Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
(Amendment
No. 1)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 27, 2009
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
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1801
E. St. Andrew Place, Santa Ana, CA 92705
(Address
of principal executive offices, zip code)
(714)
466-1000
(Registrant’s
telephone number, including area code)
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 þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and
“smaller-reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer þ Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No þ
As of
October 28, 2009, the registrant had 132,359,006 shares of Common Stock
outstanding.
POWERWAVE
TECHNOLOGIES, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2009
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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q, contains “forward-looking statements,” regarding
future events and our future results that are subject to the safe harbors
created under the Securities Act of 1933, or the Securities Act, and the
Securities Exchange Act of 1934, or the Exchange Act. All statements
other than statements of historical facts are statements that could be deemed
forward- looking statements as defined within Section 27A of the Securities Act
and Section 21E of the Exchange Act. One generally can identify
forward-looking statements by the use of forward-looking terminology such as
“believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,”
“plans,” “seeks,” or “continues,” or the negative thereof, or variations
thereon, or similar terminology. Forward-looking statements in this
Quarterly Report include, but are not limited to, statements relating to
revenue, revenue composition, market and economic conditions, demand and pricing
trends, future expense levels, competition and growth prospects in our industry,
trends in average selling prices and gross margins, product and infrastructure
development, market demand and acceptance, the timing of and demand for next
generation products, customer relationships, tax rates, employee relations, the
timing of cash payments and cost savings from restructuring activities,
restructuring charges, and the level of expected future capital and research and
development expenditures. Such statements are generally included in the items
captioned: “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” “Quantitative and Qualitative Disclosures About Market
Risk,” “Legal Proceedings,” and “Risk Factors.” These statements are
based on current expectations, estimates, forecasts, and projections about the
industry in which we operate and the beliefs and assumptions of our
management. The forward-looking statements made in this report,
regarding future events and the future performance of Powerwave Technologies,
Inc, which we refer to as Powerwave or the Company, involve risks and
uncertainties that could cause the Company’s actual results to differ materially
and adversely from those results currently anticipated. Such risks
and uncertainties may relate to, but are not limited to, our reliance upon a few
customers to generate the majority of our revenues, continued economic weakness
and uncertainty resulting from the worldwide economic crisis and tightening of
the credit markets, continued reductions in demand for our products; difficulty
in obtaining additional capital should we need to do so in the future;
significant fluctuations in our sales and operating results, continuing declines
in the sales prices for our products; the future growth of the wireless
infrastructure communications market; our reliance on single sources or limited
sources for key components and products, the risks surrounding our internal and
contract manufacturing operations in Asia and Europe; operating in a
highly-regulated industry; and the competitive nature of the wireless
communications industry which is characterized by rapid technological
change. Because the risks and uncertainties discussed in this report
and other important unanticipated factors may affect Powerwave’s operating
results, past performance should not be considered as indicative of future
performance, and investors should not use historical results to anticipate
results or trends in future periods. Reference is also made to the
risks and uncertainties described in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 28, 2008, as filed with the Securities and
Exchange Commission. Readers should also carefully review the risk
factors described in documents that Powerwave files from time to time with the
Securities and Exchange Commission, including subsequent Current Reports on Form
8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, as we
undertake no obligation to revise or update any forward-looking statements for
any reason.
HOW TO OBTAIN POWERWAVE SEC FILINGS
All reports filed
by Powerwave with the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov. In addition, the public may read and copy materials
filed by the Company with the SEC at the SEC’s public reference room located at
100 F Street, N.E., Washington, D.C. 20549. Powerwave also provides copies of
its Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports
on Form 10-K, Proxy Statements, and amendments thereto, at no charge to
investors upon request and makes electronic copies of its most recently filed
reports available through its website at www.powerwave.com as soon as reasonably
practicable after filing such material with the SEC.
EXPLANATORY NOTE
Powerwave
Technologies Inc. (the “Company” or “Powerwave”) is filing this Amendment No. 1
to its Form 10-Q for the fiscal quarter ended September 27, 2009 to amend and
restate the Form 10-Q in its entirety. This Amendment No. 1 includes
a restatement of the Company’s previously issued financial statements to reflect
the correction of an error relating to the accounting treatment for the
Company’s 1.875% convertible subordinated notes due 2024 (“2024 Notes”), as
discussed in Note 5 of the Notes to Consolidated Financial Statements under Part
I, Item 1, Financial
Statements. The Company’s 2024 Notes should have been
accounted for as set forth under the accounting guidance now codified as FASB
Accounting Standards Codification (ASC) Topic 470-20, which became effective at
the beginning of the 2009 fiscal year. FASB ASC Topic 470-20 requires
retrospective application to the terms of the 2024 Notes as they existed for all
periods presented and this retrospective application is included
herein. The items that include changes are: Part I, Item 1, Financial Statements, Part I,
Item 2, Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
Part I, Item 4, Controls and Procedures, and
Part II, Item 1A, Risk
Factors.
PART I – FINANCIAL INFORMATION
FINANCIAL
STATEMENTS
|
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
(In
thousands, except share data)
September
27,
2009
(As
Restated)
|
December 28,
2008
(As
Restated)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
44,901
|
$
|
46,906
|
||||
Restricted
cash
|
2,616
|
3,433
|
||||||
Accounts
receivable, net of allowance for sales returns and doubtful accounts of
$8,995 and $9,478, respectively
|
142,327
|
213,871
|
||||||
Inventories
|
69,843
|
81,098
|
||||||
Prepaid
expenses and other current assets
|
31,666
|
25,303
|
||||||
Deferred
income taxes
|
3,204
|
3,204
|
||||||
Total
current assets
|
294,557
|
373,815
|
||||||
Property,
plant and equipment, net
|
88,942
|
98,616
|
||||||
Intangible
assets, net
|
830
|
3,803
|
||||||
Asset
held for sale
|
3,889
|
4,845
|
||||||
Other
assets
|
6,138
|
6,215
|
||||||
TOTAL
ASSETS
|
$
|
394,356
|
$
|
487,294
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
80,076
|
$
|
139,267
|
||||
Accrued
payroll and employee benefits
|
11,569
|
12,286
|
||||||
Accrued
restructuring costs
|
1,973
|
5,813
|
||||||
Accrued
expenses and other current liabilities
|
27,624
|
37,390
|
||||||
Total
current liabilities
|
121,242
|
194,756
|
||||||
Long-term
debt
|
267,512
|
285,256
|
||||||
Other
liabilities
|
2,242
|
1,898
|
||||||
Total
liabilities
|
390,996
|
481,910
|
||||||
Commitments
and contingencies (Notes 9 and 10)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized and no shares issued
or outstanding
|
—
|
—
|
||||||
Common
stock, $0.0001 par value, 250,000,000 shares authorized, 132,359,006 and
131,637,460 shares issued and outstanding, respectively
|
824,395
|
820,733
|
||||||
Accumulated
other comprehensive income
|
11,483
|
14,245
|
||||||
Accumulated
deficit
|
(832,518
|
)
|
(829,594
|
)
|
||||
Net
shareholders’ equity
|
3,360
|
5,384
|
||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
394,356
|
$
|
487,294
|
The
accompanying notes are an integral part of these consolidated financial
statements.
POWERWAVE
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share data)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
(As
Restated)
|
September
28,
2008
(As
Restated)
|
September
27,
2009
(As
Restated)
|
September
28,
2008
(As
Restated)
|
|||||||||||||
Net
sales
|
$
|
139,048
|
$
|
237,960
|
$
|
424,904
|
$
|
709,903
|
||||||||
Cost
of sales:
|
||||||||||||||||
Cost
of goods
|
101,938
|
179,633
|
316,487
|
537,486
|
||||||||||||
Intangible
asset amortization
|
624
|
4,094
|
1,870
|
16,459
|
||||||||||||
Restructuring
and impairment charges
|
328
|
3,368
|
1,738
|
13,903
|
||||||||||||
Total
cost of sales
|
102,890
|
187,095
|
320,095
|
567,848
|
||||||||||||
Gross
profit
|
36,158
|
50,865
|
104,809
|
142,055
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
8,069
|
10,301
|
26,665
|
36,064
|
||||||||||||
Research
and development
|
14,534
|
18,447
|
44,273
|
58,907
|
||||||||||||
General
and administrative
|
11,150
|
17,992
|
36,001
|
49,062
|
||||||||||||
Intangible
asset amortization
|
206
|
2,589
|
740
|
7,846
|
||||||||||||
Restructuring
and impairment charges
|
335
|
2,755
|
1,985
|
3,834
|
||||||||||||
Total
operating expenses
|
34,294
|
52,084
|
109,664
|
155,713
|
||||||||||||
Operating
income (loss)
|
1,864
|
(1,219
|
)
|
(4,855
|
)
|
(13,658
|
)
|
|||||||||
Other
income (expense), net
|
(2,172
|
)
|
(2,037
|
)
|
3,486
|
(15,979
|
)
|
|||||||||
Loss
before income taxes
|
(308
|
)
|
(3,256
|
)
|
(1,369
|
)
|
(29,637
|
)
|
||||||||
Income
tax provision
|
803
|
540
|
1,555
|
2,515
|
||||||||||||
Net
loss
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||||
Basic
loss per share:
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.25
|
)
|
||||
Diluted
loss per share:
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.25
|
)
|
||||
Shares
used in the computation of loss per share:
|
||||||||||||||||
Basic
|
131,950
|
131,142
|
131,698
|
131,023
|
||||||||||||
Diluted
|
131,950
|
131,142
|
131,698
|
131,023
|
The
accompanying notes are an integral part of these consolidated financial
statements.
POWERWAVE
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In
thousands)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
(As
Restated)
|
September
28,
2008
(As
Restated)
|
September
27,
2009
(As
Restated)
|
September
28,
2008
(As
Restated)
|
|||||||||||||
Net
loss
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||||
Other
comprehensive loss:
|
||||||||||||||||
Foreign
currency translation adjustments, net of income taxes
|
(1,046
|
)
|
(34,542
|
)
|
(2,762
|
)
|
(6,627
|
)
|
||||||||
Comprehensive
loss
|
$
|
(2,157
|
)
|
$
|
(38,338
|
)
|
$
|
(5,686
|
)
|
$
|
(38,779
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
POWERWAVE TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
Nine
Months Ended
|
||||||||
September
27,
2009
(As
Restated)
|
September
28,
2008
(As
Restated)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
22,545
|
46,459
|
||||||
Non-cash
restructuring and impairment charges
|
3,722
|
17,737
|
||||||
Provision
for sales returns and doubtful accounts
|
1,830
|
1,457
|
||||||
Provision
for excess and obsolete inventories
|
6,068
|
3,237
|
||||||
Compensation
costs related to stock-based awards
|
3,394
|
3,722
|
||||||
Gain
on repurchase of convertible debt
|
(9,767
|
)
|
—
|
|||||
Gain
on disposal of property, plant and equipment
|
(29
|
)
|
(588
|
)
|
||||
Gain
on settlement of litigation
|
(645
|
)
|
—
|
|||||
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||
Accounts
receivable
|
71,474
|
(20,122
|
)
|
|||||
Inventories
|
5,967
|
(5,133
|
)
|
|||||
Prepaid
expenses and other current assets
|
(5,152
|
)
|
7,814
|
|||||
Accounts
payable
|
(67,060
|
)
|
32,253
|
|||||
Accrued
expenses and other current liabilities
|
(19,335
|
)
|
(39,220
|
)
|
||||
Other
non-current assets
|
465
|
1,599
|
||||||
Other
non-current liabilities
|
283
|
148
|
||||||
Net
cash provided by operating
activities
|
10,836
|
17,211
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property, plant and equipment
|
(4,243
|
)
|
(7,501
|
)
|
||||
Restricted
cash
|
817
|
3,732
|
||||||
Proceeds
from the sale of business
|
500
|
500
|
||||||
Proceeds
from the sale of property, plant and equipment
|
323
|
4,305
|
||||||
Acquisitions,
net of cash acquired
|
1,960
|
(4,105
|
)
|
|||||
Net
cash used in investing
activities
|
(643
|
)
|
(3,069
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Debt
issuance costs
|
(1,305
|
)
|
—
|
|||||
Proceeds
from stock-based compensation arrangements
|
281
|
1,086
|
||||||
Repurchase
of common stock
|
(13
|
)
|
(521
|
)
|
||||
Retirement
of short-term debt
|
—
|
(13,630
|
)
|
|||||
Retirement
of long-term debt
|
(12,445
|
)
|
—
|
|||||
Net
cash used in financing
activities
|
(13,482
|
)
|
(13,065
|
)
|
||||
EFFECT
OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
1,284
|
(1,557
|
)
|
|||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(2,005
|
)
|
(480
|
)
|
||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
46,906
|
58,151
|
||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
44,901
|
$
|
57,671
|
||||
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
expense
|
$
|
4,853
|
$
|
5,417
|
||||
Income
taxes
|
$
|
5,876
|
$
|
18,633
|
||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH ACTIVITIES:
|
||||||||
Unpaid
purchases of property and
equipment
|
$
|
859
|
$
|
1,926
|
The
accompanying notes are an integral part of these consolidated financial
statements.
8
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Note
1. Nature of Operations
Powerwave
Technologies Inc. (the “Company”) is a global supplier of end-to-end wireless
solutions for wireless communications networks. The Company designs,
manufactures and markets antennas, boosters, combiners, filters, radio frequency
power amplifiers, repeaters, tower-mounted amplifiers, remote radio head
transceivers and advanced coverage solutions for use in cellular, PCS, 3G and 4G
networks throughout the world.
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. These financial statements 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 statements. The interim financial
information is unaudited; however, it 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. All significant
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements.
The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the future quarters or the full year ending
January 3, 2010 (“fiscal 2009”). The accompanying 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 28, 2008.
Newly
Adopted Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
guidance now codified as FASB Accounting Standards Codification (ASC) Topic 105,
“Generally Accepted Accounting
Principles,” as the single source of authoritative nongovernmental U.S.
GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents will be superseded and all other
accounting literature not included in the FASB Codification will be considered
non-authoritative. These provisions of FASB ASC Topic 105 are effective for
interim and annual periods ending after September 15, 2009 and,
accordingly, are effective for the Company for the current fiscal reporting
period. The adoption of this pronouncement did not have an impact on the
Company’s business, results of operations or financial condition, but will
impact the Company’s financial reporting process by eliminating all references
to pre-codification standards. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.
In
May 2009, the FASB issued guidance now codified as FASB ASC Topic 855,
“Subsequent Events,”
which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This pronouncement is effective for
interim or fiscal periods ending after June 15, 2009. The adoption of this
pronouncement did not have a material impact on the Company’s business, results
of operations or financial position; however, the provisions of FASB ASC Topic
855 resulted in additional disclosures with respect to subsequent
events.
In
April 2009, the FASB issued guidance now codified as FASB ASC Topic 820,
“Fair Value Measurements and
Disclosures,” which amends previous guidance to require disclosures about
fair value of financial instruments in interim as well as annual financial
statements in the current economic environment. This pronouncement is effective
for periods ending after June 15, 2009. The adoption of this pronouncement
did not have a material impact on the Company’s business, results of operations
or financial condition; however, these provisions of FASB ASC Topic 820 resulted
in additional disclosures with respect to the fair value of the Company’s
financial instruments.
9
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
In
November 2008, the FASB issued guidance now codified as FASB ASC Topic 350,
“Intangibles – Goodwill and
Other,” which applies to defensive intangible assets, which are acquired
intangible assets that the acquirer does not intend to actively use but intends
to hold to prevent its competitors from obtaining access to them. As these
assets are separately identifiable, this pronouncement requires an acquiring
entity to account for defensive intangible assets as a separate unit of
accounting, and such assets should be amortized to expense over the period such
assets diminish in value. Defensive intangible assets must be recognized at fair
value in accordance with FASB ASC Topic 820. This pronouncement is effective for
financial statements in the first quarter of 2009. The adoption of the
provisions of FASB ASC Topic 350 did not have a material impact on the Company’s
business, results of operations or financial condition.
In May
2008, the FASB issued guidance now codified as FASB ASC Topic 470-20, “Debt with Conversion and Other
Options,” which clarifies how a convertible debt instrument must be
accounted for if the instrument may be settled in cash or some combination of
cash and stock upon conversion of the debt. The Company is required
to account for the liability and equity components of the convertible debt
separately. The
liability component is measured at its estimated fair value such that the
effective interest expense associated with the convertible debt reflects the
issuer’s borrowing rate at the time of issuance for similar debt instruments
without the conversion feature. The difference between the cash proceeds
associated with the convertible debt and the estimated fair value is recorded as
a debt discount and amortized to interest expense over the life of the
convertible debt using the effective interest rate method. In
addition, direct issuance costs associated with the convertible debt instruments
are required to be allocated to the liability and equity components in
proportion to the allocation of proceeds and accounted for as debt issuance
costs and equity issuance costs, respectively. The Company has restated its
previously issued financial statements to reflect the retrospective adoption of
this guidance for its 1.875% Convertible Subordinated Notes due 2024 (“2024
Notes”). See Note 5 for information on the impact of the restatement on the
consolidated financial statements related to the adoption of the new
standard.
In April
2008, the FASB issued guidance now codified as FASB ASC Topic 350, “Intangibles – Goodwill and Other,”
which amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. The pronouncement was effective in the first
quarter of 2009. The adoption of the provisions of FASB ASC Topic 350 did not
have a material impact on the Company’s business, results of operations or
financial condition.
In
December 2007, the FASB issued guidance now codified as FASB ASC Topic 810,
“Consolidation,” which
changes how business acquisitions are accounted for and changes the accounting
and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. The provisions
of FASB ASC Topic 810 were effective in the first quarter of 2009. The adoption
of the provisions of FASB ASC Topic 810 did not have a material impact on the
Company’s business, results of operations or financial condition.
New
Accounting Pronouncements
In
October 2009, the FASB issued an update to FASB ASC Topic 605, “Revenue
Recognition.” This Accounting Standards Update (ASU), No.
2009-13, “Multiple Deliverable
Revenue Arrangements – A Consensus of the FASB Emerging Issues Task
Force,” provides accounting principles and application guidance on
whether multiple deliverables exist, how the arrangement should be separated,
and the consideration allocated. This guidance eliminates the requirement to
establish the fair value of undelivered products and services and instead
provides for separate revenue recognition based upon management’s estimate of
the selling price for an undelivered item when there is no other means to
determine the fair value of that undelivered item. Previous accounting guidance
required that the fair value of the undelivered item be the price of the item
either sold in a separate transaction between unrelated third parties or the
price charged for each item when the item is sold separately by the vendor. This
was difficult to determine when the product was not individually sold because of
its unique features. Under previous accounting guidance, if the fair value of
all of the elements in the arrangement was not determinable, then revenue was
deferred until all of the items were delivered or fair value was determined.
