<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 July 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
2026 McGaw Avenue
Irvine, California 92614
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (949) 757-0530
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of August 11, 1999, the number of outstanding shares of Common Stock,
par value $.0001 per share, of the Registrant was 19,963,709.
================================================================================
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at July 4, 1999 (Unaudited) and January 3, 1999 3
Consolidated Statements of Operations (Unaudited) for the three and six months
ended July 4, 1999 and June 28, 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the six months ended
July 4, 1999 and June 28, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
</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>
July 4, January 3,
1999 1999
----------- -----------
ASSETS: (Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents....................................................... $ 59,241 $ 13,307
Accounts receivable, net of allowance for doubtful accounts of $ 1,420 and
$1,270 at July 4, 1999 and January 3, 1999, respectively...................... 41,543 31,212
Inventories, net................................................................ 20,248 28,583
Prepaid expenses and other current assets....................................... 2,036 1,633
Assets held for sale, net....................................................... 8,122 --
Deferred tax assets............................................................. 3,303 3,303
-------- --------
Total current assets......................................................... 134,493 78,038
Property and equipment............................................................ 31,743 26,286
Less accumulated depreciation and amortization.................................... (8,524) (5,838)
-------- --------
Net property and equipment...................................................... 23,219 20,448
-------- --------
Assets held for sale, net......................................................... -- 8,122
Intangible assets, net............................................................ 16,128 17,916
Deferred tax assets............................................................... 4,253 4,254
Other non-current assets.......................................................... 238 3,207
-------- --------
TOTAL ASSETS...................................................................... $178,331 $131,985
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable................................................................ $ 18,463 $ 18,667
Accrued expenses and other liabilities.......................................... 14,855 13,918
Current portion of long-term debt............................................... 392 6,528
Income taxes payable............................................................ 2,941 3,715
-------- --------
Total current liabilities.................................................... 36,651 42,828
Long-term debt, net of current portion............................................ -- 17,621
Other non-current liabilities..................................................... 531 466
-------- --------
Total liabilities............................................................ 37,182 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, 19,887 shares
issued and outstanding at July 4, 1999 and 17,956 shares
issued and 17,250 shares outstanding at January 3, 1999....................... 106,166 65,027
Retained earnings............................................................... 34,983 28,729
Less treasury stock at cost..................................................... -- (22,686)
-------- --------
Total shareholders' equity................................................... 141,149 71,070
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................ $178,331 $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 Six Months Ended
--------------------------- ----------------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales................................. $68,493 $21,099 $124,517 $43,749
Cost of sales............................. 50,353 12,567 91,363 26,362
------- ------- -------- -------
Gross profit.............................. 18,140 8,532 33,154 17,387
Operating expenses:
Sales and marketing..................... 3,411 2,164 6,989 4,195
Research and development................ 6,376 2,950 11,671 5,907
General and administrative.............. 2,654 1,204 5,345 2,440
------- ------- -------- -------
Total operating expenses.................. 12,441 6,318 24,005 12,542
Operating income.......................... 5,699 2,214 9,149 4,845
Other income, net......................... 919 745 700 1,590
------- ------- -------- -------
Income before income taxes................ 6,618 2,959 9,849 6,435
Provision for income taxes................ 2,416 1,080 3,595 2,349
------- ------- -------- -------
Net income................................ $ 4,202 $ 1,879 $ 6,254 $ 4,086
======= ======= ======== =======
Basic earnings per share.................. $ .21 $ .11 $ .32 $ .24
======= ======= ======== =======
Diluted earnings per share................ $ .20 $ .11 $ .31 $ .24
======= ======= ======== =======
Basic weighted average common shares...... 19,867 17,140 18,936 17,138
======= ======= ======== =======
Diluted weighted average common shares.... 20,500 17,466 19,542 17,410
