality standards of both
our existing and potential new customers;
. the ability of our products to operate and be compatible with various OEMs'
base station equipment;
. the availability and cost of components;
. the ability to manage expense levels;
. and the ability to accurately anticipate customer demand.
A Significant Amount of Our Revenues Comes from a Few Customers
We sell most of our products to a small number of customers, and we expect
that this will continue. We believe that our future success depends upon our
ability to broaden our customer base and maintain relationships with major
wireless original equipment manufacturers, or OEMs, such as Hyundai Electronics
Industries Co., Ltd. ("Hyundai"), LGIC, Ericsson, Lucent, Nokia
Telecommunications Inc. ("Nokia"), Nortel and Samsung, as well as major
operators of wireless networks, such as AT&T Wireless Services ("AT&T Wireless")
and BellSouth. Our dependence on a small number of major customers exposes us
to numerous risks, including:
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. slowdowns or delays in deployment of wireless networks that reduce customer
demand for our products;
. changes in customer forecasts and demand;
. customers leveraging their buying power to change the terms of pricing,
payment and product delivery schedules; and
. direct competition should a customer decide to manufacture RF power
amplifiers internally.
Revenues attributable to our top four customers for the quarter ended April 4,
1999, LGIC, Lucent, Nortel and Samsung, accounted for approximately 86% of our
net revenues or $48.3 million, and each of these customers accounted for more
than 5% of our revenues for the quarter. Our top four customers for fiscal
1998, BellSouth, LGIC, Nortel and Samsung, accounted for approximately 69% or
$68.7 million of our net revenues, with each customer accounting for more than
10% of our revenues for 1998. The risks related to our customer concentration
were magnified in 1998 due to our customer's geographic concentration in South
Korea which experienced an economic and financial crisis during 1998. Our South
Korean customers, including Hyundai, LGIC and Samsung, accounted for
approximately 18% of our total sales for the first quarter of fiscal 1999, or
$9.8 million. For all of fiscal 1998, our South Korean customers accounted for
only $30.2 million, or approximately 30% of total net sales. This was a
significant drop from 1997, when Hyundai, LGIC and Samsung accounted for $99.3
million, or approximately 83% of our total sales.
We believe that continued purchases of our products by OEMs is dependent upon
the OEMs current view of wireless infrastructure deployments and could be
significantly reduced due to any delays of such deployments. A number of factors
may cause delays in wireless infrastructure deployments, including the following
such factors:
. 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 purchase products from us on a large
quantity basis over a short period of time which may cause demand for our
products to change rapidly. Due to these and other possible uncertainties
associated with wireless infrastructure deployments and OEMs purchasing
strategies, we may experience significant fluctuations in demand from our OEM
customers. Such fluctuations could cause a significant reduction in revenues
which could have a material adverse effect on our business, results of
operations and financial condition. We cannot guarantee that a major customer
will not reduce, delay or eliminate its purchases from us, which could have a
material adverse effect on our business, results of operations and financial
condition.
We Recently Acquired HP's RF Power Amplifier Business and are Currently
Integrating It With Our Existing Business
Last October, we completed the purchase of HP's RF power amplifier business
for a total purchase price of approximately $65.9 million. As part of this
acquisition, we acquired HP's manufacturing and research and development
facility located in Folsom, California, and its production equipment and
manufacturing lines located in Malaysia. Since the completion of the HP
Acquisition, we have closed the Malaysian manufacturing operations and have
relocated the production equipment to our existing manufacturing facility
located in Irvine, California. Additionally, we are currently consolidating
the Folsom manufacturing facility into our Irvine manufacturing facility. We
intend to maintain a research and development location in the Folsom area.
Upon completion of the HP Acquisition, we became responsible for the operation
of the Folsom manufacturing facility and the production of products formerly
manufactured by HP. Additionally, with the closing of the Malaysian
manufacturing operations we have to manufacture all products in our domestic
manufacturing facilities. We do not have any experience in operating multiple
manufacturing facilities and rely upon a significant number of contract
employees from HP and third-party employment services to operate the Folsom
facility. We may fail to successfully operate the Folsom manufacturing facility
or to consolidate it with our Irvine facility on schedule or within our budget.
Either situation would have a material adverse effect upon our business,
financial condition and results of operations.