This new approach is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010. The Company is currently evaluating the potential impact of this standard
on its business, results of operations and financial
condition.
10
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with the guidance
now codified as FASB ASC Topic 718, “Compensation – Stock
Compensation.” Under the fair value recognition provision of
FASB ASC Topic 718, stock-based compensation cost is estimated at the grant date
based on the fair value of the award. The Company estimates the fair value of
stock options granted according to the Black-Scholes-Merton option pricing model
and a multiple option award approach. The fair value of restricted stock awards
is based on the closing market price of the Company’s Common Stock on the date
of grant.
Stock-based
compensation expense was recognized as follows in the consolidated statement of
operations (in thousands):
Three Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Cost
of sales
|
$
|
284
|
$
|
260
|
$
|
887
|
$
|
753
|
||||||||
Sales
and marketing expenses
|
96
|
99
|
308
|
317
|
||||||||||||
Research
and development expenses
|
231
|
286
|
775
|
854
|
||||||||||||
General
and administrative expenses
|
597
|
462
|
1,424
|
1,797
|
||||||||||||
Increase
to operating loss before income taxes
|
1,208
|
1,107
|
3,394
|
3,721
|
||||||||||||
Income
tax benefit recognized
|
—
|
—
|
—
|
—
|
||||||||||||
Impact
on net income (loss)
|
$
|
1,208
|
$
|
1,107
|
$
|
3,394
|
$
|
3,721
|
||||||||
Impact
on earnings (loss) per share:
|
||||||||||||||||
Basic
and diluted
|
$
|
0.01
|
$
|
0.01
|
$
|
0.03
|
$
|
0.03
|
As of
September 27, 2009, unrecognized compensation expense related to the unvested
portion of the Company’s stock-based awards and employee stock purchase plan was
approximately $3.7 million, net of estimated forfeitures of $0.5 million, which
is expected to be recognized over a weighted-average period of 1.4
years.
The
Black-Scholes-Merton option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation methods require the input of highly subjective
assumptions including the weighted average risk-free interest rate, the expected
life, and the expected stock price volatility. The weighted average risk-free
interest rate was determined based upon actual U.S. treasury rates over a one to
ten year horizon and the actual life of options granted. The Company grants
options with either a five year or ten year life. The expected life is based on
the Company’s actual historical option exercise experience. For the employee
stock purchase plan, the actual life of 6 months is utilized in this
calculation. The expected life was determined based upon actual option grant
lives over a 10 year period. The Company has utilized various market sources to
calculate the implied volatility factor utilized in the Black-Scholes-Merton
option valuation model. These included the implied volatility utilized in the
pricing of options on the Company’s Common Stock as well as the implied
volatility utilized in determining market prices of the Company’s outstanding
convertible notes. Using the Black-Scholes-Merton option valuation model, the
estimated weighted average fair value of options granted during the third
quarter of fiscal years 2009 and 2008 was $0.76 per share and $2.25 per share,
respectively.
The fair value of options
granted under the Company’s stock incentive plans during the first nine months
of fiscal 2009 and 2008 was estimated on the date of grant according to the
Black-Scholes-Merton option-pricing model utilizing the multiple option approach
and the following weighted-average assumptions:
Three Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Weighted
average risk-free interest rate
|
1.6
|
%
|
2.8
|
%
|
1.7
|
%
|
2.8
|
%
|
||||||||
Expected
life (in years)
|
3.9
|
4.6
|
5.2
|
4.6
|
||||||||||||
Expected
stock volatility
|
89
|
%
|
53
|
%
|
139
|
%
|
55
|
%
|
||||||||
Dividend
yield
|
None
|
None
|
None
|
None
|
11
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Note
3. Supplemental Balance Sheet Information
Inventories
Inventories
are as follows:
September
27,
2009
|
December
28,
2008
|
|||||||
Parts
and components
|
$
|
26,662
|
$
|
28,547
|
||||
Work-in-process
|
857
|
2,618
|
||||||
Finished
goods
|
42,324
|
49,933
|
||||||
Total
inventories
|
$
|
69,843
|
$
|
81,098
|
Inventories
are net of an allowance for excess and obsolete inventory of approximately $30.7
million and $43.4 million as of September 27, 2009 and December 28, 2008,
respectively.
Asset
Held For Sale
In the
fourth quarter of 2008, the Company completed the closure of its manufacturing
facility in Salisbury, Maryland as part of its 2008 Restructuring Plan. The
carrying value of the building has been separately presented in the accompanying
balance sheet under the caption “Asset Held for Sale” and this asset is no
longer being depreciated. During the first nine months of 2009, the Company
recorded additional charges of $1.0 million to write the building down to its
fair value less cost to sell in accordance with the accounting guidance now
codified as FASB ASC Topic 360, “Property, Plant and Equipment.”
FASB ASC Topic 360 requires entities to report discontinued operations
separately from continuing operations, and extends that reporting to a component
of equity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. The Company signed a
Purchase and Sale Agreement for the building in April 2009 and the sale of the
building was completed on October 8, 2009.
Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are as follows:
September
27,
2009
|
December
28,
2008
|
|||||||
Accrued
vendor cancellation costs
|
$
|
7,388
|
$
|
10,563
|
||||
Accrued
warranty costs
|
7,999
|
10,763
|
||||||
Other
accrued expenses and other current liabilities
|
12,238
|
16,064
|
||||||
Total
accrued expenses and other current liabilities
|
$
|
27,625
|
$
|
37,390
|
Warranty
Accrued
warranty costs are as follows:
Nine
Months Ended
|
||||||||
Description
|
September
27,
2009
|
September
28,
2008
|
||||||
Warranty
reserve beginning balance
|
$
|
10,763
|
$
|
26,975
|
||||
Reductions
for warranty costs incurred
|
(8,841
|
)
|
(12,231
|
)
|
||||
Warranty
accrual related to current period sales
|
6,044
|
5,445
|
||||||
Settlement
of previous warranty claims
|
—
|
(2,858
|
)
|
|||||
Change
in estimate related to previous warranty accruals
|
—
|
(2,360
|
)
|
|||||
Effect
of exchange rates
|
33
|
(130
|
)
|
|||||
Warranty
reserve ending balance
|
$
|
7,999
|
$
|
14,841
|
12
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Note
4. Intangible Assets
Intangible
assets are as follows:
Intangible Assets Subject to
Amortization:
|
September
27,
2009
|
December
28,
2008
|
||||||
Developed
technology (net of accumulated amortization of $5,077 and $3,206,
respectively)
|
$
|
623
|
$
|
2,494
|
||||
Customer
relationships (net of accumulated amortization of $1,682 and $3,479,
respectively)
|
207
|
1,309
|
||||||
Intangible
assets, net
|
$
|
830
|
$
|
3,803
|
Amortization
expense related to intangible assets totaled $2.6 million and $24.3 million for
the first nine months of 2009 and 2008, respectively. The remaining $0.8 million
of intangible assets will be fully amortized in the fourth quarter of
2009.
Note
5. Financing Arrangements, Long-Term Debt and Restatement Matters
In the
first nine months of 2009, the Company repurchased $25.4 million in aggregate
par value of its outstanding 1.875% convertible subordinated notes due November
2024, resulting in a gain of approximately $9.8 million on the
purchase. As of September 27, 2009, there is $130.9 million
outstanding under the 1.875% convertible subordinated notes and $150.0 million
outstanding under the 3.875% convertible subordinated notes.
Credit
Agreement
On
April 3, 2009, the Company entered into a Credit Agreement (the “Credit
Agreement”), with Wells Fargo Foothill, LLC, as arranger and administrative
agent. Pursuant to the Credit Agreement, Wells Fargo Foothill made available to
the Company a senior secured revolving credit facility up to a maximum of $50.0
million. Availability under the Credit Agreement is based on the calculation of
the Company’s borrowing base as defined in the Credit Agreement. The
Credit Agreement is secured by a first priority security interest on a majority
of the Company’s assets, including without limitation, all accounts, equipment,
inventory, chattel paper, records, intangibles, deposit accounts and cash and
cash equivalents. The Credit Agreement expires on August 15, 2011. The
Credit Agreement contains customary affirmative and negative covenants for
credit facilities of this type, including limitations on the Company with
respect to indebtedness, liens, investments, distributions, mergers and
acquisitions and dispositions of assets. The Credit Agreement also
includes financial covenants including minimum EBITDA and maximum capital
expenditures that are applicable only if the availability of the Company’s line
of credit falls below $20.0 million. As of September 27, 2009, the Company is in
compliance with all of these covenants.
On
April 3, 2009, in connection with entering into the Credit Agreement
referenced above, the Company terminated its Revolving Trade Receivables
Purchase Agreement with Deutsche Bank AG, New York Branch, as Administrative
Agent, as amended on May 15, 2008 (the “Amended Receivables Purchase
Agreement”). As of the date of termination, the Company did not have any
borrowings outstanding under the Amended Receivables Purchase Agreement. In
addition, the Company did not incur any early termination penalties in
connection with the termination of the Amended Receivables Purchase
Agreement.
Impact
of the Adoption of FASB ASC Topic 470-20 and Restatement
Subsequent
to the issuance of its consolidated financial statements for the three and nine
months ended September 27, 2009, the Company identified an error in the
accounting for its 2024 Notes and the application of FASB ASC Topic 470-20,
Debt with Conversion and Other
Options, to that instrument. FASB ASC Topic 470-20, which was
effective on December 29, 2008, requires the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion to be
separately accounted for in a manner that reflects the issuer’s nonconvertible
debt borrowing rate. To allocate the proceeds from a convertible debt offering
in this manner, a company would first need to determine the carrying amount of
the liability component, which would be based on the fair value of a similar
liability, excluding any embedded conversion options. The resulting debt
discount is then amortized over the period during which the debt is expected to
be outstanding as additional non-cash interest expense. The adoption of FASB ASC
Topic 470-20 generally requires retrospective application to all periods
presented. The Company had not properly applied FASB ASC Topic 470-20 to
its
13
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Upon
adoption of FASB ASC Topic 470-20, the Company estimated the fair value, as of
the date of issuance, of the 2024 Notes assuming a 7.05% non-convertible
borrowing rate to be $142.7 million. The difference between the fair
value and the principal amount of the 2024 Notes was $57.3
million. This amount was retrospectively recorded as a debt discount
and as an increase to additional paid-in capital as of the issuance
date. The Company also incurred approximately $6.2 million in
transaction costs, of which $4.4 million was allocated to the debt component as
debt issuance costs and $1.8 million was allocated to the equity component as
equity issuance costs and a decrease to additional
paid-in-capital. The debt issuance costs are being amortized over the
remaining life of the debt (the first put date in 2011) using the effective
interest method and are reported as an increase to interest
expense.
The
following tables set forth the effect of the restatement of the adoption and
retrospective application of FASB ASC Topic 470-20 on certain previously
reported financial statement items:
September 27, 2009
|
December 28, 2008
|
|||||||||||||||
Consolidated
Balance Sheets:
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||
Other
assets
|
$ | 6,514 | $ | 6,138 | $ | 6,817 | $ | 6,215 | ||||||||
Total
assets
|
394,732 | 394,356 | 487,896 | 487,294 | ||||||||||||
Long-term
debt
|
280,887 | 267,512 | 306,321 | 285,256 | ||||||||||||
Total
liabilities
|
404,371 | 390,996 | 502,975 | 481,910 | ||||||||||||
Common
Stock
|
768,866 | 824,395 | 765,204 | 820,733 | ||||||||||||
Accumulated
deficit
|
(789,988 | ) | (832,518 | ) | (794,528 | ) | (829,594 | ) | ||||||||
Net
shareholders’ equity (deficit)
|
(9,639 | ) | 3,360 | (15,079 | ) | 5,384 | ||||||||||
Total
liabilities and shareholders’ equity
|
394,732 | 394,356 | 487,896 | 487,294 |
Three Months Ended
|
||||||||||||||||
September 27, 2009
|
September 28, 2008
|
|||||||||||||||
Consolidated
Statements of Operations:
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||
Other
income (expense), net
|
$
|
(769
|
)
|
$
|
(2,172
|
)
|
$
|
(42
|
)
|
$
|
(2,037
|
)
|
||||
Income
(loss) before income taxes
|
1,095
|
(308
|
)
|
(1,261
|
)
|
(3,256
|
)
|
|||||||||
Net
income (loss)
|
292
|
(1,111
|
)
|
(1,801
|
)
|
(3,796
|
)
|
|||||||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$
|
0.00
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
|||||
Diluted
|
$
|
0.00
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
|||||
Shares used in the computation of earnings (loss) per share | 135,058 | 131,950 | 131,142 | 131,142 |
Nine Months Ended
|
||||||||||||||||
September 27, 2009
|
September 28, 2008
|
|||||||||||||||
Consolidated
Statements of Operations:
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||
Other
income (expense), net
|
$
|
10,950
|
$
|
3,486
|
$
|
(10,099
|
)
|
$
|
(15,979
|
)
|
||||||
Income
(loss) before income taxes
|
6,095
|
(1,369
|
)
|
(23,757
|
)
|
(29,637
|
)
|
|||||||||
Net
income (loss)
|
4,540
|
(2,924
|
)
|
(26,272
|
)
|
(32,152
|
)
|
|||||||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$
|
0.03
|
$
|
(0.02
|
)
|
$
|
(0.20
|
)
|
$
|
(0.25
|
)
|
|||||
Diluted
|
$
|
0.03
|
$
|
(0.02
|
)
|
$
|
(0.20
|
)
|
$
|
(0.25
|
)
|
|||||
Shares used in the computation of earnings (loss) per share | 133,665 | 131,698 | 131,023 | 131,023 |
14
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Nine Months Ended
|
||||||||||||||||
September 27, 2009
|
September 28, 2008
|
|||||||||||||||
Consolidated
Statements of Cash Flows:
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||
Net
income (loss)
|
$
|
4,540
|
$
|
(2,924
|
)
|
$
|
(26,272
|
)
|
$
|
(32,152
|
)
|
|||||
Depreciation
and amortization
|
18,384
|
22,545
|
41,414
|
46,459
|
||||||||||||
Gain
on repurchase of convertible debt
|
(12,693
|
)
|
(9,767
|
)
|
—
|
—
|
||||||||||
Other
non-current assets
|
88
|
465
|
764
|
1,599
|
The
following tables provide additional information about the Company’s 2024 Notes
that are subject to FASB ASC Topic 470-20:
September
27, 2009
(As
Restated)
|
December 28, 2008
(As
Restated)
|
|||||||
Carrying
amount of the equity component
|
$
|
55,529
|
$
|
55,529
|
||||
Principal
amount of the 2024 Notes
|
$
|
130,887
|
$
|
156,321
|
||||
Unamortized
discount of liability component
|
|
(13,375
|
)
|
|
(21,065
|
)
|
||
Net
carrying amount of liability component
|
$
|
117,512
|
$
|
135,256
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Effective
interest rate on liability component
|
7.07
|
%
|
7.07
|
%
|
7.07
|
%
|
7.07
|
%
|
||||||||
Contractual
interest expense recognized on the 2024 Notes
|
$
|
938
|
$
|
938
|
$
|
2,813
|
$
|
2,813
|
||||||||
Amortization
of the discount on liability component
|
$
|
1,446
|
$
|
2,059
|
$
|
4,678
|
$
|
6,070
|
The
remaining unamortized discount will be amortized using the effective interest
method through November 15, 2011. As of September 27, 2009, the if-converted
value of the 2024 Notes did not exceed the principal amount.
Note
6. Restructuring and Impairment Charges
2009
Restructuring Plan
In
January 2009, the Company formulated and began to implement a plan to further
reduce manufacturing overhead costs and operating expenses. As part of this
plan, the Company initiated personnel reductions in both its domestic and
foreign locations, with primary reductions in the United States, Estonia and
Sweden. These reductions were undertaken in response to current economic
conditions and the global macro-economic slowdown that began in the fourth
quarter of 2008. The Company expects to finalize the plan in the fourth quarter
of 2009.
15
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
A summary
of the activity affecting the accrued restructuring liability related to the
2009 Restructuring Plan for the first nine months of 2009 is as
follows:
Workforce
Reductions
|
Facility
Closures
&
Equipment Write-downs
|
Total
|
||||||||||
Balance
at December 28, 2008
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Amounts
accrued
|
1,973
|
77
|
2,050
|
|||||||||
Amounts
paid/incurred
|
(1,530
|
)
|
(77
|
)
|
(1,607
|
)
|
||||||
Effects
of exchange rates
|
—
|
—
|
—
|
|||||||||
Balance
at September 27, 2009
|
$
|
443
|
$
|
—
|
$
|
443
|
The costs
associated with these exit activities were recorded in accordance with the
accounting guidance now codified as FASB ASC Topic 420, “Exit or Disposal
Obligations.” Pursuant to this guidance, a liability for a
cost associated with an exit or disposal activity shall be recognized in the
period in which the liability is incurred, except for a liability for one-time
employee termination benefits that is incurred over time. In the
unusual circumstance in which fair value cannot be reasonably estimated, the
liability shall be recognized initially in the period in which fair value can be
reasonably estimated. The restructuring and integration plan is subject to
continued future refinement as additional information becomes available. The
Company expects that the workforce reduction amounts will be paid through the
first quarter of 2010.
2008
Restructuring Plan
In June
2008, the Company formulated and began to implement a plan to further
consolidate operations and reduce manufacturing and operating expenses. As part
of this plan, the Company closed its Salisbury, Maryland manufacturing facility
and transferred most of the production to its other manufacturing operations. In
addition, the Company closed its design and development center in Bristol, UK
and discontinued manufacturing operations in Kempele, Finland. These actions
were finalized in the first quarter of 2009.
A summary
of the activity affecting the accrued restructuring liability related to the
2008 Restructuring Plan for the first nine months of 2009 is as
follows:
Workforce
Reductions
|
Facility
Closures
&
Equipment Write-downs
|
Total
|
||||||||||
Balance
at December 28, 2008
|
$
|
3,106
|
$
|
585
|
$
|
3,691
|
||||||
Amounts
accrued
|
594
|
126
|
720
|
|||||||||
Amounts
paid/incurred
|
(3,634
|
)
|
(372
|
)
|
(4,006
|
)
|
||||||
Effects
of exchange rates
|
151
|
64
|
215
|
|||||||||
Balance
at September 27, 2009
|
$
|
217
|
$
|
403
|
$
|
620
|
The costs
associated with these exit activities were recorded in accordance with the
accounting guidance in FASB ASC Topic 420. The restructuring and integration
plan is subject to continued future refinement as additional information becomes
available. The Company expects that the workforce reductions will be paid out
through the fourth quarter of 2009, and the facility closure amounts will be
paid out over the remaining lease term, which extends through September
2010.
