UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 001-33278

HARRIS STRATEX NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (919) 767-3230

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of January 2, 2009, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the registrant’s Class A Common Stock and Class B Common Stock held by non-affiliates was approximately $135,276,000 (based upon the quoted closing sale price per share on the NASDAQ Global Market system). For purposes of this calculation, the registrant has assumed that its directors and executive officers as of January 2, 2009 are affiliates.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on or about November 19, 2009, which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended July 3, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein.

 

 

HARRIS STRATEX NETWORKS, INC.

 

ANNUAL REPORT ON FORM 10-K

 

For the Fiscal Year Ended July 3, 2009

 

TABLE OF CONTENTS

 

 

This Annual Report on Form 10-K contains trademarks of Harris Stratex Networks, Inc.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of, about, concerning or regarding: our plans, strategies and objectives for future operations; our research and development efforts and new product releases and services; trends in revenue; drivers of our business and the markets in which we operate; future economic conditions, performance or outlook and changes in our industry and the markets we serve; the outcome of contingencies; the value of our contract awards; beliefs or expectations; the sufficiency of our cash and our capital needs and expenditures; our intellectual property protection; our compliance with regulatory requirements and the associated expenses; expectations regarding litigation; our intention not to pay cash dividends; seasonality of our business; the impact of foreign exchange and inflation; taxes; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects,” “targets,” “goals,” “seeing,” “delivering,” “continues,” “forecasts,” “future,” “predict,” “might,” “could,” “potential,” or the negative of these terms, and similar words or expressions.

 

These forward-looking statements are based on estimates reflecting the current beliefs of the senior management of Harris Stratex Networks. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include the following:

 

 

Other factors besides those listed here also could adversely affect us. See “Item 1A. Risk Factors” in this Annual Report on Form 10-K for more information regarding factors that may cause our results to differ materially from those expressed or implied by the forward-looking statements contained in this Annual Report on Form 10-K.

 

You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Annual Report on Form 10-K. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, along with provisions of the Private Securities Litigation Reform Act of 1995, and we undertake no obligation, other than as imposed by law, to update forward-looking statements to reflect further developments or information obtained after the date of filing of this Annual Report on Form 10-K or, in the case of any document incorporated by reference, the date of that document, and disclaim any obligation to do so.

 

 

Harris Stratex Networks, Inc., together with its subsidiaries, is a leading global supplier of turnkey wireless network solutions and comprehensive network management software, backed by an extensive suite of professional services and support. Harris Stratex Networks, Inc. may be referred to as the “Company,” “HSTX,” “Harris Stratex,” “we,” “us” and “our” in this Annual Report on Form 10-K.

 

We were incorporated in Delaware in 2006 to combine the businesses of Harris Corporation’s Microwave Communications Division (“MCD”) and Stratex Networks, Inc. (“Stratex”). Our principal executive offices are located at 637 Davis Drive, Morrisville, North Carolina 27560 and our telephone number is (919) 767-3230. Our common stock is listed on the NASDAQ Global Market under the symbol HSTX. As of July 3, 2009, we employed approximately 1,521 people.

 

Recent Developments

 

From the time we acquired Stratex on January 26, 2007, Harris Corporation (“Harris”) owned 32,913,377 shares or 100% of our Class B Common Stock which approximated 56% of the total shares of our common stock. On May 27, 2009, Harris distributed all of those shares to the Harris stockholders as a taxable pro rata stock dividend, and the Harris stockholders received approximately 0.24 of a share of Harris Stratex Class A Common Stock for every share of Harris common stock they owned on the record date. Upon the distribution, the Class B Common Stock converted automatically into shares of Class A Common Stock, which is now our only outstanding class of stock.

 

On March 2, 2009, we announced that we closed the acquisition (the “Acquisition”) of Telsima Corporation (“Telsima”) of Sunnyvale, California. Telsima is a leading developer and provider of WiMAX Forum Certified products for use in next generation broadband wireless networks. The Acquisition closed on February 27, 2009 and was consummated pursuant to an Agreement and Plan of Merger, dated February 27, 2009 (the “Merger Agreement”), by and among Harris Stratex Networks Operating Corporation, a wholly-owned subsidiary of the Company (“HSNOC”), Eagle Networks Merger Corporation, a wholly-owned subsidiary of HSNOC (“Merger Sub”), Telsima and the Holder Representative party thereto. The Merger Agreement provided for the acquisition by HSNOC of all of the outstanding equity securities of Telsima for cash through the merger of Merger Sub with and into Telsima. Following such merger, Telsima became a wholly-owned subsidiary of HSNOC.

 

Overview and Description of Business by Segment

 

We design, manufacture and sell a range of wireless networking products, solutions and services to mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators across the globe. Products include broadband wireless access base stations and customer premises equipment based upon the IEEE 802.16d-2004 and 16e-2005 standards for fixed and mobile WiMAX, point-to-point digital microwave radio systems for access, backhaul, trunking and license-exempt applications, supporting new network deployments, network expansion, and capacity upgrades. We offer a broad range of products and services, delivering them through three reportable business segments: North America Microwave, International Microwave and Network Operations. Network Operations serves all markets worldwide. Revenue and other financial information regarding our business segments are set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

North America Microwave

 

The North America Microwave segment delivers microwave radio products and services to major national carriers and other cellular network operators, public safety and other government agencies, systems integrators, transportation and utility companies and other private network operators within North America. Our North American business is primarily with the cellular backhaul and public safety segments.

Our North America segment revenue represented approximately 33% and 32% of our total revenue for fiscal 2009 and 2008. Although, generally we sell products and services directly to our North American customers, we also use distributors to sell some products and services.

 

International Microwave

 

The International Microwave segment delivers microwave radio products and services to regional and national carriers and other cellular network operators, public safety agencies, government and defense agencies, and other private network operators in every region outside of North America. Our wireless systems deliver regional and country-wide backbone in developing nations, where microwave radio installations provide 21st-century communications rapidly and economically. Rural communities, areas with rugged terrain and regions with extreme temperatures benefit from the ability to build an advanced, affordable communications infrastructure despite these challenges. A significant part of our international business consists of supplying wireless segments in small-pocket, remote, rural and metropolitan areas. High-capacity backhaul is one of the fastest growing wireless market segments and is a major opportunity for us. We see the increase in subscriber density and the forecasted growth and introduction of new bandwidth-hungry HSPA/WiMAX/LTE mobile broadband services as major drivers for growth in this market.

 

Our International Microwave segment represented approximately 65% and 64% of our revenue for fiscal 2009 and 2008. We sell products and services directly to our international customers and also use agents and distributors.

 

Network Operations

 

The Network Operations segment offers a wide range of software-based network management solutions for network operators worldwide, from element management to turnkey, end-to-end network management and service assurance solutions for virtually any type of communications or information network, including broadband, wireline, wireless and converged networks. The NetBoss product line develops, designs, produces, sells and services network management systems for these applications. ProVision^® provides element management for all Harris Stratex wireless solutions.

 

Our Network Operations segment represented approximately 2% and 4% of our revenue for fiscal 2009 and 2008. We sell products and services of this segment to our customers directly and through agents, resellers and distributors.

 

Industry Background

 

Wireless transmission networks currently are constructed using microwave radios and other equipment to interconnect cell sites, switching systems, wireline transmission systems and other fixed access facilities. Wireless transmission networks range in size from a single transmission link connecting two buildings to complex networks comprising of thousands of wireless links. The architecture of a network is influenced by several factors, including the available radio frequency spectrum, coordination of frequencies with existing infrastructure, application requirements, environmental factors and local geography.

 

There has been an increase in capital spending in the wireless telecommunications industry in recent years. The demand for high-speed wireless transmission products has been growing at a higher rate than the wireless industry as a whole. We believe that this growth is directly related to a growing global subscriber base for mobile wireless communications services, increased demand for fixed wireless transmission solutions and demand for new services delivered from next-generation networks capable of delivering broadband services. Major driving factors for such growth include the following:

 

 

 

Recent Trends and Developments in the Industry

 

Other global trends and developments in the microwave communications markets include:

 

 

 

We believe that as broadband access and telecommunications requirements grow, wireless systems will continue to be used as transmission systems to support a variety of existing and expanding communications networks and applications. We believe that wireless systems will be used to address the connection requirements of several markets and applications, including the broadband access market, cellular applications and private networks.

 

Strategy

 

Over the past year, we have made significant strides in transforming our business from a pure-play microwave backhaul company to a more diverse company that not only strives to be a leader in mobile backhaul optimization but also one that aims to fully support the markets’ network capacity expansion and evolution to all-IP. We offer and will continue to improve upon our end-to-end solutions that deliver the network performance needed to support next generation services and enable a smooth transition from legacy networks. We aim to deliver the ultimate end-user experience and look to enhance our position as a leading provider of innovative, high-value wireless solutions for the worldwide mobile, network interconnection and broadband access markets.

 

Newer generation technologies such as packet-based 4G, WiMAX, and LTE require the need for high-speed packet infrastructures. To address their requirements, we intend to enhance our core Eclipse platform and its end-to-end value proposition by including new components and technology. This includes adding new features to the Eclipse platform and leveraging technology in third party products to provide a complete, holistic, end-to-end IP network solution.

 

We look to retain our position as a wireless transmission technology leader with Eclipse by ensuring our capabilities anticipate the evolving needs of our customers and the corresponding network technology use. The future roadmap for Eclipse evolves the platform towards a full convergence solution with embedded capabilities enabling full IP migration. The Eclipse solution for evolution to IP is the lowest risk, lowest cost, and most flexible solution available since it builds incrementally on the existing investment. The IP evolution capabilities are specifically enabled by the modular additions. This incremental plug-in approach allows operators to move towards all IP at their own pace, and most importantly without the risk, downtime or expense associated with a complete replacement or the forced migration to another platform.

 

Our Partner Products strategy enables us to go beyond wireless transmission to combat the vendor consolidation trend whereby customers are “buying more from fewer vendors.” Furthermore a broader portfolio enables us to further differentiate from other independent microwave only equipment competitors. Our edge when competing with smaller companies is our end-to-end delivery capability and worldwide presence to do so. Competing with larger companies, we should be able to react quicker and leverage best-of-breed products. Regardless of whether we are competing with a small or large company, we have an opportunity to straddle both sides of the competition with unrivaled technology leadership and service delivery.

 

With our recent acquisition and entry into the 4G/WiMAX space, we are now well positioned to address the growth areas of Broadband Wireless Access with fixed and mobile standard WiMAX products. The fixed WiMAX market (16d) is considerable today but quickly giving way to mobile WiMAX (16e) growth over the next few years. We and many analysts see the WiMAX market as a lucrative, growing area over the coming years with rapidly expanding addressable markets. To address this opportunity, we will focus on both fixed and mobile opportunities as well as regionally specific events to grow the business. We have a strong portfolio and position in our 16d business and are poised to take market share — our strategy for 16d growth is already underway, focused on capturing

growth from competitors. Our 16e business is poised to address further opportunities in all regions of the world. We will continue to expand our portfolio in the WiMAX space with a robust roadmap of development in access and core products.

 

Our strategy entails partnering with companies with technical expertise to meet customer demand for and end-to-end solution.

 

As part of our strategy in each product area, we will continue to leverage our end-to-end service capability to win business. Our Global Network Services organization is focused on developing new advanced services, enabling and improving service delivery globally, and managing a portfolio of services that creates value for our customers. Today, we design, deploy, manage, optimize and maintain the wireless networks of many of the largest telecom operators in the world. Our strategic intent is to expand our advanced services, combining our core IP backhaul expertise, for 4G/WiMAX and energy and security with service assurance and management tools.

 

In every case, we will continue to serve and expand upon our existing customer base. We have sold more than 500,000 microwave radios in over 150 countries and are present in over 260 mobile networks worldwide. We intend to leverage our customer base, our longstanding presence in many countries, our distribution channels, our comprehensive product line, our superior customer service and our turnkey solution capability to continue to sell existing and new products and services to current customers.

