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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to ____________
Commission File Number 000-21507
_______________
POWERWAVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2723423
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2026 McGaw Avenue
Irvine, California 92614
(Address of principal executive offices, zip code)
(949)809-1100
(Registrant's telephone number, including area code)
_______________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
-------------------
Common Stock, Par Value $.0001
_______________
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 9, 2000, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $3,729,358,760 computed
using the closing price of $185.00 per share of Common Stock on March 9, 2000 as
reported by Nasdaq, based on the assumption that directors and officers and more
than 10% stockholders are affiliates. As of March 9, 2000 the number of
outstanding shares of Common Stock, par value $.0001 per share, of the
Registrant was 20,390,643.
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1999 fiscal year.
===============================================================================
This Annual Report on Form 10-K contains certain forward-looking statements that
are based on the 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. Actual results may vary from those
expected or anticipated in these forward-looking statements, including those set
forth below and elsewhere in this Annual Report on 10-K. See "Additional Factors
That May Affect Future Results," under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
General
Powerwave Technologies, Inc. ("Powerwave" or the "Company" or "our" or
"we") was incorporated in Delaware in January 1985 under the name Milcom
International, Inc. and we changed our name to Powerwave Technologies, Inc. in
June 1996. Powerwave designs, manufactures and markets ultra-linear radio
frequency ("RF") power amplifiers for use in the wireless communications market.
Our RF power amplifiers, which are key components of wireless communications
networks, increase the signal strength of wireless transmissions from the base
station to a handset while reducing interference, or "noise." Less noise enables
wireless service providers to deliver clearer call connections. Stronger signals
reduce the number of interrupted or dropped calls.
Powerwave manufactures both single and multi-carrier RF power amplifiers
for a variety of frequency ranges and transmission protocols. Single carrier RF
power amplifiers typically amplify a specific call channel. Multi-carrier RF
power amplifiers are capable of amplifying several call channels at one time and
integrate the functions of several RF power amplifiers and cavity filters within
a single unit. Our products are currently being utilized in both cellular and
personal communications services ("PCS") base stations in digital and analog-
based networks. Our products support a wide range of digital and analog
transmission protocols including CDMA, TDMA, GSM, AMPS and TACS. We also produce
RF power amplifiers for the wireless local loop ("WLL") market, which refers to
wireless products designed for fixed, or non-mobile applications which provide
and/or replace traditional wireline telephone systems.
Powerwave was formed in 1985 to develop a line of high-power RF power
amplifiers suitable for use with VHF/UHF, AM/FM transceivers. In addition, we
offered products for use in the land mobile radio ("LMR") industry. For the next
several years, we continued product development in the LMR industry, broadening
our product offerings and selling to a diversified customer base. During this
time, we became active in the air-to-ground market providing RF power amplifiers
for both ground based transmission stations and for installation in airplanes
for on-board telephone communications. In late 1994, we developed a multi-
carrier linear RF power amplifier which could be utilized in the transmission of
radio signals for cellular base stations. In 1995, we began supplying multi-
carrier linear RF power amplifiers for installation in base stations utilized in
the deployment of two digital cellular networks utilizing CDMA technology in
South Korea. These South Korean digital cellular networks began operating during
1996 with two independent service providers offering nationwide coverage. In
1996, we began development of a single carrier RF power amplifier for use in PCS
network base stations. At this same time, Powerwave focused on diversifying our
customer base and expanding our geographic focus. During 1997, we began
supplying single carrier RF power amplifiers for use in the deployment of three
new digital PCS networks utilizing CDMA technology in South Korea. These new
South Korean PCS networks began operating on October 1, 1997, with three
independent service providers offering limited coverage within South Korea. Our
customers in South Korea include Hyundai Electronics Industries Co. ("Hyundai"),
LG Information & Communications, Ltd. ("LGIC") and Samsung Electronics Co. Ltd.
("Samsung").
While we continued efforts to diversify our customer base, a majority of
our business came from our three South Korean customers due to their strong
demand for products to support the new deployments in South Korea. During the
beginning of 1998, our South Korean-based customers began to postpone,
reschedule and cancel existing orders with Powerwave as a result of the Asian
economic crisis. These actions negatively impacted our results of operations and
financial condition in fiscal 1998. The results of our customer diversification
efforts and the impact
1
of the Asian economic crisis are reflected in the decreased percentage of the
Company's business associated with our South Korean customers for fiscal 1999.
While our customer base has expanded and we are continuing efforts to expand our
customer base, we expect that a limited number of customers will continue to
represent a substantial majority of our net sales for the foreseeable future.
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 Service Market; and --There are Many Risks Associated With
International Operations" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The HP Acquisition. On October 9, 1998, we completed the acquisition of
Hewlett-Packard Company's ("HP") RF power amplifier business and its
manufacturing and research and development facility located in Folsom,
California and its production equipment and manufacturing lines located in
Malaysia, for approximately $65.9 million (the "HP Acquisition"). 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, we have transferred both the
Folsom and Malaysian production equipment and manufacturing lines to our Irvine,
California facility. We have sold the Folsom facility and have established a new
research and development facility in El Dorado Hills, California.
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. We also assumed certain existing orders for the products acquired.
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 in the fourth quarter of
1998 and, accordingly, the total purchase price was allocated to the assets
acquired and liabilities assumed at their estimated fair values in accordance
with Accounting Principles Board Opinion No. 16. The purchase price was
allocated to tangible assets acquired of approximately $34.7 million, developed
technology of $11.5 million, in-process research and development of $12.4
million, other intangible assets of $2.7 million and goodwill of approximately
$4.6 million. Our 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.
We believe that our future success depends upon our ability to broaden our
customer base. For the fiscal year ended January 2, 2000, our largest customer
was Nortel Networks Corporation, and related entities ("Nortel"), which
accounted for approximately 41% of our net sales. Also, for fiscal year 1999,
our next four largest customers (in alphabetical order), LGIC, Lucent
Technologies, Inc. ("Lucent"), LM Ericsson Telephone Company ("Ericsson"), and
Samsung, each accounted for more than 5% of our net sales. 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
Service Market; and --There are Many Risks Associated With International
Operations" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
A limited number of large original equipment manufacturers ("OEMs") account
for a majority of RF power amplifier purchasers in the wireless equipment
market, and our future success is dependent upon our ability to establish and
maintain relationships with these types of customers. While we regularly attempt
to expand our customer base, we cannot give any assurance that a major customer
will not reduce, delay or eliminate its purchases from Powerwave. Such a
reduction would have a material adverse effect on our business, results of
operations and financial condition. See "Additional Factors That May Affect
Future Results--A Significant Amount of Our Revenues Comes from a Few Customers"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
2
We have experienced, and expect to continue to experience, declining
average sales prices for both our multi-carrier and single carrier amplifier
products. Wireless infrastructure equipment manufacturers have come under
increasing price pressure from wireless service providers, which in turn has
resulted in downward pricing pressure on our products. In addition, ongoing
competitive pressures in the RF power amplifier market have put continued
pressure on us to continually reduce the sales price of our products.
Consequently, we believe that in order to maintain or improve our existing gross
margins in the near term, we must achieve manufacturing cost reductions, and in
the long term we must develop new products that incorporate advanced features
that generate higher gross margins. 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 Service Market; --Declining
Average Sales Prices; and --There are Many Risks Associated With International
Operations" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Significant Business Developments in Fiscal 1999
On March 11, 1999, we 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 Powerwave at the $26.75 offering price on March 22, 1999. Total net
proceeds after the reduction for the underwriting discount and offering expenses
were approximately $57.8 million. On March 31, 1999, we utilized a total of
$22.8 million of the proceeds from our Common Stock offering to repay all of the
outstanding bank debt associated with the HP Acquisition.
At the time of the HP Acquisition, we stated our intention to relocate the
then existing HP Folsom manufacturing to our facility in Southern California.
Commencing in the fourth quarter of 1998, and continuing throughout 1999, we
expanded our manufacturing facility in Irvine, California, to both accommodate
the production lines that we acquired in the HP Acquisition as well as to
increase our manufacturing capacity to address the increased demand for our
products that occurred during 1999. The final relocation of the Folsom
manufacturing activities was completed in the fourth quarter of 1999.
During 1999, we sold the Folsom manufacturing facility under a sale
agreement which provided us use of the building through the end of 1999. In
addition, in October 1999 we leased a new 34,000 square foot facility adjacent
to our existing Irvine facility and relocated our engineering and sales and
marketing departments to this new facility. In December 1999, we leased 27,000
square feet in El Dorado Hills, California, and relocated our Northern
California research and development activities to this facility.
