e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2007
or
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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 001-33278
HARRIS STRATEX NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-5961564 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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637 Davis Drive |
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Morrisville, North Carolina
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27560 |
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(Address of principal executive offices)
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(Zip Code) |
(919) 767-3250
(Registrants telephone number, including area code)
Indicate by checkmark whether the registrant (l) 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 o
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. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the
Exchange Act). Yes o No þ
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Class of Stock |
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Shares Outstanding as of October 31, 2007 |
Class A Common Stock, par value $0.01 per share
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25,481,829 |
Class B Common Stock, par value $0.01 per share
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32,913,377 |
Total shares of common stock outstanding
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58,395,206 |
HARRIS STRATEX NETWORKS, INC.
FORM 10-Q/A
For the Quarter Ended September 28, 2007
INDEX
This Quarterly Report on Form 10-Q/A contains trademarks of Harris Stratex Networks, Inc.
2
EXPLANATORY NOTE
We have restated our unaudited condensed consolidated financial statements for the quarter
ended September 28, 2007 and September 29, 2006 in this Amendment to Form 10-Q (the Form
10-Q/A) to our Quarterly Report on Form 10-Q for the quarter ended September 28, 2007. This
Form 10-Q/A also reflects the restatement of Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 4 Controls and Procedures for the
quarter ended September 28, 2007 and September 29, 2006. The restatement also affects, and
is reflected in, other items in this Form 10-Q/A.
Previously filed (i) interim consolidated financial statements for the quarter ended
September 28, 2007 and September 29, 2006 (ii) the annual Consolidated financial statements
for the fiscal years ended June 29, 2007, June 30, 2006, and July 1, 2005 included in the
Companys Annual Report on Form 10-K for the year ended June 29, 2007 and (iii) related
reports of its independent registered public accountants should no longer be relied upon.
Specifically, we have restated our unaudited condensed consolidated financial statements
related to the following items:
§ |
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Errors in project work in process inventory accounts within a cost accounting system at one
location that resulted in project cost variances not being recorded to cost of sales in
a timely manner. |
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§ |
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Errors in the reconciliation of inventory and intercompany accounts receivable
accounts which resulted in an overstatement of inventory and accounts receivable in
prior years. |
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Errors in prior years product warranty liability accruals which resulted in the
improper exclusion of costs associated with technical assistance service provided by the
Company under its standard warranty policy. |
The effect of these restatement items reduced stockholders equity cumulatively by $11.0
million as of September 28, 2007 and $11.6 million as of June 29, 2007. Net loss was
decreased by $0.6 million for the quarter ended September 28, 2007 and income was increased
by $0.7 million for the quarter ended September 29, 2006.
This restatement is more fully described in Part I herein under Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations and in Note C
Restatement to Previously Issued Financial Statements to such unaudited condensed
consolidated financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Quarter Ended |
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September 28, |
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September 29, |
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2007 |
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2006 |
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(Restated) |
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(Restated) |
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(In millions, except per share amounts) |
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Revenue from product sales and services: |
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Revenue from external product sales |
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$ |
148.6 |
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$ |
81.9 |
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Revenue from product sales with Harris Corporation |
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1.2 |
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0.5 |
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Total revenue from product sales |
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149.8 |
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82.4 |
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Revenue from services |
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22.5 |
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11.2 |
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Total revenue from product sales and services |
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172.3 |
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93.6 |
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Cost of product sales and services: |
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Cost of external product sales |
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(108.9 |
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(51.9 |
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Cost of product sales with Harris Corporation |
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(0.3 |
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(0.3 |
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Total cost of product sales |
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(109.2 |
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(52.2 |
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Cost of services |
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(13.7 |
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(7.3 |
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Cost of sales billed from Harris Corporation |
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(0.6 |
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(2.6 |
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Amortization of purchased technology |
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(1.8 |
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Total cost of product sales and services |
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(125.3 |
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(62.1 |
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Gross margin |
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47.0 |
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31.5 |
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Research and development expenses |
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(12.4 |
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(7.5 |
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Selling and administrative expenses |
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(27.1 |
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(14.8 |
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Selling and administrative expenses with Harris Corporation |
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(1.7 |
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(1.6 |
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Total research, development, selling and administrative expenses |
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(41.2 |
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(23.9 |
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Amortization of identifiable intangible assets |
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(1.8 |
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Restructuring charges |
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(4.0 |
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Corporate allocations expense from Harris Corporation |
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(1.6 |
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Operating income |
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6.0 |
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Interest income |
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0.7 |
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0.1 |
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Interest expense |
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(0.7 |
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(0.2 |
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Income before provision for income taxes |
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5.9 |
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Provision for income taxes |
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(0.2 |
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(0.4 |
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Net (loss) income |
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$ |
(0.2 |
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$ |
5.5 |
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Basic and diluted net loss per share |
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$ |
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N/A |
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Basic and diluted weighted average shares outstanding |
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58.4 |
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N/A |
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N/A |
- |
Prior to January 26, 2007, the Company was a division of Harris Corporation and there were
no shares outstanding for purposes
of income or loss per share calculations. Basic and diluted weighted average shares outstanding
are calculated based on the daily outstanding shares, reflecting the fact that no shares were
outstanding prior to January 26, 2007. |
See accompanying Notes to Consolidated Financial Statements.
4
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 28, |
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June 29, |
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2007 |
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2007 |
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(Restated) |
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(Restated) |
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(In millions, except per |
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share amounts) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
64.2 |
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$ |
69.2 |
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Short-term investments and available for sale securities |
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15.1 |
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20.4 |
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Receivables |
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197.0 |
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183.1 |
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Unbilled costs |
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48.6 |
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36.9 |
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Inventories |
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121.5 |
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124.2 |
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Deferred income taxes |
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5.0 |
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4.1 |
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Other current assets |
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20.7 |
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21.7 |
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Total current assets |
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472.1 |
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459.6 |
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Long-Term Assets |
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Property, plant and equipment |
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79.2 |
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80.0 |
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Goodwill |
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315.1 |
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324.7 |
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Identifiable intangible assets |
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141.0 |
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144.5 |
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Capitalized software |
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9.7 |
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9.7 |
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Non-current notes receivable |
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4.6 |
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5.3 |
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Non-current deferred income taxes |
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0.6 |
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0.5 |
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Other assets |
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1.9 |
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1.2 |
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Total long-term assets |
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552.1 |
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565.9 |
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Total assets |
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$ |
1,024.2 |
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$ |
1,025.5 |
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Liabilities and Shareholders Equity |
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Current Liabilities |
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Short-term debt |
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$ |
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$ |
1.2 |
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Current portion of long-term debt |
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9.2 |
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10.7 |
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Accounts payable |
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92.1 |
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84.7 |
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Compensation and benefits |
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12.4 |
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11.5 |
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Other accrued items |
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46.1 |
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45.8 |
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Advance payments and unearned income |
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22.3 |
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22.3 |
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Income taxes payable |
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5.5 |
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6.8 |
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Restructuring liabilities |
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10.7 |
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10.8 |
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Current portion of long-term capital lease obligation to Harris Corporation |
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2.5 |
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3.1 |
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Due to Harris Corporation |
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20.2 |
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17.2 |
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Total Current Liabilities |
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221.0 |
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214.1 |
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Long-Term Liabilities |
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Long-term debt |
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7.5 |
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8.8 |
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Long-term portion of capital lease obligation to Harris Corporation |
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1.4 |
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2.8 |
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Restructuring and other long-term liabilities |
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9.9 |
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11.8 |
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Redeemable preference shares |
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8.3 |
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8.3 |
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Warrants |
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3.4 |
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3.9 |
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Deferred income taxes |
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20.2 |
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29.4 |
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Total Liabilities |
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271.7 |
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279.1 |
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Commitments and contingencies |
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Shareholders Equity |
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Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued |
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Common stock, Class A, $0.01 par value; 300,000,000 shares authorized;
issued and outstanding 25,478,101 shares at September 28, 2007 and
25,400,856 shares at June 29, 2007 |
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0.3 |
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0.3 |
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Common stock, Class B $0.01 par value; 100,000,000 shares authorized;
issued and outstanding 32,913,377 shares at September 28, 2007 and June
29, 2007 |
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0.3 |
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0.3 |
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Additional paid-in-capital |
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773.3 |
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770.0 |
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Accumulated deficit |
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(24.4 |
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(24.2 |
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Accumulated other comprehensive income |
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3.0 |
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Total Shareholders Equity |
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752.5 |
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746.4 |
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Total Liabilities And Shareholders Equity |
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$ |
1,024.2 |
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$ |
1,025.5 |
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See accompanying Notes to Consolidated Financial Statements.
5
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
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Quarter Ended |
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September 28, |
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September 29, |
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2007 |
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2006 |
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(Restated) |
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(Restated) |
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(In millions) |
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Operating Activities |
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Net (loss) income |
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$ |
(0.2 |
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$ |
5.5 |
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Adjustments to reconcile net (loss) income to net cash provided by (used in) operating
activities: |
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Amortization of identifiable intangible assets acquired in the Stratex acquisition |
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3.6 |
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Depreciation and amortization of property, plant and equipment and capitalized software |
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5.3 |
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3.3 |
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Non-cash stock-based compensation expense |
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2.0 |
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Increase in fair value of warrants |
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(0.5 |
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Deferred income tax expense |
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0.2 |
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Changes in operating assets and liabilities: |
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Receivables |
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(13.2 |
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(1.7 |
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Unbilled costs and inventories |
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(9.0 |
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(1.6 |
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Accounts payable and accrued expenses |
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8.6 |
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(1.2 |
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Advance payments and unearned income |
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4.0 |
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Due to Harris Corporation |
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3.0 |
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(9.5 |
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Other |
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2.3 |
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0.2 |
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Net cash provided by (used in) operating activities |
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2.1 |
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(1.0 |
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Investing Activities |
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Purchases of short-term investments and available for sale securities |
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(4.0 |
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Sales of short-term investments and available for sale securities |
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9.3 |
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Additions of property, plant and equipment |
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(2.1 |
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(0.2 |
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Additions of capitalized software |
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(4.2 |
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(1.1 |
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Net cash used in investing activities |
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(1.0 |
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(1.3 |
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Financing Activities |
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Decrease in short-term debt |
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(1.2 |
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(0.1 |
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Payments on long-term debt |
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(2.8 |
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Payments on long-term capital lease obligation to Harris Corporation |
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(2.0 |
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Proceeds from exercise of former Stratex stock options |
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0.9 |
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Net cash and other transfers from Harris Corporation prior to the Stratex acquisition |
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2.7 |
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Net cash (used in) provided by financing activities |
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(5.1 |
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2.6 |
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Effect of exchange rate changes on cash and cash equivalents |
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(1.0 |
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0.3 |
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Net (decrease) increase in cash and cash equivalents |
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(5.0 |
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0.6 |
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Cash and cash equivalents, beginning of year |
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69.2 |
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13.8 |
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Cash and cash equivalents, end of quarter |
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$ |
64.2 |
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$ |
14.4 |
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See accompanying Notes to Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2007
(Unaudited)
Note A Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Harris Stratex
Networks, Inc. and its wholly-owned and majority-owned subsidiaries (we, us, and our) and
have been prepared by us, without an audit, in accordance with accounting principles generally
accepted in the United States for interim financial information and with the rules and regulations
of the Securities and Exchange Commission (SEC). Accordingly, they do not include all information
and footnotes necessary for a complete presentation of financial position, results of operations
and changes in cash flows in conformity with U.S. generally accepted accounting principles. In the
opinion of our management, such financial statements reflect all adjustments (consisting only of
normal, recurring adjustments) considered necessary for a fair presentation of financial position,
results of operations and cash flows for such periods.
The results for the quarter ended September 28, 2007 are not necessarily indicative of the results
that may be expected for the full fiscal year or any subsequent period. The balance sheet at June
29, 2007 has been derived from our audited financial statements but does not include all the
information and footnotes required by generally accepted accounting principles in the United States
for annual financial statements. We provide complete financial statements in our Annual Report on
Form 10-K/A, which includes information and footnotes required by the rules and regulations of the
SEC. The information included in this Quarterly Report on Form 10-Q/A should be read in conjunction
with the Managements Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K/A for the fiscal year ended June 29, 2007 (Fiscal 2007
Form 10-K/A).
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States requires us to make estimates and assumptions that affect the amounts reported
in the condensed financial statements and accompanying notes. Actual results could differ from
those results and estimates.
Prior to January 26, 2007, we were a division of Harris Corporation (Harris). For periods prior
to January 26, 2007, our consolidated financial statements include the accounts of the MCD and
Harris subsidiaries classified as part of MCD, our financial reporting predecessor entity. These
financial statements have been determined to be the historical financial statements of Harris
Stratex Networks, Inc. As used in these notes, the term MCD refers to the consolidated operations
of the Microwave Communications Division of Harris.
For periods prior to January 26, 2007, our historical financial statements are presented on a
carve-out basis and reflect the assets, liabilities, revenue and expenses that were directly
attributable to MCD as it was operated within Harris. Our condensed consolidated statements of
operations include all of the related costs of doing business, including an allocation of certain
general corporate expenses of Harris, which were in support of MCD, including costs for finance,
legal, treasury, purchasing, quality, environmental, safety, human resources, tax, audit and public
relations departments and other corporate and infrastructure costs. We were allocated $1.6 million
for these general corporate expenses from Harris during the quarter ended September 29, 2006. These
costs represented approximately 9.9% of the total cost of these allocated services in the quarter
ended September 29, 2006. These cost allocations were based primarily on a ratio of our revenue to
total Harris revenue, multiplied by the total headquarters expense of Harris. The allocation of
Harris overhead expenses to us concluded on January 26, 2007. We believe these allocations were
made on a reasonable basis. Harris currently owns approximately 56% of our common stock.
