| POWERWAVE TECHNOLOGIES INC ITEM 1A RISK FACTORS We rely upon a few customers for the majority of our revenues and the loss of any one of these customers, or a significant loss, reduction or rescheduling of orders from any of these 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 |
| For the year ended January 1, 2006, sales to Cingular Wireless accounted for approximately 15prca of net sales and sales to Nokia accounted for 10prca or more of our net sales |
| For fiscal year 2005, Cingular Wireless’ North American expansion plans for both GSM and WCDMA are responsible for a significant portion of our business |
| We recognize revenues from the Cingular Wireless business through multiple channels, including direct sales to Cingular Wireless, which accounted for approximately 15prca of our net sales for fiscal 2005, as well as indirect sales through various resellers and original equipment manufacturers such as Ericsson and Nokia, all of who supply products 11 ______________________________________________________________________ [48]Table of Contents directly to Cingular Wireless |
| While we are not able to identify indirect sales to wireless operators such as Cingular Wireless, we do believe that they directly and indirectly accounted for a significant portion of our revenues for fiscal 2005 |
| The percentage of revenues and absolute sales to Nortel has decreased significantly during fiscal 2005, and we anticipate that this will continue |
| Our future success is dependent upon the continued purchases of our products by such customers and any fluctuations in demand from such customers could negatively impact our results of operations |
| If we are unable to broaden our customer base and expand relationships with major wireless original equipment manufacturers and major operators of wireless networks, our business will continue to be impacted by unanticipated demand fluctuations due to our dependence on a small number of customers |
| Unanticipated demand fluctuations can have a negative impact on our revenues and business, and an adverse effect on our results of operations and financial condition |
| In addition, our dependence on a small number of major customers exposes us to numerous other risks, including: • a slowdown or delay in deployment of wireless networks by any one customer could significantly reduce demand for our products; • reductions in a single customer’s forecasts and demand could result in excess inventories; • each of our customers has significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery schedules; • direct competition should a customer decide to increase its level of internal designing and/or manufacturing of wireless communication network products; and • concentration of accounts receivable credit risk, which could have a material adverse effect on our liquidity and financial condition if one of our major customers declared bankruptcy or delayed payment of their receivables |
| We may incur unanticipated costs as we complete the integration of our business with businesses we recently acquired |
| On May 3, 2004, we completed the exchange offer for the outstanding shares of LGP Allgon and on September 2, 2005, we completed the REMEC Wireless Acquisition |
| These acquisitions involve the integration of companies and operations, many of which are based in different countries that previously have operated independently |
| This is a complex, costly and time consuming process |
| We have limited experience integrating operations as substantial and geographically diverse as those of LGP Allgon and REMEC Wireless, and as a result, we may not successfully integrate these operations with our own in a timely manner, or at all |
| The failure to successfully integrate these operations could undermine the anticipated benefits and synergies of the acquisitions, which could adversely affect our business, financial condition and results of operations |
| The anticipated benefits and synergies of these acquisitions relate to cost savings associated with operational efficiencies, greater economies of scale and revenue enhancement opportunities |
| However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and assume a smooth and successful integration of these businesses |
| In addition, the acquisition of LGP Allgon and REMEC’s Wireless systems business are the largest acquisitions we have completed and the complex process of integrating these businesses requires significant resources |
| We have incurred and will continue to incur significant costs and commit significant management time in integrating LGP Allgon’s and REMEC Wireless’ operations, information, communications and other systems and personnel, among other items |
| The integration of these businesses has resulted and will continue to result in cash outflows related to the integration process, such as: • fees and expenses of professionals and consultants involved in completing the integration process; • settling existing liabilities of the acquired businesses; and • integrating technology and personnel |
| We have begun the process of implementing a new worldwide enterprise resource planning system and if we are unsuccessful in deploying the system or, if it takes longer than anticipated to deploy the system, we may incur significant additional costs which would negatively impact our financial results as well as potentially weaken our systemic internal controls |
| We have begun the implementation phase and intend to convert our enterprise 12 ______________________________________________________________________ [49]Table of Contents resource planning systems during the next nine months to the Oracle platform |
| System conversions are expensive and time consuming undertakings that impact all areas of the Company |
| While a successful implementation will provide many benefits to the Company, an unsuccessful or delayed implementation will cost the Company significant time and resources, as well as expense |