On November 5, 1999, Powerwave announced that it's founder and former
Chairman, Alfonso G. Cordero, had resigned from the Company's Board of
Directors, effective immediately. No replacement director was announced.
Industry Segments and Geographic Information
Powerwave operates in one industry segment: the design, manufacture and
marketing of RF power amplifiers for use in wireless communications networks. We
currently market our products through independent sales representatives as well
as our own internal sales force. For the purposes of Statement of Financial
Accounting Standards ("SFAS") No. 131, Disclosures About Segments of an
Enterprise and Related Information, we have provided a breakdown of our business
utilizing the management approach in Note 14 of the "Notes to Consolidated
Financial Statements" under Item 8, "Financial Statements and Supplementary
Data." Utilizing the management approach, we have broken down our business based
upon the RF frequency in which the product is utilized in, i.e. cellular, PCS,
WLL and other. A summary of our sales by geographic region is incorporated
herein by reference from Note 14 of the "Notes to Consolidated Financial
Statements" under Item 8, "Financial Statements and Supplementary Data."
3
Business Strategy
Powerwave's strategy is to become the leading supplier of high performance
RF power amplifiers used in digital and analog wireless networks worldwide and
includes the following key elements: (i) provide leading technology to the RF
power amplifier industry through research and development that continues to
improve our product's technical performance and establish new levels of
technical performance, to raise our productivity and to lower costs; (ii)
leverage our position as a leading supplier of both single carrier and multi-
carrier RF power amplifiers to increase our market share and expand our
relationships with our existing customers; (iii) continue to expand our customer
base of wireless network OEMs and leading wireless network operators; and (iv)
maintain our focus on the quality, reliability and manufacturability of our RF
power amplifier products.
Our focus on RF power amplifier technology and the experience we have
gained through the implementation of our products in both analog and digital
wireless networks has enabled us to develop substantial expertise in both multi-
carrier and single carrier RF power amplifier technology. We intend to continue
to dedicate significant resources to the research and development of new methods
to improve RF power amplifier performance, including efforts to support next
generation transmission standards known as 3G. We believe that both our existing
product lines and new products in development will enable us to continue to
expand our customer base by offering a broad range of products to meet the
diverse requirements of OEMs and leading wireless network operators. We also
intend to leverage our product lines in an attempt to expand our relationships
with our existing customers and to add new customers. Powerwave has developed
the ability to manufacture both multi-carrier and single carrier RF power
amplifiers in a standard, repeatable manner, which allows for increased
production levels. We believe that we are able to respond quickly and cost-
effectively to new transmission protocols and design specifications by obtaining
components from numerous leading technology companies. We also believe that our
focus on the manufacturability of our RF power amplifier designs should help us
to increase our manufacturing productivity while reducing our product costs. We
believe that this ability to offer a broad range of products represents a
competitive advantage over other third-party manufacturers of RF power
amplifiers.
If our outstanding customer orders were to be significantly reduced, the
resulting loss of volume purchasing could adversely effect our cost competitive
advantage, which would negatively affect our gross profit margins, business,
results of operations and financial condition. See "Additional Factors That May
Affect Future Results--Our Average Sales Prices are Declining; and --We May Fail
to Develop Products that are Sufficiently Manufacturable or of Adequate Quality
and Reliability" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Markets
We sell our RF power amplifier products into various segments of the
wireless communications market. Our primary focus is on the cellular and PCS
markets and during 1999 we derived approximately 74% of our revenues from the
cellular market and approximately 26% from the PCS market. The following
describes the primary segments of the wireless communications market to which we
sell our products:
Cellular and PCS. Cellular networks utilize a number of base stations with
high power antennas to serve a geographical region. Each region is broken down
into a number of smaller geographical areas, or "cells." Each cell has its own
base station which uses wireless technology to receive subscribers calls and
transmit those calls through the wireline public switched telephone network
("PSTN"). Cellular networks operate within the 800 and 900 MHz bandwidths of the
radio spectrum. PCS networks operate in a substantially similar manner as
cellular networks, except that PCS networks operate at 1800 and 1900 MHz
bandwidths and utilize only digital transmission protocols. Transmissions at the
higher frequencies utilized by PCS networks have shorter transmission waves as
compared to cellular frequency transmissions, which tends to limit the distances
PCS transmissions can travel without significant degradation. Lower frequency
signals penetrate into buildings and other obstacles better than higher
frequency signals. Therefore, PCS networks operating at the higher frequency
ranges should require smaller operating cells and more base stations than
existing cellular networks to cover the same total geographic region.
4
In analog cellular networks, each base station is allocated a certain
number of frequency channels, each of which can carry only one call at a time.
Originally, cellular base stations in analog networks used single carrier RF
power amplifiers for each frequency channel allocated to the cell. Many analog
cellular networks are now utilizing a process known as adaptive channel
allocation in order to increase network capacity. In adaptive channel
allocation, which is optimized with multi-carrier RF power amplifiers, unused
channels in cells are temporarily reallocated to augment more heavily utilized
adjacent cells. The signals are amplified simultaneously through a multi-carrier
RF power amplifier which allows for the simultaneous amplification of all
channels within a base station. Multi-carrier RF power amplifiers require
significantly higher linearity than do single carrier designs, but do not
require separate, high-maintenance, tunable cavity filters. By eliminating the
need for separate cavity filters for each channel, multi-carrier RF power
amplifiers reduce overall deployment and maintenance costs associated with base
stations. While adaptive channel allocation using multi-carrier linear
amplifiers has increased the capacity of analog networks, many service providers
still require additional capacity to serve the increased flow of transmissions
through their networks. This has led many service providers to move from analog
networks to digital networks.
In digital networks, calls are segmented into time slots or codes and
transmitted across the entire bandwidth of allocated spectrum, rather than in
single channels of that spectrum. The calls are then reassembled when received
at the base station or cellular phone. While using the entire bandwidth of
allocated spectrum results in greater system capacity, there is a greater
likelihood that even minimal background noise will result in interrupted or
dropped calls. Accordingly, ultra-linear amplification is even more critical in
digital networks than in their analog counterparts. Powerwave provides ultra-
linear multi-carrier RF power amplifiers which are located in base stations and
work to increase the signal strength of outgoing transmissions. Our single
carrier and multi-carrier RF power amplifiers work in base stations with a
variety of other sophisticated electronic equipment, including receivers, radios
and oscillators.
Wireless Local Loop. The WLL market refers to wireless products designed
for fixed, or non-mobile applications which provide and/or replace traditional
wireline telephone systems. Proposed advantages of WLL over traditional
telephone systems include rapid, cost-effective deployment, reduced operational
and maintenance costs, low initial investment costs and hardware which is
capable of providing enhanced services. This infrastructure market is targeted
for both developing countries and established telecommunications markets.
Products
Powerwave designs and manufactures both single and multi-carrier RF power
amplifiers which are sold into the cellular and PCS markets. We also design and
manufacture single carrier RF power amplifiers which are sold into the WLL
markets.
Cellular Series. Powerwave offers both single and multi-carrier RF power
amplifiers for use in cellular networks, including ultra-linear multi-carrier RF
power amplifiers for CDMA, TDMA and GSM digital cellular systems positioned
between 800-960 MHz, as well as analog systems utilizing AMPS and TACS
protocols. Powerwave's ultra-linear multi-carrier RF power amplifiers utilize a
single feedforward loop design, which allows greater operating efficiency and
requires less electrical current than multi-loop designs. Our multi-carrier
design also utilizes an actively switched output combiner (3 or 4 way), which
allows any number of RF power amplifiers to be "hot-swapped", or interchanged,
without a significant loss of power. This design also allows for true cold
standby switching of a standby RF power amplifier, thereby providing network
operators with a backup redundancy solution for even greater reliability. These
RF power amplifiers are designed to be installed in racks of three or four RF
power amplifiers. Smart combiner paralleling units allow for both higher power
as well as system redundancy, which is the ability of the system to remain
operational in the event of the failure of one or more of the paralleled RF
power amplifiers.
We offer various versions of our Cellular Series multi-carrier RF power
amplifiers providing from 25 to 100 Watts (W) or more of average power with
maximum distortion of up to -65dBc or better. Up to 4 units can be combined in
parallel utilizing our fully redundant smart combiner racks for various
effective average power ratings.
5
In the Cellular Series, we also offer single carrier RF power amplifiers
for GSM, CDMA and TDMA operating systems. Products are available in a wide range
of RF output levels. These products are available in versions ranging from
complete stand-alone units to highly integrated RF power amplifiers for tower-
top applications.
PCS Series. The PCS Series offers both single and multi-carrier RF power
amplifiers for use in PCS networks that operate in the international DCS-1800
frequency of 1.8 gigahertz (GHz) and the United States PCS band at 1.9GHz.
