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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
Registrant's telephone number, including area code: (714) 466-1000
----------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO[_]
As of July 25, 2002, the number of outstanding shares of Common Stock,
par value $.0001 per share, of the Registrant was 65,437,155.
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POWERWAVE TECHNOLOGIES, INC.
INDEX
Part I. Financial Information Page
----
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 (Unaudited) and
December 30, 2001 3
Condensed Consolidated Statements of Operations (Unaudited) for the three and
six months ended June 30, 2002 and July 1, 2001 4
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
for the three and six months ended June 30, 2002 and July 1, 2001 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for six months
ended June 30, 2002 and July 1, 2001 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
This Quarterly Report on Form 10-Q 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.
0may 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 unanticipated factors that are discussed in "Additional
Factors That May Affect Future Results" under Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", at pages 12-30.
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 result of any revisions to these forward-looking statements
that 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 ("SEC"), including
subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K. All reports filed with the SEC are available free
of charge via Edgar through the SEC website at www.sec.gov. In addition,
Powerwave provides copies of its Forms 8-K, 10-K and 10-Q, Proxy and Annual
Report at no charge to investors upon request and makes electronic copies of
such reports available through its website at www.powerwave.com/investor.html.
2
POWERWAVE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, December 30,
2002 2001
-------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ............................................................ $ 157,025 $ 123,171
Accounts receivable, net of allowance for sales returns and doubtful
accounts of $3,169 and $3,143 at June 30, 2002 and December 30, 2001,
respectively ....................................................................... 61,408 59,732
Inventories .......................................................................... 41,307 33,525
Prepaid expenses and other current assets ............................................ 5,120 5,595
Deferred tax assets .................................................................. 10,707 10,707
---------- ----------
Total current assets ............................................................ 275,567 232,730
Property, plant and equipment ............................................................. 146,640 144,540
Less accumulated depreciation and amortization ............................................ (52,331) (42,748)
---------- ----------
Net property, plant and equipment .................................................... 94,309 101,792
---------- ----------
Goodwill .................................................................................. 4,852 4,852
Deferred tax assets ....................................................................... 10,544 21,194
Other non-current assets .................................................................. 4,045 2,449
---------- ----------
TOTAL ASSETS .............................................................................. $ 389,317 $ 363,017
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................................... $ 40,000 $ 22,692
Accrued expenses and other liabilities ............................................... 18,550 20,928
Current portion of long-term debt .................................................... 535 659
Income taxes payable ................................................................. 3,164 2,196
---------- ----------
Total current liabilities ....................................................... 62,249 46,475
Long-term debt, net of current portion .................................................... -- 239
Other non-current liabilities ............................................................. 77 68
---------- ----------
Total liabilities ............................................................... 62,326 46,782
---------- ----------
Commitments and Contingencies ............................................................. -- --
Shareholders' Equity:
Preferred Stock, $.0001 par value, 5,000 shares authorized and no shares
issued and outstanding ............................................................ -- --
Common Stock, $.0001 par value, 135,000 shares authorized, 65,428 shares
issued and outstanding at June 30, 2002 and 65,081 shares issued and
outstanding at December 30, 2001 .................................................. 245,758 242,100
Retained earnings .................................................................... 81,233 74,135
---------- ----------
Total shareholders' equity ...................................................... 326,991 316,235
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................................ $ 389,317 $ 363,017
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
POWERWAVE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------- -------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------------------------- -------------------------
Net sales .......................................... $ 113,368 $ 78,248 $ 217,453 $ 151,224
Cost of sales ...................................... 91,797 67,910 177,179 136,293
---------- ---------- ---------- ----------
Gross profit ....................................... 21,571 10,338 40,274 14,931
Operating expenses:
Sales and marketing ............................ 3,396 3,602 6,937 8,578
Research and development ....................... 8,937 8,359 17,287 19,256
General and administrative ..................... 3,717 3,426 7,330 9,584
---------- ---------- ---------- ----------
Total operating expenses ........................... 16,050 15,387 31,554 37,418
---------- ---------- ---------- ----------
Operating income (loss) ............................ 5,521 (5,049) 8,720 (22,487)
Other income, net .................................. 732 1,332 1,419 3,878
---------- ---------- ---------- ----------
Income (loss) before income taxes .................. 6,253 (3,717) 10,139 (18,609)
Provision (benefit) for income taxes ............... 1,876 (1,338) 3,042 (6,699)
---------- ---------- ---------- ----------
Net income (loss) .................................. $ 4,377 $ (2,379) $ 7,097 $ (11,910)
========== ========== ========== ==========
Basic earnings (loss) per share .................... $ .07 $ (.04) $ .11 $ (.19)
========== ========== ========== ==========
Diluted earnings (loss) per share .................. $ .07 $ (.04) $ .11 $ (.19)
========== ========== ========== ==========
Basic weighted average common shares ............... 65,415 64,061 65,324 63,879
========== ========== ========== ==========
Diluted weighted average common shares ............. 66,223 64,061 66,449 63,879
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
POWERWAVE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
--------------------------- --------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------------------------- --------------------------
Net income (loss) ............................ $ 4,377 $ (2,379) $ 7,097 $ (11,910)
---------- --------- --------- ---------
Other comprehensive income (loss), net of
tax:
Reclassification of unrealized gains for
amounts included in net income (loss) .. -- -- (276)
---------- --------- --------- ---------
Other comprehensive income (loss) ............ -- -- (276)
---------- --------- --------- ---------
Comprehensive income (loss) .................. $ 4,377 $ (2,379) $ 7,097 $ (12,186)
========== ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
POWERWAVE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
---------------------------------
June 30, July 1,
2002 2001
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................ $ 7,097 $(11,910)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 10,485 13,772
Provision for sales returns and doubtful accounts ............................ 26 256
