UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
(Mark One)
|
| |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 29, 2007
or
| | | For the fiscal year ended June 30, 2017 or |
o | ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33278
HARRIS STRATEXAVIAT NETWORKS, INC.
(Exact name of registrant as specified in its charter)
|
| | |
| Delaware | | 20-5961564 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
incorporation or organization)860 N. McCarthy Blvd., Suite 200, Milpitas, California | | 95035 |
| | |
637 Davis Drive | | 27560 |
Morrisville, North Carolina | | (Zip Code) |
| (Address of principal executive offices) | | (Zip Code) |
offices) | | |
Securities registered pursuant to Section 12(b) of the Act:Registrant’s telephone number, including area code: (408) 941-7100
| | Securities registered pursuant to Section 12(b) of the Act: |
| Title of Each Class | | Name of Each Exchange on Which Registered |
| | |
Class A Common Stock, par value $0.01 per share Preferred Shares Purchase Rights | | The NASDAQ StockGlobal Select Market LLC |
Class B Common Stock, par value $0.01 per share | | None |
Warrants | | None |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþx
Indicate by check mark whether the registrant (l)(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.þx
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):
|
| | | | | | |
| Large accelerated filer | o | | Accelerated filero | o |
Non-accelerated filerþ | | Smaller reporting companyox
|
| | | | (Do (Do not check if a smaller reporting company) | | Smaller reporting company | o |
| Emerging growth company | o | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþx
As of December 29, 2006, the last business day of our most recently completed second fiscal quarter, our Class A Common Stock was not listed on any exchange or over-the-counter market. Our Class A Common Stock began trading on the NASDAQ Global Market on January 30, 2007. As of June 29, 2007,2016, the aggregate market value of the registrant’s Class A Common Stockcommon stock held by non-affiliates was approximately $450,097,000.$46.0 million. For purposes of this calculation, the registrant has assumed that its directors, executive officers and holders of 5% or more of the outstanding common stock are affiliates.
As of September 27, 2017, there was 5,317,957 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
AVIAT NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K/A
For the Fiscal Year Ended June 30, 2017
Table of Contents
Class |
| | |
| EXPLANATORY NOTE | |
| |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | Shares Outstanding as of August 14, 2007 | |
| Item 14. | | |
| | | |
Class A Common Stock, par value $0.01 per share | | 25,455,168 |
Class B Common Stock, par value $0.01 per share | | 32,913,377 |
Total shares of common stock outstanding | | 58,368,545 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this “Amendment”) supplements our Annual Report on Form 10-K for the Annual Meeting of Shareholders scheduled to be held November 14, 2007,fiscal year ended June 30, 2017, which will bewe filed with the Securities and Exchange Commission within 120 days after(“SEC”) on September 6, 2017 (the “Original Form 10-K”). We are filing this Amendment to provide the endinformation required by Items 10, 11, 12, 13 and 14 of the registrant’s fiscal year ended June 29, 2007, are incorporated by reference into Part III of Form 10-K.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Annual Report onAmendment.
Except as stated herein, this Amendment does not reflect events occurring after the filing of the Original Form 10-K to the extent described therein.
EXPLANATORY NOTE
We have restated our annual consolidated financial statements for the years ended June 29, 2007, June 30, 2006 and July 1, 2005no attempt has been made in this Amendment to modify or update other disclosures as presented in the Original Form 10-K. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K (“and our other filings with the SEC.
Unless indicated otherwise, throughout this Amendment, we refer to Aviat Networks, Inc. and its consolidated subsidiaries as “the Company,” “AVNW,” “Aviat Networks,” “Aviat”, “we,” “us” and “our”.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
Information regarding our executive officers appears in Part I, Item 1 of the Original Form 10-K/A”10-K.
Board Members
The authorized size of the Board of Directors (the “Board”) is currently six. Directors are nominated by the Governance and Nominating Committee of the Board.
The following are the current members of the Board:
|
| | |
| Name | | Title and Positions |
| John Mutch | | Director, Chairman of the Board |
| Wayne Barr Jr. | | Director |
| Kenneth Kong | | Director |
| Michael A. Pangia | | Director, President and Chief Executive Officer |
| John J. Quicke | | Director |
| Dr. James C. Stoffel | | Director |
The Board has determined that each of our current directors except Mr. Pangia has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is otherwise independent in accordance with listing rules of the NASDAQ Stock Market (the “NASDAQ Listing Rules”).
All of our directors are requested to attend our annual meetings of stockholders. Five of our directors serving at the time of our 2016 Annual Meeting attended either in person or via telephone.
Board and Committee Meetings and Attendance
In fiscal year 2017, the Board held ten meetings. Each of the Board members attended at least 90% of the Board meetings and at least 83% of the total number of meetings of the committee or committees on which the member served.
Board Member Qualifications
Our Board believes that its members should encompass a range of talents, skills and expertise, which enables the Board to provide sound guidance with respect to the Company’s operations and interest. Our Board prefers a variety of professional experiences and backgrounds among its members. In addition to considering a candidate’s experiences and background, candidates are reviewed in the context of the current composition of the Board and evolving needs of our businesses. In particular, the Board has sought to include members that have experience in establishing, growing and leading communications companies in senior management positions and serving on the board of directors of other companies. In determining that each of the members of the Board is qualified to be a director, the Board has relied on the attributes listed below and, where applicable, on the direct personal knowledge of each of the members’ prior service on the Board.
Our bylaws provide that a director may not be older than 75 years of age on the date of his or her election or appointment to the Board unless otherwise specifically approved by a resolution passed by the Board.
Directors’ Biographies
The following is a brief description of the business experience and background of each nominee for director, including the capacities in which each has served during at least the past five years:
Mr. John Mutch, age 61, currently serves as Chairman of the Board and has served on the Board since January 2015. He served on the Board of Directors of Steel Excel Inc. (“Steel Excel”), a provider of drilling and production services to the oil and gas industry and a provider of event-based sports services and other health-related services, from 2007 to 2016. From December 2008 to January 2014, he served as Chairman of the Board of Directors and Chief Executive Officer of Beyondtrust Software, a privately-held security software company. Mr. Mutch has been the founder and managing partner of MV Advisors LLC (“MV Advisors”), a strategic block
investment firm that provides focused investment and strategic guidance to small and mid-cap technology companies, since December 2005. Prior to founding MV Advisors, in March 2003, Mr. Mutch was appointed by the U.S. Bankruptcy court to the Board of Directors of Peregrine Systems, Inc. (“Peregrine Systems”), a provider of enterprise asset and service management solutions. He assisted that company in a bankruptcy work-out proceeding and was named President and Chief Executive Officer in July 2003. Previous to running Peregrine Systems, Mr. Mutch served as President, Chief Executive Officer and a director of HNC Software, an enterprise analytics software provider. Before HNC Software, Mr. Mutch spent seven years at Microsoft Corporation in a variety of executive sales and marketing positions. Mr. Mutch previously served on the Boards of Directors of Phoenix Technologies Ltd., a leader in core systems software products, services and embedded technologies, Edgar Online, Inc., a provider of financial data, analytics and disclosure management solutions, Aspyra, Inc., a provider of clinical and diagnostic information systems for the year endedhealthcare industry, Overland Storage, Inc., a provider of unified data management and data protection solutions, and Brio Software, Inc., a provider of business intelligence software. He has served as a director at Agilysys, Inc., a provider of information technology solutions, since March 2009. As of April 2017, Mr. Mutch is serving as a director at Maxwell Technologies, Inc., a manufacturer of energy storage and power delivery solutions for automotive, heavy transportation, renewable energy, backup power, wireless communications and industrial and consumer electronics applications, and as of July 2017 he is serving as a director at YuMe, Inc., a provider of digital video brand advertising solutions.
Mr. Mutch brings to the Board extensive experience as an executive in the technology sector. He also has experience as a director at several public companies in the technology sector. He is or has been a member of the audit committee of various public and private companies, and brings valuable financial expertise to the Board.
Mr. Wayne Barr, Jr., age 53, has served as a member of the Board since November 2016. Mr. Barr is currently the chairman of the board of directors of Concurrent Computer Corporation, a global software and solutions company (NASDAQ: CCUR), a position he has held since July 2017. He has served on the Concurrent board since August 2016 and serves on the compensation committee and nominating committee and is chairman of the audit committee of the Concurrent board. Mr. Barr also serves on the board of directors of HC2 Holdings, Inc. (“HC2”), a diversified holding company, a position he has held since January 2014. From January 2014 until July 2016, Mr. Barr served on the Audit Committee (chairman), Compensation Committee and Nominating and Governance Committee of the HC2 Board of Directors. Mr. Barr also serves as a director of four HC2 private portfolio companies. Mr. Barr has also served as the Managing Director of Alliance Group of NC, LLC, a full-service real estate brokerage firm in Raleigh, NC since January 2013, and as the Principal of Oakleaf Consulting Group LLC, a management consulting firm focusing on technology and telecommunications companies, since he founded the company in 2001. He previously served as a founder and President of Capital & Technology Advisors, Inc. from October 2003 until 2006 and served as Senior Managing Director of Communication Technology Advisors LLC from May 2001 to June 29, 2007.2005. From 1999 until 2001, Mr. Barr was a member of TechOne Capital Group, a private investment firm. From 1995 until 1999, Mr. Barr served as an Associate General Counsel of CAI Wireless Systems Inc., which was acquired by WorldCom Inc. in August 1999. He began his career as an attorney in private practice. Mr. Barr is a director of IoSat Holdings Ltd., a private satellite services provider. Mr. Barr was a director of Evident Technologies Inc. from 2005 until 2016, and has served on the Boards of Directors of Globix Corporation from 2004 to 2005, Anacomp from 2002 to 2003, Leap Wireless International Inc. from 2003 to 2004 and NEON Communications Group, Inc. in 2005.
Mr. Barr brings to the Board his extensive experience as a senior executive and a member of various boards of directors.
Mr. Kenneth Kong, age 43, has served as a member of the Board since November 2016. He is a Senior Vice President at Steel Services, Ltd. (“Steel Services”), a management and advisory company that provides management services to Steel Partners Holdings, L.P. and its affiliates. As an investment professional at Steel Services, Mr. Kong sources and analyzes investment opportunities in publicly traded securities in a diverse number of industries. He is also a member of the Mergers and Acquisitions team at Steel Services focused on deal sourcing, due diligence and analysis. Since joining the firm in 1997 as an investment analyst, Mr. Kong also performed in various key positions in managing investor relations, marketing and administration for Steel Partners II, L.P., Steel Partners Japan Strategic Fund, L.P. and Steel Partners China Access I, L.P. From 2006 to 2016, he managed Steel Partners China Access I, L.P., a private investment fund focused on investing in publicly listed state-owned enterprises in the People’s Republic of China. Mr. Kong currently serves as a Trustee BNS Holding Liquidating Trust, Inc. since 2012 and as a Director of Ore Holdings, Inc. since October 2010. Additionally, he has served as a Director on several private companies.
Mr. Kong’s brings to the Board an extensive knowledge of capital allocation and related matters.
Mr. Michael A Pangia, age 56, has been our President and CEO and a member of the Board since July 2011. From March 2009 to July 2011, he served as our Chief Sales Officer where he was responsible for company-wide operations of the Global Sales and Services organization. Prior to joining Aviat, Mr. Pangia served as senior vice president, Global Sales Operations and Strategy, at Nortel, where he was responsible for all operational aspects of the Global Sales function. Prior to that, he was president of Nortel’s Asia region, where his key responsibilities included sales and overall business management for all countries in the region where Nortel did business.
Mr. Pangia’s current and prior service as a senior executive officer with large technology driven companies with international operations provide him with an extensive knowledge base of complex management, financial, operational and governance issues faced
by public companies with global operations. He also brings a high level of financial literacy to the Board through both formal education and over 15 years’ experience in multiple finance functional areas, including cost accounting, financial planning and analysis, and mergers and acquisitions.
Mr. John J. Quicke, age 68, has served as a member of the Board since January 2015. Mr. Quicke has served as a director of Rowan Companies, plc, an offshore contract drilling company, since January 2009. Since January 2016, he has served as a consultant, and as Chairman, of Steel Energy Services LTD, a subsidiary of Steel Partners Holdings, L.P.. He served on the Board of Directors of Steel Excel, Inc. (“Steel Excel”) from 2007 to July 2016, and served as its Interim President and Chief Executive Officer from January 2010 to March 2013. In March 2013, he was named President and Chief Executive Officer of Steel Excel’s Steel Energy segment and served in that capacity until December 2015. Mr. Quicke served as Managing Director and operating partner of Steel Partners LLC, a subsidiary of Steel Partners Holdings L.P. from September 2005 until December 2015. Mr. Quicke has been associated with Steel Partners and its affiliates since September 2005. Previously, Mr. Quicke served in various capacities at Sequa Corporation, a diversified manufacturer, including Vice Chairman and Executive Officer, President, and as a director of the company. Mr. Quicke previously served as a Vice President and director of Handy & Harman Ltd. (“H&H”), director, President and Chief Executive Officer of DGT Holdings Corp. and as a director of Angelica Corporation, a provider of health care linen management services, Layne Christensen Company, a global solutions provider for essential natural resources, NOVT Corporation, a vascular brachytherapy business, JPS Industries, Inc., a manufacturer of mechanically formed glass and aramid substrate materials for specialty applications and H&H.
Mr. Quicke’s extensive experience, including board service on ten public companies over 20 years, over 25 years of significant operating experience, which includes participation in acquisition and disposition transactions, as well as his financial and accounting expertise, enable him to assist in the effective management of the Company.
Dr. James C. Stoffel, age 71, has served as a member of the Board since January 2007 and a lead independent director from July 2010 to February 2015. Presently, Dr. Stoffel is on the Board of Directors of Harris Corporation, of which he has been a member since August 2003, and is also a member of its Corporate Governance Committee. Additionally, since 2006 he has served as General Partner of Trillium International, LLC, a private equity company, and is a senior advisor to other private equity companies. He also serves on the boards of the following privately held companies: Display Data, Omni-ID Ltd., Quintel Ltd., and Intrinsiq Ltd. Prior to his retirement, Dr. Stoffel was Senior Vice President, Chief Technical Officer and Director of Research and Development of Eastman Kodak Company (“Kodak”). He held this position from 2000 to April 2005. He joined Kodak in 1997 as Vice President and Director, Electronic Imaging Products Research and Development, and became Director of Research and Engineering in 1998. Prior to joining Kodak, he was with Xerox Corporation (“Xerox”), where he began his career in 1972. His most recent position with Xerox was Vice President, Corporate Research and Technology. Dr. Stoffel serves on the Advisory Board for Research and Graduate Studies at the University of Notre Dame.
Dr. Stoffel’s prior service as a senior executive of large, publicly traded, technology driven companies, and his more than 30 years’ experience focused on technology development, provide him with an extensive knowledge of the complex technical research and development, management, financial and governance issues faced by a public company with international operations. This Form 10-K/Aexperience brings our Board important knowledge and expertise related to research and development, new product introductions, strategic planning, manufacturing, operations and corporate finance. His experience as an advisor to private equity firms also reflectsprovides him with additional knowledge related to strategic planning, capital raising, mergers and acquisitions and economic analysis. Dr. Stoffel also has gained an understanding of public company governance and executive compensation through his service on public company boards, including as a lead independent director.
Board Leadership
The Board does not have a policy regarding the restatementseparation of Item 6 “Selected Financial Data”the roles of CEO and Item 7 “Management’s Discussion and AnalysisChairman of Financial Condition and Resultsthe Board as the Board believes that it is in the best interests of Operations (Restated)”the Company for the fiscal years ended June 29, 2007, June 30, 2006, July 1, 2005Board to make that determination based on the position and July 2, 2004.direction of the Company and the membership of the Board. The members of the Board possess considerable experience and unique knowledge of the challenges and opportunities that the Company faces, and are in the best position to evaluate the needs of the Company and how to best organize the capabilities of the directors and management to meet those needs.
Previously filed (i) annual consolidated financial statementsWhen the CEO also serves as Chairman of the Board, our Corporate Governance Guidelines provide for the fiscal years ended June 29, 2007, June 30, 2006appointment of a lead independent director.
The Board has determined that having Mr. Mutch serve as Chairman is in the best interest of the Company at this time. This structure ensures a greater role for the independent directors in the oversight of the Company and July 1, 2005 includedactive participation of the independent directors in setting agendas and establishing Board priorities and procedures, and is useful in establishing a system of corporate checks and balances. Separating the Chairman position from the CEO position allows the CEO to focus on setting the strategic direction of the Company and the day-to-day leadership and performance of the Company, while the Chairman leads the Board in its role of, among other things, providing advice to, and overseeing the performance of, the CEO. In addition, managing the
Board can be a time-intensive responsibility, and this structure permits Mr. Pangia, our CEO, to focus on the management of the Company’s day-to-day operations.
The Board’s Role in Risk Oversight
Assessing and managing risk is the responsibility of the management of the Company. The Board, through the Governance and Nominating Committee, oversees and reviews certain aspects of the Company’s risk management efforts, focusing on the adequacy of the Company’s risk management and risk mitigation processes. At the Board’s request, management proposed a process for identifying, evaluating and monitoring material risks and such process has been approved by the Board and is currently in effect. This risk management program is overseen by senior management who, in connection with their regular review of the overall business, identify and prioritize a broad range of material risks (e.g., financial, strategic, compliance and operational). Senior management also discusses mitigation plans to address such material risks. Prioritized risks and management’s plans for mitigating such risks are regularly presented to the full Board for discussion and in order to ensure monitoring. In addition to the risk management program, the Board encourages management to promote a corporate culture that incorporates risk management into the Company’s corporate strategy and day-to-day business operations.
A discussion of risk factors in the Company’s Annual Reportcompensation design can be found below under the heading “Risk Considerations in Our Compensation Program.”
Principles of Corporate Governance, Bylaws and Other Governance Documents
The Board has adopted Corporate Governance Guidelines and other corporate governance documents that supplement certain provisions of our Bylaws and relate to, among other things, the composition, structure, interaction and operation of the Board. Some of the key governance features of our Corporate Governance Guidelines, Bylaws and other governance documents are summarized below.
Majority Voting in Director Elections. In an uncontested election of directors, to be elected to the Board, each nominee must receive the affirmative vote of shares representing a majority of the votes cast, meaning that the number of votes “FOR” a director nominee must exceed the number of votes “AGAINST” that director nominee.
Aviat’s Corporate Governance Guidelines provide that any director nominee in an uncontested election who does not receive a greater number of votes “FOR” his or her election than votes “AGAINST” such election must, promptly following certification of the stockholder vote, offer his or resignation to the Board for consideration in accordance with the following procedures. All of these procedures will be completed within 90 days following certification of the stockholder vote.
The Board, through its Qualified Independent Directors (as defined below), will evaluate the best interests of the Company and its stockholders and decide the action to be taken with respect to such offered resignation, which can include, without limitation: (i) accepting the resignation; (ii) accepting the resignation effective as of a future date not later than 180 days following certification of the stockholder vote; (iii) rejecting the resignation but addressing what the Qualified Independent Directors believe to be the underlying cause of the withhold votes; (iv) rejecting the resignation but resolving that the director will not be re-nominated in the future for election; or (v) rejecting the resignation.
In reaching their decision, the Qualified Independent Directors will consider all factors they deem relevant, including but not limited to: (i) any stated reasons why stockholders did not vote for such director; (ii) the extent to which the “AGAINST” votes exceed the votes “FOR” the election of the director and whether the “AGAINST” votes represent a majority of the outstanding shares of common stock; (iii) any alternatives for curing the underlying cause of the “AGAINST” votes; (iv) the director’s tenure; (v) the director’s qualifications; (vi) the director’s past and expected future contributions to the Company; (vii) the overall composition of the Board, including whether accepting the resignation would cause the Company to fail or potentially fail to comply with any applicable law, rule or regulation of the SEC or the NASDAQ Listing Rules; and (viii) whether such director’s continued service on Form 10-K (“Form 10-K”)the Board for a specified period of time is appropriate in light of current or anticipated events involving the Company.
Following the Board’s determination, the Company will, within four business days, disclose publicly in a document furnished or filed with the SEC the Board’s decision as to whether or not to accept the resignation offer. The disclosure will also include a description of the process by which the decision was reached, including, if applicable, the reason or reasons for rejecting the offered resignation.
A director who is required to offer his or her resignation in accordance with this policy may not be present during the deliberations or voting whether to accept his or her resignation or, except as otherwise provided below, a resignation offered by any other director in accordance with this policy. Prior to voting, the Qualified Independent Directors may afford the affected director an opportunity to provide any information or statement that he or she deems relevant.
For purposes of this policy, “Qualified Independent Directors” means all directors who (i) are independent directors (as defined in accordance with the NASDAQ Listing Rules) and (ii) are not required to offer their resignation in connection with an election in accordance with this policy. If there are fewer than three independent directors then serving on the Board who are not required to offer their resignations in accordance with this policy, then the Qualified Independent Directors means all of the independent directors, and each independent director who is required to offer his resignation in accordance with this policy must recuse himself from the deliberations and voting only with respect to his individual offer to resign.