Typical system applications include CDMA, TDMA, and GSM protocols with output
power ranging from 5W to 100W. The PCS Series of multi-carrier RF power
amplifiers offers similar power combining, system redundancy, and remote
status/fault monitoring capabilities as our Cellular Series of multi-carrier RF
power amplifiers. The PCS Series of single carrier RF power amplifiers are
available in a wide variety of configurations ranging from complete stand-alone
units to highly integrated RF power amplifiers for tower-top applications.
WLL Series. The WLL Series is our wireless local loop series of RF power
amplifiers offering a reliable means of transmitting wide band signals at
various power levels. They can be used to enhance capacity and coverage area of
current wireless base stations or can be fully integrated into new wireless
local loop site deployment.
Our multi-carrier RF power amplifiers range in price from $5,000 to over
$10,000 per RF power amplifier, based upon the specification requirements. Our
single carrier RF power amplifiers range in price from $600 to $5,000 per RF
power amplifier depending upon product type and specifications. We also sells
racks, cabinets and combiners for multiple RF power amplifiers, ranging in price
from $1,000 to over $5,000, depending upon specifications.
Customers
We sell our products to customers worldwide, including a variety of
wireless OEMs, such as Ericsson, Hyundai, LGIC, Lucent, Metawave Communications
Corporation ("Metawave"), Nokia Telecommunications Inc. ("Nokia"), Nortel and
Samsung. We also sell our products to operators of wireless networks, such as
AT&T Wireless Services ("AT&T Wireless"), BellSouth Cellular Corp. ("Bellsouth")
and GTE Wireless Services Corporation ("GTE Wireless").
For the fiscal year ended January 2, 2000, our largest customer was Nortel,
which accounted for approximately 41% of our net sales. Also, for fiscal year
1999, our next four largest customers (in alphabetical order), LGIC, Ericsson,
Lucent and Samsung, each accounted for more than 5% of our net sales. The loss
of any one of these customers, or a significant loss, reduction or rescheduling
of orders from any of our customers, would have a material adverse effect on our
business, results of operations and financial condition. 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 Service
Market; and --There are Many Risks Associated With International Operations"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Marketing and Distribution, International Sales
We sell our products through a highly technical direct sales force and
through independent sales representatives. Direct sales personnel are assigned
to geographic territories and, in addition to sales responsibilities, manage
networks of independent sales representatives. We also utilize a network of
independent sales representatives selected for their familiarity with our
potential customers and their knowledge of the wireless infrastructure equipment
market. Both the direct sales personnel and independent sales representatives
generate product sales, provide product and customer service, and provide
customer feedback for product development. In addition, the sales personnel and
independent sales representatives receive support from our marketing, product
support and customer service departments.
6
Powerwave's marketing efforts are focused on establishing and developing
long-term relationships with potential customers. Sales cycles for certain of
our products, particularly our base station RF power amplifiers, are lengthy,
typically ranging from six to eighteen months. Our customers typically conduct
significant technical evaluations of our products before making purchase
commitments. In addition, as is customary in the industry, sales are made
through standard purchase orders which can be subject to cancellation,
postponement or other types of delays. While certain customers provide us with
forecasted needs, they are not bound by such forecasts.
International sales (excluding North American sales) of our products
amounted to approximately 33%, 41% and 84% of net sales for the years ended
January 2, 2000, January 3, 1999 and December 28, 1997, respectively. Foreign
sales of some of our products may be subject to national security and export
regulations and may require us to obtain a permit or license. In recent years,
we have not experienced any material difficulty in obtaining required permits or
licenses. Foreign sales also subject us to risks related to political upheaval
and economic downturns in foreign nations and regions, such as the economic
downturn in the South Korean and Asian markets in fiscal 1998 and the Brazilian
market during 1999. In addition, our foreign customers typically pay for our
products with U.S. Dollars. As such, a strengthening of the U.S. Dollar as
compared to a foreign customer's local currency effectively increases the cost
of our products for that customer, thereby making our products less attractive
to such customers. See "Additional Factors That May Affect Future Results--There
are Many Risks Associated With International Operations" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Service and Warranty
Powerwave's warranties vary by product type and typically cover defects in
materials and workmanship. We perform warranty obligations and other maintenance
services for our products at our facilities in California and Seoul, South
Korea. We currently have service employees located in South Korea and utilize
our South Korean sales representative location to provide service support for
the Asian region.
Product Development
We invest significant resources in the research and development of new
methods to improve amplifier performance, including reduced noise and increased
power in the RF amplification process. We also invest significant resources in
the development of new amplifier products to support new transmission protocols,
including EDGE and third generation wireless systems. Our development efforts
also seek to reduce the cost and increase the manufacturing efficiency of both
new and existing products. We are also continuing to pursue various development
efforts which were in-process at the time of the HP Acquisition. Our research
and development staff consisted of 145 people as of January 2, 2000.
Expenditures for research and development amounted to approximately $26.2
million in 1999, $13.5 million in 1998 and $11.5 million in 1997. See
"Additional Factors That May Affect Future Results--We Must Develop and Sell New
Products in Order to Keep Up With Rapid Technological Change" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Competition
The wireless communications infrastructure equipment industry is extremely
competitive and is characterized by rapid technological change, new product
development and 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 the
foregoing characteristics, there can be no assurance that we will be able to
continue to do so.
Our current competitors include AML Communications, Inc., Microwave Power
Devices, Inc. and Spectrian Corporation, in addition to the amplifier
manufacturing operations captive within certain of the leading wireless
7
infrastructure OEMs such as Ericsson, Lucent, Motorola Corporation ("Motorola"),
Nokia and Samsung. Some competitors have significantly greater financial,
technical, manufacturing, sales, marketing and other resources than Powerwave
and have achieved greater name recognition for their existing products and
technologies than we have. We cannot guarantee that we will be able to
successfully increase our market penetration or our overall share of the RF
amplifier marketplace. Our results of operations could be adversely impacted if
we are unable to effectively increase our share of the RF amplifier marketplace.
Powerwave's success depends in large part upon the rate at which wireless
infrastructure OEMs incorporate our products into their systems. We believe that
a substantial portion of the present worldwide production of RF power amplifiers
is captive within the internal manufacturing operations of a small number of
leading wireless infrastructure manufacturers such as Ericsson, Lucent,
Motorola, Nokia and Samsung. Some of these companies regularly evaluate whether
to manufacture their own RF power amplifiers rather than purchase them from
third-party vendors such as Powerwave. These companies could also directly
compete with Powerwave by selling their RF Power Amplifiers to other
manufacturers and operators, including our customers. These companies may enter
into joint ventures or strategic relationships with our competitors. Our results
of operations, net sales and profitability could be adversely impacted if
certain OEMs were to actively market RF power amplifier products in direct
competition with us or continue to manufacture RF power amplifiers internally or
enter into joint ventures or other strategic relationships with our competitors.
If we are not successful in increasing the use of our products by the leading
wireless infrastructure OEMs, there would be a material adverse effect on our
business, financial condition and results of operations. See "Additional Factors
That May Affect Future Results--Many Wireless Infrastructure Manufacturers have
Internal RF Power Amplifier Production Capabilities; and --The Market in Which
We Operate is Highly Competitive" under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We have experienced significant price competition and we expect price
competition in the sale of RF power amplifiers to increase. No assurance can be
given that our competitors will not develop new technologies or enhancements to
existing products or introduce new products that will offer superior price or
performance features. We expect our competitors to offer new and existing
products at prices necessary to gain or retain market share. Certain of our
competitors have substantial financial resources, which may enable them to
withstand sustained price competition or a market downturn better than us. There
can be no assurance that we will be able to compete successfully in the pricing
of our products, or otherwise, in the future. See "Additional Factors That May
Affect Future Results--Our Average Sales Prices are Declining" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
Our backlog of orders was approximately $98.2 million on January 2, 2000,
compared to approximately $73.7 million on January 3, 1999. We include in our
backlog only the accepted product purchase orders with respect to which a
delivery schedule has been specified for product shipment within six months.
Product orders in our backlog are frequently subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. We regularly review our backlog of orders to ensure that it adequately
reflects product orders expected to be shipped within a six-month period. We
make adjustments as customer delivery schedules change and in response to
changes in our production schedule. Accordingly, we stress that although useful
for scheduling production, backlog as of any particular date may not be a
reliable indicator of sales for any future period.
Manufacturing and Suppliers
Our headquarters and our manufacturing facility are located in Irvine,
California. Our manufacturing process involves the assembly of numerous
individual components and precise fine-tuning by production technicians. The
parts and materials used by us consist primarily of printed circuit boards,
specialized subassemblies, fabricated housings, relays, and small electric
circuit components, such as integrated circuits, semiconductors, resistors and
capacitors.
