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POWERWAVE TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[November 09, 2012]

POWERWAVE TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included under Item 1, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q. 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. Please see "Cautionary Statement Regarding Forward Looking Statements" at the beginning of this report, for additional information regarding such forward looking statements.

Introduction and Overview Powerwave Technologies, Inc. (the "Company", "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 communications networks. Our principal products include antennas, boosters, combiners, cabinets, shelters, 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, which 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. We have also started marketing in new markets such as government, public safety, military and homeland security.


During the last ten years, demand for wireless communications infrastructure equipment has fluctuated dramatically. While demand for wireless infrastructure was strong during 2005, it weakened for us during 2006 and 2007 due to significant reductions in demand by three of our major customers, as well as a general slowdown in overall demand within the wireless infrastructure industry.

In 2008, demand for our products once again increased; however, in the fourth quarter of 2008 demand was negatively impacted by the global economic recession.

The recession and the ensuing period of economic weakness and uncertainty have significantly impacted demand for our products during the last three years. In particular, our revenue in 2009 fell by 36% from 2008 levels, negatively impacting our financial results. In response, during 2008 and 2009, we initiated several cost cutting measures aimed at lowering our manufacturing overhead and operating expenses. During fiscal 2011, our revenue declined by 25% compared to fiscal 2010, and during the second half of 2011, our revenues fell by over 55% as compared to the first half of 2011. For the first nine months of fiscal 2012, our revenues fell by 67% when compared to the first nine months of fiscal 2011.

We believe that the continued reductions in our revenues over the last year were due to several factors, including significant slowdowns in spending by wireless network operators in several of our markets, including North America, Western and Eastern Europe and the Middle East. In addition, we experienced a significant reduction in demand from our original equipment manufacturing customers. In response to these reductions in revenues, we initiated several cost reduction measures to both lower our manufacturing costs and reduce our operating expenses. We cannot predict if such measures will be successful, and we may be required to further reduce operating expenses and manufacturing costs or curtail certain aspects of our business if there is continued reduction in demand by our customers.

In the past, there have been significant deferrals 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. Continuing economic weakness and uncertainty, increasing energy and commodity costs, continued low consumer confidence, reduced property values, constrained credit markets and concerns about sovereign debt in some countries in the European Union have had a negative impact on the availability of financial capital, which has limited capital expenditures by wireless network operators and will likely have a negative impact on such expenditures going forward in the near term. All of these factors can have a significant negative impact on overall demand for wireless infrastructure products and, we believe, at various times, have directly led to reduced demand for our products and increased price competition within our industry, thereby reducing our revenues and contributing to our reported operating losses.

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 of our products.

23-------------------------------------------------------------------------------- Table of Contents Looking back over the last eight years, beginning in fiscal 2004, we focused on cost savings while we expanded our market presence, as evidenced by our acquisition of LGP Allgon. This acquisition involved the integration of two companies based in different countries and was a complex, costly and time-consuming process. During fiscal 2005, we continued to focus on cost savings while we expanded our market presence, as evidenced by our acquisition of selected assets and liabilities of REMEC, Inc.'s wireless systems business (the "REMEC Wireless Acquisition"). 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, 2008, 2009 and 2010, we completed the integration of these acquisitions, focused on consolidating operations and reducing 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 eight years, these acquisitions do not provide any guarantee that our revenues will increase.

We measure our success by monitoring our net sales by product and consolidated gross margins, with a short-term goal of attempting to achieve 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 the Company to benefit from these long-term opportunities in both the traditional commercial market and new markets such as government, public safety, military and homeland security.

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 have 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, 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 is inaccurate in any material respect, it could have a material 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 critical 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 fiscal year ended January 1, 2012.

Accruals for Restructuring and Impairment Charges In the third quarter and first nine months of fiscal 2012, we recorded restructuring and impairment charges of $2.9 million and $16.8 million respectively. Such charges relate to our restructuring plans. See further discussion of these plans in Note 5 of the Notes to Consolidated Financial Statements under Part I, Item I, Financial Information.

Restructuring and impairment accruals related primarily to workforce reductions and facility closure related expenses. Such 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 will be recovered 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 the actual amounts incurred or recovered may be substantially different from those based on 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 and revise the estimates and assumptions used and reflect the effects of those revisions in the period that they become known.

24 -------------------------------------------------------------------------------- Table of Contents In the third quarter of fiscal 2012, we formulated and began to implement a plan to lower our breakeven costs, conserve our cash and reduce our operating and manufacturing cost structures (the "2012 Additional Restructuring Plan"). As part of this plan, we initiated personnel reductions in both our domestic and foreign locations across all functions, and we expect to impact approximately 120 employees as well as close certain offices. These reductions were taken in further response to the continued lower revenue in the second and third quarter of fiscal 2012. We expect to finalize this plan in the fourth quarter of 2012; however, additional amounts may be accrued in future periods related to the actions associated with this plan.