======= ======= ======== =======
</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>
Six Months Ended
---------------------------
July 4, June 28,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 6,254 $ 4,086
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................... 4,513 1,284
Provision for doubtful accounts......................................... 150 100
Provision for inventory reserves........................................ -- 534
Compensation costs related to stock options............................. 18 18
Changes in current assets and liabilities:
Accounts receivable..................................................... (10,481) (2,488)
Inventories............................................................. 8,335 (246)
Prepaid expenses and other current assets............................... (407) (110)
Accounts payable........................................................ (204) (4,033)
Accrued expenses and other liabilities.................................. 937 (4,337)
Income taxes payable.................................................... 3,370 (902)
Other non-current assets.................................................. 479 37
Other non-current liabilities............................................. 65 139
-------- --------
Net cash provided by (used in) operating activities................... 13,029 (5,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (5,505) (2,617)
Redemption (Purchase) of long-term investments............................ 2,500 (2,500)
-------- --------
Net cash used in investing activities................................. (3,005) (5,117)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................................... (23,757) (261)
Issuance of Common Stock, net............................................. 58,129 273
Repurchase of Common Stock................................................ -- (3,741)
Proceeds from exercise of stock options................................... 1,538 464
-------- --------
Net cash provided by (used in) financing activities................... 35,910 (3,265)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 45,934 (14,300)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 13,307 67,433
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 59,241 $ 53,133
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................ $ 963 $ 79
======== ========
Income taxes............................................................ $ 225 $ 3,250
======== ========
NON CASH ITEMS:
Tax benefit related to stock option exercises........................... $ 3,979 $ 440
======== ========
Tax benefit related to issuance of Common Stock under the Employee
Stock Purchase Plan.................................................... $ 165 $ 37
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
POWERWAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 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 and six months ended July 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 and six-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 July 4, 1999
Net sales......................................... $53,459 $14,634 $ 400 $ -- $ 68,493
Cost of sales..................................... 36,601 12,585 1,167 -- 50,353
------- ------- ------- ------- --------
Gross profit (loss)............................... $16,858 $ 2,049 $ (767) $ $ 18,140
======= ======= ======= ======= ========
Three months ended June 28, 1998
Net sales......................................... $18,554 $ 1,613 $ 788 $ 144 $ 21,099
Cost of sales..................................... 9,666 1,928 909 64 12,567
------- ------- ------- ------- --------
Gross profit (loss)............................... $ 8,888 $ (315) $ (121) $ 80 $ 8,532
======= ======= ======= ======= ========
<CAPTION>
Business Segments
-----------------
(in thousands)
WLL and
Cellular PCS LMR Other Total
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Six months ended July 4, 1999
Net sales......................................... $92,412 $31,436 $ 669 $ -- $124,517
Cost of sales..................................... 64,534 24,719 2,110 -- 91,363
------- ------- ------- ------- --------
Gross profit (loss)............................... $27,878 $ 6,717 $(1,441) $ $ 33,154
======= ======= ======= ======= ========
Six months ended June 28, 1998
Net sales......................................... $38,342 $ 3,531 $ 1,724 $ 152 $ 43,749
Cost of sales..................................... 20,290 4,049 1,892 131 26,362
------- ------- ------- ------- --------
Gross profit (loss)............................... $18,052 $ (518) $ (168) $ 21 $ 17,387
======= ======= ======= ======= ========
</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 July 4, 1999................... $49,040 $19,453 $ 68,493
Sales for the three months ended June 28, 1998.................. $14,019 $ 7,080 $ 21,099
<CAPTION>
North
American International Total
-------- ------------- ---------
Sales for the six months ended July 4, 1999..................... $88,334 $36,183 $124,517
Sales for the six months ended June 28, 1998.................... $25,466 $18,283 $ 43,749
</TABLE>
For the three months ended July 4, 1999 and June 28, 1998, sales to the
Company's South Korean customers accounted for approximately $11.8 million and
$6.7 million, respectively. During the six months ended July 4, 1999 and June
28, 1998, sales to the Company's South Korean customers accounted for
approximately $21.6 million and $16.9 million, respectively.