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The transfer and consolidation of the Folsom manufacturing operations carry
the following risks:
. failure to properly train new employees on how to manufacture existing
products;
. failure to retain existing Folsom employees;
. delays or failures to achieve requalification from customers of the products
being produced from Irvine;
. failure to manage to reduce manufacturing costs as part of the consolidation
of manufacturing facilities;
. failure to manage manufacturing capacity to meet product demand;
. failure to manage, reproduce or maintain the quality of the HP manufacturing
processes; and
. failure to successfully redesign and requalify certain products that were
formerly designed and manufactured by HP which utilize transistors
manufactured by HP before the end of a one-year supply agreement with HP
covering those transistors.
Our integration of HP's RF power amplifier business also carries the following
business risks:
. diversion of management time and attention;
. failure to successfully operate multiple research and development
facilities;
. failure to retain former HP employees; and
. transition of customer relationships.
Our failure to achieve the transfer and consolidation and integration of HP's
RF power amplifier business in a timely manner and within our expected cost
targets could have a material adverse effect on our business, financial
condition and results of operations. Additionally, we must properly manage the
integration of HP's RF power amplifier business with our business to ensure that
our manufacturing capacity can meet product demand and to achieve the
anticipated cost reductions and synergies from the HP Acquisition. Failure to
do so could result in a reduction in our revenues, a reduction in our gross
margins and working capital, and, more generally, a reduction in our business,
financial condition and results of operations.
Our Quarterly Results Fluctuate Significantly
We experience, and will 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
our business, results of operations and financial condition. Factors that could
cause our results of operations to vary include the following:
. variations in the timing, cancellation, or rescheduling of customer orders
and shipments;
. our failure to timely and successfully complete the integration of the
operations acquired in the HP Acquisition;
. variations in manufacturing costs, capacities and efficiencies;
. capacity and production constraints, including constraints associated with
single-source component suppliers;
. cancellations or reductions of customer orders and shipments due to
economic slowdowns in the 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;
. delays in qualification by customers of new products or redesigns or delays
in qualification of new production facilities;
. the availability and cost of components;
. the timing, availability and sale of new products by us or our competitors;
. 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 our products;
. variations in product development and other operating expenses;
19
<PAGE>
. discounts given to certain customers for large volume purchases;
. competitive factors, including pricing, availability and demand for
competing amplification products; and
. high fixed expenses that increase operating expenses, especially during a
quarter with a sales shortfall.
In addition, while we periodically receive order forecasts from our major
customers, such customers have no binding obligation to purchase the forecasted
amounts. See "--A Significant Amount of Our Revenues Comes From a Few
Customers." Order deferrals and cancellations by our customers, declining
average sales prices, changes in the mix of products sold, delays in the
introduction of new products and longer than anticipated sales cycles for our
products have in the past adversely affected our quarterly results of
operations. We cannot guarantee that our quarterly results of operations will
not be similarly adversely affected in the future.
Our sales to customers are usually made under purchase orders with short
delivery requirements. While we receive periodic order forecasts, 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, we maintain significant work-in-progress
and raw materials inventory as well as increased levels of technical production
staff to meet estimated order forecasts. If customers purchase less than the
forecasted amounts or cancel or delay existing purchase orders, we will have
higher levels of inventory that face a greater risk of obsolescence and excess
production staff. If our customers desire to purchase products in excess of the
forecasted amounts or in a different product mix, we may lack the inventory or
manufacturing capacity to fill their orders. Either situation could have a
material adverse effect upon our business, financial condition and results of
operations and future business with such customers.
Due to these factors, our past results are not reliable indicators of our
future performance. Current operating profitability may fall, and future
revenues and operating results may not meet the expectations of public market
analysts and investors. In either case, the price of our Common Stock could be
materially adversely affected. See "--Our Stock Price Has Been and May Continue
to Be Volatile."