In the first quarter of fiscal 2012, we formulated and began to implement a plan to further reduce manufacturing overhead and operating expenses (the "2012 Restructuring Plan"). As part of this plan, we initiated personnel reductions in both our domestic and foreign locations. These reductions were taken in further response to economic conditions and the continued decline in revenue in the first quarter of fiscal 2012. We finalized this plan in the third quarter of 2012; however, additional amounts may be accrued in 2012 related to the actions associated with this plan.

In November 2011, we formulated and began to implement a plan to further reduce manufacturing overhead costs and operating expenses (the "2011 Restructuring Plan"). As part of this plan, we initiated personnel reductions of approximately 110 employees in both our domestic and foreign locations, with primary reductions in the U.S., Sweden, Finland, France, China and Canada. These reductions were undertaken in response to economic conditions and the significant decline in revenues in the third quarter of 2011. We finalized this plan in the fourth quarter of 2011; however, additional amounts may be accrued in 2012 related to actions associated with this plan.

Results of Operations The following table summarizes our results of operations as a percentage of net sales for the three and nine months ended September 30, 2012 and October 2, 2011: Three Months Ended Nine Months Ended September 30, October 2, September 30, October 2, 2012 2011 2012 2011 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales: Cost of goods 123.7 92.5 122.1 76.7 Restructuring and impairment charges 1.8 - 8.9 - Total cost of sales 125.5 92.5 131.0 76.7 Gross profit (loss) (25.5 ) 7.5 (31.0 ) 23.3 Operating expenses: Sales and marketing 24.6 9.8 18.0 6.4 Research and development 19.9 19.9 25.0 12.5 General and administrative 23.6 15.0 23.8 9.1 Restructuring and impairment charges 5.0 0.2 4.3 - Total operating expenses 73.1 44.9 71.1 28.0 Operating loss (98.6 ) (37.4 ) (102.1 ) (4.7 ) Other expense, net (11.6 ) (8.3 ) (10.2 ) (3.4 ) Loss before income taxes (110.2 ) (45.7 ) (112.3 ) (8.1 ) Income tax provision 15.0 (0.2 ) 7.5 1.0 Net loss (125.2 )% (45.5 )% (119.8 )% (9.1 )% Three Months ended September 30, 2012 and October 2, 2011 Net Sales Our sales are derived from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners, cabinets, shelters, 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.

25 -------------------------------------------------------------------------------- Table of Contents The following table presents a further analysis of our sales based upon our various customer groups: Three Months Ended (in thousands) Customer Group September 30, 2012 October 2, 2011 Wireless network operators and other $ 29,089 69 % $ 52,334 68 % Original equipment manufacturers 13,036 31 24,744 32 Total $ 42,125 100 % $ 77,078 100 % Sales decreased by 45% to $42.1 million for the third quarter of fiscal 2012, from $77.1 million for the third quarter of fiscal 2011. This decrease was due to several factors, including, but not limited to, a continued slowdown in spending by North American network operators coupled with further weakness in several international markets, including Western and Eastern Europe and the Middle East. In addition, we experienced further reductions in demand with our original equipment manufacturing customers both as part of our strategic plan to reduce our dependence on low-margin commodity type original equipment manufacturer business as well as an overall reduction in demand by our original equipment manufacturer customers. In particular, we experienced reductions in demand by Nokia Siemens Networks and Alcatel-Lucent of over 40% when compared to the prior year period. Sales to our direct operator customers decreased by approximately 44% for the third quarter of fiscal 2012 from the third quarter of fiscal 2011. Sales to our original equipment manufacturers decreased by 47% for the third quarter of fiscal 2012 from the third quarter of fiscal 2011. We believe that, among other factors, the current negative global economic environment has caused network operators to reduce or postpone their spending plans for the near term while they evaluate the macro-economic pressures in each individual market. In addition, our revenues have been impacted by our poor financial position and by delays in payments of invoices to certain suppliers, which has caused some of our suppliers to reduce or limit the amount of credit that they allocate to us, which has impacted our ability to obtain single or limited source components and has caused production and shipment delays that have negatively impacted revenues during the third quarter of 2012.