8
We currently procure, and expect to continue to procure, certain components
from single source manufacturers due to unique component designs as well as
certain quality and performance requirements. In addition, in order to take
advantage of volume pricing discounts, we purchase certain customized components
from single sources. We have experienced, and may in the future experience,
shortages of single-source components. In such event, we may have to make
adjustments to both product designs and production schedules which could result
in delays in production and delivery of products. Such delays could have an
adverse effect on our operating results and financial condition. See "Additional
Factors That May Affect Future Results--We Depend on Single Sources for Key
Components" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We obtained ISO 9001 certification, a uniform worldwide quality-control
standard, on our headquarters and manufacturing facility located in Irvine,
California. Numerous customers and potential customers throughout the world,
particularly in Europe, require that their suppliers be ISO certified. In
addition, many such customers require that their suppliers purchase components
only from subcontractors that are ISO certified.
Intellectual Property
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. In 1998, we were
granted our first U.S. patent for an aspect of our multi-carrier technology. We
have an on-going program which encourages applications for both U.S. and
international patents for various aspects of our technology. We currently have
over 15 separate U.S. patent applications pending. These efforts allow us to
rely upon the knowledge and experience of our management and technical personnel
and our ability 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 Powerwave or the failure to
achieve our intellectual property objectives may have a material adverse effect
on our business, financial condition and results of operations.
We believe that our success depends upon the knowledge and experience of
our management and technical personnel and our ability to market our existing
products and to develop new products. We do not have non-compete agreements with
our employees who are employed on an "at-will" basis. Therefore, employees may
leave us and go to work for a competitor. We have had employees leave us and go
to work for competitors. While we believe that we have adequately protected our
proprietary technology, and we will take all legal measures to protect it, the
use of our processes by a competitor could 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 upon the rights of others. We may not be able to
successfully protect our intellectual property or our intellectual property or
proprietary technology may otherwise become known or be independently developed
by competitors. 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.
The inability to protect our intellectual property and proprietary
technology could have a material adverse effect on our business, financial
condition and results of operations. 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. We may in the future be notified that we are
infringing upon certain patent or other intellectual property rights of others.
Although we are not aware of any pending or threatened intellectual property
lawsuits against us, we cannot guarantee that such litigation or infringement
claims will not occur in the future. Such litigation or claims could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, results of operations and financial condition. A third
party claiming infringement may also be able to obtain an injunction or other
equitable relief, which could effectively block our ability or our customers
ability to distribute, sell or import allegedly infringing products. If it
appears necessary or desirable, we may seek licenses from third parties covering
intellectual property that we are allegedly infringing. No assurance
9
can be given, however, that any such licenses could be obtained on terms
acceptable to us, if at all. The failure to obtain the necessary licenses or
other rights could have a material adverse effect on our business, financial
condition and results of operations.
Employees
As of January 2, 2000, Powerwave had 738 full and part-time employees,
including 507 in manufacturing, 145 in research and development, 35 in sales and
marketing and 51 in corporate and administration. None of our employees are
represented by a union. We believe that our relations with our employees are
good.
Contract Personnel
Powerwave also utilizes contract personnel hired from third party agencies.
As of January 2, 2000, Powerwave was utilizing approximately 672 contract
personnel.
ITEM 2. PROPERTIES
Our Irvine, California headquarters and manufacturing facility occupy a
105,000 square foot building under a lease expiring in 2006. Our sales and
research and development departments occupy a 34,000 square foot building
adjacent to our headquarters and manufacturing facility under a lease also
expiring in 2006. We also lease 27,000 square feet in El Dorado Hills,
California under a lease expiring in January 2005 for our Northern California
research and development staff. We believe that our current facilities provide
adequate capabilities for our operations.
ITEM 3. LEGAL PROCEEDINGS
We may be subject, from time to time, to various legal proceedings relating
to claims arising out of our operations in the ordinary course of business. On
July 16, 1998, a lawsuit was filed in the United States District Court for the
Central District of California, Southern Division, by a stockholder of the
Company, against the Company and certain of our present and former directors and
officers. A similar suit was filed on July 29, 1998. The stockholder in each
suit purports to represent a class consisting of all persons who purchased
Common Stock of Powerwave between June 4, 1997 and January 16, 1998. These
lawsuits allege, among other things, that the defendants violated federal
securities laws by making alleged misrepresentations which the plaintiffs claim
were designed to artificially inflate our stock price and enable the individual
defendants to sell their stock at artificially inflated prices. The Company, our
directors and officers deny the allegations of wrongdoing in the complaints and
intend to vigorously defend against the claims made in the lawsuits. The
ultimate outcome of these suits or any potential loss is not presently
determinable.
In September 1999, a lawsuit was filed against Powerwave by a former
customer. The lawsuit alleges, among other things, that we sold defective LMR
products to this customer from 1994 to 1998. The lawsuit seeks direct damages in
the amount of $1.6 million as well as unspecified punitive damages. We have
denied these allegations of wrongdoing and intend to vigorously defend against
the claims made in this lawsuit. At this time the ultimate outcome of this
proceeding is not determinable.
Powerwave is not currently party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, we believe would
have a material adverse effect on our business, financial condition and results
of operations. However, any future litigation, regardless of its merits, could
result in substantial costs to us and divert management's attention from our
operations.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Powerwave's Common Stock is quoted on the Nasdaq National Market System
under the symbol PWAV. Set forth below are the high and low sales prices as
reported by Nasdaq for Powerwave's Common Stock for the periods indicated.
High Low
---- ---
Fiscal Year 1998
First Quarter Ended March 29, 1998.................. $20.0000 $ 9.1250
Second Quarter Ended June 28, 1998.................. $22.9375 $13.1250
Third Quarter Ended September 27, 1998.............. $19.0000 $ 6.3750
Fourth Quarter Ended January 3, 1999................ $20.0000 $ 5.6250
Fiscal Year 1999
First Quarter Ended April 4, 1999................... $31.1875 $16.8125
Second Quarter Ended July 4, 1999................... $36.8750 $21.6250
Third Quarter Ended October 3, 1999................. $49.7500 $30.3750
Fourth Quarter Ended January 2, 2000................ $80.0625 $47.8125
There were approximately 51 stockholders of record as of February 25, 2000.
We believe there are approximately 13,600 stockholders of Powerwave's Common
Stock held in street name. We have not paid any dividends to date and do not
anticipate paying any dividends on the Common Stock in the foreseeable future.
We anticipate that all future earnings will be retained to finance future
growth.
(b) During fiscal 1999, Powerwave issued an aggregate total of 1,032,242
shares of Common Stock to officers, directors and employees upon the exercise of
stock options granted under our 1995 Stock Option Plan (the "1995 Plan"), 1996
Stock Incentive Plan (the "1996 Plan") and the 1996 Director Stock Option Plan
at prices ranging from $2.47 to $32.00 per share. Pursuant to the Amended
Stockholder's Agreement dated as of November 8, 1996 (see Note 11 of the Notes
to the Consolidated Financial Statements), a total of 477,328 of the aggregate
shares exercised during fiscal 1999 under the 1995 Plan were offset by a pro
rata redemption from shares provided by those stockholders party to the Amended
Stockholder's Agreement. These stockholders received the option exercise price
in payment for the shares redeemed. The net effect of this Amended Stockholder's
Agreement is to reduce the amount of dilution associated with exercises under
the 1995 Plan as well as reduce the actual number of shares issued by Powerwave
due to option exercises under the 1995 Plan. All remaining exercises under the
1995 Plan will be funded from the shares provided by the original stockholders
and are held in escrow by Powerwave to fund such exercises. In summary, out of
the total of 1,032,242 shares of Common Stock issued upon the exercise of stock
options during fiscal 1999, a total of 477,328 were offset by the pro rata
redemption from shares provided by the original stockholders, a total of 192,271
shares were issued from treasury stock and the remaining total of 362,643 shares
were new issues of Common Stock. Powerwave received aggregate net proceeds of
approximately $5,180,543 from these exercises.
From time to time during fiscal 1999, Powerwave issued an aggregate total of
908,650 nonqualified stock options to purchase Common Stock pursuant to
Powerwave's 1995 Plan, 1996 Plan and 1996 Director Stock Option Plan to
officers, directors and employees of Powerwave at prices ranging from $18.38 to
$76.94 per share. Of this total, 20,900 options were granted pursuant to the
1995 Plan, 867,750 options were granted pursuant to the 1996 Plan, and 20,000
options were granted pursuant to the 1996 Director Stock Option. Exemption from
the registration provisions of the Securities Act of 1933 (the "Act") is
claimed, among other exemptions, with respect to the grant of options referred
to above, on the basis that the grant of options did not involve a "sale" of
securities and, therefore, registration thereof was not required and, with
respect to the exercise of options referred to above, on the basis that such
transactions met the requirements of Rule 701 as promulgated under Section 3(b)
of the Act.