| In addition, due to the systemic internal control features within enterprise resource planning systems, any changes in our enterprise resource planning system will have an impact on the testing of our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 |
| If we encounter unanticipated delays in deploying our new enterprise resource planning system, we may be unable to complete within the currently required time period our Section 404 testing of the systemic internal controls within such system, which could create a material weakness or significant deficiency in our overall internal controls as of the end of a fiscal year |
| We have previously experienced significant reductions in demand for our products, by certain customers and if this continues, our operating results will be adversely impacted |
| We have a history of significant unanticipated reductions in demand that demonstrates the risks related to our customer and industry concentration levels |
| While our revenues increased during fiscal year 2005, a significant portion of this increase was due to our acquisitions of LGP Allgon and REMEC Wireless |
| During fiscal 2003, we experienced significantly reduced demand for our products due to lower than anticipated capital spending plans by major wireless network operators |
| This reduction in spending by wireless network operators also resulted in reduced purchases by wireless original equipment manufacturers, whose primary customers are wireless network operators |
| Revenues from wireless network operators decreased to dlra47dtta9 million in 2003 from dlra73dtta5 million in 2002 |
| These types of reductions in overall market demand had a negative impact on our results of operations |
| During fiscal 2005, we have experienced a significant reduction in demand from Nortel |
| While during 2005 we were able to offset this reduction with demand from other customers, we cannot guarantee that we will be able to continue to generate new demand to offset reductions from existing customers |
| If we are unable to continue to generate new demand, our revenues will go down and our results of operations will be negatively impacted |
| We have also in the past experienced significant unanticipated reductions in wireless network operator demand as well as significant delays in demand for WCDMA, or 3G, based products due to the high projected capital cost of building such networks and market concerns regarding the inoperability of such network protocols |
| In combination with these market issues, a majority of wireless network operators have, in the past, regularly reduced their capital spending plans in order to improve their overall cash flow |
| The continuation of any delays in development of 3G networks will result in reduced demand for our products which will have a material adverse effect on our business |
| 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: • the lack of any obligation by our customers to purchase their forecasted demand for our products; • variations in the timing, cancellation, or rescheduling of customer orders and shipments; • high fixed expenses that increase operating expenses, especially during a quarter with a sales shortfall; • product failures and associated warranty and in-field service support costs; and • discounts given to certain customers for large volume purchases |
| We have regularly generated a large percentage of our revenues in the last month of a quarter |
| Since we attempt to ship products quickly after we receive orders, we may not always have a significant backlog of unfilled orders at the start of each quarter and we may be required to book a substantial portion of our orders during the quarter in which such orders ship |
| Our major customers generally have no obligation to purchase forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice and without penalty |
| As a result, we may not be able to accurately predict our quarterly sales |
| Because our expense levels are partially based on our expectations of future sales, our expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall |
| Any shortfall in sales relative to our quarterly expectations or any delay of customer orders would adversely affect our revenues and results of operations |
| 13 ______________________________________________________________________ [50]Table of Contents 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 results of operations |
| Despite these factors, we, along with our contract manufacturers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts |
| If our customers purchase less than their forecasted orders or cancel or delay existing purchase orders, there will be higher levels of inventory that face a greater risk of obsolescence |
| If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough inventory or manufacturing capacity to fill their orders |
| 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 or investors |
| In either case, the price of our Common Stock could be materially adversely affected |
| 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 continuing to place pricing pressure on wireless infrastructure manufacturers, which in turn, has resulted in lower selling prices for our products, with certain competitors aggressively reducing prices in an effort to increase their market share |
| We believe that the average sales prices of our products will continue to decline for the foreseeable future |
| The average sales price for our radio frequency power amplifier products declined by between 1prca to 27prca from fiscal 2004 to fiscal 2005 |
| 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 without firm orders 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 increases in average selling prices, our gross margins will decline |
| Our suppliers, contract manufacturers or customers could become competitors |
| Many of our customers internally design and/or manufacture their own wireless communications network products |
| These customers also continuously evaluate whether to manufacture their own wireless communications network products or utilize contract manufacturers to produce their own internal designs |