All nominees for election as a director in an uncontested election are deemed to have agreed to abide by this policy and will offer to resign and will resign if requested to do so in accordance with this policy (and will if requested submit an irrevocable resignation letter, subject to this majority voting policy, as a condition to being nominated for election).
Prohibition Against Pledging Aviat Securities and Hedging Transactions. In accordance with Aviat’s Code of Conduct, directors and executive officers are prohibited from pledging Aviat securities and engaging in hedging transactions with respect to Aviat securities. Aviat specifically prohibits directors and executive officers from holding Aviat securities in any margin account for investment purposes or otherwise using Aviat securities as collateral for a loan. Such persons are also prohibited from purchasing certain instruments (including prepaid variable forward contracts, equity swaps, and collars) and engaging in transactions designed to hedge or offset any decrease in the value of Aviat securities.
Board Committees
The Board maintains an Audit Committee, a Compensation Committee and a Governance and Nominating Committee as its regular committees. Copies of the charters for the Audit Committee, the Compensation Committee and the Governance and Nominating Committee are available on our website at www.investors.aviatnetworks.com/documents.cfm.
The following table shows, at the conclusion of fiscal year ended June 29, 20072017, the Chairman and (ii) related reportsmembers of its independent registered public accountants should no longer be relied upon. This restatement also affects,each committee, the number of committee meetings held and is reflected in, other items in this
Form 10-K/A.the principal functions performed by each committee.
Specifically, we have restated our consolidated financial statements related to the following items:
§ |
| | | | | | |
| Committee | | ErrorsNumber of Meetings in project work in process inventory accounts within a costFiscal 2017 | | Members | | Principal Functions |
| Audit | | 8 | | John Mutch*
Wayne Barr. Jr
John Quicke | | • Selects our independent registered public accounting system at one location that resulted in project cost variances not being recorded tofirm • Reviews reports of our independent registered public accounting firm • Reviews and pre-approves the scope and cost of sales in a timely manner. |
|
§ | | Errors in the reconciliation of inventory and intercompany accounts receivable accounts which resulted in an overstatement of inventory and accounts receivable in prior years. |
|
§ | | Errors in prior years’ product warranty liability accruals which resulted in the improper exclusion of costs associated with technical assistance serviceall services, including all non-audit services, provided by the Company under its standard warranty policy.firm selected to conduct the audit• Monitors the effectiveness of the audit process • Reviews management’s assessment of the adequacy of financial reporting and operating controls • Monitors corporate compliance program |
The effect of these restatement items decreased shareholders’ equity cumulatively by $11.6 million and $7.7 million as of June 29, 2007 and June 30, 2006, respectively. In addition, the effect of these restatement items reduced shareholders’ equity by $4.9 million and $1.9 million as of July 1, 2005 and July 2, 2004, respectively. Division equity, which was reclassified to additional paid in capital at the merger date of January 26, 2007, deceased from the amount previously reported by $8.3 million. Net loss was increased by $3.9 million, $2.8 million, $3.0 million and $1.9 million for the fiscal years ended June 29, 2007, June 30, 2006, July 1, 2005 and July 2, 2004 respectively.
This restatement is more fully described in Part I herein under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)” and in Item 15 “Exhibits and Financial Statement Schedules” of Part IV of our consolidated financial statements and related notes, including, without limitation, in Note D “Restatement to Previously Issued Financial Statements” to such consolidated financial statements.
2
HARRIS STRATEX NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K/A
For the Fiscal Year Ended June 29, 2007
TABLE OF CONTENTS
This Annual Report on Form 10-K/A contains trademarks of Harris Stratex Networks, Inc.
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A, including “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated),” 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. 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 Form 10-K/A. 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, 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 Form 10-K/A or, in the case of any document incorporated by reference, the date of that document, and disclaim any obligation to do so.
The following are some of the factors we believe could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here also could adversely affect us, including those in “Item 1A. Risk Factors”:
| • | | The recent acquisition of Stratex could be difficult to integrate and we may fail to see the expected synergies between the combined companies. |
|
| | • | | We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures. |
|
| • | | We derive a substantial portion of our revenue from international operations and are subject to the risks of doing business in foreign countries, including fluctuations in foreign currency exchange rates. |
|
| • | | Our future success will depend on our ability to develop new products that achieve market acceptance. |
|
| • | | We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability. |
|
| • | | We have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties, including the diversion of management attention, difficulties in integration and a failure to realize expected synergies between the combined companies. |
|
| • | | The inability of our subcontractors to perform, or our key suppliers to deliver our components or products, could cause our products to be produced in an untimely or unsatisfactory manner. |
|
| • | | Third parties have claimed in the past and may claim in the future that we are infringing upon their intellectual property rights, and third parties may infringe upon our intellectual property rights. |
|
| • | | The outcome of litigation or arbitration in which we are involved is unpredictable and an adverse decision in any such matter could have a material adverse affect on our financial position and results of operations. |
|
| • | | We are subject to customer credit risk. |
|
| • | | Developing new technologies entails significant risks and uncertainties. |
|
| • | | We have significant operations in Florida that could be materially and adversely impacted in the event of a hurricane, and operations in California that could be materially and adversely impacted in the event of an earthquake. |
|
| • | | Changes in our effective tax rate may have an adverse effect on our results of operations. |
4
PART I.
Item 1.Business.
Harris Stratex Networks, Inc., together with its subsidiaries, is a leading global independent supplier of turnkey wireless network solutions and comprehensive network management software, backed by an extensive suite of professional services and support. As the market share leader in North America and a top-tier provider in international markets, we offer a broad portfolio of reliable, flexible, scalable and cost-efficient wireless network solutions, based on our innovative microwave radio systems and network management software. We serve all global markets, including mobile network operators, public safety agencies, private network operators, utility and transportation companies, government agencies and broadcasters. Customers in more than 135 countries depend on us to build, expand and upgrade their voice, data and video solutions and we are recognized around the world for innovative, best-in-class solutions and services.
Harris Stratex Networks, Inc. was 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. Our telephone number is (919) 767-3230. Our Internet address is www.harrisstratex.com. Our common stock is listed on the NASDAQ Global Market under the symbol HSTX. On August 1, 2007, we employed approximately 1,440 people. Unless the context otherwise requires, the terms “we,” “our,” “us,” “Company,” “HSTX” and “Harris Stratex” as used in this Annual Report on Form 10-K/A refer to Harris Stratex Networks, Inc. and its subsidiaries.
Acquisition of Stratex Networks, Inc. and Combination with MCD
On January 26, 2007, we completed our merger (the “Stratex acquisition”) with Stratex Networks, Inc. (“Stratex”) pursuant to a Formation, Contribution and Merger Agreement among Harris Corporation, Stratex, and Stratex Merger Corp., as amended and restated on December 18, 2006 and amended by letter agreement on January 26, 2007. In the transaction, Stratex Merger Corp., a wholly-owned subsidiary of the Company, merged with and into Stratex, with Stratex as the surviving corporation (renamed as “Harris Stratex Networks Operating Corporation”). Concurrently with the merger of Stratex and Stratex Merger Corp. (the “merger”), Harris Corporation contributed the Microwave Communications Division (“MCD”), along with $32.1 million in cash (comprised of $26.9 million contributed on January 26, 2007 and $5.2 million held by the Company’s international operating subsidiaries on January 26, 2007) to the Company (the “contribution transaction”).
Pursuant to the merger, each share of Stratex common stock was converted into one-fourth of a share of our Class A common stock, and a total of 24,782,153 shares of our Class A common stock were issued to the former holders of Stratex common stock. In the contribution transaction, Harris Corporation contributed the assets of MCD, along with $32.1 million in cash, and in exchange, we assumed certain liabilities of Harris Corporation related to MCD and issued 32,913,377 shares of our Class B common stock to Harris Corporation. As a result of these transactions, Harris Corporation owned approximately 57% and the former Stratex shareholders owned approximately 43% of our total outstanding stock immediately following the closing.
We completed the Stratex acquisition to create a leading global communications solutions company offering end-to-end wireless transmission solutions for mobile and fixed-wireless service providers and private networks.
The Stratex acquisition was accounted for as a purchase business combination. Total consideration paid by us was approximately $493.1 million as summarized in the following table (see Note E to consolidated financial statements):
| | | | | |
| | | January 26, | |
| Calculation of Allocable Purchase Price (In millions): | | 2007 | |
| Value of Harris Stratex Networks shares issued to Stratex Networks stockholders | | $ | 464.9 | |
| Value of Stratex Networks vested options assumed | | | 15.5 | |
| Acquisition costs | | | 12.7 | |
| | | | |
| Total allocable purchase price | | $ | 493.1 | |
| | | | |
5
Overview of Companies prior to the Business Combination
Stratex Networks, Inc.
Stratex Networks, Inc., formerly known as Digital Microwave Corporation and DMC Stratex Networks, Inc., was incorporated in California in 1984 and reincorporated in Delaware in 1987. In August 2002, Stratex changed its name from DMC Stratex Networks, Inc. to Stratex Networks, Inc. Stratex was a leading provider of innovative wireless transmission solutions to mobile wireless carriers and data access providers around the world. Its solutions also addressed the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. The company designed, manufactured and marketed a broad range of products that offered a wide range of transmission frequencies, ranging from 0.3 to 38 gigahertz (“GHz”), and a wide range of transmission capacities, typically ranging from 64 kilobits per second to 2xOC-3 or 311 megabits per second. In addition to product offerings, the company provided network planning, design and installation services and worked closely with its customers to optimize transmission networks.
Stratex had a long history of introducing innovative products into the telecommunications industry. Its newest product platform, Eclipsetm, which began shipping in January 2004, was one of the first wireless transmission platforms to combine a broad range of wireless transmission functions into one network processing node. This node contains many functions that previously had to be purchased separately from one or more equipment suppliers. Eclipse has the flexibility to increase transmission speeds and adjust capacity via software upgrades. It is designed to simplify complex networks and lower the total cost of ownership over the product life.
The sales of all of Stratex product lines were generated primarily through its worldwide direct sales force. The company also generated sales through base station suppliers, distributors and agents. It marketed its products directly to service providers directly, as well as indirectly through relationships with original equipment manufacturer (“OEM”) base station suppliers. Overall, Stratex had sold over 300,000 microwave radios prior to its merger with the Company, which have been installed in over 135 countries.
Harris Corporation’s Microwave Communications Division
MCD designed, manufactured and sold a broad range of microwave radios for use in worldwide wireless communications networks. Applications included wireless/mobile infrastructure connectivity; secure data networks; public safety transport for state, local and federal government users; and right-of-way connectivity for utilities, pipelines, railroads and industrial companies. In general, wireless networks are constructed using microwave radios and other equipment to connect cell sites, fixed-access facilities, switching systems, land mobile radio systems and other wireless transmission systems. For many applications, microwave systems offer a lower-cost, highly reliable alternative to competing transmission technologies such as fiber, coaxial cable or copper wire systems. MCD’s product line spanned frequencies from 2 to 38 GHz and included:
| • | | The TRuepoint® family of microwave radios.MCD’s next-generation microwave point-to-point radio platform, which provides Synchronous Digital Hierarchy (“SDH”) and Plesiochronous Digital Hierarchy (“PDH”) in a single platform and is designed to meet the current and future 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 and regulatory requirements. The software-based architecture enables transition between traditional microwave access applications and higher-capacity transport interconnections. The wide range of capacities, interfaces, modulation schemes, frequency/channel plans and power levels have been made available to meet the requirements of networks around the world. The TRuepoint product family delivered service from 4 to 180 megabits per second (“Mbps”) capacity at frequencies ranging from 6 to 38 GHz; |
|
| • | | The Constellation® medium-to-high-capacity family of point-to-point digital radios, operating in the 6, 7/8 and 10/11 GHz frequencies, designed for network applications and supporting both PDH and Synchronous Optical Network (“SONET”), the standard for digital transport over optical fiber in North American applications. Constellation radios are suited for wireless mobile carriers and private operators, including critical public safety networks; and |
|
| • | | MegaStar® high-capacity, carrier-class digital point-to-point radios, operating in the 5, 6, 7/8 and 11 GHz frequencies and designed to eliminate test equipment requirements, reduce network installation and operation costs, and conform to PDH, SONET and SDH standards. |
6
MCD provided turnkey microwave systems and service capabilities, offering complete network and systems engineering support and services, including planning, design and systems integration, site surveys and builds, deployment, management, training and customer service — the full range of services being a key competitive discriminator for MCD in the microwave radio industry.
MCD also offered a comprehensive network management system. Its NetBoss® integrated network management platform supports wireless, wireline and Internet service providers. NetBoss offers fault management, performance management, service activation, billing mediation and Operational Support System (“OSS”) integration in a modular, off-the-shelf solution designed for rapid deployment. The modularity of NetBoss enables customers to implement a comprehensive set of capabilities immediately or gradually, as their needs dictate. The newest offering in this product family is NetBoss EM, an element manager.
Principal customers for MCD’s products and services included domestic and international wireless/mobile service providers, original equipment manufacturers, as well as private network users such as public safety agencies, utilities, pipelines, railroads and other industrial enterprises. In general, MCD’s North American products and services were sold directly to customers through its sales organizations and established distribution channels. Internationally, MCD marketed and sold its products and services through regional sales offices and established distribution channels.
Overview of Integrated Company after the Business Combination
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 point-to-point digital microwave radio systems for mobile system access, backhaul, trunking and license-exempt applications, supporting new network deployments, network expansion, and capacity upgrades. We offer a broad range of products, including the products developed and sold by both Stratex and MCD. We deliver our products and services 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 is set forth on pages 50-53 of this Annual Report on Form 10-K/A.
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 operators and other government agencies, systems integrators, transportation and utility companies, and other private network operators within North America. A large part of our North American business is with the cellular backhaul and public safety segments.
Historically, and prior to the merger of Stratex and Harris MCD, the North America Microwave segment accounted for the most significant portion of our revenue. Because substantially all of Stratex’s revenue was in international markets, our North America segment revenue declined to approximately 43% of our total revenue for fiscal 2007. We generally sell products and services directly to our customers. We 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 operators, 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 is in supplying wireless segments in small-pocket, remote, rural and metropolitan areas. High-capacity backhaul is another major opportunity for us. We see the increase in subscriber density and the forecasted growth and introduction of new bandwidth-hungry 3G services as major drivers for growth is this market.
Our International Microwave segment represented approximately 53% of our revenue for fiscal 2007. The addition of Stratex business contributes significantly to our International Microwave segment, since approximately 95% of Stratex’s historical revenue was in international markets. We generally sell products and services directly to our customers. We use agents and distributors to sell some products and services in international markets.
7
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. Other element management product families include ProVision® and StarViewtm.
Our Network Operations segment represented approximately 4% of our revenue for fiscal 2007. We generally sell products and services directly to our customers. We use agents, resellers and distributors to sell some products and services in international markets.
Industry Background
Wireless transmission networks are constructed using microwave radios and other equipment to connect cell sites, switching systems, wireline transmission systems and other fixed access facilities. Wireless networks range in size from a single transmission link connecting two buildings to complex networks comprising of thousands of wireless connections. 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 slightly 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:
| • | | Increase in global wireless subscribers and minutes of use.The number of global wireless subscribers and minutes of use per subscriber are expected to continue to increase. The primary drivers include increased subscription, increased voice minutes of use per subscriber and the growing use by subscribers of data applications. Third generation, or “3G,” data applications have been introduced in developed countries and this has fueled an increase in minutes of data use. We believe that growth as a result of new data services will continue for the next several years. |
|
| • | | Increased establishment of mobile and fixed wireless telecommunications infrastructures in developing countries.In parts of the world, telecommunications services are inadequate or unreliable because of the lack of existing infrastructures. To service providers in developing countries seeking to increase the availability and quality of telecommunications and Internet access services, wireless solutions are an attractive alternative to the construction or leasing of wireline networks, given their relatively low cost and ease of deployment. As a result, there has been an increased establishment of mobile and fixed wireless telecommunications infrastructures in developing countries. Emerging telecommunications markets in Africa, Asia, the Middle East, Latin America and Eastern Europe are characterized by a need to build out basic telecommunications systems. |
|
| • | | Technological advances, particularly in the wireless telecommunications market.The demand for cellular telephone and other wireless services and devices continues to increase due to technological advances and increasing consumer demand for connectivity to data and voice services. New mobile-based services based upon third-generation wireless technology is also creating additional demand and growth in mobile networks and their associated infrastructure. The demand for fixed broadband access networks has also increased due to data transmission requirements resulting from Internet access demand. Similar to cellular telephone networks, wireless broadband access is typically less expensive to install and can be installed more rapidly than a wireline or fiber alternative. New and emerging services such as WiMAX are expected to expand over the next several years. Both WiMAX and new high-speed mobile-based technology can be used for a number of applications, including “last mile” broadband connections, hotspots and cellular backhaul, and high-speed enterprise connectivity for business. |
|
| • | | Global deregulation of telecommunications market and allocation of radio frequencies for broadband wireless access.Regulatory authorities in different jurisdictions allocate different portions of the radio frequency spectrum for various telecommunications services. Many countries have privatized the state-owned telecommunications monopoly and opened their markets to competitive network service providers. Often these providers choose a wireless transmission service, which causes an increase in the demand for transmission solutions. Such global deregulation of the telecommunications market and the related allocation of radio frequencies for broadband wireless access transmission have led to increased competition to supply wireless-based transmission systems. |
8
Other Global trends and developments in the microwave communications markets include:
| • | | Continuing fixed-line to mobile-line substitution; |
|
| • | | Private networks and public telecommunications operators building high-reliability, high-bandwidth networks that are more secure and better protected against natural and man-made disasters; |
|
| • | | Continuing global mobile operator consolidation; and |
|
| • | | An FCC network initiative in the U.S. The FCC has allocated 90 megahertz (“MHz”) of spectrum to Advanced Wireless Services (“AWS”) — 45 MHz in the 1710-1755 MHz (government) band and 45 MHz in the 2110-2155 MHz (commercial) band. Operators and federal agencies currently using these frequencies must move to another frequency to allow new entrants to use these frequencies for networks that deliver AWS services. This is a large opportunity for wireless transmission solution providers with extensive experience with frequency moves, as is the case with Harris Stratex Networks. |
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
Our objective is to enhance our position as a leading provider of innovative, high-value wireless transmission solutions for the worldwide mobile, network interconnection and broadband access markets. To achieve this objective, our strategy is to:
| • | | Continue to serve our existing customer base.As a combined company, we have sold more than 750,000 microwave radios in over 135 countries. Today, our sales are distributed about evenly between the United States and international markets, with the international segment growing at a faster rate. We intend to leverage our customer base, our longstanding presence in many countries, our distribution channels, our comprehensive product line and our turnkey solution capability to continue to sell existing and new products and services to current customers. |
|
| • | | Continue to grow our North America business.The North American market has been a traditional stronghold for MCD, and Harris Stratex Networks continues to be a clear leader in the U.S. wireless transmission market. We plan to continue our growth and leadership with innovative TRuepoint solutions for cellular backhaul, public safety, government, utilities, transportation and other market segments. Eclipse will play a growing role in cellular backhaul and in carrier Ethernet, a new type of networking using data links for all types of carrier services, including voice. |
|
| • | | Continue to grow our international business.We believe we are well-positioned to take advantage of worldwide market opportunities for wireless infrastructure to significantly grow our international business. We have a strong presence in Africa, as well as Europe, the Middle East and Russia, (“EMER”) and a growing presence in the Asia-Pacific region and South America. We plan to pursue opportunities in high-growth markets in all of these regions, leveraging our innovative products, full turnkey solution capability and professional services. Our new international headquarters in the Republic of Singapore (“Singapore ”) is now in operation as a base for our international business and a sales and service hub for the Asia-Pacific region, reflecting and supporting our growing focus on international markets. |
|
| • | | Continue to introduce innovative products that meet the needs of our customers.We have a long history of introducing innovative products into the telecommunications industry. Both Eclipse and TRuepoint offer high-value solutions to virtually every type of service provider or network operator. Eclipse offers a flexible, cost-efficient nodal solution that reduces external equipment requirements, while TRuepoint offers flexible, high-performance, high-reliability wireless networking for all global capacity and frequency requirements. |
9
| • | | Expand existing markets and explore new market opportunities.We intend to expand our presence in the mobile wireless market by exploiting market opportunities created by the growing number of global wireless subscribers, increasing global minutes of use, the continuing emergence of new services and the commitment of developing nations around the world to expand national infrastructure to all population areas via cost-efficient, rapidly installed microwave radio networks. We also intend to expand our market share in the emerging data business. In particular, carrier-grade Ethernet market opportunities are starting to emerge and Eclipse is ideally suited to meet those needs. |
|
| • | | Offer complete turnkey solutions.We plan to continue leveraging more than eight decades of microwave experience in the combined companies to offer industry-leading professional services, from network planning to site builds, system deployment and network monitoring. |
|
| • | | Deliver superior customer service.We intend to keep improving our industry-leading customer service organization to maximize our customers’ satisfaction with our solutions and loyalty to us as a solution provider. |
Solutions
Our solutions are designed to meet the various regional, operational and licensing needs of our wireless transmission customers. We provide turnkey microwave systems and service capabilities, offering complete civil engineering, network and systems engineering support and services — a key competitive differentiator for Harris Stratex Networks in the microwave radio industry. Our solutions offer the following benefits:
| • | | Broad product and solution portfolio.We offer a comprehensive line of wireless transmission solutions, consisting of various combinations of microwave digital radios, integrated ancillary equipment from Harris Stratex Networks or other manufacturers, network management systems and professional services. These solutions address a wide range of transmission frequencies, ranging from 2 to 38 GHz, and a wide range of transmission capacities, ranging from 64 kilobits per second to 311 megabits per second. Major product families include Eclipse, TRuepoint, MegaStar, Constellation, Auroratm, Velox LEtm, NetBoss and ProVision. |
|
| • | | Low total cost of ownership.Compared to prior-generation products, both Eclipse and TRuepoint offer a relatively low total cost of ownership, based on the combined costs of initial acquisition, installation and ongoing operation and maintenance. Multiple factors work to reduce cost of ownership. Both platforms reduce rack space and spare parts requirements. Installation, operation, upgrade and maintenance costs are also lower because of automated or simplified procedures and the smaller number of parts required to obtain the same functionality as previous generations. Products in both platforms have a longer life. |
|
| • | | Future-proof network.Eclipse and TRuepoint are designed to future-proof the network operator’s investment, via software-configurable capacity upgrades and plug-in modules that provide an easy migration path to emerging technologies, such as Internet Protocol (“IP”)-based networking. |
|
| • | | Flexible, easily configurable products.We intend to continue using standard design platforms, flexible architectures and chip designs and software configurable features. This design and manufacturing strategy allows us to offer our customers high-performance products with a high degree of flexibility and functionality, while shortening the time required for us to develop new configurations and capabilities. The software features of our products give our customers a greater degree of flexibility in installing, operating and maintaining their networks. Both Eclipse and TRuepoint are highly scalable and easily configurable through software, giving operators the ability to adapt to changing conditions with minimal cost and disruption and making it easier for them to plan and deploy their networks. |
|
| • | | Comprehensive network management.We offer a range of flexible network management solutions, from element management to enterprise-wide network management and service assurance — all optimized to work with Harris Stratex Networks’ wireless transmission systems. NetBoss is also offered as a stand-alone solution for a wide range of communications and information networking environments in virtually any industry. |
|
| • | | Complete professional services.In addition to our product offerings, we provide expert network planning and design, site surveys and builds, systems integration, installation, maintenance, network monitoring, training, customer service and many other professional services. Our services cover the entire evaluation, purchase, deployment and operational cycle and enable us to be one of the few complete turnkey solution providers in the industry. |
10
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 licensed (subject to local frequency licensing) and license-exempt (operating in license-exempt frequencies) point-to-point microwave radios and network management software.