Compensation costs related to stock options .................................. 30 30
Loss on disposal of property, plant and equipment ............................ 258 2
Gain on sale of available-for-sale securities ................................ -- (568)
Changes in operating assets and liabilities:
Accounts receivable .......................................................... (1,702) 16,565
Inventories .................................................................. (7,781) (9,778)
Prepaid expenses and other current assets .................................... 476 1,847
Income taxes ................................................................. 12,644 (6,082)
Accounts payable ............................................................. 17,308 (18,077)
Accrued expenses and other liabilities ....................................... (2,378) (2,265)
Other non-current assets ..................................................... (2,206) 29
Other non-current liabilities ................................................ 9 (175)
-------- ---------
Net cash provided by (used in) operating activities ...................... 34,266 (16,354)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................................ (2,684) (18,867)
Proceeds from the sale of property, plant and equipment .......................... 33 --
Proceeds from the sale of available-for-sale securities .......................... -- 568
Payment received on notes receivable ............................................. -- 26
-------- --------
Net cash used in investing activities .................................... (2,651) (18,273)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ............................................. (364) (164)
Proceeds from the sale of stock under Employee Stock Purchase Plan ............... 1,169 1,622
Proceeds from exercise of stock options .......................................... 1,434 3,626
-------- --------
Net cash provided by financing activities ................................ 2,239 5,084
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 33,854 (29,543)
CASH AND CASH EQUIVALENTS, beginning of period ....................................... 123,171 128,733
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................. $157,025 $ 99,190
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) for:
Interest ..................................................................... $ 43 $ 46
======== ========
Income taxes ................................................................. $ (9,602) $ (627)
======== ========
NON CASH ITEMS:
Tax benefit related to stock option exercises .................................... $ 996 $ 3,419
======== ========
Tax benefit related to the issuance of Common Stock under the Employee
Stock Purchase Plan .......................................................... $ 30 $ 57
======== ========
Acquisition of property and equipment through capital leases ..................... $ -- $ 128
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
POWERWAVE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data)
Basis of Presentation
The accompanying condensed consolidated financial statements of Powerwave
Technologies, Inc. and Subsidiaries ("Powerwave" or the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include certain footnotes and financial presentations
normally required under accounting principles generally accepted in the United
States of America for complete financial reporting. The interim financial
information is unaudited, but reflects all normal adjustments and accruals,
which are, in the opinion of management, considered necessary to provide a fair
presentation for the interim periods presented. The accompanying condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 2001.
The results of operations for the six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 29, 2002 ("fiscal 2002"). For further information on additional
factors that may affect future results, please refer to "Management Discussion
and Analysis of Financial Condition and Results of Operations" under Item 2 and
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 30,
2001.
Earnings (Loss) Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"), basic earnings (loss) per share is based upon
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share are based upon the weighted average number of common and
potential common shares for each period presented. Potential common shares of
1,422,582 and 1,945,282 have been excluded from diluted weighted average common
shares for the three month and the six month periods ended July 1, 2001,
respectively, as the effect would be anti-dilutive.
The following details the calculation of basic and diluted earnings (loss)
per share:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------------------------- -----------------------------
Basic:
Basic weighted average common shares .... 65,415 64,061 65,324 63,879
Net income (loss) ....................... $ 4,377 $ (2,379) $ 7,097 $ (11,910)
-------- -------- --------- ---------
Basic earnings (loss) per share ......... $ .07 $ (.04) $ .11 $ (.19)
======== ======== ========= =========
Diluted:
Basic weighted average common shares .... 65,415 64,061 65,324 63,879
Potential common shares ................. 808 -- 1,125 --
-------- -------- --------- ---------
Diluted weighted average common shares .. 66,223 64,061 66,449 63,879
Net income (loss) ....................... $ 4,377 $ (2,379) $ 7,097 $ (11,910)
-------- -------- --------- ---------
Diluted earnings (loss) per share ....... $ .07 $ (.04) $ .11 $ (.19)
======== ======== ========= =========
7
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). 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 adopted SFAS 142 effective December 31, 2001 and such adoption did not
have a material impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets ("SFAS 143"),
was issued by the FASB in August 2001. 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 adopted SFAS 143 effective December 31, 2001 and
such adoption did not have a material impact on the Company's consolidated
financial statements.
The FASB issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), in
October 2001. 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 adopted
SFAS 144 effective December 31, 2001 and such adoption did not have a material
impact on the Company's consolidated financial statements.
Inventories
Net inventories consist of the following:
June 30, December 30,
2002 2001
---------------- ---------------
Parts and components ....................................... $ 14,527 $ 14,436
Work-in-process ............................................ 7,667 9,612
Finished goods ............................................. 19,113 9,477
--------- --------
Total $ 41,307 $ 33,525
========= ========
Inventories are net of an allowance for excess and obsolete inventory of
$9,101 and $11,114 as of June 30, 2002 and December 30, 2001, respectively.
Employee Stock Purchase Plan
The tenth offering under Powerwave's Employee Stock Purchase Plan (the
"ESPP") concluded on January 31, 2002 with 76,400 shares of the Company's Common
Stock purchased under the ESPP at a price per share of $15.30. At June 30, 2002,
there were rights to purchase approximately 119,000 shares of common stock
outstanding under the ESPP's eleventh offering, which will conclude on July 31,
2002.
Stock Option Plans
The following is a summary of stock option transactions under Powerwave's
stock option plans, including the 1995 Stock Option Plan, the 1996 Stock
Incentive Plan, 1996 Director Stock Option Plan, 2000 Stock Option Plan and the
2002 Stock Option Plan, for the six months ended June 30, 2002:
8
Number of Weighted
Option Shares Price Per Number of Options Average
Outstanding Share Exercisable Exercise Price
----------- ----- ----------- --------------
Balance at December 30, 2001 ....... 8,022,211 $ 0.82-$73.56 3,319,001 $13.54
========= ======
Granted ....................... 763,750 $ 7.48-$20.10
Exercised ..................... (280,122) $ 0.82-$11.67
Canceled ...................... (331,435) $ 6.40-$63.63
-----------
Balance at June 30, 2002 ........... 8,174,404 $ 0.82-$73.56 4,004,498 $15.46
=========== ========= ======
At June 30, 2002, a total of 3,239,843 shares were available for grant
under all of the Company's stock option plans.