| Certain of our customers regularly produce or design wireless communications network products in an attempt to replace products manufactured by us |
| We believe that this practice will continue |
| In the event that our customers manufacture or design their own wireless communications network products, such customers could reduce or eliminate their purchases of our products, which would result in reduced revenues and would adversely impact our results of operations and liquidity |
| Wireless infrastructure equipment manufacturers with internal manufacturing capabilities, including many of our customers, could also sell wireless communications network products externally to other manufacturers, thereby competing directly with us |
| In addition, our suppliers or contract manufacturers may decide to produce competing products directly for our customers and, effectively, compete against us |
| If, for any reason, our customers produce their wireless communications network products internally, increase the percentage of their internal production, require us to participate in joint venture manufacturing with them, engage our suppliers or contract manufacturers to manufacture competing products, or otherwise compete directly against us, our revenues would decrease, which would adversely impact our results of operations |
| Our success is tied to the growth of the wireless services communications market and our future revenue growth is dependent upon the expected increase in the size of this market |
| Our revenues come primarily from the sale of wireless communications network products and coverage solutions |
| Our future success depends upon the growth and increased availability of wireless communications services |
| Wireless communications services may not grow at a rate fast enough to create demand for our products, as we experienced during fiscal 2003 |
| During this period, wireless network operators reduced or delayed capital spending on wireless networks in order to preserve their operating cash and improve their balance sheets |
| Such reduced spending on wireless networks has had a negative impact on our operating results |
| If wireless network operators begin to delay or reduce levels of capital spending, our operating results will be negatively impacted |
| 14 ______________________________________________________________________ [51]Table of Contents Our reliance on contract manufacturers exposes us to risks of excess inventory or inventory carrying costs |
| If our contract manufacturers are unable to timely respond to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our contract manufacturers |
| We regularly provide rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant to our agreements, a portion of which is binding upon us |
| Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast |
| Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us |
| In the past, we have been required to take delivery of materials from other suppliers and subcontractors that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material |
| We expect that we will incur such costs in the future |
| By using contract manufacturers, our ability to directly control the use of all inventory is reduced since we do not have full operating control over their operations |
| If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our contract manufacturers, we may be required to pay inventory carrying costs or purchase excess inventory |
| If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are unable to sell excess components or products due to their customized nature, our operating results and liquidity would be negatively impacted |
| Our acquisition of selected assets and liabilities of REMEC, Inc |
| ’s Wireless Systems Business, as well as future acquisitions or strategic alliances, may present risks, and we may be unable to achieve the financial and strategic goals intended at the time of any acquisition or strategic alliance |
| On September 2, 2005, we completed the REMEC Wireless Acquisition |
| In the past, we have acquired and made investments in other companies, products and technologies and entered into strategic alliances with other companies |
| We continually evaluate these types of opportunities |
| In addition to the REMEC Wireless Acquisition, we may acquire or invest in other companies, products or technologies, or we may enter into joint ventures, mergers or strategic alliances with other companies |
| Such transactions subject us to numerous risks, including the following: • difficulty integrating the operations, technology and personnel of the acquired company; • inability to achieve the anticipated financial and strategic benefits of the specific acquisition or strategic alliance; • significant additional warranty costs due to product failures and or design differences that were not identified during due diligence, and such costs could result in charges to earnings if they are not recoverable from the seller; • inability to retain key technical and managerial personnel from the acquired company; • difficulty in maintaining controls, procedures and policies during the transition and integration process; • diversion of our management’s attention from other business concerns; • failure of our due diligence process to identify significant issues, including issues with respect to product quality, product architecture, legal and financial contingencies, and product development; and • significant exit charges if products acquired in business combinations are unsuccessful |
| If we are unable to effectively manage these risks as part of any acquisition or joint venture, our business would be adversely affected |
| We depend on single sources or limited sources for key components and products, which exposes us to risks related to product shortages or delays, as well as potential product quality issues, all of which could increase the cost of our products thereby reducing our operating profits |