7
<PAGE>
The Company's product sales have historically been concentrated in a small
number of customers. During the six months ended July 4, 1999 and June 28, 1998
sales to five customers accounted for approximately 83% and 78% of total
revenues or $103.1 million and $34.1 million, 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 six months
ended July 4, 1999:
<TABLE>
<CAPTION>
Number of
Options
Exercisable
Number of Price per as of
Shares Share July 4, 1999
--------- ---------------- -------------
<S> <C> <C> <C>
Balance at January 3, 1999 2,715,102 $ 2.47-$31.75
Granted 489,750 $18.38-$31.38
Exercised (427,000) $ 2.47-$17.63
Canceled (46,041) $ 4.00-$19.19
---------
Balance at July 4, 1999 2,731,811 $ 2.47-$31.75 688,882
=========
</TABLE>
Employee Stock Purchase Plan
At July 4, 1999 there were rights to purchase approximately 23,000 shares of
Common Stock outstanding under the Company's Employee Stock 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 entered an escrow to sell
the Folsom facility to a third party during the second quarter of 1999 and this
escrow closed on July 15, 1999.
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
8
<PAGE>
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.
9
<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 July 4, 1999 and June 28,
1998.
<TABLE>
<CAPTION>
As a Percentage of Net Sales
Three Months Ended Six Months Ended
---------------------- ----------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.5 59.6 73.4 60.3
----- ----- ----- -----
Gross profit 26.5 40.4 26.6 39.7
Operating expenses:
Sales and marketing 5.0 10.2 5.6 9.5
Research and development 9.3 14.0 9.4 13.5
General and administrative 3.9 5.7 4.3 5.6
----- ----- ----- -----
Total operating expenses 18.2 29.9 19.3 28.6
Operating income 8.3 10.5 7.3 11.1
Other income (expense), net 1.3 3.5 0.6 3.6
----- ----- ----- -----
Income before income taxes 9.6 14.0 7.9 14.7
Provision for income taxes 3.5 5.1 2.9 5.4
----- ----- ----- -----
Net income 6.1% 8.9% 5.0% 9.3%
===== ===== ===== =====
</TABLE>
Three months ended July 4, 1999 and June 28, 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 225%
to $68.5 million for the quarter ended July 4, 1999 from $21.1 million for the
quarter ended June 28, 1998. The growth in revenue was due to increased sales
of the Company's cellular and PCS products. The quarter ended July 4, 1999 also
includes revenues from the sales of products acquired in the HP Acquisition in
October 1998. For the quarter ended July 4, 1999, total sales of cellular
products (including both single and multi-carrier RF power amplifiers and racks)
accounted for approximately 80% of revenues or $54.8 million, compared to
approximately 88% of revenues or $18.6 million for the quarter ended June 28,
1998. Sales of RF power amplifiers and associated products for PCS networks
(consisting mainly of single carrier RF power amplifiers) accounted for
approximately 19% of revenues or $13.3 million for the second quarter of 1999,
compared to approximately 8% or $1.8 million for the second quarter in 1998.
Sales of Land Mobile Radio ("LMR") amplifiers accounted for less than 1% of
revenues or $0.4 million for the quarter ended July 4, 1999, compared to
approximately 4% of revenues or $0.8 million for the quarter ended June 28,
1998.
10
<PAGE>
Total sales to North American (includes Canada and Mexico) customers accounted
for approximately 72% of revenues or $49.0 million for the quarter ended July 4,
1999, compared with approximately 66% or $14.0 million for the quarter ended
June 28, 1998. The Company's total international sales (excluding North
American sales) accounted for approximately 28% of revenues or $19.5 million for
the quarter ended July 4, 1999, compared with approximately 34% or $7.1 million
for the quarter ended June 28, 1998. Total Asian sales (which predominately
includes sales to South Korea) increased 77% to $11.8 million for the quarter
ended July 4, 1999 from $6.7 million for the quarter ended June 28, 1998. Total
Asian sales accounted for approximately 17% of revenues in the second quarter of
1999 compared to approximately 32% of revenues in the second 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."