12
On March 11, 1999, Powerwave 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 Powerwave at the $26.75 offering price on March 22, 1999. Total net
proceeds after the reduction for the underwriting discount and offering expenses
were approximately $57.8 million. On March 31, 1999, we utilized a total of
$22.8 million of the proceeds from our Common Stock offering to repay all of the
outstanding bank debt associated with the HP Acquisition. We also utilized $19.0
million of the proceeds for capital expenditures during 1999. The remaining
amount has been invested in short-term money market investments.
ITEM 6. SELECTED FINANCIAL DATA
Powerwave's consolidated statements of operations for the fiscal years ended
January 2, 2000, January 3, 1999, and December 28, 1997 and consolidated balance
sheets as of January 2, 2000 and January 3, 1999 included herein have been
audited by Deloitte & Touche LLP, independent auditors. Powerwave's consolidated
statements of operations for the fiscal years ended December 29, 1996 and
December 31, 1995 and consolidated balance sheets as of December 28, 1997,
December 29, 1996 and December 31, 1995 not included herein, have also been
audited by Deloitte & Touche LLP, independent auditors. The information set
forth below is not necessarily indicative of the results of future operations
and should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Fiscal Years Ended
-----------------------------------------------------------------------
January 2, January 3, December 28, December 29, December 31,
2000 1999 1997 1996 1995
-----------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales $292,547 $100,231 $119,709 $ 60,331 $ 36,044
Operating income (loss)......................... 28,725 (7,001) 23,257 12,435 7,564
Net income (loss)............................... $ 20,265 $ (2,966) $ 16,191 $ 7,622 $ 4,480
Basic earnings (loss) per share (1)............. $ 1.02 $ (0.17) $ 0.95 $ 0.67 $ 0.50
Diluted earnings (loss) per share (2)........... $ 0.98 $ (0.17) $ 0.92 $ 0.52 $ 0.31
Basic weighted average common shares (1)........ 19,493 17,178 16,958 11,460 8,999
Diluted weighted average common shares (2)...... 20,224 17,178 17,436 14,606 14,475
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 76,671 $ 13,307 $ 67,433 $ 32,386 $ 5,861
Working capital................................. 118,566 35,210 67,512 33,243 9,640
Total assets.................................... 223,038 131,985 101,683 46,932 16,463
Long-term debt.................................. -- 17,621 659 520 138
Series A Convertible Preferred Stock............ -- -- -- -- 14,498
Total shareholders' equity (deficit)............ $169,779 $ 71,070 $ 75,480 $ 36,843 $ (3,878)
(1) The 1995 shares outstanding for basic earnings per share only includes the
weighted average common shares outstanding for the year. The 1996 shares
outstanding for basic earnings per share includes the weighted average
common shares outstanding for the year and the conversion of 3,375,900
shares of Series A Convertible Preferred Stock into 5,063,850 shares of
Common Stock for the period from December 6, 1996 to December 28, 1997.
Giving effect to the IPO, conversion of the Series A Convertible Preferred
Stock into shares of Common Stock for all of 1996 and 1995 would have
resulted in basic earnings per share of $0.54 and $0.32 and weighted
average shares outstanding of 14,181,179 and 14,062,497, respectively.
(2) 1995 and 1996 shares outstanding give effect to the conversion of 3,375,900
shares of Series A Convertible Preferred Stock into 5,063,850 shares of
Common Stock and the reversal of accrued dividends payable thereon which
occurred upon the completion of our initial public offering of Common Stock
on December 6, 1996.
13
ITEM 7. 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.
Results of Operations
The following table summarizes Powerwave's results of operations as a
percentage of net sales for the fiscal years ended January 2, 2000, January 3,
1999 and December 28, 1997.
As a Percentage of Net Sales
-----------------------------------------------
Fiscal Years Ended
-----------------------------------------------
January 2, January 3, December 28,
2000 1999 1997
------------ ------------ ------------
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 71.9 65.9 59.3
----- ----- -----
Gross profit..................................... 28.1 34.1 40.7
Operating expenses:
Sales and marketing............................. 5.2 9.5 7.6
Research and development........................ 9.0 13.4 9.6
General and administrative...................... 4.1 5.8 4.1
In-process research and development............. -- 12.4 --
----- ----- -----
Total operating expenses......................... 18.3 41.1 21.3
----- ----- -----
Operating income (loss).......................... 9.8 (7.0) 19.4
Other income..................................... 1.0 2.3 2.2
----- ----- -----
Income (loss) before income taxes................ 10.8 (4.7) 21.6
----- ----- -----
Provision (benefit) for income taxes............. 3.9 (1.7) 8.1
----- ----- -----
Net income (loss)................................ 6.9% (3.0)% 13.5%
===== ===== =====
Years ended January 2, 2000 and January 3, 1999
Net Sales
Our net sales are derived primarily from the sale of RF power amplifiers for
use in wireless communications networks. Sales increased by 191.9% to $292.5
million for the year ended January 2, 2000 from $100.2 million for the year
ended January 3, 1999. The increase in revenue was primarily attributable to
increased demand for our cellular and PCS products. Fiscal 1999 includes
revenues from the sales of products acquired in the HP Acquisition, which are
only included in the results for the fourth quarter of fiscal 1998. For the year
ended January 2, 2000, total sales of cellular products (including both single
and multi-carrier RF power amplifiers and associated equipment) accounted for
approximately 74% of revenues or $215.0 million, compared to approximately 77%
or $77.3 million for the year ended January 3, 1999. Sales of RF power
amplifiers and associated products for PCS networks (consisting mainly of single
carrier RF power amplifiers) accounted for approximately 26% of revenues or
$76.8 million for the year ended January 2, 2000, compared to approximately 20%
or $19.6 million for the year ended January 2, 1999. Sales of LMR RF power
amplifiers accounted for less than 1% of revenues or $0.7 million for the year
ended January 2, 2000, compared to approximately 3% of revenues or $3.1 million
for the year ended January 3, 1999. The reduction on sales of LMR products is
due to both our divestiture of certain LMR products and our strategic decision
to no longer focus resources on this area.
14
Total international sales (excluding North American sales), accounted for
approximately 33% of revenues or $97.3 million for the year ended January 2,
2000, compared with approximately 41% or $41.2 million for the year ended
January 3, 1999. Total Asian sales (which predominately includes sales to South
Korea) accounted for approximately 21% of revenues or $62.2 million for the year
ended January 2, 2000 compared to approximately 30% of revenues or $30.2 million
for the year ended January 3, 1999. We have previously experienced postponement,
rescheduling and cancellation of orders from our South Korean customers which we
believe was due to the economic crisis in South Korea, and Asia in general,
which reduced South Korean wireless service operator's demand for our products.
While we experienced increased demand during fiscal 1999 from our South Korean
customers, we are unable to predict if such demand will continue and if such
order fluctuations, including cancellations, will continue to be experienced
from our customers in Asia or any other areas that have or may have economic and
or financial crisis. In addition, fluctuations in customer's demand can lead to
postponement, rescheduling and cancellation of orders. 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 Service
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 CDMA cellular and PCS networks during fiscal 1998 did have an adverse
effect on our fiscal 1998 revenues and business with our South Korean customers
and our results of operations. We have continued to operate in South Korea and
Asia and we do not currently plan any reduction in our operations in this
region. Any future delay, rescheduling or cancellation of customer orders or
deployments could have an adverse effect on our 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 229% to $230.3 million for the year ended
January 2, 2000 from $70.1 million for the year ended January 3, 1999. For
fiscal 1999, total sales to Nortel accounted for approximately 41% of our
revenues. In addition, sales to the following customers (in alphabetical order),
Ericsson, LGIC, Lucent and Samsung, each accounted for over 5% of revenues for
fiscal 1999. We cannot guarantee that we will continue to be successful in
attracting new customers or retaining or increasing business with our existing
customers. In addition, we believe that a significant portion of our business
with OEMs, such as Ericsson, Lucent and Nortel, is dependent upon the deployment
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. In addition, a
number of factors may cause OEMs to alter their outsourcing strategy concerning
RF power amplifiers, which could cause such OEMs to reduce or eliminate their
demand for external supplies of RF power amplifiers. Such factors include lower
perceived internal manufacturing costs and competitive reasons to remain
vertically integrated. Due to the possible uncertainties associated with
wireless infrastructure deployments and OEM demand, we have experienced and
expect to continue to experience significant fluctuations in demand from our OEM
customers. Such fluctuations could cause a significant reduction in revenues or
reduction in operating income which could have a material adverse effect on our
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; 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 fiscal 1999 and 1998 were
28.1% and 34.1%, respectively. The decrease in gross margins compared to the
prior year period was a result of several factors, including increased labor and
overhead costs associated with the significant ramp-up of production personnel
and facilities at our Southern California
15
manufacturing facility due to increased demand for our products and the
transition of the acquired Folsom manufacturing activities to Southern
California during fiscal 1999. The final transition of the Folsom manufacturing
activities was completed in the fourth quarter of fiscal 1999. In addition, our
sales during fiscal 1999 as compared to fiscal 1998 also included 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
we acquired in the HP Acquisition were single carrier RF power amplifier
products. We anticipate that we will continue to experience significant labor
and overhead costs. In addition, we currently expect single carrier RF power
amplifier products will continue to account for a significant portion of our
business and that such products will have a negative impact on our future gross
margins. While we continue to strive for manufacturing and engineering cost
reductions to offset pricing pressures on our products, there can be no
assurance that these cost reduction or redesign efforts will keep pace with
price declines and cost increases. If we are unable to obtain cost reductions
through our manufacturing and or engineering efforts, our gross margins and
profitability will continue to be adversely affected. For a discussion of the
effects of declining average sales prices on our business, see "Additional
Factors That May Affect Future Results--Our Average Sales Prices are Declining."