The following table presents a further analysis of our sales based upon our various product groups: Three Months Ended Wireless Communications (in thousands) Product Group September 30, 2012 October 2, 2011 Antenna systems $ 29,545 70 % $ 45,327 59 % Base station systems 7,647 18 19,142 25 Coverage systems 4,933 12 12,609 16 Total $ 42,125 100 % $ 77,078 100 % 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 all of our product group sales during the third quarter of fiscal 2012 as compared with the third quarter of fiscal 2011 is due to the previously mentioned significant decrease in demand we experienced from our wireless network operator and original equipment manufacturer customers.

We track the geographic location of our sales based upon the location of our customers to which we ship our products. 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 30, 2012 October 2, 2011 Americas $ 22,035 52 % $ 32,525 42 % Asia Pacific 4,814 12 14,596 19 Europe 11,094 26 25,244 33 Other International 4,182 10 4,713 6 Total $ 42,125 100 % $ 77,078 100 % Revenues decreased in all regions in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011. The decrease is attributable to the 26 -------------------------------------------------------------------------------- Table of Contents significant reductions in demand from our wireless network operator customers, other direct customers and original equipment manufacturers, which we believe is due to several factors, including, but not limited to, the current negative global economic environment that has caused network operators to reduce or postpone their equipment spending plans in most all the regions we operate in.

Our revenues have also been impacted by our poor financial performance and delays in payments of invoices to certain suppliers, which has caused some suppliers to reduce the amount of credit they allocate to us, which has contributed to production and shipment delays. In addition, our poor financial performance may cause some customers to limit the amount of business that they do with us, due to their concerns about our financial condition. 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.

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 fiscal 2012 to those in effect for the third quarter of fiscal 2011, the change in the value of foreign currencies as compared with the U.S. Dollar did not have a material impact on our net sales.

For the third quarter of fiscal 2012, one customer, Samsung, accounted for 11% of our total sales. No other customer accounted for 10% or more of our revenues.

For the third quarter of fiscal 2011, total sales to Ericsson was 11% and total sales to Raycom, one of our European resellers, was 11% of our revenues.

A number of factors have caused delays, and may cause future delays in new wireless infrastructure and upgrade deployment schedules throughout the world, including deployments 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 strategy 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 (loss) Our cost of sales includes both fixed and variable cost components and consists primarily of materials, assembly and test labor and overhead, which includes equipment depreciation, facility lease expense, transportation costs and warranty costs. Components of our fixed cost structure include test equipment depreciation, facility lease expense, 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 as 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 as 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 (loss): Three Months Ended (in thousands) September 30, 2012 October 2, 2011 Net sales $ 42,125 100.0 % $ 77,078 100.0 % Cost of sales: Cost of sales 52,101 123.7 71,282 92.5 Restructuring and impairment charges 782 1.8 - - Total cost of sales 52,883 125.5 71,282 92.5 Gross profit (loss) $ (10,758 ) (25.5 )% $ 5,796 7.5 % Our gross profit decreased during the third quarter of fiscal 2012, compared to the third quarter of fiscal 2011, primarily as a result of our significantly lower revenues. The significant drop in our revenues during the third quarter of fiscal 2012 caused us to be unable to absorb our overhead and manufacturing costs, which resulted in the reduction in our gross margin as a percentage of revenue. Gross margin was also negatively impacted by inventory related charges of approximately $8.3 million associated with excess and obsolete inventory, which is included in cost of sales, compared with $3.0 million in the third quarter of fiscal 2011.

27 -------------------------------------------------------------------------------- Table of Contents In the third quarter of fiscal 2012, the Company recorded a restructuring and impairment charge of approximately $1.0 million related to inventory that has been or will be disposed of and will not generate future revenue at closed facilities, and settled a vendor cancellation claim at a favorable amount of $0.3 million that was previously charged to restructuring and impairment charges.

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.

A portion of our coverage solution sales include design, customization, installation and implementation services and the supply of coverage solutions products. We recognize revenue using the percentage-of-completion method for these coverage solution projects. Due to the nature of these types of projects, cost estimates can vary significantly, and the actual cost of such projects can fluctuate significantly during the life of a project. These fluctuations, such as the one which occurred in the first quarter of fiscal 2011 when our gross profit was negatively impacted by a coverage solution project cost estimate adjustment of approximately $3.6 million, can have a negative impact on our gross profit margins and profitability, decrease revenues and adversely impacting 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 decisions to close and consolidate several of our manufacturing locations as part of our restructuring plans. 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.