On January 26, 2007, we acquired Stratex Networks, Inc. (Stratex). The results of operations and
cash flows of Stratex were not included in any of our consolidated financial statements before
January 26, 2007.
Note B Recent Accounting Pronouncements
Accounting for Uncertain Tax Positions
On June 30, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 prescribes a more-likely-than-not threshold for the recognition and derecognition of
tax positions, provides guidance on the accounting for interest and
penalties relating to tax positions and requires that the
7
cumulative effect of applying the provisions of FIN 48 shall be
reported as an adjustment to the opening balance in retained earnings (deficit) or other
appropriate components of equity or net assets. Refer to Note O Income Taxes, for additional
information relating to our accounting for FIN 48 and income taxes.
Note C Restatement of Previously Issued Financial Statements
As previously announced on July 30, 2008, Harris Stratex Networks, Inc. and its Audit Committee
concluded that our consolidated financial statements for the fiscal years ended June 29, 2007, June
30, 2006 and July 1, 2005 and for the first three quarters of the fiscal year ended June 27, 2008
would be restated for the correction of errors contained in those consolidated financial
statements. The effect of these restatement items reduced shareholders equity cumulatively by
$11.0 million as of September 28, 2007 and
$11.6 million as of June 29, 2007. Previously reported net loss was
decreased by $0.6 million for the quarter ended September 28, 2007 and income was increased by $0.7
million for the quarter ended September 29, 2006. The
restatement had no impact on our net cash flows from operations,
financing activities or investing activities. Details of the nature of the corrections are as
follows:
Inventory
Project costs are accumulated in work in process inventory accounts in our cost accounting systems.
As products are shipped or otherwise meet our revenue recognition criteria, these project costs
are recorded to cost of sales. Estimates may be required at the point of sale if certain costs
have been incurred, but not yet invoiced to us. On a routine and periodic basis, we review the
work in process balances related to these projects to ensure all appropriate costs have been
recorded to cost of sales in a timely manner and in the period to which they relate.
During the fiscal year 2008, we determined that this review had not been performed in a manner
sufficient to identify significant project cost variances remaining in certain inventory accounts,
and that the resulting errors impacted prior quarters and prior years. To correct this error, we
decreased work in process inventory compared to amounts previously recorded by $10.2 million and
$9.6 million as of September 28, 2007 and June 29, 2007, respectively, increased cost of
external product sales and services by $0.6 million for the quarter ended September 28, 2007 and
decreased cost of external product sales and services by $0.6 million for the quarter ended
September 29, 2006.
Inventory and Intercompany Account Reconciliations
During the course of the year end close for the fiscal year ending June 27, 2008, we determined
that certain account reconciliation adjustments recorded in the fourth quarter of fiscal 2008,
which related primarily to inventory and intercompany accounts receivable accounts, should have
been recorded in prior quarters or prior years. We determined that certain manual controls had not
been performed for certain periods, resulting in accounting errors. More specifically, we
identified errors in the work in process inventory balances resulting from incorrect account
reconciliation processes. To correct this error, we recorded adjustments to decrease inventory
compared to amounts previously recorded by $3.4 million and $1.9 million as of September 28, 2007
and June 29, 2007, respectively, increase cost of external product sales by $1.5 million for
the quarter ended September 28, 2007, and decrease the cost of external product sales by $0.1
million for the quarter ended September 29, 2006.
We also identified errors in accounts receivable balances as a result of control deficiencies in
the recording and elimination of intercompany transactions. To correct this error, we increased
accounts receivable by $0.9 million for the quarter ended September 28, 2007 and decreased accounts
receivable by $2.2 million at June 29, 2007, and increased selling and administrative expenses by $3.1
million for the quarter ended September 28, 2007.
Warranty Liability
Our liability for product warranties contains the estimated accrual for certain technical
assistance services provided under our standard warranty policy. We determined that these costs had
not been properly included in the warranty liability estimates in the balance sheet of Stratex at
the date of acquisition. To correct this error, we recorded an adjustment to increase the warranty
liability and increase goodwill related to the Stratex acquisition by $1.1 million at June 29,
2007.
Deferred Tax Liability
Taking into consideration the restatement adjustments described above, we reassessed our income tax
provision in accordance with Statement 109. As a result, we recorded an adjustment to decrease the
deferred tax liability balance by $1.7 million and $2.1 million as of September 28, 2007 and June
29, 2007, respectively, and to decrease the income tax benefit by $0.4 million for the quarter ended
September 28, 2007. For periods prior to January 26, 2007,
income tax expense was determined
as if MCD had been a stand-alone entity, although the actual tax liabilities and tax consequences
applied only to Harris. Our income tax expense for those periods
relates to income taxes
paid or to be paid in foreign
8
jurisdictions for which net operating loss carryforwards were
not available and domestic taxable income is deemed offset by tax loss carryforwards for which an
income tax valuation allowance had been previously provided for in
the financial statements. Thus, there was no change in our tax
provision for periods prior to fiscal 2007.
The following tables present the impact of the restatement adjustments on our previously reported
consolidated balance sheets as of September 28, 2007 and June 29, 2007, as well as the impact on
our previously reported consolidated statements of operations and
cash flows for the quarters ended
September 28, 2007 and September 29, 2006.
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 28, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
Revenue |
|
$ |
172.3 |
|
|
$ |
|
|
|
$ |
172.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
49.1 |
|
|
|
(2.1 |
) |
|
|
47.0 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1.0 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.8 |
) |
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 29, 2006 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
Revenue |
|
$ |
93.6 |
|
|
$ |
|
|
|
$ |
93.6 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
30.8 |
|
|
|
0.7 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.3 |
|
|
|
0.7 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4.8 |
|
|
$ |
0.7 |
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
9
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
|
|
|
|
(In
millions) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
64.2 |
|
|
$ |
|
|
|
$ |
64.2 |
|
Short-term investments and available for sale securities |
|
|
15.1 |
|
|
|
|
|
|
|
15.1 |
|
Receivables |
|
|
196.1 |
|
|
|
0.9 |
|
|
|
197.0 |
|
Unbilled costs |
|
|
48.6 |
|
|
|
|
|
|
|
48.6 |
|
Inventories |
|
|
135.1 |
|
|
|
(13.6 |
) |
|
|
121.5 |
|
Deferred income taxes |
|
|
5.0 |
|
|
|
|
|
|
|
5.0 |
|
Other current assets |
|
|
20.7 |
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
484.8 |
|
|
|
(12.7 |
) |
|
|
472.1 |
|
Long-Term Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
79.2 |
|
|
|
|
|
|
|
79.2 |
|
Goodwill |
|
|
314.0 |
|
|
|
1.1 |
|
|
|
315.1 |
|
Identifiable intangible assets |
|
|
141.0 |
|
|
|
|
|
|
|
141.0 |
|
Other long-term assets |
|
|
16.8 |
|
|
|
|
|
|
|
16.8 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
551.0 |
|
|
|
1.1 |
|
|
|
552.1 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,035.8 |
|
|
$ |
(11.6 |
) |
|
$ |
1,024.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Current portion of long-term debt |
|
|
9.2 |
|
|
|
|
|
|
|
9.2 |
|
Accounts payable |
|
|
92.1 |
|
|
|
|
|
|
|
92.1 |
|
Compensation and benefits |
|
|
12.4 |
|
|
|
|
|
|
|
12.4 |
|
Other accrued items |
|
|
45.0 |
|
|
|
1.1 |
|
|
|
46.1 |
|
Advance payments and unearned income |
|
|
22.3 |
|
|
|
|
|
|
|
22.3 |
|
Income taxes payable |
|
|
5.5 |
|
|
|
|
|
|
|
5.5 |
|
Restructuring liabilities |
|
|
10.7 |
|
|
|
|
|
|
|
10.7 |
|
Current portion of long-term capital lease obligation
to Harris Corporation |
|
|
2.5 |
|
|
|
|
|
|
|
2.5 |
|
Due to Harris Corporation |
|
|
20.2 |
|
|
|
|
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
219.9 |
|
|
|
1.1 |
|
|
|
221.0 |
|
Long-term Liabilities |
|
|
52.4 |
|
|
|
(1.7 |
) |
|
|
50.7 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
272.3 |
|
|
|
(0.6 |
) |
|
|
271.7 |
|
Total shareholders equity |
|
|
763.5 |
|
|
|
(11.0 |
) |
|
|
752.5 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,035.8 |
|
|
$ |
(11.6 |
) |
|
$ |
1,024.2 |
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69.2 |
|
|
$ |
|
|
|
$ |
69.2 |
|
Short-term investments and available for sale securities |
|
|
20.4 |
|
|
|
|
|
|
|
20.4 |
|
Receivables |
|
|
185.3 |
|
|
|
(2.2 |
) |
|
|
183.1 |
|
Unbilled costs |
|
|
36.9 |
|
|
|
|
|
|
|
36.9 |
|
Inventories |
|
|
135.7 |
|
|
|
(11.5 |
) |
|
|
124.2 |
|
Deferred income taxes |
|
|
4.1 |
|
|
|
|
|
|
|
4.1 |
|
Other current assets . |
|
|
21.7 |
|
|
|
|
|
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
473.3 |
|
|
|
(13.7 |
) |
|
|
459.6 |
|
Long-Term Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
80.0 |
|
|
|
|
|
|
|
80.0 |
|
Goodwill |
|
|
323.6 |
|
|
|
1.1 |
|
|
|
324.7 |
|
Identifiable intangible assets |
|
|
144.5 |
|
|
|
|
|
|
|
144.5 |
|
Other long-term assets |
|
|
16.7 |
|
|
|
|
|
|
|
16.7 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
564.8 |
|
|
|
1.1 |
|
|
|
565.9 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,038.1 |
|
|
$ |
(12.6 |
) |
|
$ |
1,025.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt |
|
$ |
1.2 |
|
|
$ |
|
|
|
$ |
1.2 |
|
Current portion of long-term debt |
|
|
10.7 |
|
|
|
|
|
|
|
10.7 |
|
Accounts payable |
|
|
84.7 |
|
|
|
|
|
|
|
84.7 |
|
Compensation and benefits |
|
|
11.5 |
|
|
|
|
|
|
|
11.5 |
|
Other accrued items |
|
|
44.7 |
|
|
|
1.1 |
|
|
|
45.8 |
|
Advance payments and unearned income |
|
|
22.3 |
|
|
|
|
|
|
|
22.3 |
|
Income taxes payable |
|
|
6.8 |
|
|
|
|
|
|
|
6.8 |
|
Restructuring liabilities |
|
|
10.8 |
|
|
|
|
|
|
|
10.8 |
|
Current portion of long-term capital lease obligation
to Harris Corporation |
|
|
3.1 |
|
|
|
|
|
|
|
3.1 |
|
Due to Harris Corporation |
|
|
17.2 |
|
|
|
|
|
|
|
17.2 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
213.0 |
|
|
|
1.1 |
|
|
|
214.1 |
|
Long-term
Liabilities |
|
|
67.1 |
|
|
|
(2.1 |
) |
|
|
65.0 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
280.1 |
|
|
|
(1.0 |
) |
|
|
279.1 |
|
Total shareholders equity |
|
|
758.0 |
|
|
|
(11.6 |
) |
|
|
746.4 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,038.1 |
|
|
$ |
(12.6 |
) |
|
$ |
1,025.5 |
|
|
|
|
|
|
|
|
|
|
|
11
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
September 28, 2007 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(In millions) |
|
Net loss |
|
$ |
(0.8 |
) |
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
Net cash provided by operating activities |
|
|
2.1 |
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets acquired in the Stratex acquisition |
|
|
3.6 |
|
|
|
|
|
|
|
3.6 |
|
Depreciation and amortization of property, plant and equipment and capitalized
software |
|
|
5.3 |
|
|
|
|
|
|
|
5.3 |
|
Non-cash stock-based compensation expense |
|
|
2.0 |
|
|
|
|
|
|
|
2.0 |
|
Increase in fair value of warrants |
|
|
(0.5 |
) |
|
|
|
|
|
|
(0.5 |
) |
Deferred income tax expense |
|
|
(0.2 |
) |
|
|
0.4 |
|
|
|
0.2 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(10.1 |
) |
|
|
(3.1 |
) |
|
|
(13.2 |
) |
Unbilled costs and inventories |
|
|
(11.0 |
) |
|
|
2.0 |
|
|
|
(9.0 |
) |
Accounts payable and accrued expenses |
|
|
8.5 |
|
|
|
0.1 |
|
|
|
8.6 |
|
Advance payments and unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
Due to Harris Corporation |
|
|
3.0 |
|
|
|
|
|
|
|
3.0 |
|
Other |
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
Net cash used in investing activities |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(5.1 |
) |
|
|
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5.0 |
) |
|
|
|
|
|
|
(5.0 |
) |
Cash and cash equivalents, beginning of year |
|
$ |
69.2 |
|
|
|
|
|
|
$ |
69.2 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
64.2 |
|
|
$ |
|
|
|
$ |
64.2 |
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
September 29, 2006 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
As |
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
|
|
(In millions) |
|
Net income |
|
$ |
4.8 |
|
|
$ |
0.7 |
|
|
$ |
5.5 |
|
Net cash used in operating activities |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets acquired in the Stratex acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment and capitalized
software |
|
|
3.3 |
|
|
|
|
|
|
|
3.3 |
|
Non-cash stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in fair value of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(1.6 |
) |
|
|
(0.1 |
) |
|
|
(1.7 |
) |
Unbilled costs and inventories |
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
|
(1.6 |
) |
Accounts payable and accrued expenses |
|
|
(1.3 |
) |
|
|
0.1 |
|
|
|
(1.2 |
) |
Advance payments and unearned income |
|
|
4.0 |
|
|
|
|
|
|
|
4.0 |
|
Due to Harris Corporation |
|
|
(9.5 |
) |
|
|
|
|
|
|
(9.5 |
) |
Other |
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
Net cash used in investing activities |
|
|
(1.3 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2.6 |
|
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
Cash and cash equivalents, beginning of year |
|
$ |
13.8 |
|
|
|
|
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
14.4 |
|
|
$ |
|
|
|
$ |
14.4 |
|
|
|
|
|
|
|
|
|
|
|
13
Note D Short-Term Investments and Available for Sale Securities
Short-term investments and available for sale securities as of September 28, 2007 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
|
|
(In millions) |
|
Corporate notes |
|
$ |
11.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11.0 |
|
Government notes |
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
Auction rate securities |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments and available for sale securities |
|
$ |
15.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With the exception of the auction rate securities, all of the Companys short-term investments and
available for sale securities have maturity dates of less than one year, with a weighted average
maturity of 123 days. Our auction rate securities have maturities in perpetuity or extending
through August 2038, with interest rates resetting generally every 28 days.