Licensed Point-to-Point Microwave Radios
In general, wireless networks are constructed using microwave radios and other equipment to connect cell sites, fixed-access facilities, switching systems, land mobile radio systems and other communications systems. For many applications, microwave systems offer a lower-cost, highly reliable and more easily deployable alternative to competing wireline transmission media, such as fiber, copper or coaxial cable.
Our principal product families of licensed point-to-point microwave radios include Eclipse, a platform for nodal wireless transmission systems and TRuepoint, a platform for high-performance point-to-point wireless communications. Constellation and MegaStar continue to be significant product families used for high-capacity trunking applications both in U.S. and international markets.
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 (“INU”) 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.
With frequency coverage from 5 to 38 GHz, low-to-high capacity operation and traditional TDM and Ethernet transmission capabilities, Eclipse is designed to support a wide range of long and short haul applications. In fiscal year 2006, Eclipse added carrier-grade Ethernet support via Ethernet plug-in cards. Eclipse is software-configurable, enabling easy capacity upgrades, and gives users the ability to plan and deploy networks and adapt to changing conditions at minimum cost and disruption. It requires fewer parts and spares and less rack space than previous-generation product platforms.
TRuepoint
Our TRuepoint 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 and future 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 family continues our tradition of high-performance, high-reliability wireless networking. The TRuepoint 5000 provides full-featured access, backhaul and mid-capacity trunking. Currently in development and due for release in fiscal 2008, the TRuepoint 6000 provides very-high-capacity trunking and software-programmable features in an advanced 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, the standard for high-speed networking in North American and international markets, and SONET, the standard for digital transport over optical fiber in North American applications. Constellation radios are suited for wireless mobile carriers and private operators, including critical public safety networks.
11
MegaStar
Our MegaStar family of very-high-capacity, N for 1, carrier-class digital point-to-point radios operates in the 5, 6, 7/8 and 11 GHz frequencies. MegaStar radios are designed to eliminate test equipment requirements, reduce network installation and operation costs, and conform to PDH, SONET and SDH standards.
License-Exempt Point-to-Point Microwave Radios
Harris Stratex Networks offers two license-exempt product families — Aurora and Velox LE. Both provide wireless interconnection for wireless access, cellular backhaul, Internet service, local and wide area networking and emergency response communications systems. Both enable network operators to deploy wireless transmission systems rapidly, reliably and cost-efficiently, while avoiding costly, time-consuming frequency coordination and licensing.
Velox LE
Velox LE license-exempt radios operate in the 2.4 and 5.8 GHz license-exempt frequency bands and offer wireless service in 1, 2, 4 or 8 T1/E1 configurations. Velox LE provides support for high-speed data and voice.
Network Management
Our network management product families include NetBoss, ProVision and StarView. 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 XE offers advanced element management. NetBoss products are optimized to work seamlessly with Harris Stratex Networks digital microwave radios, such as the TRuepoint family, but can also 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 optimized for Eclipse and TRuepoint products. Available as a Windows or UNIX-based platform, it can support small network systems as well as large networks of up to 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.
StarView
StarView provides comprehensive element management for Harris Stratex Networks and other microwave radio products based on the SNMP protocol. It can manage almost any network topology.
Business Factors
A number of business factors support or affect our overall performance, including sales, marketing and service, manufacturing, order backlog, customer base, our competition, research, development and engineering, patents and intellectual property, regulatory, supply chain and environmental issues and our employee base.
12
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, Argentina and Brazil in Central and South America; Croatia, France, Germany, Poland, Portugal and the United Kingdom in Europe; Kenya, Nigeria 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 OEM 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. In addition, we opened our international headquarters in Singapore on June 20, 2007, with plans to provide 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. We generally offer a conditional warranty for all customers on all of our products.
Manufacturing
We employ a dual strategy of manufacturing our own products and using outsourced contract manufacturers. Some products, such as TRuepoint, Constellation and MegaStar, are manufactured at our facilities in San Antonio, Texas and the People’s Republic of China. For Eclipse products, we have outsourced the majority of our manufacturing operations to Benchmark Electronics (“Benchmark”) in Thailand, Microelectronics Technology Inc. (“MTI”) in Taiwan and China and to GPC Electronics in Australia. We have retained product design and research and development functions for all of our products.
Although we outsource Eclipse product manufacturing, we maintain manufacturing support facilities in San Jose, California and Wellington, New Zealand, mainly focused on system testing and quality management. Our 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
The backlog of unfilled orders was $232 million at July 27, 2007, compared with $164 million at July 28, 2006. Substantially all of this backlog is expected to be filled during fiscal 2008, but we can give no assurance of such fulfillment. Our backlog at July 27, 2007 includes $68 million from our Stratex acquisition. 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.
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 2006, but not during fiscal 2007 or fiscal 2005. During fiscal 2006, VMobile Nigeria accounted for 15.1% of total revenue. 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. 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.
13
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.
Non-U.S. Business
Our revenue in fiscal 2007 from products exported from the U.S. or manufactured abroad was $339.2 million (67% of our revenue), compared with $196.8 million (55% of our revenue) in fiscal 2006 and $157.4 million (51% of our revenue) in fiscal 2005. These sales include both direct exports from the U.S. and sales from international subsidiaries. Most of these sales are derived from our International Microwave segment. Direct export sales are primarily denominated in U.S. dollars, whereas sales from international subsidiaries are generally denominated in the local currency of the subsidiary. Exports from the U.S., principally to Africa, Canada, Europe, Asia and South and Central America, totaled $214.3 million (63% of our non-U.S. revenue) in fiscal 2007, $85.1 million (43% of our non-U.S. revenue) in fiscal 2006 and $49.8 million (32% of our non-U.S. revenue) in fiscal 2005. Operations conducted in local international currencies represented 19% of our revenue in fiscal 2007, 20% of our revenue in fiscal 2006 and 34% of our revenue in fiscal 2005. Non-U.S. operations represented 61% of our long-lived assets as of June 29, 2007 and 57% of long-lived assets as of June 30, 2006.
Non-U.S. 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. During fiscal 2007, revenue from indirect sales channels represented 11% of our total revenue and 16% of our non-U.S. revenue, compared to revenue from indirect sales channels in fiscal 2006 representing 5% of our total revenue and 6% of our non-U.S. revenue.
Fiscal 2007 revenue came from customers in a large number of international countries. Other than Nigeria, 10.9%, and Canada, 7.8%, no single country accounted for 5% or more of our total revenue. Most of our exports are paid for by letters of credit, with the balance carried either on an open account or installment note basis. Advance payments, progress payments or other similar payments received prior to, or upon shipment often cover most of the related costs incurred. In addition, significant international government contracts generally require us to provide performance guarantees. In order to stay competitive in international markets, we also enter into recourse and vendor financing to facilitate sales to certain customers.
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/A.
Competition
The wireless access, backhaul and interconnection business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We operate in highly competitive markets that are sensitive to technological advances. 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. Although successful product and systems development is not necessarily dependent on substantial financial resources, many of our competitors are 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.
14
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 our network and systems engineering support and service are key competitive strengths for us. However, customers may make decisions based on factors including price and past relationships.
Our principal existing and potential competitors include established companies such as Alcatel-Lucent, Eltek ASA, Ericsson, NEC and Nokia Siemens Networks, as well as a number of other smaller public and private companies 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. Some of our competitors have product lines that compete with ours.
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.
Our research, development and engineering expenditures totaled approximately $39.4 million or 7.8% of revenue in fiscal 2007 and $28.8 million or 8.1% of revenue in fiscal 2006.
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 TRuepoint, Eclipse and NetBoss product lines.
We maintain an engineering and new product development department, with scientific assistance provided by advanced-technology departments. As of June 29, 2007, we employed a total of approximately 225 people in our research and development organizations in Morrisville, North Carolina; San Jose, California; Wellington, New Zealand; and Montreal, Canada.
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 June 29, 2007, we held 93 U.S. patents and 70 international patents, and had 35 U.S. patent applications pending and 59 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 may 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, 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.
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.
15
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.
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 June 29, 2007, we employed approximately 1,440 people, compared with approximately 1,050 people at the end of fiscal 2006. The increase was due primarily to the Stratex acquisition (Stratex employed 453 people as of March 2006), partially offset by positions eliminated in our restructuring activities. Approximately 800 of our employees are located in the U.S. We also utilize a number of independent contractors. 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.
16
Web site Access to Harris Stratex Networks Reports; Available Information
General.We maintain an Internet Web site at http://www.harrisstratex.com/. Our annual reports on Form 10-K/A, 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”).
We will also provide the reports in electronic or paper form free of charge upon request. Our Web site and the information posted thereon are not incorporated into this Annual Report on Form 10-K/A or any other report that we file with or furnish to the SEC. 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 (Restated).”
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, Nominating Committee, Audit Committee and Corporate Governance 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.
Harris Stratex Networks, Inc. was incorporated in the State of Delaware in October, 2006.
Item 1A.Risk Factors.
As indicated above in this Annual Report on Form 10-K/A under “Cautionary Statement Regarding 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; new products, services or developments; trends in revenue; future economic conditions, performance or outlook; the outcome of contingencies; the value of our contract awards; beliefs or expectations; and assumptions underlying any of the foregoing. These statements reflect the current beliefs, expectations, estimates, forecasts or intent of our management and are subject to and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. In addition to the risks described elsewhere in this Annual Report on Form 10-K/A 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/A and our other public filings.
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.
Risks Related to our Merger with Stratex
Our merger with Stratex created numerous risks and uncertainties which could adversely affect our operating results.
Strategic transactions like our merger with Stratex create numerous uncertainties and risks. Harris MCD has transitioned from being a division of Harris to being a stand-alone company, Harris Stratex. Both Stratex and Harris MCD are transitioning from being smaller companies to being a larger company, Harris Stratex. This merger entails many changes, including the integration of personnel from Harris MCD and Stratex and changes in systems and employee benefits plans. These transition activities are complex, and we may encounter unexpected difficulties or incur unexpected costs, including:
17
| • | | the diversion of management’s attention to integration matters; |
|
| • | | difficulties in achieving expected cost savings associated with the transaction; |
|
| • | | difficulties in the integration of operations and systems; |
|
| • | | difficulties in the assimilation of employees; |
|
| • | | difficulties in replacing the support functions currently provided by Harris to us, including support and assistance for financial, operational and information technology functions; |
|
| • | | challenges in keeping existing customers and obtaining new customers; and |
|
| • | | challenges in attracting and retaining key personnel. |
As a result, we may not be able to realize the expected revenue growth and other benefits that we seek to achieve from the combination with Stratex. In addition, we may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of our business, production and services.
Uncertainties associated with the merger may cause us to lose significant customers.
In response to our merger with Stratex, or due to the diversion of our attention, current and potential customers may delay or defer decisions concerning their use of our products and services. We have not experienced significant contract terminations or other loss of business due to the merger. However, if our customers elect to terminate their contracts, the financial condition of the combined company may be materially and adversely affected.
Loss of key personnel could lead to loss of customers and a decline in revenue, or otherwise adversely affect our operations.
The success of the merger will depend in part upon our ability to retain key employees. Competition for qualified personnel in the microwave communications industry is intense. In addition, key employees may depart because of issues relating to the difficulty of or uncertainty regarding the integration of the businesses or because of uncertainties relating to their future compensation and benefits. If we are unable to attract and retain qualified individuals or if our costs to do so increase significantly, our business could be adversely affected.
Risks Related to the Relationship between Harris and Us
We are and will continue to be controlled by Harris, whose interests may conflict with ours.
Harris owns no shares of our Class A common stock but all of the outstanding shares of our Class B common stock, through which it holds an approximate 57% interest of our outstanding equity which gives it approximately 57% of the voting power represented by our outstanding common stock. In addition, Harris has the right to appoint separately, as a class, five of our nine directors as long as the shares of our common stock held by Harris entitle Harris to cast a majority of the votes at an election of our directors (other than those directors appointed by Harris separately as a class). Harris also votes, along with our Class A stockholder, in the election of the four remaining directors, and as the holder of approximately 57% of our outstanding common shares holds a majority of the shares eligible to vote. In the election of the four remaining directors, Harris has agreed to vote for the persons nominated for such positions by our Nominating Committee, which is composed entirely of directors not appointed by Harris. For two years from January 26, 2007, Harris has agreed that it will not acquire or dispose of beneficial ownership in shares of our common stock, except under limited circumstances, and has no obligation to dispose of its interest in us following such two-year period. Accordingly, Harris is likely to continue to exercise significant influence over our business policies and affairs, including the composition of our board of directors and any action requiring the approval of our shareholders. The concentration of ownership also may make some transactions, including mergers or other changes in control, more difficult or impossible without the support of Harris. Harris interests may conflict with your interests as a shareholder. As a result, your ability to influence the outcome of matters requiring shareholder approval will be limited.
As the only holder of our outstanding Class B common stock, Harris has the unilateral right to elect, remove and replace, at any time, a majority of our board of directors, so long as the members elected, removed or replaced by Harris satisfy the requirements agreed to by the Company and Harris as set forth in an investor agreement entered into at the time of the Stratex acquisition. More specifically, Harris has agreed that, so long as it holds a majority of our voting common stock, it will have the right to appoint five of our nine
18
directors and, until January 26, 2009, at least one of the Harris directors will meet the NASDAQ independence standards for audit committee members and at least one other Harris director will not be an employee of Harris or any of its subsidiaries (other than Harris Stratex or our subsidiaries). After January 26, 2009, Harris will be able to elect or replace all the Harris directors without regard to their relationship with Harris.
Harris has rights reflecting its controlling interest in our company. As a result, the ability of non-Harris stockholders to influence the outcome of matters requiring stockholder approval will be limited.
Harris’ right to vote a majority of our outstanding voting stock enables it to control decisions without the consent of our other stockholders, including among others, with respect to:
| • | | our business direction and policies; |
|
| • | | mergers or other business combinations, except until January 26, 2009; |
|
| • | | the acquisition or disposition of assets; |
|
| • | | the payment or nonpayment of dividends; |
|
| • | | determinations with respect to tax returns; |
|
| • | | our capital structure; and |
|
| • | | amendments to our certificate of incorporation and bylaws. |
In addition to the effects described above, Harris’ control position could make it more difficult for us to raise capital or make acquisitions by issuing our capital stock. This concentrated ownership also might delay or prevent a change in control and may impede or prevent transactions in which our stockholders might otherwise receive a premium for their shares.
We may have potential conflicts of interest with Harris relating to our ongoing relationship, and because of Harris’ controlling ownership in us, the resolution of these conflicts may not be favorable to us.
Conflicts of interest may arise between us and Harris in a number of areas relating to our ongoing relationship, including:
| • | | indemnification and other matters arising under the Formation, Contribution and Merger Agreement or other agreements; |
|
| • | | intellectual property matters; |
|
| • | | employee recruiting and retention; |
|
| • | | competition for customers in the areas where Harris is permitted to do business under the non-competition agreement described below; |
|
| • | | sales or distributions by Harris of all or any portion of its ownership interest in us, which could be to one of our competitors; |
|
| • | | business combinations involving us; and |
|
| • | | business opportunities that may be attractive to both Harris and us. |
In addition, we may not be able to resolve any potential conflicts with Harris, and, even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
We have an investor agreement and non-competition agreement with Harris. The investor agreement provides that Harris and its affiliates are only permitted to enter into a transaction with us if the transaction is approved by a majority of our non-Harris-appointed directors or the terms are, in all material respects, no less favorable to us than those that could have been obtained from an informed, unrelated third party (taking into consideration all the then prevailing facts and circumstances). However, if a transaction has a fair market value of more than $5 million, it must be approved in advance by a majority of our non-Harris-appointed directors, regardless of the nature of the terms. There are limited exceptions to these arrangements.
19
Pursuant to the terms of the non-competition agreement, Harris has agreed in general terms that, for five years following January 26, 2007, it cannot and will not permit any of its subsidiaries (other than us and our subsidiaries) to, engage in the development, manufacture, distribution and sale of microwave radio systems that are competitive with our current products or substantially similar to those products in form, fit and function when used in terrestrial microwave point-to-point communications networks that provide access and trunking of voice and data for telecommunications networks. Notwithstanding this restriction, Harris is permitted to purchase and resell products produced by and branded by persons unaffiliated with Harris and to develop, manufacture, distribute and sell microwave radios and related components for use by government entities.
We are and will continue to be a “controlled company” within the meaning of the NASDAQ rules and, as a result, rely on exemptions from certain corporate governance requirements that are designed to provide protection to shareholders of companies that trade on NASDAQ.
Harris owns more than 50% of the total voting power of our outstanding capital stock. Therefore, we are a “controlled company” under the NASDAQ rules. As a controlled company, we are entitled to utilize exemptions under the NASDAQ standards that free us from the obligation to comply with some governance requirements under the NASDAQ rules, including the following:
| • | | a majority of our board of directors consists of independent directors; |
|
| • | | our director nominees must either be selected, or recommended for selection by the board of directors, either by: |
| • | | a majority of the independent directors; or |
|
| • | | a nominations committee comprised solely of independent directors; and |
the compensation of our officers must be determined, or recommended to the board of directors for determination, either by:
| • | | a majority of the independent directors; or |
|
| • | | a compensation committee comprised solely of independent directors. |
Although a majority of our board of directors currently consists of independent directors and our compensation committee, which recommends the compensation of our officers to the board of directors, is comprised solely of independent directors, we may use these exemptions in the future and, as a result, may not provide the same protection afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements.
So long as Harris holds a majority of our securities outstanding and is entitled to vote generally in the election of our directors (other than those directors elected separately as a class by Harris), it will have the right to preserve its control position by participating in our equity offerings.
