Back to GetFilings.com
================================================================================
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 December 30, 2001
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.)
1801 E. St. Andrew Place
Santa Ana, CA 92705
(Address of principal executive offices, zip code)
(714) 466-1000
(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 February 1, 2002, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $1,154,670,288
computed using the closing price of $17.71 per share of Common Stock on February
1, 2002 as reported by Nasdaq, based on the assumption that directors and
officers and more than 10% stockholders are affiliates. As of February 1, 2002
the number of outstanding shares of Common Stock, par value $.0001 per share, of
the Registrant was 65,198,774.
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on April 24, 2002, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 2001 fiscal year.
================================================================================
This Annual Report on Form 10-K includes certain forward-looking statements as
defined within Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended, relating to revenue,
revenue composition, demand and pricing trends, future expense levels, trends in
average selling prices and gross margins, the timing of and demand for 3G
products and the level of expected capital expenditures. Such forward-looking
statements are based on the beliefs of, estimates made by and information
currently available to, the Company's management and are subject to certain
risks, uncertainties and assumptions. Any statements contained herein (including
without limitation statements to the effect that the Company or management
"estimates," "expects," "anticipates," "plans," "believes," "projects,"
"continues," "may," or "will," or statements concerning "potential" or
"opportunity" or variations thereof or comparable terminology or the negative
thereof) that are not statements of historical fact should be construed as
forward looking statements. The actual results of Powerwave Technologies, Inc.
may vary materially from those expected or anticipated in these forward-looking
statements. The realization of such forward-looking statements may be impacted
by certain important factors which are discussed in "Additional Factors That May
Affect Future Results" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" at pages 14-32. Because of these
and other factors that may affect Powerwave's operating results, past
performance should not be considered as an indicator of future performance and
investors should not use historical results to anticipate results or trends in
future periods. Powerwave undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers should carefully review the risk
factors described in this and other documents Powerwave files from time to time
with the Securities and Exchange Commission, including subsequent Current
Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form
10-K.
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.
RF power amplifiers, which are key components of wireless communications
networks, increase the signal strength of wireless transmissions from the base
station to the handset while reducing interference, or "noise." Less noise
enables wireless service providers to deliver clearer call connections and
reduces 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 ("SCPA") typically amplify a specific radio channel.
Multi-carrier RF power amplifiers ("MCPA") are capable of amplifying several
radio channels at one time by integrating the functions of several SCPA units
and cavity filters within a single MCPA unit. Powerwave's products are currently
being utilized in wireless networks operating in the 800-1000 megahertz (MHz),
1800-2000 MHz and over 2000 MHz frequency ranges. Our products support a wide
range of transmission protocols including analog protocols such as AMPS and TACS
and digital protocols such as CDMA, TDMA, and GSM. We also have developed and
introduced RF power amplifiers for third generation ("3G') transmission
protocols such as UMTS, W-CDMA and cdma2000.
We believe that our future success depends upon our ability to broaden our
customer base and continued growth in demand for wireless services. For the
fiscal year ended December 30, 2001, our largest customer was Nortel Networks
Corporation and related entities ("Nortel"), which accounted for approximately
44% of our net sales. Also, for fiscal year 2001, our next five largest
customers (in alphabetical order), Cingular Wireless, LM Ericsson Telephone
Company ("Ericsson"), Lucent Technologies, Inc. ("Lucent"), Samsung Electronics
Co. Ltd. ("Samsung"), and Verizon Wireless each accounted for 5% or more 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
2
adverse effect on our business, results of operations and financial condition.
See "Additional Factors That May Affect Future Results--We rely upon a few
customers for a significant amount of our revenues...; -- Our success is tied to
the growth of the wireless services 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 us. We have previously
experienced significant reductions in demand from customers, such as the
significant reductions in demand from Nortel during fiscal 2001 as compared to
fiscal 2000. That reduction in demand coupled with the industry-wide reduction
in demand for fiscal 2001 had an adverse effect on our business and results of
operations. Any future such reductions by any of our major customers would have
a material adverse effect on our business, results of operations and financial
condition. See "Additional Factors That May Affect Future Results-- "We rely
upon a few customers for a significant amount of our revenues..." under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have experienced, and expect to continue to experience, declining
average sales prices for both our multi-carrier and single carrier amplifier
products. Consolidation among wireless service providers has enabled such
companies to place increased pricing pressure on wireless infrastructure
manufacturers, 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 pressure on us to continually reduce the sales price of our
products. Consequently, we believe that our gross margins will decline over time
and that in order to maintain or improve our gross margins, we must achieve
manufacturing cost reductions and develop new products that incorporate advanced
features that may generate higher gross margins. See "Additional Factors That
May Affect Future Results--We rely upon a few customers for a significant amount
of our revenues...; --Our success is tied to the growth of the wireless services
market...; --Our average sales prices have declined...; 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 2001
During the first quarter of fiscal 2001, we completed the retrofitting and
relocation to our new 360,000 square foot Southern California headquarters and
manufacturing facility located in Santa Ana, California.
Powerwave received TL-9000 Quality System Certification in March of 2001.
The TL 9000 Quality System is a set of requirements established specifically by
the telecommunications industry to help ensure uniform standards of quality and
performance for the design, development, production, delivery, installation and
maintenance of products and services.
On May 31, 2001, the Board of Directors adopted a Shareholder Rights Plan
to protect shareholder interests against takeover strategies that may not
provide maximum shareholder value. See "Note 9 to Notes to Consolidated
Financial Statements."
On December 28, 2001, Powerwave completed the acquisition of Toracomm
Limited, a private engineering research and development company located in
Bristol, United Kingdom. Toracomm has been providing design and development
services to the wireless and mobile communications industries since 1997.
Toracomm offers a broad range of RF, digital signal processing (DSP), system
design and simulation expertise covering 2G, 2.5G and 3G wireless applications.
The total purchase price, including capitalized acquisition costs, was $5.3
million.
As a result of continuing poor economic conditions and reductions in the
forecasted future demand fo products acquired through our 1998 acquisition of
the RF amplifier group of Hewlett Packard Company ("the HP Acquisition"), we
determined that the majority of the intangible assets associated with the HP
Acquisition were impaired during the fourth quarter of fiscal 2001, and
therefore, recorded a one-time non-cash charge of $6.5 million. This amount
included approximately $3.6 million recorded in cost of sales related to the
writedown of
3
developed technology and approximately $2.9 million recorded in general and
administrative expenses related to the writedown of goodwill. This non-cash
charge is included in our fourth quarter and year-end 2001 operating results.
See "Impairment Charges" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Industry Segments and Geographic Information
Powerwave currently operates in one industry segment: the design,
manufacture and marketing of RF power amplifiers for use in wireless
communication networks. We currently market our products through our own
internal sales force as well as independent sales representatives. For the
purposes of Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information, we have provided a
breakdown of our sales utilizing the management approach in Note 16 of the
"Notes to Consolidated Financial Statements" under Item 8, "Financial Statements
and Supplementary Data." Utilizing the management approach, we have broken down
our sales based upon the RF frequency in which the product is utilized in, i.e.
800-1000 MHz commonly referred to as "Cellular", 1800-2000 MHz, commonly
referred to as "PCS" and over 2000 MHz, which includes third generation ("3G")
frequency bands. A summary of our sales by geographic region is incorporated
herein by reference from Note 16 of the "Notes to Consolidated Financial
Statements" under Item 8, "Financial Statements and Supplementary Data."