 

Solutions

 

Our solutions are designed to meet the various regional, operational and licensing needs of our customers. We provide end-to-end turnkey broadband telecommunications systems, including complete design, deployment, maintenance and managed network services, while being an attentive and adaptive partner to our customers — a key competitive differentiator for Harris Stratex. Our solutions offer the following benefits:

 

 

 

Product Portfolio

 

We offer a comprehensive product portfolio that addresses the needs of service providers and network operators in every region of the world, addressing a broad range of applications, frequencies, capacities and network topologies. Product categories include 4G/WiMAX (fixed and mobile) broadband access, licensed (subject to local frequency regulatory requirements) and license-exempt (operating in license-exempt frequencies) point-to-point microwave radios, element and network management software.

 

4G/WiMAX Broadband Wireless Access

 

WiMAX is a 4G wireless access technology now being deployed for mobile and fixed broadband network applications throughout the world. WiMAX can be an ideal means to provide broadband services to communities and populations that are not currently served or well served by existing telecommunications networks, whether in developing economies, such as in Africa, or in rural areas of developed nations in Europe and North America.

 

Our StarMAX platform is the result of the February 27, 2009 acquisition of Telsima Corporation by Harris Stratex Networks and includes an extensive portfolio of IEEE 802.16d-2004 and 16e-2005 compatible base stations, fixed and mobile subscriber devices, ASN gateway solutions, home agent and network management tools.

 

Licensed Point-to-Point Microwave Radios

 

Over 50% of the world’s mobile network base stations are interconnected using licensed microwave technology. Microwave is also extensively used as a cost effective alternative to competing wireline transmission media, such as fiber, copper or coaxial cable, or in deployments where cables are just not practical, such as over mountainous or rough terrain or over water. Other network applications that make significant use of microwave for these reasons include public safety/homeland security, public land mobile radio (PMR/TETRA), utilities, local/state/federal government, IT/Enterprise, health and education authorities, transportation networks, broadcast, defense/military and other private networks applications.

 

Our principal product families of licensed point-to-point microwave radios include Eclipse, a platform for nodal wireless transmission systems, and TRuepoint 6500, a platform for ultra-high capacity trunking applications. An enhanced version of Eclipse, called Eclipse Packet Node, was introduced in 2009 to address the market for high speed IP transport and TDM to IP convergence features in support of the evolution of mobile backhaul networks. Constellation and TRuepoint 5000 continue to be significant product families used for North American high-capacity trunking and backhaul applications respectively.

 

Eclipse

 

Eclipse combines wireless transmission functions with network processing node functions, including many functions that, for non-nodal products, would have to be purchased separately. Each Eclipse Intelligent Node Unit is a complete network node, able to support multiple radio paths. System functions include voice, data and video transport, node management, multiplexing, routing and cross-connection. Eclipse is designed to simplify complex networks and lower the total cost of ownership over the product life. We believe that these are significant innovations that address the needs of a broad range of customers.

 

Our Eclipse Packet node product provides a complete convergence solution to an all IP-based network and enables a network migration and optimization strategy for operators, regardless of the mixed technology state of their access network, with the most comprehensive set of market-leading capabilities. Eclipse Packet Node supports

market leading IP capacities of over 2 Gbit/s per radio path, along with TDM support both natively and using industry-standard Pseudowires. We introduced the new IRU600 all-indoor radio frequency unit in 2009, to meet the specific requirements of North American operators for an indoor mounted, high power architecture.

 

TRuepoint

 

Our TRuepoint 5000 product family offers full plug-and-play, software-programmable microwave radio configuration. It delivers service from 4 to 180 megabits per second capacity at frequencies ranging from 6 to 38 GHz. TRuepoint is designed to meet the current needs of network operators, including mobile, private network, government and access service providers. The unique architecture of the core platform reduces both capital expenditures and life cycle costs, while meeting international and North American standards. The software-based architecture enables migration from traditional microwave access applications to higher-capacity transport interconnections.

 

The TRuepoint 6500 family continues our tradition of high-performance, high-reliability wireless transport for national trunking networks. The TRuepoint 6500 provides very-high-capacity trunking and software-programmable features in an advanced compact architecture. TRuepoint reduces cost of deployment through smaller antenna requirements, increased transmission distance and fewer repeater sites. It also reduces operating costs through high reliability, efficient diagnostics and network management, reduced real estate requirements, low power consumption and reduced spare parts and training requirements.

 

Constellation

 

Our Constellation family of medium-to-high-capacity point-to-point digital radios operates in the 6, 7/8 and 10/11 GHz frequencies, which are designed for network applications and support both PDH and SONET for North American applications. Constellation radios are suited for wireless mobile carriers and private operators, including critical public safety networks.

 

License-Exempt Point-to-Point Microwave Radios

 

We offer license-exempt wireless interconnection for wireless access, cellular backhaul, Internet service, local and wide area networking and emergency response communications systems. These solutions enable network operators to deploy wireless transmission systems rapidly, reliably and cost-efficiently, while avoiding costly, time-consuming frequency coordination and licensing.

 

Network Management

 

Our major network management product families include NetBoss and ProVision. These product families offer a broad set of choices for all levels of network management, from enterprise-wide management and service assurance to element management.

 

NetBoss

 

NetBoss is a family of network management and service assurance solutions for managing multi-vendor, multi-technology communications networks. It offers high performance, availability, scalability and flexibility and is designed to manage complex and demanding networks, including networks built on advanced next-generation technologies.

 

NetBoss supports wireless and wireline networks of many types, offering fault management, performance management, service activation and assurance, billing mediation and OSS integration. As a modular, off-the-shelf product, it enables customers to implement management systems immediately or gradually, as their needs dictate. NetBoss also supports advanced element management. NetBoss products are optimized to work seamlessly with our digital microwave radios, such as the TRuepoint family, but also can be customized to manage products based on any network or computing technology.

ProVision

 

The ProVision element manager is a centralized network monitoring and control system designed specifically to manage wireless transmission networks. ProVision is a platform-independent Java-based application, and can support small network systems as well as large networks in excess of 1,000 radio links. The ProVision management system is built on open standards, and seamlessly integrates into higher-level system management products through commonly available interfaces.

 

Business Operations

 

Sales, Marketing and Service

 

We believe that a direct and continuing relationship with service providers is a competitive advantage in attracting new customers and satisfying existing ones. As a result, we offer our products and services through our own direct sales, service and support organization, which allows us to closely monitor the needs of our customers. We have offices in Canada and the United States in North America; Mexico and Argentina in Central and South America; Croatia, France, Germany, Poland, Portugal and the United Kingdom in Europe; Kenya, Nigeria, Ivory Coast and South Africa in Africa; the United Arab Emirates in the Middle East; and Bangladesh, China, India, Indonesia, Malaysia, New Zealand, the Philippines, Singapore and Thailand in the Asia-Pacific region. Our local offices provide us with a better understanding of our customers’ needs and enable us to respond to local issues and unique local requirements.

 

We also have informal, and in some cases formal, relationships with Original Equipment Manufacturers (“OEMs”) base station suppliers. Such relationships increase our ability to pursue a limited number of major contract awards each year. In addition, such relationships provide our customers with easier access to financing and integrated system providers with a variety of equipment and service capabilities. In selected countries, we also market our products through independent agents and distributors, as well as through system integrators.

 

Our sales personnel are highly trained to provide customers with assistance in selecting and configuring a digital microwave transmission system suitable for a customer’s particular needs. We have repair and service centers in India, New Zealand, the Philippines, the United Kingdom and the United States. Our international headquarters in Singapore provides sales and customer support for the Asia-Pacific region from this facility. We have customer service and support personnel who provide customers with training, installation, technical support, maintenance and other services on systems under contract. We install and maintain customer equipment directly in some cases and contract with third-party service providers in other cases, depending on the equipment being installed and customer requirements.

 

On product sales we provide for future warranty costs upon product delivery. The specific terms and conditions of those warranties vary depending upon the product sold and country in which we do business. In the case of products sold by us, our warranties generally start from the delivery date and continue for two to three years, depending on the terms.

 

Manufacturing

 

Our overall manufacturing approach has involved a combination of in-house and outsourced processes. In general, printed circuit assemblies, mechanical housings, and packaged modules are manufactured by strategically selected contract manufacturing partners, with periodic business reviews of material levels and obsolescence. Product assembly, product test, complete system integration and system test may either be performed within our own facilities or at partner locations.

 

In accordance with our global logistics requirements and customer geographic distribution we are engaged with contract manufacturing partners in Asia, Europe and the United States. All manufacturing operations have been certified to International Standards Organization (“ISO”) 9001, a recognized international quality standard. We have also been certified to the TL 9000 standard, a telecommunication industry-specific quality system standard.

Backlog

 

Our backlog by business segment is as follows:

 

 

Substantially this entire backlog is expected to be filled during fiscal 2010, but we can give no assurance of such fulfillment. Product orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period because of the timing of orders, delivery intervals, customer and product mix and the possibility of changes in delivery schedules and additions or cancellations of orders. As of July 3, 2009, backlog with one major customer accounts for approximately 23% of total backlog.

 

Customers

 

Principal customers for our products and services include domestic and international wireless/mobile service providers, original equipment manufacturers, as well as private network users such as public safety agencies, government institutions, and utility, pipeline, railroad and other industrial enterprises that operate wireless networks.

 

During fiscal 2009 and 2008, we had one International Microwave segment customer in Africa (Mobile Telephone Networks or MTN) that accounted for 17% and 13% of our total revenue. MTN is an affiliated group of separate regional carriers and operators located on the continent of Africa. As of July 3, 2009, MTN as a whole accounted for approximately 6% of our accounts receivable. In fiscal 2007, no customers accounted for more than 10% of our total revenue.

 

Although we have a large customer base, during any given fiscal year or quarter, a small number of customers may account for a significant portion of our revenue. In certain circumstances, we sell our products to service providers through OEMs, which provide the service providers with access to financing and in some instances, protection from fluctuations in international currency exchange rates.

 

In general, our North American products and services are sold directly to customers through direct sales organizations and through established distribution channels. Internationally, we market and sell products and services through regional sales offices and established distribution channels. We also sell our products to agents, distributors and base station suppliers, who provide and install integrated systems to service providers.

 

International Business

 

The following tables present measures of our revenue in international markets as a percentage of total revenue and international revenue:

 

 

 

 

 

The functional currency of our subsidiaries located in the United Kingdom, Singapore, Mexico and New Zealand is the U.S. dollar so the effect of foreign currency changes have not had a significant effect on our revenue. Direct export sales, as well as sales from international subsidiaries, are primarily denominated in U.S. dollars. International operations represented 63% of our long-lived assets as of July 3, 2009 and 58% of long-lived assets as of June 27, 2008.

 

International marketing activities are conducted through subsidiaries operating in Europe, Central and South America, Africa and Asia. We also have established marketing organizations and several regional sales offices in these same geographic areas.

 

We use indirect sales channels, including dealers, distributors and sales representatives, in the marketing and sale of some lines of products and equipment, both domestically and internationally. These independent representatives may buy for resale or, in some cases, solicit orders from commercial or governmental customers for direct sales by us. Prices to the ultimate customer in many instances may be recommended or established by the independent representative and may be above or below our list prices. These independent representatives generally receive a discount from our list prices and may mark up those prices in setting the final sales prices paid by the customer.

 

A significant portion of our exports are paid for by letters of credit, with the balance carried on an open account. In addition, significant international government contracts generally require us to provide performance guarantees.

 

The particular economic, social and political conditions for business conducted outside the U.S. differ from those encountered by domestic businesses. We believe that the overall business risk for our international business as a whole is somewhat greater than that faced by our domestic operations as a whole. For a discussion of the risks we are subject to as a result of our international operations, see “Item 1A. Risk Factors” of this Annual Report on Form 10-K.