During each of the six months ended June 30, 2002 and July 1, 2001, the
Company recorded compensation expense related to stock options of approximately
$30. The remaining unamortized compensation expense as of June 30, 2002 was
approximately $67 and will be amortized through September 2003.
Stockholder Rights Plan
On May 31, 2001, the Board of Directors adopted a Stockholder Rights Plan
to protect stockholder interests against takeover strategies that may not
provide maximum stockholder value. A dividend of one preferred stock purchase
right ("Right") for each share of the Company's Common Stock was distributed to
stockholders 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 stockholder 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.
Commitments and Contingencies
Powerwave has various equipment and real estate operating leases,
including 115,000 square feet of warehouse space in Santa Ana, California,
31,500 square feet of engineering and office space in El Dorado Hills,
California, and 6,000 square feet of engineering and office space in Bristol,
United Kingdom.
Future minimum lease payments required under all operating leases at June
30, 2002 are payable as follows:
Fiscal Year:
Remainder of 2002 ....................................... $ 700
2003 .................................................... 1,433
2004 .................................................... 1,444
2005 .................................................... 1,181
2006 .................................................... 1,129
Thereafter .............................................. 507
-------
Total future minimum lease payments ....................... $ 6,394
=======
The Company is subject to various legal proceedings from time to time as
part of its business. As of June 30, 2002, Powerwave is not currently party to
any legal proceedings, the adverse outcome of which, individually or in the
aggregate, the Company believes would have a material adverse effect on its
business, financial condition or results of operations.
9
Segment Information
Powerwave operates in a single business segment as a designer and
manufacturer of radio frequency (RF) power amplifiers for wireless
telecommunications equipment. Net sales are derived primarily from the sale of
RF power amplifiers for use in wireless communications networks. The Company
reviews its revenues based upon the RF frequency in which the product is
utilized, i.e. 800-1000 MHz commonly referred to as "Cellular," 1800-2000 MHz,
commonly referred to as "PCS" and over 2000 MHz, which includes "3G" frequency
bands. Cost of sales, operating expenses and specific assets are not tracked or
allocated to these RF frequency ranges. The following schedule presents an
analysis of Powerwave's net sales based upon RF frequency range.
800-1000 1800-2000 2000+
MHz MHz MHz Total
---------------------------------------------------
Net sales for the three months ended June 30, 2002 ........ $ 65,265 $ 36,478 $ 11,625 $ 113,368
Net sales for the three months ended July 1, 2001 ......... $ 52,375 $ 8,097 $ 17,776 $ 78,248
Net sales for the six months ended June 30, 2002 .......... $130,713 $ 56,874 $ 29,866 $ 217,453
Net sales for the six months ended July 1, 2001 ........... $ 98,748 $ 20,039 $ 32,437 $ 151,224
The following schedule presents an analysis of Powerwave's net sales
based upon the geographic location of our customers:
North Europe and Other
America Asia International Total
------- ---- ------------- -----
Net sales for the three months ended June 30, 2002 ........ $ 78,243 $ 10,871 $ 24,254 $ 113,368
Net sales for the three months ended July 1, 2001 ......... $ 33,148 $ 24,224 $ 20,876 $ 78,248
Net sales for the six months ended June 30, 2002 .......... $ 158,056 $ 12,479 $ 46,918 $ 217,453
Net sales for the six months ended July 1, 2001 ........... $ 73,940 $ 38,575 $ 38,709 $ 151,224
North American sales include sales to the United States and Canada. Asian
sales include sales to South Korea and all locations in Asia. Europe and Other
International sales include sales to Europe and all other foreign countries. For
the quarters ended June 30, 2002 and July 1, 2001, sales to Canada were $29,589
and $13,299, respectively. Sales to Canada were $60,580 and $23,525 for the six
months ended June 30, 2002 and July 1, 2001, respectively. For the quarters
ended June 30, 2002 and July 1, 2001, sales to South Korea were $8,414 and
$20,882, respectively. Sales to South Korea were $9,767 and $33,701 for the six
months ended June 30, 2002 and July 1, 2001, respectively.
The majority of Powerwave's assets are located in the United States,
within the State of California. Total accounts receivable as of June 30, 2002
include 21% from customers based in the United States, 40% from customers based
in Canada, and 10% from customers based in Finland.
Customer Concentrations
Powerwave's product sales have historically been concentrated in a small
number of customers. During the quarter ended June 30, 2002, sales to one
customer accounted for approximately 42% of net sales and sales to two other
customers each accounted for 10% or more of net sales. For the quarter ended
July 1, 2001, sales to one customer accounted for approximately 45% of net sales
and sales to two other customers each accounted for 10% or more of net sales.
For the six months ended June 30, 2002, sales to one customer accounted for
approximately 39% of net sales and sales to three other customers each accounted
for 10% or more of net sales. For the six months ended July 1, 2001, sales to
one customer accounted for approximately 41% of net sales and sales to one other
customer accounted for 10% or more of net sales. The loss of or reduction in
sales to any of these customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
10
Supplier Concentrations
Certain of the Company's products utilize components that are available
in the short-term only from a single or a limited number of sources. In
addition, in order to take advantage of volume pricing discounts, the Company
purchases certain customized components for its RF power amplifiers from single
sources. Any inability to obtain single-sourced components in the amounts needed
on a timely basis or at commercially reasonable prices could result in delays in
product introductions, interruption in product shipments or increases in product
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations until alternative sources could be
developed at a reasonable cost.
Related Party Transactions
During the quarter ended June 30, 2002, an officer of the Company repaid
a $1.4 million bridge loan that was issued by the Company in connection with
such officer's relocation to Southern California. The Company has no knowledge
of other significant transactions with, receivables from or payables to, officer
or significant shareholders of the Company.