Business Strategy
Powerwave's strategy is to become the leading supplier of advanced RF power
amplifier solutions to the wireless communications industry and includes the
following key elements:
. provide leading technology to the RF power amplifier industry through
research and development that continues to improve our product's technical
performance and establishes new levels of technical performance;
. utilize our research and development efforts to raise our productivity and
to lower our costs;
. 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;
. continue to expand our customer base of wireless network OEMs and leading
wireless network operators; and
. 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 throughout the world has enabled us to develop substantial
expertise in both multi-carrier and single carrier RF power amplifier
technology. We intend to continue to research and develop new methods to improve
RF power amplifier performance, including efforts to support future generation
transmission standards. We believe that both our existing products 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
wireless OEMs and 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 we are unsuccessful in designing new products or improving and reducing
the costs of our products, such inability to fulfill these objectives would have
a negative effect on our gross profit margins, business, results of operations
and financial condition. In addition, if our outstanding customer orders were to
be significantly reduced, the resulting loss of purchasing volume could also
adversely affect 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 have declined...; and --We may fail to develop
4
products that are sufficiently manufacturable" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Markets
Powerwave provides RF power amplifiers that 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 networks typically 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 that uses wireless technology to receive and transmit calls via base
stations (BTS) and the wireline public switched telephone network ("PSTN").
Cellular networks typically operate within the 800 and 900 MHz bandwidths of the
radio spectrum and utilize either analog or digital protocols. PCS networks
operate in a substantially similar manner as cellular networks, except that PCS
networks typically operate at 1800 and 1900 MHz bandwidths and utilize only
digital transmission protocols. Third generation networks typically operate in
the over 2000 MHz range utilizing only digital transmissions. Transmissions at
the higher frequencies utilized by PCS and 3G networks have shorter transmission
waves as compared to cellular frequency transmissions, which tends to limit the
distances transmissions can travel without significant degradation. Lower
frequency signals penetrate into buildings and other obstacles better than
higher frequency signals. Therefore, wireless networks operating at high
frequency ranges may require smaller operating cells and more base stations than
existing cellular networks to cover the same total geographic area.
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. With the use
of MCPA technology, transmission signals can be amplified simultaneously through
a single multi-carrier RF power amplifier that 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 cavity filters for each channel, multi-carrier RF
power amplifiers reduce overall deployment and maintenance costs associated with
base stations. 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.
Products
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, cdma2000, TDMA and GSM digital cellular systems as well as analog
systems utilizing AMPS and TACS protocols. We also offer both single and
multi-carrier RF power amplifiers for use in PCS networks that operate in the
international DCS-1800 frequency (1800 MHz) and the United States PCS band at
1900 MHz and multi-carrier RF power amplifiers for UMTS networks (3G) operating
at 2100 MHz. Typical system applications include CDMA, cdma 2000, W-CDMA, TDMA,
and GSM protocols with output power ranging from 5 to 140 Watts (W).
Our ultra-linear multi-carrier RF power amplifiers utilize feedforward
technology, and typically pre-distortion techniques. Our multi-carrier designs
also utilize 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
5
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 multi-carrier RF power amplifiers
providing from 25W to 140W 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.
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.
Our multi-carrier RF power amplifiers range in price from $3,000 to over
$12,000 per RF power amplifier, based upon the specification requirements. Our
single carrier RF power amplifiers range in price from $500 to $3,000 per RF
power amplifier depending upon product type and specifications. We also sell
rack systems, cabinets and combiners for multiple RF power amplifiers, ranging
in price from $400 to over $100,000, depending upon specifications.
Customers
We sell our products to customers worldwide, including a variety of
wireless OEMs, such as Ericsson, LG Electronics ("LG"), Lucent, Metawave
Communications Corporation ("Metawave"), Motorola Corporation ("Motorola"),
Nokia Telecommunications Inc. ("Nokia"), Nortel and Samsung. We also sell our
products to operators of wireless networks, such as ALLTEL Corporation, AT&T
Wireless Services ("AT&T Wireless"), Cingular Wireless and Verizon Wireless.
For the fiscal year ended December 30, 2001, our largest customer was
Nortel, which accounted for approximately 44% of our net sales. Also, for fiscal
year 2001, our next five largest customers (in alphabetical order), Cingular
Wireless, Ericsson, Lucent, Samsung and Verizon Wireless, each accounted for 5%
or more 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--We
rely upon a few customers for a significant amount of our revenues...; --Our
success is tied to the growth of the wireless services 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.
Our 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 that can be subject to cancellation,
postponement or other types of delays. While certain customers provide us with
estimated forecasts of their future requirements, they are not typically bound
by such forecasts.
6
International sales (excluding North American sales) of our products
amounted to approximately 41%, 21%, and 33% of net sales for the years ended
December 30, 2001, December 31, 2000, January 2, 2000, 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. Since our foreign customers typically pay for our products
with U.S. Dollars, 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
Our warranties vary by customer and 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 Southern 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 and 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 protocols such as W-CDMA and cdma2000. Our
development efforts also seek to reduce the cost and increase the manufacturing
efficiency of both new and existing products. In an effort to strengthen our
research and development skills, we acquired Toracomm Limited in December 2001.
This acquisition added a total of 23 employees, 19 of which are engineers. Our
total research and development staff consisted of 208 people as of December 30,
2001. Expenditures for research and development amounted to approximately $34.8
million in 2001, $41.1 million in 2000, $26.3 million in 1999. See "Additional
Factors That May Affect Future Results--The wireless communications
infrastructure equipment industry is extremely competitive" 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, 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 Allen Telecom, Inc., Andrew Corporation,
Celiant Corporation, Fujitsu Limited, Hitachi Kokusai Electric Inc., Japan Radio
Co., Ltd., Mitsubishi Electric Corporation and Spectrian Corporation. We also
compete with a number of other foreign and privately held companies throughout
the world, the subsidiaries of certain multinational corporations and the
amplifier manufacturing operations captive within certain of the leading
wireless infrastructure OEMs such as Ericsson, 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.
7
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. During 2000, Ericsson purchased Microwave
Power Devices, Inc., one of our competitors. We cannot predict the ultimate
impact this purchase will have on our business with Ericsson. In the third
quarter of 2001, Lucent announced that it had formed a new company called
Celiant Corporation, which consisted of its former power amplifier design group,
with the intended purpose of competing directly in the independent power
amplifier marketplace. Any potential reduction in business from Ericsson or
Lucent could have a negative impact on our business, financial condition and
results of operations. In addition, various companies could also directly
compete with Powerwave by selling their RF power amplifiers to other
manufacturers and operators, including our customers. If we are not successful
in increasing the use of our products by the leading wireless infrastructure
OEMs, there will 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 manufactures have internal RF
production capabilities; and --The wireless communications infrastructure
equipment industry is extremely 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 have declined..." under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
Our backlog of orders was approximately $134.1 million on December 30, 2001
compared to approximately $84.5 million on December 31, 2000. We include in our
reported 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. While 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 cannot make any guarantee that such orders will actually be shipped
or that such orders will not be cancelled in the future. We make regular
adjustments to our backlog as customer delivery schedules change and in response
to changes in our production schedule. Accordingly, we stress that although
somewhat useful for scheduling production, backlog as of any particular date
should not be considered a reliable indicator of sales for any future period.