14
Note E Accumulated Other Comprehensive Income (Loss) and Comprehensive Income (Restated)
The changes in components of our accumulated other comprehensive income (loss) during the quarters
ended September 28, 2007 and September 29, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Accumulated |
|
|
|
Foreign |
|
|
|
|
|
|
Available |
|
|
Other |
|
|
|
Currency |
|
|
Hedging |
|
|
for Sale |
|
|
Comprehensive |
|
|
|
Translation |
|
|
Derivatives |
|
|
Securities |
|
|
Income (Loss) |
|
|
|
(In millions) |
|
Balance at June 29, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign currency translation |
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
2.7 |
|
Net unrealized gain on hedging activities, net of $0 tax |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2007 |
|
$ |
2.7 |
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
(1.5 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
(1.4 |
) |
Foreign currency translation |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Net unrealized loss on hedging activities, net of $0 tax |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2006 |
|
$ |
(1.2 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income for the quarters ended September 28, 2007 and September 29, 2006 was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 28, 2007 |
|
|
September 29, 2006 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(In millions) |
|
Net (loss) income |
|
$ |
(0.2 |
) |
|
$ |
5.5 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
2.7 |
|
|
|
0.3 |
|
Net unrealized gain (loss) on hedging activities |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
2.8 |
|
|
$ |
5.7 |
|
|
|
|
|
|
|
|
Note F Receivables (Restated)
Our receivables are summarized below:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 28, 2007 |
|
|
June 29, 2007 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(In millions) |
|
Accounts receivable |
|
$ |
202.0 |
|
|
$ |
188.3 |
|
Notes receivable due within one year net |
|
|
3.4 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
205.4 |
|
|
|
191.6 |
|
Less allowances for collection losses |
|
|
(8.4 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
$ |
197.0 |
|
|
$ |
183.1 |
|
|
|
|
|
|
|
|
Note G Inventories (Restated)
Our inventories are summarized below:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 28, 2007 |
|
|
June 29, 2007 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(In millions) |
|
Finished products |
|
$ |
50.6 |
|
|
$ |
52.9 |
|
Work in process |
|
|
24.1 |
|
|
|
17.1 |
|
Raw materials and supplies |
|
|
63.5 |
|
|
|
68.4 |
|
|
|
|
|
|
|
|
|
|
|
138.2 |
|
|
|
138.4 |
|
Inventory reserves |
|
|
(16.7 |
) |
|
|
(14.2 |
) |
|
|
|
|
|
|
|
|
|
$ |
121.5 |
|
|
$ |
124.2 |
|
|
|
|
|
|
|
|
15
Note H Property, Plant and Equipment
Our property, plant and equipment are summarized below:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 28, 2007 |
|
|
June 29, 2007 |
|
|
|
(In millions) |
|
Land |
|
$ |
1.3 |
|
|
$ |
1.3 |
|
Buildings |
|
|
28.1 |
|
|
|
30.8 |
|
Software developed for internal use |
|
|
6.7 |
|
|
|
3.0 |
|
Machinery and equipment |
|
|
122.5 |
|
|
|
123.3 |
|
|
|
|
|
|
|
|
|
|
|
158.6 |
|
|
|
158.4 |
|
Less allowances for depreciation and amortization |
|
|
(79.4 |
) |
|
|
(78.4 |
) |
|
|
|
|
|
|
|
|
|
$ |
79.2 |
|
|
$ |
80.0 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to plant and equipment, including software
amortization, was $4.6 million and $3.3 million during the quarters ended September 28, 2007 and
September 29, 2006.
Note I Credit Facility and Debt
Our debt consisted of the following at September 28, 2007 and June 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 28, 2007 |
|
|
June 29, 2007 |
|
|
|
(In millions) |
|
Credit Facility with Bank: |
|
|
|
|
|
|
|
|
Term Loan A |
|
$ |
4.2 |
|
|
$ |
5.7 |
|
Term Loan B |
|
|
12.5 |
|
|
|
13.8 |
|
Other short-term notes |
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
|
16.7 |
|
|
|
20.7 |
|
Less other short-term notes |
|
|
|
|
|
|
(1.2 |
) |
Less current portion |
|
|
(9.2 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
7.5 |
|
|
$ |
8.8 |
|
|
|
|
|
|
|
|
As part of the Stratex acquisition, we assumed the existing credit facility of Stratex with a
commercial bank (the Credit Facility). The Credit Facility allows for revolving credit borrowings
of up to $50 million with available credit defined as $50 million less the outstanding balance of
our term loans ($16.7 million as of September 28, 2007) and any usage under the revolving credit
portion which includes our outstanding standby letters of credit ($6.7 million as of September 28,
2007). The Credit Facility is unsecured. The fair value of our debt approximates book values as of
September 28, 2007.
Term Loan A of the Credit Facility requires monthly principal payments of $0.5 million plus
interest at a fixed rate of 6.38% through May 2008. Term Loan B requires monthly principal payments
of $0.4 million plus interest at a fixed rate of 7.25% through March 2010.
The credit facility agreement contains a minimum tangible net worth covenant and a liquidity ratio
covenant. As of September 28, 2007, we were in compliance with these financial covenants.
As of September 28, 2007, our future principal payment obligations on long-term debt under the
Credit Facility were as follows:
|
|
|
|
|
|
|
Years Ending |
|
|
|
in June |
|
|
|
(In millions) |
|
2008 |
|
$ |
7.9 |
|
2009 |
|
|
5.0 |
|
2010 |
|
|
3.8 |
|
|
|
|
|
Total |
|
$ |
16.7 |
|
|
|
|
|
16
We have other uncommitted short-term lines of credit aggregating $11.2 million from various
international banks, all of which was available on September 28, 2007. These lines provide for
borrowings at various interest rates, typically may be terminated upon notice, may be used on such
terms as mutually agreed to by the banks and us and are reviewed annually for renewal or
modification.
Note J Accrued Warranties (Restated)
We have accrued for the estimated cost to repair or replace products under warranty at the time of
sale. Changes in warranty liability, which is included as a component of Other accrued items on
the condensed consolidated balance sheets, during the quarters ended September 28, 2007 and
September 29, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
September 28, 2007 |
|
|
September 29, 2006 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(In millions) |
|
Balance as of the beginning of the year |
|
$ |
6.7 |
|
|
$ |
3.9 |
|
Warranty provision for revenue recorded during the quarter |
|
|
1.9 |
|
|
|
0.5 |
|
Settlements made during the quarter |
|
|
(2.2 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
Balance as of the end of the quarter |
|
$ |
6.4 |
|
|
$ |
3.9 |
|
|
|
|
|
|
|
|
Note K Warrants
As part of the Stratex acquisition, we assumed warrants to purchase shares of our Class A common
stock. As of September 28, 2007, warrants to purchase 520,445 shares of our Class A common stock
were outstanding. These warrants have an exercise price of $11.80 per common share and will expire
on September 24, 2009. The per share fair value of each warrant was $6.53 and $7.43 on September
28, 2007 and June 29, 2007, respectively, determined based on the Black-Scholes-Merton model with the assumptions
listed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2007 |
|
June 29, 2007 |
Dividend yield |
|
|
0 |
.0% |
|
|
0 |
.0% |
Expected volatility |
|
|
39 |
.6% |
|
|
43 |
.1% |
Risk-free interest rate |
|
|
4 |
.14% |
|
|
4 |
.91% |
Expected holding period |
|
|
1 |
.00 year |
|
|
1 |
.25 year |
As a result of recording these outstanding warrants at fair value at September 28, 2007, we
recorded the change in fair value during the quarter ended September 28, 2007 as a $0.5 million
decrease to selling and administrative expenses on our condensed consolidated statements of
operations. During the quarter ended September 28, 2007, there were no warrants exercised.
Note L Restructuring Activities
In order to improve operating efficiencies and create synergies through the consolidation of
facilities, we implemented restructuring plans in fiscal 2007 to scale down our operations in
Canada, France, the U.S. and Mexico. We began implementation of a plan in February 2007 to scale
down operations in Montreal, Canada and, to a lesser extent, in the U.S. In the initial phase of
this plan, notices were sent to approximately 200 employees in Montreal that their employment would
be terminated between March 30, 2007 and December 31, 2007. We also began implementation of a plan
in June 2007 to scale down operations in Paris, France and, to a lesser extent, Mexico City,
Mexico. Notices were sent to 12 employees in Paris and 3 employees in Mexico City that their
employment would be terminated by December 31, 2007.
In the first quarter of fiscal 2008, we recorded an additional $4.0 million of restructuring
charges in connection with implementation of these fiscal 2007 plans. The cost of these plans as
they relate to the reductions in force during the first quarter of fiscal 2007 consisted primarily
of retention, severance and other benefits totaling $2.3 million. Also, during the first quarter of
fiscal 2008, we commenced the exit of our facilities in Montreal and Redwood Shores, California. We
recognized as part of restructuring expense approximately $1.8 million in Montreal relating to the
write-off of fixed assets and leasehold improvements ($1.3 million), the impairment of a lease
($0.3 million) and inventory ($0.2 million). We also recognized the impairment of our lease in
Redwood Shores ($0.5 million). These charges to restructuring in the first quarter of fiscal 2008
were partially offset by $0.3 million for the reduction in severance estimated to be paid in France
and a $0.3 million reduction in the amount estimated to close out our restructuring liability in
connection with our fiscal year 2006 restructuring plan to transfer our Montreal manufacturing
activities to our San Antonio, Texas facility.
17
In the third quarter of fiscal 2007, in connection with the Stratex acquisition on January 26,
2007, we recognized $12.0 million of restructuring liabilities representing the fair value of
Stratex restructuring liabilities incurred prior to, and not related to, the acquisition as
summarized in the table below. These charges relate to building lease obligations at four of
Stratexs U.S. facilities. In the quarter ended September 28, 2007, we made payments of $0.7
million on these leases, which reduced the liability by $0.5 million, net of $0.2 million in
interest expense. Also during the quarter ended September 28, 2007, new information became
available with regard to our utilization of the space under these
building lease obligations, and we
reduced our restructuring liability by $1.4 million with an offsetting decrease to goodwill under
purchase accounting.
The information in the following table summarizes our restructuring activity during the quarter
ended September 28, 2007 and the remaining restructuring liability as of September 28, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facilities |
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
|
|
Benefits |
|
|
Other |
|
|
Total |
|
|
|
(In millions) |
|
Restructuring liability at June 29, 2007 |
|
$ |
7.8 |
|
|
$ |
10.8 |
|
|
$ |
18.6 |
|
Provision in the quarter ended September 28, 2007 |
|
|
2.3 |
|
|
|
2.3 |
|
|
|
4.6 |
|
Release of accrual to statement of operations in the quarter ended September 28, 2007 |
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.6 |
) |
Amount credited to goodwill in the quarter ended September 28, 2007 |
|
|
|
|
|
|
(1.4 |
) |
|
|
(1.4 |
) |
Non-cash charges in the quarter ended September 28, 2007 |
|
|
|
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
Cash payments in the quarter ended September 28, 2007 |
|
|
(1.6 |
) |
|
|
(1.3 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring liability at September 28, 2007 |
|
$ |
7.9 |
|
|
$ |
8.9 |
|
|
$ |
16.8 |
|
|
|
|
|
|
|
|
|
|
|
Current portion of restructuring liability at September 28, 2007 |
|
$ |
7.9 |
|
|
$ |
2.8 |
|
|
|
10.7 |
|
Long-term portion of restructuring liability at September 28, 2007 |
|
|
|
|
|
|
6.1 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
Total restructuring liability at September 28, 2007 |
|
$ |
7.9 |
|
|
$ |
8.9 |
|
|
$ |
16.8 |
|
|
|
|
|
|
|
|
|
|
|
Our fiscal
year 2007 restructuring plans were expected to be fully implemented by December 31, 2007.