Our Average Sales Prices are Declining
We anticipate that the average sales prices for our products will continue to
decline and negatively impact our gross profit margins. Wireless service
providers are placing increasing price pressure on wireless infrastructure
manufacturers, which in turn has resulted in downward pricing pressure on our
products. Competition among third-party suppliers also has increased the
downward price pressure on our products. Since wireless infrastructure
manufacturers frequently negotiate supply arrangements far in advance of
delivery dates, we must often commit to price reductions for our products before
we know how, or if, we can obtain such cost reductions. In addition, average
sales prices are affected by price discounts negotiated for large volume
purchases by certain customers. To offset declining average sales prices, we
must reduce manufacturing costs and ultimately develop new products with lower
costs or higher average sales prices. If we cannot achieve such cost reductions
or product improvements, our gross margins will continue to decline.
We anticipate that single carrier RF power amplifier products will account for
a larger portion of our net sales in 1999 than in prior years. Our recent HP
Acquisition included only single carrier RF power amplifier business with no
existing multi-carrier RF power amplifier business. Sales of single carrier RF
power amplifiers have been subject to intense price competition and carry lower
gross profit margins than multi-carrier RF power amplifier products. If we
cannot reduce manufacturing costs on our single carrier RF power amplifiers and
such RF power amplifiers account for an increased percentage of net sales, our
overall gross profit margins will fall.
Our Failure to Manage Future Growth Could Have Adverse Effects
Our ability to compete effectively, capitalize on the HP Acquisition and
manage future growth depends on our ability to:
. effectively expand, train and manage our work force, particularly to
complete the transition of the Folsom manufacturing operations;
20
<PAGE>
. manage production and inventory levels to meet product demand and new
product introductions;
. manage and improve production quality;
. expand both the range of customers and the geographic scope of our customer
base;
. reduce product costs; and
. improve financial and management controls, reporting systems and
procedures.
Any failure to manage growth effectively could have a material adverse effect
on our business, financial condition and results of operations.
We Must Retain Key Executives and Personnel
We need to hire and retain highly qualified technical, marketing and
managerial personnel. Competition for 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 our business, results of
operations and financial condition.
There are Many Risks Associated With International Operations
For fiscal years 1996, 1997, 1998 and the first three months of fiscal 1999,
international revenues (excluding North American sales) accounted for
approximately 77%, 84%, 41% and 30% respectively, of our net sales. These
revenues will continue to account for a significant percentage of our revenues
for the foreseeable future. Therefore, the following risks associated with
international operations could have a material adverse effect on our
performance:
. compliance with multiple and potentially conflicting regulations, including
export requirements, tariffs and other barriers, and health and safety
requirements;
. differences in intellectual property protections;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection cycles;
. currency fluctuations;
. economic instability, including inflation and interest rate fluctuations,
such as those seen in South Korea and Brazil;
. restrictions against the repatriation of earnings from a foreign country;
. overlapping or differing tax structures; and
. political or civil turmoil.
We have traditionally invoiced all of our foreign sales in U.S. Dollars.
Accordingly, we do not currently engage in foreign currency hedging
transactions. However, as we continue to expand our international operations,
we may be paid in foreign currencies and, therefore, would become exposed to
possible losses in foreign currency transactions. Since we sell our products in
many countries, when the U.S. Dollar becomes more expensive relative to the
currency of our foreign customers, the price of our products in those countries
rises and our sales into those countries may fall. This happened to us in South
Korea during 1998. If any of the above risks actually occurs, there may be a
material adverse effect on our business, financial condition and results of
operations.
Our Success is Tied to the Growth of the Wireless Services Market
Most of our revenues come from the sale of RF power amplifiers for wireless
communications networks. Our future success depends to a considerable extent
upon the continued growth and increased availability of wireless communications
services, including cellular and PCS. Wireless communications services may not
continue to grow and create demand for our products. We believe that continued
growth in the use of wireless communications services depends, in part, on
lowering the cost per subscriber by reducing the costs of the infrastructure
capital equipment and thereby enabling reductions in wireless service pricing.
Although FCC regulations require local
21
<PAGE>
phone companies to reduce the rates charged to wireless carriers for connection
to their wireline networks, wireless service rates will probably remain higher
than rates charged by traditional wireline companies.
The expansion of wireless communications services depends on developed
countries, such as the United States, continuing to allow deployment of new
networks and upgrades to existing networks, and on less developed countries
deploying wireless communications networks.