As part of the HP Acquisition, we 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 our financial statements for the fourth quarter 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 fiscal 1999 and 1998, approximately $3.0
million and $0.7 million, respectively, were amortized and included in cost of
sales. See Note 17 of the Notes to Consolidated Financial Statements for more
information concerning the purchase price allocation associated with the HP
Acquisition. As an additional part of the HP Acquisition, we assumed certain
specific liabilities from HP related to the acquired business, including certain
warranty obligations. During fiscal 1999 and 1998, we incurred warranty expenses
of approximately $0.7 million and $0.2 million respectively, 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, we expect that the average sales prices of our products will continue
to decrease. We have introduced new products at lower sales prices. These lower
sales prices have impacted the average sales prices of our products. Future
pricing actions by us and our competitors may also adversely impact our gross
profit margins and profitability, which could also result in decreased liquidity
and adversely affect our business, financial condition and results of
operations. For a discussion of the impact of new products on our 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 59.2% to $15.2 million
for the year ended January 2, 2000 from $9.5 million for the year ended January
3, 1999. As a percentage of sales, sales and marketing expenses were 5.2% and
9.5% for the years ended January 2, 2000 and January 3, 1999, respectively. The
increase in sales and marketing expenses in absolute dollars was primarily
attributable to increases in sales commission costs and increased staffing
levels associated with our increased revenues.
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 PCS, cellular and wireless local loop
products and next generation "3G" products. Research and development expenses
increased by 94.8% to $26.3 million for the year ended January 2, 2000 from
$13.5 million for the year ended January 3, 1999. Research and development
expenses as a percentage of sales for the years ended January 2, 2000 and
January 3, 1999 were 9.0% and 13.4%, 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. We
16
anticipate that we will continue operating at a higher expense level for
research and development because we intend 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 purchase price allocation of the HP Acquisition, our
financial statements for the year ended January 3, 1999 include the one-time
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 the estimate of the costs to
complete the projects. 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, it was estimated that these
projects were approximately 75% complete and it was estimated that the cost to
complete these projects would aggregate approximately $2.5 million and would be
incurred over a two-year period. We incurred approximately $1.6 million of
research and development expenses related to these projects during fiscal 1999
and since the date of the acquisition have incurred a total of $1.8 million of
research and development expenses related to these projects. As of January 2,
2000, we have discontinued further development on the single carrier CDMA
project, as the potential customer for this product has changed its strategic
focus for this type of technology and we were not able to achieve the
technological and economic constraints required for this type of product. As of
January 2, 2000, we believe that the remaining development projects are
approximately 95% complete.
Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly, continued economic feasibility of developed technologies, customer
acceptance, customer demand and customer qualification of such new technology,
and general competitive conditions in the industry. There can be no assurance
that the in-process research and development projects will be successfully
completed and commercially introduced.
General and administrative expenses consist primarily of salaries and other
expenses for management, finance, information systems, facilities maintenance
and human resources. General and administrative expenses increased by 109.5% to
$12.1 million for the year ended January 2, 2000 from $5.8 million for the year
ended January 3, 1999. General and administrative expenses as a percentage of
sales for the years ended January 2, 2000 and January 3, 1999 were 4.1% and
5.8%, respectively. The increase in general and administrative expenses in
absolute dollars is primarily attributable to increased staffing costs
associated with supporting our increased revenues and personnel. In addition, 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 our balance sheet. This amount is amortized over ten years and
included in general and administrative expenses.
As an additional part of the HP Acquisition, we assumed certain specific
liabilities related to the acquired business, including certain retention
bonuses for contracted HP employees. Since the date of the acquisition we have
paid approximately $1.8 million for these retention bonuses. We also recorded
liabilities related to moving and relocation costs associated with the planned
closure of the Folsom manufacturing facility. During fiscal 1999, we paid
approximately $0.4 million related to these moving and relocation costs. The
final closure of the Folsom facility occurred in December 1999. For additional
information regarding the HP Acquisition, see Note 17 of the Notes to
Consolidated Financial Statements.
Other Income
The Company earned other income, net, of $2.8 million in fiscal 1999
compared to $2.3 million for fiscal 1998. Other income consists primarily of
interest income, net of any interest expense. To fund a portion of the HP
Acquisition, we borrowed $25.0 million under a secured bank credit facility in
October 1998. We repaid this
17
facility in full in March 1999. For fiscal 1999, we had total interest expense
of approximately $0.6 million compared to $0.6 million for fiscal 1998.
Provision (Benefit) for Income Taxes
Our effective tax rate was 35.8% and 36.5% for the years ended January 2,
2000 and January 3, 1999, respectively. The decrease in our effective tax rate
was due to tax benefits from international sales and research and development
tax credits.
Years ended January 3, 1999 and December 28, 1997
Net Sales
Sales decreased by 16.3% to $100.2 million for the year ended January 3,
1999 from $119.7 million for the year ended December 28, 1997. The decrease in
revenue was primarily attributable to decreased sales of our PCS products, as
well as reduced sales of our LMR RF power amplifiers. The decrease in PCS sales
was mainly due to the economic crisis in South Korea, which significantly
reduced South Korean wireless service operators' demand for our PCS and cellular
products beginning in the first quarter of 1998. For the year ended January 3,
1999, total sales to customers in South Korea decreased by 69.6% to $30.2
million from $99.3 million for the year ended December 28, 1997. Partially
offsetting the sharp decline in sales to South Korea, non-Korean based sales
increased by 243% to $70.1 million for the year ended January 3, 1999 from $20.4
million for the year ended December 28, 1997.
During the fourth quarter of fiscal 1998, we completed the HP Acquisition
and recognized revenues from the sales of the products acquired, which
contributed to the significant increase in non-Korean based sales. For the year
ended January 3, 1999, total sales of cellular products accounted for
approximately 77% of revenues or $77.3 million, compared to approximately 61% or
$73.1 million for the year ended December 28, 1997. Sales of products for PCS
networks (consisting mainly of single carrier RF power amplifiers) accounted for
approximately 19% of revenues or $18.8 million for the year ended January 3,
1999, compared to approximately 34% or $40.4 million for the year ended December
28, 1997. Sales of LMR RF power amplifiers accounted for approximately 3% of
revenues or $3.1 million for the year ended January 3, 1999, compared to
approximately 5% of revenues or $6.2 million for the year ended December 28,
1997. For fiscal 1998, sales of WLL RF power amplifiers and other products
accounted for $1.0 million or approximately 1% of sales, compared to $32,000 or
less than 1% of sales for fiscal 1997.
For fiscal 1997 and the first nine months of fiscal 1998, the majority of
our single carrier PCS RF power amplifiers were being utilized in the deployment
of new PCS networks being built in South Korea, and a majority of our cellular
multi-carrier RF power amplifiers sold during fiscal 1997 were also being
utilized in the deployment of the digital cellular CDMA networks in South Korea.