2007
Restructuring Plan
In the
second quarter of 2007, the Company formulated and began to implement a plan to
further consolidate operations and reduce operating costs. As part of this plan,
the Company closed its design and development centers in El Dorado Hills,
California and Toronto, Canada, and discontinued its design and development
center in Shipley, UK. Also as part of this plan, the Company sold its
manufacturing operations located in Hungary to Sanmina SCI, a third party
contract manufacturing supplier, and entered into a manufacturing services
agreement with Sanmina SCI. The transaction included inventories and fixed
assets and included a sublease of the existing facility, along with the
assumption of certain liabilities, including all transferred employees. The
Company finalized this plan in the fourth quarter of 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Facility
Closures
&
Equipment Write-downs
|
||||
Balance
at December 28, 2008
|
$
|
551
|
||
Amounts
accrued
|
(179
|
)
|
||
Amounts
paid/incurred
|
(388
|
)
|
||
Effects
of exchange rates
|
16
|
|||
Balance
at September 27, 2009
|
$
|
—
|
The costs
associated with these exit activities were recorded in accordance with the
accounting guidance in FASB ASC Topic 420. The remaining payments on this
plan were made in the third quarter of 2009, and all actions associated with
this plan have been completed.
2006
Plan for Consolidation of Operations
In the
fourth quarter of 2006, and in connection with the Filtronic plc wireless
acquisition, the Company formulated and began to implement a plan to restructure
its global manufacturing operations, including the consolidation of its
manufacturing facilities in Wuxi and Shanghai, China, into the manufacturing
facility located in Suzhou, China. The plan includes a reduction of workforce,
impairment and disposal of inventory and equipment utilized in discontinued
product lines, and facility closure costs. In addition, the Company also ceased
the production of certain product lines manufactured at these facilities to
eliminate duplicative product lines.
A summary
of the activity affecting the accrued restructuring liability related to the
2006 Plan for Consolidation of Operations for the first nine months of 2009 is
as follows:
Facility
Closures
&
Equipment Write-downs
|
||||
Balance
at December 28, 2008
|
$
|
146
|
||
Amounts
accrued
|
175
|
|||
Amounts
paid/incurred
|
(321
|
)
|
||
Effects
of exchange rates
|
—
|
|||
Balance
at September 27, 2009
|
$
|
—
|
The costs
associated with these exit activities were recorded in accordance with the
accounting guidance in FASB ASC Topic 420. The remaining payments on this
plan were made in the second quarter of 2009, and all actions associated with
this plan have been completed.
Integration
of LGP Allgon and REMEC, Inc.’s Wireless Systems Business
The
Company recorded liabilities in connection with the acquisitions for estimated
restructuring and integration costs related to the consolidation of REMEC,
Inc.’s wireless systems business and LGP Allgon’s operations, including
severance and future lease obligations on excess facilities. These estimated
costs were included in the allocation of the purchase consideration and resulted
in additional goodwill pursuant to the accounting guidance now codified as FASB
ASC Topic 805, “Business
Combinations.” The costs associated with these exit activities
were recorded in accordance with the accounting guidance in FASB ASC Topic 420.
The implementation of the restructuring and integration plan is
complete.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Facility
Closures
&
Equipment Write-downs
|
||||
Balance
at December 28, 2008
|
$
|
1,425
|
||
Amounts
accrued
|
—
|
|||
Amounts
paid/incurred
|
(515
|
)
|
||
Effects
of exchange rates
|
—
|
|||
Balance
at September 27, 2009
|
$
|
910
|
The
Company expects that the facility closure amounts will be paid out over the
remaining lease term which extends through January 2011.
Restructuring
and Impairment Charges
In the
first nine months of 2009, the Company recorded charges of approximately $1.0
million to write down the Salisbury, Maryland building to its fair value less
the cost to sell. The Company also incurred severance charges of $2.6 million
related to personnel reductions primarily in the United States, Finland and
Sweden and $0.1 million of facility closure expenses. The aggregate
of all such charges was $3.7 million of which approximately $1.7 million was
included in cost of sales and approximately $2.0 million was included in
operating expenses.
In the
first nine months of 2008, the Company recorded charges of approximately $8.6
million for the impairment of inventory at closed or consolidated facilities
that either has been or will be disposed of and is not expected to generate
future revenue. Included in these charges is $4.7 million and $3.3 million,
respectively, of inventory charges related to the closure of the Company’s
facilities in China and Salisbury, Maryland. The Company also incurred charges
of $0.9 million for professional fees related to the Company’s restructuring
plans. In addition, the Company recorded lease cancellation charges of $2.0
million associated with the closure of the Company’s facilities in Bristol, UK
and Hungary, charges of $2.2 million related to impairment charges and fees
associated with the closure of the Company’s entities in Salisbury, Maryland,
Bristol, UK, Costa Rica and Hungary, and incurred certain vendor cancellation
charges of $0.6 million related to closed facilities in China. Also in the first
nine months of 2008, the Company incurred severance costs of $3.4 million which
related to its restructuring plans. The aggregate of all such charges was $17.7
million of which $13.9 million was included in cost of sales and $3.8 million
was included in operating expenses.
Note
7. Other Income (Expense), Net
The
components of other income (expense), net, are as follows:
Three Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Interest
income
|
$
|
62
|
$
|
191
|
$
|
531
|
$
|
430
|
||||||||
Interest
expense
|
(4,064
|
)
|
(4,978
|
)
|
(12,937
|
)
|
(14,252
|
)
|
||||||||
Foreign
currency gain (loss), net
|
1,687
|
2,582
|
4,751
|
(3,227
|
)
|
|||||||||||
Gain
on repurchase of convertible debt
|
—
|
—
|
9,767
|
—
|
||||||||||||
Other
income, net
|
143
|
168
|
1,374
|
1,070
|
||||||||||||
Total
other income (expense), net
|
$
|
(2,172
|
)
|
$
|
(2,037
|
)
|
$
|
3,486
|
$
|
(15,979
|
)
|
Other
income (expense), net, for the nine months ended September 27, 2009 includes a
gain of approximately $9.8 million related to the repurchase of approximately
$25.4 million in aggregate par value of the Company’s outstanding 1.875%
convertible subordinated notes due 2024. The Company recognized net
foreign currency gains and losses in the
18
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Note 8. Loss Per Share
In
accordance with the accounting guidance now codified as FASB ASC Topic 260,
“Earnings per Share,”
basic earnings (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is based upon the
weighted average number of common and potential common shares for each period
presented and income available to common stockholders is adjusted to reflect any
changes in income or loss that would result from the issuance of the dilutive
common shares. The Company’s potential common shares include stock options under
the treasury stock method and convertible subordinated debt under the
if-converted method. Potential common shares of 32,131,430 and 31,713,003
related to the Company’s stock option programs and convertible debt have been
excluded from diluted weighted average common shares for the three and nine
months ended September 27, 2009, as the effect would be
anti-dilutive. Potential common shares of 35,695,340 and 36,504,974
related to the Company’s stock option programs and convertible debt have been
excluded from diluted weighted average common shares for the three and nine
months ended September 28, 2008.
The
following details the calculation of basic and diluted loss per
share:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Basic:
|
||||||||||||||||
Net
loss
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||||
Weighted
average common shares
|
131,950
|
131,142
|
131,698
|
131,023
|
||||||||||||
Basic
loss per share
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.25
|
)
|
||||
Diluted:
|
||||||||||||||||
Net
loss
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||||
Interest
expense of convertible debt, net of tax
|
—
|
—
|
—
|
—
|
||||||||||||
Net
loss, as adjusted
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
||||
Weighted
average common shares
|
131,950
|
131,142
|
131,698
|
131,023
|
||||||||||||
Potential
common shares
|
—
|
—
|
—
|
—
|
||||||||||||
Weighted
average common shares, as adjusted
|
131,950
|
131,142
|
131,698
|
131,023
|
||||||||||||
Diluted
loss per share
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.25
|
)
|
Note
9. Commitments and Contingencies
In the
first quarter of 2007, four purported shareholder class action complaints were
filed in the United States District Court for the Central District of California
against the Company, its President and Chief Executive Officer, its former
Executive Chairman of the Board of Directors and its Chief Financial Officer.
The complaints were Jerry
Crafton v. Powerwave Technologies, Inc., et. al., Kenneth Kwan v. Powerwave
Technologies, Inc., et. al., Achille Tedesco v. Powerwave Technologies, Inc.,
et. al. and Farokh Etemadieh v. Powerwave Technologies, Inc. et. al. and
were brought under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. In June 2007, the four cases were consolidated
into one action before the Honorable Judge Philip Gutierrez, and a lead
plaintiff was appointed. In October 2007, the lead plaintiff filed an amended
complaint asserting the same causes of action and purporting to state claims on
behalf of all persons who purchased Powerwave securities between May 2,
2005 and November 2, 2006. The essence of the allegations in the amended
complaint was that the defendants made misleading statements or omissions
concerning the Company’s projected and actual sales revenues, the integration of
certain acquisitions and the sufficiency of the Company’s internal controls. In
December 2007, the defendants filed a motion to dismiss the amended complaint.
On April 17, 2008, the Court granted defendants’ motion to dismiss
plaintiffs’ claims in connection with the Company’s projected sales revenues,
but denied defendants’ motion to dismiss plaintiffs’ other claims. On
August 29, 2008, the defendants answered the amended complaint. On May 14,
2009, the parties executed a stipulation of settlement to resolve the
consolidated action. According to the terms of the proposed settlement, the
settlement payment will be funded by the Company’s directors and officers
liability insurance. The Court granted preliminary approval of the
proposed settlement and provisionally certified a settlement class on June 22,
2009, and on October 19, 2009 entered a judgment that granted final approval of
the settlement.
In March
2007, one additional lawsuit that relates to the pending shareholder class
action was filed. The lawsuit, Cucci v. Edwards, et al.,
filed in the Superior Court of California, is a shareholder derivative action,
purported to be brought by an individual shareholder on behalf of Powerwave,
against current and former directors of Powerwave. Powerwave is also named as a
nominal defendant. The allegations of the derivative complaint closely resemble
those in the class action and pertain to the time period of May 2, 2005
through October 9, 2006. Based on those allegations, the derivative
complaint asserts various claims for breach of fiduciary duty, waste of
corporate assets, mismanagement, and insider trading under state law. The
derivative complaint was removed to federal court, and is also pending before
Judge Gutierrez. On May 15, 2009, the parties executed a stipulation of
settlement to resolve the derivative action. According to the terms
of the proposed settlement, the Company will adopt certain enhancements to its
corporate governance policies and procedures and counsel for the derivative
plaintiff will be reimbursed its legal fees and expenses, which will be funded
by the Company’s directors and officers liability
19
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
The
Company is subject to other legal proceedings and claims in the normal course of
business. The Company is currently defending these proceedings and
claims, and, although the outcome of legal proceedings is inherently uncertain
presently, the Company anticipates that it will be able to resolve these matters
in a manner that will not have a material adverse effect on the Company’s
consolidated financial position, results of operations or cash
flows.
Note
10. Contractual Guarantees and Indemnities
During
the normal course of its business, the Company makes certain contractual
guarantees and indemnities pursuant to which the Company may be required to make
future payments under specific circumstances. The Company has not recorded any
liability for these contractual guarantees and indemnities in the accompanying
consolidated financial statements. A description of significant contractual
guarantees and indemnities existing as of September 27, 2009 is included
below:
Intellectual
Property Indemnities
The
Company indemnifies certain customers and its contract manufacturers against
liability arising from third-party claims of intellectual property rights
infringement related to the Company’s products. These indemnities appear in
development and supply agreements with the Company’s customers as well as
manufacturing service agreements with the Company’s contract manufacturers, are
not limited in amount or duration and generally survive the expiration of the
contract. Given that the amount of any potential liabilities related to such
indemnities cannot be determined until an infringement claim has been made, the
Company is unable to determine the maximum amount of losses that it could incur
related to such indemnifications. Historically, any amounts payable pursuant to
such intellectual property indemnifications have not had a material effect on
the Company’s business, financial condition or results of
operations.
Director
and Officer Indemnities and Contractual Guarantees
The
Company has entered into indemnification agreements with its directors and
executive officers which require the Company to indemnify such individuals to
the fullest extent permitted by Delaware law. The Company’s indemnification
obligations under such agreements are not limited in amount or duration. Certain
costs incurred in connection with such indemnifications may be recovered under
certain circumstances under various insurance policies. Given that the amount of
any potential liabilities related to such indemnities cannot be determined until
a lawsuit has been filed against a director or executive officer, the Company is
unable to determine the maximum amount of losses that it could incur relating to
such indemnifications. Historically, any amounts payable pursuant to such
director and officer indemnifications have not had a material negative effect on
the Company’s business, financial condition or results of
operations.
The
Company has also entered into severance agreements and change in control
agreements with certain of its executives. These agreements provide for the
payment of specific compensation benefits to such executives upon the
termination of their employment with the Company.
20
POWERWAVE
TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
General
Contractual Indemnities/Products Liability
During
the normal course of business, the Company enters into contracts with customers
where it has agreed to indemnify the other party for personal injury or property
damage caused by the Company’s products. The Company’s indemnification
obligations under such agreements are not limited in duration and are generally
not limited in amount. Historically, any amounts payable pursuant to such
contractual indemnities have not had a material negative effect on the Company’s
business, financial condition or results of operations. The Company maintains
product liability insurance as well as errors and omissions insurance which may
provide a source of recovery to the Company in the event of an indemnification
claim.
Other
Guarantees and Indemnities
The
Company occasionally issues guarantees for certain contingent liabilities under
various contractual arrangements, including customer contracts, self-insured
retentions under certain insurance policies, and governmental value-added tax
compliance programs. These guarantees normally take the form of standby letters
of credit issued by the Company’s banks, which may be secured by cash deposits
or pledges, or performance bonds issued by an insurance company. Historically,
any amounts payable pursuant to such guarantees have not had a material negative
effect on the Company’s business, financial condition or results of operations.
In addition, the Company, as part of the agreements to register the convertible
notes it issued in September 2007, November 2004, and July 2003, agreed to
indemnify the selling security holders against certain liabilities, including
liabilities under the Securities Act. The Company’s indemnification obligations
under such agreements are not limited in duration and generally not limited in
amount.
Note
11. Income Taxes
The
Company provides for income taxes in interim periods based on the estimated
effective income tax rate for the complete fiscal year. The income tax provision
is computed on the pretax income of the consolidated entities located within
each taxing jurisdiction based on current tax law. Deferred tax assets and
liabilities are determined based on the future tax consequences associated with
temporary differences between income and expenses reported for financial
accounting and tax reporting purposes. A valuation allowance for deferred tax
assets is recorded to the extent that the Company cannot determine that the
ultimate realization of the net deferred tax assets is more likely than
not.
Realization
of deferred tax assets is principally dependent upon the achievement of future
taxable income, the estimation of which requires significant management
judgment. The Company’s judgment regarding future profitability may change due
to many factors, including future market conditions and the Company’s ability to
successfully execute its business plans and/or tax planning strategies. These
changes, if any, may require material adjustments to these deferred tax asset
balances. Due to uncertainties surrounding the realization of the Company’s
cumulative federal and state net operating losses and other factors, the Company
has recorded a valuation allowance against a portion of its gross deferred tax
assets. For the foreseeable future, the Federal tax provision related to future
earnings will be offset substantially by a reduction in the valuation allowance.
Accordingly, current and future tax expense will consist primarily of certain
required state income taxes and taxes in certain foreign
jurisdictions.
In
addition to unrecognized tax benefits, the Company has recorded valuation
allowances against its net tax benefits in certain jurisdictions arising from
net operating losses. On a quarterly basis, the Company reassesses the need for
these valuation allowances based on operating results and its assessment of the
likelihood of future taxable income and developments in the relevant tax
jurisdictions. The Company continues to maintain a valuation allowance against
its net deferred tax assets in the U.S. and various foreign jurisdictions in
2009 where the Company believes it is more likely than not that deferred tax
assets will not be realized.
As of
September 27, 2009, the liability for income taxes associated with uncertain tax
positions was $10.0 million, including accrued penalties, interest, and foreign
currency fluctuations of $0.5 million. Of this amount, $7.9 million,
if recognized, would affect the Company’s effective tax rate. In the
first quarter of 2009, approximately $1.1 million of the liability was reduced
as a result of the expiration of the statutory audit period of the tax
jurisdiction. Interest charges associated with all relevant uncertain
tax positions were recorded for the period and all other changes to the
liability were immaterial.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
Note
12. Fair Value of Financial Instruments
The
estimated fair value of the Company’s financial instruments has been determined
using available market information and valuation methodologies. Considerable
judgment is required in estimating fair values. Accordingly, the estimates may
not be indicative of the amounts the Company could realize in a current market
exchange.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it was practicable to estimate that
value.
Cash
and Cash Equivalents and Restricted Cash
The
carrying amount approximates fair value because of the short maturity (less than
90 days) and high credit quality of these instruments.
Long-Term
Debt
The fair
value of the Company’s long-term debt is estimated based on the quoted market
prices for the debt. The Company’s long-term debt consists of
convertible subordinated notes, which are not actively traded as an investment
instrument and therefore, the quoted market prices may not reflect actual sales
prices at which these notes would be traded. The Company values these
instruments at their stated par value, which represents the principal amount due
at maturity, as well as the amount upon which interest expense is based. The
stated par value of these notes equals their carrying value on the Company’s
consolidated balance sheet.