Competition

 

The wireless access, backhaul and interconnection business is a specialized segment of the wireless telecommunications industry that is sensitive to technological advances and is extremely competitive. Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and greater financial, technical and personnel resources than we have. Some of our competitors may have greater name recognition, broader product lines (some including non-wireless telecommunications equipment), a larger installed base of products and longer-standing customer relationships. In addition, some competitors offer seller financing which is a competitive advantage in the current economic environment.

 

Although successful product and systems development is not necessarily dependent on substantial financial resources, many of our competitors are significantly larger than us and can maintain higher levels of expenditures for research and development. In addition, a portion of our overall market is addressed by large mobile infrastructure providers, who bundle microwave radios with other mobile network equipment, such as cellular base stations or switching systems, and offer a full range of services. This part of the market is generally not open to independent microwave suppliers such as us.

 

We also compete with a number of smaller independent private and public specialist companies, who typically leverage new technologies and low-cost models, but usually are not able to offer a complete solution including turnkey services in all regions of the world.

 

Our principal microwave competitors include large established companies such as Alcatel-Lucent, Ericsson, NEC, Huawei and Nokia Siemens Networks, as well as a number of other smaller public and private companies such as Ceragon, Dragonwave and SIAE Technologies in selected markets. Several of our competitors are original equipment manufacturers or systems integrators through which we sometimes distribute and sell products and services to end users.

 

In the WiMAX access market we again compete against large established companies such as Alcatel-Lucent, Cisco, Huawei, Motorola and Samsung, as well as numerous tier 2 and 3 competitors that include Alvarion, Aperto and Redline.

 

We concentrate on market opportunities that we believe are compatible with our resources, overall technological capabilities and objectives. Principal competitive factors are cost-effectiveness, product quality and reliability, technological capabilities, service, ability to meet delivery schedules and the effectiveness of dealers in international areas. We believe that the combination of our network and systems engineering support and service, global reach, technological innovation and agility, financial strength and close collaborative relationship with our customers, is the key competitive strengths for us. However, customers may still make decisions based purely on factors such as price and/or past or existing relationships.

 

Research, Development and Engineering

 

We believe that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our success. Accordingly, we allocate, and intend to continue to allocate, a significant portion of our resources to research and development efforts in four major areas: Backhaul, Radio Access Networks, Core Networks and Network Management Systems.

 

Our research, development and engineering expenditures totaled $40.4 million, or 5.9% of revenue, in fiscal 2009, $46.1 million, or 6.4% of revenue in fiscal 2008, and $39.4 million, or 7.8% of revenue in fiscal 2007.

 

Research, development and engineering are primarily directed to the development of new products and to building technological capability. We are, and historically have been, an industry innovator. Consistent with our history and strategy of introducing innovative products, we intend to continue to focus significant resources on product development in an effort to maintain our competitiveness and support our entry into new markets. We maintain new product development programs that could result in new products and expansion of the Eclipse, TRuepoint, NetBoss and the new StarMAX platform which was a result of the February 27, 2009 acquisition of Telsima Corporation.

We maintain an engineering and new product development department, with scientific assistance provided by advanced-technology departments. As of July 3, 2009, we employed a total of 261 people in our research and development organizations in Morrisville, North Carolina; San Jose, California; Wellington, New Zealand; Singapore; Slovenia and India.

 

Patents and Other Intellectual Property

 

We consider our patents and other intellectual property rights, in the aggregate, to constitute an important asset. We own a portfolio of patents, trade secrets, know-how, confidential information, trademarks, copyrights and other intellectual property. We also license intellectual property to and from third parties. As of August 21, 2009, we held 101 U.S. patents and 84 international patents and had 41 U.S. patent applications pending and 74 international patent applications pending. We do not consider our business to be materially dependent upon any single patent, license or other intellectual property right, or any group of related patents, licenses or other intellectual property rights. From time to time, we might engage in litigation to enforce our patents and other intellectual property or defend against claims of alleged infringement. Any of our patents, trade secrets, trademarks, copyrights and other proprietary rights could be challenged, invalidated or circumvented, or may not provide competitive advantages. Numerous trademarks used on or in connection with our products are also considered to be valuable assets.

 

In addition, to protect confidential information, including our trade secrets, we require our employees and contractors to sign confidentiality and invention assignment agreements. We also enter into non-disclosure agreements with our suppliers and appropriate customers to limit access to and disclosure of our proprietary information.

 

While our ability to compete may be affected by our ability to protect our intellectual property, we believe that, because of the rapid pace of technological change in the wireless telecommunications industry, our innovative skills, technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property. Trade secret, trademark, copyright and patent protections are important but must be supported by other factors such as the expanding knowledge, ability and experience of our personnel, new product introductions and product enhancements. Although we continue to implement protective measures and intend to defend vigorously our intellectual property rights, there can be no assurance that these measures will be successful.

 

Environmental and Other Regulations

 

Our facilities and operations, in common with those of our industry in general, are subject to numerous domestic and international laws and regulations designed to protect the environment, particularly with regard to wastes and emissions. We believe that we have complied with these requirements and that such compliance has not had a material adverse effect on our results of operations, financial condition or cash flows. Based upon currently available information, we do not expect expenditures to protect the environment and to comply with current environmental laws and regulations over the next several years to have a material impact on our competitive or financial position, but can give no assurance that such expenditures will not exceed current expectations. From time to time, we receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, which is commonly known as the Superfund Act, and/or equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances attributable to us from past operations.

 

Electronic products are subject to environmental regulation in a number of jurisdictions. Equipment produced by us is subject to domestic and international requirements requiring end-of-life management and/or restricting materials in products delivered to customers. We believe that we have complied with such rules and regulations, where applicable, with respect to our existing products sold into such jurisdictions.

 

Radio communications are also subject to governmental regulation. Equipment produced by us is subject to domestic and international requirements to avoid interference among users of radio frequencies and to permit interconnection of telecommunications equipment. We believe that we have complied with such rules and

regulations with respect to our existing products, and we intend to comply with such rules and regulations with respect to our future products. Reallocation of the frequency spectrum also could impact our business, financial condition and results of operations.

 

Raw Materials and Supplies

 

Because of the diversity of our products and services, as well as the wide geographic dispersion of our facilities, we use numerous sources for the wide array of raw materials needed for our operations and for our products, such as electronic components, printed circuit boards, metals and plastics. We are dependent upon suppliers and subcontractors for a large number of components and subsystems and upon the ability of our suppliers and subcontractors to adhere to customer or regulatory materials restrictions and meet performance and quality specifications and delivery schedules.

 

Our strategy for procuring raw material and supplies includes dual sourcing on strategic assemblies and components. In general, we believe this reduces our risk in regards to the potential financial difficulties in our supply base. During fiscal 2009, we have not had any material disruptions in procuring raw materials and supplies. In some instances, we are dependent upon one or a few sources, either because of the specialized nature of a particular item or because of local content preference requirements pursuant to which we operate on a given project. Examples of sole or limited sourcing categories include metal fabrications and castings, for which we own the tooling and therefore limit our supplier relationships, and MMICs (a type of integrated circuit used in manufacturing microwave radios), which we procure at volume discount from a single source. Our supply chain plan includes mitigation plans for alternative manufacturing sources and identified alternate suppliers.

 

While we have been affected by performance issues of some of our suppliers and subcontractors, we have not been materially adversely affected by the inability to obtain raw materials or products. In general, any performance issues causing short-term material shortages are within the normal frequency and impact range experienced by high-tech manufacturing companies. They are due primarily to the high technical nature of many of our purchased components.

 

Employees

 

As of July 3, 2009, we employed 1,521 people, compared with 1,410 people at the end of fiscal 2008. In February 2009, we added 146 employees through the acquisition of Telsima. Approximately 769 of our employees are located in the U.S. We also utilized approximately 100 independent contractors as of July 3, 2009. None of our employees in the U.S. is represented by a labor union. In certain international subsidiaries, our employees are represented by workers’ councils or statutory labor unions. In general, we believe that our relations with our employees are good.

 

Web site Access to Harris Stratex Reports; Available Information

 

General.  We maintain an Internet Web site at http://www.harrisstratex.com. Our annual reports on Form 10-K, proxy statement, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our Web site as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Our website and the information posted thereon are not incorporated into this Annual Report on Form 10-K or any current or other periodic report that we file or furnish to the SEC.

 

We will also provide the reports in electronic or paper form, free of charge upon request. All reports we file with or furnish to the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room, 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Additional information relating to our businesses, including our operating segments, is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Corporate Governance Principles and Committee Charters.  We have adopted Corporate Governance Principles, which are available on the Corporate Governance section of our Web site at http://www.harrisstratex.com/cg/default.asp. In addition, the charters of each committee of our Board of Directors, including the Compensation Committee, Audit Committee and Governance and Nominating Committee, are also available on the Corporate Governance section of our Web site. Copies of these charters are also available free of charge upon written request to our Corporate Secretary at Harris Stratex Networks, Inc., 637 Davis Drive, Morrisville, North Carolina 27560.

 

 

In addition to the risks described elsewhere in this Annual Report on Form 10-K and in certain of our other filings with the SEC, the following risks and uncertainties, among others, could cause our actual results to differ materially from those contemplated by us or by any forward-looking statement contained herein. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this Annual Report on Form 10-K and our other public filings.

 

We have many business risks including those related to our financial performance, investments in our common stock, operating our business and legal matters. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are not aware of or focused on may also impair our business operations. If any of these risks actually occur, our financial condition and results of operations could be materially and adversely affected.

 

We may not be profitable.

 

As measured under U.S. generally accepted accounting principles (“U.S. GAAP”), we have incurred a net loss in each of the last five fiscal years. We incurred a net loss of $355.0 million in fiscal 2009, $11.9 million in fiscal 2008 and $21.8 million in fiscal 2007. We can give no assurance that we will be consistently profitable, if at all.

 

The effects of the recession in the United States and general downturn in the global economy, including financial market disruptions, could have an adverse impact on our business, operating results or financial condition.

 

The United States economy is in recession and there has been a general downturn in the global economy. A continuation or worsening of these conditions, including the ongoing credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example:

 

 

Credit and commercial risks and exposures could increase if the financial condition of our customers declines.

 

A substantial portion of our sales are to customers in the telecommunications industry. These customers may require their suppliers to provide extended payment terms, direct loans or other forms of financial support as a condition to obtaining commercial contracts. We expect that we may provide or commit to financing where appropriate for our business. Our ability to arrange or provide financing for our customers will depend on a number of factors, including our credit rating, our level of available credit and our ability to sell off commitments on acceptable terms. More generally, we expect to routinely enter into long-term contracts involving significant

amounts to be paid by our customers over time. Pursuant to these contracts, we may deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. As a result of the financing that may be provided to customers and our commercial risk exposure under long-term contracts, our business could be adversely affected if the financial condition of our customers erodes. Over the past few years, certain of our customers have filed with the courts seeking protection under the bankruptcy or reorganization laws of the applicable jurisdiction, or have experienced financial difficulties. As a result of the more challenging economic environment, we saw some increase in the number of our customers experiencing such difficulties in 2008, and we expect that trend to intensify if global economy deteriorates further in 2009. That trend may be exacerbated in many emerging markets, where our customers are being affected not only by recession, but by deteriorating local currencies and a lack of credit. Upon the financial failure of a customer, we may experience losses on credit extended and loans made to such customer, losses relating to our commercial risk exposure and the loss of the customer’s ongoing business. If customers fail to meet their obligations to us, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our results of operations and financial position.

 

Our customers may not pay for products and services in a timely manner, or at all, which would decrease our cash flows and adversely affect our working capital.