The following table summarizes our costs incurred through September 28, 2007 and costs expected to
be incurred for our fiscal 2007 restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred During |
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The |
|
|
Costs Incurred |
|
|
|
|
|
|
Total |
|
|
|
Total Costs |
|
|
Quarter Ended |
|
|
through |
|
|
Estimated |
|
|
Restructuring |
|
|
|
Incurred through |
|
|
September 28, |
|
|
September 28, |
|
|
Additional Costs |
|
|
Costs Expected |
|
|
|
June 29, 2007 |
|
|
2007 |
|
|
2007 |
|
|
to be Incurred |
|
|
to be Incurred |
|
|
|
(In millions) |
|
North America Microwave: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefits |
|
$ |
5.1 |
|
|
$ |
1.5 |
|
|
$ |
6.6 |
|
|
$ |
1.1 |
|
|
$ |
7.7 |
|
Facilities and other |
|
|
|
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America Microwave |
|
$ |
5.1 |
|
|
$ |
3.8 |
|
|
$ |
8.9 |
|
|
$ |
3.8 |
|
|
$ |
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Microwave: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefits |
|
$ |
4.2 |
|
|
$ |
0.2 |
|
|
$ |
4.4 |
|
|
$ |
|
|
|
$ |
4.4 |
|
Facilities and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International Microwave |
|
$ |
4.2 |
|
|
$ |
0.2 |
|
|
$ |
4.4 |
|
|
$ |
0.4 |
|
|
$ |
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
9.3 |
|
|
$ |
4.0 |
|
|
$ |
13.3 |
|
|
$ |
4.2 |
|
|
$ |
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note M Share-Based Compensation
Compensation expense for share-based awards was $2.4 million and $0.4 million for the quarters
ended September 28, 2007 and September 29, 2006. Amounts were included in our consolidated
statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
September 28, 2007 |
|
|
September 29, 2006 |
|
|
|
(In millions) |
|
Cost of product sales and services |
|
$ |
0.2 |
|
|
$ |
|
|
Research and development expenses |
|
|
0.5 |
|
|
|
|
|
Selling and administrative expenses |
|
|
1.7 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
Total compensation expense |
|
$ |
2.4 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
18
We did not grant any share-based awards during the quarter ended September 28, 2007. The
share-based compensation expense recorded during the first quarter of fiscal 2008 related solely to
recognition of costs associated with grants issued prior to June 29, 2007.
We issued 77,245 shares during the quarter ended September 28, 2007 upon the exercise of stock
options.
Note N Business Segments (Restated)
We are organized into three operating segments around the markets we serve: North America
Microwave, International Microwave and Network Operations. The North America Microwave segment
designs, manufactures, sells and services microwave radio products, primarily for cellular network
providers and private network users within North America (U.S. and Canada). The International
Microwave segment designs, manufactures, sells and services microwave radio products, primarily for
cellular network providers and private network users outside of North America. The Network
Operations segment develops, designs, produces, sells and services network management software
systems, primarily for cellular network providers and private network users.
During the first quarter of fiscal 2008, we had one customer in Africa (Mobile Telephone Networks
or MTN) that accounted for 11% of our total revenue.
Revenue and (loss) income before income taxes by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
September 28, 2007 |
|
|
September 29, 2006 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
|
(In millions) |
|
Revenue |
|
|
|
|
|
|
|
|
North America Microwave |
|
$ |
56.6 |
|
|
$ |
49.9 |
|
International Microwave |
|
|
109.2 |
|
|
|
39.3 |
|
Network Operations |
|
|
6.5 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
172.3 |
|
|
$ |
93.6 |
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
|
|
|
|
|
|
Segment Operating (Loss) Income: |
|
|
|
|
|
|
|
|
North America Microwave (1) |
|
$ |
(0.3 |
) |
|
$ |
3.7 |
|
International Microwave (2) |
|
|
(0.5 |
) |
|
|
3.6 |
|
Network Operations |
|
|
0.8 |
|
|
|
0.3 |
|
Corporate allocations expense from Harris |
|
|
|
|
|
|
(1.6 |
) |
Net interest expense |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
|
|
|
$ |
5.9 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the first quarter of fiscal 2008, we recorded $0.6 million in amortization of
developed technology, tradenames, customer relationships, and non-compete agreements, $0.2
million in amortization of the step-up in the fair value of fixed assets related to the
acquisition of Stratex, $3.8 million in restructuring charges, $1.0 million in merger-related
integration charges, $0.8 million in charges for impairment of a lease agreement and $2.3
million in FAS 123R share-based compensation in our North America Microwave segment. |
|
(2) |
|
During the first quarter of fiscal 2008, we recorded $3.0 million in amortization of
developed technology, tradenames, customer relationships, and non-compete agreements, $0.5
million in amortization of the step-up in the fair value of fixed assets related to the
acquisition of Stratex, $0.2 million in restructuring charges, $1.8 million in merger related
integration charges and $0.1 million in FAS 123R share-based compensation in our International
Microwave segment. |
Note O Income Taxes (Restated)
The income
tax benefit for the current fiscal quarter reflects our pre-tax loss
and was based on our
estimated annual effective tax. The income tax provision for the quarter ended September 28, 2007
was $0.2 million. The variation between income taxes and income tax expense at the U.S. statutory
rate of 35% is primarily due to the consolidation of our foreign operations, which are subject to
income taxes at lower statutory rates.
19
The income tax provision on income from operations for the quarter ended September 29, 2006 was
$0.4 million and is based upon an allocation of tax expense from Harris Corporation.
During the first quarter of fiscal 2008, we updated our purchase accounting adjustment under
Statement of Financial Accounting Standards No. 141 for the fair value of deferred tax liabilities
acquired in the Stratex acquisition, which resulted in a reduction to long-term deferred tax
liabilities and goodwill of $9.5 million.
We adopted the provisions of FIN 48 on June 30, 2007. FIN 48 prescribes a comprehensive model for
financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. As a result of adopting FIN 48,
there was an insignificant decrease in our retained earnings and a corresponding increase in tax
liabilities.
At June 30, 2007, we had a liability for unrecognized tax benefits of $28.1 million for various
federal, foreign, and state income tax matters. The adoption of FIN 48 resulted in a
reclassification of deferred tax asset items which included a full valuation allowance, as well as
goodwill for appropriate balance sheet presentation. If the unrecognized tax benefits associated
with these positions are ultimately recognized, they would not have a material impact on our
effective tax rate or our financial position.
We account for interest and penalties related to unrecognized tax benefits as part of our provision
for federal, foreign, and state income tax expense. We accrued an insignificant amount at June 30,
2007 for the payment of any such interest. We recorded an insignificant amount for such interest in
the quarter ended September 28, 2007. No penalties have been accrued.
We expect that the amount of unrecognized tax benefit may change in the next twelve months;
however, it is not expected to have a significant impact on our results of operations, financial
position or cash flows.
We have a number of years with open tax audits which vary from jurisdiction to jurisdiction. Our
major tax jurisdictions include the U.S., Nigeria, Singapore, New Zealand, Poland, South Africa,
France and the UK. The earliest years still open and subject to ongoing audits as of the date of
adoption of FIN 48 for these jurisdictions are as follows: (i) United States
(Federal/State)2003/2002; (ii) Nigeria2003; (iii) Singapore2000; (iv) New Zealand2003; (v)
Poland2003; (vi) South Africa2001; (vii) France2005; and (viii) UK2006.
Note P Related Party Transactions with Harris
Harris provided information services, human resources, financial shared services, facilities, legal
support and supply chain management services to us. Prior to the Stratex acquisition, the charges
for these services were billed to us primarily based on actual usage. During the quarter ended
September 29, 2006, Harris charged us $1.6 million for these services.
On January 26, 2007, we entered into a Transition Services Agreement with Harris to provide for
certain services during the periods subsequent to the Stratex acquisition. These services also are
charged to us based primarily on actual usage and include database management, supply chain
operating systems, eBusiness services, sales and service, financial systems, back office material
resource planning support, HR systems, internal and information systems shared services support,
network management and help desk support, and server administration and support. During the quarter
ended September 28, 2007, Harris charged us $1.7 million for these services.
We have sales to, and purchases from, other Harris entities from time to time. Prior to January 26,
2007, the entity initiating the transaction sold to the other Harris entity at cost or transfer
price, depending on jurisdiction. The entity making the sale to the end customer recorded the
profit on the transaction above cost or transfer price, depending on jurisdiction. Subsequent to
January 26, 2007, these purchases and sales are recorded at market price. Our sales to other Harris
entities were $1.2 million and $0.5 million for the quarters ended September 28, 2007 and September
29, 2006. We also recognized costs associated with related party purchases from Harris of $0.6
million and $2.6 million for the quarters ended
September 28, 2007 and September 29, 2006, respectively.
Harris was the primary source of our financing and equity activities through January 26, 2007, the
date of the Stratex acquisition. During the quarter ended September 29, 2006, Harris net
investment in us was increased by $2.7 million.
Additionally, through the date of the Stratex acquisition, Harris loaned cash to us to fund our
international entities and, we distributed excess cash back to Harris. This arrangement ended on
January 26, 2007. We recognized interest income and expense on these loans. The amount of interest
income and expense for the quarter ended September 29, 2006 was not significant.
20
The amounts billed from Harris are included within Due to Harris Corporation on the condensed
consolidated balance sheets. Additionally, we have other receivables and payables in the normal
course of business with Harris. These amounts are netted within Due to Harris Corporation on the
condensed consolidated balance sheets. Total receivables from Harris were $2.0 million and $0.7
million at September 28, 2007 and June 29, 2007. Total payables to Harris were $22.2 million and
$17.9 million at September 28, 2007 and June 29, 2007.
Prior to January 26, 2007, MCD used certain assets in Canada owned by Harris that were not
contributed to us as part of the Combination Agreement. We continue to use these assets in our
business and on January 26, 2007, we entered into a 5-year lease agreement to accommodate this use.
This agreement is a capital lease under U.S. generally accepted accounting principles. At September 28,
2007, our lease obligation to Harris was $3.9 million and the related asset amount is included in
our property, plant and equipment. Quarterly lease payments are due to Harris based on the amount
of 103% of Harris annual depreciation calculated in accordance with U.S. generally accepted
accounting principles. We recognized an impairment charge of $1.3 million on a portion of these
assets which is included in our restructuring charges during the first quarter of fiscal 2008.
Additionally, our depreciation expense on this capital lease was $0.4 million in the first quarter
of fiscal 2008.
Note Q Legal Proceedings
On February 8, 2007, a court order was entered against Stratex do Brasil, a subsidiary of Harris
Stratex Networks Operating Company, in Brazil, to enforce performance of an alleged agreement
between the former Stratex Networks, Inc. entity and a supplier. We have not determined what, if
any, liability this may result in, as the court did not award any damages. We have appealed the
decision to enforce the alleged agreement, and do not expect this litigation to have a material
adverse effect on our business, operating results or financial condition.
From time to time, the Company may be involved in various legal claims and litigation that arise in
the normal course of its operations. While the results of such claims and litigation cannot be
predicted with certainty, the Company currently believes that it is not a party to any litigation
the final outcome of which is likely to have a material adverse effect on the Companys financial
position, results of operations or cash flows. However, should the Company not prevail in any such
litigation; it could have a materially adverse impact on the Companys operating results, cash
flows or financial position.
21
Report of Independent Registered Public Accounting Firm
We have reviewed the condensed consolidated balance sheet of Harris Stratex Networks, Inc. and
subsidiaries as of September 28, 2007, the related condensed consolidated statements of operations
for the quarters ended September 28, 2007 and September 29, 2006, and the condensed consolidated
statements of cash flows for the quarters ended September 28, 2007 and September 29, 2006. These
financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
As described in Note C to the condensed consolidated financial statements, the financial statements
referred to above have been restated.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Harris Stratex Networks, Inc.
and subsidiaries as of June 29, 2007, and the related consolidated statements of operations and
cash flows for the year then ended, not presented herein, and in our report dated August 16, 2007
(except for Note D, as to which the date is September 12, 2008), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of June 29, 2007, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it has been derived.
As described in Note D to the consolidated financial statements, these financial statements have
been restated.
/s/ Ernst & Young LLP
Raleigh, North Carolina
November 2, 2007, except for Note C,
as to which the date is September 12, 2008
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), which include, without limitation, statements about the market for our technology,
our strategy and competition. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements of historical fact
may be deemed forward-looking statements. For example, the words believes, anticipates,
plans, expects, intends and similar expressions are intended to identify forward-looking
statements. Our actual results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause such a discrepancy
include, but are not limited to, those discussed below under the discussions of Risk Factors set
forth in our annual report on Form 10-K filed with the Securities and Exchange Commission on August
27, 2007. All forward looking statements in this document are based on information available to us
as of the date hereof and we assume no obligation to update any such forward-looking statements.
As previously announced on July 30, 2008, Harris Stratex Networks, Inc. and its Audit Committee
concluded that our consolidated financial statements for the fiscal years ended June 29, 2007, June
30, 2006 and July 1, 2005 and for the first three quarters of the fiscal year ended June 27, 2008
would be restated for the correction of errors contained in those consolidated financial
statements. The effect of these restatement items reduced stockholders equity cumulatively by
$11.0 million as of September 28, 2007 and
$11.6 million as of June 29, 2007, respectively. Previously
reported net loss was
decreased by $0.6 million for the quarter ended September 28, 2007 and income was increased by
$0.7 million for the quarter ended September 29, 2006. The
restatement had no impact on our net cash flows from operations,
financing activities or investing activities. Details of the nature of the corrections are
as follows:
Inventory
Project costs are accumulated in work in process inventory accounts in our cost accounting systems.