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) Operating Expenses September 30, 2012 October 2, 2011 Sales and marketing $ 10,365 24.6 % $ 7,544 9.8 % Research and development 8,383 19.9 15,315 19.9 General and administrative 9,928 23.6 11,597 15.0 Restructuring and impairment charges 2,098 5.0 147 0.2 Total operating expenses $ 30,774 73.1 % $ 34,603 44.9 % Sales and marketing expenses consist primarily of salaries and commissions, travel expenses, advertising and marketing expenses, selling expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses increased by $2.8 million, or 37.4%, during the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011, primarily due to increased bad debt expense offset in part by lower personnel expense and lower trade show and related marketing expenses. The personnel cost reductions were related to our restructuring plans.

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. Total research and development expenses decreased $6.9 million or 45.3% during the third quarter of fiscal 2012, as compared to the third quarter of fiscal 2011, due primarily to lower personnel costs, reduced outsourced professional fees and lower materials expense. The personnel cost reductions were related to our restructuring plans.

28 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, legal fees, facilities and human resources. Total general and administrative expenses decreased $1.7 million, or 14.4% during the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011, due primarily to lower personnel costs offset in part by higher legal fees. The personnel cost reductions were related to our restructuring plans.

Restructuring and impairment charges in operating expense of $2.1 million in the third quarter of fiscal 2012 primarily related to severance for terminated employees in domestic and global locations as well as facility closure costs and fixed asset impairment charges. Restructuring charges of $0.1 million in the third quarter of fiscal 2011, primarily for adjustments to severance costs for previously terminated employees in Europe.

Other Expense, net The following table presents an analysis of other expense, net: Three Months Ended (in thousands) September 30, 2012 October 2, 2011 Interest income $ 38 0.1 % $ 55 0.1 % Interest expense (4,228 ) (10.0 ) (3,764 ) (4.9 ) Foreign currency gain (loss), net 288 0.7 (2,158 ) (2.8 ) Loss on repurchase of convertible debt - - (874 ) (1.1 ) Loss on early extinguishment of debt (506 ) (1.2 ) - - Change in fair value of derivatives (581 ) (1.3 ) - - Other income, net 80 0.1 306 0.4 Other expense, net $ (4,909 ) (11.6 )% $ (6,435 ) (8.3 )% Interest expense increased by $0.5 million during the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011 due to higher debt levels, including our new secured term loan. Included in non-cash charges are the amortization of debt issuance costs, debt discount and bond accretion totaling $1.9 and $1.6 million for the third quarters of 2012 and 2011, respectively.

Additionally, we recognized a net foreign currency translation gain of $0.3 million in the third quarter of fiscal 2012, primarily due to the fluctuations of the U.S. Dollar versus the Euro, Chinese RMB, and several other currencies, compared with a loss of $2.2 million in the third quarter of fiscal 2011. Also in the third quarter of fiscal 2012, we recognized a loss of $0.5 million related to the termination of our line of credit with Wells Fargo and a loss of $0.6 million related to the change in value of embedded derivatives the warrants issued in connection with our new secured term loan.

Income Tax Provision Our effective tax rate for the third quarter of 2012 was an expense of approximately 13.5% of our pre-tax loss of $46.4 million, compared with a benefit of 0.4% of our pre-tax loss of $35.2 million in the third quarter of 2011. We have recorded a valuation allowance against a portion of our deferred tax assets pursuant to Accounting Standards Codification (ASC) Topic 740, "Income Taxes," due to the uncertainty as to 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 or increase in the valuation allowance. Accordingly, the tax expense consisted primarily of taxes from operations in foreign jurisdictions, primarily Sweden, India and Canada. We expect our tax rate to continue to fluctuate based on the percentage of income earned in each jurisdiction. In the third quarter of 2012, we changed our position on our legal entity and future operations in China and no longer assert that our accumulated earnings in China will be permanently reinvested. As a result, we recorded a provision of $5.3 million related to the withholding tax on our Chinese operation's earnings and profits which would be repatriated to the U.S. jurisdiction upon dissolution. No additional U.S. tax liability will result from the future dividend due to existing net operating losses, which would offset any potential increase in U.S.

federal taxable income.

29 -------------------------------------------------------------------------------- Table of Contents Net Loss The following table presents a reconciliation of operating loss to net loss: Three Months Ended (in thousands) September 30, October 2, 2012 2011 Operating loss $ (41,532 ) $ (28,807 ) Other expense, net (4,909 ) (6,435 ) Loss before income taxes (46,441 ) (35,242 ) Income tax provision 6,287 (158 ) Net loss $ (52,728 ) $ (35,084 ) Our net loss for the third quarter of fiscal 2012 was $52.7 million, compared to a net loss of $35.1 million for the third quarter of fiscal 2011. The net loss in the third quarter of fiscal 2012 was largely due to our decreased revenues during the period, which resulted in a larger operating loss. In addition, we incurred additional inventory and bad debt related charges during the quarter, which contributed to our net loss.