 

Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment. A risk of non-payment by customers is a significant focus of our business. We expect a significant amount of future revenue to come from international customers, many of whom will be startup telecom operators in developing countries. We do not generally expect to obtain collateral for sales, although we require letters of credit or credit insurance as appropriate for international customers. For information regarding the percentage of revenue attributable to certain key customers, see the risks discussed in the factor below titled “Because a significant amount of our revenue may come from a limited number of customers, the termination of any of these customer relationships may adversely affect our business.” Our historical accounts receivable balances have been concentrated in a small number of significant customers. Unexpected adverse events impacting the financial condition of our customers, bank failures or other unfavorable regulatory, economic or political events in the countries in which we do business may impact collections and adversely impact our business, require increased bad debt expense or receivable write-offs and adversely impact our cash flows, financial condition and operating results.

 

Part of our inventory may be written off, which would increase our cost of revenues. In addition, we may be exposed to inventory-related losses on inventories purchased by our contract manufacturers.

 

In fiscal 2009, we recorded charges of $29.8 million for product transition and $3.4 for purchase obligations from contract manufacturers. In fiscal 2008, we recorded charges of $14.7 million for inventory impairment charges resulting from post-merger product transitioning and product end-of-life events.

 

Inventory of raw materials, work in-process or finished products may accumulate in the future, and we may encounter losses due to a variety of factors, including:

 

 

Further, our inventory of finished products may accumulate as the result of cancellation of customer orders or our customers’ refusal to confirm the acceptance of our products. Our contract manufacturers are required to purchase inventory based on manufacturing projections we provide to them. If our actual orders from our customers are lower than these manufacturing projections, our contract manufacturers will have excess inventory of raw materials or finished products which we would be required to purchase. In addition, we require our contract manufacturers from time to time to purchase more inventory than is immediately required, and to partially assemble

components, in order to shorten our delivery time in case of an increase in demand for our products. In the absence of such increase in demand, we may need to compensate our contract manufacturers. If we are required to purchase excess inventory from our contract manufacturers or otherwise compensate our contract manufacturers for purchasing excess inventory, our business, financial condition and results of operations could be materially adversely affected. We also may purchase components or raw materials from time to time for use by our contract manufacturers in the manufacturing of our products. These purchases are based on our own manufacturing projections. If our actual orders are lower than these manufacturing projections, we may accumulate excess inventory which we may be required to write-off. If we are forced to write-off this inventory other than in the normal course of business, our business, financial condition, results of operations could be materially affected adversely.

 

We may undertake further restructurings which may adversely impact our operations, and we may not realize all of the anticipated benefits of our prior or any future restructurings.

 

We continue to restructure and transform our business to realign resources and achieve desired cost savings in an increasingly competitive market. During fiscal 2009, 2008 and 2007, we undertook restructuring activities implemented within the merger restructuring plans approved in connection with the January 26, 2007 merger between the Microwave Communications Division of Harris Corporation and Stratex Networks, Inc. Additionally, during the first quarter of fiscal 2009, we announced a new restructuring plan (the “Fiscal 2009 Plan”) to reduce our worldwide workforce. These restructuring plans included the consolidation of facilities and operations of the predecessor entities in Canada, France, the U.S., China, Brazil and, to a lesser extent, Mexico, New Zealand and the United Kingdom. If we consolidate additional facilities in the future, we may incur additional restructuring and related expenses, which could have a material adverse effect on our business, financial condition or results of operations.

 

We have based our restructuring efforts on assumptions and plans regarding the appropriate cost structure of our businesses based on our product mix and projected sales among other factors. These assumptions may not be correct and we may not be able to operate in accordance with our plans. Should this occur we may determine that we must incur additional restructuring charges in the future. Moreover, we cannot assure you that we will realize all of the anticipated benefits of the restructurings or that we will not further reduce or otherwise adjust our workforce or exit, or dispose of, certain businesses and protect lines. Any decision by management to further limit investment, exit, or dispose of businesses may result in the recording of additional restructuring charges. As a result, the costs actually incurred in connection with the restructuring efforts may be higher than originally planned and may not lead to the anticipated cost savings and/or improved results.

 

Our average sales prices may decline in the future.

 

Currently, manufacturers of digital microwave telecommunications equipment are experiencing, and are likely to continue to experience, declining sales prices. This price pressure is likely to result in downward pricing pressure on our products and services. As a result, we are likely to experience declining average sales prices for our products. Our future profitability will depend upon our ability to improve manufacturing efficiencies, reduce costs of materials used in our products, and to continue to introduce new lower-cost products and product enhancements. If we are unable to respond to increased price competition, our business, financial condition and results of operations will be harmed. Because customers frequently negotiate supply arrangements far in advance of delivery dates, we may be required to commit to price reductions for our products before we are aware of how, or if, cost reductions can be obtained. As a result, current or future price reduction commitments and any inability on our part to respond to increased price competition, could harm our business, financial condition and results of operations.

 

We may experience additional impairment charges for our intangible assets or goodwill.

 

During fiscal 2009, we recorded charges of $279.0 million to write-off all of our goodwill prior to the acquisition of Telsima and $32.6 million for a majority of our “Stratex” trade name indefinite lived-asset. As a result, the remaining value of the “Stratex” trade name was $0.4 million as of July 3, 2009 and it has a useful life of six months. As of July 3, 2009, the net carrying value of our total definite-lived intangible assets, and recently acquired goodwill from the Telsima acquisition totaled approximately $84.1 million and $3.2 million.

Our intangible assets are subject to impairment testing in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets and our goodwill is subject to an impairment test in accordance with Statement No. 142, Goodwill and Other Intangible Assets. We review the carrying value of our intangible assets and goodwill for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Significant negative industry or economic trends, including a lack of recovery in the market price of our common stock or the fair value of our debt, disruptions to our business, unexpected significant changes or planned changes in the use of the intangible assets, and mergers and acquisitions could result in the need to reassess the fair value of our assets and liabilities which could lead to an impairment charge for any of our definite-lived intangible assets or goodwill. An impairment charge related to our intangible assets or goodwill could have a significant adverse effect on our financial position and results of operations in the period in which it is incurred.

 

Our effective tax rate could be highly volatile and could adversely affect our operating results.

 

Our future effective tax rate may be adversely affected by a number of factors, many of which are outside of our control, including:

 

 

Any significant increase in our future effective tax rates could impact our results of operations for future periods adversely.

 

Termination of our transitional services agreements with Harris before we have established our own fully independent administrative and other support functions could impair our ability to operate our business effectively and materially increase our general and administrative expenses.

 

On January 26, 2007, we completed our merger with Stratex Networks, Inc. Prior to the merger, we were a division of Harris Corporation and we relied on administrative and other resources of Harris to operate our business. In connection with the merger, we entered into a transition services agreement with Harris to retain the ability to use these Harris resources at our option, some for a specified term, which pursuant to an amendment in the second quarter of fiscal 2009, will expire September 30, 2010. Pursuant to the transition services agreement, Harris provides us with database management, supply chain systems, sales and service, financial systems, HR systems, internal and information systems shared services support, network management and help desk support, and server administration and support, and charges us for these services at a stipulated rate based on our actual usage. This agreement can be terminated by either party upon 90 days’ prior written notice. We must be able to replace these services prior to termination of the transition services agreement. It is likely that replacing these services will require new capital expenditures and that our costs for these services may increase once we are no longer receiving these services from Harris under the current agreement. This could adversely affect our operating results and cash flows going forward.

Because a significant amount of our revenue may come from a limited number of customers, the termination of any of these customer relationships may adversely affect our business.

 

Sales of our products and services historically have been concentrated in a small number of customers. Principal customers for our products and services include domestic and international wireless/mobile service providers, original equipment manufacturers, as well as private network users such as public safety agencies; government institutions; and utility, pipeline, railroad and other industrial enterprises that operate broadband wireless networks. We had revenue from a single external customer that exceeded 10% of our total revenue during fiscal 2009 and 2008, but not during fiscal 2007. Although we have a large customer base, during any given quarter, a small number of customers may account for a significant portion of our revenue.

 

It is possible that a significant portion of our future product sales also could be concentrated in a limited number of customers. In addition, product sales to major customers have varied widely from period to period. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or our inability to gain additional customers could result in declines in our revenue or an inability to grow revenue. In addition, consolidation of our potential customer base could result in purchasing decision delays as consolidating customers integrate their operations and could generally reduce our opportunities to win new customers to the extent that the number of potential customers decreases. Furthermore, as our customers become larger, they may have more leverage to negotiate better pricing which could adversely affect our revenues and gross margins.

 

We will face strong competition for maintaining and improving our position in the market, which could adversely affect our revenue growth and operating results.

 

The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We expect competition in this segment to increase. Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and significantly greater financial, technical and personnel resources than we have. In addition, some of our competitors have greater name recognition, broader product lines, a larger installed base of products and longer-standing customer relationships. Our competitors include established companies, such as Alcatel-Lucent, Eltek ASA, Ericsson, NEC and Nokia Siemens Networks, as well as a number of other public and private companies such as Ceragon and Huawei Technologies in selected markets. Some of our competitors are original equipment manufacturers or systems integrators through whom we market and sell our products, which means our business success may depend on these competitors to some extent. One or more of our largest customers could internally develop the capability to manufacture products similar to those manufactured or outsourced by us and, as a result, the demand for our products and services may decrease.

 

In addition, we compete for acquisition and expansion opportunities with many entities that have substantially greater resources than we have. Our competitors may enter into business combinations in order to accelerate product development or to compete more aggressively and we may lack the resources to meet such enhanced competitions.

 

Our ability to compete successfully will depend on a number of factors, including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and competitors, the ability of our customers to obtain financing and the stability of regional sociopolitical and geopolitical circumstances, and the ability of large competitors to obtain business by providing more seller financing especially for large transactions. We can give no assurances that we will have the financial resources, technical expertise, or marketing, sales, distribution, customer service and support capabilities to compete successfully, or that regional sociopolitical and geographic circumstances will be favorable for our successful operation.

 

Consolidation within the telecommunications industry could result in a decrease in our revenue.

 

The telecommunications industry has experienced significant consolidation among its participants, and we expect this trend to continue. Some operators in this industry have experienced financial difficulty and have filed, or may file, for bankruptcy protection. Other operators may merge and one or more of our competitors may supply products to the customers of the combined company following those mergers. This consolidation could result in

purchasing decision delays and decreased opportunities for us to supply products to companies following any consolidation. This consolidation may also result in lost opportunities for cost reduction and economies of scale. In addition, see the risks discussed in the factor above titled “Because a significant amount of our revenue may come from a limited number of customers, the termination of any of these customer relationships may adversely affect our business.”

 

If we fail to develop and maintain distribution and licensing relationships, our revenue may decrease.

 

Although a majority of our sales are made through our direct sales force, we also will market our products through indirect sales channels such as independent agents, distributors, OEMs and systems integrators. These relationships enhance our ability to pursue major contract awards and, in some cases, are intended to provide our customers with easier access to financing and a greater variety of equipment and service capabilities, which an integrated system provider should be able to offer. We may not be able to maintain and develop additional relationships or, if additional relationships are developed, they may not be successful. Our inability to establish or maintain these distribution and licensing relationships could restrict our ability to market our products and thereby result in significant reductions in revenue. If these revenue reductions occur, our business, financial condition and results of operations would be harmed.

 

Our success will depend on new product introductions, product transitioning and customer acceptance.

 

The market for our products is characterized by rapid technological change, evolving industry standards and frequent new product introductions. Our future success will depend, in part, on continuous, timely development and introduction of new products and enhancements that address evolving market requirements and are attractive to customers. We believe that successful new product introductions provide a significant competitive advantage because of the significant resources committed by customers in adopting new products and their reluctance to change products after these resources have been expended. We have spent, and expect to continue to spend, significant resources on internal research and development to support our effort to develop and introduce new products and enhancements. As we transition to common product platforms, we may face significant risk that current customers may not accept these new products. To the extent that we fail to introduce new and innovative products that are adopted by customers, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which could be difficult or impossible to regain. In addition, we could incur significant costs in completing the transition.