Manufacturing and Suppliers
We purchased our headquarters and manufacturing facility located in Santa
Ana, California in the second quarter of 2000 and completed the relocation of
our operations to this facility during the first quarter of 2001. 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. The majority of
our subassemblies and all printed circuit boards are made by third parties to
our specifications and are generally delivered to us for final assembly,
testing, and tuning in the completed product.
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
8
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 have been ISO 9001 certified since 1996 and received our TL-9000
certification in March of 2001. 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 and patents to protect our intellectual
property. We execute confidentiality and non-disclosure agreements with our
employees and suppliers and limit access to and distribution of our proprietary
information. We have an on-going program to identify and file applications for
both U.S. and international patents for various aspects of our technology. We
have been granted a total of 15 U.S. patents, and as of December 30, 2001 we
have 23 separate additional U.S. patent applications filed, with multiple
additional international patents filed. All of these efforts along with the
knowledge and experience of our management and technical personnel strengthen
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 that we have taken all legal measures to protect it,
we will continue to pursue all legal measures available to protect it and to
prohibit the unauthorized use of our proprietary technology. In spite of our
efforts, 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 we, along with other companies in our industry,
may face more frequent infringement claims. Such litigation or claims of
infringement 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 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.
9
Employees
As of December 30, 2001, Powerwave had 1,233 full and part-time employees,
including 838 in manufacturing, 70 in quality, 208 in research and development,
42 in sales and marketing and 75 in general and administration. None of our
employees are represented by a union. We believe that employee relations are
good.
Contract Personnel
Powerwave also utilizes contract personnel hired from third party agencies.
As of December 30, 2001, Powerwave was utilizing approximately 344 contract
personnel, primarily in our manufacturing operations.
ITEM 2. PROPERTIES
Our Southern California headquarters and manufacturing facility is located
in Santa Ana, California. This facility has approximately 360,000 square feet,
of which 275,000 is available to us. The remaining 85,000 square feet is being
sublet to an unrelated third party. We also lease an additional 115,000 square
foot warehouse facility in Santa Ana, California. The lease on this warehouse
facility commenced on April 15, 2001 and has a expiration date of March 31,
2007. In addition, we lease a 61,300 square foot warehouse in Irvine, California
under a lease expiring in March 2002, which we vacated during the first quarter
of 2001. In connection with the move to our new headquarters, we terminated the
leases of our two former Irvine facilities as of June 30, 2001.
We lease 20,000 square feet in El Dorado Hills, California under a lease
expiring in January 2005 for our Northern California research and development
staff. In addition, we also lease an additional 11,500 square feet adjacent to
our El Dorado Hills facility. This lease expires on January 01, 2007. Our
European research and development staff are located in a 6,000 square foot
facility in Bristol, United Kingdom under a lease expiring in October 2009.
Powerwave also leases four office suites for our regional sales and support
staff. Theses leases cover approximately 8,000 square feet and expire from 2003
through 2006.
We believe that our headquarters and manufacturing facility, as well as our
remaining leased facilities, provide adequate space for our operations.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings and threatened legal
proceedings from time to time as part of our business. Powerwave is not
currently party to any legal proceedings nor aware of any threatened 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 potential litigation,
regardless of its merits, could result in substantial costs to us and divert
management's attention from our operations. Such diversions could have an
adverse impact on our business, results of operations and financial condition.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2001 Annual Meeting of Shareholders was held on October 17,
2001 in Irvine, California. A quorum was declared present for the meeting. The
following matters were submitted to a vote of security holders, and all
proposals were approved by the majority of those voting:
(1) The election of the following eight directors to hold office until the
next annual meeting or until their successors are duly elected and
qualified. All of the nominated directors were elected.
Gregory M. Avis There were 56,987,541 votes for 278,159 votes withheld and no broker non-votes.
John L. Clendenin There were 57,211,581 votes for 49,219 votes withheld, and no broker non-votes.
Bruce C. Edwards There were 51,024,542 votes for 6,236,258 votes withheld, and no broker non-votes.
David L. George There were 57,215,302 votes for 45,498 votes withheld, and no broker non-votes.
Eugene Goda There were 57,212,883 votes for 47,917 votes withheld, and no broker non-votes.
Carl W. Neun There were 57,212,932 votes for 47,868 votes withheld, and no broker non-votes.
Safi U. Qureshey There were 57,207,263 votes for 53,537 votes withheld, and no broker non-votes.
Andrew J. Sukawaty There were 56,933,402 votes for 321,398 votes withheld, and no broker non-votes.
(2) The ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the 2001 fiscal year. The
proposal was approved by the shareholders.
There were 57,133,427 votes cast for, 110,804 votes opposed, 16,574
votes abstaining and no broker non-votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 2001
First Quarter Ended April 1, 2001 ......... $ 60.5625 $ 11.8750
Second Quarter Ended July 1, 2001 ......... $ 22.2900 $ 8.7500
Third Quarter Ended September 30, 2001 .... $ 21.0000 $ 10.1500
Fourth Quarter Ended December 30, 2001 .... $ 21.3000 $ 9.6500
Fiscal Year 2000
First Quarter Ended April 2, 2000 ......... $ 68.3333 $ 15.2917
Second Quarter Ended July 2, 2000 ......... $ 74.0000 $ 27.1667
Third Quarter Ended October 1, 2000 ....... $ 52.0000 $ 27.1875
Fourth Quarter Ended December 31, 2000 .... $ 75.3750 $ 30.3750
There were approximately 104 stockholders of record as of February 1, 2002.
We believe there are approximately 30,000 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.
11
On May 31, 2001, the Board of Directors adopted a Shareholder Rights Plan
to protect shareholder interests against takeover strategies that may not
provide maximum shareholder value. A dividend of one preferred stock purchase
right ("Right") for each share of the Company's Common Stock was distributed to
shareholders of record on June 18, 2001. The Rights automatically attached to
outstanding shares so no separate certificates were issued. Each Right allows
its holder to purchase one one-hundredth of a share of Series A Jr.
Participating Preferred Stock at an exercise price of $115.00 per share. This
portion of a preferred share gives the shareholder approximately the same
dividend, voting and liquidation rights as one share of Common Stock. The Rights
are not currently exercisable, but will become exercisable if certain events
occur relating to a person or group acquiring or attempting to acquire 15
percent or more of the outstanding shares of Common Stock. The Rights expire on
June 1, 2011, unless redeemed or exchanged by the Company earlier.
On December 28, 2001, we issued a total of 250,000 shares of our common
stock to the shareholder's of Toracomm Limited in connection with our
acquisition of the company. Based on a closing price of $18.19 on that day,
these shares had a value of approximately $4.5 million when issued. Exemption
from the registration provisions of the Securities Act of 1933 (the "Act") is
claimed among other exemptions, with respect to the issuance of the shares of
Common Stock, on the basis that such transaction met the requirements of
Regulation S under the Act.
All compensation plans under which Powerwave's Common Stock is reserved for
issuance have been approved by our shareholders. The following table provides
summary information as of December 30, 2001 for all equity compensation plans of
Powerwave.