As products are shipped or otherwise meet our revenue recognition criteria, these project costs
are recorded to cost of sales. Estimates may be required at the point of sale if certain costs
have been incurred, but not yet invoiced to us. On a routine and periodic basis, we review the
work in process balances related to these projects to ensure all appropriate costs have been
recorded to cost of sales in a timely manner and in the period to which they relate.
During the fiscal year 2008, we determined that this review had not been performed in a manner
sufficient to identify significant project cost variances remaining in certain inventory accounts,
and that the resulting errors impacted prior quarters and prior years. To correct this error, we
decreased work in process inventory compared to amounts previously recorded by $10.2 million and
$9.6 million as of September 28, 2007 and June 29, 2007, respectively, and increased cost of
external product sales and services by $0.6 million for the quarter ended September 28, 2007 and
decreased cost of external product sales and services by $0.6 million for the quarter ended
September 29, 2006.
Inventory and Intercompany Account Reconciliations
During the course of the year end close for the fiscal year ending June 27, 2008, we determined
that certain account reconciliation adjustments recorded in the fourth quarter of fiscal 2008,
which related primarily to inventory and intercompany accounts receivable accounts, should have
been recorded in prior quarters or prior years. We determined that certain manual controls had not
been performed for certain periods, resulting in accounting errors. More specifically, we
identified errors in the work in process inventory balances resulting from incorrect account
reconciliation processes. To correct this error, we recorded adjustments to decrease inventory
compared to amounts previously recorded by $3.4 million and $1.9 million as of September 28, 2007
and June 29, 2007, respectively, and increased cost of external product sales by $1.5 million for
the quarter ended September 28, 2007, and decreased the cost of external product sales by $0.1
million for the quarter ended September 29, 2006.
We also identified errors in accounts receivable balances as a result of control deficiencies in
the recording and elimination of intercompany transactions. To correct this error, we increased
accounts receivable by $0.9 million for the quarter ended September 28, 2007 and decreased accounts
receivable by $2.2 million at June 29, 2007, and increased selling and administrative expenses by $3.1
million for the quarter ended September 28, 2007.
Warranty Liability
Our liability for product warranties contains the estimated accrual for certain technical
assistance services provided under our standard warranty policy. We determined that these costs had
not been properly included in the warranty liability estimates in the balance sheet of Stratex at
the date of acquisition. To correct this error, we recorded an adjustment to increase the warranty
liability and increase
goodwill related to the Stratex acquisition by $1.1 million at June 29, 2007.
23
Deferred Tax Liability
Taking into consideration the restatement adjustments described above, we reassessed our income tax
provision in accordance with Statement 109. As a result, we recorded an adjustment to decrease the
deferred tax liability balance by $1.7 million and $2.1 million as of September 28, 2007 and June
29, 2007, respectively, and to decrease the income tax benefit by $0.4 million for the quarter ended
September 28, 2007. For periods prior to January 26, 2007, income tax expense has been determined
as if MCD had been a stand-alone entity, although the actual tax liabilities and tax consequences
applied only to Harris. Our income tax expense for those periods relates to income taxes paid or to be paid in
foreign jurisdictions for which net operating loss carryforwards were not available and domestic
taxable income is deemed offset by tax loss carryforwards for which an income tax valuation
allowance had been previously provided for in the financial
statements. Thus, there was no change in our tax provision for
periods prior to fiscal 2007.
The following tables present the impact of the restatement adjustments on our previously reported
consolidated balance sheets as of September 28, 2007 and June 29, 2007, as well as the impact on
our previously reported consolidated statements of operations and cash flows for the quarter ended
September 28, 2007 and September 29, 2006.
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 28, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
Revenue |
|
$ |
172.3 |
|
|
$ |
|
|
|
$ |
172.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
49.1 |
|
|
|
(2.1 |
) |
|
|
47.0 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1.0 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.8 |
) |
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter ended September 29, 2006 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
Revenue |
|
$ |
93.6 |
|
|
$ |
|
|
|
$ |
93.6 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
30.8 |
|
|
|
0.7 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.3 |
|
|
|
0.7 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4.8 |
|
|
$ |
0.7 |
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
24
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(In millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
64.2 |
|
|
$ |
|
|
|
$ |
64.2 |
|
Short-term investments and available for sale securities |
|
|
15.1 |
|
|
|
|
|
|
|
15.1 |
|
Receivables |
|
|
196.1 |
|
|
|
0.9 |
|
|
|
197.0 |
|
Unbilled costs |
|
|
48.6 |
|
|
|
|
|
|
|
48.6 |
|
Inventories |
|
|
135.1 |
|
|
|
(13.6 |
) |
|
|
121.5 |
|
Deferred income taxes |
|
|
5.0 |
|
|
|
|
|
|
|
5.0 |
|
Other current assets |
|
|
20.7 |
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
484.8 |
|
|
|
(12.7 |
) |
|
|
472.1 |
|
Long-Term Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
79.2 |
|
|
|
|
|
|
|
79.2 |
|
Goodwill |
|
|
314.0 |
|
|
|
1.1 |
|
|
|
315.1 |
|
Identifiable intangible assets |
|
|
141.0 |
|
|
|
|
|
|
|
141.0 |
|
Other long-term assets |
|
|
16.8 |
|
|
|
|
|
|
|
16.8 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
551.0 |
|
|
|
1.1 |
|
|
|
552.1 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,035.8 |
|
|
$ |
(11.6 |
) |
|
$ |
1,024.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Current portion of long-term debt |
|
|
9.2 |
|
|
|
|
|
|
|
9.2 |
|
Accounts payable |
|
|
92.1 |
|
|
|
|
|
|
|
92.1 |
|
Compensation and benefits |
|
|
12.4 |
|
|
|
|
|
|
|
12.4 |
|
Other accrued items |
|
|
45.0 |
|
|
|
1.1 |
|
|
|
46.1 |
|
Advance payments and unearned income |
|
|
22.3 |
|
|
|
|
|
|
|
22.3 |
|
Income taxes payable |
|
|
5.5 |
|
|
|
|
|
|
|
5.5 |
|
Restructuring liabilities |
|
|
10.7 |
|
|
|
|
|
|
|
10.7 |
|
Current portion of long-term capital lease obligation
to Harris Corporation |
|
|
2.5 |
|
|
|
|
|
|
|
2.5 |
|
Due to Harris Corporation |
|
|
20.2 |
|
|
|
|
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
219.9 |
|
|
|
1.1 |
|
|
|
221.0 |
|
Long-term
Liabilities |
|
|
52.4 |
|
|
|
(1.7 |
) |
|
|
50.7 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
272.3 |
|
|
|
(0.6 |
) |
|
|
271.7 |
|
Total shareholders equity |
|
|
763.5 |
|
|
|
(11.0 |
) |
|
|
752.5 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,035.8 |
|
|
$ |
(11.6 |
) |
|
$ |
1,024.2 |
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2007 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69.2 |
|
|
$ |
|
|
|
$ |
69.2 |
|
Short-term investments and available for
sale securities |
|
|
20.4 |
|
|
|
|
|
|
|
20.4 |
|
Receivables |
|
|
185.3 |
|
|
|
(2.2 |
) |
|
|
183.1 |
|
Unbilled costs |
|
|
36.9 |
|
|
|
|
|
|
|
36.9 |
|
Inventories |
|
|
135.7 |
|
|
|
(11.5 |
) |
|
|
124.2 |
|
Deferred income taxes |
|
|
4.1 |
|
|
|
|
|
|
|
4.1 |
|
Other current assets |
|
|
21.7 |
|
|
|
|
|
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
473.3 |
|
|
|
(13.7 |
) |
|
|
459.6 |
|
Long-Term Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
80.0 |
|
|
|
|
|
|
|
80.0 |
|
Goodwill |
|
|
323.6 |
|
|
|
1.1 |
|
|
|
324.7 |
|
Identifiable intangible assets |
|
|
144.5 |
|
|
|
|
|
|
|
144.5 |
|
Other long-term assets |
|
|
16.7 |
|
|
|
|
|
|
|
16.7 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
564.8 |
|
|
|
1.1 |
|
|
|
565.9 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,038.1 |
|
|
$ |
(12.6 |
) |
|
$ |
1,025.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt |
|
$ |
1.2 |
|
|
$ |
|
|
|
$ |
1.2 |
|
Current portion of long-term debt |
|
|
10.7 |
|
|
|
|
|
|
|
10.7 |
|
Accounts payable |
|
|
84.7 |
|
|
|
|
|
|
|
84.7 |
|
Compensation and benefits |
|
|
11.5 |
|
|
|
|
|
|
|
11.5 |
|
Other accrued items |
|
|
44.7 |
|
|
|
1.1 |
|
|
|
45.8 |
|
Advance payments and unearned income |
|
|
22.3 |
|
|
|
|
|
|
|
22.3 |
|
Income taxes payable |
|
|
6.8 |
|
|
|
|
|
|
|
6.8 |
|
Restructuring liabilities |
|
|
10.8 |
|
|
|
|
|
|
|
10.8 |
|
Current portion of long-term capital
lease obligation to Harris Corporation |
|
|
3.1 |
|
|
|
|
|
|
|
3.1 |
|
Due to Harris Corporation |
|
|
17.2 |
|
|
|
|
|
|
|
17.2 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
213.0 |
|
|
|
1.1 |
|
|
|
214.1 |
|
Long-term liabilities |
|
|
67.1 |
|
|
|
(2.1 |
) |
|
|
65.0 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
280.1 |
|
|
|
(1.0 |
) |
|
|
279.1 |
|
Total shareholders equity |
|
|
758.0 |
|
|
|
(11.6 |
) |
|
|
746.4 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and shareholders equity |
|
$ |
1,038.1 |
|
|
$ |
(12.6 |
) |
|
$ |
1,025.5 |
|
|
|
|
|
|
|
|
|
|
|
26
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
September 28, 2007 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(In millions) |
|
Net loss |
|
$ |
(0.8 |
) |
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
Net cash provided by operating activities |
|
|
2.1 |
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets acquired in the Stratex acquisition |
|
|
3.6 |
|
|
|
|
|
|
|
3.6 |
|
Depreciation and amortization of property, plant and equipment and capitalized
software |
|
|
5.3 |
|
|
|
|
|
|
|
5.3 |
|
Non-cash stock-based compensation expense |
|
|
2.0 |
|
|
|
|
|
|
|
2.0 |
|
Increase in fair value of warrants |
|
|
(0.5 |
) |
|
|
|
|
|
|
(0.5 |
) |
Deferred income tax expense |
|
|
(0.2 |
) |
|
|
0.4 |
|
|
|
0.2 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(10.1 |
) |
|
|
(3.1 |
) |
|
|
(13.2 |
) |
Unbilled costs and inventories |
|
|
(11.0 |
) |
|
|
2.0 |
|
|
|
(9.0 |
) |
Accounts payable and accrued expenses |
|
|
8.5 |
|
|
|
0.1 |
|
|
|
8.6 |
|
Advance payments and unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
Due to Harris Corporation |
|
|
3.0 |
|
|
|
|
|
|
|
3.0 |
|
Other |
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
Net cash used in investing activities |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(5.1 |
) |
|
|
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5.0 |
) |
|
|
|
|
|
|
(5.0 |
) |
Cash and cash equivalents, beginning of year |
|
$ |
69.2 |
|
|
|
|
|
|
$ |
69.2 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
64.2 |
|
|
$ |
|
|
|
$ |
64.2 |
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
September 29, 2006 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(In millions) |
|
Net income |
|
$ |
4.8 |
|
|
$ |
0.7 |
|
|
$ |
5.5 |
|
Net cash used in operating activities |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets acquired in the Stratex acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment and capitalized
software |
|
|
3.3 |
|
|
|
|
|
|
|
3.3 |
|
Non-cash stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in fair value of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(1.6 |
) |
|
|
(0.1 |
) |
|
|
(1.7 |
) |
Unbilled costs and inventories |
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
|
(1.6 |
) |
Accounts payable and accrued expenses |
|
|
(1.3 |
) |
|
|
0.1 |
|
|
|
(1.2 |
) |
Advance payments and unearned income |
|
|
4.0 |
|
|
|
|
|
|
|
4.0 |
|
Due to Harris Corporation |
|
|
(9.5 |
) |
|
|
|
|
|
|
(9.5 |
) |
Other |
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
Net cash used in investing activities |
|
|
(1.3 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2.6 |
|
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
Cash and cash equivalents, beginning of year |
|
$ |
13.8 |
|
|
|
|
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
14.4 |
|
|
$ |
|
|
|
$ |
14.4 |
|
|
|
|
|
|
|
|
|
|
|
28
Acquisition of Stratex Networks, Inc. and Combination with MCD
On January 26, 2007, Harris Stratex Networks, Inc. (the Company, HSTX, Harris Stratex, we,
us and our) completed its merger (the Stratex acquisition) with Stratex Networks, Inc.
(Stratex) pursuant to a Formation, Contribution and Merger Agreement among Harris, Stratex, and
Stratex Merger Corp., as amended and restated on December 18, 2006 and amended by letter agreement
on January 26, 2007. In the transaction, Stratex Merger Corp., a wholly-owned subsidiary of the
Company, merged with and into Stratex with Stratex as the surviving corporation (renamed as Harris
Stratex Networks Operating Corporation). Concurrently with the merger of Stratex and Stratex
Merger Corp. (the merger), Harris contributed the Microwave Communications Division (MCD),
along with $32.1 million in cash (comprised of $26.9 million contributed on January 26, 2007 and
$5.2 million held by the Companys foreign operating subsidiaries on January 26, 2007) to the
Company and the Company assumed the liabilities (with certain exceptions) of MCD (the contribution
transaction).