Nine Months ended September 30, 2012 and October 2, 2011 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 30, 2012 October 2, 2011 Wireless network operators and other $ 87,022 68 % $ 254,625 66 % Original equipment manufacturers 40,744 32 129,718 34 Total $ 127,766 100 % $ 384,343 100 % Sales decreased by 67% to $127.8 million for the first nine months of fiscal 2012, from $384.3 million for the first nine months of fiscal 2011. This decrease was due to several factors, including, but not limited to, a continued slowdown in spending by North American network operators coupled with further weakness in international markets, including Western and Eastern Europe, Asia and the Middle East. In addition, we experienced further reductions in demand with our original equipment manufacturing customers both as part of our strategic plan to reduce our dependence on low-margin commodity type original equipment manufacturer business as well as an overall reduction in demand by our original equipment manufacturer customers. In particular, we experienced reductions in demand by Nokia Siemens Networks and Alcatel-Lucent of over 88% when compared to the prior year period. Sales to our direct operator customers decreased by approximately 66% for the first nine months of fiscal 2012 from the first nine months of fiscal 2011. Sales to our original equipment manufacturers decreased by 69% for the first nine months of fiscal 2012 from the first nine months of fiscal 2011. We believe that, among other factors, the current negative global economic environment has caused network operators to reduce or postpone their spending plans for the near term while they evaluate the macro-economic pressures in each individual market. Due to our poor financial position, and resulting delays in payments of invoices to certain suppliers, some of our suppliers have reduced or limited the amount of credit that they allocate to us, which has also impacted our ability to obtain single or limited source components which has caused production and shipment delays that have negatively impacted revenues during the first nine months of 2012.

30-------------------------------------------------------------------------------- Table of Contents 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 30, 2012 October 2, 2011 Antenna systems $ 75,181 59 % $ 186,319 49 % Base station systems 25,539 20 155,798 40 Coverage systems 27,046 21 42,226 11 Total $ 127,766 100 % $ 384,343 100 % The decrease in all of our product group sales during the first nine months of fiscal 2012 as compared with the first nine months of fiscal 2011 is due to the previously mentioned significant decrease in demand we experienced from our wireless network operator and original equipment manufacturer customers.

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 30, 2012 October 2, 2011 Americas $ 59,528 47 % $ 166,993 43 % Asia Pacific 23,465 18 100,552 26 Europe 34,591 27 102,115 27 Other International 10,182 8 14,683 4 Total $ 127,766 100 % $ 384,343 100 % 31 -------------------------------------------------------------------------------- Table of Contents Revenues decreased in all regions in the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011. The decrease is attributable to the significant reductions in demand from our wireless network operator customers, other direct customers and original equipment manufacturers, which we believe is due to several factors, including, but not limited to, the current negative global economic environment that has caused network operators to reduce or postpone their equipment spending plans. Our revenues have also been impacted by our poor financial performance, and delays in payments of invoices to certain suppliers, which has caused some suppliers to reduce the amount of credit that they allocate to us, which has contributed to production and shipment delays. In addition, our poor financial performance may cause some customers to limit the amount of business that they do with us, due to their concerns about our financial condition. We experienced continued slowness in capital growth spending by wireless network operators in most of the regions we operate in.

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.

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 first nine months of fiscal 2012 to those in effect for the first nine months of fiscal 2011, the change in the value of foreign currencies as compared with the U.S. Dollar did not have a material impact on our net sales.

For the first nine months of fiscal 2012, no customer accounted for 10% or more of our revenues. For the first nine months of fiscal 2011, sales to KMM Telecommunications (formerly known as Team Alliance), one of our North American resellers, accounted for 18% of our total sales, sales to Nokia Siemens Networks accounted for approximately 17% of total sales, and sales to Raycom, one of our European resellers, accounted for approximately 13% of our total sales.

Cost of Sales and Gross Profit (Loss) The following table presents an analysis of our gross profit (loss): Nine Months Ended (in thousands) September 30, 2012 October 2, 2011 Net sales $ 127,766 100.0 % $ 384,343 100.0 % Cost of sales: Cost of sales 155,990 122.1 294,895 76.7 Restructuring and impairment charges 11,341 8.9 - - Total cost of sales 167,331 131.0 294,895 76.7 Gross profit (loss) $ (39,565 ) (31.0 )% $ 89,448 23.3 % Our gross profit decreased during the first nine months of fiscal 2012 compared to the first nine months of 2011 primarily as a result of our significantly lower revenues. The significant drop in our revenues during the first nine months of fiscal 2012 caused us to be unable to absorb our overhead and manufacturing costs, which resulted in the reduction in our gross margin as a percentage of revenue. Gross margin was also negatively impacted by inventory related charges of approximately $22.9 million associated with excess and obsolete inventory and scrapping of inventory, compared with $3.5 million in the first nine months of fiscal 2011. In addition, gross profit was impacted by warranty charges of $9.3 million in the first nine months of fiscal 2012, compared with $10.6 million in the first nine months of fiscal 2011, which were higher in 2011 due to higher specific warranty claims.