Our performance could be adversely affected by any of the following risks:
. failure of local governments or foreign countries to allow construction of
new wireless communications systems;
. termination or delays by local governments or foreign countries of existing
construction of wireless communications systems;
. imposition of moratoriums by local governments or foreign countries on
building new base stations for existing wireless communications systems;
and
. foreign authorities may disfavor wireless communications systems because of
environmental concerns, political unrest, economic downturns, favorable
prices for other communications services or delays in implementing wireless
communications systems.
Over the Last Three Years, We Have Had a Reliance upon the South Korean Market
Three of our customers, Hyundai, LGIC and Samsung, are based in South Korea
and collectively accounted for approximately 17% of the Company's net sales for
the first quarter ended April 4, 1999. For fiscal year 1998, four of our
customers based in South Korea, Hyundai, LGIC, Samsung and SK Global,
collectively accounted for approximately 30% of our net sales and three of these
customers, Hyundai, LGIC and Samsung, accounted for approximately 83% of our net
sales for fiscal year 1997. These customers have purchased products for
deployment in the South Korean digital cellular and PCS networks.
The build-out of the South Korean digital cellular networks began in 1995 with
two independent service providers offering digital CDMA service beginning in
1996. In contrast, the build-out of the South Korean PCS networks began in the
first quarter of 1997 with three service providers. We provided multi-carrier
cellular RF power amplifiers starting from the initial stages of the digital
cellular network buildout in South Korea. During 1997, we began shipping, in
volume, PCS single carrier RF power amplifiers for use in the new PCS networks
being built in South Korea. Sales to our South Korean customers for the South
Korean PCS networks represented substantially all of our PCS sales during 1997
and approximately 86% of our PCS sales for the first nine months of 1998. Since
the completion of the HP Acquisition, we have significantly increased our non-
Korean PCS sales. The delay, postponement and cancellation of the build-out of
the South Korean digital wireless networks which occurred during 1998, did have
an adverse effect on our revenues and results of operations during 1998. The
continued delay, termination or early completion of the infrastructure build-out
of the South Korean digital wireless networks could have a material adverse
effect on our business, results of operations and financial condition. Further,
even if these networks are developed as originally anticipated, there can be no
assurance that our products will continue to be purchased by our South Korean
customers or be capable of being manufactured at competitive prices in
sufficient volumes.
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, our South Korean customers
continued to order and take delivery of products and continued to make timely
payments for amounts owed to us. However, during 1998, economic and currency
conditions in Asia and South Korea continued to deteriorate which negatively
impacted overall market conditions within South Korea. As a result, we
experienced postponed, rescheduled and cancelled orders from our South Korean
customers for both the cellular and PCS networks in South Korea.
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<PAGE>
The economic and financial crisis in Asia and South Korea caused a reduction
in the value of the South Korean Won when compared to the U.S. dollar. This
reduction in purchasing value caused a reduction in South Korean wireless
service operators' demand for our products. Our South Korean customers pay for
products with U.S. dollars. As such, the strengthening of the U.S. dollar as
compared to the South Korean Won during 1998, increased the effective cost of
our products by at times as much as 100% or more for our South Korean customers.
The resulting significant increase in the local currency cost of such products
made them less attractive to our customers. Additionally, due to the economic
problems facing the South Korean banking network, it became more difficult for
local operating companies to raise additional financing to support the increased
costs of their infrastructure buildout. Please note that the types of economic
problems experienced in Asia have been encountered in other areas of the world
where we operate, such as Brazil in South America.
Therefore, we currently believe 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. Accordingly, we are 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,
we are unable to predict what level, if any, such sales will be for 1999.
Hyundai, LGIC and Samsung have also been marketing wireless infrastructure
equipment for installation in networks outside of the South Korean market. We
cannot predict whether such customers will be successful in obtaining new
business outside of South Korea or that, if successful, they will continue to
purchase RF power amplifiers from us. Any further significant decrease in our
sales of RF power amplifiers to these customers, without an offsetting increase
in sales to other customers, could have a material adverse effect on our
business, results of operations and financial condition.