 

If we fail to accurately forecast our manufacturing requirements or customer demand, we could incur additional costs which would adversely affect our business and results of operations.

 

If we fail to accurately predict our manufacturing requirements or forecast customer demand, we may incur additional costs of manufacturing and our gross margins and financial results could be adversely affected. If we overestimate our requirements, our contract manufacturers may experience an oversupply of components and assess us charges for excess or obsolete components that could adversely affect our gross margins. If we underestimate our requirements, our contract manufacturers may have inadequate inventory or components, which could interrupt manufacturing and result in higher manufacturing costs, shipment delays, damage to customer relationships and/or our payment of penalties to our customers. Our contract manufacturers may also have other customers and may not have sufficient capacity to meet all of their customer’s needs, including ours, during periods of excess demand.

 

If we fail to effectively manage our contract manufacturer relationships, we could incur additional costs or be unable to timely fulfill our customer commitments, which would adversely affect our business and results of operations and, in the event of an inability to fulfill commitments, would harm our customer relationships.

 

We outsource a substantial portion of our manufacturing and repair service operations to independent contract manufacturers and other third parties. Our contract manufacturers typically manufacture our products based on rolling forecasts of our product needs that we provide to them on a regular basis. The contract manufacturers are responsible for procuring components necessary to build our products based on our rolling forecasts, building and

assembling the products, testing the products in accordance with our specifications and then shipping the products to us. We configure the products to our customer requirements, conduct final testing and then ship the products to our customers. Although we currently partner with multiple major contract manufacturers, there can be no assurance that we will not encounter problems as we become increasingly dependent on contract manufacturers to provide these manufacturing services or that we will be able to replace a contract manufacturer that is not able to meet our demand.

 

In addition, if we fail to effectively manage our relationships with our contract manufacturers or other service providers, or if one or more of them should not fully comply with their contractual obligations or should experience delays, disruptions, component procurement problems or quality control problems, then our ability to ship products to our customers or otherwise fulfill our contractual obligations to our customers could be delayed or impaired which would adversely affect our business, financial results and customer relationships.

 

Our industry is volatile and subject to frequent changes, and we may not be able to respond effectively or in a timely manner to these changes.

 

We participate in a highly volatile industry that is characterized by vigorous competition for market share and rapid technological development. These factors could result in aggressive pricing practices and growing competition both from start-up companies and from well-capitalized telecommunication systems providers, which could decrease our revenue. In response to changes in our industry and market conditions, we may restructure our activities to more strategically realign our resources. This includes assessing whether we should consider disposing of, or otherwise exiting, certain businesses, and reviewing the recoverability of our tangible and intangible assets. Any decision to limit investment in our tangible and intangible assets or to dispose of or otherwise exit businesses may result in the recording of accrued liabilities for special charges, such as workforce reduction costs. Additionally, accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets could change as a result of such assessments and decisions, and could harm our results of operations.

 

Rapid changes in the microwave radio industry and the frequent introduction of lower cost components for our product offerings may result in excess inventory that we cannot sell or may be required to sell at distressed prices, and may result in longer credit terms to our customers.

 

The rapid changes and evolving industry standards that characterize the market for our products require frequent modification of products for us to be successful. These rapid changes could result in the accumulation of component inventory parts that become obsolete as modified products are introduced and adopted by customers. We have experienced significant inventory write-offs in recent years, and because of the rapid changes that characterize the market, we also may be forced to write down excess inventory from time to time. Moreover, these same factors may force us to significantly reduce prices for older products or extend more and longer credit terms to customers, which could negatively impact our cash and possibly result in higher bad debt expense. More generally, we cannot give assurances that we will be successful in matching our inventory purchases with anticipated shipment volumes. As a result, we may fail to control the amount of inventory on hand and may be forced to write off additional amounts. Such additional inventory write-offs, if required, would adversely impact our cash flows, financial condition and operating results.

 

If sufficient radio frequency spectrum is not allocated for use by our products, and we fail to obtain regulatory approval for our products, our ability to market our products may be restricted.

 

Radio communications are subject to regulation by U.S. and foreign laws and international treaties. Generally, our products need to conform to a variety of United States and international requirements established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of such products.

 

In addition, we will be affected by the allocation and auction of the radio frequency spectrum by governmental authorities both in the U.S. and internationally. Such governmental authorities may not allocate sufficient radio frequency spectrum for use by our products or we may not be successful in obtaining regulatory approval for our

products from these authorities. Historically, in many developed countries, the unavailability of frequency spectrum has inhibited the growth of wireless telecommunications networks. In addition, to operate in a jurisdiction, we must obtain regulatory approval for our products. Each jurisdiction in which we market our products has its own regulations governing radio communications. Products that support emerging wireless telecommunications services can be marketed in a jurisdiction only if permitted by suitable frequency allocations, auctions and regulations. The process of establishing new regulations is complex and lengthy. If we are unable to obtain sufficient allocation of radio frequency spectrum by the appropriate governmental authority or obtain the proper regulatory approval for our products, our business, financial condition and results of operations may be harmed.

 

Due to the significant volume of international sales we expect, we may be susceptible to a number of political, economic and geographic risks that could harm our business.

 

We are highly dependent on sales to customers outside the U.S. In fiscal 2009, our sales to international customers accounted for 69% of total revenue. During fiscal 2008 and 2007, sales to international customers accounted for 73% and 67% of our revenue, respectively. Also, significant portions of our international sales are in less developed countries. Our international sales are likely to continue to account for a large percentage of our products and services revenue for the foreseeable future. As a result, the occurrence of any international, political, economic or geographic event that adversely affects our business could result in a significant decline in revenue.

 

Some of the risks and challenges of doing business internationally include:

 

 

While these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition and results of operations in the future.

 

Our products are used in critical communications networks which may subject us to significant liability claims.

 

Since our products are used in critical communications networks, we may be subject to significant liability claims if our products do not work properly. The provisions in our agreements with customers that are intended to limit our exposure to liability claims may not preclude all potential claims. In addition, any insurance policies we have may not adequately limit our exposure with respect to such claims. We warrant to our current customers that our products will operate in accordance with our product specifications. If our products fail to conform to these specifications, our customers could require us to remedy the failure or could assert claims for damages. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, whether or not successful, would be costly and time-consuming to defend, and could divert management’s attention and seriously damage our reputation and our business.

If we are unable to adequately protect our intellectual property rights, we may be deprived of legal recourse against those who misappropriate our intellectual property.

 

Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in the U.S. and internationally. We rely upon a combination of trade secrets, trademarks, copyrights, patents and contractual rights to protect our intellectual property. In addition, we enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. We cannot give assurances that any steps taken by us will be adequate to deter misappropriation or impede independent third-party development of similar technologies. In the event that such intellectual property arrangements are insufficient, our business, financial condition and results of operations could be harmed. We have significant operations in the U.S., United Kingdom, Singapore and New Zealand, and outsourcing arrangements in Asia. We cannot provide assurances that the protection provided to our intellectual property by the laws and courts of particular nations will be substantially similar to the protection and remedies available under U.S. law. Furthermore, we cannot provide assurances that third parties will not assert infringement claims against us based on intellectual property rights and laws in other nations that are different from those established in the U.S.

 

We may be subject to litigation regarding intellectual property associated with our wireless business; this litigation could be costly to defend and resolve, and could prevent us from using or selling the challenged technology.

 

The wireless telecommunications industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Such litigation or claims could result in substantial costs and diversion of resources. In the event of an adverse result in any such litigation, we could be required to pay substantial damages, cease the use and transfer of allegedly infringing technology or the sale of allegedly infringing products and expend significant resources to develop non-infringing technology or obtain licenses for the infringing technology. We can give no assurances that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be available to us on commercially reasonable terms, if at all. This could have a materially adverse effect on our business, results of operation, financial condition, competitive position and prospects.

 

Our stock price may be volatile, which may lead to losses by investors.

 

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the telecommunications industry in which we compete, or the economies of the countries in which we do business and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could lower the market price of our common stock. Our stock is currently listed on the NASDAQ Global Market.

 

The unpredictability of our quarter-to-quarter results may harm the trading price of our Class A Common Stock.

 

Our quarterly operating results may vary significantly for a variety of reasons, many of which are outside our control. These factors could harm our business and include, among others:

 

 

 

Our quarterly results are expected to be difficult to predict and delays in product delivery or closing a sale can cause revenue and net income or loss to fluctuate significantly from anticipated levels. In addition, we may increase spending in response to competition or in pursuit of new market opportunities. Accordingly, we cannot provide assurances that we will be able to achieve profitability in the future or that if profitability is attained, that we will be able to sustain profitability, particularly on a quarter-to-quarter basis.

 

Anti-takeover provisions of Delaware law, provisions in our amended and restated certificate of incorporation, amended and restated bylaws and our stockholders’ rights plan, or poison pill, could make a third-party acquisition of us difficult.

 

Because we are a Delaware corporation, the anti-takeover provisions of Delaware law could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. We are subject to the provisions of Section 203 of the General Corporation Law of Delaware, which prohibits us from engaging in certain business combinations, unless the business combination is approved in a prescribed manner. In addition, our amended and restated certificate of incorporation and amended and restated bylaws also contain certain provisions that may make a third-party acquisition of us difficult, including the ability of the board of directors to issue preferred stock and the requirement that nominations for directors and other proposals by stockholders must be made in advance of the meeting at which directors are elected or the proposals are voted upon.

 

On April 20, 2009, we adopted a stockholders’ rights plan, also called a poison pill, which could make it uneconomical for a third party to acquire our company on a hostile basis. The rights plan has the potential effect of significantly diluting the ownership interest in us of any person that acquires beneficial ownership of 15% or more of our common stock or commences or announces its intent to commence a tender offer that would result in a person or group owning 15% or more of our common stock. The rights plan is due to expire on January 20, 2010. These provisions, as well as Section 203, may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market price, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests.

 

We may face risks related to pending litigation over the restatement of our financial statements.

 

In connection with our identification of the material weaknesses in internal control described in our fiscal 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 25, 2008, we have had to restate our interim consolidated financial statements for the first three fiscal quarters of fiscal 2008 (the

quarters ended March 28, 2008, December 28, 2007 and September 28, 2007) and our consolidated financial statements for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005 in order to correct errors contained in those financial statements. We also announced on July 30, 2008 that investors should no longer rely on our previously issued financial statements for those periods.

 

We and certain of our current and former executive officers and directors were named in a federal securities class action complaint filed on September 15, 2008 in the United States District Court for the District of Delaware by plaintiff Norfolk County Retirement System on behalf of an alleged class of purchasers of our securities from January 29, 2007 to July 30, 2008, including shareholders of Stratex Networks, Inc. who exchanged shares of Stratex Networks, Inc. for our shares as part of the merger between Stratex Networks and the Microwave Communications Division of Harris Corporation. This action relates to the restatement of our prior financial statements as discussed in our fiscal 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 25, 2008. Similar complaints were filed in the United States District Court of Delaware on October 6 and October 30, 2008. Each complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as violations of Sections 11 and 15 of the Securities Act of 1933 and seeks, among other relief, determinations that the action is a proper class action, unspecified compensatory damages and reasonable attorneys’ fees and costs. The actions were consolidated on June 5, 2009 and a consolidated class action complaint was filed on July 29, 2009. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

 

 

None.

 

 

As of July 3, 2009, we conducted operations using facilities in the U.S., Canada, Europe, Central America, South America, Africa and Asia. Our principal executive offices are located at leased facilities in Morrisville, North Carolina. There are no material encumbrances on any of our facilities. Remaining initial lease periods extend to 2018.