The reduction and stoppage of the deployment of both the South Korean digital
cellular CDMA and PCS networks during 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 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,
increased approximately 250% to $49.0 million for the quarter ended July 4, 1999
from $14.0 million for the quarter ended June 28, 1998. For the second quarter
ended July 4, 1999, total sales to Nortel Networks Corporation and related
entities ("Nortel") accounted for approximately 44% of revenues and sales to
Lucent Technologies, Inc. ("Lucent") accounted for over 10% of the revenues for
the quarter. 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 Original
Equipment Manufacturers ("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 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 second quarter of
fiscal 1999 and 1998 were 26.5% and 40.4%, respectively. The decrease in
11
<PAGE>
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 second quarter of 1999 were negatively impacted by the
significant increase in labor and overhead costs associated with the significant
ramp-up of production personnel and facilities at the Company's Southern
California manufacturing facility due to increased demand for the Company's
products and the ongoing transition of the Folsom manufacturing activities to
Southern California. The Company's sales during 1999 as compared to 1998 also
include a larger percentage 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 ongoing transition of production from the Folsom manufacturing facility to
the Company's Irvine facility, and its increase in production personnel at its
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 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 July 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 second quarter ended July 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. Due to these competitive
pressures, the Company expects that the average sales prices of its products
will continue to decrease. The Company has introduced new products at lower
sales prices which has impacted the average sales prices of the Company's
products. Future pricing actions by the Company and its competitors may also
adversely impact the Company's gross profit margins and profitability, which
could also result in decreased liquidity and adversely affect the Company's
business, results of operations and financial condition. For a discussion of the
impact of new products on the Company's business, see "Additional Factors That
May Affect Future Results 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 58% to $3.4 million for the
quarter ended July 4, 1999 from $2.2 million for the quarter ended June 28,
1998. As a percentage of sales, sales and marketing expenses were 5.0% and
10.3% for the quarters ended July 4, 1999 and June 28, 1998, respectively. The
increase in actual sales
12
<PAGE>
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, third generation wireless
and wireless local loop ("WLL") products. Research and development expenses
increased by 116% to $6.4 million for the quarter ended July 4, 1999 from $3.0
million for the quarter ended June 28, 1998. Research and development expenses
as a percentage of sales were 9.3% and 14.0%, 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. At
the date of the acquisition, the Company estimated that these projects were
approximately 75% complete and estimated that the cost to complete these
projects would aggregate approximately $2.5 million and would be incurred over a
two-year period. The Company incurred approximately $0.6 million of research and
development expenses related to these projects during the second quarter of
1999, and since the date of the acquisition has incurred a total of $1.0 million
of research and development expenses related to these projects. As of July 4,
1999, the Company believes that these projects are approximately 85% complete.
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 120% to $2.7 million for the
quarter ended July 4, 1999, from $1.2 million for the quarter ended June 28,
1998. General and administrative expenses as a percentage of sales were 3.9%
and 5.7%, 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 second quarter of
1999, the Company paid approximately $0.7 million for these retention bonuses.
The remainder of 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 second quarter ended July 4, 1999,
the Company paid approximately $0.2 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.
13
<PAGE>
Other Income (Expense)
The Company earned $0.9 million of other income, net, in the second quarter of
1999 compared to $0.7 million of other income, net, for the second quarter of
1998. Other income consists primarily of interest income, net of any interest
expense. In addition, during the second quarter of 1999 the Company sold
selected assets which resulted in a net gain of approximately $0.3 million.
Provision for Income Taxes
The Company's effective tax rate was 36.5% for the quarters ended July 4, 1999
and June 28, 1998.
Six months ended July 4, 1999 and June 28, 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 185%
to $124.5 million for the six months ended July 4, 1999 from $43.7 million for
the six months ended June 28, 1998. The increase in revenue was primarily
attributable to increased sales of the Company's cellular and PCS products. The
first six months of 1999 includes revenues from the sales of products acquired
in the HP Acquisition in October 1998, which are not included in the prior
period. For the first six months of 1999 total sales of cellular products
accounted for approximately 75% of revenues or $93.8 million, compared to
approximately 88% of revenues or $38.3 million for the first six months of 1998.