At any time that Harris holds a majority of our securities outstanding and entitled to vote generally in the election of our directors (other than those directors elected separately as a class by Harris), subject to limited exceptions, Harris has the right to participate in any offering of our capital stock including grants of equity to employees on the same terms and conditions as the offering and purchase up to that number of shares of our capital stock necessary to preserve its then voting percentage. As a result, Harris will be able to maintain its control position as long as it is able to and elects to participate in any offering of our capital stock.
Neither Harris nor any of its affiliates will have any fiduciary obligation or other obligation to offer corporate opportunities to us, and our certificate of incorporation and investor agreement with Harris expressly permit certain of our directors and our employees to offer certain corporate opportunities to Harris before us.
20
Our certificate of incorporation and the investor agreement with Harris provide that:
| • | | except (1) as otherwise provided in the non-competition agreement with Harris or (2) opportunities offered to an individual who is a director or officer of both Harris Stratex and Harris in writing solely in that person’s capacity as our officer or director, Harris is free to compete with us in any activity or line of business; invest or develop a business relationship with any person engaged in the same or similar activities or businesses as us; do business with any of our customers; or employ any of our former employees; |
|
| • | | neither Harris nor its affiliates have any duty to communicate its or their knowledge of or offer any potential business opportunity, transaction or other matter to us unless the opportunity was offered to the individual who is a director or officer of both Harris Stratex and Harris in writing solely in that person’s capacity as our officer or director; and |
|
| • | | if any director or officer of Harris, who is also an officer or director of Harris Stratex, becomes aware of a potential business opportunity, transaction or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer), that director or officer will have no duty to communicate or offer that opportunity to us and will be permitted to communicate or offer that opportunity to Harris (or its affiliates), and that director or officer will not be deemed to have acted in bad faith or in a manner inconsistent with our best interests or in a manner inconsistent with his or her fiduciary or other duties to us. |
Two members of our board of directors are also directors and/or officers of Harris. As a result, Harris may gain the benefit of corporate opportunities that are presented to these directors.
In certain circumstances, Harris is permitted to engage in the same types of businesses that we conduct. If Harris elects to pursue opportunities in these areas, our ability to successfully operate and expand our business may be limited.
We have a non-competition agreement with Harris restricting its and its subsidiaries’ ability to compete with us for five years from January 26, 2007 in specified lines of business related to our current business operations. However, the non-competition agreement will not restrict Harris from competing in a limited number of specific areas in which we operate, such as the development, manufacture and sale of wireless systems for use by government entities and the purchase and resale of non-Harris-branded wireless systems. Following the five-year term, there will be no restriction on Harris’ ability to compete with us. If Harris elects to pursue opportunities in these areas or re-enters the business from which it is prohibited following the five-year term of the non-competition agreement, our ability to successfully operate and expand our business may be limited.
Sales by Harris of its interest in us could result in offers for shares of Class A common stock, the terms of which have been negotiated solely by Harris, and could adversely affect the price and liquidity of our Class A common stock.
Harris has agreed not to buy or sell our common stock until January 26, 2009, except with the consent of our non-Harris directors or to enable Harris to preserve its percentage interest in our outstanding common stock. From January 26, 2009 to January 26, 2011, Harris will be free to transfer majority control of us to a buyer, at a price and on terms acceptable to Harris in its sole discretion so long as the buyer offers to acquire all our outstanding voting shares not owned by Harris on the same terms offered to Harris or the non-Harris directors approve the transfer by Harris in advance. However, our non-Harris stockholders will have no role in determining the identity of the buyer and the amount and type of consideration to be received or any other terms of the transaction. If equity securities of the buyer are offered or if our other shareholders elect not to accept the buyer’s offer, their continuing investment would be in a company that may be majority-controlled by a company or an investor selected only by Harris. After January 26, 2011, Harris will no longer be subject to any contractual limitations on the sale of its interest in Harris Stratex.
In addition, we have agreed to register for resale to the public shares of common stock which are held by Harris. Sales of our registered shares by Harris, or the perception that such sales might occur, could depress the trading price of our Class A common stock.
Other Risks
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. In fiscal 2007, we incurred a net loss of $21.8 million and in fiscal 2006, we incurred a net loss of $38.6 million. We can give no assurance that we will be consistently profitable, if at all.
We will face strong competition for maintaining and improving our position in the market, which could adversely affect our revenue growth and operating results.
21
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 smaller public companies and private companies 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. Furthermore, our competitors may enter into business combinations in order to accelerate product development or to engage in aggressive price reductions or other competitive practices, resulting in even more powerful or aggressive competitors.
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. 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.
If we do not successfully market our newest products, TRuepoint and Eclipse, our business would be harmed.
In 2004, Stratex began commercial shipments of the Eclipse product. Eclipse is a wireless transmission platform that uses a nodal architecture to provide multiplexing, routing and cross-connection functions, in addition to radio transmission, to reduce the network operators’ deployments costs. To a large extent, our future profitability depends on the continued success and price competitiveness of Eclipse. In fiscal years 2005 and 2006, Stratex recorded $39.6 million and $134.5 million, respectively, of revenue from sales of Eclipse products. In fiscal 2007, we recorded $105.9 million in revenue during the five month period ended June 29, 2007 and Stratex recorded $108.1 million in revenue during the seven month period ended January 26, 2007, for a total of $214.0 million in revenue from sales of Eclipse products during our fiscal year 2007.
In 2004, Harris MCD began shipping TRuepoint products. To a large extent, our future profitability depends on the continued success of TRuepoint, especially in the North American market and worldwide high-capacity trunking markets. Because TRuepoint represents a new, innovative solution for wireless carriers, we cannot give assurances that we will be able to continue to successfully market this product. If TRuepoint does not achieve market acceptance to the extent expected by us, we may not be able to recoup the significant amount of research and development expenses associated with the development and introduction of this product and our business could be negatively impacted. Should the continued development and ramp-up of the TRuepoint platform be unsuccessful, there would be a material adverse effect on our business, financial condition and results of operations.
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.
22
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 2006, 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. If these revenue declines occur or if we are unable to create revenue growth, our business, financial condition, and results of operations may be adversely affected.
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.
As a subsidiary of Harris, we may have the benefit of one or more existing cross-license agreements between Harris and certain third parties, which may help protect us from infringement claims. If we cease to be a subsidiary of Harris, those benefits will be lost.
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 2007, our sales to international customers accounted for 67% of total revenue. During fiscal 2006 and 2005, sales to international customers accounted for 55% and 51% of our revenue, respectively. Our dependence on international customers is expected to increase, due to our merger with Stratex, since approximately 95% of its revenue has historically been derived from international markets. 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:
| • | | unexpected changes in regulatory requirements; |
|
| • | | fluctuations in international currency exchange rates; |
|
| • | | imposition of tariffs and other barriers and restrictions; |
|
| • | | management and operation of an enterprise spread over various countries; |
|
| • | | the burden of complying with a variety of laws and regulations in various countries; |
23
| • | | application of the income tax laws and regulations of multiple jurisdictions, including relatively low-rate and relatively high-rate jurisdictions, to our sales and other transactions, which results in additional complexity and uncertainty; |
|
| • | | general economic and geopolitical conditions, including inflation and trade relationships; |
|
| • | | war and acts of terrorism; |
|
| • | | natural disasters; |
|
| • | | currency exchange controls; and |
|
| • | | changes in export regulations. |
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.
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.
The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver materials, could cause our products to be produced in an untimely or unsatisfactory manner, or not at all.
Our manufacturing operations, which are substantially subcontracted, are highly dependent upon the delivery of materials by outside suppliers in a timely manner. Also, we depend in part upon subcontractors to assemble major components and subsystems used in our products in a timely and satisfactory manner. We generally do not enter into long-term or volume purchase agreements with any of our suppliers, and we cannot provide assurances that such materials, components and subsystems will be available for our use at such time and in such quantities as we require, if at all. In addition, we have historically obtained some of our supplies from a single source. If these suppliers are unable to provide supplies and products to us because they are no longer in business or because they discontinue a certain supply or product we need, we may not be able to fill orders placed by our customers on a timely basis or at all. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and timely deliver our products to our customers. We cannot give assurances that we will not experience material supply problems or component or subsystem delays in the future. Also, our subcontractors may not be able to maintain the quality of our products, which might result in a large number of product returns by customers and could harm our business, financial condition and results of operations.
Additional risks associated with the outsourcing of our manufacturing operations to MTI in Taiwan and its subsidiary in the People’s Republic of China could include, among other things: political risks due to political issues between Taiwan and The People’s Republic of China; risk of natural disasters in Taiwan, such as earthquakes and typhoons; economic and regulatory developments; and other events leading to the disruption of manufacturing operations.
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.”
24
Our success will depend on new product introductions and 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. 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.
Our customers may not pay for products and services in a timely manner, or at all, which would decrease our income and adversely affect our working capital.
Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment. Risks 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 above titled “Because a significant amount of our revenue 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.
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.
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:
| • | | volume and timing of our product orders received and delivered during the quarter; |
|
| • | | our ability and the ability of our key suppliers to respond to changes on demand as needed; |
|
| • | | our suppliers’ inability to perform and deliver on time as a result of their financial condition, component shortages or other supply chain constraints; |
|
| • | | our sales cycles can be lengthy; |
|
| • | | continued market expansion through strategic alliances; |
25
| • | | continued timely rollout of new product functionality and features; |
|
| • | | increased competition resulting in downward pressures on the price of our products and services; |
|
| • | | unexpected delays in the schedule for shipments of existing products and new generations of the existing platforms; |
|
| • | | failure to realize expected cost improvement throughout our supply chain; |
|
| • | | order cancellations or postponements in product deliveries resulting in delayed revenue recognition; |
|
| • | | seasonality in the purchasing habits of our customers; |
|
| • | | war and acts of terrorism; |
|
| • | | natural disasters; |
|
| • | | the ability of our customers to obtain financing to enable their purchase of our products; |
|
| • | | fluctuations in international currency exchange rates; |
|
| • | | regulatory developments including denial of export and import licenses; and |
|
| • | | general economic conditions worldwide. |
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.
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 its 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.
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
26
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.
Negative changes in the capital markets available for telecommunications and mobile cellular projects may result in reduced revenue and 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.
Many of our current and potential customers require significant capital funding to finance their telecommunications and mobile cellular projects, which include the purchase of our products and services. Although in the last year we have seen some growth in capital spending in the wireless telecommunications market, changes in capital markets worldwide could negatively impact available funding for these projects and may continue to be unavailable to some customers. As a result, the purchase of our products and services may be slowed or halted. Reduction in demand for our products has resulted in excess inventories on hand in the past, and could result in additional excess inventories in the future. If funding is unavailable to our customers or their customers, we may be forced to write down excess inventory. In addition, we may have to extend more and longer credit terms to our customers, which could negatively impact our cash and possibly result in higher bad debt expense. 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 decrease our profits.
In addition, in order to maintain competitiveness in an environment of restrictive third-party financing, we may have to offer customer financing that is recorded on our balance sheet. This may result in deferred revenue recognition, additional credit risk and substantial cash usage.
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.
If we are unable to favorably assess the effectiveness of our internal controls over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which could adversely affect our stock price.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports. Pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (also known as the SOX Act), and beginning with our Annual Report on Form 10-K/A for the fiscal year ending June 27, 2008, our management will be required to certify to and report on, and its independent registered public accounting firm will be required to attest to, the effectiveness of our internal controls over financial reporting as of June 27, 2008. If we fail to maintain effective internal controls over financial reporting, our operating results could be misstated, our reputation may be harmed and the trading price of our stock could be negatively impacted. As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Stratex’s Annual Report on Form 10-K/A for the year ended March 31, 2006, as amended, Stratex determined there were two material weaknesses in its internal control over financial reporting as defined in standards established by the Public Company Accounting Oversight Board (“PCAOB”). In general, a “material weakness” (as defined in PCAOB Auditing Standard No. 2) is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. In fiscal 2006, Stratex devoted significant resources to remediate and improve its internal controls related to these material weaknesses. Stratex believes that these efforts have remediated the concerns that gave rise to the “material weakness” related to revenue recognition. However, due to the assessment of Stratex’s internal controls over financial reporting as of March 31, 2006, Stratex had identified the continuation of a material weakness in the review of the financial statements of international operations and the period-end financial
27
close and reporting process for Stratex’s consolidated operations. Historically, Harris has only been required to certify or report on or receive an attestation from its independent registered public accounting firm with respect to Harris, taken as a whole, and not MCD in particular. We are currently in the process of reviewing, documenting and testing our internal controls over financial reporting. We will continue reviewing our internal controls over the financial close and reporting process, and will implement additional controls as needed. However, we cannot be certain that our controls over our financial processes and reporting will be adequate in the future, and we may incur significant additional expenses in complying with these provisions of the SOX Act. Any failure to maintain effective internal controls over financial reporting could cause us to prepare inaccurate financial statements, subject us to a misappropriation of assets or cause us to fail to meet our SEC reporting obligations on a timely basis, which could materially and adversely affect the trading price of our Class A common stock.
As previously announced on July 30, 2008, we concluded that our consolidated financial statements for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005 would be restated for the correction of errors contained in those consolidated financial statements. In conjunction with the identification of these errors, we also identified certain weaknesses in our internal control structure that led to these errors. Refer to Item 9A in Part II of this Form 10-K/A where these internal control deficiencies are further discussed.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
As of June 29, 2007, we conducted operations in 39 facilities in the U.S., Canada, Europe, Central America, South America, Africa and Asia. Additionally, in the first quarter of fiscal 2008, we will begin operations in two additional leased facilities. 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 2012, and one lease may be extended to 2013.
As of June 29, 2007, the locations and approximate floor space of our principal offices and facilities in productive use (including the two additional leased facilities mentioned above) were as follows:
| | | | | | | | | | | |
| | | | | Owned | | Leased |
| | | | | (square | | (square |
| Location | | Major Activities | | feet) | | feet) |
| San Antonio, Texas | | Office, manufacturing | | | 130,000 | | | | — | |
| Wellington, New Zealand | | Office, R&D center | | | 58,000 | | | | — | |
| Lanarkshire, Scotland | | Office, repair center | | | 33,000 | | | | — | |
| San Jose, California (three facilities) | | Offices, R&D center, warehouse | | | — | | | | 98,000 | |
| Montreal, Canada | | Office, R&D center | | | — | | | | 79,000 | |
| Redwood Shores, California | | Office | | | — | | | | 75,000 | |
| Morrisville, North Carolina | | Headquarters, R&D center | | | — | | | | 60,000 | |
| People’s Republic of China (three facilities) | | Offices, manufacturing | | | — | | | | 42,000 | |
| Redwood City, California | | Office | | | — | | | | 18,000 | |
| Paris, France (two facilities) | | Offices | | | — | | | | 15,000 | |
| Republic of Singapore | | Office | | | — | | | | 13,000 | |
| Mexico City, Mexico (two facilities) | | Offices, warehouse | | | — | | | | 12,000 | |
| 23 other facilities | | Offices | | | — | | | | 67,000 | |
| | | | | | | | | | | |
| Totals | | | | | 221,000 | | | | 479,000 | |
| | | | | | | | | | | |
In 2007, in connection with the acquisition of Stratex, we ceased operations at, and subsequently vacated, a leased facility in Seattle, Washington, and two leased facilities in San Jose and Milpitas, California. These facilities comprise approximately 63,000 square feet. Additionally, we ceased most of our operations at, and mostly vacated, a fourth leased facility in San Jose. This facility comprises approximately 60,000 square feet, of which we have retained the use of approximately 10,000 square feet. We have subleased the remaining 50,000 square feet of this facility. 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 T — Lease Commitments” and “Note O — Restructuring Activities” of Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Annual Report on Form 10-K/A.
28
Item 3. Legal Proceedings.
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.
We record accruals for losses related to those matters that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal costs are generally expensed when incurred. While it is not feasible to predict the outcome of these matters with certainty, and some lawsuits, claims or proceedings may be disposed of or decided unfavorably to us, based upon available information, in the opinion of management, settlements and final judgments, if any, which are considered probable of being rendered against us in litigation or arbitration in existence at June 29, 2007 are reserved against, covered by insurance or would not have a material adverse effect on our financial position, results of operations or cash flows.
Item 4. Submissions of Matters to a Vote of Security Holders.
No matters were submitted by us to a vote of our security holders during the fourth quarter of fiscal 2007.
PART II.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Price Range of Common Stock
Our 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. Shares of our Class B common stock are not expected to be listed for trading on any exchange or quotation system at any time in the foreseeable future.
According to the records of our transfer agent, as of August 14, 2007, there were approximately 230 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 year ended June 29, 2007:
| | | | | | | | | |
| | | Common Stock |
| | | High | | Low |
| Fiscal Year Ended June 29, 2007 | | | | | | | | |
| First Quarter | | None | | None |
| Second Quarter | | None | | None |
| Third Quarter (beginning January 30, 2007) | | $ | 21.25 | | | $ | 18.23 | |
| Fourth Quarter | | $ | 20.07 | | | $ | 14.85 | |
On August 14, 2007, the last sale price of our common stock as reported in the NASDAQ Global Market system was $19.85 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 outstanding $50 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 fiscal 2007, we did not issue or sell any unregistered securities.
29
Issuer Repurchases of Equity Securities
During fiscal 2007, we did not repurchase any equity securities.
Equity Compensation Plans
The equity compensation plan information required to be provided in this Annual Report on Form 10-K/A is incorporated by reference to the section of our Proxy Statement for our Annual Meeting of Shareholders to be held on November 14, 2007, entitled “Executive Compensation” to be filed with the SEC.
Performance Graph
The following graph compares the cumulative total return on our common stock with the cumulative total return of the Total Return Index for The NASDAQ Stock Market (U.S. Companies) and the NASDAQ Telecommunications Index for the five-month period commencing January 29, 2007. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF 5 MONTH CUMULATIVE TOTAL RETURN*
Among Harris Stratex Networks, Inc., The NASDAQ Composite Index
And The NASDAQ Telecommunications Index
30
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | 1/29/07 | | | 1/31/07 | | | 2/28/07 | | | 3/30/07 | | | 4/30/07 | | | 5/31/07 | | | 6/29/07 | |
| | Harris Stratex Networks, Inc. | | | | 100.00 | | | | | 109.90 | | | | | 102.00 | | | | | 95.95 | | | | | 99.70 | | | | | 85.50 | | | | | 89.90 | | |
| | NASDAQ Composite | | | | 100.00 | | | | | 101.91 | | | | | 100.03 | | | | | 100.68 | | | | | 104.46 | | | | | 108.06 | | | | | 108.11 | | |
| | NASDAQ Telecommunications | | | | 100.00 | | | | | 99.96 | | | | | 99.42 | | | | | 99.98 | | | | | 103.53 | | | | | 106.34 | | | | | 110.08 | | |
| |
| | |
* | | Assumes (i) $100 invested on January 29, 2007 in Harris Stratex Networks, Inc. Common Stock, the Total Return Index for The NASDAQ Composite Market (U.S. companies) and the NASDAQ Telecommunications Index; and (ii) immediate reinvestment of all dividends. |
Item 6. Selected Financial Data (Restated).
The following table summarizes our selected historical financial information for each of the last five fiscal years. The selected financial information as of June 29, 2007; June 30, 2006; and July 1, 2005 and for the fiscal years ended June 29, 2007; June 30, 2006; July 1, 2005; and July 2, 2004 has been derived from our consolidated financial statements, for which data presented for fiscal years 2007, 2006 and 2005 are included elsewhere in this Annual Report on Form 10-K/A. 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 (Restated)” which discusses our restatement of previously issued financial statements and the Consolidated Financial Statements and Notes, included elsewhere in this Annual Report on Form 10-K/A.