During fiscal 1998, the percentage of our RF power amplifiers sold for use in
cellular systems of wireless network operators located in both North America and
other international markets outside of Asia increased by approximately 243% to
$70.1 million, compared to $20.4 million for all of fiscal 1997. Due to the
economic and financial crisis that impacted South Korea, and Asia in general,
the deployments of both the digital cellular CDMA networks and the PCS networks
in South Korea were significantly delayed during fiscal 1998. The reduction and
stoppage of these deployments during fiscal 1998 did have an adverse effect on
our revenues and business with our South Korean customers and our results of
operations. 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 Service Market and --There
are Many Risks Associated With International Operations."
Total international sales (excluding North American sales), accounted for
approximately 41% of our revenues or $41.2 million for the year ended January 3,
1999, compared with approximately 84% or $101.0 million for the year ended
December 28, 1997. Total sales to customers in South Korea accounted for
approximately 30% of revenues or $30.2 million for the year ended January 3,
1999 compared to approximately 83% of revenues or $99.3 million for the year
ended December 28, 1997. The decrease in sales to customers in South Korea was a
result of
18
the economic crisis in South Korea, and Asia in general, which reduced
South Korean wireless service operators' demand for our products. During fiscal
1998, we experienced postponement, rescheduling and cancellation of orders from
our South Korean customers.
Sales to customers in countries outside of South Korea, primarily in North
America, increased approximately 243% to $70.1 million for the year ended
January 3, 1999 from $20.4 million for the year ended December 28, 1997. For
fiscal 1998, sales to four customers (in alphabetical order), BellSouth, LGIC,
Nortel and Samsung, each accounted for more than 10% of our sales, collectively
accounting for $68.7 million or approximately 69% of revenues for the year.
This compares to fiscal 1997 total sales to South Korean customers of $99.3
million or approximately 83% of revenues with Hyundai, LGIC and Samsung each
accounting for more than 9% of revenues for the year. During fiscal 1997, no
non-Korean customer accounted for more than 6% of revenues. As part of the HP
Acquisition, we significantly increased our sales to Nortel and added Lucent as
a customer. For the fourth quarter of fiscal 1998, total sales to Nortel
accounted for approximately 52% of revenues and sales to Lucent accounted for
over 10% of revenues for the quarter.
Gross Profit
Gross profit margins for fiscal 1998 and 1997 were 34.1% and 40.7%,
respectively. The decrease in gross margins during fiscal 1998 was a result of
several factors, including increased labor and overhead costs associated with
the significant reduction in sales to our South Korean customers which impacted
our total revenues during the first three quarters and the increased labor and
overhead costs associated with operating the Folsom manufacturing facility which
we acquired in October 1998 as part of the HP Acquisition.
For fiscal 1998, the cost of sales includes the amortization of developed
technology and workforce associated with the purchase price allocation from the
HP Acquisition. See Note 17 of the Notes to Consolidated Financial Statements
for more information concerning the purchase price allocation associated with
the HP Acquisition.
Operating Expenses
Sales and marketing expenses increased by 5.3% to $9.5 million for the year
ended January 3, 1999 from $9.1 million for the year ended December 28, 1997.
As a percentage of sales, sales and marketing expenses were 9.5% and 7.6% for
the years ended January 3, 1999 and December 28, 1997, respectively. The
increase in actual sales and marketing expenses was primarily attributable to
increases in sales commission costs and increased staffing levels. In addition,
as part of the purchase price allocation of the HP Acquisition, sales and
marketing expenses for 1998 include the amortization of the customer list and
non-compete agreement. See Note 17 of the Notes to Consolidated Financial
Statements for more information concerning the purchase price allocation
associated with the HP Acquisition.
Research and development expenses increased by 17.3% to $13.5 million for
the year ended January 3, 1999 from $11.5 million for the year ended December
28, 1997. Research and development expenses as a percentage of sales for the
years ended January 3, 1999 and December 28, 1997 were 13.4% and 9.6%,
respectively. The increase in actual research and development expenses was
primarily due to increased staffing and associated engineering costs at our
Irvine, California facility, related to continued new product development and
existing product enhancement efforts. In addition, as part of the HP
Acquisition, we added 35 additional engineers who were located in the Folsom
facility.
General and administrative expenses consist primarily of salaries and other
expenses for management, finance, facilities maintenance and human resources.
General and administrative expenses increased by 18.0% to $5.8 million for the
year ended January 3, 1999 from $4.9 million for the year ended December 28,
1997. General and administrative expenses as a percentage of sales for the years
ended January 3, 1999 and December 28, 1997 were 5.8% and 4.1%, respectively.
The increase in actual general and administrative expenses is primarily
attributable to increased staffing costs. 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 our balance sheet.
This amount is amortized over ten years and included in general and
administrative expenses.
19
Other Income
We earned other income, net, of $2.3 million in fiscal 1998 compared to
$2.6 million for fiscal 1997. Other income consists primarily of interest
income, net of any interest expense.
Provision (Benefit) for Income Taxes
Our effective tax rate was 36.5% and 37.4% for the years ended January 3,
1999 and December 28, 1997, respectively. The decrease in our effective tax rate
was due to tax benefits from international sales and research and development
tax credits.
Liquidity and Capital Resources
We have historically financed our operations primarily through a
combination of cash on hand, cash provided from operations, equipment lease
financings, available borrowings under bank lines of credit and both private and
public equity offerings. As of January 2, 2000, we had working capital of $118.6
million, including $76.7 million in cash and cash equivalents as compared with
working capital of $35.2 million at January 3, 1999, which included $13.3
million in cash and cash equivalents. We received net proceeds of approximately
$57.8 million from a Common Stock offering which was completed during the first
fiscal quarter of 1999. We utilized approximately $22.8 million of these
proceeds to retire bank debt associated to the HP Acquisition.
Net accounts receivable increased to $47.5 million at January 2, 2000 from
$31.2 million at January 3, 1999, consistent with the significant increase in
our revenues in fiscal 1999 as compared to fiscal 1998. Net inventory increased
to $31.7 million at January 2, 2000, from $28.6 million at January 3, 1999. Cash
provided by operations was approximately $39.6 million in fiscal 1999, compared
with cash used by operations of $8.7 million in fiscal 1998 and cash provided by
operations of $22.8 million in fiscal 1997. The positive cash flow from
operations during fiscal 1999 was primarily a result of an increase in net
income. The negative cash flow from operations during fiscal 1998 was primarily
a result of an increase in accounts receivable and inventories, a decrease in
accrued expenses and other liabilities, offset by an increase in accounts
payable.
Capital expenditures were approximately $20.6 million and $4.9 million in
fiscal 1999 and 1998, respectively. The majority of capital spending during both
periods represents spending on electronic test equipment utilized in our
manufacturing and research and development areas. In addition, capital spending
for fiscal 1999 includes a total of $3.5 million in leasehold improvement costs.
These leasehold improvements related to the expansion of our manufacturing
facility in Irvine, California, the relocation of our engineering and sales
departments to an adjacent leased building in Irvine, California, and the
relocation of our Northern California based engineering staff to a leased
facility in El Dorado Hills, California.
On April 28, 1998 we 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, in a private offering. The total amount raised in the 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 redeemed in full on April 28, 1999. Upon the
redemption of the Notes, we received related warrants for shares of Metawave
Communications Corporation Series D Preferred Stock.
On October 9, 1998, we completed the HP Acquisition and the cash price paid
to HP was approximately $57.4 million. We also incurred acquisition costs of
approximately $1.1 million and assumed liabilities of $7.3 million. We financed
the acquisition utilizing $25.0 million of a new $35.0 million secured credit
agreement, and we paid for the remainder of the cash purchase price with our
then existing cash balances.
Net cash provided by financing activities was $39.9 million for fiscal
1999, compared with $20.6 million for fiscal 1998. On March 11, 1999, we
completed the sale of two million shares of Common Stock in a public offering
20
at an offering price of $26.75 per share. The underwriters also exercised their
right to purchase an additional 300,000 shares from us at the $26.75 offering
price on March 22, 1999. Total net proceeds after the reduction for the
underwriting discount and offering expenses were approximately $57.8 million. On
March 31, 1999, we utilized a total of $22.8 million of the proceeds from the
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 $7.0 million for the Purpose Loan. 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 us on March 31, 1999. We intend to obtain
a new bank revolving credit agreement and have currently initiated discussions
with our banks regarding such new agreement.
The majority of cash provided by financing activities in fiscal 1998 was
from the $25.0 million bank borrowing to finance the HP Acquisition, offset by
the repurchase of 300,000 shares of our Common Stock at a total cost of $3.7
million. As of January 3, 1999, we had repurchased a total of 810,000 shares of
our Common Stock at a total cost of approximately $12.5 million, under a stock
repurchase program. We ended the stock repurchase program with our March 1999
public stock offering. All of the remaining shares we repurchased were reissued
in the March 1999 offering.