No. of Shares of
Common Stock
Number of Remaining Available for
Shares of Common Stock Future Issuance under
to be Issued upon Exercise Weighted Average Exercise the Equity Compensation
of Outstanding Options Price of Outstanding Options Plans (excluding shares
Warrants and Rights Warrants and Rights reflected in column 1)
------------------- ------------------- -------------------------
Equity Compensation Plans Approved by
Shareholders .............................. 8,022,211 $ 17.39 1,672,158
Equity Compensation Plans not Approved
by Shareholders ........................... -- -- --
------------ ------- ----------
Total ..................................... 8,022,211 $ 17.39 1,672,158
============ ======= ==========
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from
Powerwave's consolidated statements of operations for the fiscal years ended
December 30, 2001, December 31, 2000 and January 2, 2000, and consolidated
balance sheets as of December 30, 2001 and December 31, 2000 which are included
herein, and have been audited by Deloitte & Touche LLP, independent auditors.
Powerwave's consolidated statements of operations for the fiscal years ended
January 3, 1999 and December 28, 1997 and consolidated balance sheets as of
January 2, 2000, January 3, 1999, and December 28, 1997 which are not included
herein, have also been audited by Deloitte & Touche LLP, independent auditors.
The information set forth below is not necessarily indicative of the
expectations of results for 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
--------------------------------------------------------------------
December 30, December 31, January 2, January 3, December 28,
2001 2000 2000 1999 1997
-------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales ..................................... $ 300,293 $ 447,422 $ 292,547 $ 100,231 $ 119,709
Operating income (loss) ....................... $ (37,615) $ 64,717 $ 28,725 $ (7,001) $ 23,257
Net income (loss) ............................. $ (20,512) $ 45,653 $ 20,265 $ (2,966) $ 16,191
Basic earnings (loss) per share ............... $ (.33) $ 0.75 $ 0.34 $ (0.06) $ 0.32
Diluted earnings (loss) per share ............. $ (.33 $ 0.71 $ 0.33 $ (0.06) $ 0.31
Basic weighted average common shares .......... 64,197 61,953 58,480 51,534 50,874
Diluted weighted average common shares ........ 64,197 65,313 60,671 51,534 52,308
Consolidated Balance Sheet Data:
Cash and cash equivalents ..................... $ 123,171 $ 128,733 $ 76,671 $ 13,307 $ 67,433
Working capital ............................... $ 186,255 $ 196,733 $ 118,566 $ 35,210 $ 67,512
Total assets .................................. $ 363,017 $ 393,797 $ 223,038 $ 131,985 $ 101,683
Long-term debt, net of current portion ........ $ 239 $ 42 -- $ 17,621 $ 659
Total shareholders' equity .................... $ 316,235 $ 316,272 $ 169,779 $ 71,070 $ 75,480
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.
Significant Accounting Policies
We prepare the consolidated financial statements of Powerwave in conformity
with accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and assumptions
that we believe are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Revenue Recognition
Powerwave recognizes revenue from product sales at the time of shipment and
passage of title. We also offer certain of our customers the right to return
products that do not function properly within a limited time after delivery. We
continuously monitor and track such product returns and we record a provision
for the estimated amount of such future returns, based on historical experience
and any notification we receive of pending returns. While such returns have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same return rates that
we have in the past. Any significant increase in product failure rates and the
resulting credit returns could have a material adverse impact on our operating
results for the period or periods in which such returns materialize.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our accounts receivable are concentrated
in a relatively few number of customers, a significant change in the liquidity
or financial position of any one of these customers could have a material
adverse impact on the collectability of our accounts receivables and our future
operating results. See "Additional Factors That May Affect Future Results--We
rely upon a few customers for a significant amount of our revenues..."
Inventories
We value our inventory at the lower of the actual cost to purchase and/or
manufacture the inventory or the current estimated market value of the
inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. As demonstrated during 2001, demand for our products can fluctuate
significantly. A significant increase in the demand for our products could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. In addition, our industry is characterized
by rapid technological change, frequent new product development, and rapid
product obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Additionally, our estimates of future product
demand may prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if our inventory is determined to be overvalued, we would be required to
recognize such costs in our cost of goods sold at the time of such
determination. Likewise, if our inventory is determined to be undervalued, we
may have over-reported our costs of goods sold in previous periods and would be
required to recognize such additional operating income at the time of sale.
Therefore, although we make every effort to ensure the accuracy of our forecasts
of future product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of our
inventory and our reported operating
14
results. See "Additional Factors That May Affect Future Results--We have
experienced, and will continue to experience, significant fluctuations in sales
and operating results from quarter to quarter... and --The wireless
communications infrastructure equipment industry is extremely competitive and is
characterized by rapid technological change..."
Deferred Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. Powerwave regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. If we continue to operate at a loss
or are unable to generate sufficient future taxable income, or if there is a
material change in the actual effective tax rates or time period within which
the underlying temporary differences become taxable or deductible, we could be
required to establish a valuation allowance against all or a significant portion
of our deferred tax assets resulting in a substantial increase in our effective
tax rate and a material adverse impact on our operating results.
Warranties
We offer warranties of various lengths to our customers depending upon the
specific product and terms of the customer purchase agreement. We typically
negotiate varying terms regarding warranty coverage and length of warranty
dependant upon the product involved and the type of customer. We also offer
certain customers various warranty options which impacts the quoted price that
we charge customers for our product. Our standard warranties require us to
repair or replace defective product returned to us during such warranty period
at no cost to the customer. We record an estimate for warranty related costs
based on our actual historical return rates and repair costs at the time of
sale. While our warranty costs have historically been within our expectations
and the provisions established, we cannot guarantee that we will continue to
experience the same warranty return rates or repair costs that we have in the
past. A significant increase in product return rates, or a significant increase
in the costs to repair our products, could have a material adverse impact on our
operating results for the period or periods in which such returns or additional
costs materialize.
Results of Operations
The following table summarizes Powerwave's results of operations as a
percentage of net sales for the fiscal years ended December 30, 2001, December
31, 2000 and January 2, 2000.
As a Percentage of Net Sales
---------------------------------------
Fiscal Years Ended
---------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---------------------------------------
Net sales ................................. 100.0% 100.0% 100.0%
Cost of sales ............................. 90.1 68.2 71.9
------ ------ ------
Gross profit .............................. 9.9 31.8 28.1
Operating expenses:
Sales and marketing .................. 4.6 4.7 5.2
Research and development ............. 11.6 9.2 9.0
General and administrative ........... 6.3 3.4 4.1
------ ------ ------
Total operating expenses .................. 22.5 17.3 18.3
------ ------ ------
Operating income (loss) ................... (12.6) 14.5 9.8
Other income, net ......................... 1.9 1.3 1.0
------ ------ ------
Income (loss) before income taxes ......... (10.7) 15.8 10.8
Provision (benefit) for income taxes ...... (3.9) 5.6 3.9
------ ------ ------
Net income (loss) ......................... (6.8%) 10.2% 6.9%
====== ====== ======
15
Impairment Charges
As a result of continuing poor economic conditions and reductions in the
forecasted future demand for products acquired through our HP Acquisition, we
recorded a non-cash charge of $6.5 million during the fourth quarter of fiscal
year 2001 for the impairment of intangible assets associated with the HP
Acquisition. This amount included approximately $3.6 million recorded in cost of
sales related to the writedown of developed technology and approximately $2.9
million recorded in general and administrative expenses related to the writedown
of goodwill. The amount of this impairment charge was determined by comparing
the carrying value of these intangible assets to the net present value of the
estimated future cash flows, based on our best estimates using appropriate
judgments and assumptions, from the operations to which these assets relate.