Sales PCS products accounted for approximately 24% of revenues or $30.1 million
for the first half of 1999, compared to approximately 8% or $3.7 million during
the first half of 1998. Sales of LMR products accounted for less than 1% of
revenues or $0.7 million for the six months ended July 4, 1999, compared to
approximately 4% of revenues or $1.7 million for the six months ended June 28,
1998.
Total sales to North American customers accounted for approximately 71% of
revenues or $88.3 million for the six months ended July 4, 1999, compared with
approximately 58% or $25.5 million for the six months ended June 28, 1998. The
Company's total international sales (excluding North American sales) accounted
for approximately 29% of revenues or $36.2 million for the six months ended July
4, 1999, compared with approximately 42% or $18.3 million for the six months
ended June 28, 1998. Total sales to Asian customers accounted for approximately
17% of revenues in the first six months of 1999 compared to approximately 39% of
revenues in the first six months of 1998. For the first six months of 1999,
total sales to Nortel accounted for approximately 49% of revenues and sales to
Lucent accounted for over 10% of revenues for this period. For the first six
months of 1998, Nortel accounted for approximately 20% of revenues and Lucent
accounted for no revenues. See "Additional Factors That May Affect Future
Results A Significant Amount of Our Revenues Comes from a Few Customers."
Gross Profit
The gross profit margins as a percentage of sales for the six months ended
July 4, 1999 and June 28, 1998 were 26.6% and 39.7%, respectively. The decrease
in gross margins during the first six months of 1999 is due to several factors,
including increased labor and overhead costs associated with operating the
Folsom manufacturing facility acquired in the HP Acquisition and inefficiencies
in the ramp-up of increased production in the Company's Irvine facility. In
addition, the significant increase in single carrier amplifiers has negatively
impacted the Company's gross margins
Operating Expenses
Sales and marketing expenses increased by 67% to $7.0 million for the six
months ended July 4, 1999 from $4.2 million for the six months ended June 28,
1998. As a percentage of sales, sales and marketing expenses were 5.6% and 9.6%
for the six months ended July 4, 1999 and June 28, 1998, respectively. The
increase in actual sales
14
<PAGE>
and marketing expenses was primarily attributable to increases in the sales and
marketing staff and increased sales commissions related to increased product
sales.
Research and development expenses increased by 98% to $11.7 million for the
six months ended July 4, 1999 from $5.9 million for the six months ended June
28, 1998. Research and development expenses as a percentage of sales were 9.4%
and 13.5%, 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. The increase also reflects the additional engineers added
as part of the HP Acquisition.
General and administrative expenses increased by 119% to $5.3 million for the
six months ended July 4, 1999, from $2.4 million for the six months ended June
28, 1998. General and administrative expenses as a percentage of sales were
4.3% and 5.6%, respectively. The increase in actual general and administrative
expenses was primarily attributable to increased staffing costs associated with
supporting the Company's increased revenues and personnel.
Other Income (Expense)
The Company earned $0.7 million of other income, net, in the first six months
of 1999 compared to $1.6 million of other income, net, for the first six months
of 1998. The decrease in other income primarily reflects the interest expense
incurred during the first quarter of 1999 on the debt incurred as part of the HP
Acquisition. The acquisition debt was completely retired on March 31, 1999 with
the proceeds of the Company's sales 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 six months ended July 4,
1999 and June 28, 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 July 4, 1999, the Company had working
capital of $97.8 million, including $59.2 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 increased to $41.5 million at July
4, 1999 from $31.2 million at January 3, 1999 primarily due to increased sales
volume in the second quarter of 1999 as compared to the fourth quarter of 1998.
Net inventory decreased to $20.2 million at July 4, 1999, from $28.6 million at
January 3, 1999. The decrease in net inventory is primarily due to the ongoing
consolidation of the Company's manufacturing facilities as well as increased
sales.