| A number of our products and 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 products, and along with our contract manufacturers, purchase certain customized components from single or limited sources |
| We have experienced, and expect to continue to experience, shortages of single-source and limited-source components |
| Shortages have 15 ______________________________________________________________________ [52]Table of Contents compelled us to adjust our product designs and production schedules and have caused us to miss customer requested delivery dates |
| To date, the missed customer delivery dates have not had a material adverse impact on our financial results |
| If single-source or limited-source components become unavailable in sufficient quantities in the desired time periods, are discontinued or are available only on unsatisfactory terms, we would be required to purchase comparable components from other sources and may be required to redesign our products to use such components which could delay production and delivery of our products |
| If production and delivery of our products are delayed such that we do not meet the agreed upon delivery dates of our customers, such delays could result in lost revenues due to customer cancellations, as well as potential financial penalties payable to our customers |
| Any such loss of revenue or financial penalties could have a material adverse effect on our results of operations |
| Our reliance on certain single-source and limited-source components and products also exposes us and our contract manufacturers to quality control risks if these suppliers experience a failure in their production process or otherwise fail to meet our quality requirements |
| A failure in a single-source or limited-source component or product could force us to repair or replace a product utilizing replacement components |
| If we cannot obtain comparable replacements or redesign our products, we could lose customer orders or incur additional costs, which would have a material adverse effect on our results of operations |
| We may fail to develop products that are sufficiently manufacturable, which could negatively impact our ability to sell our products |
| Manufacturing our products is a complex process that requires significant time and expertise to meet customers’ specifications |
| Successful manufacturing is substantially dependent upon the ability to assemble and tune these products to meet specifications in an efficient manner |
| In this regard, we largely depend on our staff of assembly workers and trained technicians at our internal manufacturing operations in the US, Costa Rica, Europe and Asia, as well as our contract manufacturers’ staff of assembly workers and trained technicians predominantly located in Asia |
| If we cannot design our products to minimize the manual assembly and tuning process, or if we or our contract manufacturers lose a number of trained assembly workers and technicians or are unable to attract additional trained assembly workers or technicians, we may be unable to have our products manufactured in a cost effective manner |
| We have recently sold our Philippines manufacturing facility to Celestica |
| If after the transfer of ownership production efficiency falls, we could be adversely affected |
| On March 10, 2006, we sold our manufacturing facility in the Philippines to Celestica |
| As part of this sale, we have committed to buy products from Celestica manufactured in the Philippines facility |
| If Celestica is unable to maintain current production levels or has some other difficulty in managing the facility, we could be adversely impacted and unable to deliver certain products to our customers |
| Such failure could cause us to purchase replacement products which would have a negative impact on our operating results |
| We may fail to develop products that are of adequate quality and reliability, which could negatively impact our ability to sell our products |
| 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 and replaced entire products in accordance with our product warranties |
| We believe that our customers will demand that our products meet increasingly stringent performance and reliability standards |
| If we cannot keep pace with technological developments, evolving industry standards and new communications protocols, if we fail to adequately improve product quality and meet the quality standards of our customers, or if our contract manufacturers fail to achieve the quality standards of our customers, we risk losing business which would negatively impact our results of operations |
| Design problems could also 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 products and have stringent quality control standards |
| 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 |
| 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 also have a material adverse effect on our business |
| 16 ______________________________________________________________________ [53]Table of Contents 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 generally 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 |
| There are significant risks related to our internal and contract manufacturing operations in Asia |
| As part of our manufacturing strategy, we utilize contract manufacturers in China, Singapore and Thailand |
| We also maintain our own manufacturing operations in China, Costa Rica, Estonia and Sweden, as well as limited capability in the United States |
| We sold our Philippines manufacturing facility to one of our contract manufacturers in March 2006 |
| The Chinese legal system lacks transparency, which gives the Chinese central and local government authorities a higher degree of control over our business in China than is customary in the United States and makes the process of obtaining necessary regulatory approval in China inherently unpredictable |
| In addition, the protection accorded our proprietary technology and know-how under the Chinese and Thai legal systems is not as strong as in the United States and, as a result, we may lose valuable trade secrets and competitive advantage |