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | June 29, | | June 30, | | July 1, | | July 2, | | |
| | | 2007(1) | | 2006(2) | | 2005 | | 2004(3) | | June 27, |
| | | (Restated) | | (Restated) | | (Restated) | | (Restated) | | 2003(4) |
| | | (In millions) |
| Results of Operations: | | | | | | | | | | | | | | | | | | | | |
| Revenue from product sales and services | | $ | 507.9 | | | $ | 357.5 | | | $ | 310.4 | | | $ | 329.8 | | | $ | 297.5 | |
| Cost of product sales and services | | | (361.2 | ) | | | (275.2 | ) | | | (223.5 | ) | | | (246.0 | ) | | | (221.7 | ) |
| Net loss | | | (21.8 | ) | | | (38.6 | ) | | | (6.8 | ) | | | (22.2 | ) | | | (35.2 | ) |
| Basic and diluted net loss per common share | | | (0.88 | ) | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
31
| | | | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | June 29, | | June 30, | | July 1, | | July 2, | | |
| | | 2007(1) | | 2006(2) | | 2005 | | 2004(3) | | June 27, |
| | | (Restated) | | (Restated) | | (Restated) | | (Restated) | | 2003(4) |
| | | (In millions) |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 1,025.5 | | | $ | 344.9 | | | $ | 358.1 | | | $ | 342.3 | | | $ | 398.3 | |
| Long-term liabilities | | | 65.0 | | | | 12.6 | | | | 14.2 | | | | 15.0 | | | | 11.9 | |
| Total net assets | | | 746.4 | | | | 244.3 | | | | 275.4 | | | | 244.6 | | | | 272.4 | |
| | |
(1) | | The merger with Stratex and the contribution transaction occurred on January 26, 2007. Results of operations for the business acquired in the merger were included in fiscal 2007 from that date only. Thus, operating results in fiscal 2007 are not directly comparable to operating results for the prior fiscal years. In addition, during fiscal 2007, we recorded $15.3 million in acquired in-process research and development expenses, $9.1 million in amortization of developed technology, tradenames, customer relationships, contract backlog and non-compete agreements, $8.6 million in amortization of fair value adjustments for inventory and fixed assets related to the acquisition of Stratex, $4.2 million in restructuring charges and $3.6 million in merger-related integration charges to our International Microwave segment. In addition, we recorded $1.4 million in amortization of developed technology, tradenames, customer relationships, contract backlog and non-compete agreements, $0.4 million in amortization of fair value adjustments for inventory and fixed assets related to the acquisition of Stratex, $5.1 million in restructuring charges and $2.7 million in merger related integration charges to our North America microwave segment. |
|
(2) | | Fiscal 2006 results include a $39.6 million after-tax charge related to inventory write-downs and other charges associated with product discontinuances, as well as the planned shutdown of manufacturing activities at our plant in Montreal, Canada. |
|
(3) | | Fiscal 2004 results include a $7.3 million charge related to cost-reduction measures and fixed asset write-downs. |
|
(4) | | Fiscal 2003 results include an $8.6 million write-down of inventory related to the exit from unprofitable products and the shut-down of our manufacturing plant in Brazil, as well as an $8.3 million charge related to cost-reduction measures. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated).
Restatement of Previously Issued Financial Statements
As previously announced on July 30, 2008, we concluded that our consolidated financial statements for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005 would be restated for the correction of errors contained in those consolidated financial statements. The effect of these restatement items decreased shareholders’ equity cumulatively by $11.6 million and $7.7 million as of June 29, 2007 and June 30, 2006, respectively. In addition, the effect of these restatement items reduced shareholders’ equity by $4.9 million and $1.9 million as of July 1, 2005 and July 2, 2004, respectively. Division equity, which was reclassified to additional paid in capital at the merger date of January 26, 2007, decreased from the amount previously reported by $8.3 million. Previously reported net loss was increased by $3.9 million, $2.8 million, $3.0 million and $1.9 million for the fiscal years ended June 29, 2007, June 30, 2006, July 1, 2005 and July 2, 2004 respectively. The restatement had no impact on our net cash flows from operations, financing activities or investing activities. Details of the nature of the corrections are as follows:
Inventory
Project costs are accumulated in work in process inventory accounts in our cost accounting systems. As products are shipped or otherwise meet our revenue recognition criteria, these project costs are recorded to cost of sales. Estimates may be required at the point of sale if certain costs have been incurred but not yet invoiced to us. On a routine and periodic basis, we review the work in process balances related to these projects to ensure all appropriate costs have been recorded to cost of sales in a timely manner and in the period to which they relate.
During fiscal year 2008, we determined that this review had not been performed in a manner sufficient to identify significant project cost variances remaining in certain inventory accounts, and that the resulting errors impacted prior quarters and prior years. To correct
32
this error, we decreased work in process inventory compared to amounts previously recorded by $9.6 million and $5.0 million as of June 29, 2007 and June 30, 2006, respectively, and increased cost of external product sales and services by $4.6 million, $2.1 million and $2.4 million for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005, respectively. A $0.5 million increase in the cost of external product sales and services was recorded in fiscal years prior to 2005.
Inventory and Intercompany Account Reconciliations
During the course of the year end close for the fiscal year ending June 27, 2008, we determined that certain account reconciliation adjustments recorded in the fourth quarter of fiscal 2008, which related primarily to inventory and intercompany accounts receivable accounts, should have been recorded in prior quarters or prior years. We determined that certain manual controls had not been performed for certain periods, resulting in accounting errors. More specifically, we identified errors in the work in process inventory balances resulting from incorrect account reconciliation processes. To correct this error, we decreased work in process inventory compared with amounts previously recorded by $1.9 million and $0.5 million as of June 29, 2007 and June 30, 2006, respectively, and increased cost of external product sales by $1.4 million, $0.6 million and $0.3 million for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005, respectively. A $0.4 million decrease in the cost of external product sales was recorded in fiscal years prior to 2005.
We also identified errors in accounts receivable balances as a result of control deficiencies in the recording and elimination of intercompany transactions. To correct this error, we decreased accounts receivable by $2.2 million at June 29, 2007 and June 30, 2006, compared with amounts previously recorded and increased selling and administrative expenses by $0.1 million and $0.3 million for the fiscal years ended June 30, 2006 and July 1, 2005, respectively. A $1.8 million increase in selling and administrative expenses was recorded in fiscal years prior to 2005.
Warranty Liability
Our liability for product warranties contains the estimated accrual for certain technical assistance service provided under our standard warranty policy. We determined that these costs had not been properly included in the warranty liability estimates in the balance sheet of Stratex at the date of acquisition. To correct this error, we recorded an adjustment to increase the warranty liability and increase goodwill related to the Stratex acquisition by $1.1 million as of June 29, 2007.
Deferred Tax Liability
Taking into consideration the restatement adjustments described above, we reassessed our income tax provision in accordance with Statement of Financial Accounting Standards No. 109. As a result, we recorded an adjustment to decrease the net deferred tax liability balance and increase the income tax benefit by $2.1 million as of and for the fiscal year ended June 29, 2007. For periods prior to January 26, 2007, income tax expense has been determined as if MCD had been a stand-alone entity, although the actual tax liabilities and tax consequences applied only to Harris. Income tax expense for those periods relates to income taxes paid or to be paid in foreign jurisdictions for which net operating loss carryforwards were not available and domestic taxable income is deemed offset by tax loss carryforwards for which an income tax valuation allowance had been previously provided for in the financial statements. Thus, there was no change in our tax provision for periods prior to fiscal 2007.
33
The following tables present the impact of the restatement adjustments on our previously reported consolidated balance sheets as of June 29, 2007 and June 30, 2006, as well as the impact on our previously reported consolidated statements of operations and cash flows for the fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended June 29, 2007 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions, except per share amounts) | |
| Net revenues from product sales and services | | $ | 507.9 | | | $ | — | | | $ | 507.9 | |
Cost of product sales and services: | | | | | | | | | | | | |
| Cost of external product sales | | | (281.2 | ) | | | (5.1 | ) | | | (286.3 | ) |
| Cost of product sales with Harris Corporation | | | (1.3 | ) | | | — | | | | (1.3 | ) |
| | | | | | | | | | |
| Total cost of product sales | | | (282.5 | ) | | | (5.1 | ) | | | (287.6 | ) |
| Cost of services | | | (64.3 | ) | | | (0.9 | ) | | | (65.2 | ) |
| Cost of sales billed from Harris Corporation | | | (5.4 | ) | | | — | | | | (5.4 | ) |
| Amortization of purchased technology | | | (3.0 | ) | | | — | | | | (3.0 | ) |
| | | | | | | | | | |
| Total cost of product sales and services | | | (355.2 | ) | | | (6.0 | ) | | | (361.2 | ) |
| | | | | | | | | | |
Gross margin | | | 152.7 | | | | (6.0 | ) | | | 146.7 | |
| Research and development expenses | | | (39.4 | ) | | | — | | | | (39.4 | ) |
| Selling and administrative expenses | | | (92.1 | ) | | | — | | | | (92.1 | ) |
| Selling and administrative expenses with Harris Corporation | | | (6.8 | ) | | | — | | | | (6.8 | ) |
| | | | | | | | | | |
| Total research, development, selling and administrative expenses | | | (138.3 | ) | | | — | | | | (138.3 | ) |
| Acquired in-process research and development | | | (15.3 | ) | | | — | | | | (15.3 | ) |
| Amortization of identifiable intangible assets | | | (7.5 | ) | | | — | | | | (7.5 | ) |
| Restructuring charges | | | (9.3 | ) | | | — | | | | (9.3 | ) |
| Corporate allocations expense from Harris Corporation | | | (3.7 | ) | | | — | | | | (3.7 | ) |
| | | | | | | | | | |
Operating loss | | | (21.4 | ) | | | (6.0 | ) | | | (27.4 | ) |
| Interest income | | | 1.8 | | | | — | | | | 1.8 | |
| Interest expense | | | (2.3 | ) | | | — | | | | (2.3 | ) |
| | | | | | | | | | |
Loss before provision for income taxes | | | (21.9 | ) | | | (6.0 | ) | | | (27.9 | ) |
| Benefit for income taxes | | | 4.0 | | | | 2.1 | | | | 6.1 | |
| | | | | | | | | | |
Net loss | | $ | (17.9 | ) | | $ | (3.9 | ) | | $ | (21.8 | ) |
| | | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (0.72 | ) | | $ | (0.16 | ) | | $ | (0.88 | ) |
| Basic and diluted weighted average shares outstanding | | | 24.7 | | | | | | | | 24.7 | |
34
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended June 30, 2006 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions, except per share amounts) | |
| Net revenues from product sales and services | | $ | 357.5 | | | $ | — | | | $ | 357.5 | |
Cost of product sales and services: | | | | | | | | | | | | |
| Cost of external product sales | | | (222.7 | ) | | | (2.4 | ) | | | (225.1 | ) |
| Cost of product sales with Harris Corporation | | | (7.4 | ) | | | — | | | | (7.4 | ) |
| | | | | | | | | | |
| Total cost of product sales | | | (230.1 | ) | | | (2.4 | ) | | | (232.5 | ) |
| Cost of services | | | (37.1 | ) | | | (0.3 | ) | | | (37.4 | ) |
| Cost of sales billed from Harris Corporation | | | (5.3 | ) | | | — | | | | (5.3 | ) |
| Amortization of purchased technology | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Total cost of product sales and services | | | (272.5 | ) | | | (2.7 | ) | | | (275.2 | ) |
| | | | | | | | | | |
Gross margin | | | 85.0 | | | | (2.7 | ) | | | 82.3 | |
| Research and development expenses | | | (28.8 | ) | | | — | | | | (28.8 | ) |
| Selling and administrative expenses | | | (62.9 | ) | | | (0.1 | ) | | | (63.0 | ) |
| Selling and administrative expenses with Harris Corporation | | | (5.6 | ) | | | — | | | | (5.6 | ) |
| | | | | | | | | | |
| Total research, development, selling and administrative expenses | | | (97.3 | ) | | | (0.1 | ) | | | (97.4 | ) |
| Acquired in-process research and development | | | — | | | | — | | | | — | |
| Amortization of identifiable intangible assets | | | — | | | | — | | | | — | |
| Restructuring charges | | | (3.8 | ) | | | — | | | | (3.8 | ) |
| Corporate allocations expense from Harris Corporation | | | (12.4 | ) | | | — | | | | (12.4 | ) |
| | | | | | | | | | |
Operating loss | | | (28.5 | ) | | | (2.8 | ) | | | (31.3 | ) |
| Interest income | | | 0.5 | | | | — | | | | 0.5 | |
| Interest expense | | | (1.0 | ) | | | — | | | | (1.0 | ) |
| | | | | | | | | | |
Loss before provision for income taxes | | | (29.0 | ) | | | (2.8 | ) | | | (31.8 | ) |
| Provision for income taxes | | | (6.8 | ) | | | — | | | | (6.8 | ) |
| | | | | | | | | | |
Net loss | | $ | (35.8 | ) | | $ | (2.8 | ) | | $ | (38.6 | ) |
| | | | | | | | | | |
| Basic and diluted net loss per common share | | | N/A | | | | | | | | N/A | |
| Basic and diluted weighted average shares outstanding | | | N/A | | | | | | | | N/A | |
35
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended July 1, 2005 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions, except per share amounts) | |
| Net revenues from product sales and services | | $ | 310.4 | | | $ | — | | | $ | 310.4 | |
Cost of product sales and services: | | | | | | | | | | | | |
| Cost of external product sales | | | (181.5 | ) | | | (1.7 | ) | | | (183.2 | ) |
| Cost of product sales with Harris Corporation | | | (3.7 | ) | | | — | | | | (3.7 | ) |
| | | | | | | | | | |
| Total cost of product sales | | | (185.2 | ) | | | (1.7 | ) | | | (186.9 | ) |
| Cost of services | | | (31.3 | ) | | | (1.0 | ) | | | (32.3 | ) |
| Cost of sales billed from Harris Corporation | | | (4.3 | ) | | | — | | | | (4.3 | ) |
| Amortization of purchased technology | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Total cost of product sales and services | | | (220.8 | ) | | | (2.7 | ) | | | (223.5 | ) |
| | | | | | | | | | |
Gross margin | | | 89.6 | | | | (2.7 | ) | | | 86.9 | |
| Research and development expenses | | | (28.0 | ) | | | — | | | | (28.0 | ) |
| Selling and administrative expenses | | | (52.8 | ) | | | (0.3 | ) | | | (53.1 | ) |
| Selling and administrative expenses with Harris Corporation | | | (6.0 | ) | | | — | | | | (6.0 | ) |
| | | | | | | | | | |
| Total research, development, selling and administrative expenses | | | (86.8 | ) | | | (0.3 | ) | | | (87.1 | ) |
| Acquired in-process research and development | | | — | | | | — | | | | — | |
| Amortization of identifiable intangible assets | | | — | | | | — | | | | — | |
| Restructuring charges | | | — | | | | — | | | | — | |
| Corporate allocations expense from Harris Corporation | | | (6.2 | ) | | | — | | | | (6.2 | ) |
| | | | | | | | | | |
Operating loss | | | (3.4 | ) | | | (3.0 | ) | | | (6.4 | ) |
| Interest income | | | 0.9 | | | | — | | | | 0.9 | |
| Interest expense | | | (1.0 | ) | | | — | | | | (1.0 | ) |
| | | | | | | | | | |
Loss before provision for income taxes | | | (3.5 | ) | | | (3.0 | ) | | | (6.5 | ) |
| Provision for income taxes | | | (0.3 | ) | | | — | | | | (0.3 | ) |
| | | | | | | | | | |
Net loss | | $ | (3.8 | ) | | $ | (3.0 | ) | | $ | (6.8 | ) |
| | | | | | | | | | |
| Basic and diluted net loss per common share | | | N/A | | | | | | | | N/A | |
| Basic and diluted weighted average shares outstanding | | | N/A | | | | | | | | N/A | |
36
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | |
| | | As of June 29, 2007 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | | | | | (In millions) | | | | | |
ASSETS | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 69.2 | | | $ | — | | | $ | 69.2 | |
| Short-term investments and available for sale securities | | | 20.4 | | | | — | | | | 20.4 | |
| Receivables | | | 185.3 | | | | (2.2 | ) | | | 183.1 | |
| Unbilled costs | | | 36.9 | | | | — | | | | 36.9 | |
| Inventories | | | 135.7 | | | | (11.5 | ) | | | 124.2 | |
| Deferred income taxes | | | 4.1 | | | | — | | | | 4.1 | |
| Other current assets | | | 21.7 | | | | — | | | | 21.7 | |
| | | | | | | | | | |
| Total current assets | | | 473.3 | | | | (13.7 | ) | | | 459.6 | |
Long-Term Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | 80.0 | | | | — | | | | 80.0 | |
| Goodwill | | | 323.6 | | | | 1.1 | | | | 324.7 | |
| Identifiable intangible assets | | | 144.5 | | | | — | | | | 144.5 | |
| Other long-term assets | | | 16.7 | | | | — | | | | 16.7 | |
| | | | | | | | | | |
| | | | 564.8 | | | | 1.1 | | | | 565.9 | |
| | | | | | | | | | |
| Total assets | | $ | 1,038.1 | | | $ | (12.6 | ) | | $ | 1,025.5 | |
| | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | |
| Short-term debt | | $ | 1.2 | | | $ | — | | | $ | 1.2 | |
| Current portion of long-term debt | | | 10.7 | | | | — | | | | 10.7 | |
| Accounts payable | | | 84.7 | | | | — | | | | 84.7 | |
| Compensation and benefits | | | 11.5 | | | | — | | | | 11.5 | |
| Other accrued items | | | 44.7 | | | | 1.1 | | | | 45.8 | |
| Advance payments and unearned income | | | 22.3 | | | | — | | | | 22.3 | |
| Income taxes payable | | | 6.8 | | | | — | | | | 6.8 | |
| Restructuring liabilities | | | 10.8 | | | | — | | | | 10.8 | |
| Current portion of long-term capital lease obligation to Harris Corporation | | | 3.1 | | | | — | | | | 3.1 | |
| Due to Harris Corporation | | | 17.2 | | | | — | | | | 17.2 | |
| | | | | | | | | | |
| Total current liabilities | | | 213.0 | | | | 1.1 | | | | 214.1 | |
| Long-term liabilities | | | 67.1 | | | | (2.1 | ) | | | 65.0 | |
| | | | | | | | | | |
| Total liabilities | | | 280.1 | | | | (1.0 | ) | | | 279.1 | |
| Total shareholders’ equity | | | 758.0 | | | | (11.6 | ) | | | 746.4 | |
| | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 1,038.1 | | | $ | (12.6 | ) | | $ | 1,025.5 | |
| | | | | | | | | | |
37
| | | | | | | | | | | | | |
| | | As of June 30, 2006 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions) | |
ASSETS | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 13.8 | | | $ | — | | | $ | 13.8 | |
| Short-term investments and available for sale securities | | | — | | | | — | | | | — | |
| Receivables | | | 123.9 | | | | (2.2 | ) | | | 121.7 | |
| Unbilled costs | | | 25.5 | | | | — | | | | 25.5 | |
| Inventories | | | 71.9 | | | | (5.5 | ) | | | 66.4 | |
| Deferred income taxes | | | — | | | | — | | | | — | |
| Other current assets | | | 6.7 | | | | — | | | | 6.7 | |
| | | | | | | | | | |
| Total current assets | | | 241.8 | | | | (7.7 | ) | | | 234.1 | |
Long-Term Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | 52.2 | | | | — | | | | 52.2 | |
| Goodwill | | | 28.3 | | | | — | | | | 28.3 | |
| Identifiable intangible assets | | | 6.4 | | | | — | | | | 6.4 | |
| Other long-term assets | | | 23.9 | | | | — | | | | 23.9 | |
| | | | | | | | | | |
| | | | 110.8 | | | | — | | | | 110.8 | |
| | | | | | | | | | |
| Total assets | | $ | 352.6 | | | $ | (7.7 | ) | | $ | 344.9 | |
| | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | |
| Short-term debt | | $ | 0.2 | | | $ | — | | | $ | 0.2 | |
| Current portion of long-term debt | | | — | | | | — | | | | — | |
| Accounts payable | | | 42.1 | | | | — | | | | 42.1 | |
| Compensation and benefits | | | 17.4 | | | | — | | | | 17.4 | |
| Other accrued items | | | 16.9 | | | | — | | | | 16.9 | |
| Advance payments and unearned income | | | 9.2 | | | | — | | | | 9.2 | |
| Income taxes payable | | | — | | | | — | | | | — | |
| Restructuring liabilities | | | 2.2 | | | | — | | | | 2.2 | |
| Current portion of long-term capital lease obligation to Harris Corporation | | | — | | | | — | | | | — | |
| Due to Harris Corporation | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Total current liabilities | | | 88.0 | | | | — | | | | 88.0 | |
| Long-term liabilities | | | 12.6 | | | | — | | | | 12.6 | |
| | | | | | | | | | |
| Total liabilities | | | 100.6 | | | | — | | | | 100.6 | |
| Total shareholders’ equity | | | 252.0 | | | | (7.7 | ) | | | 244.3 | |
| | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 352.6 | | | $ | (7.7 | ) | | $ | 344.9 | |
| | | | | | | | | | |
38
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended June 29, 2007 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions) | |
| Net loss | | $ | (17.9 | ) | | $ | (3.9 | ) | | $ | (21.8 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | �� | | | | | |
| Amortization of identifiable intangible assets acquired in the Stratex acquisition | | | 25.8 | | | | — | | | | 25.8 | |
| Other noncash charges related to the Stratex acquisition | | | 7.9 | | | | — | | | | 7.9 | |
| Depreciation and amortization of property, plant and equipment and capitalized software | | | 14.5 | | | | — | | | | 14.5 | |
| Noncash stock-based compensation expense | | | 3.9 | | | | — | | | | 3.9 | |
| Write-down of inventory | | | — | | | | — | | | | — | |
| Decrease in fair value of warrants | | | (0.6 | ) | | | — | | | | (0.6 | ) |
| Gain on sale of land and building | | | — | | | | — | | | | — | |
| Deferred income tax (benefit) expense | | | (10.9 | ) | | | (2.1 | ) | | | (13.0 | ) |
| Changes in operating assets and liabilities, net of effects from acquisition: | | | | | | | | | | | | |
| Receivables | | | (23.8 | ) | | | — | | | | (23.8 | ) |
| Unbilled costs and inventories | | | (39.1 | ) | | | 6.0 | | | | (33.1 | ) |