Cash provided by operations was approximately $12.7 million for the six months
ended July 4, 1999, compared with cash used in operations of $6.0 million for
the six months ended June 28, 1998. The positive cash flow from operations for
the first six months of 1999 is attributable to increased profitability and a
decrease in inventory, offset by an increase in accounts receivable from January
3, 1999 to July 4, 1999.
Capital expenditures were approximately $5.5 and $2.6 million for the first
six months of 1999 and 1998, respectively. 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
15
<PAGE>
offering was $29.0 million. The Notes initially accrued interest at a rate of
13.75% per annum and interest was payable semi-annually. The Notes contained
provisions to increase the rate of interest during the life of the Notes if the
Notes were not repaid prior to maturity. The Notes were secured by certain
assets of Metawave Communications Corporation and were and were redeemed in full
on April 28, 1999. Upon the redemption of The Notes, the Company received
related warrants for shares of Metawave Communications Corporation Series D
Preferred Stock.
Cash provided by financing activities was approximately $36.2 million for the
first six months of 1999 compared with $3.3 million of cash used in financing
activities for the first six 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 March 31, 1999, the Company utilized a total of $22.8 million of the
proceeds from its 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 and the Purpose Loan had a balance of $7.0. 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 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. As of July 4, 1999, the
Company had entered into an escrow agreement covering the sale of the Folsom
facility. As a result, the Company has included $8.1 million in short-term
assets as assets held for sale.
The Company had cash and cash equivalents of $59.2 million at July 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 our revenues have been derived from international
sources, with our customers in South Korea accounting for the significant
majority of such revenues. With the reduction in sales to customers in South
Korea, we are 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 we currently invoice all of our customers
in U.S. Dollars, changes in the value of the U.S. Dollar versus the local
currency in which our products are sold, along with the economic and political
16
<PAGE>
conditions of such foreign countries, could adversely affect our 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 us. Although we
currently believe that our international customers have the ability to meet all
of their obligations to us, there can be no assurance that they will continue to
be able meet such obligations. We regularly monitor the credit worthiness of our
international customers and make credit decisions based on both prior sales
experience with such customers as well as current financial performance and
overall economic conditions. We 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 our
products. In addition, Brazil has experienced significant weakness in its
currency and equity markets. Such weaknesses could negatively impact demand for
wireless services and thereby reduce demand for our products in Brazil. Such a
reduction in demand for our products could have a negative impact on our future
sales and gross margins. Our foreign customers currently pay for 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 our products by as much as 100% or more for our 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 our future sales and gross margins. For further discussion of
the risks associated with our international sales, see "Additional Factors That
May Affect Future Results--There are Many Risks Associated With International
Operations."
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.
Our transactions for Europe are currently recorded in U.S. Dollars and we do
not currently anticipate future transactions being recorded in the euro. Based
on the lack of transactions recorded in the euro, we do not believe that the
euro will have a material effect on our financial position, results of
operations or cash flows. In addition, we have not incurred and do not expect
to incur any significant costs from the continued implementation of the euro,
including any currency risk, which could materially affect our business,
financial condition and results of operations.
We have not experienced any significant operational disruptions to date and we
do 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. We have examined our computer and information systems and contacted
our software and hardware providers to determine whether our software
17
<PAGE>
applications and computer and information systems are compliant with the Year
2000. We have completed an upgrade to our computer operating system and we have
been assured by our software and hardware providers that our computer systems
are fully compliant with the Year 2000. We have also performed our own internal
tests of our software and hardware to confirm that they are Year 2000 compliant.
It is not possible to quantify the aggregate cost to us of such upgrades since
they were part of the software and hardware providers normal upgrades to our
systems. The costs for upgrading our information systems have been funded
through our operating cash flows, and the we estimate that we have spent
approximately $250,000 since 1996 for upgrades of our information systems and
services associated with such upgrades.
While we believe that our information systems are fully Year 2000 compliant,
we intend to continue to review our information systems for any possible
problems, as well as monitor our key suppliers and customers for any impact that
the Year 2000 may have on their information systems which could then impact us.