Powerwave did not record any similar impairment charges in fiscal years 2000 or
1999. Excluding this non-cash impairment charge and the related tax benefit of
$2.3 million, Powerwave would have reported a net loss of $16.3 million and a
basic loss per share of 26 cents for the fiscal year ending December 30, 2001.
Years ended December 30, 2001 and December 31, 2000
Net Sales
Our net sales are derived primarily from the sale of RF power amplifiers
for use in wireless communications networks. Sales decreased by 33% to $300.3
million for the year ended December 30, 2001 from $447.4 million for the year
ended December 31, 2000. We believe that the decline in net sales for fiscal
year 2001 compared to fiscal year 2000 was predominantly due to the affects of
the global economic recession that has impacted the wireless communications
industry resulting in reductions and delays in wireless infrastructure spending
during 2001. During 2001, we experienced lower demand for the majority of our
products which are sold through our original equipment manufacturer ("OEM")
customers, as well as weakness in demand from our direct network operator
customers. The weakness in demand occurred in both the 800-1000 MHz and the
1800-2000 MHz ranges. For the year ended December 30, 2001, total sales of
products for networks in the 800-1000 MHz range accounted for approximately 60%
of revenues or $181.1 million, compared to approximately 78% or $348.3 million
for the year ended December 31, 2000. Sales of products for networks in the
1800-2000 MHz range accounted for approximately 19% of revenues or $57.1 million
for the year ended December 30, 2001, compared to approximately 21% or $96.1
million for the year ended December 31, 2000. The decline in sales of 800-1000
MHz and 1800-2000 MHz products was partially offset by increased sales of
products for use in networks over 2000 MHz or the new 3G networks as they are
commonly known. Sales of products for use in networks over 2000 MHz accounted
for approximately 21% of sales or $62.1 million for the year ended December 30,
2001 compared to approximately 1% or $3.0 million for the year ended December
31, 2000. We currently are unable to predict when the global economic slowdown
in the wireless communications industry will cease to have a negative impact on
our revenues and results of operations.
We track the geographic location of our sales based upon the location of
our customers. Since many of our customers purchase products from us at central
locations and then reship the product with other base station equipment to
locations throughout the world, we are not able to identify the final
installation location of our products. Sales to customers in North America
accounted for the majority of our sales, comprising approximately 59% of
revenues or $176.3 million for the year ended December 30, 2001, compared to
approximately 79% of revenues or $352.7 million for the year ended December 31,
2000. Total international sales (excluding North American sales) accounted for
approximately 41% of revenues or $124.0 million for the year ended December 30,
2001, compared with approximately 21% or $94.7 million for the year ended
December 31, 2000. Total Asian sales accounted for approximately 15% of revenues
or $46.0 million for the year ended December 30, 2001 compared to approximately
10% of revenues or $44.6 million for the year ended December 31, 2000. Total
sales to Europe increased to $77.3 million or approximately 26% of revenues for
the year ended December 30, 2001, as compared to $48.2 million or approximately
11% of revenues for the year ended December 31, 2000. The increase in European
sales is due primarily to the beginning of shipments for new 3G products. See
"Additional Factors That May Affect Future Results--We rely upon a few customers
for a significant amount of our revenues...; --Our success is tied to the growth
of the wireless services market: and --There are many risks associated with
international operations...."
16
For fiscal 2001, total sales to Nortel accounted for approximately 44% of
revenues and sales to the following customers (in alphabetical order), Cingular
Wireless, Ericsson, Lucent, Samsung and Verizon Wireless each accounted for 5%
or more of revenues for the year. 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, Motorola, Nokia 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. During fiscal 2001, several
major OEMs made multiple announcements that they were lowering their
expectations for wireless infrastructure demand for 2002. A number of factors
have caused delays and may cause future delays in wireless infrastructure
deployment schedules for both North American and international deployments,
including deployments in Europe, Asia, South America and other areas. Such
factors include economic slowdowns in the wireless operator's operating region,
delays in government approvals required for system deployment, reduced
subscriber demand for wireless services, high prices for new spectrum licenses,
increased competition and bidding between OEMs for infrastructure contracts and
delays in the development and delivery of telephone handsets and base station
equipment that are compatible with new wireless protocols. 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 or shift their demand to
alternative suppliers. Such factors include lower perceived internal
manufacturing costs and competitive reasons to remain vertically integrated.
Some OEMs, such as Ericsson, have acquired our competitors to strengthen their
vertical integration. 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 and
network operator customers. Such fluctuations have caused and may continue to
cause significant reductions in revenues and/or reduction in operating income,
which has harmed and may continue to harm our business, financial condition and
results of operations. See "Additional Factors That May Affect Future Results
- --We rely upon a few customers for a significant amount of our revenues...;
- --There are many risks associated with international operations...; and --We
have experienced, and will continue to experience, significant fluctuations in
sales and operating results from quarter to quarter...."
Gross Profit
Cost of sales consists primarily of raw materials, assembly and test labor,
overhead and warranty costs. Gross profit margins for fiscal 2001 and 2000 were
9.9% and 31.8%, respectively. The decrease in our gross profit margins during
fiscal 2001 as compared to fiscal 2000 is due to several factors, the most
significant being the large decline in revenues which resulted in lower
absorption of manufacturing overhead expenses and increased labor costs, when
viewed as a percentage of revenues. During the second half of 2000 we began to
significantly ramp up our production capacity to support anticipated increases
in demand for our products. While this demand did not materialize during 2001,
we incurred additional depreciation expenses associated with new capital
equipment that was purchased and placed in service during 2001 to support our
previously expected increases in demand. We continue to be negatively impacted
by the additional depreciation costs associated with the capital equipment
purchased to support the anticipated growth in demand. In addition, our 2001
gross profit margins were also impacted by $12.5 million in provisions for and
disposals of excess and obsolete inventories as a result of the reduction in
demand during fiscal 2001. For both fiscal 2001 and 2000, approximately $2.3
million of cost of goods sold represented the amortization of developed
technology acquired as part of the HP Acquisition. Our 2001 gross profit margin
was further reduced by a non-cash charge of $3.6 million during the fourth
quarter relating to the writedown of developed technology acquired through the
HP Acquisition. See "Impairment Charges."
While we continue to strive for manufacturing and engineering cost
reductions to offset pricing pressures on our products, we cannot guarantee that
these cost reduction or redesign efforts will keep pace with price declines and
cost increases. Our third generation multi-carrier products have not obtained
the level of gross margins that our high powered multi-carrier products have
historically obtained. If we are unable to reduce our costs through our
manufacturing and/or engineering efforts, our gross margins and profitability
may continue to be adversely affected. For a discussion of effects of declining
average sales prices on our business, see "Additional Factors That May Affect
Future Results--Our average sales prices have declined....."
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
17
significant price erosion over the life of a product. Due to these competitive
pressures, we expect that average sales prices of our products will continue to
decrease. We have introduced new products at lower sales prices and 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. See "Additional Factors That May Affect Future Results--The wireless
communications infrastructure equipment industry is extremely competitive....."