The President and CEO of the Company, Bruce Edwards, is a member of the
Board of Directors of Metawave Communications Corporation ("Metawave"), a
supplier of "smart" antennas to the wireless communications market and a
customer of the Company. During the quarter ended June 30, 2002, the Company had
net sales to Metawave in the amount of $815 and no sales for the quarter ended
July 1, 2001. The Company had net sales of $2,239 and $3,772 to Metawave for the
six months ended June 30, 2002 and July 1, 2001, respectively. Total outstanding
accounts receivable from Metawave were $332 and $1,804 at June 30, 2002 and July
1, 2001, respectively.
Use of Estimates
The preparation of the condensed consolidated financial statements, in
conformity with accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current quarter presentation.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto. This discussion contains
forward-looking statements, the realization of which may be impacted by certain
important factors including, but not limited to, those discussed in "Additional
Factors That May Affect Our Future Results."
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 currently
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. Any future changes to
these estimates and assumptions could have a significant impact on the reported
amounts of revenue, expenses, assets and liabilities in our financial
statements. 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 highly
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. 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. 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 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
12
could have a significant impact on the value of our inventory and our reported
operating 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 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 that impact 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 our results of operations as a percentage
of net sales for the three and six months ended June 30, 2002 and July 1, 2001.
As a Percentage of Net Sales
---------------------------- ------------------------------
Three Months Ended Six Months Ended
---------------------------- ------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------------------- ------------------------------
Net sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................. 81.0 86.8 81.5 90.1
----- ------ ----- -----
Gross profit .............................. 19.0 13.2 18.5 9.9
Operating expenses:
Sales and marketing .................. 3.0 4.6 3.2 5.7
Research and development ............. 7.9 10.7 7.9 12.7
General and administrative ........... 3.2 4.4 3.4 6.4
----- ------ ----- -----
Total operating expenses .................. 14.1 19.7 14.5 24.8
Operating income (loss) ................... 4.9 (6.5) 4.0 (14.9)
Other income, net ......................... 0.6 1.7 0.7 2.6
----- ------ ----- -----
Income (loss) before income taxes ......... 5.5 (4.8) 4.7 (12.3)
Provision (benefit) for income taxes ...... 1.6 (1.7) 1.4 (4.4)
----- ------ ----- -----
Net income (loss) ......................... 3.9% (3.1)% 3.3% (7.9)%
===== ====== ===== =====
13
Three months ended June 30, 2002 and July 1, 2001
Net Sales
Our net sales are derived primarily from the sale of RF power amplifiers
for use in wireless communications networks. Sales increased by 45% to $113.4
million for the quarter ended June 30, 2002 from $78.2 million for the quarter
ended July 1, 2001. The increase in revenue was attributed to increased demand
for wireless infrastructure products in the Cellular and PCS frequency ranges,
offset by a reduction in demand for products in the over 2000 MHz frequency
range. For the quarter ended June 30, 2002, total sales of products for networks
in the Cellular frequency range accounted for approximately 58% of sales or
$65.3 million, compared to approximately 67% of sales or $52.3 million for the
quarter ended July 1, 2001. Sales of products for networks in the PCS frequency
range accounted for approximately 32% of sales or $36.5 million for the second
quarter of 2002, compared to approximately 10% of sales or $8.1 million for the
second quarter of 2001. For the quarter ended June 30, 2002, sales of products
for use in networks over 2000 MHz, which largely consist of 3G products,
accounted for approximately 10% of sales or $11.6 million, as compared to 23% of
sales or $17.8 million for the quarter ended July 1, 2001.
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 unable to identify the final installation
location of our products. Sales to customers in North America accounted for the
majority of our sales, comprising approximately 69% of revenue or $78.2 million
for the quarter ended June 30, 2002, compared to approximately 42% of revenue or
$33.1 million for the quarter ended July 1, 2001. Total international sales
(excluding North American sales) accounted for approximately 31% of revenues or
$35.1 million for the quarter ended June 30, 2002, compared to approximately 58%
or $45.1 million for the quarter ended July 1, 2001. Total Asian sales decreased
to $10.9 million for the quarter ended June 30, 2002 from $24.2 million for the
quarter ended July 1, 2001. Total Asian sales accounted for approximately 10% of
revenues in the second quarter of 2002 compared to approximately 31% of revenues
in the second quarter of 2001. Total sales to Europe and other international
locations increased to $24.3 million or 21% of revenues for the quarter ended
June 30, 2002, as compared to $20.9 million or 27% for the quarter ended July 1,
2001. 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"
For the second quarter ended June 30, 2002, total sales to Nortel
Networks Corporation and related entities ("Nortel") accounted for approximately
42% of revenues and sales to Cingular Wireless and Nokia Networks ("Nokia") each
accounted for 10% or more of revenues for the quarter. Total sales to Nortel
accounted for approximately 45% of revenues for the quarter ended July 1, 2001
and sales to LG Information & Communications, Ltd. ("LGIC") and Samsung
Electronics Co. Ltd. ("Samsung") each accounted for 10% or more of revenues for
such quarter. 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 LM Ericsson Telephone Company ("Ericsson"), Lucent
Technologies, Inc. ("Lucent"), Motorola, Inc. ("Motorola"), Nokia and Nortel, is
dependent upon the deployment schedules of wireless network operators who are
purchasing wireless infrastructure equipment from such OEMs and on such OEMs'
strategy concerning the outsourcing of RF power amplifiers. During the first
half of fiscal 2002, several major OEMs made announcements that they were
lowering their expectations for wireless infrastructure demand for the remainder
of 2002. If OEMs significantly reduce their demand for our products, our
business, financial condition and results of operations would be negatively
impacted.