 

As of July 3, 2009, the locations and approximate floor space of our principal offices and facilities in productive use were as follows:

 

During fiscal 2007, in connection with the acquisition of Stratex, we ceased operations at, and subsequently vacated leased facilities in Seattle, Washington, and San Jose and Milpitas, California. These three facilities consist of approximately 139,000 square feet, of which approximately 90,000 square feet have been subleased to third parties. Additionally, we ceased most operations at, and mostly vacated a fourth leased 60,000 square foot facility in San Jose, California. We have retained 40,400 square feet for our use and subleased 4,500 square feet of the remaining space to a third party. As the lessee, we have ongoing lease commitments, which extend into fiscal year 2011 for these four facilities.

 

We maintain our facilities in good operating condition, and believe that they are suitable and adequate for our current and projected needs. We continuously review our anticipated requirements for facilities and may, from time to time, acquire additional facilities, expand existing facilities, or dispose of existing facilities or parts thereof, as we deem necessary.

 

For more information about our lease obligations, see “Note Q — Operating Lease Commitments” and “Note K — Restructuring Activities” of Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Annual Report on Form 10-K.

 

 

We and certain of our current and former executive officers and directors were named in a federal securities class action complaint filed on September 15, 2008 in the United States District Court for the District of Delaware by plaintiff Norfolk County Retirement System on behalf of an alleged class of purchasers of our securities from January 29, 2007 to July 30, 2008, including shareholders of Stratex Networks, Inc. who exchanged shares of Stratex Networks, Inc. for our shares as part of the merger between Stratex Networks and the Microwave Communications Division of Harris Corporation. This action relates to the restatement of our prior financial statements as discussed in our fiscal 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 25, 2008. Similar complaints were filed in the United States District Court of Delaware on October 6 and October 30, 2008. Each complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as violations of Sections 11 and 15 of the Securities Act of 1933 and seeks, among other relief, determinations that the action is a proper class action, unspecified compensatory damages and reasonable attorneys’ fees and costs. The actions were consolidated on June 5, 2009 and a consolidated class action complaint was filed on July 29, 2009. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

 

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, as a normal incident of the nature and kind of businesses in which we are engaged, various claims or charges are asserted and litigation commenced against us arising from or related to: personal injury, patents, trademarks, trade secrets or other intellectual property; labor and employee disputes; commercial or contractual disputes; the sale or use of products containing restricted or hazardous materials; breach of warranty; or environmental matters. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards.

 

 

No matters were submitted by us to a vote of our security holders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal 2009.

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The name, age, position held with us, and principal occupation and employment during at least the past 5 years for each of our executive officers as of September 3, 2009, are as follows:

 

 

There is no family relationship between any of our executive officers or directors, and there are no arrangements or understandings between any of our executive officers or directors and any other person pursuant to which any of them was appointed or elected as an officer or director, other than arrangements or understandings

with our directors or officers acting solely in their capacities as such. All of our executive officers are elected annually and serve at the pleasure of our Board of Directors.

 

 

Market Information and Price Range of Common Stock

 

Our Class A Common Stock, with a par value of $0.01 per share, is listed and primarily traded on the NASDAQ Global Market (“NASDAQ”), under the ticker symbol HSTX. There was no established trading market for the shares of our Class A or Class B Common Stock prior to January 29, 2007.

 

From the time we acquired Stratex on January 26, 2007, Harris owned 32,913,377 shares or 100% of our Class B Common Stock which approximated 56% of the total shares of our common stock. On May 27, 2009, Harris distributed all of those shares to the Harris stockholders as a taxable pro rata stock dividend. Upon the distribution, the Class B Common Stock converted automatically into shares of Class A Common Stock, which is now our only outstanding class of stock.

 

According to the records of our transfer agent, as of August 28, 2009, there were approximately 5,800 holders of record of our Class A Common Stock. The following table sets forth the high and low reported sale prices for a share of our Class A Common Stock on NASDAQ Global Market system for the periods indicated during our fiscal years 2009 and 2008:

 

 

On August 28, 2009, the last sale price of our common stock as reported in the NASDAQ Global Market system was $6.09 per share.

 

Dividend Policy

 

We have not paid cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain any earnings for use in our business. In addition, the covenants of our $70 million credit facility restrict us from paying dividends or making other distributions to our shareholders under certain circumstances. We also may enter into other credit facilities or debt financing arrangements that further limit our ability to pay dividends or make other distributions.

 

Sales of Unregistered Securities

 

During the fourth quarter of fiscal 2009, we did not issue or sell any unregistered securities.

 

Issuer Repurchases of Equity Securities

 

During the fourth quarter of fiscal 2009, we did not repurchase any equity securities.

Performance Graph

 

The following graph and accompanying data compares the cumulative total return on our Class A Common Stock with the cumulative total return of the Total Return Index for The NASDAQ Composite Market (U.S. Companies) and the NASDAQ Telecommunications Index for the two-year, five month period commencing January 29, 2007 and ending July 3, 2009. The stock price performance shown on the graph below is not necessarily indicative of future price performance. Note that this graph and accompanying data is “furnished,” not “filed,” with the Securities and Exchange Commission.

 

COMPARISON OF 2 YEAR, 5 MONTH CUMULATIVE TOTAL RETURN*

 

Among Harris Stratex Networks, Inc., The NASDAQ Composite Index

and the NASDAQ Telecommunications Index

 

 

 

 

 

The following table summarizes our selected historical financial information for each of the last five fiscal years. The selected financial information as of and for the fiscal years ended July 3, 2009, June 27, 2008, June 29, 2007, June 30, 2006 and July 1, 2005 has been derived from our audited consolidated financial statements, for which data presented for fiscal years 2009, 2008 and 2007 are included elsewhere in this Annual Report on Form 10-K. This table should be read in conjunction with our other financial information, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes, included elsewhere in this Annual Report on Form 10-K.

 

 

 

 

The following table summarizes certain charges and expenses included in our net losses for each of the fiscal years in the five year period ended July 3, 2009 (none during fiscal 2005).

 

 

Overview of our Business and Products; Operating Environment and Key Factors Impacting Fiscal 2009 and 2010 Results

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Harris Stratex Networks Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes.

 

We generate revenue by designing, developing, manufacturing and supporting a range of wireless networking products, solutions and services for mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators across the globe. Our products include broadband wireless access base stations and customer premise equipment based upon the IEEE 802.16d-2004 and 16e-2005 standards for fixed and mobile WiMAX, point-to-point digital microwave radio systems for access, backhaul, trunking and license-exempt applications, supporting new network deployments, network expansion, and capacity upgrades.

 

We work continuously to improve our established brands and to create new products that meet our customers’ evolving needs and preferences. Our fundamental business goal is to generate superior returns for our stockholders over the long term. We believe that increases in revenue, segment operating profits, earnings per share, and return on average total capital are the key measures of financial performance for our business.

 

Our objectives are to consistently deliver:

 

 

Business Overview

 

The majority of our goodwill and the trade name “Stratex” were recorded in connection with the acquisition of Stratex Networks, Inc. (“Stratex”) in January 2007 and were included in the International Microwave segment of our business. In January 2009, we determined that based on the current global economic environment and the decline of our market capitalization, it was likely that an indicator of goodwill impairment existed as of the end of the second quarter of fiscal 2009. As a result, we performed an interim review for impairment as of the end of the second quarter of fiscal 2009 of our goodwill and other indefinite-lived intangible assets (consisting solely of the trade name “Stratex”).

 

To test for potential impairment of our goodwill, we determined the fair value of each of our reporting segments based on projected discounted cash flows and market-based multiples applied to sales and earnings. The results indicated an impairment to goodwill, because the current carrying value of the North America Microwave and International Microwave segments exceeded their fair value. We then allocated these fair values to the respective underlying assets and liabilities to determine the implied fair value of goodwill, resulting in a $279.0 million charge to write down all of our goodwill. We determined the fair value of the trade name “Stratex” by performing a projected discounted cash flow analysis based on the relief-from-royalty approach, resulting in a $22.0 million charge to write down the trade name “Stratex” to $11.0 million as of April 3, 2009, the end of our third quarter in fiscal 2009.

 

During June 2009, subsequent to the May 27, 2009 spin-off by Harris of its majority interest or 56 percent of our common stock, Harris notified us of its intent to terminate the trademark license in effect between us since January 26, 2007. The new name of our Company will not include Harris or Stratex. Accordingly, the fair value of the indefinite-lived trade name “Stratex” was deemed to be impaired. Furthermore, we anticipate making this change by December 2009, which is a known definite life of six months from July 3, 2009, the end of our fiscal year 2009. As a result, we determined the fair value of the trade name “Stratex” as of July 3, 2009 by performing a projected discounted cash flow analysis based on the relief-from-royalty approach, resulting in a $10.6 million

charge to write down a majority of the trade name “Stratex” to a fair value of $0.4 million with a six-month remaining life.

 

We will not be required to make any current or future cash expenditures as a result of these impairments, and these impairments do not impact our financial covenant compliance under our credit arrangements or our ongoing financial performance. We did not record any impairment losses on identifiable intangible assets or goodwill in fiscal 2008 or 2007.

 

In fiscal 2010, the challenges of the macro-economic climate will continue to remain a challenge for us. In any given region, we can be faced with currency issues, poor economic conditions, limited access to capital as credit markets remain tight, reduced capital spending or customer consolidation. While customer consolidation can generate attractive volume opportunities, it can also result in pricing pressures. Regardless of these challenges, we are committed to our strategic vision as we continue to make significant progress.

 

We will continue to execute on our four growth strategies announced last year — expanding our customer reach geographically, introducing a broader range of services to support our customers’ growing needs, moving quickly to a fully-outsourced contract manufacturing model, and rebalancing our R&D investment to fund additional innovation incubators.

 

During the past year, we have laid the foundation for long-term growth by delivering innovative products and services, creating opportunities for our customers, improving customer satisfaction with key audiences and improving our internal business processes. Our focus in fiscal 2010 is to continue to build on this foundation and to execute well in key areas, including continuing to focus on converging to a common IP-based microwave platform, which will increase R&D efficiency, simplify our supply chain, improve lead times, reduce component cost, and decrease the number of products required to support our company’s worldwide customer base.

 

In our global network services business, we are driving to meet the needs of our customers to optimize their investments, reduce their operational expenses and improve productivity. To help manage networks for enterprise carrier and State and Local Government customers, we recently commissioned a state-of-the-art network operations center, or NOC, at our Raleigh, North Carolina headquarters. Our NOC provides 24/7 energy, security and surveillance controls for subscribers worldwide, as well as performance monitoring to ensure productivity.

 

The rapidly increased popularity of smart phones, and the applications that they enable, is driving the need for more bandwidth in the backhaul portion of the mobile network. Our IP backhaul solutions are a compelling alternative in more cases than in the past, and we are optimistic about the future of this sector.

 

The American Recovery and Reinvestment Act creates another area of opportunity. Rural broadband is a perfect fit for what we offer specifically, backhaul over long distances and WiMAX in the last mile. Our ability to provide an end-to-end solution, including long-term managed service support, is closely aligned with the need of many small networks, and will be developed. Our backhaul solutions have now been accepted by the Rural Utility Services, RUS, a telecommunications program.

 

Internationally, Africa remains a region of relative strength when measured by customer demand and network infrastructure expansion. We continue to have a leadership position in Africa, but the region is not without its own challenges. Cash and credit excess are becoming increasingly important to customers, and roll-off has been slow. The strength of the U.S. dollar also makes network deployments more expensive. Despite these challenges, our long term outlook remains positive for this region. The acceptance of our two new growth areas, WiMAX and energy and security, continue to confirm that our products and services are a perfect match for this continent.

 

In our EMER region, which comprises Europe, the Middle East and Russia, the challenges continue, and may last longer than originally anticipated. Across Europe, especially Eastern Europe, operators continue to focus on their cash positions and are constraining their capital spending. The expansion plan of some Middle East operators has stalled, as they weigh strategic options. Select large operators, however, are investing in their future growth.