Pursuant to the merger, each share of Stratex common stock was converted into one-fourth of a share
of our Class A common stock, and a total of 24,782,153 shares of our Class A common stock were
issued to the former holders of Stratex common stock. In the contribution transaction, Harris
contributed the assets of MCD, along with $32.1 million in cash, and in exchange, we assumed
certain liabilities of Harris related to MCD and issued 32,913,377 shares of our Class B common
stock to Harris. As a result of these transactions, Harris owned approximately 57% and the former
Stratex shareholders owned approximately 43% of our total outstanding stock immediately following
the closing.
We completed the Stratex acquisition to create a leading global communications solutions company
offering end-to-end wireless transmission solutions for mobile and fixed-wireless service providers
and private networks.
The Stratex acquisition was accounted for as a purchase business combination with MCD considered
the acquirer for accounting purposes. Thus, the historical results discussed herein for periods
prior to January 26, 2007 represent the separate financial results of MCD on a carve-out basis.
Total consideration paid by us was approximately $493.1 million as summarized in the following
table:
|
|
|
|
|
Calculation of Allocable Purchase Price |
|
January 26, 2007 |
|
|
|
(In millions) |
|
Value of Harris Stratex Networks shares issued to Stratex Networks stockholders |
|
$ |
464.9 |
|
Value of Stratex Networks vested options assumed |
|
|
15.5 |
|
Acquisition costs |
|
|
12.7 |
|
|
|
|
|
Total allocable purchase price |
|
$ |
493.1 |
|
|
|
|
|
Overview
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations, which is sometimes referred to in this Quarterly Report on Form 10-Q/A as the MD&A, is
provided as a supplement to, should be read in conjunction with, and is qualified in its entirety
by reference to our condensed consolidated financial statements and related notes presented under
Item 1. Financial Statements of this report.
The following is a list of the sections of the MD&A, together with the perspective of our
management on the contents of these sections of the MD&A, which is intended to make reading these
pages more productive:
|
|
|
Business Considerations a general description of our businesses; the drivers of these
businesses and our strategy for achieving value and key indicators that are relevant to us
in the microwave communications industry. |
|
|
|
|
Operations Review an analysis of our consolidated results of operations and of the
results in each of its three operating segments, to the extent the operating segment results
are helpful to gaining an understanding of our business as a whole. |
|
|
|
|
Liquidity, Capital Resources and Financial Strategies an analysis of cash flows,
contractual obligations, off-balance sheet arrangements, commercial commitments, financial
risk management, impact of foreign exchange and impact of inflation. |
|
|
|
|
Critical Accounting Policies and Estimates a discussion of accounting policies and
estimates that require the most judgment and a discussion of accounting pronouncements that
have been issued but not yet implemented by us and their potential impact. |
29
Business Considerations
General
MCD was a leading global provider of turnkey wireless transmission solutions and comprehensive
network management software, with an extensive services suite. With innovative products and a broad
portfolio, MCD was a market share leader in North America and a top-tier provider in international
markets, most notably in the growing Middle East/Africa region. Stratex Networks was a leading
provider of innovative wireless transmission solutions to mobile wireless carriers and data access
providers around the world. As a result of the combination of the two historical businesses, Harris
Stratex was formed and has become a leading independent wireless networks solutions provider,
focused on delivering 1) microwave digital radio and other communications products, systems and
professional services for private network operators and mobile telecommunications providers; and 2)
turnkey end-to-end network management and service assurance solutions for broadband and converged
networks. Our three segments serve markets for microwave products and services in North America
Microwave, International Microwave and network management software solutions worldwide or Network
Operations. All of our revenue, income and cash flow are derived from the sale of these products,
systems, software and services. We generally sell directly to the end customer. However, to extend
our global footprint and maximize our penetration in certain markets, we sometimes sell through
agents, resellers and/or distributors, particularly in international markets.
Our mission statement is: Harris Stratex Networks offers the most reliable, flexible, scalable,
and easy to use wireless network solutions in the world for mobile, government and private
networks. Every day, we build lasting customer relationships, grow our company and build new value
for our shareholders by listening to our customers, delivering innovative products matched to
market demand and offering superior service and quality. Were committed to helping customers meet
their competitive demands by building new wireless networks, upgrading existing networks and
providing complete professional services.
Drivers of Harris Stratex Businesses and Strategy for Achieving Value
We are committed to our mission statement, and we believe that executing the mission statement
creates value. Consistent with this commitment, we currently focus on these key drivers:
|
|
|
Achieving profitable revenue growth in all segments; |
|
|
|
|
Focusing on operating efficiencies and cost reductions; and |
|
|
|
|
Maintaining an efficient capital structure. |
Achieving Profitable Revenue Growth in All Segments
We are a global provider of wireless transmission networks solutions. We will focus on capitalizing
on our strength in the North American market by continuing to win opportunities with wireless
telecommunications providers as well as federal, state and other private network operators. Growth
opportunities will come from network and capacity expansion and the evolution to IP networking in
both the public and private segments. Other growth drivers include the emerging triple-play
services (voice, data and video) market in the public sector, the trend towards network hardening
and interoperability for public safety and disaster response agencies and the FCC directive to
relocate frequency bands in the 2 GHz range to open up spectrum for Advanced Wireless Services.
Wireless transmission systems are particularly well-suited to meet the increasing demand for
high-reliability, high-bandwidth networks that are more secure and better protected against natural
and man-made disasters.
We are focused on increasing international revenue by offering innovative new products and
expanding regional sales channels to capture greenfield network opportunities. We will also focus
on two major evolutionary trends in the global communications market by 1) penetrating large
regional mobile telecom operators to participate in network expansion and new third-generation
(3G) network opportunities; and 2) enabling the migration to Internet Protocol (IP) networking in
both the public and private segments by providing both IP-enabled and IP-centric wireless
transmission solutions.
We offer a broad range of engineering and other professional services for network planning, systems
architecture design and project management as a global competitive advantage. We will expand our
Network Operations offerings in microwave and non-microwave opportunities to create a
differentiator for our total solutions offerings.
Focusing on Operating Efficiencies and Cost Reductions
The principal focus areas for operating efficiencies and cost management are: 1) reducing
procurement costs through an emphasis on coordinated supply chain management; 2) reducing product
costs through dedicated value engineering resources focused on product value engineering; 3)
improving manufacturing efficiencies across all segments; and 4) optimizing facility utilization.
Maintaining an Efficient Capital Structure
Our capital structure is intended to optimize our cost of capital. We believe a strong capital
position, access to key financial markets, ability to raise funds at a low effective cost and
overall low cost of borrowing provide a competitive advantage. We had $79.3 million in cash, cash
equivalents, short-term investments and available for sale securities as of September 28, 2007.
Key Indicators
We believe our key drivers, when fully implemented, will improve key indicators such as: revenue,
gross margin, net income, operating cash flows, total assets as a percentage of revenue and total
equity as a percentage of revenue.
30
Quarter Ended September 28, 2007 compared to Quarter Ended September 29, 2006
Revenue and Net (Loss) Income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
172.3 |
|
|
$ |
93.6 |
|
|
|
84.1 |
% |
Net (loss) income |
|
$ |
(0.2 |
) |
|
$ |
5.5 |
|
|
|
N/M |
|
% of revenue |
|
|
(0.1 |
)% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
N/M = Not statistically meaningful |
The results for the first quarter of fiscal 2008 include the operations acquired in the Stratex
acquisition for the entire period while the results for the first quarter of fiscal 2007 include
only the results of MCD prior to the merger. Historically, Stratex derived its revenues primarily
from international markets.
Our revenue for the first quarter of fiscal 2008 was $172.3 million, an increase of $78.7 million
or 84.1% compared to the first quarter of fiscal 2007, which includes $68.4 million of revenue from
the products and services acquired in the Stratex acquisition. The remainder of the revenue
increase, or $10.3 million, resulted from revenue growth in the International Microwave and Network
Operations segments. The increased international demand for our products came from
increases in Africa and Latin America. Operators in Africa continue to expand their coverage and
capacity across East and West Africa, driving increased business activity. Additionally, we had
increased shipments into Mexico, Brazil and Argentina in the first quarter of fiscal 2008 compared
to the first quarter of fiscal 2007. The Network Operations segment experienced increased demand in
the first quarter of fiscal 2008 for its service assurance solution with Next Generation Network
customers.
Our first quarter fiscal 2008 net loss was $0.2 million compared to net income of $5.5 million in
the first quarter of fiscal 2007 which reflected only MCDs historical operations. The first
quarter fiscal 2008 net loss included the following purchase accounting adjustments and other
expenses related to the acquisition and integration of Stratex: $2.8 million of charges related
primarily to integration activities undertaken in connection with the merger; $0.7 million
amortization of a portion of the fair value adjustments related to fixed assets; and $1.8 million
of amortization related to developed technology; $1.8 million of amortization of trade names,
customer relationships and non-competition agreements. These charges were classified in either cost
of product sales and services or selling and administrative expenses depending on the nature of the
charge in the first quarter of fiscal 2008. We also recognized a charge for the impairment of a
lease of $0.8 million and recorded $2.4 million in FAS 123R share-based compensation ($0.4 million
in the first quarter of fiscal 2007).
In order to improve operating efficiencies and create synergies through the consolidation of
facilities, we implemented restructuring plans in fiscal 2007 to scale down our operations in
Canada, France, the U.S. and Mexico. We began implementation of a plan in February 2007 to scale
down operations in Montreal, Canada and, to a lesser extent, in the U.S. In the initial phase of
this plan, notices were sent to approximately 200 employees in Montreal that their employment would
be terminated between March 30, 2007 and December 31, 2007. We also began implementation of a plan
in June 2007 to scale down operations in Paris, France and, to a lesser extent, Mexico City,
Mexico. Notices were sent to 12 employees in Paris and 3 employees in Mexico City that their
employment would be terminated by December 31, 2007.
In the first quarter of fiscal 2008, we recorded an additional $4.0 million of restructuring
charges in connection with implementation of these fiscal 2007 plans. The cost of these plans as
they relate to the reductions in force during the first quarter of fiscal 2007 consisted primarily
of retention, severance and other benefits totaling $2.3 million. Also, during the first quarter of
fiscal 2008, we commenced the exit of our facilities in Montreal and Redwood Shores, California. We
recognized as part of restructuring expense approximately $1.8 million in Montreal relating to the
write-off of fixed assets and leasehold improvements ($1.3 million), the impairment of a lease
($0.3 million) and inventory ($0.2 million). We also recognized the impairment of our lease in
Redwood Shores ($0.5 million). These charges to restructuring in the first quarter of fiscal 2008
were partially offset by $0.3 million for the reduction in severance estimated to be paid in France
and a $0.3 million reduction in the amount estimated to close out our restructuring liability in
connection with our fiscal year 2006 restructuring plan to transfer our Montreal manufacturing
activities to our San Antonio, Texas facility.
31
Our fiscal year 2007 restructuring plans are expected to be fully implemented by December 31, 2007.
We also recorded $1.8 million amortization of acquired intangible assets during the first quarter
of fiscal 2008 compared to none in the first quarter of fiscal 2007.
These
restructuring charges were partially offset by income generated from the operations acquired from Stratex
and by the margin generated by the increased revenue from our International Microwave and Network
Operations segments. In the first quarter of fiscal 2008 we recorded a net tax provision of $0.2
million, compared to a tax provision of $0.4 million in the first quarter of fiscal 2007. The tax
provision recorded in the first quarter of fiscal 2008 resulted primarily from foreign tax credits
expected to be earned by our international operations.
Gross Margin (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
172.3 |
|
|
$ |
93.6 |
|
|
|
84.1 |
% |
Cost of product sales and services |
|
|
(125.3 |
) |
|
|
(62.1 |
) |
|
|
N/M |
|
Gross margin |
|
$ |
47.0 |
|
|
$ |
31.5 |
|
|
|
49.2 |
% |
% of revenue |
|
|
27.3 |
% |
|
|
33.7 |
% |
|
|
|
|
|
|
|
N/M = Not statistically meaningful |
Our first quarter fiscal 2008 gross margin was $47.0 million, or 27.3% of revenue, compared to
$31.5 million, or 33.7% of revenue, for the first quarter of fiscal 2007. Our first quarter fiscal
2008 gross margin was reduced by $1.8 million of amortization on developed technology and $0.2
million of amortization of the fair value of adjustments for fixed assets acquired from Stratex.
Our first quarter fiscal 2008 gross margin also was reduced by $0.6 million in integration costs.
In the first quarter of fiscal 2007, we did not incur costs for these items. Our first quarter
fiscal 2008 gross margin was also impacted by an increase in gross
margin attributed to sales of former Stratex products and services and the margin generated by
the increase in revenue from our International Microwave and Network Operations segments. Our gross
margin percentage in the first quarter of fiscal 2008 was comparatively lower than gross margins in
the first quarter of fiscal 2007 primarily because of the expenses described above and our
International Microwave segment revenue included a significant amount of lower-margin, low-capacity
Eclipse microwave radio sales in the most recent quarter. We acquired the Eclipse product line in
the Stratex acquisition.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
172.3 |
|
|
$ |
93.6 |
|
|
|
84.1 |
% |
Research and development expenses |
|
$ |
12.4 |
|
|
$ |
7.5 |
|
|
|
65.3 |
% |
% of revenue |
|
|
7.2 |
% |
|
|
8.0 |
% |
|
|
|
|
Research and development (R&D) expenses were $12.4 million in the first quarter of fiscal 2008,
compared to $7.5 million in the first quarter of fiscal 2007. As a percent of revenue, these
expenses decreased from 8.0% in the first quarter of fiscal 2007 to 7.2% in the first quarter of
fiscal 2008 due to higher revenue. The majority of the increase in spending in the first quarter of
fiscal 2008 compared to the first quarter of fiscal 2007 is attributable to the R&D activities
acquired from Stratex. Some of the increase was attributable to higher spending in the first
quarter of fiscal 2008 related to our TRuepoint 6000 development efforts.