A number of factors have caused delays and may cause future delays in new
wireless infrastructure and upgrade deployment schedules for both North American
and international deployments, including deployments in the United States,
Europe, Asia, South America and other areas. Such factors include economic
slowdowns in the wireless operator's operating region, the inability of wireless
network operators to fund infrastructure deployment plans, 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
14
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 our revenues and/or 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 the second quarter
of fiscal 2002 and 2001 were 19.0% and 13.2%, respectively. The increase in our
gross profit margins during the second quarter of 2002 as compared to the second
quarter of 2001 is due to several factors, the most significant being the large
increase in revenues, higher absorption of manufacturing overhead expenses and
improved manufacturing efficiencies associated with the increased production
rates realized in the second quarter of fiscal 2002. The second quarter of
fiscal 2001 was negatively impacted by an unanticipated reduction in revenues
during that quarter that resulted in lower absorption of manufacturing overhead
expense and increased labor costs, when viewed as a percentage of revenue.
The wireless communications infrastructure equipment industry is
extremely competitive and is characterized by rapid technological change, new
product development and product obsolescence, evolving industry standards and
significant price erosion over the life of a product. Due to these competitive
pressures, we expect that the average sales prices of our products will continue
to decrease. We have introduced new products at lower sales prices and these
lower sales prices have impacted the average sales prices of our products.
Future pricing actions by our competitors and us 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"
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. If we are unable to further reduce our costs through our
manufacturing and/or engineering efforts, our gross margins and profitability
may 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"
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 5.7% to $3.4
million for the quarter ended June 30, 2002, from $3.6 million for the quarter
ended July 1, 2001. As a percentage of sales, sales and marketing expenses were
3.0% and 4.6% for the quarters ended June 30, 2002 and July 1, 2001,
respectively. The decrease in sales and marketing expenses was primarily
attributable to continued cost reduction efforts and reduced personnel costs.
For the quarter ended June 30, 2002, approximately $0.03 million in sales and
marketing expenses represents the amortization of a non-compete agreement
acquired as part of our acquisition of Hewlett-Packard Company's RF power
amplifier business in October 1998 (the "HP Acquisition"). This compares to
approximately $0.2 million of sales and marketing expenses related to the
amortization of a customer list and non-compete agreement from the HP
Acquisition for the quarter ended July 1, 2001.
Research and development expenses include ongoing RF power amplifier
design and development expenses, as well as 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 increased by 7.0% to $8.9
million for the quarter ended June 30, 2002, from $8.4 million for
15
the quarter ended July 1, 2001. Research and development expenses as a
percentage of sales for the quarters ended June 30, 2002 and July 1, 2001 were
7.9% and 10.7%, respectively. The increase in the dollar amount of research and
development expenses was primarily due to increased staffing and associated
engineering costs related to continued new product development efforts, and
existing product cost reduction and enhancement efforts.
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 8.5% to $3.7 million for the quarter ended June 30, 2002, from $3.4 million
for the quarter ended July 1, 2001. General and administrative expenses as a
percentage of sales for the quarters ended June 30, 2002, and July 1, 2001 were
3.2% and 4.4%, respectively. The increase in the absolute dollar amount of
general and administrative expenses was primarily attributable to increased
professional fees which was partially offset by the discontinuance of the
amortization of goodwill pursuant to SFAS 142, which approximated $0.1 million
during the quarter ended July 1, 2001.
Other Income (Expense)
We earned other income, net, of $0.7 million during the second quarter of
2002, compared to $1.3 million for the second quarter of 2001. 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
During the quarter ended June 30, 2002, we recorded a tax provision at a
rate of 30.0% as compared to a tax benefit at a rate of 36.0% for the quarter
ended July 1, 2001. The decrease in our effective tax rate is primarily due to
the availability of various federal and state tax credits.
Six months ended June 30, 2002 and July 1, 2001
Net Sales
Net sales increased by 44% to $217.5 million for the six months ended
June 30, 2002, from $151.2 million for the six months ended July 1, 2001. The
increase in revenue was attributed to increased sales of our products covering
the Cellular and PCS frequency ranges. For the six months ended June 30, 2002,
total sales of products for networks in the 800-1000 MHz range accounted for
approximately 60% of revenues or $130.7 million, compared to approximately 65%
of revenues or $98.7 million for the six months ended July 1, 2001. Sales of
products for networks in the 1800-2000 MHz range accounted for approximately 26%
of revenues or $56.9 million for the first six months of 2002, compared to
approximately 13% of revenues or $20.0 million for the first six months of 2001.
Sales of products for networks in the over 2000 MHz range accounted for
approximately 14% of revenues or $29.9 million for the first six months of 2002,
compared to approximately 22% of revenues or $32.4 million for the first six
months of 2001.
Total sales to North American customers accounted for approximately 73%
or $158.1 million of revenues for the six months ended June 30, 2002, compared
with approximately 49% or $73.9 million for the six months ended July 1, 2001.
Our total international sales (excluding North American sales) accounted for
approximately 27% of revenues or $59.4 million for the six months ended June 30,
2002, compared with approximately 51% or $77.3 million for the six months ended
July 1, 2001. Total Asian sales accounted for approximately 6% or $12.5 million
of revenues in the first six months of 2002 compared to approximately 26% or
$38.6 million in the first six months of 2001. Total sales to Europe and other
international locations increased to $46.9 million or 21% of revenues for the
six months ended June 30, 2002, as compared to $38.7 million or 25% of revenues
for the six months ended July 1, 2001. See "Additional factors that may affect
future results -- We rely on 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..."
For the first six months of 2002, total sales to Nortel accounted for
approximately 39% of revenues and sales to and sales to Cingular Wireless,
Lucent and Nokia each accounted for 10% or more of revenues. For the first six
months of 2001, total sales to Nortel accounted for approximately 41% of
revenues and sales to Samsung accounted
16
for 10% or more of revenues. 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
Gross profit margins for the first six months of fiscal 2002 and 2001
were 18.5% and 9.9%, respectively. The increase in gross margins during the
first six months of 2002 as compared to the first six months of 2001 was
primarily due to several factors, the most significant being the large increase
in revenues, higher absorption of manufacturing overhead expenses and improved
manufacturing efficiencies associated with the increased production rates
realized in fiscal 2002. See "Additional Factors That May Affect Future Results
- --We rely upon a few customers for a significant amount of our revenues...; and
- -- Our success is tied to the growth of the wireless services market..."