 

Asia-Pacific continues to deliver a number of growth opportunities. During the quarter, we captured several WiMAX rollouts and 2G expansions in the Philippines, Thailand, Indonesia and India.

Overall, we remain watchful of the risk profiles in all of the regions we serve. We do see signs of stabilization, but remain cautious in our extended growth outlook. Africa remains a region of relative strength for us, when measured by the demand and opportunity, as does Asia-Pacific. We believe we are establishing a competitive position in India, largely as a result of our acquisition, and expect to enlarge our footprint in other countries as well.

 

OPERATIONS REVIEW

 

Revenue and Net Loss

 

 

 

N/M = Not meaningful, as used in tables throughout this MD&A.

 

Fiscal 2009 Compared with Fiscal 2008

 

Our revenue in fiscal 2009 was $679.9 million, a decrease of $38.5 million or 5.4%, compared with fiscal 2008. This decrease in revenue resulted from declines in all regions (except Africa) primarily due to the global economic recession and the continuing credit crisis adversely affecting our customers expansion, as well as increased competition from our competitors. Compared with fiscal 2008, revenue in fiscal 2009 in Europe, Middle East and Russia declined by $23.4 million, Latin America and Asia-Pacific declined $15.1 million, and North America was down $5.4 million. These decreases were partially offset by growth in Africa ($15.1 million increase) as customers in this region continued to expand their network infrastructures prior to the slowdown in the third quarter of fiscal 2009.

 

During fiscal 2009, the MTN group in Africa accounted for 17% of our total revenue compared with 13% during fiscal 2008. We have entered into separate and distinct contracts with MTN as well as separate arrangements with MTN group subsidiaries. None of such other contracts on an individual basis are material to our operations. The loss of all MTN group business could adversely affect our results of operations, cash flows and financial position.

 

Our net loss in fiscal 2009 was $355.0 million compared with $11.9 million in fiscal 2008. The net loss in fiscal 2009 included $311.6 million of impairment charges for goodwill and the trade name “Stratex” and $29.8 million of charges related to the accelerated transition towards a common IP-based platform.

These charges, as well as purchase accounting adjustments and other expenses related to the acquisitions of Stratex and Telsima, share-based compensation expense and an impairment for software are set forth on a comparative basis in the table below:

 

 

During the first quarter of fiscal 2009, we announced a new restructuring plan (the “Fiscal 2009 Plan”) to reduce our worldwide workforce. During fiscal 2008, Harris Stratex completed its restructuring activities implemented within the merger restructuring plans (the “Fiscal 2007 Plans”) approved in connection with the January 26, 2007 merger between the Microwave Communications Division of Harris Corporation and Stratex. These restructuring plans included the consolidation of facilities and operations of the predecessor entities in Canada, France, the U.S., China, Brazil and, to a lesser extent, Mexico, New Zealand and the United Kingdom.

 

During fiscal 2009, our net restructuring charges totaled $8.2 million consisted of:

 

 

During fiscal 2008, we recorded $9.3 million of restructuring charges in connection with completion of the Fiscal 2007 Plans. These fiscal 2008 restructuring charges consisted of:

 

 

 

Fiscal 2008 Compared with Fiscal 2007

 

The results of operations in fiscal 2008 include the operations acquired in the Stratex acquisition for the entire year while the results for fiscal 2007 include the results of Stratex since January 26, 2007 or five months. Historically, Stratex derived its revenues primarily from international markets.

 

Our revenue in fiscal 2008 was $718.4 million, an increase of $210.5 million or 41.4%, compared with fiscal 2007. Revenue in fiscal 2008 included $353.9 million from sales of former Stratex products and services compared with $123.7 million in fiscal 2007. Excluding the impact of the Stratex acquisition, revenue declined $19.7 million, primarily due to a decrease in sales of the former MCD business products and services in the International Microwave segment. The Network Operations segment operating income increased by $0.1 million in fiscal 2008 compared with fiscal 2007.

 

Our net loss in fiscal 2008 was $11.9 million compared with a net loss of $21.8 million in fiscal 2007. The net loss in fiscal 2008 and fiscal 2007 included the following purchase accounting adjustments and other expenses related to the acquisition and integration of Stratex, share-based compensation expense and inventory markdowns and impairment from product transitioning:

 

 

During fiscal 2008, we continued the restructuring activities and plans approved in connection with the Stratex acquisition. These restructuring plans included the consolidation of facilities and operations of the predecessor entities in Canada, France, the U.S., China, Brazil and, to a lesser extent, Mexico, New Zealand and the United Kingdom. These restructuring activities were completed during the fourth quarter of fiscal 2008.

 

During fiscal 2008, we recorded an additional $9.3 million of restructuring charges in connection with implementation of these fiscal 2007 plans. The costs related to reductions in force consisted primarily of retention, severance and other benefits totaling $3.4 million. We also recorded $1.8 million in restructuring charges related to the impairment of a lease, $1.9 million relating to impairment of fixed assets and leasehold improvements and $2.2 million relating to the reduction in fair value of ICMS tax recoverable in Brazil.

Gross Margin

 

 

Fiscal 2009 Compared with Fiscal 2008

 

Gross margin in fiscal 2009 was $174.4 million, or 25.7% of revenue, compared with $190.2 million, or 26.5% of revenue in fiscal 2008. Gross margin in fiscal 2009 was reduced by $29.8 million in charges related to product transition, $7.5 million for amortization of developed technology and $0.6 million of amortization of the fair value of adjustments for fixed assets acquired from Stratex.

 

By comparison, gross margin in fiscal 2008 was reduced by $14.7 million for inventory markdowns and impairment relating to product transitioning, $7.1 million of amortization on developed technology, $0.8 million for amortization of the fair value of adjustments for fixed assets acquired from Stratex, and $1.5 million of merger integration costs.

 

Aside from the charges and expenses mentioned above, gross margin and gross margin percentage benefited from a favorable margin impact on some projects, gains on currency translations, decreased warranty expenses, favorable purchase price variance and product mix.

 

Fiscal 2008 Compared with Fiscal 2007

 

Gross margin in fiscal 2008 was $190.2 million, or 26.5% of revenue, compared with $146.7 million, or 28.9% of revenue in fiscal 2007. Gross margin in fiscal 2008 was reduced by $14.7 million for inventory markdowns and impairment relating to product transitioning, $7.1 million of amortization on developed technology, $0.8 million for amortization of the fair value of adjustments for fixed assets acquired from Stratex, and $1.5 million of merger integration costs. Gross margin in fiscal 2007 was reduced by an $8.3 million write-off of a portion of the fair value adjustments related to inventory and fixed assets, and $3.0 million for amortization of developed technology.

 

Our gross margin percentage during fiscal 2008 was comparatively lower than the gross margin percentage in fiscal 2007 because of the expenses described above and because our International Microwave segment revenue included a significant amount of the lower-margin, low-capacity version of Eclipse microwave radio sales in fiscal 2008. Gross margin percentage continued to be adversely affected by increased freight and service costs in fiscal 2008.

 

Research and Development Expenses

 

 

Fiscal 2009 Compared with Fiscal 2008

 

Research and development (“R&D”) expenses were $40.4 million in fiscal 2009 compared with $46.1 million in fiscal 2008. As a percentage of revenue, these expenses decreased to 5.9% in fiscal 2009 from 6.4% in fiscal 2008 due to higher revenue and a decrease in spending. The decrease in spending in fiscal 2009 compared with fiscal 2008 was primarily attributable to the reduction in engineering workforce implemented in our restructuring plans during fiscal 2008.

Fiscal 2008 Compared with Fiscal 2007

 

R&D expenses were $46.1 million in fiscal 2008, compared with $39.4 million in fiscal 2007. As a percent of revenue, these expenses decreased from 7.8% in fiscal 2007 to 6.4% in fiscal 2008 due to higher revenue. The majority of the increase in spending in fiscal 2008 compared with fiscal 2007 was attributable to the R&D activities acquired from Stratex. The remainder of the increase was attributable to higher spending in fiscal 2008 related to our TRuepoint 6000 development efforts.

 

Selling and Administrative Expenses

 

 

Fiscal 2009 Compared with Fiscal 2008

 

The following table summarizes the significant increases and decreases to our selling and administrative expenses comparing fiscal 2009 with fiscal 2008:

 

 

The chief operations officer group was formed in fiscal 2009 to centrally manage activities that provide support to all functions of our company. These costs include the development of a program manager group that drives our internal project execution and the business process engineering team that enhances system integration and facilitates process improvements throughout the company.

 

Fiscal 2008 Compared with Fiscal 2007

 

Selling and administrative (“S&A”) expenses in fiscal 2008 increased to $141.4 million from $98.9 million in fiscal 2007. As a percentage of revenue, these expenses increased from 19.5% of revenue in fiscal 2007 to 19.7% of revenue in fiscal 2008. This increase was partially offset by a $3.3 million gain on the change in fair value of warrants classified in S&A expenses compared with a $0.6 million gain in fiscal 2007. S&A expenses also increased as a result of the increase in revenue. The majority of the increase in spending in fiscal 2008 compared with fiscal 2007 was attributable to the S&A expenses associated with the former Stratex business. The remainder of the increase was due to higher selling expenses associated with the increase in revenue, and increased costs incurred for compliance with Sarbanes-Oxley requirements for review and attestation of internal control over financial reporting.

Income Taxes

 

 

The income tax expense for fiscal 2009 was $17.8 million. The variation between our income tax expense of $17.8 million and income tax benefit at the statutory rate of 35% on our pre-tax loss of $337.2 million was primarily due to our evaluation of the ability to realize certain deferred tax assets in future periods. We increased our valuation allowance on these certain deferred tax assets resulting from our assessment of positive and negative evidence. We concluded that additional valuation allowance was required, resulting in income tax expense of $25.1 million. The effective tax rate for fiscal 2009 otherwise reflects the benefits of lower taxed foreign earnings and losses.

 

Our fiscal 2008 tax benefit was the result of a pre-tax loss primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates.

 

Our fiscal 2007 tax benefit was the result of foreign tax credits earned as a result of our international operations offset somewhat by unfavorable carve-out tax adjustments attributable to MCD.

 

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. In those periods, our income tax expense for those periods related 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.

 

As of July 3, 2009, we had $27.9 million of U.S. and foreign credit carryforward. We also had U.S. net operating loss carryforwards of approximately $201.2 million and U.S. capital loss carryforwards of $12.9 million. Tax loss and credit carryforwards as of July 3, 2009 have expiration dates ranging between one year and none in certain instances. Certain credits begin to expire in fiscal 2010 and U.S. net operating losses will begin to expire in fiscal 2022. On January 26, 2007 we recorded a full valuation allowance on the net operating loss carryforward in the opening balance sheet of Stratex under purchase accounting. During the current year, all goodwill was impaired. Any realization of the acquired net operating loss carryforwards in future periods will be recorded through the income statement.

 

Discussion of Business Segments

 

North America Microwave Segment

 

 

Fiscal 2009 Compared with Fiscal 2008

 

North America Microwave segment revenue decreased by $5.4 million, or 2.3%, in fiscal 2009 compared with fiscal 2008. This decrease in revenue resulted primarily from the global economic recession and the continuing credit crisis adversely affecting our customers expansion.

 

Our North America Microwave segment had an operating loss of $62.7 million in fiscal 2009 primarily due to goodwill impairment and charges for the accelerated transition towards a common IP-based platform. The charges for this accelerated product transition included provisions for legacy product excess and obsolete inventory, and

write-downs of property, plant, manufacturing and test equipment, and charges recorded for inventory purchase commitments. This compares with an operating loss of $9.4 million in fiscal 2008. The operating losses in fiscal 2009 and 2008 also included acquisition expenses, restructuring charges and share-based compensation expense.