| Accounts payable and accrued expenses | | | 10.1 | | | | — | | | | 10.1 | |
| Advance payments and unearned income | | | 12.8 | | | | — | | | | 12.8 | |
| Due to Harris Corporation | | | 4.6 | | | | — | | | | 4.6 | |
| Other | | | (0.4 | ) | | | — | | | | (0.4 | ) |
| | | | | | | | | | |
| Net cash used in operating activities | | | (13.1 | ) | | | — | | | | (13.1 | ) |
| | | | | | | | | | |
| Net cash provided by investing activities | | | 14.3 | | | | — | | | | 14.3 | |
| | | | | | | | | | |
| Net cash provided by financing activities | | | 57.3 | | | | — | | | | 57.3 | |
| | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | (3.1 | ) | | | — | | | | (3.1 | ) |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | 55.4 | | | | — | | | | 55.4 | |
Cash and cash equivalents, beginning of year | | | 13.8 | | | | — | | | | 13.8 | |
| | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 69.2 | | | $ | — | | | $ | 69.2 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended June 30, 2006 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions) | |
| Net loss | | $ | (35.8 | ) | | $ | (2.8 | ) | | $ | (38.6 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
| Amortization of identifiable intangible assets acquired in the Stratex acquisition | | | — | | | | — | | | | — | |
| Other noncash charges related to the Stratex acquisition | | | — | | | | — | | | | — | |
| Depreciation and amortization of property, plant and equipment and capitalized software | | | 15.7 | | | | — | | | | 15.7 | |
| Noncash stock-based compensation expense | | | — | | | | — | | | | — | |
| Write-down of inventory | | | 38.5 | | | | — | | | | 38.5 | |
| Decrease in fair value of warrants | | | — | | | | — | | | | — | |
| Gain on sale of land and building | | | (1.8 | ) | | | — | | | | (1.8 | ) |
| Deferred income tax (benefit) expense | | | 5.7 | | | | — | | | | 5.7 | |
| Changes in operating assets and liabilities, net of effects from acquisition: | | | | | | | | | | | | |
| Receivables | | | (5.1 | ) | | | 0.1 | | | | (5.0 | ) |
| Unbilled costs and inventories | | | (27.3 | ) | | | 2.7 | | | | (24.6 | ) |
| Accounts payable and accrued expenses | | | 18.0 | | | | — | | | | 18.0 | |
| Advance payments and unearned income | | | 2.4 | | | | — | | | | 2.4 | |
| Due to Harris Corporation | | | (1.5 | ) | | | — | | | | (1.5 | ) |
| Other | | | 10.7 | | | | — | | | | 10.7 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | | 19.5 | | | | — | | | | 19.5 | |
| | | | | | | | | | |
| Net cash used in investing activities | | | (8.2 | ) | | | — | | | | (8.2 | ) |
| | | | | | | | | | |
| Net cash used in financing activities | | | (5.8 | ) | | | — | | | | (5.8 | ) |
| | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 0.5 | | | | — | | | | 0.5 | |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | 6.0 | | | | — | | | | 6.0 | |
Cash and cash equivalents, beginning of year | | | 7.8 | | | | — | | | | 7.8 | |
| | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 13.8 | | | $ | — | | | $ | 13.8 | |
| | | | | | | | | | |
39
| | | | | | | | | | | | | |
| | | For the Fiscal Year Ended July 1, 2005 | |
| | | As Previously | | | | | | | |
| | | Reported | | | Adjustments | | | As Restated | |
| | | (In millions) | |
| Net loss | | $ | (3.8 | ) | | $ | (3.0 | ) | | $ | (6.8 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Amortization of identifiable intangible assets acquired in the Stratex acquisition | | | — | | | | — | | | | — | |
| Other noncash charges related to the Stratex acquisition | | | — | | | | — | | | | — | |
| Depreciation and amortization of property, plant and equipment and capitalized software | | | 14.6 | | | | — | | | | 14.6 | |
| Noncash stock-based compensation expense | | | — | | | | — | | | | — | |
| Write-down of inventory | | | — | | | | — | | | | — | |
| Decrease in fair value of warrants | | | — | | | | — | | | | — | |
| Gain on sale of land and building | | | — | | | | — | | | | — | |
| Deferred income tax (benefit) expense | | | — | | | | — | | | | — | |
| Changes in operating assets and liabilities, net of effects from acquisition: | | | | | | | | | | | | |
| Receivables | | | 0.2 | | | | 0.3 | | | | 0.5 | |
| Unbilled costs and inventories | | | (16.0 | ) | | | 2.7 | | | | (13.3 | ) |
| Accounts payable and accrued expenses | | | (4.5 | ) | | | — | | | | (4.5 | ) |
| Advance payments and unearned income | | | (5.0 | ) | | | — | | | | (5.0 | ) |
| Due to Harris Corporation | | | (0.8 | ) | | | — | | | | (0.8 | ) |
| Other | | | 11.1 | | | | — | | | | 11.1 | |
| | | | | | | | | | |
| Net cash used in operating activities | | | (4.2 | ) | | | — | | | | (4.2 | ) |
| | | | | | | | | | |
| Net cash used in investing activities | | | (19.4 | ) | | | — | | | | (19.4 | ) |
| | | | | | | | | | |
| Net cash provided by financing activities | | | 24.9 | | | | — | | | | 24.9 | |
| | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 1.2 | | | | — | | | | 1.2 | |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | 2.5 | | | | — | | | | 2.5 | |
Cash and cash equivalents, beginning of year | | | 5.3 | | | | — | | | | 5.3 | |
| | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 7.8 | | | $ | — | | | $ | 7.8 | |
| | | | | | | | | | |
40
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Fiscal 2007
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | September 29, 2006 |
| | | As Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 93.6 | | | $ | — | | | $ | 93.6 | |
| Gross margin | | | 30.8 | | | | 0.7 | | | | 31.5 | |
| Income from operations | | | 5.3 | | | | 0.7 | | | | 6.0 | |
| Net income | | | 4.8 | | | | 0.7 | | | | 5.5 | |
| Basic and diluted net income per common share | | | N/A | | | | — | | | | N/A | |
| Market price range common stock | | | | | | | | | | | | |
| High | | | N/A | | | | — | | | | N/A | |
| Low | | | N/A | | | | — | | | | N/A | |
| Quarter-end Close | | | N/A | | | | — | | | | N/A | |
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | December 29, 2006 |
| | | As Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 101.2 | | | $ | — | | | $ | 101.2 | |
| Gross margin | | | 34.8 | | | | (1.3 | ) | | | 33.5 | |
| Income from operations | | | 6.2 | | | | (1.3 | ) | | | 4.9 | |
| Net income | | | 5.8 | | | | (1.3 | ) | | | 4.5 | |
| Basic and diluted net income per common share | | | N/A | | | | — | | | | N/A | |
| Market price range common stock | | | | | | | | | | | | |
| High | | | N/A | | | | — | | | | N/A | |
| Low | | | N/A | | | | — | | | | N/A | |
| Quarter-end Close | | | N/A | | | | — | | | | N/A | |
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | March 30, 2007 |
| | | As Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 139.0 | | | $ | — | | | $ | 139.0 | |
| Gross margin | | | 36.0 | | | | (2.3 | ) | | | 33.7 | |
| Loss from operations | | | (22.7 | ) | | | (2.3 | ) | | | (25.0 | ) |
| Net loss | | | (23.2 | ) | | | (1.4 | ) | | | (24.6 | ) |
| Basic and diluted net loss per common share | | | (0.58 | ) | | | (0.03 | ) | | | (0.61 | ) |
| Market price range common stock | | | | | | | | | | | | |
| High | | | 21.3 | | | | — | | | | 21.3 | |
| Low | | | 18.2 | | | | — | | | | 18.2 | |
| Quarter-end Close | | | 19.2 | | | | — | | | | 19.2 | |
41
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | June 29, 2007 |
| | | As Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 174.1 | | | $ | — | | | $ | 174.1 | |
| Gross margin | | | 51.1 | | | | (3.1 | ) | | | 48.0 | |
| Loss from operations | | | (10.2 | ) | | | (3.1 | ) | | | (13.3 | ) |
| Net loss | | | (5.3 | ) | | | (1.9 | ) | | | (7.2 | ) |
| Basic and diluted net loss per common share | | | (0.09 | ) | | | (0.03 | ) | | | (0.12 | ) |
| Market price range common stock | | | | | | | | | | | | |
| High | | | 20.1 | | | | — | | | | 20.1 | |
| Low | | | 14.9 | | | | — | | | | 14.9 | |
| Quarter-end Close | | | 18.0 | | | | — | | | | 18.0 | |
Fiscal 2006
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | September 30, 2005 |
| | | As | | | | |
| | | Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 84.7 | | | $ | — | | | $ | 84.7 | |
| Gross margin | | | 26.8 | | | | (0.1 | ) | | | 26.7 | |
| Income from operations | | | 6.1 | | | | (0.1 | ) | | | 6.0 | |
| Net income | | | 5.7 | | | | (0.1 | ) | | | 5.6 | |
| Basic and diluted net income per common share | | | N/A | | | | — | | | | N/A | |
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | December 30, 2005 |
| | | As | | | | |
| | | Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 88.7 | | | $ | — | | | $ | 88.7 | |
| Gross deficit | | | (6.2 | ) | | | (0.2 | ) | | | (6.4 | ) |
| Loss from operations | | | (31.7 | ) | | | (0.3 | ) | | | (32.0 | ) |
| Net loss | | | (37.4 | ) | | | (0.3 | ) | | | (37.7 | ) |
| Basic and diluted net loss per common share | | | N/A | | | | — | | | | N/A | |
42
| | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | March 31, 2006 |
| | | As | | | | |
| | | Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 73.6 | | | $ | — | | | $ | 73.6 | |
| Gross margin | | | 25.1 | | | | (1.1 | ) | | | 24.0 | |
| Loss from operations | | | (6.1 | ) | | | (1.0 | ) | | | (7.1 | ) |
| Net loss | | | (6.9 | ) | | | (1.0 | ) | | | (7.9 | ) |
| Basic and diluted net loss per common share | | | N/A | | | | — | | | | N/A | |
| | | | | �� | | | | | | | | |
| | | For the Quarter Ended |
| | | June 30, 2006 |
| | | As | | | | |
| | | Previously | | | | |
| | | Reported | | Adjustments | | As Restated |
| | | (In millions) |
| Revenue | | $ | 110.5 | | | $ | — | | | $ | 110.5 | |
| Gross margin | | | 39.2 | | | | (1.2 | ) | | | 38.0 | |
| Income from operations | | | 3.3 | | | | (1.5 | ) | | | 1.8 | |
| Net income | | | 2.8 | | | | (1.4 | ) | | | 1.4 | |
| Basic and diluted net income per common share | | | N/A | | | | — | | | | N/A | |
Acquisition of Stratex Networks, Inc. and Combination with MCD
On January 26, 2007, we completed our merger (the “Stratex acquisition”) with Stratex Networks, Inc. (“Stratex”) pursuant to a Formation, Contribution and Merger Agreement among Harris Corporation, Stratex, and Stratex Merger Corp., as amended and restated on December 18, 2006 and amended by letter agreement on January 26, 2007. In the transaction, Stratex Merger Corp., a wholly-owned subsidiary of the Company, merged with and into Stratex with Stratex as the surviving corporation (renamed as “Harris Stratex Networks Operating Corporation”). Concurrently with the merger of Stratex and Stratex Merger Corp. (the “merger”), Harris Corporation contributed the Microwave Communications Division (“MCD”), along with $32.1 million in cash (comprised of $26.9 million contributed on January 26, 2007 and $5.2 million held by the Company’s foreign operating subsidiaries on January 26, 2007) to the Company and the Company assumed the liabilities (with certain exceptions) of MCD (the “contribution transaction”).
Pursuant to the merger, each share of Stratex common stock was converted into one-fourth of a share of our Class A common stock, and a total of 24,782,153 shares of our Class A common stock were issued to the former holders of Stratex common stock. In the contribution transaction, Harris Corporation contributed the assets of MCD, along with $32.1 million in cash, and in exchange, we assumed certain liabilities of Harris Corporation related to MCD and issued 32,913,377 shares of our Class B common stock to Harris Corporation. As a result of these transactions, Harris Corporation owned approximately 57% and the former Stratex shareholders owned approximately 43% of our total outstanding stock immediately following the closing.
We completed the Stratex acquisition to create a leading global communications solutions company offering end-to-end wireless transmission solutions for mobile and fixed-wireless service providers and private networks.
43
The Stratex acquisition was accounted for as a purchase business combination with MCD considered the acquirer for accounting purposes. Thus, the historical results discussed herein for periods prior to January 26, 2007 represent the separate financial results of MCD on a carve-out basis. Total consideration paid by us was approximately $493.1 million as summarized in the following table (see Note E to consolidated financial statements):
| | | | | |
| Calculation of Allocable Purchase Price | | January 26, 2007 | |
| | | (In millions) | |
| Value of Harris Stratex Networks shares issued to Stratex Networks stockholders | | $ | 464.9 | |
| Value of Stratex Networks vested options assumed | | | 15.5 | |
| Acquisition costs | | | 12.7 | |
| | | | |
| Total allocable purchase price | | $ | 493.1 | |
| | | | |
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is sometimes referred to in this Annual Report on Form 10-K/A as the MD&A, is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to our consolidated financial statements and related notes beginning on page 65 of this report.
The following is a list of the sections of the MD&A, together with the perspective of our management on the contents of these sections of the MD&A, which is intended to make reading these pages more productive:
| • | | Business Considerations — a general description of our businesses; the drivers of these businesses and our strategy for achieving value and key indicators that are relevant to us in the microwave communications industry. |
|
| • | | Operations Review — an analysis of our consolidated results of operations and of the results in each of its three operating segments, to the extent the operating segment results are helpful to gaining an understanding of our business as a whole. |
|
| • | | Liquidity, Capital Resources and Financial Strategies — an analysis of cash flows, contractual obligations, off-balance sheet arrangements, commercial commitments, financial risk management, impact of foreign exchange and impact of inflation. |
|
| • | | Critical Accounting Policies and Estimates — a discussion of accounting policies and estimates that require the most judgment and a discussion of accounting pronouncements that have been issued but not yet implemented by us and their potential impact. |
Business Considerations
General
MCD was a leading global provider of turnkey wireless transmission solutions and comprehensive network management software, with an extensive services suite. With innovative products and a broad portfolio, MCD was a market share leader in North America and a top-tier provider in international markets, most notably in the growing Middle East/Africa region. Stratex Networks was a leading provider of innovative wireless transmission solutions to mobile wireless carriers and data access providers around the world. As a result of the combination of the two historical businesses, Harris Stratex was formed and has become a leading independent wireless networks solutions provider, focused on delivering 1) microwave digital radio and other communications products, systems and professional services for private network operators and mobile telecommunications providers; and 2) turnkey end-to-end network management and service assurance solutions for broadband and converged networks. Our three segments serve markets for microwave products and services in North America Microwave, International Microwave and network management software solutions worldwide or Network Operations. All of our revenue, income and cash flow are developed from the sale of these products, systems, software and services. We generally sell directly to the end customer. However, to extend our global footprint and maximize our penetration in certain markets, we sometimes sell through agents, resellers and/or distributors, particularly in international markets.
Our mission statement is: “Harris Stratex Networks offers the most reliable, flexible, scalable, and easy to use wireless network solutions in the world for mobile, government and private networks. Every day, we build lasting customer relationships, grow our company and build new value for our shareholders by listening to our customers, delivering innovative products matched to market demand and offering superior service and quality. We’re committed to helping customers meet their competitive demands by building new wireless networks, upgrading existing networks and providing complete professional services.”
44
Drivers of Harris Stratex Businesses and Strategy for Achieving Value
We are committed to our mission statement, and we believe that executing the mission statement creates value. Consistent with this commitment, we currently focus on these key drivers:
| • | | Continuing profitable revenue growth in all segments; |
|
| • | | Focusing on operating efficiencies and cost reductions; and |
|
| • | | Maintaining an efficient capital structure. |
Continuing Profitable Revenue Growth in All Segments
Harris Stratex Networks is a global provider of wireless transmission networks solutions. We will focus on capitalizing on our strength in the North American market by continuing to win opportunities with wireless telecommunications providers as well as federal, state and other private network operators. Growth opportunities will come from network and capacity expansion and the evolution to IP networking in both the public and private segments. Other growth drivers include the emergingtriple-playservices (voice, data and video) market in the public sector, the trend towards network hardening and interoperability for public safety and disaster response agencies and the FCC directive to relocate frequency bands in the 2 GHz range to open up spectrum for Advanced Wireless Services. Wireless transmission systems are particularly well-suited to meet the increasing demand for high-reliability, high-bandwidth networks that are more secure and better protected against natural and man-made disasters.
We are focused on increasing international revenue by offering innovative new products and expanding regional sales channels to capture greenfield network opportunities. We will also focus on two major evolutionary trends in the global communications market by 1) penetrating large regional mobile telecom operators to participate in network expansion and new third-generation (“3G”) network opportunities; and 2) enabling the migration to Internet Protocol (IP) networking in both the public and private segments by providing both IP-enabled and IP-centric wireless transmission solutions.
We offer a broad range of engineering and other professional services for network planning, systems architecture design and project management as a global competitive advantage. We will expand our Network Operations offerings in microwave and non-microwave opportunities to create a differentiator for our total solutions offerings.
Focusing on Operating Efficiencies and Cost Reductions
The principal focus areas for operating efficiencies and cost management are: 1) reducing procurement costs through an emphasis on coordinated supply chain management; 2) reducing product costs through dedicated value engineering resources focused on product value engineering; 3) improving manufacturing efficiencies across all segments; and 4) optimizing facility utilization.
Maintaining an Efficient Capital Structure
Our capital structure is intended to optimize our cost of capital. We believe a strong capital position, access to key financial markets, ability to raise funds at a low effective cost and overall low cost of borrowing provide a competitive advantage. We had $89.6 million in cash, cash equivalents, short-term investments and available for sale securities as of June 29, 2007.
Key Indicators
We believe our drivers, when fully implemented, will improve key indicators such as: net income, revenue, gross margin, operating cash flows, total assets as a percentage of revenue and total equity as a percentage of revenue.
45
Fiscal 2007 Compared to Fiscal 2006 and Fiscal 2006 Compared to Fiscal 2005
Revenue and Net Loss (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | 2007 | | 2006 | | % Increase/ | | 2005 | | % Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Revenue | | $ | 507.9 | | | $ | 357.5 | | | | 42.1 | % | | $ | 310.4 | | | | 15.2 | % |
| Net loss | | $ | (21.8 | ) | | $ | (38.6 | ) | | | (43.5 | )% | | $ | (6.8 | ) | | | N/M | |
| % of revenue | | | (4.3 | )% | | | (10.8 | )% | | | — | | | | (2.2 | )% | | | — | |
N/M Not meaningful
Fiscal 2007 Compared with Fiscal 2006 (Restated)
Our revenue for fiscal 2007 was $507.9 million, an increase of $150.4 million or 42.1% compared to fiscal 2006, and includes $123.7 million of revenue from the products and services acquired in the Stratex acquisition for the five-month period following January 26, 2007. The remainder of the revenue increase, or $26.7 million, resulted from growth in the North America Microwave, and Network Operations segments, offset by a decline in international microwave revenue. The increased demand for our products in North America during fiscal 2007 came from both wireless service providers and private networks as mobile operators began to substitute microwave wireless capabilities for leased lines to reduce network operating costs, expand their geographic footprint and increase capacity to handle high-bandwidth voice, data, and video services. Private network demand also increased during fiscal 2007 compared to fiscal 2006, driven by the need for higher bandwidth and by the availability of federal grant dollars to improve interoperability of public safety networks. The decline in international microwave revenue was driven by lower revenue in Asia-Pac, EMER and Africa, due to the timing of project awards.
Our fiscal 2007 net loss was $21.8 million compared to a net loss of $38.6 million in fiscal 2006. The fiscal 2007 net loss reflected the following charges related to the acquisition of Stratex: $15.3 million write-off of acquired in-process research and development; $6.3 million of charges related primarily to severance and integration activities undertaken in connection with the merger; $9.0 million amortization of a portion of the fair value adjustments related to inventory and fixed assets; and $10.5 million of amortization related to developed technology, trade names, customer relationships, contract backlog and non-competition agreements. These charges were classified in cost of product sales and services or selling and administrative expenses depending on the nature of the charge.