| Also, manufacturing our products and utilizing contract manufacturers, as well as other suppliers throughout the Asia region, exposes our business to the risk that our proprietary technology and ownership rights may not be protected or enforced to the extent that they may be in the United States |
| Although the Chinese government has been pursuing economic reform and a policy of welcoming foreign investments during the past two decades, it is possible that the Chinese government will change its current policies in the future, making continued business operations in China difficult or unprofitable |
| In February 2006 the Philippines experience a failed coup to overturn the existing government, which prompted the government to declare a state of emergency |
| While the state of emergency was eventually lifted, this highlights some of the political risks of relying upon manufacturing operations in this location |
| If there were to be a coup or some other type of political unrest, such activity may impact the ability to manufacture products in this region and may prevent shipments from entering or leaving the country |
| Any such disruptions could have a material negative impact on our operations and financial results |
| We require air or ocean transport to ship products built in our various manufacturing locations to our customers |
| High energy costs have increased our transportation cost which has had a negative impact on our production costs |
| Transportation costs would escalate if there were a shortage of air or ocean cargo space and any significant increase in transportation costs would cause an increase in our expenses and negatively impact our results of operations |
| In addition, if we are unable to obtain cargo space or secure delivery of components or products due to labor strikes, lockouts, work slowdowns or work stoppages by longshoremen, dock workers, airline pilots or other transportation industry workers, our delivery of products could be adversely delayed |
| The initial sales cycle associated with our products is typically lengthy, often lasting from nine to eighteen months, which could cause delays in forecasted sales and cause us to incur substantial expenses before we record any associated revenues |
| Our customers normally conduct significant technical evaluations, trials and qualifications of our products before making purchase commitments |
| This qualification process involves a significant investment of time and resources from both our customers and us in order to ensure that our product designs are fully qualified to perform as required |
| The qualification and evaluation process, as well as customer field trials, may take longer than initially forecasted, thereby delaying the shipment of sales forecasted for a specific customer for a particular quarter and causing our operating results for the quarter to be less than originally forecasted |
| Such a sales shortfall would reduce our profitability and negatively impact our results of operations |
| 17 ______________________________________________________________________ [54]Table of Contents We conduct a significant portion of our business internationally, which exposes us to increased business risks |
| For fiscal years 2005, 2004, and 2003, international revenues (excluding North American sales) accounted for approximately 64prca, 71prca, and 46prca of our net sales, respectively |
| There are many risks that currently impact, and will continue to impact our international business and multinational operations, including the following: • compliance with multiple and potentially conflicting regulations in Europe, Asia, North and South America, including export requirements, tariffs, import duties and other trade barriers, as well as health and safety requirements; • potential labor strikes, lockouts, work slowdowns and work stoppages at US and international ports; • differences in intellectual property protections throughout the world; • difficulties in staffing and managing foreign operations in Europe, Asia and South America, including dealings with unionized labor pools in Europe; • longer accounts receivable collection cycles in Europe, Asia and South America; • currency fluctuations and resulting losses on currency translations; • terrorists attacks on American companies; • economic instability, including inflation and interest rate fluctuations, such as those previously seen in South Korea and Brazil; • competition for foreign based suppliers throughout the world; • overlapping or differing tax structures; • the complexity of global tax and transfer pricing rules and regulations and our potential inability to benefit/offset losses in one tax jurisdiction with income from another; • cultural and language differences between the United States and the rest of the world; and • political or civil turmoil |
| Any failure on our part to manage these risks effectively would seriously reduce our competitiveness in the wireless infrastructure marketplace |
| Protection of our intellectual property is limited |
| We rely upon trade secrets and patents to protect our intellectual property |
| We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information |
| We have an on-going program to identify and file applications for US and other international patents |
| The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a material adverse effect on our business, results of operations and financial condition |
| We do not have non-compete agreements with our employees who are generally employed on an at-will basis |
| Therefore, we have had, and may continue to have, employees leave us and go to work for competitors |
| If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in reduced revenues |
| We are at risk of third-party claims of infringement that could harm our competitive position |
| We have received third-party claims of infringement in the past and have been able to resolve such claims without having a material impact on our business |