We Depend on Single Sources for Key Components
A number of the parts used in our products are available from only one or a
limited number of outside suppliers due to unique component designs as well as
certain quality and performance requirements. To take advantage of volume
pricing discounts, we also purchase certain customized components from single
sources. We have experienced, and expect to continue to experience, shortages
of single-sourced components. Shortages have compelled us to adjust our product
designs and production schedules. If single-sourced components become
unavailable in sufficient quantities or available only on unsatisfactory terms,
we would be required to purchase comparable components from other sources and
"retune" our products to function with the replacement components, or we may be
required to redesign our products to use other components, either of which could
delay production and delivery of our products. If we could not obtain
comparable replacements or effectively retune or redesign our products, there
could be a material adverse effect on our business, results of operations and
financial condition.
The RF power amplifier business which we acquired in the HP Acquisition
utilizes certain custom components manufactured by HP. While we have a one-year
supply commitment from HP, we are expected to begin sourcing such components
from new suppliers. If we are unsuccessful in adding such new suppliers, such
failure could have a material adverse effect on our business, results of
operations and financial condition.
Due to the our reliance on certain single-sourced customized components, if we
experience an abrupt reduction in customer demand, we may end up with excess
inventories of such components due to the nature of the volume purchasing
agreements that we enter to obtain component cost reductions. If we are unable
to utilize such components in a timely manner and are unable to sell such
components due to their customized nature, the resulting negative impact on our
liquidity and resulting increased inventory levels could have a material adverse
effect on our business, results of operations and financial condition.
The Market in Which We Operate is Highly Competitive
The wireless communications infrastructure equipment industry is extremely
competitive and is characterized by rapid technological change, frequent new
product development, rapid product obsolescence, evolving industry
23
<PAGE>
standards and significant price erosion over the life of a product. Our products
compete on the basis of the following key characteristics:
. performance;
. functionality;
. reliability;
. pricing;
. quality;
. designs that can be efficiently manufactured in large volumes
. time-to-market delivery capabilities; and
. compliance with industry standards.
While we believe that we compete favorably with respect to these
characteristics at present, this may change. If we fail to address our
competitive challenges, there could be a material adverse effect on our
business, financial condition and results of operations.
Our current competitors include AML Communications, Inc., M/A-COM, Inc. (a
subsidiary of AMP, Inc.), Microwave Power Devices, Inc. and Spectrian
Corporation, in addition to the RF power amplifier manufacturing operations of
the leading wireless infrastructure manufacturers such as Ericsson, Lucent,
Motorola, Nokia and Samsung. Some competitors have significantly greater
financial, technical, manufacturing, sales, marketing and other resources than
we do and have achieved greater name recognition for their products.
Our success depends in part upon the rate at which wireless infrastructure
manufacturers incorporate our products into their systems. A substantial
portion of the present worldwide production of RF power amplifiers is captive
within the internal manufacturing operations of leading wireless infrastructure
manufacturers such as Ericsson, Lucent, Motorola, Nokia and Samsung. These
companies regularly evaluate whether to manufacture their own RF power
amplifiers rather than purchase them from us. These companies could also
directly compete with us by selling their RF power amplifiers to other
manufacturers and operators, including our customers. If we are not successful
in increasing the use of our products by the leading wireless infrastructure
manufacturers, there would be a material adverse effect on our business,
financial condition and results of operations.
We Must Develop and Sell New Products in Order to Keep Up With Rapid
Technological Change
The markets in which we compete are characterized by:
. rapidly changing technology;
. evolving industry standards and communications protocols; and
. frequent improvements in products and services.
To succeed, we must improve current products and develop and introduce new
products that are competitive in terms of price, performance and quality. These
products must adequately address the requirements of wireless infrastructure
manufacturing customers and end-users.
To develop new products, we invest in the research and development of RF power
amplifiers for wireless communications networks. We target our research and
development efforts on major wireless network deployments worldwide, which cover
a broad range of frequency and transmission protocols. We also engage in
development projects for products requested by our customers. In spite of our
efforts, the deployment of a wireless network may be delayed which could cause a
particular research or development effort to not generate a revenue producing
product. In addition, the new products we develop may not achieve market
acceptance or may not be manufacturable at competitive prices in sufficient
volumes. We cannot guarantee the success of our research and development
efforts.
We also continue efforts to improve our existing cellular and PCS lines of RF
power amplifier products. Any delays in the shipment of these products may
cause customer dissatisfaction and delay or loss of product revenues.
24
<PAGE>
In addition, it is possible that a significant number of development projects
will not result in manufacturable new products or product improvements.