The
estimated fair values of the Company’s financial instruments were as
follows:
September 27, 2009
|
December
28, 2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
Cash
and cash
equivalents
|
$
|
44,901
|
$
|
44,901
|
$
|
46,906
|
$
|
46,906
|
||||||||
Restricted
cash
|
2,616
|
2,616
|
3,433
|
3,433
|
||||||||||||
Long-term
debt
|
||||||||||||||||
3.875%
Convertible Subordinated Notes due 2027
|
$
|
150,000
|
$
|
92,250
|
$
|
150,000
|
$
|
35,805
|
||||||||
1.875%
Convertible Subordinated Notes due 2024
|
130,887
|
105,691
|
156,321
|
37,189
|
||||||||||||
Less
unamortized discount
|
(13,375
|
)
|
(21,065
|
)
|
||||||||||||
Total
long-term
debt
|
$
|
267,512
|
$
|
285,256
|
Note
13. Gain on Settlement of Litigation
As part
of the Company’s acquisition of REMEC, Inc’s wireless systems business, $15
million of the purchase price was held in escrow to cover any potential
indemnification claims. In March 2009, the Company settled a dispute arising out
of certain claims made against the escrow. As a result of this settlement, the
Company received approximately $2 million in cash. This payment was accounted
for as an adjustment to the total consideration paid for this acquisition. As a
result, the remaining net book value of the intangible assets and fixed assets
acquired in this acquisition was eliminated and the Company recorded a net gain
of approximately $0.6 million. This amount is included in other income (expense), net
in the accompanying consolidated statement of operations.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular
amounts in thousands, except per share data)
The
Company’s product sales have historically been concentrated in a small number of
customers. For the three and nine months ended September 27, 2009, sales to
customers that accounted for 10% or more of revenues totaled $57.7 million and
$194.8 million, respectively. For the three months ended September 27, 2009,
sales to Nokia Siemens accounted for 31% of total revenues, and sales to Samsung
accounted for 11% of total revenues. For the first nine months of
2009, sales to Nokia Siemens accounted for approximately 35% of total revenues,
and sales to Alcatel-Lucent accounted for approximately 11% of total
revenues. For the three and nine months ended September 28, 2008,
sales to customers that accounted for 10% or more of revenues totaled $110.3
million and $330.1 million, respectively. For the three months ended September
28, 2008, sales to Nokia Siemens accounted for 32% of total revenues, and sales
to Alcatel-Lucent accounted for 14% of total revenues. For the first
nine months of 2008, sales to Nokia Siemens accounted for approximately 30% of
revenues, and sales to Alcatel-Lucent accounted for approximately 17% of
revenues.
As of
September 27, 2009, approximately 38% of total accounts receivable related to
customers that accounted for 10% or more of the Company’s total revenue during
the three months ended September 27, 2009. Nokia Siemens and Samsung accounted
for approximately 32% and 6%, respectively, of the Company’s total accounts
receivable. The inability to collect outstanding receivables from
these customers or any other significant customers, the delay in collecting
outstanding receivables within the contractual payment terms, or 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.
Note
15. Supplier Concentrations
Certain
of the Company’s products, as well as components utilized in such products, 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 from single-source suppliers as well as
finished products from single-source contract manufacturers. The inability to
obtain single-source components or finished products 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
obtained at a reasonable cost.
Note
16. Segments and Geographic Data
The
Company operates in one reportable business segment: “Wireless Communications.”
The Company’s revenues are derived from the sale of wireless communications
network products and coverage solutions, including antennas, boosters,
combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted
amplifiers, remote radio head transceivers and advanced coverage solutions for
use in cellular, PCS, 3G and 4G wireless communications networks throughout the
world.
The
Company manufactures multiple product categories at its manufacturing locations
and produces certain products at more than one location. With regard to sales,
the Company sells its products through two major sales channels. The largest
channel is the original equipment manufacturer channel, which consists of large
global companies such as Alcatel-Lucent, Ericsson, Huawei, Motorola, Nokia
Siemens and Samsung. The other major channel is direct to wireless network
operators such as AT&T, Bouygues, Orange, Sprint, Verizon Wireless and
Vodafone. A majority of the Company’s products are sold to both sales channels.
The Company maintains global relationships with most of its customers. The
Company’s original equipment manufacturer customers normally purchase on a
global basis and the sales to these customers, while recognized in various
reporting regions, are managed on a global basis. For network operator
customers, where they have a global presence, the Company typically maintains a
global purchasing agreement. Individual sales are also made on a regional
basis.
The
Company measures its performance by monitoring its net sales by product and
consolidated gross margins, with a short-term goal of maintaining a positive
operating cash flow while striving to achieve long-term operating
profits.
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Subsequent
to the issuance of its consolidated financial statements for the fiscal quarter
ended September 27, 2009, the Company identified an error in the accounting for
its 2024 Notes and the application of FASB ASC Topic 470-20, Debt with Conversion and Other
Options, to that instrument. FASB ASC Topic 470-20, which was
effective on December 29, 2008, requires the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion to be
separately accounted for in a manner that reflects the issuer’s nonconvertible
debt borrowing rate. To allocate the proceeds from a convertible debt offering
in this manner, a company would first need to determine the carrying amount of
the liability component, which would be based on the fair value of a similar
liability, excluding any embedded conversion options. The resulting debt
discount is then amortized over the period during which the debt is expected to
be outstanding as additional non-cash interest expense. The adoption of FASB ASC
Topic 470-20 generally requires retrospective application to all periods
presented. The Company had not properly applied FASB ASC Topic 470-20 to
its 2024 Notes. As a result, the accompanying consolidated financial
statements for the three and nine months ended September 27, 2009 and September
28, 2008 have been restated to correct for this error. The effect of the
restatement is described in Note 5 of the Notes to
Consolidated Financial Statements under Part I, Item 1, Financial
Statements. The following management’s
discussion and analysis gives effect to the restatement.
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included under Item 1, Financial Statements
(Unaudited). 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 Risk Factors, in Part II,
Item 1A included herein.
Introduction
and Overview
Powerwave
Technologies, Inc., which is referred to herein as “we,” “us” or “our,” is a
global supplier of end-to-end wireless solutions for wireless communications
networks. Our business consists of the design, manufacture, marketing and sale
of products to improve coverage, capacity and data speed in wireless
communication networks, including antennas, boosters, combiners, filters, radio
frequency power amplifiers, remote radio head transceivers, repeaters,
tower-mounted amplifiers and advanced coverage solutions. These products are
utilized in major wireless networks throughout the world that support voice and
data communications by use of cell phones and other wireless communication
devices. We sell our products to both original equipment manufacturers, who
incorporate our products into their proprietary base stations (which they then
sell to wireless network operators), and directly to individual wireless network
operators for deployment into their existing networks.
During
the last decade, demand for wireless communications infrastructure equipment has
fluctuated dramatically. While demand for wireless infrastructure was strong
during 2005, it weakened for Powerwave during 2006 and 2007 due to significant
reductions in demand from three of our major customers, as well as a general
slowdown in overall demand within the wireless infrastructure industry. For the
first three quarters of 2008, demand once again increased; however, starting in
the fourth quarter of 2008 and carrying over into 2009, demand for our products
has been negatively impacted by the global economic recession and credit
crisis. These events have led to reduced capital spending and lower
demand for our products, which has negatively impacted our financial results.
During 2008 and the first nine months of 2009, we implemented several cost
cutting initiatives aimed at lowering our operating expenses and manufacturing
cost structure. These initiatives will continue and we may be required to
further reduce operating expenses if there continues to be reduced demand from
our customers and reduced spending in the wireless communications industry
generally.
In the
past there have been significant slowdowns in capital spending by wireless
network operators due to delays in the expected deployment of infrastructure
equipment and financial difficulties on the part of the wireless network
operators who were forced to consolidate and reduce spending to strengthen their
balance sheets and improve their profitability. Economic conditions, such as the
turmoil in the global equity and credit markets, as well as the global recession
and the rise of inflationary pressures related to rising commodity prices, have
also had a negative impact on capital spending by wireless network operators,
and will likely have a negative impact going forward in the near term. All of
these factors can have a significant negative impact on overall demand for
wireless infrastructure products, and at various times, have directly reduced
demand for our products and increased price competition within our industry,
which has led to reductions in our revenues and contributed to our reported
operating losses. During fiscal 2006 and 2007, we experienced a significant
slowdown in demand from one of our direct network operator customers, AT&T,
as well as reduced demand from several of our original equipment manufacturing
customers, including Nokia Siemens and Nortel Networks, all of which combined,
directly reduced demand for our products and contributed to our operating losses
for both fiscal 2006 and 2007. During the first nine months of 2009,
we have again experienced a significant reduction in demand from our customers
that we believe is directly related to the global economic crisis and
recession.
We
believe that we have maintained our competitive position within the wireless
communications infrastructure equipment market during this period of changing
demand for wireless communication infrastructure equipment. We continue to
invest in the research and development of wireless communications network
technology and the diversification of our product offerings, and we believe that
we have one of our industry’s leading product portfolios in terms of performance
and features. We believe that our proprietary design technology is a further
differentiator for our products.
Looking
back over the last several years, beginning in fiscal 2004 we focused on cost
savings while we expanded our market opportunities, as evidenced by our
acquisition of LGP Allgon. This acquisition involved the integration of two
companies based in different countries that previously operated independently,
which was a complex, costly and time-consuming process. During fiscal 2005, we
continued to focus on cost savings while we expanded our market opportunities,
as evidenced by our acquisition of selected assets and liabilities of REMEC,
Inc.’s wireless systems business. We believe that this acquisition further
strengthened our position in the global wireless infrastructure market. In
October 2006, we completed the Filtronic plc wireless acquisition. We believe
that this strategic acquisition provided us with the leading position in
transmit and receive filter products, as well as broadened our RF conditioning
and base station solutions product portfolio and added significant additional
technology to our intellectual property portfolio. For fiscal years 2007 and
2008, we focused on finalizing and implementing our plans to integrate this
acquisition, consolidate operations and reduce our overall cost structure.
During this same time, we encountered a significant unanticipated reduction in
revenues, which caused us to revise our integration and consolidation plans with
a goal of further reducing our operating costs and significantly lowering our
breakeven operating structure. As has been demonstrated during the last five
years, these acquisitions do not provide any guarantee that our revenues will
increase. During the fall of 2008 and continuing through 2009, the
world’s economies have been impacted by the global credit crisis which combined
to cause a worldwide recession, which has severely impacted our markets and
significantly reduced demand for our products. We currently have a
number of ongoing restructuring activities which are aimed at further reducing
our overall operating cost structure and positioning us to return to improved
profitability when market conditions improve.
We
measure our success by monitoring our net sales by product and consolidated
gross margins, with a short-term goal of maintaining a positive operating cash
flow while striving to achieve long-term operating profits. We believe that
there continues to be long-term growth opportunities within the wireless
communications infrastructure marketplace, and we are focused on positioning
Powerwave to benefit from these long-term opportunities.
Critical
Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on our unaudited consolidated financial statements included in this
Quarterly Report on Form 10-Q, which has been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The preparation of these financial statements
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and related 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. On an ongoing
basis, we evaluate these estimates and assumptions, including those related to
revenue recognition, allowances for doubtful accounts, inventory reserves,
warranty obligations, vendor cancellation reserves, restructuring reserves,
asset impairment, income taxes and stock-based compensation expense. We base
these estimates on our historical experience and on various other factors which
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities and the amounts of certain expenses that are not readily apparent
from other sources. These estimates and assumptions by their nature involve
risks and uncertainties, and may prove to be inaccurate. In the event that any
of our estimates or assumptions are inaccurate in any material respect, it could
have a material adverse effect on our reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
For a
summary of our significant accounting policies and estimates, see Item 7,
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, of Part II of
our Annual Report on Form 10-K for the year ended December 28,
2008.
Accruals
for Restructuring and Impairment Charges
In the
first nine months of 2009 and 2008, we recorded restructuring and impairment
charges of approximately $3.7 million and $17.7 million, respectively. Such
charges relate to our 2006, 2007, 2008 and 2009 Restructuring Plans. See further
discussion of these plans in Note 6 of the Notes to Consolidated Financial
Statements under Part I, Item I, Financial
Information.
All of
these restructuring and impairment accruals related primarily to workforce
reductions, consolidation of facilities, and discontinuation of certain product
lines, including the associated write-downs of inventory, manufacturing and test
equipment, and certain intangible assets. These accruals were based on estimates
and assumptions made by management about matters which were uncertain at the
time, including the timing and amount of sublease income that would be recovered
25
on
vacated property and the net realizable value of used equipment that is no
longer needed in our continuing operations. While we used our best current
estimates based on facts and circumstances available at the time to quantify
these charges, different estimates could reasonably be used in the relevant
periods to arrive at different accruals and/or the actual amounts incurred or
recovered may be substantially different from the assumptions utilized, either
of which could have a material impact on the presentation of our financial
condition or results of operations for a given period. As a result, we
periodically review the estimates and assumptions used and reflect the effects
of those revisions in the period that they become known.
New
Accounting Pronouncements and Newly Adopted Accounting
Pronouncements
For a
summary of our New Accounting Pronouncements and Newly Adopted Accounting
Pronouncements, see Note 2 of the Notes to Consolidated Financial
Statements under Part I, Item I, Financial
Information.
Results
of Operations
The
following table summarizes Powerwave’s results of operations as a percentage of
net sales for the three and nine months ended September 27, 2009 and September
28, 2008:
Three Months
Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
Cost
of sales:
|
||||||||||||||||
Cost
of goods
|
73.3
|
75.5
|
74.5
|
75.7
|
||||||||||||
Intangible
asset amortization
|
0.5
|
1.7
|
0.4
|
2.3
|
||||||||||||
Restructuring
and impairment charges
|
0.2
|
1.4
|
0.4
|
2.0
|
||||||||||||
Total
cost of sales
|
74.0
|
78.6
|
75.3
|
80.0
|
||||||||||||
Gross
profit
|
26.0
|
21.4
|
24.7
|
20.0
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
5.8
|
4.3
|
6.3
|
5.1
|
||||||||||||
Research
and development
|
10.5
|
7.7
|
10.4
|
8.3
|
||||||||||||
General
and administrative
|
8.0
|
7.6
|
8.5
|
6.9
|
||||||||||||
Intangible
asset amortization
|
0.2
|
1.1
|
0.2
|
1.1
|
||||||||||||
Restructuring
and impairment charges
|
0.2
|
1.2
|
0.4
|
0.5
|
||||||||||||
Total
operating expenses
|
24.7
|
21.9
|
25.8
|
21.9
|
||||||||||||
Operating
income (loss)
|
1.3
|
(0.5
|
)
|
(1.1
|
)
|
(1.9
|
)
|
|||||||||
Other
income (expense), net
|
(1.5
|
)
|
(0.8
|
)
|
0.7
|
(2.2
|
)
|
|||||||||
Income
(loss) before income taxes
|
(0.2
|
)
|
(1.3
|
)
|
(0.4
|
)
|
(4.1
|
)
|
||||||||
Income
tax provision
|
0.6
|
0.3
|
0.3
|
0.4
|
||||||||||||
Net
income (loss)
|
(0.8
|
)%
|
(1.6
|
)%
|
(0.7
|
)%
|
(4.5
|
)%
|
Three
Months ended September 27, 2009 and September 28, 2008
Net
Sales
Our sales
are derived from the sale of wireless communications network products and
coverage solutions, including antennas, boosters, combiners, filters, radio
frequency power amplifiers, remote radio head transceivers, repeaters,
tower-mounted amplifiers and advanced coverage solutions for use in cellular,
PCS, 3G and 4G wireless communications networks throughout the
world.
The
following table presents a further analysis of our sales based upon our various
customer groups:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
Customer Group
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Wireless
network operators and other
|
$
|
57,892
|
42
|
%
|
$
|
97,382
|
41
|
%
|
||||||||
Original
equipment manufacturers
|
81,156
|
58
|
%
|
140,578
|
59
|
%
|
||||||||||
Total
|
$
|
139,048
|
100
|
%
|
$
|
237,960
|
100
|
%
|
Sales
decreased by 42% to $139.0 million for the third quarter of 2009, from $238.0
million, for the third quarter of 2008. This decrease was due to
several factors, including decreased demand from both our network operator
customers and our original equipment manufacturer customers, which decreased by
approximately 41% and 42%, respectively, for the third quarter of 2009 from the
third quarter of 2008. The decreases were primarily due to significantly reduced
demand related to the global macro-economic crisis and associated global credit
crisis and economic recession that began in the fall of 2008. This economic
instability and the tight credit markets have impacted our customers’ demand for
products throughout the first nine months of 2009.
The following table
presents a further analysis of our sales based upon our various product
groups:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
Wireless Communications Product
Group
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Antenna
systems
|
$
|
37,423
|
27
|
%
|
$
|
75,352
|
32
|
%
|
||||||||
Base
station systems
|
79,673
|
57
|
%
|
142,880
|
60
|
%
|
||||||||||
Coverage
systems
|
21,952
|
16
|
%
|
19,728
|
8
|
%
|
||||||||||
Total
|
$
|
139,048
|
100
|
%
|
$
|
237,960
|
100
|
%
|
Antenna
systems consist of base station antennas and tower-mounted amplifiers. Base
station systems consist of products that are installed into or around the base
station of wireless networks and include products such as boosters, combiners,
filters, radio frequency power amplifiers and VersaFlex cabinets. Coverage
systems consist primarily of repeaters and advanced coverage solutions. The
decrease in antenna systems and base station systems sales as listed in the
table above is due to the significantly reduced demand related to the global
economic crisis and recession impacting both our original equipment manufacturer
and network operator customers during the third quarter of 2009 as compared with
the third quarter of 2008. The increase in coverage systems is
primarily due to a large coverage solutions project that commenced near the end
of the second quarter of 2009.
We track
the geographic location of our sales based upon the location of our customers to
which we ship our products. However, since many of our original equipment
manufacturer customers purchase products from us at central locations and then
re-ship the product with other base station equipment to locations throughout
the world, we are unable to identify the final installation location of many of
our products.
The
following table presents an analysis of our net sales based upon the geographic
area to which a product was shipped:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
Geographic Area
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Americas
|
$
|
48,414
|
35
|
%
|
$
|
70,504
|
30
|
%
|
||||||||
Asia
Pacific
|
53,477
|
38
|
%
|
99,977
|
42
|
%
|
||||||||||
Europe
|
31,128
|
23
|
%
|
64,614
|
27
|
%
|
||||||||||
Other
international
|
6,029
|
4
|
%
|
2,865
|
1
|
%
|
||||||||||
Total
|
$
|
139,048
|
100
|
%
|
$
|
237,960
|
100
|
%
|
Revenues
decreased in all regions in the third quarter of 2009 as compared with the third
quarter of 2008 with the exception of the “other international” category. The
increase in revenues in the “other international” category largely represents
increased revenues in the Middle East region. The decrease in the other regions
was largely due to contraction in both the network operator channel and the
original equipment manufacturer sales channel, resulting from the global
macro-economic crisis and recession. Since wireless network infrastructure
spending is dependent on individual network coverage and capacity demands, we do
not believe that our revenue fluctuations for any geographic region are
necessarily indicative of a trend for our future revenues by geographic area. In
addition, as noted above, growth in one geographic location may not reflect
actual demand growth in that location due to the centralized buying processes of
our original equipment manufacturer customers.
A large
portion of our revenues are generated in currencies other than the U.S. Dollar.