We have contacted all of our key suppliers and have been assured that such
suppliers will not be impacted by the Year 2000. During the remainder of 1999,
we intend to contact all of our significant customers to request verification
that such customers are Year 2000 compliant. Embedded software sold with our
products is not date dependent and therefore is Year 2000 compliant. In
addition, the equipment we utilize in our manufacturing process is not date
dependent. During the remainder of 1999, we intend to conduct tests on our
manufacturing equipment to ensure that there are not any Year 2000 issues with
such equipment. To date, none of our internal testing has identified any
significant Year 2000 compliance issues.
We do not believe that there will be significant issues or costs associated
with our 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 our manufacturing process which could be impacted by the
Year 2000. Although we are not currently aware of any material operational
issues or costs associated with preparing our products, manufacturing processes
or internal information systems for the Year 2000, there can be no assurance
that we will not experience unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in our
products, manufacturing processes or internal information systems, which are
comprised predominantly of third party software and hardware. We do not
currently anticipate that the Year 2000 programming issue will have a material
impact on our business, financial condition or results of operations.
Should we 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 our vendors and suppliers.
We believe that under a worse case scenario, we could continue the majority of
our normal business activities on a manual basis. We do not currently have a
contingency plan with respect to potential Year 2000 failures of our suppliers
or customers.
We have evaluated the information systems, equipment and software included in
the HP Acquisition for our Year 2000 compliance. We have completed a transition
of the computer information and operating systems to our existing systems so
that the Folsom facility is now operating on a Year 2000 compliant system. We
are disposing of any computer equipment acquired in the HP Acquisition which is
not Year 2000 compliant. We upgraded the telephone system at the Folsom facility
to a new Year 2000 compliant system in May 1999. The costs for upgrading our
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;
18
<PAGE>
. 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"), GTE Wireless Service Corporation ("GTE") and BellSouth. Our
dependence on a small number of major customers exposes us to numerous risks,
including:
. 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 five customers for the six months ended July
4, 1999, (in alphabetical order) BellSouth, LGIC, Lucent, Nortel and Samsung
accounted for approximately 83% of our net revenues or $103.1 million, and each
of these customers accounted for more than 5% of our revenues for the period.
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 17% of our
total sales for the first six months of fiscal 1999, or $21.6 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 our South Korean customers 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.
19
<PAGE>
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 did not have any experience in operating multiple
manufacturing facilities and we 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.
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
20
<PAGE>
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;
. 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."
21
<PAGE>
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;
. 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 six months of fiscal 1999,
international revenues (excluding North American sales) accounted for
approximately 77%, 84%, 41% and 29% 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:
22
<PAGE>
. 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;
. competition from foreign based suppliers;
. 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 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 six months ended July 4, 1999. For fiscal year 1998,
23
<PAGE>
customers based in South Korea collectively accounted for approximately 30% of
our net sales and they accounted for approximately 83% of our net sales for
fiscal year 1997. These customers have purchased products primarily 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 four 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.
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.
Due to the numerous factors involved, 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 addition, we are unable to predict
what level 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
24
<PAGE>
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. We have a one-year
supply commitment from HP for these components and we are expected to begin
sourcing such components from new suppliers. While we have an ongoing process to
redesign certain products as well as identify and test alternative sources for
such custom components, 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 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.
25
<PAGE>
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. 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
26
<PAGE>
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, 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.
27
<PAGE>
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 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);
28
<PAGE>
. 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.
29
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our financial instruments include cash and long-term debt. At July 4, 1999,
the carrying values of these financial instruments approximated their fair
values based on current market prices and rates.
It is currently our policy not to enter into derivative financial instruments.
We do not currently have any significant foreign currency exposure since we do
not transact business in foreign currencies.
30
<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.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POWERWAVE TECHNOLOGIES, INC.