 

The following table summarizes these charges and expenses included in the North America Microwave segment operating results during fiscal 2009 and 2008:

 

 

Fiscal 2008 Compared with Fiscal 2007

 

North America Microwave segment revenue increased by $16.1 million, or 7.4%, in fiscal 2008 compared with fiscal 2007. Revenue in fiscal 2008 and fiscal 2007 included $25.5 million and $7.7 million from sales of former Stratex products and services. Revenue drivers in the North America Microwave segment included customer demand for increased bandwidth, footprint expansion and the relocation of advanced wireless services to the 2 gigahertz spectrum by mobile operators.

 

Our North America Microwave segment had an operating loss of $9.4 million in fiscal 2008 compared with operating income of $6.3 million in fiscal 2007 due to the following charges and expenses included in fiscal 2008 compared with similar types of charges in fiscal 2007:

 

International Microwave Segment

 

 

Fiscal 2009 Compared with Fiscal 2008

 

International Microwave segment revenue decreased by $23.4 million or 5.1% in fiscal 2009 compared with fiscal 2008. This decrease in revenue resulted from declines in all regions (except Africa) primarily due to the global economic recession and the continuing credit crisis adversely affecting our customers expansion. Compared with fiscal 2008, revenue in fiscal 2009 in Europe, Middle East and Russia declined by $23.4 million and Latin America and Asia-Pacific declined $15.1 million. These decreases were partially offset by growth in Africa ($15.1 million increase) as customers in this region continued to expand their network infrastructures prior to the slowdown in the third quarter of fiscal 2009.

 

Our International Microwave segment had an operating loss of $270.8 million in fiscal 2009 primarily due to charges for goodwill and trade name impairments. This compares with an operating loss of $5.7 million in fiscal 2008. The operating losses in fiscal 2009 and 2008 also included acquisition expenses, restructuring charges and share-based compensation expense.

 

The following table summarizes these charges and expenses included in the International Microwave segment operating results during fiscal 2009 and 2008:

 

 

Fiscal 2008 Compared with Fiscal 2007

 

International Microwave segment revenue increased by $189.5 million or 69.6% in fiscal 2008 compared with fiscal 2007. Revenue in fiscal 2008 and fiscal 2007 included $328.4 million and $116.0 million from sales of former Stratex products and services. Excluding the impact of the revenue from Stratex products and services, our International Microwave segment revenue decreased by $22.9 million because of our transition to selling the former Stratex products.

Our International Microwave segment had an operating loss of $5.7 million in fiscal 2008 compared with $31.3 million in fiscal 2007 due to the following charges and expenses included in fiscal 2008 compared with similar types of charges in fiscal 2007:

 

 

Network Operations Segment

 

 

Fiscal 2009 Compared with Fiscal 2008

 

Network Operations segment revenue decreased by 39.9% in fiscal 2009 compared with fiscal 2008 primarily due to the global economic recession and the continuing credit crisis adversely affecting our customers expansion. This segment reported an operating loss of $1.8 million in fiscal 2009 compared with operating income of $1.4 million in fiscal 2008. The operating loss in fiscal 2009 compared with an operating income in fiscal 2008 resulted primarily from the significant decline in revenue.

 

Fiscal 2008 Compared with Fiscal 2007

 

Network Operations segment revenue increased by 25.2% in fiscal 2008 compared with fiscal 2007. This segment had operating income of $1.4 million in fiscal 2008 compared with operating income of $1.3 million in fiscal 2007. Operating income as a percentage of sales decreased to 5.8% in fiscal 2008 compared with 6.7% in fiscal 2007 however. The increase in revenue resulted primarily from an increase in software and license revenue in fiscal 2008 because of increased demand for our service assurance solution with next generation network customers as a result of new features and functionality in our product offerings. The increase in operating income during fiscal 2008 was driven by product mix including an increase in higher margin software and license revenue and a decrease in S&A expenses as a percentage of revenue.

 

Related Party Transactions

 

Prior to the Stratex acquisition, Harris provided information services, human resources, financial shared services, facilities, legal support and supply chain management services to us. The charges for those services were billed to us primarily based on actual usage. 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 fiscal 2009, 2008 and 2007, Harris charged us $5.5 million,

$7.0 million and $6.8 million for these services. We intend to continue utilizing select services from Harris and have extended the terms of the Transition Services Agreement. However, as a result of Harris’s spin-off of its share of our stock to its stockholders in May 2009, Harris will no longer be considered a related party with respect to transactions under that arrangement.

 

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 $6.0 million, $3.5 million and $1.9 million in fiscal 2009, 2008 and 2007. We also recognized costs associated with related party purchases from Harris of $3.3 million, $6.1 million and $6.7 million for fiscal 2009, 2008 and 2007.

 

Harris was the primary source of our financing and equity activities through January 26, 2007, the date of the Stratex acquisition. During the seven months ended January 26, 2007, Harris’ net investment in us was increased by $24.1 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 in fiscal 2007 was not significant.

 

The unpaid amounts billed from Harris are included within “Due to Harris Corporation” on our 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 our Consolidated Balance Sheets. Total receivables from Harris were $6.3 million and $4.0 million as of July 3, 2009 and June 27, 2008. Total payables to Harris were $3.3 million and $20.8 million as of July 3, 2009 and June 27, 2008.

 

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 we entered into a 5-year lease agreement to accommodate this use. This agreement is a capital lease under generally accepted accounting principles. As of July 3, 2009, our lease obligation to Harris was $1.4 million of which $0.5 million is a current liability and the related asset amount, net of accumulated amortization of $1.4 million is included in 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.

 

During the first quarter of fiscal 2008, we recognized an impairment charge of $1.3 million on a portion of these assets which is included in our restructuring charges. We also recognized an increase of $0.4 million to the lease obligation balance during fiscal 2008 from a recapitalization under the lease terms, primarily because of the impairment charge discussed above and a rescheduling of the lease payments. During fiscal 2009 we paid Harris $1.4 million under this capital lease obligation. During fiscal 2008, we paid Harris $3.8 million under this capital lease obligation resulting from the $1.3 million impairment discussed above and the lease payments. Our amortization expense on this capital lease was $1.1 million, $1.8 million and $0.8 million in fiscal 2009, 2008 and 2007. As of July 3, 2009, the future minimum payments for this lease are $0.8 million for fiscal 2010, $0.5 million for fiscal 2011 and $0.2 million for fiscal 2012.

 

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

 

Sources of Cash

 

As of July 3, 2009, our principal sources of liquidity consisted of $137.1 million in cash, cash equivalents and short-term investments plus $47.5 million of available credit under our current $70 million credit facility.

 

Available Credit Facility and Repayment of Debt

 

As of July 3, 2009, we had $47.5 million of credit available under our $70 million revolving credit facility with two commercial banks as mentioned above. The total amount of revolving credit available was $70 million less $10 million in outstanding short term loans which mature by December 2010, and $12.5 million in outstanding standby letters of credit. The current credit facility for an initial committed amount of $70 million replaced our

previous credit facility with one commercial bank in the amount of $50 million as of June 30, 2008. As of that date we had outstanding a long-term loan of $8.8 million and $8.6 million in standby letters of credit defined as usage under the previous facility. The $8.8 million in long-term debt was repaid at that time with the proceeds of a $10 million short-term borrowing under the current facility. The standby letters of credit outstanding at that time remained as an obligation to the bank and are not included as usage under the current facility.

 

The initial commitment of $70 million under the current facility is currently divided equally between Bank of America and Silicon Valley Bank, with each providing $35 million. The initial term of the facility expires in June 2011 and provides for (1) demand borrowings at the greater of Bank of America’s prime rate and the Federal Funds rate plus 0.5%, (2) fixed term Eurodollar loans for six months or more as agreed with the banks at LIBOR plus a spread of between 1.25% to 2.00% based on the company’s current leverage ratio and (3) the issuance of standby or commercial letters of credit. The facility contains a minimum liquidity ratio covenant and a maximum leverage ratio covenant and is unsecured.

 

Our debt consisted of the following as of July 3, 2009 and June 27, 2008:

 

 

Based on covenants included as part of the credit facility as of June 30, 2008, we must maintain, as measured at the last day of each fiscal quarter, (1) no more than a maximum consolidated leverage ratio of 3.00 to 1 (defined as the ratio of total consolidated funded indebtedness to consolidated EBITDA for the four fiscal quarters most recently ended) and (2) a minimum liquidity coverage ratio of 1.75 to 1 (defined as the ratio of total unrestricted cash and equivalents, short-term investments and marketable securities plus 50% of total monetary receivables to the total amount of outstanding loans and letter of credit obligations under the facility). As of July 3, 2009, we were in compliance with these financial covenants.

 

Restructuring and Payments

 

We have a liability for restructuring activities totaling $7.8 million as of July 3, 2009, of which $5.3 million is classified as a current liability and expected to be paid out in cash over the next year. We expect to fund these future payments with available and cash flow provided by operations.

Contractual Obligations

 

As of July 3, 2009, we had contractual cash obligations for repayment of short-term debt and related interest, purchase obligations to acquire goods and services, payments for operating lease commitments, a capital lease obligation 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. Cash payments due under these contractual obligations are estimated as follows:

 

 

 

 

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 tenders and contracts to provide products and services to customers. As of July 3, 2009, we had commercial commitments on outstanding surety bonds, standby letters of credit, guarantees and other arrangements, as follows:

 

 

We currently believe that existing cash, cash equivalents, short-term investments, funds generated from operations and access to our credit facility will be sufficient to provide for our anticipated requirements for working capital and capital expenditures for the next 12 months and the foreseeable future.

 

There can be no assurance, however, that our business will generate cash flow, or that anticipated operational improvements will be achieved. If we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations, we may be required to sell assets, reduce capital expenditures, or obtain financing. If we need to obtain additional financing, we cannot be assured that it will be available on favorable terms, or at all. Our ability to make scheduled principal payments or pay interest on or refinance any future indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the microwave communications market and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

Off-Balance Sheet Arrangements

 

In accordance with the definition under SEC rules (Item 303(a) (4) (ii) of Regulation S-K), any of the following qualify as off-balance sheet arrangements:

 

 

Currently we are not participating in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities, and we do not have any material retained or contingent interest in assets as defined above. As of July 3, 2009, we did not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. In addition, we are not currently a party to any related party transactions that materially affect our results of operations, cash flows or financial condition.

 

Due to our downsizing of certain operations pursuant to acquisitions, restructuring plans or otherwise, certain properties leased by us have been sublet to third parties. In the event any of these third parties vacate any of these premises, we would be legally obligated under master lease arrangements. We believe that the financial risk of default by such sublessors is individually and in the aggregate not material to our financial position, results of operations or cash flows.

 

Financial Risk Management

 

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 are exposed to global market risks, including the effect of changes in foreign currency exchange rates, and use derivatives to manage financial exposures that occur in the normal course of business. We do not hold nor issue derivatives for trading purposes.

 

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to either specific firm commitments or forecasted transactions. We also enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions are recognized immediately in cost of external product sales on the consolidated statements of operations together with the transaction gain or loss from the hedged balance sheet position.

 

Substantially all derivatives outstanding as of July 3, 2009 are designated as cash flow hedges or non-designated hedges of recorded balance sheet positions. All derivatives are recognized on the balance sheet at their fair value. The total notional amount of outstanding derivatives as of July 3, 2009 was $74.9 million, of which $9.7 million were designated as cash flow hedges and $65.2 million were not designated as cash flow hedging instruments.

 

A 10% adverse change in currency exchange rates for our foreign currency derivatives held as of July 3, 2009 would have an impact of approximately $4.6 million on the fair value of such instruments. This quantification of exposure to the market risk associated with foreign exchange financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments.

 

As of July 3, 2009, we had 40 foreign currency forward contracts outstanding with a total net notional amount of $29.2 million consisting of 14 different currencies, primarily the Australian dollar, Canadian dollar, Euro and