During the last year, the value of the U.S. Dollar has fluctuated
significantly against many other currencies. We have calculated that when
comparing exchange rates in effect for the third quarter of 2008 to those in
effect for the third quarter of 2009, the change in the value of foreign
currencies as compared with the U.S. Dollar had a negative impact on our
revenues for the third quarter of 2009 of less than one percent. This
impact did not have a material impact on our net sales. We are unable
to predict the future impact of such currency fluctuations on our future
results.
For the
third quarter of 2009, total sales to Nokia Siemens accounted for approximately
31% of sales and sales to Samsung accounted for approximately 11% of
sales. For the third quarter of 2008, total sales to Nokia Siemens
accounted for approximately 32% of sales, and sales to Alcatel-Lucent accounted
for approximately 14% of sales for the quarter. Notwithstanding our
acquisitions, our business remains largely dependent upon a limited number of
customers within the wireless communications market, and we cannot guarantee
that we will continue to be successful in attracting new customers or retaining
or increasing business with our existing customers.
A number
of factors have caused delays and may cause future delays in new wireless
infrastructure and upgrade deployment schedules throughout the world, including
those in the United States, Europe, Asia, South America and other areas. In
addition, a number of factors may cause original equipment manufacturers to
alter their outsourcing strategies concerning certain wireless communications
network products, which could cause such original equipment manufacturers to
reduce or eliminate their demand for external supplies of such products or shift
their demand to alternative suppliers or internal suppliers. Such factors
include lower perceived internal manufacturing costs and competitive reasons to
remain vertically integrated. Due to the possible uncertainties associated with
wireless infrastructure deployments and original equipment manufacturer demand,
we have experienced and expect to continue to experience significant
fluctuations in demand from our original equipment manufacturer and network
operator customers. Such fluctuations have caused and may continue to cause
significant reductions in our revenues and/or operating results, which has
adversely impacted and may continue to adversely impact our business, financial
condition and results of operations.
Cost
of Sales and Gross Profit
Our cost
of sales includes both fixed and variable cost components and consists primarily
of materials, assembly and test labor, overhead, which includes equipment and
facility depreciation, transportation costs, warranty costs and amortization of
product-related intangibles. Components of our fixed cost structure include test
equipment and facility depreciation, purchasing and procurement expenses and
quality assurance costs. Given the fixed nature of such costs, the absorption of
our overhead costs into inventory decreases and the amount of overhead variances
expensed to cost of sales increases as volumes decline since we have fewer units
to absorb our overhead costs against. Conversely, the absorption of our overhead
costs into inventory increases and the amount of overhead variances expensed to
cost of sales decreases as volumes increase since we have more units to absorb
our overhead costs against. As a result, our gross profit margins generally
decrease as revenue and volumes decline due to lower sales volume and higher
amounts of overhead variances expensed to cost of sales. Our gross profit
margins generally increase as our revenue and volumes increase due to higher
sales volume and lower amounts of overhead variances expensed to cost of
sales.
The
following table presents an analysis of our gross profit:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Net
sales
|
$
|
139,048
|
100.0
|
%
|
$
|
237,960
|
100.0
|
%
|
||||||||
Cost
of sales:
|
||||||||||||||||
Cost
of sales
|
101,938
|
73.3
|
%
|
179,633
|
75.5
|
%
|
||||||||||
Intangible
amortization
|
624
|
0.5
|
%
|
4,094
|
1.7
|
%
|
||||||||||
Restructuring
and impairment charges
|
328
|
0.2
|
%
|
3,368
|
1.4
|
%
|
||||||||||
Total
cost of sales
|
102,890
|
74.0
|
%
|
187,095
|
78.6
|
%
|
||||||||||
Gross
profit
|
$
|
36,158
|
26.0
|
%
|
$
|
50,865
|
21.4
|
%
|
Our
actual total gross profit decreased during the third quarter of 2009, compared
with the third quarter of 2008, primarily as a result of our decreased revenues.
As a percentage of revenue, our gross profit margin increased during the third
quarter of 2009 compared with the third quarter of 2008 due primarily to reduced
overhead costs within cost of goods sold due to our restructuring activities
over the last year, and lower amortization and restructuring costs. The decrease
in the intangible amortization costs is due to the intangible asset impairment
recorded in the fourth quarter of 2008 (see Note 6 in the Notes to Consolidated Financial
Statements included under Part II, Item 8, and Financial Statements and
Supplementary Data of our Annual Report on Form 10-K for the fiscal year
ended December 28, 2008). We incurred minimal restructuring and impairment
charges in cost of sales during the third quarter of fiscal 2009. For
the third quarter of 2008, we incurred restructuring and impairment charges in
cost of sales totaling $3.4 million.
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. Certain of our competitors
have aggressively lowered prices in an attempt to gain market share. Due to
these competitive pressures and the pressures of our customers to continually
lower product costs, we expect that the average sales prices of our products
will continue to decrease and negatively impact our gross margins. In addition,
we have introduced new products at lower sales prices and these lower sales
prices have impacted the average sales prices of our products. We have also
reduced prices on our existing products in response to our competitors and
customer demands. We currently expect that pricing pressures will remain strong
in our industry. Future pricing actions by our competitors and us may adversely
impact our gross profit margins and profitability, which could result in
decreased liquidity and adversely affect our business, financial condition and
results of operations.
We
continue to strive for manufacturing and engineering cost reductions to offset
pricing pressures on our products, as evidenced by our prior decisions to close
or transfer our Salisbury, Maryland, Finland, Hungary, Shanghai and Wuxi, China
manufacturing operations as part of our restructuring plans to reduce our
manufacturing costs. However, we cannot guarantee that these cost reductions and
our outsourcing or product redesign efforts will keep pace with price declines
and cost increases. If we are unable to further reduce our costs through our
manufacturing, outsourcing and/or engineering efforts, our gross margins and
profitability will be adversely affected. See “Our average sales prices have
declined…” and “Our
reliance on contract manufacturers exposes us to risks…” under Part II,
Item 1A, Risk
Factors.
Operating
Expenses
The
following table presents a breakdown of our operating expenses by functional
category and as a percentage of
net
sales:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Operating Expenses
|
||||||||||||||||
Sales
and marketing
|
$
|
8,069
|
5.8
|
%
|
$
|
10,301
|
4.3
|
%
|
||||||||
Research
and development
|
14,534
|
10.5
|
%
|
18,447
|
7.7
|
%
|
||||||||||
General
and administrative
|
11,150
|
8.0
|
%
|
17,992
|
7.6
|
%
|
||||||||||
Intangible
amortization
|
206
|
0.2
|
%
|
2,589
|
1.1
|
%
|
||||||||||
Restructuring
and impairment charges
|
335
|
0.2
|
%
|
2,755
|
1.2
|
%
|
||||||||||
Total
operating expenses
|
$
|
34,294
|
24.7
|
%
|
$
|
52,084
|
21.9
|
%
|
Sales and
marketing expenses consist primarily of sales salaries and commissions, travel
expenses, advertising and marketing expenses, selling expenses, customer
demonstration unit expenses and trade show expenses. Sales and marketing
expenses decreased by $2.2 million, or 22%, during the third quarter of 2009 as
compared with the third quarter of 2008. The decrease was due primarily to lower
personnel costs resulting from restructuring actions taken in the last year,
lower bad debt expense and lower trade show expenses. In addition,
expenses for the third quarter of 2008 include an employee bonus accrual of $0.1
million. No bonuses have been accrued during fiscal
2009.
Research
and development expenses consist primarily of ongoing design and development
expenses for new wireless communications network products, as well as for
advanced coverage solutions. We also incur design expenses associated with
reducing the cost and improving the manufacturability of our existing products.
Research and development expenses can fluctuate dramatically from period to
period depending on numerous factors including new product introduction
schedules, prototype developments and hiring patterns. Research and development
expenses decreased by $3.9 million, or 21%, during the third quarter of 2009 as
compared with the third quarter of 2008, due primarily to restructuring actions
taken in the last year and lower professional fees for outsourced research and
development costs. Also contributing to the decrease in research and
development expenses were lower material expenses used in research and
development activities. In addition, expenses for the third quarter
of 2008 include an employee bonus accrual of $0.6 million. No bonuses
have been accrued during fiscal 2009.
General
and administrative expenses consist primarily of salaries and other expenses for
management, finance, information systems, legal fees, facilities and human
resources. General and administrative expenses decreased by $6.8 million, or
38%, during the third quarter of 2009 as compared with the third quarter of
2008. This decrease was due primarily to reduced payroll resulting from
personnel reductions taken in the last year from our restructuring activities
and lower tax, audit and professional fees. In addition, expenses for
the third quarter of 2008 include an employee bonus accrual of $0.7
million. No bonuses have been accrued during fiscal
2009.
Amortization
of customer-related intangibles from our acquisitions, amounted to $0.2 million
for the third quarter of 2009, compared with $2.6 million for the third quarter
of 2008 (see Note 6 in the Notes to Consolidated Financial
Statements included under Part II, Item 8, and Financial Statements and
Supplementary Data of our Annual Report on Form 10-K for the fiscal year
ended December 28, 2008). The decreased amortization expense for
the third quarter of 2009 was a result of the intangible asset impairment
recorded in the fourth quarter of 2008, which led to lower amortization in
2009.
Restructuring
charges of $0.3 million were recorded in the third quarter of 2009, primarily
related to severance costs in the United States, compared with charges of $2.8
million in the third quarter of 2008.
Other
Income (Expense), net
The
following table presents an analysis of other income (expense),
net:
Three
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Interest
income
|
$
|
62
|
0.1
|
%
|
$
|
191
|
0.1
|
%
|
||||||||
Interest
expense
|
(4,064
|
)
|
(2.9
|
)%
|
(4,978
|
)
|
(2.1
|
)%
|
||||||||
Foreign
currency gain
|
1,687
|
1.2
|
%
|
2,582
|
1.1
|
%
|
||||||||||
Other
income, net
|
143
|
0.1
|
%
|
168
|
0.1
|
%
|
||||||||||
Other
expense, net
|
$
|
(2,172
|
)
|
(1.5
|
)%
|
$
|
(2,037
|
)
|
(0.8
|
)%
|
Interest
income decreased during the third quarter of 2009 as compared with the third
quarter of 2008 primarily due to lower average cash balances and lower interest
rates. Interest expense decreased during the third quarter of 2009 as compared
to the third quarter of 2008, primarily due to the repurchases of approximately
$69 million of convertible subordinated notes during the last twelve months. For
the third quarter of 2009, we recognized a net foreign currency gain of $1.7
million primarily due to foreign currency fluctuations between the U.S. dollar
and the Euro, Swedish Krona, Chinese RMB and Indian Rupee, compared to the third
quarter of 2008 when we recognized a foreign currency gain of $2.6
million.
Income
Tax Provision
Our
effective tax rate for the third quarter of 2009 was an expense of approximately
260.7% of our pre-tax loss of $0.3 million. We have recorded a valuation
allowance against a portion of our deferred tax assets due to the uncertainty of
the timing and ultimate realization of those assets. As such, for the
foreseeable future, the tax provision or tax benefit related to future U.S.
earnings or losses will be offset substantially by a reduction in the valuation
allowance. For the third quarter of 2009, we recorded an income tax benefit for
losses from jurisdictions where the tax benefits will be realized or offset by
permanent differences. The benefit recorded was offset by tax expense
from operations in foreign jurisdictions, primarily China, and additional tax
expense associated with uncertain tax positions. We expect our tax
rate to continue to fluctuate based on the percentage of income earned in each
jurisdiction.
Net
Loss
The
following table presents a reconciliation of operating income (loss) to net
loss:
Three
Months Ended
(in
thousands)
|
||||||||
September
27,
2009
|
September
28,
2008
|
|||||||
Operating
income (loss)
|
$
|
1,864
|
$
|
(1,219
|
)
|
|||
Other
expense, net
|
(2,172
|
)
|
(2,037
|
)
|
||||
Loss
before income taxes
|
(308
|
)
|
(3,256
|
)
|
||||
Income
tax provision
|
803
|
540
|
||||||
Net
loss
|
$
|
(1,111
|
)
|
$
|
(3,796
|
)
|
Our net
loss for the third quarter of 2009 was $1.1 million, compared with a net loss of
$3.8 million for the third quarter of 2008. The decrease in our net loss during
the third quarter of 2009 compared with the third quarter of 2008 is the result
primarily of lower intangible asset amortization costs resulting from prior year
asset impairments and lower restructuring and impairment charges when compared
to the prior year period.
Nine
Months ended September 27, 2009 and September 28, 2008
Net
Sales
The
following table presents a further analysis of our sales based upon our various
customer groups:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
Customer Group
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Wireless
network operators and other
|
$
|
154,274
|
36
|
%
|
$
|
278,162
|
39
|
%
|
||||||||
Original
equipment manufacturers
|
270,630
|
64
|
%
|
431,741
|
61
|
%
|
||||||||||
Total
|
$
|
424,904
|
100
|
%
|
$
|
709,903
|
100
|
%
|
Sales
decreased by approximately 40% to $424.9 million for the first nine months of
2009, from $709.9 million, for the first nine months of 2008. This
decrease was due to lower demand from both our network operator customers and
our original equipment manufacturer customers, which decreased by approximately
45% and 37%, respectively, for the first nine months of 2009 from the first nine
months of 2008. The decreases were primarily due to significantly reduced demand
related to the global macro-economic crisis and associated global credit crisis
and economic recession that began in the fall of 2008. We believe that this
economic instability and the tight credit markets have impacted our customers’
demand for products throughout the first nine months of 2009.
The
following table presents a further analysis of our sales based upon our various
product groups:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
Wireless Communications Product
Group
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Antenna
systems
|
$
|
104,932
|
25
|
%
|
$
|
195,788
|
28
|
%
|
||||||||
Base
station systems
|
278,466
|
65
|
%
|
444,180
|
62
|
%
|
||||||||||
Coverage
systems
|
41,506
|
10
|
%
|
69,935
|
10
|
%
|
||||||||||
Total
|
$
|
424,904
|
100
|
%
|
$
|
709,903
|
100
|
%
|
The
decrease in all three of our product groups is due to the significantly reduced
demand related to the global economic crisis impacting both our original
equipment manufacturer and network operator customers during the first nine
months of 2009 as compared with the first nine months of 2008.
The
following table presents an analysis of our net sales based upon the geographic
area to which a product was shipped:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
Geographic Area
|
September
27, 2009
|
September
28, 2008
|
||||||||||||||
Americas
|
$
|
125,896
|
29
|
%
|
$
|
239,669
|
34
|
%
|
||||||||
Asia
Pacific
|
160,749
|
38
|
%
|
235,572
|
33
|
%
|
||||||||||
Europe
|
108,990
|
26
|
%
|
215,738
|
30
|
%
|
||||||||||
Other
international
|
29,269
|
7
|
%
|
18,924
|
3
|
%
|
||||||||||
Total
|
$
|
424,904
|
100
|
%
|
$
|
709,903
|
100
|
%
|
Revenues
decreased in all regions in the first nine months of 2009 as compared with the
first nine months of 2008 with the exception of the “other international”
category. The increase in revenues in the “other international” category largely
represents increased revenues in the Middle East region. The decrease in the
other regions was largely due to contraction in both the network operator
channel and the original equipment manufacturer sales channel, resulting from
the global macro-economic crisis and recession. Since wireless network
infrastructure spending is dependent on individual network coverage and capacity
demands, we do not believe that our revenue fluctuations for any geographic
region are necessarily indicative of a trend for our future revenues by
geographic area. In addition, growth in one geographic location may not reflect
actual demand growth in that location due to the centralized buying processes of
our original equipment manufacturer customers.
A large
portion of our revenues are generated in currencies other than the U.S.
Dollar. During the last year, the value of the U.S. Dollar has
fluctuated significantly against most other currencies. We have
calculated that when comparing exchange rates in effect for the first nine
months of 2008 to those in effect for the first nine months of 2009, the change
in the value of foreign currencies as compared with the U.S. Dollar had a
negative impact on our revenues for the first nine months of 2009 of
approximately one percent. This impact did not have a material impact on our net
sales.
For the
first nine months of 2009, total sales to Nokia Siemens accounted for
approximately 35% of sales, and sales to Alcatel-Lucent accounted for
approximately 11% of sales. For the first nine months of 2008, total
sales to Nokia Siemens accounted for approximately 30% of sales, and sales to
Alcatel-Lucent accounted for approximately 17% of sales for the
period.
Cost
of Sales and Gross Profit
The
following table presents an analysis of our gross profit:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Net
sales
|
$
|
424,904
|
100.0
|
%
|
$
|
709,903
|
100.0
|
%
|
||||||||
Cost
of sales:
|
||||||||||||||||
Cost
of sales
|
316,487
|
74.5
|
%
|
537,486
|
75.7
|
%
|
||||||||||
Intangible
amortization
|
1,870
|
0.4
|
%
|
16,459
|
2.3
|
%
|
||||||||||
Restructuring
and impairment charges
|
1,738
|
0.4
|
%
|
13,903
|
2.0
|
%
|
||||||||||
Total
cost of sales
|
320,095
|
75.3
|
%
|
567,848
|
80.0
|
%
|
||||||||||
Gross
profit
|
$
|
104,809
|
24.7
|
%
|
$
|
142,055
|
20.0
|
%
|
Our total
gross profit decreased during the first nine months of fiscal 2009 compared with
the first nine months of fiscal 2008, primarily as a result of our decreased
revenues. As a percentage of revenue, our gross profit margin
increased during the first nine months of 2009 compared with the first nine
months of 2008 due to lower manufacturing costs, lower intangible amortization
and lower restructuring costs. The decrease in the intangible
amortization costs is due to the intangible asset impairment recorded in the
fourth quarter of 2008 (see Note 6 in the Notes to Consolidated Financial
Statements included under Part II, Item 8, and Financial Statements and
Supplementary Data of our Annual Report on Form 10-K for the fiscal year
ended December 28, 2008). We incurred approximately $1.7 million
of restructuring and impairment charges during the first nine months of fiscal
2009 related to severance charges in the United States, Finland, Sweden and the
UK. For the first nine months of 2008, we incurred $13.9 million of
restructuring and impairment charges related to restructuring plans implemented
primarily in conjunction with our China and Salisbury manufacturing
consolidations. Our cost of goods sold for
33
the first
nine months of 2009 was slightly lower as a percentage of revenue compared with
the prior year period. This decrease in the percentage of cost of goods sold is
due primarily to our cost reduction activities over the last
year.