We incurred $11.3 million of restructuring charges during the first nine months of fiscal 2012, which included a charge of approximately $7.2 million related to inventory that will be disposed of and will not generate future revenue, as well as vendor cancellation charges of $3.8 million, primarily related to the transactions with Tatfook and severance charges of approximately $0.3 million.

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) Operating Expenses September 30, 2012 October 2, 2011 Sales and marketing $ 23,021 18.0 % $ 24,695 6.4 % Research and development 31,980 25.0 47,666 12.5 General and administrative 30,379 23.8 34,920 9.1 Restructuring and impairment charges 5,486 4.3 189 0.0 Total operating expenses $ 90,866 71.1 % $ 107,470 28.0 % 32 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses decreased by $1.7 million, or 6.8%, during the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011, primarily due to lower personnel costs, trade show costs and related marketing costs, commissions and professional fees offset in part by higher bad debt expense. The personnel cost reductions were related to our restructuring plans.

Total research and development expenses decreased $15.7 million, or 32.9%, during the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011, primarily due to lower personnel costs, reduced outsourced professional fees and lower materials expense. The personnel cost reductions were related to our restructuring plans.

Total general and administrative expenses decreased $4.5 million, or 13.0%, during the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011, due primarily to lower personnel costs. The personnel cost reductions were related to our restructuring plans.

Restructuring charges in operating expense of $5.5 million were recorded in the first nine months of fiscal 2012 due to a realized loss of $1.5 million on the sale of our building in Finland, fixed asset impairment charges and facility closure costs in Finland, and severance costs of $3.9 million for terminated employees at various domestic and international locations. Restructuring charges of $0.2 million were recorded in the first nine months of 2011, primarily for severance costs.

Other Expense, net The following table presents an analysis of other expense, net: Nine Months Ended (in thousands) September 30, 2012 October 2, 2011 Interest income $ 118 0.1 % $ 168 0.0 % Interest expense (12,027 ) (9.4 ) (9,544 ) (2.5 ) Foreign currency loss, net (386 ) (0.3 ) (4,219 ) (1.0 ) Gain on exchange of convertible debt - - (874 ) (0.2 ) Loss on early extinguishment of debt (506 ) (0.4 ) - - Change in value of derivatives (581 ) (0.4 ) - - Other income, net 370 0.2 1,198 0.3 Other expense, net $ (13,012 ) (10.2 )% $ (13,271 ) (3.4 )% Interest income decreased during the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011, due to lower cash balances. Interest expense increased by $2.5 million during the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011 primarily due to non-cash bond principal accretion related to our 2.75% Notes and interest on our secured term loan. Included in non-cash charges are the amortization of debt issuance costs, debt discount and bond accretion totaling $5.2 and $3.6 million for the first nine months of 2012 and 2011, respectively. Additionally, we recognized a net foreign currency loss of $0.4 million in the first nine months of fiscal 2012, primarily due to the fluctuations of the U.S. Dollar versus the Euro, Chinese RMB and several other currencies, as compared to the loss of $4.2 million in the first nine months of fiscal 2011. The reduction of other income (expense), net from the first nine months of fiscal 2011 to the first nine months of fiscal 2012 of $0.8 million is primarily related to lower net sub-lease income.

Income Tax Provision Our effective tax rate for the nine months ended September 30, 2012 was an expense of approximately 6.7% of our pre-tax loss of $143.4 million, compared with an expense of approximately 12.0% of our pre-tax loss of $31.3 million in the first nine months of 2011. We have recorded a valuation allowance against a portion of our deferred tax assets pursuant to Accounting Standards Codification (ASC) Topic 740, "Income Taxes," due to the uncertainty as to the timing and ultimate realization of those assets. The Company continued to record valuation allowances against the net deferred tax assets in Finland and China of $2.9 million in the third quarter of 2012. As such, for the foreseeable future, the tax provision or tax benefit related to future Chinese, Finnish and U.S.

earnings or losses will be offset substantially by a reduction or increase in the valuation allowance. Accordingly, current tax expense consisted primarily of taxes from operations in foreign jurisdictions, primarily Sweden, India and Canada. We expect our tax rate to continue to fluctuate based on the percentage of income earned in each jurisdiction. In the third quarter of 2012, we changed our position on our legal entity and future operations in China and no longer assert that our accumulated earnings in China will be permanently reinvested. As a result, we recorded a provision of $5.3 million related to the withholding tax on our Chinese operation's earnings and profits which would be repatriated to the U.S. jurisdiction upon dissolution. No additional U.S. tax liability will result from the future dividend due to existing net operating losses, which would offset any potential increase in U.S. federal taxable income.