If we fail to develop new products or improve existing products in a timely
manner, there will be a material adverse effect on our business, financial
condition and results of operations.
We May Fail to Develop Products that are Sufficiently Manufacturable or of
Adequate Quality and Reliability
Manufacturing our products is a complex process and requires significant time
and expertise to meet customers' specifications. Successful manufacturing is
substantially dependent upon our ability to tune these products to meet
specifications in an efficient manner. In this regard, we depend on our staff
of trained technicians. If we cannot design our products to minimize the manual
tuning process or if we are unable to attract additional trained technicians, or
we lose a number of our trained technicians, it would have a material adverse
effect on our business, financial condition and results of operations.
We have had quality problems with our products in the past and may have
similar problems in the future. We have replaced components in some products in
accordance with our product warranties. We believe that our customers will
demand increasingly stringent product performance and reliability, particularly
in domestic markets. We cannot provide any assurance that our product designs
will remain successful or that they will keep pace with technological
developments, evolving industry standards and new communications protocols. We
may fail to adequately improve product quality and meet the quality standards of
our customers, which could cause us to lose such customers. Design problems
could damage relationships with existing and prospective customers and could
limit our ability to market our products to large wireless infrastructure
manufacturers, many of which build their own, high quality RF power amplifiers
and have stringent quality control standards. See "--Many Wireless
Infrastructure Manufacturers have Internal RF Power Amplifier Production
Capabilities."
The Sales Cycle for Our Products is Lengthy
The sales cycle associated with our products is typically lengthy, often
lasting from six to eighteen months. Our customers normally conduct significant
technical evaluations of our products and our competitors' products before
making purchase commitments. Our OEM customers typically require extensive
technical qualification of our products before they are integrated into each
OEM's products. This qualification process involves a significant investment of
time and resources from us and the OEMs to ensure that our product designs are
fully qualified to perform with each OEM's equipment. Also, individual wireless
network operators can subject our products to field and evaluation trials, which
can last anywhere from one to six months, before making a purchase. The
qualification and evaluation process and the customer field trials may delay the
shipment of sales forecasted for a specific customer for a particular quarter
and our operating results for that quarter could be materially adversely
affected.
Many Wireless Infrastructure Manufacturers have Internal RF Power Amplifier
Production Capabilities
Many of the leading wireless infrastructure equipment manufacturers internally
manufacture their own RF power amplifiers. We believe that our existing
customers continuously evaluate whether to manufacture their own RF power
amplifiers. Certain of our customers produced RF power amplifiers in an attempt
to replace products manufactured by us. We believe that this practice will
continue. In addition, LGIC, one of our customers, has entered into a joint
venture manufacturing arrangement with one of our competitors. In the event
that our customers manufacture their own RF power amplifiers, such customers
could reduce or eliminate their purchases of our products. We cannot guarantee
that our current customers will continue to rely, or expand their reliance, on
us as an external source of supply for their RF power amplifiers.
Wireless infrastructure equipment manufacturers with internal manufacturing
capabilities could also sell RF power amplifiers externally to other
manufacturers, thereby competing directly with us. In addition, even if we are
successful in selling our products to these customers, we believe that such
customers will demand price and other concessions based on their ability to
manufacture RF power amplifiers internally. If, for any reason, our major
customers decide to produce their RF power amplifiers internally or through
joint ventures with other competitors,
25
<PAGE>
or require us to participate in joint venture manufacturing with them, our
business, results of operations and financial condition could be materially
adversely affected.
Protection of Our Intellectual Property is Limited; Risk of Third-Party Claims
of Infringement
We rely upon trade secrets to protect our intellectual property. We execute
confidentiality and non-disclosure agreements with our employees and limit
access to and distribution of our proprietary information. During 1998, we were
granted our first U.S. patent for an aspect of our multi-carrier technology. In
addition, we have applied for several additional U.S. and international patents
for various aspects of our proprietary technology. These efforts allow us to
rely upon the knowledge and experience of our management and technical
personnel, to market our existing products and to develop new products. The
departure of any of our management and technical personnel, the breach of their
confidentiality and non-disclosure obligations to us or the failure to achieve
our intellectual property objectives may have a material adverse effect on our
business, financial condition and results of operations.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing the rights of others. We may fail to do so. In
addition, the laws of certain countries in which our products are or may be sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States.