Operating
Expenses
The
following table presents a breakdown of our operating expenses by functional
category and as a percentage of net sales:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Operating Expenses
|
||||||||||||||||
Sales
and marketing
|
$
|
26,665
|
6.3
|
%
|
$
|
36,064
|
5.1
|
%
|
||||||||
Research
and development
|
44,273
|
10.4
|
%
|
58,907
|
8.3
|
%
|
||||||||||
General
and administrative
|
36,001
|
8.5
|
%
|
49,062
|
6.9
|
%
|
||||||||||
Intangible
amortization
|
740
|
0.2
|
%
|
7,846
|
1.1
|
%
|
||||||||||
Restructuring
and impairment charges
|
1,985
|
0.4
|
%
|
3,834
|
0.5
|
%
|
||||||||||
Total
operating expenses
|
$
|
109,664
|
25.8
|
%
|
$
|
155,713
|
21.9
|
%
|
Sales and
marketing expenses decreased by $9.4 million, or 26%, during the first nine
months of 2009 as compared with the first nine months of 2008. The decrease
resulted primarily from lower personnel costs resulting from restructuring
activities taken in the last year, as well as decreased travel and trade show
expenses.
Research
and development expenses decreased by $14.6 million, or 25%, during the first
nine months of 2009 as compared with the first nine months of 2008, primarily
from reduced personnel costs due to restructuring actions taken in the last
year, lower professional fees for outsourced research and development costs and
lower travel expenses. Also contributing to the decrease were lower
materials costs used in research and development activities.
General
and administrative expenses decreased by $13.1 million, or 27%, during the first
nine months of 2009 as compared with the first nine months of 2008. This
decrease was due to reduced payroll resulting from personnel reductions over the
last year from our restructuring activities and lower audit, tax, legal and
professional fees.
Amortization
of customer-related intangibles from our acquisitions, amounted to $0.7 million
for the first nine months of 2009, compared with $7.8 million for the first nine
months of 2008. The decrease was due to the intangible asset impairment recorded
in the fourth quarter of 2008, which led to lower amortization expense in
2009.
Restructuring
charges of $2.0 million were recorded in the first nine months of 2009,
primarily for severance costs in the United States, Finland and Sweden, compared
with charges of $3.8 million for the first nine months of 2008.
Other
Income (Expense), net
The
following table presents an analysis of other income (expense),
net:
Nine
Months Ended
(in
thousands)
|
||||||||||||||||
September
27, 2009
|
September
28, 2008
|
|||||||||||||||
Interest
income
|
$
|
531
|
0.1
|
%
|
$
|
430
|
0.1
|
%
|
||||||||
Interest
expense
|
(12,937
|
)
|
(3.1
|
)%
|
(14,252
|
)
|
(2.0
|
)%
|
||||||||
Foreign
currency gain (loss), net
|
4,751
|
1.1
|
%
|
(3,227
|
)
|
(0.4
|
)%
|
|||||||||
Gain
on repurchase of convertible debt
|
9,767
|
2.3
|
%
|
—
|
—
|
|||||||||||
Other
income, net
|
1,374
|
0.3
|
%
|
1,070
|
0.1
|
%
|
||||||||||
Other
income (expense), net
|
$
|
3,486
|
0.7
|
%
|
$
|
(15,979
|
)
|
(2.2
|
)%
|
Interest
income increased slightly during the first nine months of 2009 compared with the
first nine months of 2008. Interest expense decreased due to lower interest
expense associated with the retirement of approximately $69 million of our
long-term debt in the last three quarters when compared with the first nine
months of 2008. The increase in other income (expense), net, is
primarily due to the $9.8 million gain we recognized on the purchase of $25.4
million in aggregate par value of our outstanding 1.875% subordinated
convertible notes due 2024. We recognized a net foreign currency gain
of $4.8 million in the first nine months of 2009 primarily due to fluctuations
between the U.S. Dollar and the Euro, Swedish Krona and Chinese RMB, compared to
a foreign currency loss of $3.2 million in the first nine months of
2008.
Income
Tax Provision
Our
effective tax rate for the first nine months of 2009 was an expense of
approximately 113.6% of our pre-tax loss of $1.4 million. Our
effective tax rate was reduced by approximately $1.1 million from a reduction in
our liability for income taxes associated with uncertain tax positions as a
result of the expiration of the statutory audit period of the tax
jurisdiction. We have recorded a valuation allowance against a
portion of our deferred tax assets pursuant to the accounting guidance now
codified as FASB ASC Topic 740, “Income Taxes,” due to the
uncertainty of the timing and ultimate realization of those assets. As such, for
the foreseeable future, the tax provision or tax benefit related to future U.S.
earnings or losses will be offset substantially by a reduction in the valuation
allowance. For the first nine months of 2009, we recorded an income
tax benefit for losses from tax jurisdictions where the tax benefits will be
realized or offset by permanent differences. The tax benefit recorded
was offset by tax expense from operations in foreign jurisdictions, primarily
China, and tax expense associated with uncertain tax positions. We
expect our effective tax rate to continue to fluctuate based on the percentage
of income earned in each tax jurisdiction.
Net
Loss
The
following table presents a reconciliation of operating loss to net
loss:
Nine
Months Ended
(in
thousands)
|
||||||||
September
27,
2009
|
September
28,
2008
|
|||||||
Operating
loss
|
$
|
(4,855
|
)
|
$
|
(13,658
|
)
|
||
Other
income (expense), net
|
3,486
|
(15,979
|
)
|
|||||
Income
(loss) before income taxes
|
(1,369
|
)
|
(29,637
|
)
|
||||
Income
tax provision
|
1,555
|
2,515
|
||||||
Net
income (loss)
|
$
|
(2,924
|
)
|
$
|
(32,152
|
)
|
Our net
loss for the first nine months of 2009 was $2.9 million compared with a loss of
$32.2 million for the first nine months of 2008. The decrease in our
net loss during the first nine months of 2009 as compared with the first nine
months of 2008 is the result of lower manufacturing costs and operating expenses
resulting from our worldwide cost-cutting and restructuring activities, lower
restructuring and impairment costs, lower intangible asset amortization costs
resulting from prior year asset impairments and gains on our debt repurchases
during the period.
Liquidity
and Capital Resources
We have
historically financed our operations through a combination of cash on hand, cash
provided from operations, equipment lease financings, available borrowings under
our bank line of credit, private debt placements and both private and public
equity offerings. Our principal sources of liquidity consist of existing cash
balances, funds expected to be generated from future operations and available
borrowings under our Credit Agreement. As of September 27, 2009, we had working
capital of $173.3 million, including $44.9 million in unrestricted cash and cash
equivalents compared with working capital of $205.2 million at September 28,
2008, which included $57.7 million in unrestricted cash and cash
equivalents. We currently invest our excess cash in short-term,
investment-grade, 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.
Cash
Flows
The
following table summarizes our cash flows for the nine months ended September
27, 2009 and September 28, 2008:
Nine
Months Ended
(in
thousands)
|
||||||||
September
27,
2009
|
September
28,
2008
|
|||||||
Net
cash provided by (used in):
|
||||||||
Operating
activities
|
$
|
10,836
|
$
|
17,211
|
||||
Investing
activities
|
(643
|
)
|
(3,069
|
)
|
||||
Financing
activities
|
(13,482
|
)
|
(13,065
|
)
|
||||
Effect
of foreign currency translation on cash and cash
equivalents
|
1,284
|
(1,557
|
)
|
|||||
Net
decrease in cash and cash equivalents
|
$
|
(2,005
|
)
|
$
|
(480
|
)
|
Net cash
provided by operations during the first nine months of 2009 was $10.8 million as
compared with $17.2 million during the first nine months of 2008. The reduction
in cash flow from operations from the prior year period is due primarily to
lower revenues during the first nine months of 2009, which resulted in lower
actual gross profit, partially offset by lower operating expenses.
Net cash
used in investing activities during the first nine months of 2009 was $0.6
million as compared with net cash used in investing activities of $3.1 million
during the first nine months of 2008. The net cash used in investing activities
during the first nine months of 2009 represents a reduction in our restricted
cash of $0.8 million, proceeds from a settlement of litigation of $2.0 million,
proceeds from the final installment payment from the sale of the Arkivator
business in 2006 of $0.5 million and proceeds from the sale of fixed assets of
$0.3 million, offset by capital expenditures of $4.2 million. Total capital
expenditures during the first nine months of 2009 and the first nine months of
2008 were approximately $4.2 million and $7.5 million, respectively. The
majority of the capital spending during both periods related to computer
hardware and test equipment utilized in our manufacturing and research and
development areas. We expect our capital spending requirements for the remainder
of this year to range between $2 million and $4 million, consisting of test
and production equipment, computer hardware and software and expenditures
related to our new Thailand facility.
Net cash
used in financing activities of $13.5 million during the first nine months of
2009 relates primarily to the repurchase of $25.4 million in aggregate par value
of our 1.875% convertible subordinated notes due 2024, as well as $1.3 million
in debt issuance costs related to our new Credit Agreement. Net cash
used in financing activities of $13.1 million for the first nine months of 2008
relates primarily to the redemption of the 1.25% convertible notes due July
2008.
We
currently believe that our existing cash balances, funds expected to be
generated from operations and borrowings under our Credit Agreement will provide
us with sufficient funds to finance our current operations for at least the next
twelve months. Our principal sources of liquidity consist of our existing cash
balances, funds expected to be generated from operations and our Credit
Agreement described below. 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 would reduce our operating cash flows
and erode our existing cash balances. No assurances can be given that we will be
able to generate positive operating cash flows in the future or maintain and/or
grow our existing cash balances.
We had a
total of $280.9 million of long-term convertible subordinated notes outstanding
at September 27, 2009, consisting of $130.9 million of 1.875% convertible
subordinated notes due 2024 (“2024 Notes”) and $150.0 million of 3.875%
convertible subordinated notes due 2027 (“2027 Notes”). Holders of the 2024
Notes may require us to repurchase all or a portion of their notes for cash on
November 15, 2011, 2014 and 2019 at 100% of the principal amount of the
notes, plus accrued and unpaid interest. Holders of the 2027 Notes may require
us to repurchase all or a portion of their notes for cash on October 1,
2014, 2017 and 2022 at 100% of the principal amount of the notes, plus accrued
and unpaid interest. No assurance can be given that we will be able to generate
positive operating cash flows in the future or maintain and/or grow our existing
cash balances. If we do not generate sufficient cash from operations, or improve
our ability to generate cash, we may not have sufficient funds available to pay
our maturing debt. If we have not retired the debt prior to maturity, and if we
do not have adequate cash available at that time, we would be required to
refinance the notes and no assurance can be given that we will be able to
refinance the notes on terms acceptable to us or at all given current conditions
in the credit markets. If our financial performance is poor or if credit markets
remain tight, we will likely encounter a more difficult environment in terms of
raising additional financing. If we are not able to repay or refinance the notes
or if we experience a prolonged period of reduced customer demand for our
products, our ability to maintain operations may be impacted.
Financing
Activities
We
entered into a Credit Agreement on April 3, 2009, see Note 5 of the Notes to Consolidated Financial
Statements under Part I, Item I, Financial
Information. Pursuant to the Credit Agreement, the lenders
thereunder have made available to us a senior secured credit facility in the
form of a revolving line of credit up to a maximum of $50.0 million.
Availability under the Credit Agreement is based on the calculation of our
borrowing base as defined in the Credit Agreement. The Credit Agreement is
secured by a first priority security interest on a majority of our assets,
including without limitation, all accounts, equipment, inventory, chattel paper,
records, intangibles, deposit accounts, cash and cash equivalents and proceeds
of the foregoing. The Credit Agreement expires on August 15, 2011. The
Credit Agreement contains customary affirmative and negative covenants for
credit facilities of this type, including limitations on us with respect to
indebtedness, liens, investments, distributions, mergers and acquisitions and
dispositions of assets. The Credit Agreement also includes financial covenants
including minimum EBITDA and maximum capital expenditures that are applicable
only if the availability of our line of credit falls below $20.0
million. We are currently in compliance with these covenants as
of September 27, 2009. If the current economic recession continues
and our revenues decrease, there is no assurance that we will be able to comply
36
with the
covenants in the Credit Agreement. See “We will need additional capital in
the future and such financing may not be available on favorable terms…”
under Part II, Item 1A, Risk
Factors.
Also on
April 3, 2009, in connection with entering into the Credit Agreement
referenced above, we terminated our Amended Receivables Purchase Agreement. As
of the date of termination, we did not have any borrowings outstanding under the
Amended Receivables Purchase Agreement. In addition, we did not incur any early
termination penalties in connection with the termination of the Amended
Receivables Purchase Agreement.
On
occasion, we have previously utilized both operating and capital lease financing
for certain equipment purchases used in our manufacturing and research and
development operations and may selectively continue to do so in the future. We
may require additional funds in the future to support our working capital
requirements or for other purposes such as acquisitions, 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 secure additional
financing or sources of funding is dependent upon our financial performance,
credit rating and the market price for our Common Stock, which are all directly
impacted by our ability to grow revenues and generate profits. In addition, our
ability to obtain financing is directly dependent upon the availability of
financial markets to provide sources of financing on reasonable terms and
conditions. During the last half of fiscal 2008 and the first nine
months of fiscal 2009, the capital and credit markets have experienced extreme
volatility and disruption. In several cases, the markets have exerted
downward pressure on stock prices and credit capacity for certain issuers. Given
current market conditions, we can make no guarantee that we will be able to
obtain additional financing or secure new financing arrangements in the future.
If our operating performance was to deteriorate and our cash balances were to be
significantly reduced, we would likely encounter a more difficult environment in
terms of raising additional funding to support our business and we may be
required to further reduce operating expenses or scale back
operations.
Off-Balance
Sheet Arrangements
Our
off-balance sheet arrangements consist primarily of conventional operating
leases, purchase commitments and other commitments arising in the normal course
of business, as further discussed in our Form 10-K for the year ended
December 28, 2008, in Part II, Item 7 under the heading Contractual Obligations and
Commercial Commitments. As of September 27, 2009, we did not have any
other relationships with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually-narrow or limited
purposes.
Disclosure
About Stock Option Plans
Our stock
option program is a broad-based, long-term retention program that is intended to
attract and retain talented employees and align stockholder and employee
interests. The program consists of six separate plans: one under which
non-employee directors may be granted options to purchase shares of stock and
five broad-based plans under which options may be granted to all employees,
including officers. One such plan provides for both option grants and stock
based awards including restricted stock awards. Options granted under these
plans expire either five or ten years from the grant date and generally vest
over one to four years.
During
the first nine months of 2009, we granted options to purchase a total of
4,698,750 shares of Common Stock. We did not grant any shares of restricted
stock to employees during this time period. After deducting 787,566 shares for
options forfeited, the result was net options granted of 3,911,184. Net options
granted during the first nine months of 2009 represented 3.0% of our total
outstanding shares of Common Stock of 132,359,006 as of September 27, 2009. The
following table summarizes the net stock option grants and restricted stock
awards to our employees, directors and executive officers:
Nine Months Ended
September
27,
2009
|
Year
Ended
December 28,
2008
|
|||||||
Net
grants (forfeitures) during the period as a % of total outstanding common
shares
|
3.0%
|
0.2%
|
||||||
Grants
to executive officers during the period as a % of total options and awards
granted during the period
|
32.9%
|
21.6%
|
||||||
Grants
to executive officers during the period as a % of total outstanding common
shares
|
1.2%
|
0.3%
|
||||||
Cumulative
options held by executive officers as a % of total options
outstanding
|
36.5%
|
34.7%
|
As of
September 27, 2009, a total of 1,800,328 options were available for grant under
all of our option plans with a total of 16,200 shares of Common Stock held in
escrow to cover all remaining exercises under our 1995 Stock Option Plan. See
Note 13 in the Notes to
Consolidated Financial Statements included under Part II, Item 8,
Financial Statements and
Supplementary Data of our Annual Report on Form 10-K for the fiscal year
ended December 28, 2008 for further information regarding our 1995 Stock
Option Plan. The following table summarizes activity for outstanding options
under all of our stock option plans during the first nine months of
2009:
Number
of
Shares
|
Price Per Share
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
||||||||||||||||
Balance
at December 28, 2008
|
6,840,921
|
$
|
0.49-$67.08
|
$
|
8.34
|
3,724,870
|
$
|
10.62
|
||||||||||||
Granted
|
4,698,750
|
$
|
0.42-$1.46
|
$
|
0.54
|
|||||||||||||||
Exercised
|
—
|
—
|
—
|
|||||||||||||||||
Cancelled
|
(787,566
|
)
|
$
|
0.48-$61.67
|
$
|
9.74
|
||||||||||||||
Balance
at September 27, 2009
|
10,752,105
|
$
|
0.42-$67.08
|
$
|
4.83
|
4,138,920
|
$
|
9.23
|
The
following table summarizes outstanding stock options that are “in-the-money” and
“out-of the-money” as of September 27, 2009. For purposes of this table,
in-the-money stock options are those options with an exercise price less than
$1.58 per share, the closing price of our Common Stock on September 25, 2009,
the last trading day of the fiscal quarter. Out-of-the-money stock options are
stock options with an exercise price greater than or equal to the $1.58 per
share closing price.
Exercisable
|
Unexercisable
|
Total
Shares
|
||||||||||||||||||
Shares
|
Wtd. Avg.
Exercise
Price
|
Shares
|
Wtd. Avg.
Exercise
Price
|
|||||||||||||||||
In-the-Money
|
22,500
|
$
|
1.20
|
4,663,750
|
$
|
0.54
|
4,686,250
|
|||||||||||||
Out-of-the-Money
|
4,116,420
|
9.27
|
1,949,435
|
5.76
|
6,065,855
|
|||||||||||||||
Total
Options Outstanding
|
4,138,920
|
$
|
9.23
|
6,613,185
|
$
|
2.08
|
10,752,105
|
The
following table sets forth certain information concerning the exercise of
options by each of our executive officers during the first nine months of 2009,
including the aggregate value of gains on the date of exercise held by such
executive officers, as well as the number of shares covered by both exercisable
and unexercisable stock options as of September 27, 2009. Also reported are the
values for the in-the-money options which represent the positive spread between
the exercise prices of any such existing stock options and the closing price of
our Common Stock on September 25, 2009, the last trading day of the fiscal
quarter.
Name
|
Shares
Acquired
on
Exercise
|
Value
Realized
|
Number
of
Securities Underlying
Unexercised
Options at
September
27, 2009
|
Value
of Unexercised
In-the-Money
Options at
September
27, 2009(1)
|
|||||||||||||
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||||||
Ronald
J. Buschur
|
—
|
$
|
—
|
1,050,000
|
550,000
|
$
|
—
|
$
|
565,000
|
||||||||
Kevin
T. Michaels
|
—
|
$
|
—
|
552,500
|
337,500
|
$
|
—
|
$
|
282,500
|
||||||||
J.