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, provisions for credit losses and trade
show expenses. Sales and marketing expenses decreased by 35% to $13.7 million
for the year ended December 30, 2001 from $21.2 million for the year ended
December 31, 2000. As a percentage of sales, sales and marketing expenses were
4.6% and 4.7% for the years ended December 30, 2001 and December 31, 2000,
respectively. The decrease in sales and marketing expenses in absolute dollars
was primarily attributable to decreases in sales commissions and reduced
personnel costs. For fiscal 2001 and 2000, approximately $0.6 million and $0.8
million, respectively, in sales and marketing expenses represented the
amortization of a customer list and non-compete agreement acquired as part of
the HP Acquisition.
Research and development expenses include ongoing RF power amplifier design
and development expenses, as well as those design expenses associated with
reducing the cost and improving the manufacturability of existing RF power
amplifiers. Current programs include cellular, PCS, and next generation "2.5G"
and "3G" products. Research and development expenses can fluctuate from year to
year depending on several factors including new product introduction schedules,
prototype developments, hiring patterns and depreciation of capital equipment.
For the year ended December 30, 2001, research and development expenses
decreased by 15% to $34.8 million for the year ended December 30, 2001 from
$41.1 million. Research and development expenses as a percentage of sales for
the years ended December 30, 2001 and December 31, 2000 were 11.6% and 9.2%,
respectively. The decrease in research and development expenses in absolute
dollars was primarily due to reductions in material and engineering expenditures
as several of our design projects entered the production stage during 2001.
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 23.3% to
$18.9 million for the year ended December 30, 2001 from $15.3 million for the
year ended December 31, 2000. General and administrative expenses as a
percentage of sales for the years ended December 30, 2001 and December 31, 2000
were 6.3% and 3.4%, respectively. The increase in general and administrative
expenses in absolute dollars during 2001 was primarily attributable to
approximately $5.1 million in one time expenses, of which $2.2 million related
to the move to our new Southern Californian headquarters and manufacturing
facility during the first quarter of 2001 and $2.9 million related to a non-cash
charge for the write-down of goodwill associated with the HP Acquisition during
the fourth quarter of 2001. See "Impairment Charges."
Other Income
We earned other income, net, of $5.6 million in fiscal 2001 compared to
$6.1 million for fiscal 2000. Other income consists primarily of interest
income, net of any interest expense. The decrease in other income is primarily
due to the decline in short-term interest rates on our cash investments.
Provision (Benefit) for Income Taxes
Our effective tax rate was 36.0% and 35.5% for the years ended December 30,
2001 and December 31, 2000, respectively. The slight increase in our effective
tax rate was the result of the availability of net operating loss carrybacks and
carryforwards.
18
Years ended December 31, 2000 and January 2, 2000
Net Sales
Sales increased by 53% to $447.4 million for the year ended December 31,
2000 from $292.5 million for the year ended January 2, 2000. The increase in
revenue was primarily attributable to increased demand for our products. For the
year ended December 31, 2000, total sales of products for networks in the
800-1000 MHz accounted for approximately 78% of revenues or $348.3 million,
compared to approximately 74% or $215.0 million for the year ended January 2,
2000. Sales of RF power amplifiers and associated products for networks in the
1800-2000 MHz range accounted for approximately 21% of revenues or $96.1 million
for the year ended December 31, 2000, compared to approximately 26% or $76.8
million for the year ended January 2, 2000. Sales of amplifiers for use in
networks over 2000 MHz accounted for approximately 1% of sales or $3.0 million
for the year ended December 31, 2000 and no revenue for the prior year.
Total North American sales accounted for approximately 79% of revenues or
$352.7 million for the year ended December 31, 2000, compared to approximately
67% of revenue or $195.3 million for the year ended January 2, 2000. Total
international sales (excluding North American sales), accounted for
approximately 21% of revenues or $94.7 million for the year ended December 31,
2000, compared with approximately 33% or $97.3 million for the year ended
January 2, 2000. Total Asian sales accounted for approximately 10% of revenues
or $44.6 million for the year ended December 31, 2000, compared to approximately
21% of revenues or $62.2 million for the year ended January 2, 2000.
For fiscal 2000, total sales to Nortel accounted for approximately 47% of
revenues and sales to (in alphabetical order), Cingular Wireless, Ericsson, and
Verizon Wireless each accounted for 5% or more of revenues for the year. For
fiscal 1999, total sales to Nortel accounted for approximately 41% of our
revenues. In addition, sales to (in alphabetical order), Ericsson, LG, Lucent
and Samsung, each accounted for 5% of more of revenues for fiscal 1999.
Gross Profit
Gross profit margins for fiscal 2000 and 1999 were 31.8% and 28.1%,
respectively. The increase in gross margins during fiscal 2000 as compared to
fiscal 1999 was primarily due to the final closure of the acquired Folsom
manufacturing facility in the fourth quarter of 1999 and the resulting
improvements in manufacturing operating costs in fiscal 2000 as compared to
fiscal 1999. Also during fiscal 2000, sales of multi-carrier RF power amplifier
products accounted for a greater percentage of product sales when compared to
fiscal 1999. Our multi-carrier RF power amplifier products have traditionally
carried higher margins than our single carrier RF power amplifier products.
Operating Expenses
Sales and marketing expenses increased by 40% to $21.2 million for the
year ended December 31, 2000 from $15.2 million for the year ended January 2,
2000. As a percentage of sales, sales and marketing expenses were 4.7% and 5.2%
for the years ended December 31, 2000 and January 2, 2000, 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 programs included PCS, cellular and third
generation "3G" products. Research and development expenses increased by 56% to
$41.1 million for the year ended December 31, 2000, from $26.3 million for the
year ended January 2, 2000. Research and development expenses as a percentage of
sales for the years ended December 31, 2000 and January 2, 2000 were 9.2% and
9.0%, respectively. The increase in actual research and development expenses was
primarily due to increased staffing and associated engineering costs related to
continued new product development and existing product enhancement efforts.
General and administrative expenses increased by 27% to $15.3 million for
the year ended December 31, 2000, from $12.1 million for the year ended January
2, 2000. General and administrative expenses as a percentage of sales for the
years ended December 31, 2000 and January 2, 2000 were 3.4% and 4.1%,
respectively. The increase in
19
general and administrative expenses in absolute dollars is primarily
attributable to increased staffing costs associated with supporting our
increased revenues and personnel.
Other Income
The Company earned other income, net, of $6.1 million in fiscal 2000
compared to $2.8 million for fiscal 1999. The increase in other income is
primarily due to increased net interest income as a result of higher average
cash balances during fiscal 2000 as compared to fiscal 1999, as well as the
addition of net tenant rental income of approximately $0.5 million.
Provision (Benefit) for Income Taxes
Our effective tax rate was 35.5% and 35.8% for the years ended December 31,
2000 and January 2, 2000, respectively. The slight 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 December 30, 2001, we had working capital of
$186.3 million, including $123.2 million in cash and cash equivalents as
compared with working capital of $196.7 million at December 31, 2000, which
included $128.7 million in cash and cash equivalents.