As part of the HP Acquisition, we 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. We have transferred production from the Folsom manufacturing facility
to our Irvine facility. On July 15, 1999, we sold the Folsom facility for
approximately $8.4 million. We received approximately $0.925 million in cash
(before expenses) and an interest free note for $7.475 million due December 31,
1999. The note was secured by the land, land improvements and building. In
exchange for the interest free note, the buyer entered into a rent-free lease
with us of the Folsom facility through December 31, 1999. In December 1999, the
note receivable on the Folsom facility was amended to extend the maturity date
to January 27, 2000 and to apply an annual interest rate of 8% beginning
December 31, 1999. The buyer of the Folsom facility made an additional principal
payment of $500,000 on December 30, 1999. The remaining balance of $6.975
million was paid on January 27, 2000.
We had cash and cash equivalents of $76.7 million at January 2, 2000,
compared with $13.3 million at January 3, 1999. We regularly review our cash
funding requirements and attempt 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. We invest our
excess cash in short-term, investment-grade money market instruments.
We currently believe that our existing cash balances and funds expected to
be generated from operations will provide us with sufficient funds to finance
our operations for at least the next 12 months. In the past, we utilized both
operating and capital lease financing for certain equipment used in our
manufacturing and research and development operations and expect to continue to
selectively do so in the future. We may in the future require additional funds
to support our 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 us or our stockholders when
we may require it.
Disclosure About Foreign Currency Risk
A significant portion 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
conditions of such
21
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.
Several of the international markets in which we sell our products have
experienced significant weaknesses in their currencies, banking systems and
equity markets in the last few years. Such weaknesses could negatively impact
demand for wireless services and thereby reduce demand for our products. 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 our products
with U.S. Dollars. The past strengthening of the U.S. Dollar as compared to the
Brazilian Real or the South Korean Won, effectively increased the cost of our
products by as much as 100% or more for our Brazilian and South Korean
customers. Such a 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."
Quantitative and Qualitative Disclosures About Market Risk
Our financial instruments include cash, short-term investments less than
three months and long-term debt. At January 2, 2000, the carrying values of our
financial instruments approximated their fair values based on current market
prices and rates.
It is our current policy to not enter into derivative financial
instruments. We do not currently have any significant foreign currency exposure
since we do not transact business in foreign currencies. Due to this, we do not
have any significant overall currency exposure at January 2, 2000.
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 are recorded in U.S. Dollars and we do not currently
anticipate future sales 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
do not currently expect the continued implementation of the euro to cause any
significant operational disruptions.
22
Year 2000 Compliance
On January 1, 2000, many companies faced a potentially serious information
systems (computer) problem because many software applications and operational
programs written in the past did not properly recognize calendar dates beginning
in the Year 2000. This problem could have forced computers or machines which
utilize date dependent software to either shut down or provide incorrect data or
information. We examined our computer and information systems and contacted our
software and hardware providers to determine whether our software applications
and computer and information systems were compliant with the Year 2000. We
completed an upgrade of our computer operating system and were assured by our
software and hardware providers that our computer systems were fully compliant
with the Year 2000. We also performed our own internal tests of our software and
hardware to confirm that they were Year 2000 compliant.
At this time we have not experienced any material Year 2000 related
problems with our information systems and computer software, and we have not
experienced any material problems with our key suppliers or customers related to
Year 2000. There has been no material impact on our business, financial
condition or results of operations related to the Year 2000.
It is not possible to quantify the aggregate cost of upgrading our computer
operating system and software since they were part of the software and hardware
providers' normal upgrades to our systems. The costs for upgrading our
information systems were funded through our operating cash flows, and we
estimated that we spent approximately $450,000 since 1996 for upgrades of our
information systems and services associated with such upgrades.
We intend to continue to review our information systems as well as monitor
our key suppliers and customers for any undetected Year 2000 problems which may
not yet be apparent. However, we do not currently believe that there are any
undetected Year 2000 problems that could have a material impact on our business,
financial condition or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which we are required to adopt effective in our fiscal
year 2001. SFAS 133 will require us to record all derivatives on the balance
sheet at fair value. We do not currently engage in hedging activities and will
continue to evaluate the effects of adopting SFAS No. 133. We will adopt SFAS
No. 133 in our fiscal year 2001.
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:
. the ability to add new customers to reduce our dependence on any one
customer while maintaining our existing customers;
. the ability to increase demand for our products from major wireless
infrastructure OEMs;
. industry specific factors, including slowdown in demand for wireless
communications and RF power amplifiers;
. the ability to produce products which meet the quality standards of
both our existing and potential new customers;
. worldwide and regional economic downturns and unfavorable political
conditions;
. the ability to timely develop and produce commercially viable products
at competitive prices;
23
. the ability to manage rapid change in demand for our products;
. the availability and cost of components;
. the ability to finance our activities and maintain our financial
liquidity;
. the ability of our products to operate and be compatible with various
OEMs' base station equipment;
. the ability to manage expense levels;
. the ability to manage future product repairs; 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, LGIC,
Ericsson, Lucent, Nokia, Nortel and Samsung as well as major operators of
wireless networks, such as AT&T Wireless, BellSouth and GTE Wireless.
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.
For fiscal 1999, our largest customer was Nortel, which accounted for
approximately 41% of our net sales. Also, for fiscal 1999, our next four largest
customers (in alphabetical order), LGIC, Ericsson, Lucent and Samsung, each
accounted for more than 5% of our net sales. The loss of any one of these
customers, or a significant loss, reduction or rescheduling of orders from any
of our customers, would have a material adverse effect on our business, results
of operations and financial condition. The risks related to our customer
concentration were magnified in 1998 due certain of our customer's geographic
concentration in South Korea which experienced an economic and financial crisis
during 1998. For fiscal 1998, our South Korean customers including Hyundai, LGIC
and Samsung accounted for $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 net sales. During
1999 our South Korean customers accounted for approximately 21% of our total net
sales or $62.2 million.
We believe that continued purchases of our products by OEMs is dependent
upon many factors, including the OEMs view of utilizing third party suppliers of
RF power amplifiers and their 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 increase in demand which
could exceed our production capacity, which could negatively impact our ability
to meet customers' demands as well as could potentially impact product quality.
Alternatively, 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
24
purchases from us, which could have a material adverse effect on our business,
results of operations and financial condition.
Our Quarterly Results Fluctuate Significantly
We experience, and will continue to experience, significant fluctuations in
sales and operating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors, any of which could have a material adverse
effect on our business, results of operations and financial condition. Factors
that could cause our results of operations to vary include the following:
. variations in the timing, cancellation, or rescheduling of customer
orders and shipments;
. variations in manufacturing costs, capacities and efficiencies;
. capacity and production constraints, including constraints associated
with single-source component suppliers;
. product failures and associated in-field service support costs;
. 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;
. competitive factors, including pricing, availability and demand for
competing amplification products;
. delays in qualification by customers of new products or redesigns or
delays in qualification of new production facilities;
. warranty expenses;
. the availability and cost of components;
. the timing, availability and sale of new products by us or our
competitors;
. changes in the mix of products having differing gross margins;
. 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; 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
25
analysts and investors. In either case, the price of our Common Stock could be
materially adversely affected. See "--Our Stock Price Has Been and May Continue
to Be Volatile."
Our Average Sales Prices are Declining
Our average sales prices have declined, and 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 continue
to account for a large portion of our net sales in 2000. The 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 in
response to fluctuations in demand for various products;
. 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. The departure of any of our management and
technical personnel, the breach of their confidentiality and non-disclosure
obligations to Powerwave or the failure to achieve our intellectual property
objectives may have a material adverse effect on our business, financial
condition and results of operations.
We believe that our success depends upon the knowledge and experience of
our management and technical personnel and our ability to market our existing
products and to develop new products. We do not have non-compete agreements with
our employees who are employed on an at-will-basis. Therefore, employees may
leave us and go to work for a competitor. We have had employees leave us and go
to work for competitors. While we believe that we have adequately protected our
proprietary technology, and we will take all legal measures to protect
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it, the use of our processes by a competitor could have a material adverse
effect on our business, financial condition and results of operations.
There are Many Risks Associated With International Operations
For fiscal years 1999, 1998 and 1997, international revenues (excluding
North American sales) accounted for approximately 33%, 41% and 84% respectively,
of our net sales. These revenues will continue to account for a significant
percentage of our revenues for the foreseeable future. Therefore, the following
risks associated with international operations could have a material adverse
effect on our performance:
. compliance with multiple and potentially conflicting regulations,
including export requirements, tariffs, import duties and other
barriers, and health and safety requirements;
. differences in intellectual property protections;
. difficulties in staffing and ma