As the number of patents, copyrights and other intellectual property rights in
our industry increases, and as the coverage of these rights and the
functionality of the products in the market further overlap, we believe that
companies in our industry may face more frequent infringement claims. Although
there are no pending or threatened intellectual property lawsuits against us, we
may face litigation or infringement claims in the future. Such claims could
result in substantial costs and diversion of our resources.
A third party claiming infringement may also obtain an injunction or other
equitable relief, which could effectively block the distribution or sale of
allegedly infringing products. Although we may seek licenses from third parties
covering intellectual property that we are allegedly infringing, we cannot
guarantee that any such licenses could be obtained on acceptable terms, if at
all.
Certain of our customers and other wireless communications infrastructure
equipment manufacturers may decide to protect their intellectual property by
deciding not to purchase RF power amplifiers from external sources. The
appearance of a close working relationship with a particular customer may
adversely affect our ability to establish or maintain a relationship with, or
sell products to, competitors of that particular customer. The failure of our
major customers to purchase products from us due to our relationship with other
customers could have a material adverse effect on our business, financial
condition and results of operations.
Actual or Alleged Defects in Our Products May Create Liability to Those
Claiming Injury
Any of the following could have a material adverse effect on our business,
financial condition and results of operations:
. if systems or devices relying on or incorporating our products are
determined or alleged to create a health risk, causing us to be named as a
defendant, and held liable, in a product liability lawsuit;
. delays or prohibitions on the installation of wireless communications
networks due to alleged health or environmental risks; and
. our inability to maintain insurance at an acceptable cost or to otherwise
protect against potential product liability lawsuits.
Government Regulation of the Communications Industry
The products that we manufacture are regulated. We must obtain regulatory
approvals to manufacture and sell our products and our customers must obtain
approvals to operate our products. The FCC has adopted regulations that impose
stringent RF emissions standards on the communications industry. These
regulations may require that
26
<PAGE>
we alter the manner in which radio signals are transmitted or otherwise alter
the equipment transmitting such signals. We are also subject to regulatory
requirements in international markets where prominent local competitors may have
the ability to influence regulations in situations where we do not.
The enactment by governments of new laws or regulations or a change in the
interpretation of existing regulations could adversely affect the market for our
products. Recent deregulation of international communications industries along
with recent RF spectrum allocations made by the FCC have increased the potential
demand for our products. We cannot guarantee 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 us. 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. In the past, the delays inherent in
this governmental approval process have caused, and may in the future cause, the
cancellation, postponement or rescheduling of the installation of communications
systems by our customers. These delays could have a material adverse effect on
our business, results of operations and financial condition.
Our Stock Price Has Been and May Continue to Be Volatile
Our Common Stock, and the stock market generally, have from time to time
experienced significant price and volume fluctuations. The fluctuations in the
stock market are often 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 may adversely affect
the market price of our Common Stock. Our stock price may be affected by the
factors discussed above as well as:
. fluctuations in our results of operations or the operations of our
competitors;
. failure of such results of operations to meet the expectations of stock
market analysts and investors
. sales of a significant number of shares of restricted securities in the
market;
. changes in the political or economic outlook of the markets into which we
sell our products (such as South Korea or Brazil);
. changes in stock market analyst recommendations regarding us or our
competitors;
. the timing and announcements of technological innovations or new products
by us or our competitors;
. changes in the wireless communications industry; and
. general market conditions.
Risk of Litigation
We are subject to various legal proceedings from time to time as part of our
business. In July 1998, lawsuits were filed by certain of our shareholders
against us and certain of our present and former directors and officers. The
shareholders bringing these lawsuits claim to represent a class consisting of
all persons who purchased our Common Stock between June 4, 1997 and January 16,
1998. These lawsuits allege, among other things, that we (and our officers and
directors) violated federal securities laws by making misrepresentations
designed to artificially inflate our stock price and allow certain individuals
to sell their Common Stock at artificially inflated prices. We, and our
directors and officers, deny the allegations of wrongdoing and intend to
vigorously defend the lawsuits, although the ultimate outcome of these
proceedings is not currently determinable. A decision adverse to us in any of
these matters could have a material adverse effect on our business, financial
condition and results of operations. In addition, litigation, regardless of its
merits, could result in substantial costs to us and divert management's
attention from our operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's financial instruments include cash and long-term debt. At April
4, 1999, the carrying values of the Company's financial instruments approximated
their fair values based on current market prices and rates.