Operating Expenses
Sales and marketing expenses decreased by 19% to $6.9 million for the six
months ended June 30, 2002 from $8.6 million for the six months ended July 1,
2001. As a percentage of sales, sales and marketing expenses were 3.2% and 5.7%
for the six months ended June 30, 2002 and July 1, 2001, respectively. The
decrease in sales and marketing expenses was primarily attributable to cost
reduction efforts and reduced personnel costs.
Research and development expenses decreased to $17.3 million for the six
months ended June 30, 2002 from $19.3 million for the six months ended July 1,
2001. Research and development expenses as a percentage of sales for the six
months ended June 30, 2002 and July 1, 2001 were 7.9% and 12.7%, respectively.
The decrease in research and development expenses was primarily due to
reductions in material and engineering expenses in fiscal 2002 as several of our
design projects entered into the production stage during fiscal 2001.
General and administrative expenses decreased to $7.3 million for the six
months ended June 30, 2002, from $9.6 million for the six months ended July 1,
2001. General and administrative expenses as a percentage of sales were 3.4% and
6.4%, respectively. The decrease in general and administrative expenses was
primarily attributable to approximately $2.2 million of one-time expenses
related to the move to our new Santa Ana headquarters during the first quarter
of 2001, and the discontinuance of the amortization of goodwill pursuant to SFAS
142, which approximated $0.2 million during the six months ended July 1, 2001.
Other Income (Expense)
We earned $1.4 million of other income, net, during the first six months
of 2002 compared to $3.9 million of other income, net, earned in the first six
months of 2001. Other income consists primarily of interest income, net of any
interest expense. The decrease in other income was primarily due to the decline
in short-term interest rates on our cash investments and the recognition of a
one-time gain of approximately $0.6 million from the sale of available-for-sale
securities during the first six months of 2001.
Provision for Income Taxes
We recorded a tax provision at a rate of 30.0% for the six months ended
June 30, 2002 and a tax benefit at a rate of 36.0% for the six months ended July
1, 2001. The decrease in our effective tax rate was primarily due to the
availability of various federal and state 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 June 30, 2002, we had working capital of $213.3
million, including $157.0 million in cash and cash equivalents as compared to
working capital of $186.3 million at December 30, 2001, which included $123.2
million in cash and cash equivalents. We currently invest our excess cash in
short-term, investment-grade,
17
money market instruments with maturities of three months or less. We typically
hold such investments until maturity and then reinvest the proceeds in similar
money market instruments. We believe that all of our cash investments would be
readily available to us should the need arise.
Net cash provided by operations was approximately $34.3 million during
the six months ended June 30, 2002, compared with cash used in operations of
$16.4 million during the six months ended July 1, 2001. The increase in cash
flow from operating activities during the first six months of 2002 as compared
to the first six months of 2001 is due to several factors, including enhanced
operating profitability associated with our increased sales during 2002,
improved inventory management, and the carryback of our fiscal 2001 net
operating loss which resulted in income tax refunds of approximately $9.6
million. Our net accounts receivable increased to $61.4 million at June 30, 2002
from $59.7 million at December 30, 2001, consistent with the increase in our
sales volume during the second quarter of 2002. Net inventories increased to
$41.3 million at June 30, 2002, from $33.5 million at December 30, 2001
consistent with our increased production volume. Also consistent with our
increased production volume, net accounts payable increased to $40.0 million at
June 30, 2002 from $22.7 million at December 30, 2001.
Total capital expenditures during the first six months of 2002 and 2001
were approximately $2.7 million and $18.9 million, respectively. The majority of
the capital spending during the first six months of 2002 was for computer
hardware and software, tooling and electronic test equipment utilized in our
manufacturing and research and development areas. The majority of the capital
spending for the first six months of 2001 was for capital improvements to our
new Santa Ana manufacturing and headquarters facility as well as the purchase of
electronic test equipment to expand our manufacturing capacity.
Net cash provided by financing activities was $2.2 million for the
quarter ended June 30, 2002, compared to $5.1 million for the quarter ended July
1, 2001. Net cash provided by financing activities for the periods primarily
represents proceeds from employee stock option exercises as well as proceeds
from the issuance of common stock under our Employee Stock Purchase Plan. The
amount of cash provided by employee option exercises is subject to various
factors beyond our control, including the market price of our Common Stock and
an individual's timing decisions regarding the exercise of such options.
Therefore, we cannot be assured that this will continue to be a source of cash
for Powerwave on an on-going basis.
Effective May 31, 2002, we renewed our $20 million revolving credit
agreement with Comerica Bank-California for a period of one year. 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, payable quarterly in
arrears. The revolving credit facility allows for borrowings based either upon
the bank's prime rate (4.75% at June 30, 2002) 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, 2003. 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 June 30, 2002, 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 June 30, 2002.
We incur various obligations pursuant to capital and operating leases in
our normal course of business. As of June 30, 2002, we had total short-term and
long-term obligations under operating leases of approximately $1.5 million and
$4.9 million, respectively, and no obligations under capital leases. We also
incur various future purchase obligations with our vendors and suppliers for the
purchase of inventory, as well as other goods and services, in the normal course
of business. These obligations are generally evidenced by purchase orders and,
in certain cases, supply agreements that contain the terms and conditions
associated with these purchase arrangements. We estimate that the total value of
our purchase obligations was approximately $19.8 million at June 30, 2002. In
addition, we issue standby letters of credit as security for liabilities related
to our workers compensation insurance policies. As of June 30, 2002, our total
commitments secured by standby letters of credit were approximately $0.3
million. We believe that our existing cash balances and funds expected to be
generated from future operations will be sufficient to satisfy these contractual
obligations and that the ultimate payments associated with these commitments
will not have a material adverse impact on our liquidity position.