32
Selling and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
|
|
|
|
|
28, 2007 |
|
September |
|
Percentage |
|
|
(Restated) |
|
29, 2006 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
172.3 |
|
|
$ |
93.6 |
|
|
|
84.1 |
% |
Selling and administrative expenses |
|
$ |
28.8 |
|
|
$ |
16.4 |
|
|
|
75.6 |
% |
% of revenue |
|
|
16.7 |
% |
|
|
17.5 |
% |
|
|
|
|
Our first quarter fiscal 2008 selling and administrative (S&A) expenses increased to $28.8
million from $16.4 million in the first quarter of fiscal 2007. As a percentage of revenue, these
expenses decreased from 17.5% of revenue in the first quarter of fiscal 2007 to 16.7% of revenue in
the first quarter of fiscal 2008. The majority of the increase in spending in the first quarter of
fiscal 2008 compared to the first quarter of fiscal 2007 was attributable to the SG&A expenses
acquired from Stratex. The remainder of the increase was due to higher selling expenses associated
with the increase in revenue. We anticipate that administrative expenses may increase during the
remainder of fiscal 2008 in connection with Sarbanes-Oxley requirements.
Income Taxes (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Income before income taxes |
|
$ |
0.0 |
|
|
$ |
5.9 |
|
|
|
N/M |
|
Income tax provision |
|
$ |
(0.2 |
) |
|
$ |
(0.4 |
) |
|
|
50.0 |
% |
% of income before income taxes |
|
|
N/M |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
N/M = Not statistically meaningful |
The income tax provision of $0.2 million for the first quarter of fiscal 2008 reflected our pre-tax
loss based on our estimated annual effective tax rate. The variation between income taxes and
income tax expense at the statutory rate of 35% was primarily due to the consolidation of our
foreign operations, which are subject to income taxes at lower statutory rates.
The income tax provision for the first quarter of fiscal 2007 was $0.4 million and was based upon
an allocation of tax expense from Harris.
Related Party Transactions with Harris
Harris provided information services, human resources, financial shared services, facilities, legal
support and supply chain management services to us. Prior to the Stratex acquisition, the charges
for these services were billed to us primarily based on actual usage. During the quarter ended
September 29, 2006, Harris charged us $1.6 million for these services.
On January 26, 2007, we entered into a Transition Services Agreement with Harris to provide for
certain services during the periods subsequent to the Stratex acquisition. These services also are
charged to us based primarily on actual usage and include database management, supply chain
operating systems, eBusiness services, sales and service, financial systems, back office material
resource planning support, HR systems, internal and information systems shared services support,
network management and help desk support, and server administration and support. During the quarter
ended September 28, 2007, Harris charged us $1.7 million for these services.
We have sales to, and purchases from, other Harris entities from time to time. Prior to January 26,
2007, the entity initiating the transaction sold to the other Harris entity at cost or transfer
price, depending on jurisdiction. The entity making the sale to the end customer recorded the
profit on the transaction above cost or transfer price, depending on jurisdiction. Subsequent to
January 26, 2007, these purchases and sales are recorded at market price. Our sales to other Harris
entities were $1.2 million and $0.5 million for the quarters ended September 28, 2007 and September
29, 2006. We also recognized costs associated with related party purchases from Harris of $0.6
million and $2.6 million for the quarters ended
September 28, 2007 and September 29, 2006, respectively.
33
Harris was the primary source of our financing and equity activities through January 26, 2007, the
date of the Stratex acquisition. During the quarter ended September 29, 2006, Harris net
investment in us was increased by $2.7 million.
Additionally, through the date of the Stratex acquisition, Harris loaned cash to us to fund our
international entities and we distributed excess cash back to Harris. This arrangement ended on
January 26, 2007. We recognized interest income and expense on these loans. The amount of interest
income and expense for the quarter ended September 29, 2006 was not significant.
The amounts billed from Harris are included within Due to Harris Corporation on the condensed
consolidated balance sheets. Additionally, we have other receivables and payables in the normal
course of business with Harris. These amounts are netted within Due to Harris Corporation on the
condensed consolidated balance sheets. Total receivables from Harris were $2.0 million and $0.7
million at September 28, 2007 and June 29, 2007. Total payables to Harris were $22.2 million and
$17.9 million at September 28, 2007 and June 29, 2007.
Prior to January 26, 2007, MCD used certain assets in Canada owned by Harris that were not
contributed to us as part of the Combination Agreement. We continue to use these assets in our
business and on January 26, 2007, we entered into a 5-year lease agreement to accommodate this use.
This agreement is a capital lease under U.S. generally accepted accounting principles. At September 28,
2007, our lease obligation to Harris was $3.9 million and the related asset amount is included in
our property, plant and equipment. Quarterly lease payments are due to Harris based on the amount
of 103% of Harris annual depreciation calculated in accordance with U.S. generally accepted
accounting principles. We recognized an impairment charge of $1.3 million on a portion of these
assets which is included in our restructuring charges during the first quarter of fiscal 2008.
Additionally, our depreciation expense on this capital lease was $0.4 million in the first quarter
of fiscal 2008.
Discussion of Business Segments (Restated)
North America Microwave Segment (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
56.6 |
|
|
$ |
49.9 |
|
|
|
13.4 |
% |
Segment operating (loss) income |
|
$ |
(0.3 |
) |
|
$ |
3.7 |
|
|
|
N/M |
|
% of revenue |
|
|
(0.5 |
)% |
|
|
7.4 |
% |
|
|
|
|
|
|
|
N/M = Not statistically meaningful |
North America Microwave segment revenue increased by $6.7 million or 13.4% from the first quarter
of fiscal 2007 to the first quarter of fiscal 2008. Revenue for the first quarter of fiscal 2008
included $6.9 million of revenue related to the acquisition of Stratex, which accounted for almost
all of the revenue growth in the most recent quarter.
Our first quarter fiscal 2008 operating income was reduced by the following amounts related to the
acquisition of Stratex: $0.2 million amortization of the fair value adjustments for fixed assets,
$0.6 million amortization of developed technology, trade names, customer relationships, and
non-compete agreements, $3.8 million of restructuring charges, $0.8 million in charges for
impairment of a lease agreement and $1.0 of integration and severance charges undertaken in
connection with the merger including the reduction in force at our Montreal facility.
We also recorded $2.3 million in FAS 123R share-based compensation expense during the first quarter
of fiscal 2008 in our North America Microwave segment compared to $0.4 million in the first quarter
of fiscal 2007.
34
International Microwave Segment (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
|
|
|
28, 2007 |
|
29, 2006 |
|
Percentage |
|
|
(Restated) |
|
(Restated) |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
109.2 |
|
|
$ |
39.3 |
|
|
|
N/M |
|
Segment operating (loss) income |
|
$ |
(0.5 |
) |
|
$ |
3.6 |
|
|
|
N/M |
|
% of revenue |
|
|
(0.5 |
)% |
|
|
9.2 |
% |
|
|
|
|
|
|
|
N/M = Not statistically meaningful |
International microwave segment revenue increased by $69.9 million from the first quarter of fiscal
2007 to the first quarter of fiscal 2008. Revenue in the first quarter of fiscal 2008 included
$61.5 million in revenues related to the sale of former Stratex products and services. Excluding
the impact of the revenue from Stratex products and services, our International Microwave revenue
increased by $8.4 million primarily due to increased sales to customers located in Africa and Latin
America. Operators in Africa continue to expand their coverage and capacity across East and West
Africa, driving increased business activity. Additionally, we had increased shipments into Mexico,
Brazil and Argentina in the first quarter of fiscal 2008 compared to the first quarter of fiscal
2007.
This segment had an operating loss of $0.5 million for the first quarter of fiscal 2008 compared to
operating income of $3.6 million for the first quarter of fiscal 2007. The operating loss for the
first quarter of fiscal 2008 reflected the following charges related to the acquisition of Stratex:
$0.5 million amortization of the fair value adjustments for fixed assets, $3.0 million amortization
of developed technology, trade names, customer relationships, contract backlog and non-compete
agreements, $0.2 million of restructuring charges and $1.8 million of integration expenses
associated with the merger. International operating income increased due to the acquisition of
Stratex, however this increase was partially offset by a higher mix of lower-margin, low-capacity
Eclipse microwave sales.
We also recorded $0.1 million in FAS 123R share-based compensation expense during the first quarter
of fiscal 2008 in our International Microwave segment and none in the first quarter of fiscal 2007.
Network Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September |
|
September |
|
Percentage |
|
|
28, 2007 |
|
29, 2006 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
6.5 |
|
|
$ |
4.4 |
|
|
|
47.7 |
% |
Segment operating income |
|
$ |
0.8 |
|
|
$ |
0.3 |
|
|
|
N/M |
|
% of revenue |
|
|
12.3 |
% |
|
|
6.8 |
% |
|
|
|
|
Network Operations segment revenue increased by 47.7% from the first quarter of fiscal 2007 to the
first quarter of fiscal 2008. This segment had operating income of $0.8 million in the first
quarter of fiscal 2008, which more than doubled compared to operating income of $0.3 million in the
first quarter of fiscal 2007. Additionally, operating income as a percentage of sales increased to
12.3% in the first quarter of fiscal 2008 compared to 6.8% in the first quarter of fiscal 2007. The
increase in revenue resulted primarily from an increase in software and license revenue in the
first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.
The Network Operations segment had increased demand in the first quarter of fiscal 2008 for its
service assurance solution with Next Generation Network customers compared to the first quarter of
fiscal 2007. The increase in first quarter fiscal 2008 operating income and as a percentage of
revenue compared to first quarter fiscal 2007 was driven by product mix including an increase in
higher margin software and license revenue and a decrease in selling and administrative expenses as
a percentage of revenue.
35
Liquidity and Capital Resources
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
September 28, |
|
|
September 29, |
|
|
|
2007 |
|
|
2006 |
|
Net cash provided by (used in)operating activities |
|
$ |
2.1 |
|
|
$ |
(1.0 |
) |
Net cash used in investing activities |
|
|
(1.0 |
) |
|
|
(1.3 |
) |
Net cash (used in) provided by financing activities |
|
|
(5.1 |
) |
|
|
2.6 |
|
Effect of foreign exchange rate changes on cash |
|
|
(1.0 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(5.0 |
) |
|
$ |
0.6 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a remaining maturity of three months
or less at the time of purchase to be cash equivalents. Our cash and cash equivalents decreased by
$5.0 million to $64.2 million at the end of the first quarter of fiscal 2008. We generated $2.1
million in cash flow from operations, $9.3 million in cash and cash equivalents from the sale of
short-term investments and realized proceeds from the exercise of stock options of $0.9 million.
These increases to cash and cash equivalents were more than offset by our purchase of short-term
investments totaling $4.0 million, $2.1 million in purchases of property, plant and equipment, $4.2
million in additions to capitalized software, the repayment of $1.2 million in short-term debt and
principal payments of $2.8 million on long-term debt.
Our cash and cash equivalents increased by $0.6 million to $14.4 million at the end of the first
quarter of fiscal 2007, primarily due to $2.7 million in cash and other transfers from Harris,
partially offset by $1.3 million in purchases of property, plant and equipment including
capitalized software and $1.0 million cash and cash equivalents used in operations.
Net Cash Provided by Operating Activities
Our net cash and cash equivalents provided by operating activities was $2.1 million in the first
quarter of fiscal 2008 compared to $1.0 million used in operating activities in the first quarter
of fiscal 2007. Operating cash flow in the first quarter of fiscal 2008 was positively affected by
increases in accounts payable and accrued expenses, amounts due to Harris and other cash flow from
operations. These increases to operating cash flow were partially offset by increases in
receivables and unbilled costs. The increase in unbilled receivables was due to the build-up of
several large projects scheduled to ship during the remainder of fiscal 2008.
36
Net Cash Used in Investing Activities
Our net cash used in investing activities was $1.0 million in the first quarter of fiscal 2008
compared to $1.3 million used in investing activities in the first quarter of fiscal 2007. Net cash
used in investing activities in the first quarter of fiscal 2008 was $4.0 million in purchases of
short-term investments, $4.2 million of additions of capitalized software primarily for the
purchase and implementation of new enterprise-wide information systems and $2.1 million of
additions of property, plant and equipment. These uses of cash in investing activities during the
first quarter of fiscal 2008 were partially offset by the receipt of $9.3 million in proceeds from
the sale and maturity of short-term investments and available for sale securities. Net cash used in
investing activities in the first quarter of fiscal 2007 was due to $0.2 million of additions of
plant and equipment and $1.1 million of additions of capitalized software.
Net Cash (Used in) Provided by Financing Activities
Our net cash used in financing activities in the first quarter of fiscal 2008 was $5.1 million
compared to $2.6 million provided by financing activities in the first quarter of fiscal 2007. The
net cash used in financing activities in the first quarter of fiscal 2008 was for the repayment of
$1.2 million in short-term debt, payment of $2.0 million on our capital lease obligation to Harris
and $2.8 million in principal payments on long-term debt. We received $0.9 million in proceeds from
the exercise of former Stratex options. In the first quarter of fiscal 2007, our cash provided by
financing activities was primarily from net cash and other transfers from Harris totaling $2.7
million.