It is currently the Company's policy not to enter into derivative financial
instruments. The Company does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies.
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<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as a part of this report:
Exhibit
Number Description
- ------ -----------
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.
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<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: May 19, 1999 By: /s/ Kevin T. Michaels
-------------------------------
Kevin T. Michaels
Vice President, Finance and Chief
Financial Officer
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<PAGE>
EXHIBIT 11.1
POWERWAVE TECHNOLOGIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
EPS CALCULATION AS OF March 29, 1998
<S> <C> <C>
Shares outstanding December 28, 1997.......................... 17,263,713
Shares issued under the Employee Stock Purchase Plan 23,456 14,950
Options exercised during quarter.............................. 146,204 106,848
Shares repurchased during the period.......................... (300,000) (249,694)
-----------
Weighted average common shares - basic........................ 17,135,817
Weighted average options outstanding
during the period ending March 29, 1998.................... 889,664
Proceeds...................................................... $ 7,851,012
Assumed buyback price......................................... $ 14.44
-----------
Shares bought back with proceeds.............................. 547,045
Assumed shares bought back with non-qualified tax
benefit utilizing 36.5% tax rate........................... 125,056
Potential common shares....................................... 217,563
-----------
Total weighted average common shares - diluted................ 17,353,380
Quarterly net income at March 29, 1998........................ $ 2,207,041
-----------
Diluted net income per share.................................. $ 0.13
===========
Basic net income per share.................................... $ 0.13
===========
EPS CALCULATION AS OF April 4, 1999
Shares outstanding January 3, 1999............................ 17,249,676
Shares issued under the Employee Stock Purchase Plan 31,789 22,008
Shares issued in public offering.............................. 2,000,000 549,451
Share issued to fulfill over-allotment........................ 300,000 46,154
Options exercised during quarter.............................. 194,845 137,717
-----------
Weighted average common shares - basic........................ 18,005,006
Weighted average options outstanding
during the period ending April 4, 1999..................... 1,938,363
Proceeds...................................................... $25,706,049
Assumed buyback price......................................... $ 25.10
-----------
Equivalent shares bought back with proceeds................... 914,209
Assumed equivalent shares bought back with non-qualified tax
benefit utilizing 36.5% tax rate........................... 335,493
Potential common shares....................................... 578,716
-----------
Total weighted average common shares - diluted................ 18,583,722
Quarterly net income at April 4, 1999......................... $ 2,051,205
-----------
Diluted net income per share.................................. $ 0.11
===========
Basic net income per share.................................... $ 0.11
===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEETS OF POWERWAVE
TECHNOLOGIES,INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-03-1999
<PERIOD-START> JAN-04-1999 DEC-29-1997
<PERIOD-END> APR-04-1999 MAR-29-1998
<CASH> 54,008 57,413
<SECURITIES> 0 0
<RECEIVABLES> 29,979 12,069
<ALLOWANCES> 1,270 877
<INVENTORY> 30,581 9,549
<CURRENT-ASSETS> 119,434 83,222
<PP&E> 27,889 12,617
<DEPRECIATION> 7,116 3,263
<TOTAL-ASSETS> 172,633 93,267
<CURRENT-LIABILITIES> 38,396 17,145
<BONDS> 0 0
0 0
0 0
<COMMON> 115,177 65,864
<OTHER-SE> 18,550 9,145
<TOTAL-LIABILITY-AND-EQUITY> 172,633 93,267
<SALES> 56,024 22,650
<TOTAL-REVENUES> 56,024 22,650
<CGS> 41,010 13,795
<TOTAL-COSTS> 52,574 20,019
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 583 0
<INCOME-PRETAX> 3,231 3,476
<INCOME-TAX> 1,179 1,269
<INCOME-CONTINUING> 2,052 2,207
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,052 2,207
<EPS-PRIMARY> .11 .13
<EPS-DILUTED> .11 .13
</TABLE>