18
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 and fulfill our contractual commitments for at least the next 12
months. For the remainder of fiscal 2002, we currently anticipate capital
spending on property and equipment to be in the range of approximately $7.5
million, and we plan to fund these expenditures from our existing cash balances.
Our principal sources of liquidity consist of existing cash balances and funds
expected to be generated from future operations. We had cash and cash
equivalents of $157.0 million at June 30, 2002, compared with $123.2 million at
December 30, 2001, and we regularly review our cash funding requirements and
attempt to meet those requirements through a combination of cash on hand and
cash provided by operations. Our ability to increase revenues and generate
profits is subject to numerous risks and uncertainties and any significant
decrease in our revenues or profitability could reduce our operating cash flows
and erode our existing cash balances. During the first half of fiscal 2002,
several major OEM's made announcements that they were lowering their
expectations for wireless infrastructure demand for the remainder of 2002. No
assurances can be given that we will continue to be able to generate positive
operating cash flows or maintain/grow our existing cash balances. See
"Additional Factors That May Affect Future Results --We rely upon a few
customers for a significant amount of our revenues...; --The wireless
communications infrastructure equipment industry is extremely competitive; --Our
average sales prices have declined; --Our success is tied to the growth of the
wireless services market; and --We have experienced, and will continue to
experience, significant fluctuations in sales and operating results from quarter
to quarter"
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 may continue to do so selectively in the
future. We may also 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. Our ability to maintain existing
financing arrangements and to secure additional financing or sources of funding
is dependant on our credit rating and the market price for our common stock,
which are both directly impacted by our ability to grow revenues and generate
profits. We can make no guarantees that we will be able to obtain additional
financing or secure new financing arrangements in the future. See "Additional
Factors That May Affect Future Results --We rely upon a few customers for a
significant amount of our revenues...; --The wireless communications
infrastructure equipment industry is extremely competitive; --Our average sales
prices have declined; --Our success is tied to the growth of the wireless
services market; and --We have experienced, and will continue to experience,
significant fluctuations in sales and operating results from quarter to quarter"
Disclosure About Foreign Currency Risk
We have operations in France, the United Kingdom and South Korea that
incur expenses in foreign currencies. 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 27% of
our net sales for the first six months of 2002, 41% of our fiscal 2001 net
sales, and 21% of our fiscal 2000 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 most 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 and their current financial performance, as well
as overall economic conditions. In the future, we may be required or decide to
offer certain international customers extended payment terms and/or sell
additional products or services in the local currency of such customers. If we
sell additional products or services in a foreign currency, we may be required
to convert the payments received into U.S. dollars or utilize such foreign
currencies as payments for expenses of our business. Given the uncertainty as to
when and what specific foreign currencies we may be required or decide to accept
as payment from our international customers, we cannot predict the ultimate
impact that such a decision would have on our business, gross margins and
results of operations.
19
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 generally 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 unable 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
that 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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). 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. We adopted
SFAS 142 effective December 31, 2001 and such adoption did not have a material
impact on our consolidated financial statements.
Statement of Financial Accounting Standards No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets ("SFAS 143"),
was issued by the FASB in August 2001. 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. We adopted SFAS 143 effective December 31, 2001 and such
adoption did not have a material impact on our consolidated financial
statements.
The FASB issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), in
October 2001. 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. We adopted SFAS 144
effective December 31, 2001 and such adoption did not have a material impact on
our consolidated financial statements.
20
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;
. the ability to timely develop and produce commercially viable
products at competitive prices;
. 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 and price targets 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 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 maintain a stable and reliable source of
electricity to support our operations at a reasonable cost;
. the ability to manage future product repairs; and
. the ability to accurately anticipate customer demand.
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;
. concentration of accounts receivable credit risk;
. 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 six months ended June 30, 2002, our largest customer, Nortel,
accounted for approximately 39% of our net sales or $85.0 million. For fiscal
2001, Nortel accounted for approximately 44% of our net sales. For the first six
months of 2002, our next three largest customers (in alphabetical order)
Cingular Wireless, Lucent and Nokia, each accounted for 10% or more of our net
sales. During the first six months of fiscal 2002, a number of major OEMs made
announcements lowering their expectations for total wireless infrastructure
demand for the remainder of 2002. If these forecasted reductions in overall
market demand result in significant reductions in demand by our OEM customers,
such reductions will have an adverse effect on our business, results of
operations and financial condition. In addition, several of our major OEM
customers continue to experience poor financial performance that has resulted in
downgrades of their credit worthiness by outside credit rating agencies and
significant reductions in their common stock price and overall market value.
While we perform ongoing credit evaluations and have not
21
experienced any significant payment delays from these customers, further
reductions in their financial liquidity could result in future payment delays
and/or the declaration of bankruptcy causing the non-payment of their accounts
receivable, which in turn, would have a material adverse effect on our business,
results of operations and financial condition.
There are several examples of the risks related to our customer and
industry concentration. During 2001, we experienced an overall reduction in
revenue of $147 million from our 2000 revenue levels, $80 million of which
related to a single customer, Nortel. During 1998, we had a significant
geographic customer concentration in South Korea, which experienced an economic
and financial crisis. As a result, our fiscal 1998 sales to South Korean
customers decreased by approximately 70% to $30.2 million, or approximately 30%
of total net sales, as compared to $99.3 million or approximately 83% of our
total net sales for fiscal 1997.
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 the first quarter of 2002, Andrew
Corporation, a competitor, announced that it had entered into an agreement to
acquire Celiant Corporation and completed such acquisition during the second
quarter of 2002. 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;
. the inability of network operators to raise additional capital to
fund network expansion;
. 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 that 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 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 of new products or redesigns by our
customers;
. product failures and associated in-field service support costs;
. competitive factors, including pricing, availability and demand
for competing amplification products;
. 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;
. warranty expenses;
. the availability and cost of components;
22
. 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 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.
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
23
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 cannot 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
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 to address our
competitive challenges, there could be a material adverse effect on our
business, financial condition and results of operations.