Date: August 16, 1999 By: /s/ Kevin T. Michaels
---------------------------------
Kevin T. Michaels
Vice President, Finance and Chief
Financial Officer
32
<PAGE>
EXHIBIT 11.1
POWERWAVE TECHNOLOGIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
EPS CALCULATION AS OF JUNE 28, 1998
<S> <C> <C> <C> <C>
Shares issued and outstanding at March 29, 1998
and December 28, 1997.............................. 17,133,373 17,263,713
Shares issued under the Employee Stock
Purchase Plan...................................... - - 23,456 19,203
Options exercised during the period................. 12,375 6,174 158,579 129,613
Shares repurchased during the period................ - (300,000) (274,847)
----------- -----------
Weighted average common shares - basic.............. 17,139,547 17,137,682
Weighted average options issued
and outstanding as of June 28, 1998................ 1,362,492 1,126,078
Proceeds............................................ $15,060,857 $11,455,935
Assumed buyback price............................... $ 17.77 $ 16.38
----------- -----------
Shares bought back with proceeds.................... 847,694 699,369
Assumed shares bought back with non-qualified tax
benefit utilizing 36.5% tax rate................... 187,901 156,479
Potential common shares............................. 326,897 272,230
----------- -----------
Total weighted average common shares - diluted...... 17,466,444 17,409,912
Net income at June 28, 1998......................... $ 1,879,142 $ 4,086,183
----------- -----------
Diluted net income per share........................ $ 0.11 $ 0.24
=========== ===========
Basic net income per share.......................... $ 0.11 $ 0.24
=========== ===========
<CAPTION>
EPS CALCULATION AS OF July 4, 1999
Shares issued and outstanding at April 4, 1999
and January 3, 1999................................ 19,776,310 17,249,676
Options exercised during the period................. 110,657 90,271 305,502 211,417
Shares issued in public offering.................... - - 2,000,000 1,274,726
Share issued to fulfill over-allotment.............. - - 300,000 173,077
Shares issued under the Employee Stock
Purchase Plan...................................... - - 31,789 26,899
----------- ----------
Weighted average common shares - basic.............. 19,866,581 18,935,795
Weighted average options issued
and outstanding as of July 4, 1999................. 1,981,788 1,960,076
Proceeds............................................ $29,177,561 $27,441,805
Assumed buyback price............................... $ 29.69 $ 27.35
----------- -----------
Shares bought back with proceeds.................... 982,883 1,003,519
Assumed shares bought back with non-qualified tax
benefit utilizing 36.5% tax rate................... 365,908 350,701
Potential common shares............................. 632,997 605,856
----------- -----------
Total weighted average common shares - diluted...... 20,499,578 19,541,651
Net income at July 4, 1999.......................... $ 4,202,401 $ 6,253,615
----------- -----------
Diluted net income per share........................ $ 0.20 $ 0.31
=========== ===========
Basic net income per share.......................... $ 0.21 $ 0.32
=========== ===========
</TABLE>
33
<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> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-03-1999
<PERIOD-START> JAN-04-1999 DEC-29-1997
<PERIOD-END> JUL-04-1999 JUN-28-1998
<CASH> 59,241 53,133
<SECURITIES> 0 0
<RECEIVABLES> 41,543 14,356
<ALLOWANCES> 1,420 869
<INVENTORY> 20,248 8,556
<CURRENT-ASSETS> 134,493 80,459
<PP&E> 31,743 13,567
<DEPRECIATION> 8,524 3,856
<TOTAL-ASSETS> 178,331 93,390
<CURRENT-LIABILITIES> 36,651 15,295
<BONDS> 0 0
0 0
0 0
<COMMON> 106,166 66,032
<OTHER-SE> 34,983 11,025
<TOTAL-LIABILITY-AND-EQUITY> 178,331 93,390
<SALES> 124,517 43,749
<TOTAL-REVENUES> 124,517 43,749
<CGS> 91,363 26,362
<TOTAL-COSTS> 115,368 38,904
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 610 0
<INCOME-PRETAX> 9,849 6,435
<INCOME-TAX> 3,595 2,349
<INCOME-CONTINUING> 6,254 4,086
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,254 4,086
<EPS-BASIC> .32 .24
<EPS-DILUTED> .31 .24
</TABLE>