Marvin Magee
|
—
|
$
|
—
|
147,916
|
512,084
|
$
|
—
|
$
|
452,000
|
||||||||
Khurram
P. Sheikh
|
—
|
$
|
—
|
96,354
|
459,896
|
$
|
—
|
$
|
414,150
|
||||||||
Basem
Anshasi
|
—
|
$
|
—
|
68,331
|
146,669
|
$
|
—
|
$
|
75,500
|
(1)
|
In
accordance with the Securities and Exchange Commission’s rules, values are
calculated by subtracting the exercise price from the fair market value of
the underlying Common Stock. For purposes of this table, fair market value
per share is deemed to be $1.58, which was the closing price of our Common
Stock as reported by NASDAQ on September 25, 2009, the last trading day of
the fiscal quarter.
|
Our
shareholders have previously approved all stock option plans under which our
Common Stock is reserved for issuance. The following table provides summary
information as of September 27, 2009, for all of our stock option
plans:
Number of Shares of
Common Stock to
be
Issued upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
|
Weighted
Average
Exercise Price
of Outstanding
Options,
Warrants
and
Rights
|
Number of Shares
of
Common
Stock
Remaining Available
for
Future Issuance
under
our Stock
Option
Plans
(Excluding
Shares
Reflected in Column 1)
(1)
|
||||||||||
Equity
Compensation Plans Approved by Shareholders
|
10,752,105
|
$
|
4.83
|
1,800,328
|
||||||||
Equity
Compensation Plans Not Approved by Shareholders
|
—
|
—
|
—
|
|||||||||
Total
|
10,752,105
|
$
|
4.83
|
1,800,328
|
(1)
|
The
number of shares of Common Stock remaining available for future issuance
has also been reduced to reflect 245,000 shares of restricted stock issued
under the 2005 Stock Incentive
Plan.
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
financial instruments include cash and cash equivalents, restricted cash,
short-term investments, capital leases and long-term debt. As of September 27,
2009, the carrying values of our financial instruments approximated their fair
values based upon current market prices and rates.
We are
exposed to a number of market risks in the ordinary course of business. These
risks, which include foreign currency risk, interest rate risk and commodity
price risk, arise in the normal course of business rather than from trading. We
have examined our exposures to these risks and have concluded, as we similarly
concluded in our Form 10-K for the fiscal year ended December 28, 2008, that
none of our exposures in these areas are material to fair values, cash flows or
earnings.
Foreign
Currency Risk
Our
international operations represent a substantial portion of our operating
results and asset base. We maintain various operations in multiple foreign
locations including Brazil, China, Estonia, Finland, France, Germany, India,
Singapore, Sweden and the United Kingdom. These international operations
generally incur local operating costs and generate third-party revenues in the
currencies used in such foreign jurisdictions. Such foreign currency revenues
and expenses expose us to foreign currency risk and give rise to foreign
exchange gains and losses.
We
regularly pursue new customers in various international locations where new
deployments or upgrades to existing wireless communication networks are planned.
As a result, a significant portion of our revenues are derived from
international sources (excluding North America), with our international
customers accounting for approximately 72% of our net sales during the first
nine months of 2009, 70% of our net sales during fiscal 2008 and 73% of our
fiscal 2007 sales. Such international sources include Europe, Asia and South
America, where there has been historical volatility in several of the regions’
currencies. Changes in the value of the U.S. Dollar versus the local
currency in which our products are sold exposes us to foreign currency risk,
since 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. Alternatively, if a sale price is denominated in U.S. Dollars
and the value of the Dollar falls, we may suffer a loss due to the lower value
of the Dollar. In addition, certain of our international customers require that
we transact business with them in their own local currency regardless of the
location of our operations, which also exposes us to foreign currency risk. As
we sell products or services in foreign currencies, 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, which may give rise to
foreign exchange gains and losses. Given the uncertainty as to when and what
specific foreign currencies may be required or agreed upon to accept as payment
from our international customers, we cannot predict the ultimate impact that
such a decision would have on our business, results of operations and financial
condition. For the first nine months of 2009, we recorded a foreign exchange
translation gain of $4.8 million due to fluctuations in the value of the U.S.
Dollar. There can be no assurance that we will not incur foreign exchange
translation losses in the future if the Dollar further weakens.
Interest
Rate Risk
As of
September 27, 2009, we had cash equivalents of approximately $47.5 million in
both interest and non-interest bearing accounts, including restricted cash. We
also had $130.9 million of our convertible subordinated notes due November 2024
at a fixed annual interest rate of 1.875% and $150.0 million of convertible
subordinated notes due October 2027 at a fixed rate of 3.875%. We are exposed to
interest rate risk primarily through our convertible subordinated debt and our
cash investment portfolio. Short-term investment rates decreased significantly
during 2008 and 2009 as the U.S. Federal Reserve attempted to soften the impacts
of the economic slowdown and subprime mortgage crisis. In spite of this, we
believe that we are not subject to material fluctuations in principal given the
short-term maturities and high-grade investment quality of our investment
portfolio, and the fact that the effective interest rate of our portfolio tracks
closely to various short-term money market interest rate benchmarks. Therefore,
we currently do not use derivative instruments to manage our interest rate risk.
Based on our overall interest rate exposure at September 27, 2009, we do not
believe that a 100 basis point change in interest rates would have a material
effect on our consolidated business, results of operations or financial
condition.
Commodity
Price Risk
Our
internal manufacturing operations and contract manufacturers require significant
quantities of transistors, semiconductors and various metals for use in the
manufacture of our products. Therefore, we are exposed to certain commodity
price risk associated with variations in the market prices for these electronic
components as these prices directly impact the cost to manufacture products and
the price we pay our contract manufacturers to manufacture our products. We
attempt to manage this risk by entering into supply agreements with our contract
manufacturers and various suppliers of these components in order to mitigate the
impact on us of any fluctuations in commodity prices. These supply agreements
are not long-term supply agreements. If we or our contract manufacturers become
subject to a significant increase in the price of one of these components, we
would likely be forced to pay such higher prices and we may be unable to pass
such costs onto our customers. In addition, certain transistors and
semiconductors are regularly revised or changed by their manufacturers, which
may result in a requirement for us to redesign a product that utilizes such
components or cease to produce such products. In such events, our business,
results of operations and financial condition could be adversely affected.
Additionally, we require specialized electronic test equipment, which is
utilized in both the design and manufacture of our products. Such electronic
test equipment is available from limited sources and may not be available in the
time periods required for us to meet our customers’ demand. If required, we may
be forced to pay higher prices for such equipment and/or we may not be able to
obtain the equipment in the time periods required, which would then delay our
development or production of new products. Such delays and any potential
additional costs could have a material adverse effect on our business, results
of operations and financial condition. Further, the world economy experienced
significant increases in the price of oil and energy during the first three
quarters of 2008. Such increases have translated into higher freight and
transportation costs and, in certain cases, higher raw material supply costs.
These higher costs negatively impacted our production costs. We may not be able
to pass on these higher costs to our customers and if we insist on raising
prices, our customers may curtail their purchases from us. Further increases in
energy prices may negatively impact our results of operations.
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Controls
and Procedures
We have
established disclosure controls and procedures to ensure that material
information relating to us and our consolidated subsidiaries is made known
to the officers who certify our financial reports, as well as other members of
senior management and the Board of Directors, to allow timely decisions
regarding required disclosures. As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act.
Based upon the material weakness described below and the restatement described
in Note 5 of the Notes to Consolidated Financial Statements, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were not effective as of September 27, 2009 in timely alerting them
to material information related to us that is required to be included in our
annual and periodic SEC filings.
During
the first quarter of 2010, we completed the design and implementation of control
activities that we believe will prevent or detect material misstatements that
might exist related to our debt agreements. Specifically, we have
thoroughly reviewed our outstanding debt agreements and have created a process
for review of all new debt agreements. The remediation was completed in the
first quarter of 2010 and we believe that these controls are operating
effectively.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within Powerwave have been detected.
Internal
Control Over Financial Reporting (As Revised)
Other
than the material weakness described below, there has been no change in our
internal control over financial reporting during the fiscal quarter ended
September 27, 2009 that has materially affected, or is reasonable likely to
materially affect, our internal control over financial reporting.
We did not timely adopt a
new accounting standard due to insufficient analysis of our debt agreements and
the related impact of such standard on our financial statements which resulted
in a restatement of the fiscal 2009 consolidated financial statements. This
material weakness resulted in the need for us to record various adjustments
during 2009, but also resulted in a more than reasonable possibility that a
material misstatement to the annual or interim financial statements would not
have been prevented or detected.
PART
II – OTHER INFORMATION
LEGAL
PROCEEDINGS
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In the
first quarter of 2007, four purported shareholder class action complaints were
filed in the United States District Court for the Central District of California
against us, our President and Chief Executive Officer, our former
Executive Chairman of the Board of Directors and our Chief Financial
Officer. The complaints were Jerry Crafton v. Powerwave
Technologies, Inc., et. al., Kenneth Kwan v. Powerwave Technologies, Inc., et.
al., Achille Tedesco v. Powerwave Technologies, Inc., et. al. and Farokh
Etemadieh v. Powerwave Technologies, Inc. et. al. and were brought under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. In June 2007, the four cases were consolidated into one action
before the Honorable Judge Philip Gutierrez, and a lead plaintiff was appointed.
In October 2007, the lead plaintiff filed an amended complaint asserting the
same causes of action and purporting to state claims on behalf of all persons
who purchased Powerwave securities between May 2, 2005 and November 2,
2006. The essence of the allegations in the amended complaint was that the
defendants made misleading statements or omissions concerning our projected
and actual sales revenues, the integration of certain acquisitions and the
sufficiency of our internal controls. In December 2007, the defendants filed a
motion to dismiss the amended complaint. On April 17, 2008, the Court
granted defendants’ motion to dismiss plaintiffs’ claims in connection with our
projected sales revenues, but denied defendants’ motion to dismiss plaintiffs’
other claims. On August 29, 2008, the defendants answered the amended
complaint. On May 14, 2009, the parties executed a stipulation of
settlement to resolve the consolidated action. According to the terms of the
proposed settlement, the settlement payment will be funded by our directors and
officers liability insurance. The Court granted preliminary approval
of the proposed settlement and provisionally certified a settlement class on
June 22, 2009, and on October 19, 2009 entered a judgment that granted final
approval of the settlement.
In March
2007, one additional lawsuit that relates to the pending shareholder class
action was filed. The lawsuit, Cucci v. Edwards, et al.,
filed in the Superior Court of California, is a shareholder derivative action,
purported to be brought by an individual shareholder on behalf of Powerwave,
against current and former directors of Powerwave. Powerwave is also named as a
nominal defendant. The allegations of the derivative complaint closely resemble
those in the class action and pertain to the time period of May 2, 2005
through October 9, 2006. Based on those allegations, the derivative
complaint asserts various claims for breach of fiduciary duty, waste of
corporate assets, mismanagement, and insider trading under state law. The
derivative complaint was removed to federal court, and is also pending before
Judge Gutierrez. On May 15, 2009, the parties executed a stipulation
of settlement to resolve the derivative action. According to the
terms of the proposed settlement, we will adopt certain enhancements to its
corporate governance policies and procedures and counsel for the derivative
plaintiff will be reimbursed its legal fees and expenses, which will be funded
by our directors and officers liability insurance. The Court granted preliminary
approval of the proposed settlement on June 22, 2009, and on October 19, 2009
entered a judgment that granted final approval of the settlement.
We
are subject to other legal proceedings and claims in the normal course of
business. We are currently defending these proceedings and claims,
and, although the outcome of legal proceedings is inherently uncertain
presently, we anticipate that we will be able to resolve these matters in a
manner that will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
ITEM 1A.
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RISK
FACTORS
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Our
business faces significant risks. The risks described below may not be the only
risks we face. Additional risks that we do not yet know of or that we currently
think are immaterial also may impair our business operations. If any of the
events or circumstances described in the following risks actually occur, our
business, results of operations or financial condition could suffer, and the
trading price of our Common Stock could decline, and you may lose all or a part
of your investment.
Risks
Related to the Business
We
rely upon a few customers for the majority of our revenues and the loss of any
one or more 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 while we are
continually seeking to expand our customer base, we expect this will continue.
For the first nine months of 2009, sales to Nokia Siemens accounted for
approximately 35% of our net sales and sales to Alcatel-Lucent accounted for
approximately 11% of our net sales. Nokia Siemens accounted for
approximately 31% of our revenues in 2008, and Alcatel-Lucent accounted for
approximately 17% of our revenues in fiscal 2008. Nokia Siemens and
Alcatel-Lucent are our two largest customers and any decline in business with
either of these customers will have an adverse impact on our business, results
of operations and financial condition. For the first nine months of 2009, our
total sales have declined by 40% compared with the same period in
2008. During this same period, our sales to Nokia Siemens have
declined approximately 29% and our sales to Alcatel-Lucent have declined
approximately 62%, which has had a negative impact on our business and results
of operations. Our future success is dependent upon the continued purchases of
our products by a small number of customers such as Nokia Siemens,
Alcatel-Lucent, other original equipment manufacturers and network operator
customers. Any fluctuations in demand from such customers or other customers
would negatively impact our business, results of operations and financial
condition. 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 business, results of
operations and financial condition. In addition, our dependence on a small
number of major customers exposes us to numerous other risks,
including:
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a
slowdown or delay in deployment of wireless networks by any one or more
customers could significantly reduce demand for our
products;
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reductions
in a single customer’s forecasts and demand could result in excess
inventories;
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the
current economic crisis could negatively affect one or more of our major
customers and cause them to significantly reduce operations, or file for
bankruptcy;
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consolidation
of customers can reduce demand as well as increase pricing pressure on our
products due to increased purchasing
leverage;
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each
of our customers has significant purchasing leverage over us to require
changes in sales terms including pricing, payment terms and product
delivery schedules;
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direct
competition should a customer decide to increase its level of internal
designing and/or manufacturing of wireless communication network products;
and
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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.
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Our
operating results have been adversely impacted by the worldwide economic crisis
and credit tightening.
Beginning
in the fourth quarter of 2008, worldwide economic conditions significantly
deteriorated due to the credit crisis and other factors, including slower
economic activity, recessionary concerns, increased energy costs, decreased
consumer confidence, reduced corporate profits, reduced or canceled capital
spending, adverse business conditions and liquidity concerns. Our revenues
declined approximately 42% in the third quarter of 2009 when compared to the
third quarter of 2008. All of these factors combined are having a negative
impact on the availability of financial capital which is contributing to a
reduction in demand for infrastructure in the wireless communication market.
These conditions make it difficult or impossible for our customers and vendors
to accurately forecast and plan future business activities, causing domestic and
foreign businesses to slow or suspend spending on our products and services. As
customers face this challenging economic time, they are finding it difficult to
gain sufficient credit in a timely manner, which has resulted in an impairment
of their ability to place orders with us or to make timely payments to us for
previous purchases. If this continues to occur, our revenues will be further
reduced, thereby having a negative impact on our business, results of operations
and
44
financial
condition. In addition, we may be forced to increase our allowance for doubtful
accounts and our days of sales outstanding may increase significantly, which
would have a negative impact on our cash position, liquidity and financial
condition. We cannot predict the magnitude, timing or duration of this economic
recession or its impact on the wireless industry.
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 demonstrate the
risks related to our customer and industry concentration levels. While our
revenues have increased at times during fiscal years 2005, 2006, 2007 and 2008,
a significant portion of this increase was due to our various acquisitions.
During fiscal years 2006 and 2007, we experienced significantly reduced demand
for our products due to lower than anticipated purchasing plans by a major North
American wireless network operator. In addition, beginning in the fourth quarter
of 2006, when we acquired the wireless infrastructure division of Filtronic plc,
Nokia and Siemens significantly reduced their demand which had a significant
negative impact on both Powerwave and the Filtronic plc wireless businesses. As
a result of this reduction and the general slowdown in the wireless
infrastructure marketplace during the fourth quarter of fiscal 2006, our
revenues decreased to $169.8 million in the fourth quarter of fiscal 2006
from $249.4 million in the fourth quarter of 2005. This slowdown continued in
the first six months of 2007, when our revenues declined from the fourth quarter
of 2006. Our revenues also declined when compared with the first six months of
2006, even though the first six months of 2007 included the Filtronic plc
wireless acquisition. These types of reductions in overall market demand have
had a negative impact on our business, results of operations and financial
condition.
Beginning
in the fourth quarter of 2008, the global economic crisis and related recession
began to have an impact on our customers and their demand for our
products. As a result of this crisis and recession, our revenues have
decreased to $139.0 million in the third quarter of 2009 from $149.7 million in
the first quarter of 2009, $180.3 million in the fourth quarter of 2008 and
$238.0 million in the third quarter of 2008. We currently anticipate that our
customers may continue to reduce their demand for wireless infrastructure
products in the near term, thereby negatively impacting all companies within our
industry. This possible reduction in demand would have a negative impact on our
business, results of operations and financial condition.
During
fiscal 2005, 2006, 2007 and 2008, we also experienced a significant reduction in
demand from Nortel. In the first quarter of 2009, Nortel filed for bankruptcy
protection and in the third quarter of 2009, they received government approval
of the sale of their assets. Given the current economic climate, it
is possible that one or more of our other customers will suffer significant
financial difficulties, including potentially filing for bankruptcy protection.
In such an event, the demand for our products from these customers may decline
significantly or cease completely. We cannot guarantee that we will be able to
continue to generate new demand to offset any such reductions from existing
customers. If we are unable to continue to generate new demand, our revenues
will go down and our results of operations and financial condition will be
negatively impacted.
Also, in
the past we have experienced significant unanticipated reductions in wireless
network operator demand as well as significant delays in demand for 3G and 4G,
or next generation service 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. There is a
substantial likelihood that the global economic recession will continue
throughout 2009 and 2010, thereby having a negative impact on network operator
deployment spending plans. The impact of any future reduction in capital
spending by wireless network operators, coupled with any delays in deployment of
wireless networks, will result in reduced demand for our products, which will
have a material adverse effect on our business.
We
will need additional capital in the future and such additional financing may not
be available on favorable terms or at all.