Additionally, we recorded $9.3 million of restructuring charges in connection with plans to improve operating efficiencies, and to create synergies through the consolidation of facilities. We began implementation of a plan in February 2007 to scale down operations in Montreal, Canada and, to a lesser extent, in the U.S. In the initial phase of this plan, notices were sent to approximately 200 employees in Montreal that their employment would be terminated between March 30, 2007 and December 31, 2007. We believe that the overall cost to implement this plan will be approximately $6.2 million for Montreal (consisting primarily of severance and other benefits) and approximately $0.7 million in the U.S. (consisting primarily of severance and other benefits). We began implementation of a plan in June 2007 to scale down operations in Paris, France and, to a lesser extent, Mexico City, Mexico. Notices were sent to 12 employees in Paris and 3 employees in Mexico City that their employment would be terminated by December 31, 2007. We believe the overall cost to implement these plans will be approximately $4.2 million in total (consisting primarily of severance and other benefits), with the majority of the costs relating to the reduction in force in France. These plans are expected to be fully implemented by December 31, 2007.
These charges were partially offset by income generated from the operations acquired from Stratex, and by the margin generated by the increased revenue from our North America Microwave segment. In fiscal 2007 we recorded a net tax benefit of $6.1 million, compared to a tax provision of $6.8 million in fiscal 2006. The tax benefit recorded in fiscal 2007 resulted primarily from foreign tax credits earned by our international operations during the fiscal year.
Our fiscal 2006 net loss was negatively impacted by $34.9 million of inventory write-downs related to product discontinuances, the related increase in income tax valuation allowance of $5.7 million, $5.4 million of corporate allocation expense related to the settlement of arbitration proceedings in connection with our former analog base station business and related services, and $3.8 million in restructuring costs related to the relocation of our Canadian manufacturing activities to our San Antonio, Texas manufacturing facility.
46
Fiscal 2006 Compared with Fiscal 2005 (Restated)
Our revenue for fiscal 2006 was $357.5 million, an increase of $47.1 million or 15.2% compared to fiscal 2005. Net loss for fiscal 2006 was $38.6 million compared to fiscal 2005 net loss of $6.8 million. Fiscal 2006 revenue increased in both the North America Microwave and International Microwave segments by 5.2% and 35.4% from June 2005, respectively. The increase was partially offset by a decrease in revenue in the Network Operations segment of 26.9% from June 2005.
Our net loss of $38.6 million in fiscal 2006 included the impact of $39.6 million in charges related to the International microwave segment associated with product discontinuances and the shutdown of manufacturing activities in Montreal, Canada. Corporate allocations expense from Harris increased from $6.2 million in fiscal 2005 to $12.4 million in fiscal 2006. Corporate allocations expense in fiscal 2006 included the impact of a $5.4 million corporate allocation related to the settlement of arbitration proceedings in connection with our former analog base station business and related services.
Gross Margin (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Revenue | | $ | 507.9 | | | $ | 357.5 | | | | 42.1 | % | | $ | 310.4 | | | | 15.2 | % |
| Cost of product sales and services | | $ | 361.2 | | | $ | 275.2 | | | | 31.3 | % | | $ | 223.5 | | | | 23.1 | % |
| Gross margin | | $ | 146.7 | | | $ | 82.3 | | | | 78.3 | % | | $ | 86.9 | | | | (5.3 | )% |
| % of revenue | | | 28.9 | % | | | 23.0 | % | | | — | | | | 28.0 | % | | | — | |
Fiscal 2007 Compared with Fiscal 2006 (Restated)
Our fiscal 2007 gross margin was $146.7 million, or 28.9% of revenue, compared to $82.3 million, or 23.0% of revenue, for fiscal 2006. Our fiscal 2006 gross margin was negatively impacted by a $34.9 million write-down of inventory related to product discontinuances and there was no comparable write-down in fiscal 2007. Our fiscal 2007 gross margin was reduced by the following amounts related to the acquisition of Stratex: $8.3 million amortization of a portion of the fair value adjustments related to inventory and fixed assets; and $3.0 million of amortization on developed technology. Our fiscal 2007 gross margin was also impacted by an increase in gross margin attributed to the gross margin generated by the products and services acquired from Stratex and the margin generated by the increase in revenue from our North America Microwave segment.
Fiscal 2006 Compared with Fiscal 2005 (Restated)
Our fiscal 2006 gross margin of $82.3 million represented 23.0% of revenue, compared to 28.0% in fiscal 2005. The gross margin percentage decline reflected $34.9 million, or 9.8% of revenue, of inventory write-downs associated with product discontinuances in fiscal 2006. Gross margins benefited from increased shipments of TRuepoint, a new family of lower-cost, higher margin microwave radios. See “Discussion of Business Segments” below for further information.
Research and Development Expenses
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | | | | | | | | | Increase/ | | | | | | Increase/ |
| | | 2007 | | 2006 | | (Decrease) | | 2005 | | (Decrease) |
| | | (In millions, except percentages) |
| Research and development expenses | | $ | 39.4 | | | $ | 28.8 | | | | 36.8 | % | | $ | 28.0 | | | | 2.9 | % |
| % of revenue | | | 7.8 | % | | | 8.1 | % | | | — | | | | 9.0 | % | | | — | |
47
Fiscal 2007 Compared with Fiscal 2006
Research and development (“R&D”) expenses were $39.4 million in fiscal 2007, compared to $28.8 million in fiscal 2006. As a percent of revenue, these expenses decreased from 8.1% in fiscal 2006 to 7.8% in fiscal 2007. Of the total increase in the expense, $7.2 million of the increase is attributable to the research and development expense related to the Stratex merger. The remainder of the increase is primarily due to higher spending in fiscal 2007 related to our new TRuepoint family of microwave radios.
Fiscal 2006 Compared with Fiscal 2005
R&D expenses were $28.8 million in fiscal 2006, compared to $28.0 million in fiscal 2005. As a percent of revenue, these expenses decreased from 9.0% in fiscal 2005 to 8.1% in fiscal 2006. The increase of $0.8 million was primarily due to higher spending in 2006 related to our new TRuepoint family of microwave radios.
Selling and Administrative Expenses (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Selling and administrative expenses | | $ | 98.9 | | | $ | 68.6 | | | | 44.2 | % | | $ | 59.1 | | | | 16.1 | % |
| % of revenue | | | 19.5 | % | | | 19.2 | % | | | N/M | | | | 19.0 | % | | | N/M | |
N/M Not meaningful
Fiscal 2007 Compared with Fiscal 2006 (Restated)
Our fiscal 2007 selling and administrative (S&A) expenses increased to $98.9 million from $68.6 million in fiscal 2006. As a percentage of revenue, these expenses increased from 19.2% of revenue in fiscal 2006 to 19.5% of revenue in fiscal 2007. Of the total increase, $19.8 million of the increase is attributable to the selling and administrative expenses acquired from Stratex. S&A expenses in fiscal 2006 were favorably impacted by a $1.8 million gain on the sale of a building in San Antonio, Texas. The remainder of the increase is due to higher selling expenses resulting from the increase in revenue.
Fiscal 2006 Compared with Fiscal 2005 (Restated)
S&A expenses increased from $59.1 million in fiscal 2005 to $68.6 million in fiscal 2006. As a percentage of revenue, these expenses increased from 19.0% in fiscal 2005 to 19.2% in fiscal 2006. The S&A increase is primarily related to charges associated with product discontinuances, stock-based compensation expense, and increased selling costs related to the 15.2% increase in sales, partially offset by the $1.8 million gain in 2006 as noted above. See “Discussion of Business Segments” below for further information.
Other Operating Expense Charges
In order to improve operating efficiencies and to create synergies through the consolidation of facilities, we have implemented restructuring plans to scale down our operations in Canada, France, the U.S., and Mexico.
In the third quarter of fiscal 2007, we implemented a restructuring plan to close our Montreal facility and reduce our Canadian workforce, and, to a lesser extent, our U.S. workforce. In the fourth quarter of fiscal 2007 we implemented plans to reduce our French and Mexican workforces. As part of these restructuring plans, we notified approximately 215 employees in Canada, the U.S., France, and Mexico that their employment will be terminated between March 30, 2007 and December 31, 2007. These plans are expected to be fully implemented by December 31, 2007. In fiscal 2007, we recorded restructuring charges of approximately $9.3 million ($5.1 million in our North America Microwave segment and $4.2 million in our International Microwave segment), all of which pertained to employee severance benefits. We anticipate that we will record an additional $2.2 million in restructuring charges associated with these plans in fiscal 2008 ($1.8 million in our North America Microwave segment and $0.4 in our International Microwave segment).
48
In fiscal 2007, as part of the Stratex purchase, we estimated the fair value of acquired in-process research and development to be approximately $15.3 million, which we have reflected in “Acquired in-process research and development” expense in the accompanying fiscal 2007 consolidated statements of operations. This represents certain technologies under development, primarily related to the next generation of the Eclipse product line. We estimated that the technologies under development were approximately 50% complete at the date of acquisition. We expect to incur up to an additional $3.4 million to complete this development, with completion expected in late calendar 2007. We also recorded $7.5 million amortization of acquired intangible assets. In fiscal 2006, we recorded $3.8 million of restructuring expenses, which were primarily related to the relocation of our Montreal manufacturing activities to our San Antonio facility.
Income Taxes (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Loss before income taxes | | $ | (27.9 | ) | | $ | (31.8 | ) | | | 12.3 | % | | $ | (6.5 | ) | | | N/M | |
| Income tax benefit (expense) | | $ | 6.1 | | | $ | (6.8 | ) | | | 189.7 | % | | $ | (0.3 | ) | | | N/M | |
| % of loss before income taxes | | | 21.9 | % | | | 21.4 | % | | | — | | | | 4.6 | % | | | — | |
The basis for determining our income tax benefit (expense) is discussed in “Note R – Income Taxes” of the Consolidated Financial Statements under Part II, Item 8 below.
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.
Fiscal 2006 income tax expense relates primarily to a valuation allowance established in the period against certain net operating losses we have determined will not be realized subsequent to the decision to cease manufacturing activities in Canada.
At June 29, 2007, we had $8.8 million of federal alternative minimum tax (“AMT”) credit carryforwards, which do not expire. We also had U.S. net operating loss carryforwards of approximately $108.0 million. The tax loss carryforwards have expiration dates ranging between one year and no expiration in certain instances. We recorded a full valuation allowance on the net operating loss carryforward in the opening balance sheet of Stratex under purchase accounting. This adjustment resulted in an increase to goodwill. Any realization of this net operating loss carryforward in the future will be recorded as a reduction to goodwill. We also had foreign tax credit carryforwards in the amount of $4.7 million, which will begin to expire in 2017.
For periods prior to January 26, 2007, income tax expense has been determined as if MCD had been a stand-alone entity, although the actual tax liabilities and tax consequences applied only to Harris. Our income tax expense for those periods relates to income taxes paid or to be paid in foreign jurisdictions for which net operating loss carryforwards were not available and domestic taxable income is deemed offset by tax loss carryforwards for which an income tax valuation allowance had been previously provided for in the financial statements. Thus, there was no change in our tax provision for periods prior to fiscal 2007.
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 these services were billed to us primarily based on actual usage.
These amounts were charged directly to us and were not part of the corporate allocations expense in the consolidated statements of operations for the periods presented in this report. The amount charged to us for these services was $12.2 million, $10.9 million and $10.3 million in fiscal years 2007, 2006 and 2005, respectively. These amounts are included in the cost of product sales and services and engineering, selling and administrative expenses captions in the consolidated statements of operations for the periods presented in this report.
There are other services Harris provided to us prior to the Stratex acquisition that were not directly charged to the Company. These functions and amounts are explained above under the subtitle “Basis of Presentation.” These amounts are included within “Due to Harris Corporation” on the consolidated balance sheets. Additionally, we have other receivables and payables in the normal course of business with Harris. These amounts are netted within “Due to Harris Corporation” on the consolidated balance sheets. Total receivables from Harris were $0.7 million and $7.5 million at June 29, 2007 and June 30, 2006, respectively. Total payables to Harris were $17.9 million and $20.1 million at June 29, 2007 and June 30, 2006.
49
Harris was the primary source of our financing and equity activities for the periods presented in this report through January 26, 2007, the date of the Stratex acquisition. During the seven months ended January 26, 2007, Harris’s net investment in us was increased by $24.1 million. During the fiscal 2006, Harris’s provided $2.8 million to recapitalize one of our subsidiaries and Harris’s net investment in us decreased by $7.8 million. During the fiscal 2005, Harris’s provided $43.0 million to recapitalize some of our subsidiaries and Harris’s net investment in us decreased by $13.3 million.
Additionally, through the date of the Stratex acquisition, Harris loaned funds to us to fund our international entities and we provided excess cash at various locations back to Harris. This arrangement ended on January 26, 2007. We recognized interest income and expense on these loans. The amount of interest income and expense for each of the three fiscal years in the period ended June 29, 2007 was not significant.
We have sales to, and purchases from, other Harris entities from time to time. Prior to the merger, 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 the merger, sales to and purchases from Harris entities are recorded at market price. Our sales to other Harris entities were $1.9 million, $6.5 million and $3.1 million in fiscal 2007, 2006 and 2005, respectively. We also recognized costs associated with related party purchases from Harris of $6.7 million, $12.7 million and $8.0 million in fiscal 2007, 2006 and 2005, respectively.
On January 26, 2007, we entered into a new Transition Services Agreement with Harris to provide for certain services during the period subsequent to the Stratex acquisition. These services are charged to us based primarily on actual usage and include database management, supply chain operating systems, eBusiness services, sales and service, financial systems, back office material resource planning support, HR systems, internal and information systems shared services support, network management and help desk support, and server administration and support. During the year ended June 29, 2007, Harris charged us $3.7 million for these services.
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 U.S. generally accepted accounting principles. At June 29, 2007, our lease obligation to Harris was $5.9 million and the related asset amount is included in our property, plant and equipment. Quarterly lease payments are due to Harris based on the amount of 103% of Harris’ annual depreciation calculated in accordance with U.S. generally accepted accounting principles. Our depreciation expense on this capital lease was $0.8 million in fiscal 2007. As of June 29, 2007, the future minimum payments for this lease are $3.1 million for fiscal 2008, $1.0 million for fiscal 2009, $0.6 million for fiscal 2010, $0.4 million for fiscal 2011 and $0.8 million for fiscal 2012.
Discussion of Business Segments
North America Microwave Segment (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Revenue | | $ | 216.3 | | | $ | 168.1 | | | | 28.7 | % | | $ | 159.8 | | | | 5.2 | % |
| Segment operating income | | $ | 6.3 | | | $ | 14.8 | | | | (57.4 | )% | | $ | 8.9 | | | | 66.3 | % |
| % of revenue | | | 2.9 | % | | | 8.8 | % | | | — | | | | 5.6 | % | | | — | |
Fiscal 2007 Compared with Fiscal 2006 (Restated)
North America Microwave segment revenue increased by $48.2 million or 28.7% from fiscal 2006 to fiscal 2007. Revenue for fiscal 2007 included $7.7 million of revenue related to the acquisition of Stratex. The remainder of the increase reflects increased demand for our products driven primarily by mobile operators that are upgrading and expanding networks for high bandwidth voice, data and video services and by private networks upgrading for increased reliability, survivability and interoperability.
50
Fiscal 2007 operating income was reduced by the following amounts related to the acquisition of Stratex: $0.4 million amortization of the fair value adjustments for fixed assets, $1.4 million amortization of developed technology, trade names, customer relationships, and non-compete agreements, and $5.1 million of restructuring charges and $2.7 million of integration and severance charges undertaken in connection with the merger including the reduction in force at our Montreal facility. North America operating income increased by $0.8 million attributable to the acquisition of Stratex.
Operating margin as a percentage of revenue also declined from 2006 to 2007 due to a higher mix of lower margin service revenue in fiscal 2007 compared to fiscal 2006.
Fiscal 2006 Compared with Fiscal 2005 (Restated)
North America Microwave segment revenue increased by $8.3 million or 5.2% from fiscal 2005 to fiscal 2006. This segment had operating income of $14.8 million in fiscal 2006 compared to operating income of $8.9 million in fiscal 2005. The strengthening market for microwave radios primarily drove the increase in revenue. Demand for both private networks and mobile service providers continued to be driven by capacity expansion and by network upgrades to provide high-reliability, high-bandwidth applications.
The increase in operating income was primarily due to increased shipments in fiscal 2006 of TRuepoint, a family of lower-cost microwave radios. This was partially offset by increased engineering, selling and administrative expenses in fiscal 2006 when compared to fiscal 2005 as a result of increased selling expenses and stock and cash based compensation plan expenses.
International Microwave Segment (Restated)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | (Restated) | | (Restated) | | (Decrease) | | (Restated) | | (Decrease) |
| | | (In millions, except percentages) |
| Revenue | | $ | 272.2 | | | $ | 172.3 | | | | 58.0 | % | | $ | 127.2 | | | | 35.5 | % |
| Segment operating loss | | $ | (31.3 | ) | | $ | (34.8 | ) | | | 10.1 | % | | $ | (13.5 | ) | | | N/M | |
| % of revenue | | | (11.5 | )% | | | (20.2 | )% | | | N/M | | | | (10.6 | )% | | | N/M | |
N/M Not meaningful
Fiscal 2007 Compared with Fiscal 2006 (Restated)
International microwave segment revenue increased by $99.9 million or 58.0% from fiscal 2006 to fiscal 2007. Revenue in fiscal 2007 included $116.0 million from products and services obtained in the Stratex acquisition. Excluding the impact of the revenue from Stratex products and services, our International Microwave revenue declined by $16 million.
This segment had an operating loss of $31.3 million for fiscal 2007 compared to an operating loss of $34.8 million for fiscal 2006. The operating loss for fiscal 2007 reflected the following charges related to the acquisition of Stratex: $15.3 million write off of in-process research and development, $8.6 million amortization of the fair value adjustments for inventory and fixed assets, $9.1 million amortization of developed technology, trade names, customer relationships, contract backlog and non-compete agreements, and $4.2 million of restructuring charges including the reduction in force at our Paris facility, and $3.6 million of integration expenses associated with the merger. The operating loss for fiscal 2006 reflected $34.9 million of inventory write-downs related to product discontinuances, and $3.8 million in restructuring costs associated with relocating our Montreal manufacturing activities to our San Antonio, Texas manufacturing plant. International operating income increased by $9.0 million attributable to the acquisition of Stratex.
Operating margin as a percentage of revenue also declined from 2006 to 2007 due to a higher mix of lower margin service revenue in fiscal 2007 compared to fiscal 2006.
51
Fiscal 2006 Compared with Fiscal 2005 (Restated)
International microwave segment revenue increased by $45.1 million or 35.5% from fiscal 2005 to fiscal 2006. This segment had an operating loss of $34.8 million in fiscal 2006 compared to an operating loss of $13.5 million in fiscal 2005. The success of this segment’s TRuepoint radio products and a strengthening market for microwave radios primarily drove the increase in revenue.
The increase in operating loss was primarily due to $39.6 million of inventory write-downs and severance costs associated with product discontinuances and the shut-down of our Montreal, Canada manufacturing activities. During the second quarter of fiscal 2005, we successfully completed the release of the TRuepoint product family, which is our product offering for the low- and mid-capacity microwave radio market segments. In light of the market acceptance of this product family, as demonstrated by TRuepoint product sales, management announced during the second quarter of fiscal 2006 a manufacturer’s discontinuance, or “MD”, of the MicroStar(R) M/H, MicroStar L and Galaxytm product families (the product families the TRuepoint product line was developed to replace) and of the ClearBursttm product family, a product line that shared manufacturing facilities with the MicroStar and the Galaxy product lines in Montreal, Canada. In November 2005, letters were sent to MicroStar, Galaxy and ClearBurst customers, informing them of the MD announcement.
We estimated expected demand for these products based on responses to the letters noted above and a percentage of the installed base, using our previous product history as a basis for this estimate. In addition, the customer service inventory of these discontinued products was reviewed and quantities required to support existing warranty obligations and contractual obligations were quantified. These analyses identified inventory held in multiple locations including Montreal, Canada; Redwood Shores, California; San Antonio, Texas; Paris, France; Mexico City, Mexico; São Paulo, Brazil; and Shenzhen, China. As a result of these analyses, $34.9 million of inventory was written down in the second quarter of fiscal 2006. Also, $5.6 million of severance and other costs were recorded in fiscal 2006 related to the shutdown of manufacturing activities at the Montreal, Canada plant and product discontinuances. The inventory reserved in the second quarter of fiscal 2006 has been subsequently disposed of or scrapped. No additional material costs or charges are expected to be incurred in connection with these product discontinuances.
The decrease in gross margins and operating losses associated with the product discontinuances noted above were partially offset by improved gross margins in fiscal 2006 as a result of increased shipments of TRuepoint. Engineering, selling and administrative expenses increased in fiscal 2006 when compared to fiscal 2005 as a result of increased selling expenses and stock and cash based compensation plan expenses.