Our net accounts receivable decreased to $59.7 million at December 30, 2001
from $80.0 million at December 31, 2000, consistent with the significant
decreases in our revenues during fiscal 2001 as compared to fiscal 2000. Net
inventory decreased to $33.5 million at December 30, 2001, from $51.3 million at
December 31, 2000 consistent with our decreased volume. Also consistent with our
decreased volume, net accounts payable decreased to $22.7 million at December
31, 2001 from $50.8 million at December 31, 2000. Cash provided by operations
was approximately $6.3 million in fiscal 2001, compared with cash provided by
operations of $57.6 million in fiscal 2000 and cash provided by operations of
$39.6 million in fiscal 1999. The decrease in cash flow from operating
activities from 2000 to 2001 is primarily due to our net loss from operations.
Total capital spending for fiscal 2001 was approximately $21.6 million.
During 2001, we spent approximately $9.0 million on capital improvements for our
Santa Ana facility. The majority of the remaining amount of capital spending
during fiscal 2001 represents spending on electronic test equipment utilized in
our manufacturing and research and development areas. Total capital spending for
fiscal 2000 was approximately $84.1 million including $35.3 million for the
original purchase of, and approximately $8.0 million in capital improvements
for, our Santa Ana facility. The majority of the remaining amount of capital
spending during fiscal 2000 represents spending on electronic test equipment
utilized in our manufacturing and research and development areas.
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
("Metawave"), a supplier of "smart" antennas to the wireless communications
market and a customer, in a private offering. The total amount raised in this
private 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 and were redeemed in full on April 28, 1999. Upon the
issuance of the Notes, we received related warrants to purchase 53,576 shares of
Metawave Series D Preferred Stock at a price of $.01 per share. We exercised
these warrants in April 1999. These shares of Series D Preferred Stock were
converted into 51,420 shares of Metawave Common Stock upon Metawave's initial
public offering in May 2000. We sold these shares in February 2001, at an
average price per share, net of commissions of $11.06, and recognized a gain of
approximately $0.6 million. This gain was included in other income, net during
the first quarter of 2001.
Net cash provided by financing activities was $9.2 million for fiscal 2001,
compared with $71.5 million for fiscal 2000. For year ended December 30, 2001,
net cash provided by financing activities primarily represents
20
proceeds from our employee's stock option exercises as well as proceeds from the
issuance of common stock under our Employee Stock Purchase Plan. On August 23,
2000 we sold 1.5 million shares of our Common Stock at a price per share of
$41.1875 to Deutsche Banc Alex.Brown pursuant to a previously filed shelf
registration. Total net proceeds after expenses were approximately $61.7
million.
We currently have a $20 million revolving credit agreement with Comerica
Bank-California. The credit facility provides for an unsecured revolving line of
credit up to a maximum principal amount outstanding at any one time of $20
million (the "Revolving Commitment Amount"). We are required to pay a commitment
fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount.
The commitment fee is payable quarterly in arrears. The revolving credit
facility allows for borrowings based either upon the bank's prime rate (4.75% at
December 30, 2001) or the bank's LIBOR rate plus an applicable LIBOR Margin of
1.25% or 1.50%, based upon our debt leverage ratio. The revolving credit
facility terminates on May 31, 2002. The revolving credit facility contains
certain standard affirmative and negative covenants, including limitations on
future indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers, transfers of assets and leverage ratios. At December 30,
2001 we were in compliance with all covenants contained in the revolving credit
facility. There were no amounts outstanding and the full $20 million of the
Revolving Commitment Amount was available to us at December 30, 2001.
We had cash and cash equivalents of $123.2 million at December 30, 2001,
compared with $128.7 million at December 31, 2000. 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. For fiscal 2002, we currently
anticipate capital spending on property and equipment to be in the range of
approximately $10 million, and we plan to fund these expenditures from our
existing cash balances. In the past, we have occasionally utilized both
operating and capital lease financing for certain equipment purchases used in
our manufacturing and research and development operations and expect to continue
to do so selectively in the future. We may require additional funds in the
future to support our working capital requirements or for other purposes, and we
may seek to raise such additional funds through the sale of public or private
equity and/or debt financings as well as 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
shareholders when we may require it.
Disclosure About Foreign Currency Risk
We have operations in France, South Korea and England that incur foreign
currency expenses. These expenses expose us to foreign currency transactions and
result in gains and losses from such transactions. In addition, a significant
portion of our revenues are derived from international sources, with our
international customers accounting for approximately 41% of fiscal 2001 net
sales, 21% of fiscal 2000 net sales, and 33% of our fiscal 1999 net sales. We
regularly pursue 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 and Argentine Peso. 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 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. If we sell
products or services in a foreign currency, our results of operations and gross
margins may be affected by changes in currency exchange rates.
21
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...."
Disclosure About Terrorist Risk
We did not experience any direct impact from the September 11, 2001
terrorist attacks on the United States other than minor delays in certain
material shipments due to disruptions in the air transportation system. These
delays did not have a material impact on us. We are not able to estimate or
predict what long-term impact these events will have on us, our customers, our
suppliers and market demand for our products. Since all of our manufacturing
capability is located in the State of California, we may be exposed to risks
which could include production delays or shutdowns due to terrorist attacks. Any
reduction in demand or loss of customers could have a negative impact on our
results of operations and future sales.
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, remained legal tender through December 31, 2001. Beginning on
January 1, 2002, euro-denominated bills and coins are now 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.
Currently most of 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 due
to the euro and do not currently expect the continued implementation of the euro
to cause any significant operational disruptions.
New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations ("SFAS 141") and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
They also issued Statement of Financial Accounting Standards No. 143, Accounting
for Obligations Associated with the Retirement of Long-Lived Assets ("SFAS
143"), and Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), in August and
October 2001, respectively.
22
SFAS 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method. SFAS 141 superseded APB Opinion
No. 16, Business Combinations, and Statement of Financial Accounting Standards
No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and
is effective for all business combinations initiated after June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS 142, the Company is no longer
required to amortize goodwill and other intangible assets with indefinite lives
but will be required to subject these assets to periodic testing for impairment.
SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, effective for fiscal
years beginning after December 15, 2001. The Company is currently evaluating the
provisions of SFAS 142 but expects that the provisions of SFAS 142 will not have
a material impact on its consolidated results of operations and financial
position upon adoption.
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company is currently evaluating the provisions of SFAS 143 but
expects that the provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets and new standards for reporting discontinued
operations. SFAS 144 superseded Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and APB Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company is
currently evaluating the provisions of SFAS 144 but expects that the provisions
of SFAS 144 will not have a material impact on its consolidated results of
operations and financial position upon adoption.
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 in this
document, which reflect our current expectations. These factors include the
following:
. the ability to add new customers to reduce our dependence on any
one customer;
. the ability to maintain our existing customers;
. industry specific factors, including a slowdown in the demand for
wireless communications and RF power amplifiers;
. the impact of any reduction in demand for our products;
. the ability to manage expense levels given reductions in demand;
. the ability to increase demand for our products from major wireless
infrastructure original equipment manufacturers, or OEMs;
. the ability to produce both new and existing products which meet
the quality standards of both our existing and potential new
customers;
. the ability to ramp-up production of new products in both a timely
and cost effective manner;
. the ability to timely develop and produce commercially viable
products at competitive prices;
. the ability to maintain a stable and reliable source of electricity
to support our operations at a reasonable cost;
. 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;
. worldwide and regional economic downturns and unfavorable political
conditions;
. the ability to manage future product repairs; and
. the ability to accurately anticipate customer demand.