Sources of Liquidity
At September 28, 2007, our principal sources of liquidity consisted of $79.3 million in cash, cash
equivalents, short-term investments and available for sale securities and $26.6 million of
available credit under our $50 million credit facility.
Available Credit Facility and Repayment of Debt
At
September 28, 2007 we had $26.6 million of credit available against our $50 million revolving credit facility with a
commercial bank as mentioned above. The total amount of revolving credit available is $50 million
less the outstanding balance of the term loan portion and any usage under the revolving credit
portion. The balance of the term loan portion of our credit facility was $16.7 million as of
September 28, 2007 and there were $6.7 million outstanding in standby letters of credit as of that
date, which are defined as usage under the revolving credit portion of the facility. There were no
borrowings under the short-term debt portion of the facility as of September 28, 2007.
Our debt consisted of the following at September 28, 2007 and June 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
September 28, 2007 |
|
|
June 29, 2007 |
|
|
|
(In millions) |
|
Credit Facility with Bank: |
|
|
|
|
|
|
|
|
Term Loan A |
|
$ |
4.2 |
|
|
$ |
5.7 |
|
Term Loan B |
|
|
12.5 |
|
|
|
13.8 |
|
Other short-term notes |
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
|
16.7 |
|
|
|
20.7 |
|
Less current portion and short-term notes |
|
|
(9.2 |
) |
|
|
(11.9 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
7.5 |
|
|
$ |
8.8 |
|
|
|
|
|
|
|
|
Term Loan A of the Credit Facility requires monthly principal payments of $0.5 million plus
interest at a fixed rate of 6.38% through May 2008. Term Loan B requires monthly principal payments
of $0.4 million plus interest at a fixed rate of 7.25% through March 2010.
37
At September 28, 2007, our future debt principal payment obligations were as follows:
|
|
|
|
|
|
|
Years Ending |
|
|
|
in June |
|
|
|
(In millions) |
|
2008 |
|
$ |
7.9 |
|
2009 |
|
|
5.0 |
|
2010 |
|
|
3.8 |
|
|
|
|
|
Total |
|
$ |
16.7 |
|
|
|
|
|
Based on
covenants included as part of the credit facility we were required to maintain, as measured at the
last day of each fiscal quarter, tangible net worth of at least $54 million plus (1) 25% of net
income, as determined in accordance with U.S. GAAP (exclusive of losses) and (2) 50% of any
increase to net worth due to subordinated debt or net equity proceeds from either public or private
offerings (exclusive of issuances of stock under our employee benefit plans) for such quarter and
all preceding quarters since December 31, 2005. We also were required to maintain, as measured at the last
day of each fiscal month, a ratio of not less than 1.25 determined as follows: (a) the sum of total
unrestricted cash and cash equivalents plus short-term and long-term marketable securities plus 25%
of all accounts receivable due to us minus certain outstanding bank services and reserve for
foreign currency contract transactions divided by (b) the aggregate amount of outstanding
borrowings and other obligations to the bank. As of September 28, 2007, we were in compliance with
these financial covenants.
Restructuring and Severance Payments
We had total liability for restructuring activities of $16.8 million as of September 28, 2007, of
which $10.7 million was classified as a current liability and expected to be paid out in cash over
the next 12 months.
Contractual Obligations
At September 28, 2007, we had contractual cash obligations for repayment of debt and related
interest, purchase obligations to acquire goods and services, payments for operating lease
commitments, obligations to Harris, payments on our restructuring and severance liabilities,
redemption of our preference shares and payment of the related required dividend payments and other
current liabilities on our balance sheet in the normal course of business. The amounts disclosed in
our Fiscal 2007 Form 10-K included our contractual obligations as of June 29, 2007. During the
quarter ended September 28, 2007, no material changes occurred in our contractual obligations,
except that our purchase obligations to acquire goods and services increased from June 29, 2007 by
$9.7 million to $33.3 million. The increase was due to additional purchase obligations with our
contract manufacturers.
Commercial Commitments
We have entered into commercial commitments in the normal course of business including surety
bonds, standby letters of credit and other arrangements with financial institutions and insurers
primarily relating to the guarantee of future performance on certain contracts to provide products
and services to customers. The amounts disclosed in our Fiscal 2007 Form 10-K include our
commercial commitments. During the quarter ended September 28, 2007, no material changes occurred
in our commercial commitments and contingent liabilities on outstanding letters of credit,
guarantees and other arrangements as disclosed in our Fiscal 2007 Form 10-K.
Use of Estimates and Critical Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, and the
application of U.S. GAAP requires management to make estimates that affect our reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. In many instances, we could have reasonably used different accounting estimates. In
other instances, changes in the accounting estimates from period to period are reasonably likely to
occur. Accordingly, actual results could differ significantly from the estimates made by
management. To the extent that there are material differences between these estimates and actual
results, our future financial statement presentation of our financial condition or results of
operations may be affected.
38
On an ongoing basis, we evaluate our estimates, including those related to revenue recognition,
provision for doubtful accounts and sales returns, provision for inventory obsolescence, fair value
of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible
assets and property and equipment, income taxes, restructuring obligations, product warranty
obligations, and contingencies and litigation, among others. We base our estimates on historical
experience, our assessment of current factors impacting the estimates and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. We refer to accounting estimates of this type as critical
accounting estimates.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes are prepared in
accordance with U.S. generally accepted accounting principles. Preparing financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected by the application
of our accounting policies. Our significant accounting policies are described in Note B
Significant Accounting Policies in our Notes to Consolidated Financial Statements included in our
Fiscal 2007 Form 10-K. Critical accounting policies and estimates are those that require
application of managements most difficult, subjective or complex judgments, often as a result of
matters that are inherently uncertain and may change in subsequent periods. Critical accounting
policies and estimates for us include: (i) revenue recognition, (ii) provisions for excess and
obsolete inventory losses, (iii) goodwill and intangible assets, and (iv) income taxes and tax
valuation allowances. For additional discussion of our critical accounting policies and estimates,
see our Managements Discussion and Analysis of Financial Condition and Results of Operations in
our Fiscal 2007 Form 10-K.
Impact of Recently Issued Accounting Pronouncements
As described in
Note B Recent Accounting Pronouncements in our Notes to Condensed Consolidated
Financial Statements included in this Form 10-Q/A, there are accounting pronouncements that have
recently been issued but have not yet been implemented by us. Note B in this Form 10-Q/A describes
the potential impact that these pronouncements are expected to have on our financial position,
results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of doing business, we are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates. We employ established policies and
procedures governing the use of financial instruments to manage our exposure to such risks.
Exchange Rate Risk
We use foreign exchange contracts to hedge both balance sheet and off-balance sheet future foreign
currency commitments. Generally, these foreign exchange contracts offset foreign currency
denominated inventory and purchase commitments from suppliers; accounts receivable from, and future
committed sales to, customers; and inter-company loans. We believe the use of foreign currency
financial instruments reduces the risks that arise from doing business in international markets. At
September 28, 2007, we had open foreign exchange contracts with a notional amount of $61.5 million
($52.5 million at June 29, 2007), of which $19.1 million ($15.1 million at June 29, 2007) were
designated as Statement 133 hedges and $42.4 million ($37.4 million at June 29, 2007) were not
designated as Statement 133 hedges. At September 28, 2007, contract expiration dates range from
less than one month to three months with a weighted average contract life of approximately one
month. More specifically, the foreign exchange contracts designated as Statement 133 hedges have
been used primarily to hedge currency exposures from customer orders denominated in non-functional
currencies currently in backlog.
As of September 28, 2007, we estimated that a pre-tax gain of $0.3 million would be reclassified
into earnings from comprehensive income within the next three months related to these cash flow
hedges.
We immediately recognize in earnings any portion of a derivatives change in fair value which is
assessed as ineffective in accordance with the provisions of Statement 133. Amounts included in our
Statements of Operations in the first quarter of fiscal 2008 and the first quarter of fiscal 2007
representing hedge ineffectiveness were not significant.
We recognized less than $0.1 million, in our Statements of Operations in the first quarter of
fiscal 2008 and the first quarter of fiscal 2007 related to the component of the derivative
instruments gain or loss excluded from the assessment of hedge ineffectiveness. All of these
derivatives were recorded at their fair value on the balance sheet in accordance with Statement
133.
39
Factors that could impact the effectiveness of our hedging programs for foreign currency include
accuracy of sales estimates, volatility of currency markets and the cost and availability of
hedging instruments. A 10% adverse change in currency exchange rates would not have a material
impact on our financial condition, cash flow or results of operations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term
investments and bank debt.
Exposure on Short-term Investments: We do not use derivative financial instruments in our
short-term investment portfolio. We invest in high-credit quality issues and, by policy, limit the
amount of credit exposure to any one issuer and country. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is
also diversified by maturity to ensure that funds are readily available as needed to meet our
liquidity needs. This policy reduces the potential need to sell securities in order to meet
liquidity needs and therefore the potential effect of changing market rates on the value of
securities sold.
We had $79.3 million in cash, cash equivalents and short-term investments at September 28, 2007.
Short-term investments totaled $15.1 million at September 28, 2007. At September 28, 2007,
short-term investments had contractual maturities ranging from 1 month to 11 months.
The primary objective of our short-term investment activities is to preserve principal while
maximizing yields, without significantly increasing risk. Our short-term investments are at fixed
interest rates; therefore, changes in interest rates will not generate a gain or loss on these
investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our
short-term investments prior to maturity have not been significant. The average number of days
to maturity for short-term investments held at September 28, 2007 was 123 days and had an average
yield of 5.3% per annum. The average number of days to maturity for our cash equivalents at
September 28, 2007 was 9 days and had an average yield of 5.3% per annum. The potential loss in
fair value resulting from a hypothetical 10% decrease in quoted market price was approximately $1.5
million at September 28, 2007 and $2.4 million at June 29, 2007.
As of September 28, 2007, unrealized gains on short-term investments were less than $0.1 million.
The investments have been recorded at fair value on our balance sheet.
Exposure on Borrowings: Any borrowings under the revolving portion of our credit facility will be
at an interest rate of the banks prime rate or LIBOR plus 2%. As of September 28, 2007 we had
$26.6 million of available credit. All of our borrowings at September 28, 2007 bear interest at
fixed rates. A hypothetical 10% change in interest rates would not have a material impact on our
financial position, results of operations or cash flows.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures: Our management, with the participation of our
chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) (the Exchange Act), as of the end of the period covered by this
Quarterly Report on Form 10-Q. Subsequent to the end of this period, the Company identified certain
accounting errors that resulted in a restatement to the Companys interim consolidated financial
statements for the first three quarters of fiscal 2008 (the quarters ended March 28, 2008, December
28, 2007 and September 28, 2007) and the fiscal years ended June 29, 2007, June 30, 2006, and July
1, 2005. During managements evaluation of effectiveness of the Companys internal control over
financial reporting as of June 27, 2008, two material weaknesses, relating to the accounting for
certain project cost variances and reconciliation of certain balance sheet accounts, were
identified as described in our amended fiscal 2007 Form 10-K. The Chief Executive Officer and
Chief Financial Officer have concluded that these material weaknesses existed as of the end of the
period covered by this Quarterly Report on Form 10-Q, and as such, our disclosure controls and
procedures were not effective.
Changes in Internal Control over Financial Reporting Plan for Remediation of Material Weaknesses:
As discussed above, two material weaknesses were identified during managements evaluation of the
effectiveness of the Companys internal control over financial reporting as of June 27, 2008. As
such, the Companys plan for remediation of these material weaknesses, as described in our amended
fiscal 2007 Form 10-K, had not yet been initiated and there were no changes in our internal
controls over financial reporting for the period covered by this Quarterly Report that materially
affected our internal control over financial reporting.
40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements Notes
to Condensed Consolidated Financial Statements Note Q.
Item 1A. Risk Factors.
Investors should carefully review and consider the information regarding certain factors which
could materially affect our business, operating results, cash flows and financial condition set
forth under Item 1A. Risk Factors in our Fiscal 2007 Form 10-K/A. We do not believe that there
have been any material changes to the risk factors previously disclosed in our Fiscal 2007 Form
10-K/A, although we may disclose changes to such factors or disclose additional factors from time
to time in our future filings with the SEC. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial also may impair our business operations.
Item 6. Exhibits.
The following exhibits are filed herewith or incorporated by reference to exhibits previously filed
with the SEC:
|
|
|
(15)
|
|
Letter Regarding Unaudited Interim Financial Information. |
|
|
|
(31.1)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
(31.2)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
(32.1)
|
|
Section 1350 Certification of Chief Executive Officer. |
|
|
|
(32.2)
|
|
Section 1350 Certification of Chief Financial Officer. |
41
SIGNATURE
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.
|
|
|
|
|
|
|
|
|
HARRIS STRATEX NETWORKS, INC. |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
Date: September 25, 2008
|
|
By:
|
|
/s/ Sarah A. Dudash |
|
|
|
|
|
|
|
|
|
|
|
Sarah A. Dudash |
|
|
|
|
Vice President and Chief Financial Officer |
|
|
|
|
(principal financial officer and duly authorized officer) |
|
|
42
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
(15)
|
|
Letter Regarding Unaudited Interim Financial Information. |
|
|
|
(31.1)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
(31.2)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
(32.1)
|
|
Section 1350 Certification of Chief Executive Officer. |
|
|
|
(32.2)
|
|
Section 1350 Certification of Chief Financial Officer. |
43