| Currently, certain parties have notified the Company of potential claims against the Company |
| While the Company reviews such potential claims, we do not believe that their resolution will have a material affect on the Company |
| As the number of patents, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that we may face additional infringement claims |
| Such claims, whether or not valid, could result in substantial costs and diversion of our resources |
| A third party claiming infringement may also obtain an injunction or other equitable relief, which could effectively block the distribution or sale of allegedly infringing products, which would adversely affect our customer relationships and negatively impact our revenues |
| 18 ______________________________________________________________________ [55]Table of Contents The communications industry is heavily regulated |
| We must obtain regulatory approvals to manufacture and sell our products, and our customers must obtain approvals to operate our products |
| Any failure or delay by us or any of our customers to obtain such approvals could negatively impact our ability to sell our products |
| Various governmental agencies have adopted regulations that impose stringent radio frequency emissions standards on the communications industry |
| Future regulations may require that we alter the manner in which radio signals are transmitted or otherwise alter the equipment transmitting such signals |
| The enactment by governments of new laws or regulations or a change in the interpretation of existing regulations could negatively impact the market for our products |
| The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation and deliberation over competing technologies |
| The delays inherent in this type of governmental approval process have caused, and may continue to cause, the cancellation, postponement or rescheduling of the installation of communications systems by our customers |
| These types of unanticipated delays would result in delayed or cancelled customer orders |
| The price of our Common Stock has been, and may continue to be, volatile and our shareholders may not be able to resell shares of our Common Stock at or above the price paid for such shares |
| The price for shares of our Common Stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our Common Stock unsuitable for many investors |
| For example, for the two years ended January 1, 2006, the price of our Common Stock ranged from a high of dlra13dtta92 to a low of dlra4dtta54 |
| The fluctuations in the price of our Common Stock have occasionally been unrelated to our operating performance |
| These broad fluctuations may negatively impact the market price of shares of our Common Stock |
| The price of our Common Stock has also been influenced by: • fluctuations in our results of operations or the operations of our competitors or customers; • failure of our results of operations and sales revenues to meet the expectations of stock market analysts and investors; • reductions in wireless infrastructure demand or expectations of future wireless infrastructure demand by our customers; • delays or postponement of wireless infrastructure deployments, including new 3G deployments; • changes in stock market analyst recommendations regarding us, our competitors or our customers; • the timing and announcements of technological innovations, new products or financial results by us or our competitors; and • changes in the wireless industry |
| In addition, the increase in the number of shares of our outstanding Common Stock due to the potential conversion of our outstanding convertible debt instruments would add approximately 30dtta4 million shares of Common Stock to our outstanding shares |
| Such an increase may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, our Common Stock |
| Any potential future sale or issuance of shares of our Common Stock or instruments convertible or exchangeable into shares of our Common Stock, or the perception that such sales or transactions could occur, could adversely affect the market price of our Common Stock |
| Based on the above, we expect that our stock price will continue to be extremely volatile |
| Therefore, we cannot guarantee that our investors will be able to resell their Powerwave shares at or above their acquisition price |
| We may need additional capital in the future and such additional financing may not be available at favorable terms |
| We may need to raise additional funds through public or private debt or equity financings in order to take advantage of opportunities, including more rapid international expansion or acquisitions of complementary businesses or technologies |
| If we are not successful in integrating our businesses and managing the worldwide aspects of our company, our operations may not generate profits and may consume our cash resources faster than we anticipate |
| Such losses would make it difficult to obtain new sources of financing |
| In addition, if we do not generate sufficient cash flow from operations, we may need to raise additional funds to repay our dlra330dtta0 million of 19 ______________________________________________________________________ [56]Table of Contents outstanding convertible debt that we issued in 2003 and 2004 |
| Our ability to secure additional financing or sources of funding is dependent upon numerous factors, including the current outlook of our business, our credit rating and the market price of our common stock, all of which are directly impacted by our ability to increase revenues and generate profits |
| 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 |
| If we are unable to secure additional financing or such financing is not available at acceptable terms, we may not be able to take advantage of such opportunities, or otherwise respond to unanticipated competitive pressures |
| 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, results of operations and financial condition would be adversely affected |