23
We rely upon a few customers for a significant amount of our revenues and 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.
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 OEMs, such as Ericsson, LG, Lucent, Motorola, Nokia, Nortel and
Samsung, as well as major operators of wireless networks, such as ALLTEL
Corporation, AT&T Wireless, Cingular Wireless and Verizon 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 the year ended December 30, 2001, our largest customer, Nortel,
accounted for approximately 44% of our net sales or $130.7 million. During
fiscal 2001, a number of major OEMs have made multiple announcements lowering
their expectations for wireless infrastructure demand for 2002. The resulting
significant reductions in demand by our OEM customers has and will continue to
have an adverse effect on our business, results of operations and financial
condition. For the fourth quarter of 2001, our next two largest customers (in
alphabetical order) Cingular Wireless and Ericsson, each accounted for 10% or
more of our net sales.
There are several examples of the risks related to our customer
concentration. One example is the reduction of $80 million in our sales to
Nortel for fiscal 2001 compared to 2000. A second example was in 1998 when we
had a significant geographic customer concentration in South Korea, which
experienced an economic and financial crisis during 1998. For fiscal 1998, our
South Korean customers 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 fiscal 2000, our South Korean customers accounted for
approximately 8% of total sales or $34.1 million, and in fiscal 1999, they
accounted for approximately 21% of our total net sales or $62.2 million. For
fiscal 2001, our South Korean customers accounted for approximately 13% of our
net sales or $39.5 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. During the third quarter of 2001, Lucent announced that
it had split off its internal power amplifier group to a new private entity
called Celiant Corporation. During fiscal 2000, Ericsson purchased Microwave
Power Devices, Inc., one of our competitors. Any shift in demand by an OEM away
from utilizing third party suppliers of RF amplifiers could have a negative
impact on our business, results of operations and financial condition.
Additionally, OEM purchasers are impacted by their current view of wireless
infrastructure deployments and orders for our products 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 factors:
. economic or political problems in the wireless operator's operating
region;
. delays in government approvals required for system deployment;
. higher than anticipated network infrastructure costs;
. technical delays in the development of new wireless protocols, such
as 3G; and
. reduced subscriber demand for wireless services.
In addition, from time to time, OEMs may purchase products from us in large
quantities over a short period of time, which may cause demand for our products
to change rapidly. Due to these and other 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 and could negatively impact our ability to meet customers' demands as
well as 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
purchases from us, which could have
24
a material adverse effect on our business, results of operations and financial
condition.
We have experienced, 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, including:
. 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;
. delays in qualification by customers of new products or redesigns;
. 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;
. 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;
. 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;
. interruptions in the supply of electricity and significant
increases in the cost of electricity; and
. high fixed expenses that increase operating expenses, especially
during a quarter with a sales shortfall.
Our sales to customers are usually made under purchase orders with short
delivery requirements. While we receive periodic order forecasts from our major
customers, such customers generally 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. 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. 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 and other factors, our past results are not reliable
indicators of our future performance. Future revenues and operating results may
not meet the expectations of public market analysts and investors. In either
case, the price of our Common Stock could be materially adversely affected. See
"Our stock price has been and may continue to be volatile and you may not be
able to resell shares of our stock at or above the price you paid for such
shares."
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 has
also 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
25
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.
Sales of single carrier RF power amplifiers have been subject to intense
price competition and historically have carried lower gross profit margins than
our multi-carrier RF power amplifier products. If we cannot reduce manufacturing
costs on our single carrier RF power amplifiers and such RF power amplifiers
continue to account for a significant percentage of our net sales, our overall
gross profit margins will fall. In addition, we currently expect that 3G
multi-carrier RF power amplifiers will have lower gross margins than our 2G
multi-carrier products. If we are unable to continue to reduce our manufacturing
costs on all of our products, our gross margins will decline.
Our success is tied to the growth of the wireless services market, and if
there is a slower than expected increase in the size of this market, sales of
our products would be materially adversely affected.
Almost all of our revenues come from the sale of RF power amplifiers for
wireless communications networks. Our future success depends to a considerable
extent upon the continued growth and increased availability of wireless
communications services. Wireless communications services may not continue to
grow and create demand for our products. We believe that continued growth in the
use of wireless communications services depends, in part, on lowering the cost
per subscriber by reducing the costs of the infrastructure capital equipment and
thereby enabling reductions in wireless service pricing. Although FCC
regulations require local phone companies to reduce the rates charged to
wireless carriers for connection to their wireline networks, wireless service
rates will probably remain higher than rates charged by traditional wireline
companies.
The expansion of wireless communications services depends on developed
countries, such as the United States, continuing to allow deployment of new
networks and upgrades to existing networks, and on less developed countries
deploying wireless communications networks. Our performance could be adversely
affected by any of the following risks:
. failure of local governments or foreign countries to allow
construction of new wireless communications systems;
. termination or delays by local governments or foreign countries of
existing construction of wireless communications systems;
. imposition of moratoriums by local governments or foreign countries
on building new base stations for existing wireless communications
systems; and
. foreign authorities may disfavor wireless communications systems
because of environmental concerns, political unrest, economic
downturns, favorable prices for other communications services or
delays in implementing wireless communications systems.
We depend on single sources for key components, and a failure by any of these
sources to provide components of sufficient quality and quantity, on a timely
basis, would cause us to delay product shipments, which could result in
delayed or lost revenues or customer dissatisfaction.
A number of the parts used in our products are available from only one or a
limited number of outside suppliers due to unique component designs as well as
certain quality and performance requirements. To take advantage of volume
pricing discounts, we also purchase certain customized components from single
sources. We have experienced, and expect to continue to experience, shortages of
single-sourced components. Shortages have compelled us to adjust our product
designs and production schedules. If single-sourced components become
unavailable in sufficient quantities, are discontinued or are available only on
unsatisfactory terms, we would be required to purchase comparable components
from other sources and "retune" our products to function with the replacement
components, or we may be required to redesign our products to use other
components, either of which could delay production and delivery of our products.
In addition, our reliance on certain single-sourced components exposes us to
quality control issues if such suppliers experience a failure in their
production process. A failure in a single-sourced component could force us to
repair or replace a product utilizing replacement components. Such a requirement
could have a material adverse effect on our business, results of operations and
financial condition. In addition, if we can not obtain comparable replacements
or effectively retune or redesign our products, there could be a material
adverse effect on our business, results of operations and financial condition.
As a result of our reliance on certain single-sourced customized
components, an abrupt reduction in customer demand could result in excess
inventories of such components due to the nature of the volume purchasing
26
agreements that we utilize to obtain component cost reductions. If we are unable
to utilize such components in a timely manner and are unable to sell such
components due to their customized nature, the resulting negative impact on our
liquidity and resulting increased inventory levels could have a material adverse
effect on our business, results of operations and financial condition.
The wireless communications infrastructure equipment industry is extremely
competitive and is characterized by rapid technological change, frequent new
product development, rapid product obsolescence, evolving industry standards
and significant price erosion over the life of a product. If we are unable to
compete effectively, our business would be harmed.
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 currently compete favorably with respect to these
characteristics, this may change in the future. If we fail t