24
Our current competitors include Allen Telecom, Inc., Andrew Corporation,
Fujitsu Limited, Hitachi Kokusai Electric Inc., Japan Radio Co., Ltd.,
Mitsubishi Electric Corporation and Spectrian Corporation, in addition to a
number of privately held companies throughout the world, subsidiaries of certain
multinational corporations and the RF power amplifier manufacturing operations
of the leading wireless infrastructure manufacturers such as Ericsson, Motorola,
Nokia and Samsung. Some competitors have significantly greater financial,
technical, manufacturing, sales, marketing and other resources than we do and
have achieved greater name recognition for their products and technologies than
we have. If we are unable to successfully increase our market penetration or our
overall share of the RF power amplifier market, our results of operations could
be adversely impacted.
Our future success depends largely upon the rate at which wireless
infrastructure manufacturers incorporate our products into their systems. A
substantial portion of the present worldwide production of RF power amplifiers
is captive within the internal manufacturing operations of leading wireless
infrastructure manufacturers such as Ericsson, Motorola, Nokia and Samsung.
These companies regularly evaluate whether to manufacture their own RF power
amplifiers rather than purchase them from us. In addition, various companies
could also compete directly with us by selling their RF power amplifiers to
other manufacturers and operators, including our customers. If we are not
successful in increasing the use of our products by the leading wireless
infrastructure manufacturers, there would be a material adverse effect on our
business, financial condition and results of operations.
Our failure to enhance our existing products or to develop and introduce new
products that meet changing customer requirements and evolving technological
standards would adversely impact our ability to sell our products.
To succeed, we must improve current products and develop and introduce new
products that are competitive in terms of price, performance and quality. These
products must adequately address the requirements of wireless infrastructure
manufacturing customers and end-users.
To develop new products, we invest in the research and development of RF
power amplifiers for wireless communications networks. We target our research
and development efforts on major wireless network deployments worldwide, which
cover a broad range of frequency and transmission protocols. In addition, we are
currently working on products for third generation networks as well as
development projects for products requested by our customers. In spite of our
efforts, the deployment of a wireless network may be delayed which could result
in the failure of a particular research or development effort to generate a
revenue producing product. Additionally, the new products we develop may not
achieve market acceptance or may not be manufacturable at competitive prices in
sufficient volumes. We cannot guarantee the success of our research and
development efforts.
We also continue efforts to improve our existing Cellular, PCS and 3G lines
of RF power amplifier products. Any delays in the shipment of these products may
cause customer dissatisfaction and delay or loss of product revenues. In
addition, it is possible that a significant number of development projects will
not result in manufacturable new products or product improvements.
If we fail to develop new products or improve existing products in a timely
manner, there will be a material adverse effect on our business, financial
condition and results of operations.
We may fail to develop products that are sufficiently manufacturable or of
adequate quality and reliability, which would adversely impact our ability to
sell our products.
Manufacturing our products is a complex process and requires significant
time and expertise to meet customers' specifications. Successful manufacturing
is substantially dependent upon our ability to tune these products to meet
specifications in an efficient manner. In this regard, we depend on our staff of
trained technicians. If we cannot design our products to minimize the manual
tuning process, if we are unable to attract additional trained technicians, or
if we lose a number of our trained technicians, it would have a material adverse
effect on our business, financial condition and results of operations.
We have had quality problems with our products in the past and may have
similar problems in the future. We have replaced components in some products in
accordance with our product warranties. We believe that our overall relationship
with our customers is good and that they consider our products to be of good
quality. We also believe that our customers will demand increasingly stringent
product performance and reliability. We cannot provide any
25
assurance that our product designs will remain successful or that they will keep
pace with technological developments, evolving industry standards and new
communications protocols. We may fail to adequately improve product quality and
meet the quality standards of our customers, which could cause us to lose such
customers. Design problems could damage relationships with existing and
prospective customers and could limit our ability to market our products to
large wireless infrastructure manufacturers, many of which build their own, high
quality RF power amplifiers and have stringent quality control standards. See
"Many wireless infrastructure manufactures have internal RF power amplifier
production capabilities and if these manufacturers begin offering their own RF
power amplifiers, demand for our products would be reduced, and our business,
financial condition and results of operations would be materially adversely
affected."
If we are unable to hire and retain highly qualified technical and managerial
personnel, we may not be able to sustain or grow our business.
Competition for personnel, particularly qualified engineers, is
intense, and the loss of a significant number of such persons, as well as the
failure to recruit and train additional technical personnel in a timely manner,
could have a material adverse effect on our business, results of operations and
financial condition. The departure of any of our management and technical
personnel, the breach of their confidentiality and non-disclosure obligations to
Powerwave or the failure to achieve our intellectual property objectives may
have a material adverse effect on our business, financial condition and results
of operations.
We believe that our success depends upon the knowledge and experience of
our management and technical personnel and our ability to market our existing
products and to develop new products. Our employees are employed on an
at-will-basis and do not have non-compete agreements. Therefore, we have had,
and may continue to have 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.
There are many risks associated with international operations, including the
following:
. compliance with multiple and potentially conflicting regulations,
including export requirements, tariffs, import duties and other
barriers, as well as health and safety requirements;
. differences in intellectual property protections;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection cycles;
. currency fluctuations;
. terrorists attacks on American companies;
. economic instability, including inflation and interest rate
fluctuations, such as those previously seen in South Korea and
Brazil;
. competition from foreign based suppliers;
. restrictions against the repatriation of earnings from a foreign
country;
. overlapping or differing tax structures; and
. political or civil turmoil.
For the first six months of fiscal 2002, fiscal years 2001, 2000, and 1999,
international revenues (excluding North American sales) accounted for
approximately 27%, 41%, 21%, and 33%, respectively, of our net sales. We
currently expect that international revenues will continue to account for a
significant percentage of our revenues for the foreseeable future.
We have traditionally invoiced most of our international sales in U.S.
dollars. Accordingly, we do not currently engage in