| Our products compete on the basis of the following 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 |
| If we fail to address the above factors, there could be a material adverse effect on our business, results of operations and financial condition |
| Our current competitors include Andrew Corporation, Filtronic PLC, Fujitsu Limited, Hitachi Kokusai Electric Inc, Japan Radio Co, Ltd, Kathrein-Werke KG, Mitsubishi Electric Corporation, and Radio Frequency Systems, in addition to a number of privately held companies throughout the world, subsidiaries of certain multinational corporations and the internal manufacturing operations and design groups of the leading wireless infrastructure manufacturers such as Ericsson, Motorola, Nokia, Nortel, Samsung and Siemens |
| Some competitors have adopted aggressive pricing strategies in an attempt to gain market share, which in return, has caused us to lower our prices in order to remain competitive |
| Such pricing actions have had an adverse effect on our financial condition and results of operations |
| In addition, 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 wireless communications infrastructure equipment market, our revenues will decline, which would negatively impact our 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 could have a negative impact on 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 wireless communications network products and coverage solutions |
| 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 next generation networks, as well as development projects for products requested by our customers and improvements to our existing products |
| 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 able to be manufactured cost effectively in sufficient volumes |
| Our research and development efforts are generally funded internally and our customers do not normally pay for our research and development efforts |
| These costs are expensed as incurred |
| Therefore, if our efforts are not successful at creating or improving products that are purchased by our customers, there will be a negative impact on our operating results due to high research and development expenses |
| 20 ______________________________________________________________________ [57]Table of Contents Failure to maintain effective internal controls over financial reporting could adversely affect our business and the market price of our Common Stock |
| Pursuant to rules adopted by the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal controls over financial reporting and provide a management report on our internal controls over financial reporting in all annual reports, beginning with our Annual Report on Form 10-K for the fiscal year ended January 2, 2005 |
| This report contains, among other matters, a statement as to whether or not our internal controls over financial reporting are effective and the disclosure of any material weaknesses in our internal controls over financial reporting identified by management |
| Section 404 also requires our independent registered public accounting firm to audit management’s report |
| The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems |
| Auditing Standard Nodtta 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting under Section 404 |
| Management’s assessment of internal controls over financial reporting requires management to make subjective judgments and, particularly because Section 404 and Auditing Standard Nodtta 2 are newly effective, some of the judgments will be in areas that may be open to interpretation |
| Therefore, our management’s report on our internal controls over financial reporting may be difficult to prepare, and our auditors may not agree with our management’s assessment |
| While we currently believe our internal controls over financial reporting are effective, we are required to comply with Section 404 on an annual basis |
| If, in the future, we identify one or more material weaknesses in our internal controls over financial reporting during this continuous evaluation process, our management will be unable to assert such internal controls are effective |
| Although we currently anticipate being able to continue to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of completion for our future evaluation, testing and any required remediation due in large part to the fact that there are limited precedents available by which to measure compliance with these new requirements |
| In addition, we have begun the process of replacing our enterprise resource planning system and such system replacement during fiscal 2006 may create unanticipated delays in completing the documentation and testing requirements of Section 404 |
| Therefore, if we are unable to assert that our internal controls over financial reporting are effective in the future, or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our business and the market price of our Common Stock |
| Our shareholder rights plan and charter documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders |
| Our shareholder rights plan and certain provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value |
| However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which in turn, could harm our stock price and our shareholders |
| Our business is subject to the risks of earthquakes and other natural catastrophic events, and to interruptions by man made problems such as computer viruses or terrorism |
| Our corporate headquarters and the majority of our US based research and development operations are located in the State of California in regions known for seismic activity |
| In addition, we have production facilities and have outsourced some of our production to contract manufacturers in Asia, another region known for seismic activity |
| A significant natural disaster, such as an earthquake in either of these regions, could have a material adverse effect on our business, operating results and financial condition |
| In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems |
| Any such event could have a material adverse effect on our business |