33-------------------------------------------------------------------------------- Table of Contents Net Loss The following table presents a reconciliation of operating loss to net loss: Nine Months Ended (in thousands) September 30, October 2, 2012 2011 Operating loss $ (130,431 ) $ (18,022 ) Other expense, net (13,012 ) (13,271 ) Loss before income taxes (143,443 ) (31,293 ) Income tax provision 9,657 3,745 Net loss $ (153,100 ) $ (35,038 ) Our net loss for the first nine months of fiscal 2012 was $153.1 million, compared to a net loss of $35.0 million for the first nine months of fiscal 2011. The net loss in the first nine months of fiscal 2012 was largely due to our decreased revenue during the period, which resulted in a gross loss and, consequently, an operating loss and the resulting net loss.

Liquidity and Capital Resources Introduction We have historically financed our operations through a combination of cash on hand, cash provided from operations, available borrowings under a bank line of credit or term loan, private debt offerings and both private and public equity offerings. We no longer have a bank line of credit. As a result, our principal sources of liquidity currently consist of our existing cash balances, funds generated from future operations and additional term loans under our Credit Agreement. As of September 30, 2012, we had working capital of $94.6 million, including $16.3 million in unrestricted cash and cash equivalents, as compared to working capital of $194.3 million at January 1, 2012, which included $64.1 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 30, 2012 and October 2, 2011: Nine Months Ended (in thousands) September 30, October 2, 2012 2011 Net cash provided by (used in): Operating activities $ (84,757 ) $ (36,514 ) Investing activities 4,937 (5,448 ) Financing activities 31,935 26,290Effect of foreign currency translation on cash and cash equivalents 82 (310 ) Net decrease in cash and cash equivalents $ (47,803 ) $ (15,982 ) Operating Activities Net cash used in operating activities in the first nine months of fiscal 2012 was $84.8 million as compared to $36.5 million used in operating activities in the first nine months of fiscal 2011. The increase in cash used in operating activities was due to the reduction in revenue and related increase in net loss, and an increase in working capital, primarily a decrease in accounts payable, accrued expenses and an increase in prepaid and other current assets, partially offset by a decrease in accounts receivable.

34-------------------------------------------------------------------------------- Table of Contents Investing Activities Net cash provided by investing activities in the first nine months of fiscal 2012 was $4.9 million as compared to $5.4 million used by investing in the first nine months of fiscal 2011. The $4.9 million in net cash provided by investing activities during the first nine months of fiscal 2012 reflects proceeds from the sale of our Finland facility and other assets of approximately $5.6 million and cash received from the Tatfook transaction of approximately $6.9 million, along with various proceeds for the sale of other excess fixed assets, partially offset by capital expenditures of $2.5 million and an increase in restricted deposits of $5.6 million. The $5.4 million in net cash used by investing activities during the first nine months of fiscal 2011 represents capital expenditures of $5.8 million partially offset by proceeds from the sale of property, plant and equipment of $0.4 million. 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 $1 million and $2 million, consisting of test and production equipment, as well as computer hardware and software.

Financing Activities Net cash provided by financing activities during the first nine months of fiscal 2012 and 2011 was $31.9 million and $26.3 million, respectively. The 2012 amount was primarily comprised of proceeds from the issuance of senior secured debt, net of debt issuance costs, and proceeds from our employee stock purchase plan, and the 2011 amount was comprised of proceeds from debt issuance of $100.0 million and proceeds from our employee stock purchase plan of $1.6 million, offset by the retirement of long-term debt of $46.8 million, the repurchase of common stock of $25.0 million and debt issuance costs of $3.5 million.

On September 11, 2012, we entered into a credit agreement ("Credit Agreement") with P-Wave Holdings, LLC (an affiliate of The Gores Group, LLC), as the Agent (the "Agent"), and the various financial institutions and other persons from time to time parties thereto (the "Lenders").