As of
September 27, 2009, we had approximately $47.5 million of cash, with $2.6
million of it restricted. We cannot provide any guarantee that we will generate
sufficient cash in the future to maintain or grow our operations over the
long-term. We rely upon our ability to generate positive cash flow from
operations to fund our business. If we are not able to generate positive cash
flow from operations, we may need to utilize sources of financing such as our
Credit Agreement or other sources of cash. While our Credit Agreement provides
us with additional sources of liquidity, we may need to raise additional funds
through public or private debt or equity financings in order to fund existing
operations or to take advantage of opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies. In addition, if our business further deteriorates, we
might be unable to maintain compliance with the covenants in our Credit
Agreement which could result in reduced availability under the Credit Agreement,
an event of default under the Credit Agreement, or could make the Credit
Agreement unavailable to us. If we are not successful in growing our
businesses, reducing our inventories and accounts receivable and managing the
worldwide aspects of our Company, our operations may
45
not
generate positive cash flow, and we 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 $280.9 million of
remaining outstanding convertible subordinated debt that we issued in 2004 and
2007. The holders of this convertible subordinated debt may require us to
repurchase the debt issued in 2004 as early as November 15, 2011 and the debt
issued in 2007 as early as October 1, 2014. 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. In addition, the availability of new financing is
dependent upon functioning debt and equity markets with financing available on
reasonable terms. Given the recent credit crisis, there can be no guarantee that
such a market would be available to us. If such a market is not available, we
may be unable to raise new financing, which would negatively impact our business
and possibly impact our ability to maintain operations as presently
conducted.
Our
ability to increase revenues and generate profits is subject to numerous risks
and uncertainties including the likelihood of decreased revenues in the current
macro-economic environment. Any significant decrease in our revenues or
profitability could reduce our operating cash flows and erode our existing cash
balances. Our ability to reduce our inventories and accounts receivable and
improve our cash flow is dependent on numerous risks and uncertainties, and if
we are not able to reduce our inventories, we will not generate the cash
required to operate our business. Our ability to secure additional financing is
also dependent upon not only our business profitability, but also the credit
markets, which have recently become highly constrained due to credit concerns
arising from the subprime mortgage lending market and subsequent worldwide
economic recession. If we are unable to secure additional financing or such
financing is not available on acceptable terms, we may not be able to fund our
operations, otherwise respond to unanticipated competitive pressures, or repay
our convertible debt.
We
may be adversely affected by the bankruptcy of our customers.
We may
not successfully evaluate the creditworthiness of our customers. While we
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments, greater than
anticipated nonpayment and delinquency rates could harm our financial results
and liquidity. Given the current global economic recession, there are potentials
risks of greater than anticipated customer defaults. In the first quarter of
2009, our customer Nortel filed for U.S. bankruptcy protection. If the financial
condition of any of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be
required and would negatively impact our business, results of operations and
financial condition.
We
may incur unanticipated costs as we complete the restructuring of our
business.
We have
previously encountered difficulties and delays in integrating and consolidating
operations which have had a negative impact on our business, results of
operations and financial condition. The failure to successfully integrate these
operations could undermine the anticipated benefits and synergies of the
restructuring, which could adversely affect our business, financial condition
and results of operations. The anticipated benefits and synergies of our
restructurings relate to cost savings associated with operational efficiencies
and greater economies of scale. However, these anticipated benefits and
synergies are based on projections and assumptions, not actual experience, and
assume a smooth and successful integration of our business.
We
may need to undertake restructuring actions in the future.
We have
previously recognized restructuring charges in response to slowdowns in demand
for our products and in conjunction with cost cutting measures and measures to
improve the efficiency of our operations. As a result of economic conditions, we
may need to initiate restructuring actions that could result in restructuring
charges which could have a material impact on our business, results of
operations and financial condition. Such potential restructuring actions could
include cash costs that could reduce our available cash balances, which would
have a negative impact on our business.
The
potential for increased commodity and energy costs may adversely affect our
business, results of operations and financial condition.
The world
economy has experienced significant fluctuations in the price of oil and energy
during 2008 and the first nine months of 2009. Such fluctuations resulted in
significant price increases which translated into higher freight and
transportation costs and, in certain cases, higher raw material supply costs.
These higher costs negatively impacted our production costs. We were not able to
pass on these higher costs to our customers, and if we insist on raising prices,
our customers may curtail their purchases from us. The costs of energy and items
directly related to the cost of energy will fluctuate due to factors that may
not be predictable, such as the economy, political conditions and the weather.
Further increases in energy prices may negatively impact 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:
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the
lack of any obligation by our customers to purchase their forecasted
demand for our products;
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costs
associated with restructuring activities, including severance, inventory
obsolescence and facility closure
costs;
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variations
in the timing, cancellation, or rescheduling of customer orders and
shipments;
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costs
associated with consolidating
acquisitions;
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high
fixed expenses that increase operating expenses, especially during a
quarter with a sales shortfall;
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product
failures and associated warranty and in-field service support costs;
and
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discounts
given to certain customers for large volume
purchases.
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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 business, results of operations and financial
condition.
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 business, results of operations and financial condition.
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. The consolidation of original
equipment manufacturers such as Alcatel-Lucent and Nokia Siemens is
concentrating their purchasing power at the surviving entities, which is placing
further pricing pressures on the products we sell to such customers. Moreover,
the current economic downturn may cause wireless service providers to be even
more aggressive in demanding price reductions as they attempt to reduce costs.
As a result, we may be forced to further reduce our prices to such customers,
which would have a negative impact on our business, results of operations and
financial condition. If we do not agree to lower our prices as some customers
request, those customers may stop purchasing our products, which would
significantly impact our business. We believe that the average sales prices of
our products will continue to decline for the foreseeable future. The weighted
average sales price for our products declined approximately 6% to 9% from fiscal
2007 to fiscal 2008 and we expect that this will continue going forward. 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. With
ongoing consolidation in our industry, the increased size of many of our
customers allows them to exert greater pressure on us to reduce prices. 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, especially our original equipment manufacturer 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. In addition, some customers
threaten to undertake such activities if we do not agree to their requested
price reductions. We believe that all of these practices 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 business, results of operations and financial condition. 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,
require us to reduce our prices, 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 business, results of
operations and financial condition.
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 from the sale of wireless communications network products and
coverage solutions. Our future success depends solely 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, fiscal 2006, fiscal 2007,
the fourth quarter of fiscal 2008 and the first nine months of fiscal 2009. Some
of our network operator customers rely on credit to finance the build-out or
expansion of their wireless networks. The current credit environment and the
worldwide economic recession will likely result in a reduction of demand from
some of our customers in the near term. During fiscal 2006 and into fiscal 2007,
a major North American wireless network operator significantly reduced demand
for new products. In addition, during the same period, several major equipment
manufacturers began a process of consolidating their operations, which
significantly reduced their demand for our products. During fiscal 2003,
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 had a negative impact on our
operating results. If wireless network operators delay or reduce levels of
capital spending, our business, results of operations and financial condition
would be negatively impacted.
Our
reliance on contract manufacturers exposes us to risks of excess inventory or
inventory carrying costs.
If our
contract manufacturers are unable to respond in a timely fashion to changes in
customer demand, we may be unable to produce enough products to respond to
sudden increases in demand, resulting in lost revenues. 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 our 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
inventories 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.
Future
additions to, or consolidations of manufacturing operations may present risks,
and we may be unable to achieve the financial and strategic goals associated
with such actions.
We have
previously added new manufacturing locations, as well as consolidated existing
manufacturing locations in an attempt to achieve operating cost savings and
improved operating results. We continually evaluate these types of
opportunities. We may acquire or invest in new locations, or we may
consolidate existing locations into either existing or
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new
locations in order to reduce our manufacturing costs. We are
currently in the process of establishing a new manufacturing location in the
country of Thailand. Such activities subject us to numerous risks and
uncertainties, including the following:
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difficulty
integrating the new locations into our existing
operations;
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difficulty
consolidating existing locations into one
location;
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inability
to achieve the anticipated financial and strategic benefits of the
specific new location or
consolidation;
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significant
unanticipated additional costs incurred to start up a new manufacturing
location;
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inability
to attract key technical and managerial personnel to a new
location;
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inability
to retain key technical and managerial personnel due to the consolidation
of locations to a new location;
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diversion
of our management’s attention from other business
issues;
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failure
of our review and approval process to identify significant issues,
including issues related to manpower, raw material supplies, legal and
financial contingencies.
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If we are
unable to manage these risks effectively as part of any investment in a new
manufacturing location or consolidation of locations, our business would be
adversely affected.
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.
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. 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:
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difficulty
integrating the operations, technology and personnel of the acquired
company;
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inability
to achieve the anticipated financial and strategic benefits of the
specific acquisition or strategic
alliance;
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significant
additional warranty costs due to product failures and or design
differences that were not identified during due diligence, which could
result in charges to earnings if they are not recoverable from the
seller;
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inability
to retain key technical and managerial personnel from the acquired
company;
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difficulty
in maintaining controls, procedures and policies during the transition and
integration process;
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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 manage these risks effectively 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
compelled us to adjust our product designs and production schedules and have
caused us to miss customer requested delivery dates. To date, 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 business, results of operations and
financial condition.
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 business, results of operations and
financial condition.
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 United States, Europe and Asia, as well as our contract
manufacturers’ staff of assembly workers and trained technicians located in Asia
and Europe. 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
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 including those we have acquired in
recent business acquisitions. We may have similar product quality 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 business, results of operations and financial condition. 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. In addition, we have incurred significant
costs addressing quality issues from products that we have acquired in certain
of our acquisitions. We are also required to honor certain warranty claims for
products that we have acquired in our recent acquisitions. While we intend to
seek recovery of amounts that we have paid, or may pay in the future to resolve
warranty claims through indemnification from the prior manufacturer, this can be
a costly and time consuming process.
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 us or the failure to achieve
our intellectual property objectives may also have a material adverse effect on
our business.
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 and Europe.
As part
of our manufacturing strategy, we utilize contract manufacturers in China,
Europe, Singapore and Thailand. We also maintain our own manufacturing
operations in China and Estonia, as well as the United States and are in the
process of establishing a new manufacturing facility in Thailand.
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
September 2006, Thailand experienced a military coup which overturned the
existing government. In late 2008, anti-government protests and civilian
occupations culminated with a court-ordered ouster of Thailand’s prime minister.
In 2009, continued unrest has impacted the government of Thailand, and potential
civil unrest may continue. To date, this has not had a long-term impact on our
operations in Thailand. If there are future coups 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 business,
results of operations and financial condition.
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 costs which has had a negative impact on our production costs.
Transportation costs would also 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 business, results of
operations and financial condition. 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 business, results of
operations and financial condition.
We
conduct a significant portion of our business internationally, which exposes us
to increased business risks.
For the
first nine months of 2009, and for fiscal years 2008, 2007, and 2006,
international revenues (excluding North American sales) accounted for
approximately 72%, 70%, 73% and 72% 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:
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•
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compliance
with multiple and potentially conflicting regulations in Europe, Asia and
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 U.S. 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 and in
Asia;
|
|
•
|
longer
accounts receivable collection cycles in Europe, Asia and South
America;
|
|
•
|
currency
fluctuations and resulting losses on currency
translations;
|
|
•
|
terrorist
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;
|
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•
|
cultural
and language differences between the United States and the rest of the
world; and
|
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•
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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 ongoing program to identify and file applications for
U.S. 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. 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.
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
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:
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•
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performance;
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•
|
functionality;
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•
|
reliability;
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•
|
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 CommScope, Inc., 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 Alcatel-Lucent, Ericsson,
Huawei, Motorola, Nokia Siemens and Samsung. Some competitors have adopted
aggressive pricing strategies in an attempt to gain market share, which in turn,
has caused us to lower our prices in order to remain competitive. Such pricing
actions have had an adverse effect on our business, results of operations and
financial condition. 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
business, results of operations and financial condition.
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 and
financial condition due to high research and development expenses.
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 a large portion of our U.S. 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, results of operations 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, results of operations and financial
condition.
At
times over the past year, our stock price has not met the minimum bid price for
continued listing on the NASDAQ Global Select Market. Our ability to publicly or
privately sell equity securities and the liquidity of our Common Stock could be
adversely affected if we are delisted from the NASDAQ Global Select Market or if
we are unable to transfer our listing to another stock market.
The bid
price for our Common Stock on the NASDAQ Global Select Market was below $1.00
for a significant period of time over the past four fiscal
quarters. The NASDAQ Marketplace Rules provide that one of the
continuing listing requirements for an issuer’s common stock is having a minimum
bid price of $1.00 per share. Due to the current economic
crisis, NASDAQ announced a moratorium on the enforcement of this minimum
bid requirement. However, this moratorium was rescinded on July 31,
2009, and NASDAQ has not indicated an intention to reinstate the
moratorium. We cannot control whether NASDAQ will reinstate the moratorium
again in the future or whether NASDAQ will make any other concessions to allow
issuers to avoid potential delisting. Accordingly, if the bid
price of our Common Stock does not stay above $1.00 per share, we risk
being delisted from the NASDAQ Global Select Market.
If our
Common Stock is delisted by NASDAQ, our Common Stock may be eligible to trade on
the OTC Bulletin Board maintained by NASDAQ, another over-the-counter quotation
system, or on the pink sheets. Each of these alternatives will likely result in
it being more difficult for investors to dispose of, or obtain accurate
quotations as to the market value of our Common Stock. In addition, there can be
no assurance that our Common Stock will be eligible for trading on any of such
alternative exchanges or markets.
In
addition, delisting from NASDAQ could adversely affect our ability to raise
additional capital through the public or private sale of equity securities.
Delisting from NASDAQ also would make trading our Common Stock more difficult
for investors, potentially leading to further declines in our share price and
inhibiting a stockholder’s ability to liquidate all or part of their investment
in Powerwave.
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
December 28, 2008, the closing price of our Common Stock ranged from a high
of $7.45 to a low of $0.40 per share. During the first nine months of 2009, the
closing price of our Common Stock ranged from a high of $1.72 per share to a low
of $0.23 per share. At times, the fluctuations in the price of our Common Stock
may have 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 may also have been influenced by:
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•
|
fluctuations
in our results of operations or the operations of our competitors or
customers;
|
|
•
|
the
aggregate amount of our outstanding debt and perceptions about our ability
to make debt service payments;
|
|
•
|
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 regarding 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;
|
|
•
|
lawsuits
attempting to allege misconduct by the Company and its
officers;
|
|
•
|
increases
in the number of shares of our Common Stock outstanding;
and
|
|
•
|
changes
in the wireless industry.
|
In
addition, the potential conversion of our outstanding convertible debt
instruments would add approximately 29.0 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 our Common Stock at or above its acquisition price.
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 under 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. 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 No. 5 provides the professional standards and related
performance guidance for auditors to report on 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 No. 5 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.
Subsequent
to the issuance of our consolidated financial statements for the three and nine
months ended September 27, 2009, we identified an error in the accounting for
our 2024 Notes and the application of FASB ASC Topic 470-20, Debt with Conversion and Other
Options, to that instrument. We did not timely adopt this new accounting
standard due to insufficient analysis of our debt agreements and the related
impact of the standard on our financial statements which resulted in a
restatement of the 2009 consolidated financial statements. This is a material
weakness and during the first quarter of 2010, we completed the design and
implementation of control activities to remediate this issue. As a result, we
currently believe our internal controls over financial reporting are effective.
We are required to comply with Section 404 on an annual basis, and 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 may not be able to assert that such internal controls are effective.
Although we currently anticipate satisfying 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. 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.
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Issuer
Purchases of Equity Securities
The
following table details the repurchases that were made during the third quarter
of 2009:
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
per
Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plan
|
Approximate Dollar
Value
of Shares
That
May Yet Be
Purchased
Under
the
Plan
|
||||||||||||
(In thousands)
|
(In thousands)
|
|||||||||||||||
June
29 – August 2
|
—
|
—
|
—
|
—
|
||||||||||||
August
3 – August 30
|
8,490
|
(1)
|
$
|
1.23
|
—
|
—
|
||||||||||
August
31 – September 27
|
—
|
—
|
—
|
—
|
(1)
|
During
August 2009, 8,490 shares of Common Stock were surrendered to cover tax
withholding obligations with respect to the vesting of 23,750 shares under
restricted stock grants.
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not
applicable.
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The 2009
Annual Meeting of Shareholders of the Company was held on August 12, 2009.
The following matters were submitted to a vote of the Company’s
shareholders:
1.
Election of Directors. The following directors were elected to hold office until
the 2010 Annual Meeting and until their successors have been elected and have
qualified to hold such office. The results of the election for each director are
as follows:
Directors
|
Number
of Votes
|
|
Moiz
M. Beguwala
|
For
|
114,304,891
|
Withheld
|
3,384,807
|
|
Ken
J. Bradley
|
For
|
115,342,233
|
Withheld
|
2,347,465
|
|
Ronald
J. Buschur
|
For
|
113,648,987
|
Withheld
|
4,040,711
|
|
John
L. Clendenin
|
For
|
114,672,520
|
Withheld
|
3,017,178
|
|
David
L. George
|
For
|
114,132,476
|
Withheld
|
3,557,222
|
|
Eugene
L. Goda
|
For
|
114,409,274
|
Withheld
|
3,280,424
|
|
Carl
W. Neun
|
For
|
114,786,459
|
Withheld
|
2,903,239
|
|
2.
|
Ratification
of the appointment of Deloitte & Touche LLP as Independent
Registered Public Accounting Firm for 2009. The ratification of the
appointment of Deloitte & Touche LLP as the Company’s independent
registered public accounting firm for 2009 was approved. The voting
results are as follows:
|
Number
of Votes
|
|
For
|
116,085,740
|
Against
|
1,070,496
|
Abstentions
|
533,462
|
Broker
Non-Votes
|
N/A
|
ITEM 5.
|
OTHER
INFORMATION
|
Not
applicable.
ITEM 6.
|
EXHIBITS
|
The
following exhibits are filed as part of this report:
Exhibit
Number
|
Description
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Exchange Act.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Exchange Act.
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(b) or 15d-14(b) of
the Exchange Act and 18 U.S.C. Section 1350.*
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of
the Exchange Act and 18 U.S.C. Section
1350.*
|
*
|
In
accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit
shall not be deemed “filed” for the purposes of Section 18 of the
Exchange Act or otherwise subject to the liability of that section, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act or the Exchange Act.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
March 8, 2010
|
POWERWAVE
TECHNOLOGIES, INC.
|
|||
By:
|
/s/ KEVIN
T. MICHAELS
|
|||
Kevin
T. Michaels
|
||||
Chief
Financial Officer
(Principal
Financial Officer)
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Exchange Act.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Exchange Act.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(b) or 15d-14(b) of
the Exchange Act and 18 U.S.C. Section 1350.*
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of
the Exchange Act and 18 U.S.C. Section
1350.*
|
*
|
In
accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall
not be deemed “filed” for the purposes of Section 18 of the Exchange Act
or otherwise subject to the liability of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act or
the Exchange Act.
|