Pursuant to the Credit Agreement, the Lenders provided an initial $35 million secured term loan to us (the "Initial Draw") and shall, from time to time thereafter, make available to us additional secured term loans of up to $15 million, which we may request in one or more advances, subject to the satisfaction of certain closing conditions, including: (i) no event of default occurring or continuing under the Credit Agreement; (ii) prior payment in full of all fees and expenses due under the Credit Agreement; (iii) prior issuance of all warrants due and payable under the Credit Agreement; and (iv) us providing Agent with evidence of the Company's achievement of revenues for the fiscal quarter ended on or about January 1, 2013 totaling $60 million. The Credit Agreement further contemplates that the lenders may make available to us incremental secured term loans in an aggregate amount not to exceed $100 million (the "Incremental Loans"), for a total potential commitment of up to $150 million in principal amount of term loans under the Credit Agreement. However, there is no obligation on the part of us to accept these Incremental Loans and there is no obligation on the part of the lenders to make any Incremental Loans.

On July 26, 2011, we completed the private placement of $100 million in original principal amount of our 2.75% Convertible Senior Subordinated Notes due 2041 (the "2.75% Notes"). We used the proceeds from the sale of the 2.75% Notes to repurchase $57.9 million in aggregate principal amount of our 1.875% Notes. We also utilized approximately $25.0 million of the net proceeds from the private placement of the 2.75% Notes to repurchase 2.2 million shares of our Common Stock, and incurred debt issuance costs of $3.6 million during the year ended January 1, 2012.

We have a total of $256.1 million of long-term convertible subordinated notes outstanding as of September 30, 2012, consisting of $0.1 million of our 1.875% Convertible Subordinated Notes due 2024 (the "1.875% Notes"), $150.0 million of our Convertible Subordinated Notes due October 2027 (the "3.875% Notes") and $106.0 million of the 2.75% Notes. Holders of the 3.875% 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. Holders of the 2.75% Notes may require us to repurchase all or a portion of their notes for cash on July 15, 2018, 2025 or 2032 for a repurchase price equal to 100% of the accreted amount of the 2.75% Notes, plus accrued and unpaid interest on the original principal amount.

We are in the process of pursuing other financing or refinancing options. There is no assurance that we will be able to obtain new financing on favorable terms or at all.

Liquidity We have experienced significant recurring net losses and operating cash flow deficits for the past five quarters. Our ability to continue as a going concern is dependent on many factors, including among others, our ability to meet the financial covenants in our Credit Agreement, including those covenants that are a pre-condition to receiving additional term loans under the Credit Agreement, our ability to raise additional funding, and our ability to generate positive cash flow from operations by increasing revenue and successfully restructuring operations to lower manufacturing costs and reduce operating expenses.

35-------------------------------------------------------------------------------- Table of Contents As of September 30, 2012, we had $16.3 million in unrestricted cash and cash equivalents available to support ongoing operations. During the nine months ended September 30, 2012, we used approximately $84.8 million of cash in operating activities. In September 2012, we entered into the Credit Agreement under which we obtained a $35 million secured loan under which we received net proceeds of approximately $26.8 million (after deducting debt issue costs and the required reserve amount of $5 million that is included in restricted cash) from such term loan. The Lenders also agreed to provide an additional $15 million secured term loan that is available in the first quarter of 2013 assuming we meet certain covenants and pre-conditions in the Credit Agreement.

The Lenders may also to provide up to an additional $100 million in secured terms loans, which the Lenders can extend at its sole discretion.

Although we obtained a secured term loan in the third quarter of 2012, our continued negative cash flow from operations, declining revenue and cash expenses from restructuring activities raise substantial doubt about our ability to continue as a going concern.

We plan to address this situation by implementing restructuring plans designed to reduce our operating expenses and manufacturing costs. We believe that our ability to have sufficient cash flows to continue as a going concern for the next twelve months is dependent upon us: (1) meeting the fourth quarter revenue covenant of $60 million and complying with the other pre-conditions to obtaining an additional $15 million secured term loan under the Credit Agreement and remaining in compliance with all other financial covenants, and as a result, receiving the additional $15 million available to us under the Credit Agreement in the first quarter of 2013; (2) remaining in compliance with the financial covenants throughout 2013; (3) successfully implementing restructuring actions; (4) significantly reducing our negative cash flows from operating activities; (5) successfully collecting our billed and unbilled accounts receivable; and (6) having other net favorable working capital changes. However, should we be unsuccessful with one or more of these items, we believe that we will need to raise additional funding to continue as a going concern for the next twelve months, which funding may not be available on acceptable terms or at all.

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 Annual Report on Form 10-K for the fiscal year ended January 1, 2012, in Part II, Item 7 under the heading "Contractual Obligations and Commercial Commitments". As of September 30, 2012, 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.

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