52
Network Operations Segment
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2007/2006 | | | | | | 2006/2005 |
| | | | | | | | | | | % | | | | | | % |
| | | 2007 | | 2006 | | Increase/ | | 2005 | | Increase/ |
| | | | | | | | | | | (Decrease) | | | | | | (Decrease) |
| | | (In millions, except percentages) |
| Revenue | | $ | 19.4 | | | $ | 17.1 | | | | 13.5 | % | | $ | 23.4 | | | | (26.9 | )% |
| Segment operating income | | $ | 1.3 | | | $ | 1.1 | | | | 18.2 | % | | $ | 4.4 | | | | (75.0 | )% |
| % of revenue | | | 6.7 | % | | | 6.4 | % | | | N/M | | | | 18.8 | % | | | N/M | |
N/M Not meaningful
Fiscal 2007 Compared with Fiscal 2006
Network Operations segment revenue increased by 13.5% from fiscal 2006 to fiscal 2007. This segment had operating income of $1.3 million in fiscal 2007, which represented an improvement of 18.2% compared to operating income of $1.1 million in fiscal 2006. Additionally, operating income as a percentage of sales increased to 6.7% in fiscal 2007 compared to 6.4% in fiscal 2006. The increase in revenue resulted primarily from an increase in maintenance and services revenue in fiscal 2007 compared to fiscal 2006.
The increase in operating income in total and as a percentage of sales was driven by product mix and a slight increase in higher margin software revenue compared to fiscal 2006.
Fiscal 2006 Compared with Fiscal 2005
Network Operations segment revenue decreased 26.9% from fiscal 2005 to fiscal 2006. This segment had operating income of $1.1 million in fiscal 2006 compared to operating income of $4.4 million in fiscal 2005. The decrease in revenue and operating income was due to obtaining the majority of the revenue through customer add-ons and software maintenance as opposed to adding major new customers.
Liquidity, Capital Resources and Financial Strategies
Cash Flows
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In millions) | |
| Net cash (used in) provided by operating activities | | $ | (13.1 | ) | | $ | 19.5 | | | $ | (4.2 | ) |
| Net cash provided by (used in) investing activities | | | 14.3 | | | | (8.2 | ) | | | (19.4 | ) |
| Net cash provided by (used in) financing activities | | | 57.3 | | | | (5.8 | ) | | | 24.9 | |
| Effect of foreign exchange rate changes on cash | | | (3.1 | ) | | | 0.5 | | | | 1.2 | |
| | | | | | | | | | |
| Net increase in cash and cash equivalents | | $ | 55.4 | | | $ | 6.0 | | | $ | 2.5 | |
| | | | | | | | | | |
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a remaining maturity of three months or less at the time of purchase to be cash equivalents. Our cash and cash equivalents increased by $55.4 million to $69.2 million at the end of fiscal 2007. We acquired $20.4 million in cash from the Stratex acquisition net of acquisition costs of $12.7 million. We also generated cash of $8.3 million from the issuance of redeemable preference shares, $26.9 million in proceeds from the sale of Class B common stock to Harris in the contribution transaction, $35.8 million in proceeds from the sale of short-term investments, and net cash and other transfers of $24.1 million from Harris prior to the Stratex acquisition. These increases in cash were offset by $13.1 million used in operations and purchases of $30.7 million in short-term investments.
Our cash and cash equivalents increased by $6.0 million to $13.8 million at the end of fiscal 2006, primarily due to $19.5 million of cash provided by operating activities and $4.6 million of proceeds from the sale of land and building in San Antonio, Texas. These increases were partially offset by $12.8 million of software and plant and equipment additions and $5.0 million of cash and other transfers to Harris Corporation.
53
Net Cash (Used in) Provided by Operating Activities (Restated)
Our net cash used in operating activities was $13.1 million in fiscal 2007 compared to $19.5 million cash provided by operating activities in fiscal 2006. Operating cash flow was negatively affected primarily due to increases in receivables, inventories and unbilled costs. These negative cash flow items were partially offset by increases in accounts payable and accrued expenses, advance payments and unearned income and amounts due to Harris. The increase in inventories was due to the build-up of several large projects scheduled to ship during the remainder of calendar 2007.
Our net cash provided by operating activities was $19.5 million in fiscal 2006 compared to net cash used in operating activities of $4.2 million in fiscal 2005. The improvement in cash flow was primarily due to an increase in accounts payable, accrued compensation and benefits and accrued expenses associated with higher production volumes and increased incentive compensation and commission accruals.
Net Cash Provided by (Used in) Investing Activities
Our net cash provided by investing activities was $14.3 million in fiscal 2007 compared to $8.2 million used in investing activities in fiscal 2006, primarily because of the cash provided by the merger and the contribution transaction. Net cash used in investing activities in fiscal 2007 was primarily for $30.7 million in purchases of short-term investments, $2.9 million of additions of capitalized software and $8.3 million of additions of property, plant and equipment. Net cash used in investing activities in fiscal 2006 was due to $9.6 million of additions of plant and equipment and $3.2 million of additions of capitalized software, which was partially offset by $4.6 million proceeds from the sale of land and building in San Antonio, Texas.
Our total additions of capitalized software and property, plant and equipment in fiscal 2008 are expected to be in the $8 million to $10 million range.
Our net cash used in investing activities was $8.2 million in fiscal 2006 compared to $19.4 million used in investing activities in fiscal 2005. Net cash used in investing activities in fiscal 2006 was due to $9.6 million additions of property, plant and equipment and $3.2 million additions of capitalized software, which was partially offset by $4.6 million proceeds from the sale of land and building in San Antonio, Texas. Net cash used in investing activities in fiscal 2005 was primarily due to $9.3 million of additions of property, plant and equipment and $10.1 million of additions of capitalized software.
The decrease in additions of capitalized software from $10.1 million in fiscal 2005 to $3.2 million in fiscal 2006 mainly relates to next generation software that was developed in the Network Operations segment.
Net Cash Provided by (Used in) Financing Activities
Our net cash provided by financing activities in fiscal 2007 was $57.3 million compared to $5.8 million used in financing activities in fiscal 2006. The net cash provided by financing activities in fiscal 2007 came primarily from $26.9 million in proceeds from the issuance of Class B common stock issued to Harris, $24.1 million in net cash and other transfers from Harris prior to the Stratex acquisition, $8.3 million in proceeds from the issuance of redeemable preference shares and $3.1 million in proceeds from the exercise of former Stratex options. Our short-term debt also increased by $1.0 million during fiscal 2007. We made $5.2 million in principal payments on our long-term debt during fiscal 2007.
54
Our net cash used in financing activities in fiscal 2006 was $5.8 million compared to net cash provided by financing activities in fiscal 2005 of $24.9 million, and primarily related to net cash transfers to and from Harris Corporation.
Sources of Cash
At June 29, 2007, our principal sources of liquidity consisted of $89.6 million in cash, cash equivalents, short-term investments and available for sale securities and $24.2 million of available credit under our $50 million credit facility.
Available Credit Facility and Repayment of Debt
At June 29, 2007, we had $24.2 million of credit available against our $50 million revolving credit facility with a commercial bank as mentioned above. The total amount of revolving credit available is $50 million less the outstanding balance of the term loan portion and any usage under the revolving credit portion. The balance of the term loan portion of our credit facility was $19.5 million as of June 29, 2007 and there was $6.3 million outstanding in standby letters of credit as of that date, which are defined as usage under the revolving credit portion of the facility. There were no borrowings under the short-term debt portion of the facility as of June 29, 2007. As the term loans are repaid, additional credit becomes available under the revolving credit portion of the facility.
Our debt consisted of the following at June 29, 2007 and June 30, 2006:
| | | | | | | | | |
| | | As of June 29, | | | As of June 30, | |
| | | 2007 | | | 2006 | |
| | | (In millions) | |
| Credit Facility with Bank: | | | | | | | | |
| Term Loan A | | $ | 5.7 | | | $ | 0.0 | * |
| Term Loan B | | | 13.8 | | | | 0.0 | * |
| Other short-term notes | | | 1.2 | | | | 0.2 | |
| | | | | | | |
| Total | | | 20.7 | | | | 0.2 | |
| Less current portion and short-term notes | | | (11.9 | ) | | | (0.2 | ) |
| | | | | | | |
| Long-term debt | | $ | 8.8 | | | $ | 0.0 | |
| | | | | | | |
| | |
* | | The debt balances assumed as a result of the Stratex acquisition were not our obligations as of June 30, 2006. |
Term Loan A of the Credit Facility requires monthly principal payments of $0.5 million plus interest at a fixed rate of 6.38% through May 2008. Term Loan B requires monthly principal payments of $0.4 million plus interest at a fixed rate of 7.25% through March 2010.
At June 29, 2007, our future debt principal payment obligations were as follows:
| | | | | |
| | | Years Ending in June | |
| | | (In millions) | |
| 2008 | | $ | 11.9 | |
| 2009 | | | 5.0 | |
| 2010 | | | 3.8 | |
| | | | |
| Total | | $ | 20.7 | |
| | | | |
55
Based on covenants included as part of the credit facility we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth of at least $54 million plus (1) 25% of net income, as determined in accordance with U.S. GAAP (exclusive of losses) and (2) 50% of any increase to net worth due to subordinated debt or net equity proceeds from either public or private offerings (exclusive of issuances of stock under our employee benefit plans) for such quarter and all preceding quarters since December 31, 2005. We also were obligated to maintain, as measured at the last day of each fiscal month, a ratio of not less than 1.25 determined as follows: (a) the sum of total unrestricted cash and cash equivalents plus short-term and long-term marketable securities plus 25% of all accounts receivable due to us minus certain outstanding bank services and reserve for foreign currency contract transactions divided by (b) the aggregate amount of outstanding borrowings and other obligations to the bank. As of June 29, 2007, we were in compliance with these financial covenants.
Restructuring and Severance Payments
We have a liability for restructuring activities totaling $18.6 million as of June 29, 2007, of which $10.8 million is classified as a current liability and expected to be paid out in cash over the next year. Additionally, we have recorded an $8.3 million liability as of June 29, 2007 for severance payments in connection with the Stratex acquisition, of which $4.3 million is classified as a current liability and expected to be paid out in cash over the next year.
Contractual Obligations (Restated)
At June 29, 2007, we had contractual cash obligations for repayment of debt and related interest, purchase obligations to acquire goods and services, payments for operating lease commitments, obligations to Harris, payments on our restructuring and severance liabilities, redemption of our preference shares and payment of the related required dividend payments and other current liabilities on our balance sheet in the normal course of business. Cash payments due under these contractual obligations are estimated as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Obligations Due by Fiscal Year (Restated) | |
| | | | | | | | | 2009 & | | | 2011 & | | | | |
| | | Total | | | 2008 | | | 2010 | | | 2012 | | | After 2012 | |
| Long-term debt | | $ | 19.5 | | | $ | 10.7 | | | $ | 8.8 | | | $ | — | | | $ | — | |
| Interest on long-term debt | | | 1.6 | | | | 1.0 | | | | 0.6 | | | | — | | | | — | |
| Purchase obligations(1) | | | 23.6 | | | | 23.6 | | | | — | | | | — | | | | — | |
| Operating lease commitments | | | 17.3 | | | | 6.7 | | | | 8.7 | | | | 1.9 | | | | — | |
| Amounts due to Harris Corporation | | | 17.2 | | | | 17.2 | | | | — | | | | — | | | | — | |
| Capital lease obligation to Harris Corporation | | | 5.9 | | | | 3.1 | | | | 1.6 | | | | 1.2 | | | | 0.0 | |
| Restructuring and severance liabilities | | | 26.9 | | | | 15.1 | | | | 9.0 | | | | 2.8 | | | | 0.0 | |
| Redeemable preference shares(2) | | | 8.3 | | | | — | | | | — | | | | — | | | | 8.3 | |
| Dividend requirements on redeemable preference shares(3) | | | 9.5 | | | | 1.0 | | | | 2.0 | | | | 2.0 | | | | 4.5 | |
| Current liabilities on the balance sheet(4) | | | 142.6 | | | | 142.6 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total contractual cash obligations | | $ | 272.4 | | | $ | 221.0 | | | $ | 30.7 | | | $ | 7.9 | | | $ | 12.8 | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | From time to time in the normal course of business we may enter into purchasing agreements with our suppliers that require us to accept delivery of, and remit full payment for, finished products that we have ordered, finished products that we requested be held as safety stock, and work in process started on our behalf in the event we cancel or terminate the purchasing agreement. It is not our intent, nor is it reasonably likely, that we would cancel a purchase order that we have executed. Because these agreements do not specify fixed or minimum quantities, do not specify minimum or variable price provisions, and do not specify the approximate timing of the transaction, we have no basis to estimate any future liability under these agreements. |
|
(2) | | Assumes the mandatory redemption will occur more than five years from June 29, 2007. |
|
(3) | | The dividend rate is 12% and assumes no redemptions for five years from June 29, 2007. |
|
(4) | | Includes short-term debt, accounts payable, liabilities for compensation, benefits and other accrued items and income taxes payable, less the current portion of severance liabilities included in other accrued items. |
56
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:
| • | | Any obligation under certain guarantee contracts; |
|
| • | | A retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; |
|
| • | | Any obligation, including a contingent obligation, under certain derivative instruments; and |
|
| • | | Any obligation, including a contingent obligation, under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant. |
As of June 29, 2007, we did not have material financial guarantees or other contractual commitments that were reasonably likely to adversely affect liquidity. In addition, we were not a party to any related party transactions that materially affected 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.
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 June 29, 2007, we had commercial commitments on outstanding surety bonds, standby letters of credit, guarantees and other arrangements, as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Expiration of Commitments by Fiscal Year | |
| | | | | | | | | | | | | | | After | |
| | | Total | | | 2008 | | | 2009 | | | 2010 | | | 2010 | |
| | | (In millions) | |
| Standby letters of credit used for: | | | | | | | | | | | | | | | | | | | | |
| Bids | | $ | 3.1 | | | $ | 3.1 | | | $ | — | | | $ | — | | | $ | — | |
| Down payments | | | 0.1 | | | | 0.1 | | | | — | | | | — | | | | — | |
| Performance | | | 10.4 | | | | 8.6 | | | | 1.5 | | | | 0.3 | | | | — | |
| Warranty | | | 0.1 | | | | — | | | | — | | | | 0.1 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | 13.7 | | | | 11.8 | | | | 1.5 | | | | 0.4 | | | | — | |
| Surety bonds used for: | | | | | | | | | | | | | | | | | | | | |
| Bids | | | 1.3 | | | | 1.3 | | | | — | | | | — | | | | — | |
| Performance | | | 25.8 | | | | 25.8 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | 27.1 | | | | 27.1 | | | | — | | | | — | | | | — | |
| Guarantees | | | 0.5 | | | | 0.4 | | | | — | | | | — | | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| Total commitments | | $ | 41.3 | | | $ | 39.3 | | | $ | 1.5 | | | $ | 0.4 | | | $ | 0.1 | |
| | | | | | | | | | | | | | | | |
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.
57
Exchange Rate Risk
We use foreign exchange contracts to hedge both balance sheet and off-balance sheet future foreign currency commitments. Generally, these foreign exchange contracts offset foreign currency denominated inventory and purchase commitments from suppliers; accounts receivable from, and future committed sales to, customers; and intercompany loans. We believe the use of foreign currency financial instruments should reduce the risks that arise from doing business in international markets. As of June 29, 2007, we had open foreign exchange contracts with a notional amount of $52.5 million, of which $15.1 million were designated as hedges under Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“Statement 133”) and $37.4 million were not designated as Statement 133 hedges. That compares to total foreign exchange contracts with a notional amount of $19.4 million as of June 30, 2006, all of which were designated as Statement 133 hedges. The June 30, 2006 amounts include only the MCD business while the June 29, 2007 amounts include amounts assumed in the Stratex acquisition and other activity since January 26, 2007. As of June 29, 2007, contract expiration dates ranged from less than one month to three months with a weighted average contract life of approximately one month. More specifically, the foreign exchange contracts designated as Statement 133 hedges have been used primarily to hedge currency exposures from customer orders denominated in non-functional currencies currently in backlog. As of June 29, 2007, we estimated that a pre-tax loss of less than $0.1 million would be reclassified into earnings from comprehensive income within the next six months related to these cash flow hedges. The net gain or loss included in our earnings in fiscal 2007, 2006 and 2005 representing the amount of fair value and cash flow hedges’ ineffectiveness was not material. No amounts were recognized in our earnings in fiscal 2007, 2006 or 2005 related to the component of the derivative instruments’ gain or loss excluded from the assessment of hedge effectiveness. All of these derivatives were recorded at their fair value on our consolidated balance sheet in accordance with Statement 133, “Accounting for Derivative Instruments and Hedging Activities.” Factors that could impact the effectiveness of our hedging programs for foreign currency include accuracy of sales estimates, volatility of currency markets and the cost and availability of hedging instruments. A 10% adverse change in currency exchange rates would not have a material impact on our financial condition, cash flow or results of operations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents, short-term investments, available for sale securities and bank debt.
Exposure on Cash Equivalents, Short-term Investments and Available for Sale Securities
We do not use derivative financial instruments in our short-term investment portfolio. We invest in high-credit quality issues and, by policy, limit the amount of credit exposure to any one issuer and country. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs. This policy reduces the potential need to sell securities in order to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.
We had $89.6 million in cash, cash equivalents, short-term investments and available for sale securities at June 29, 2007. Short-term investments and available for sale securities totaled $20.4 million as of June 29, 2007. As of June 29, 2007, short-term investments and available for sale securities had contractual maturities ranging from 1 month to 13 months.
The primary objective of our short-term investment activities is to preserve principal while maximizing yields, without significantly increasing risk. Our cash equivalents, short-term investments and available for sale securities earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior to maturity have been immaterial. The weighted average days to maturity for cash equivalents, short-term investments and available for sale securities held as of June 29, 2007 was 82 days, and these investments had an average yield of 5.2% per annum.
As of June 29, 2007, unrealized losses on our investments were insignificant. Cash equivalents, short-term investments and available for sale securities have been recorded at fair value on our balance sheet.
Exposure on Borrowings
As of June 29, 2007, we had $24.2 million of available credit at an interest rate equal to the bank’s prime rate or the London Interbank Offered Rate (LIBOR) plus 2%. A 10% change in interest rates would not have had material impact on our financial position, results of operations or cash flows since our interest on our long-term debt is fixed rate. Our short-term debt of $1.2 million at June 29, 2007 bears interest at a variable rate (14% at June 29, 2007). A 10% change in interest rates would not have had material impact on our financial position, results of operations or cash flows since interest on our short-term debt is not material to our overall financial position.
Impact of Foreign Exchange
Approximately 91% of our international business was transacted in non-U.S. Dollar environments in fiscal 2007. The impact of translating the assets and liabilities of foreign operations to U.S. dollars is included as a component of shareholders’ equity. At June 29, 2007, the cumulative translation adjustment increased shareholders’ equity by less than $0.1 million compared to a reduction of $1.5 million as of June 30, 2006. We utilize foreign currency hedging instruments to minimize the currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material effect on our results in fiscal 2007, 2006 or 2005.
58
Impact of Inflation
To the extent feasible, we have consistently followed the practice of adjusting prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services.
Seasonality
Our fiscal third quarter revenue and orders have historically been lower than the revenue and orders in the immediately preceding second quarter because many of our customers utilize a significant portion of their capital budgets at the end of their fiscal year, the majority of our customers begin a new fiscal year on January 1, and capital expenditures tend to be lower in an organization’s first quarter than in its fourth quarter. We anticipate that this seasonality will continue. The seasonality between the second quarter and third quarter may be impacted by a variety of factors, including changes in the global economy and other factors. Please refer to the section entitled “Risk Factors” in Item 1A.
Critical Accounting Policies and Use of Estimates
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, and the application of U.S. GAAP requires management to make estimates that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates. In other instances, changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.
On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, provision for inventory obsolescence, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, product warranty obligations, and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as “critical accounting estimates.”
Critical Accounting Policies
The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our significant accounting policies are more fully described in Note B — Significant Accounting Policies in the Notes to Consolidated Financial Statements. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates on our business operations are discussed throughout this MD&A where such estimates affect our reported and expected financial results. Senior management has discussed the development and selection of the critical accounting policies and estimates and the related disclosure included herein with the Audit Committee of our Board of Directors. Preparation of this Annual Report on Form 10-K/A requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
Besides estimates that meet the “critical” accounting estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”
59
Revenue Recognition
Revenue includes product, services and software sales to end users, distributors, system integrators and OEMs.
Revenue primarily relates to product sales (other than for long-term contracts) and service arrangements, which are recognized in accordance with SEC Staff Accounting Bulletin (SAB) No. 104 “Revenue Recognition” (“SAB 104”), when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, delivery of a product has occurred and title and risk of loss has transferred or services have been rendered. Further, if an arrangement, other than a long-term contract, requires the delivery or performance of multiple deliverables or elements, we determine whether the individual elements represent “separate units of accounting” under the requirements of Emerging Issues Task Force Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). We recognize the revenue associated with each element separately. Such revenue, including products with installation services, is recognized as the revenue when each unit of accounting is earned based on the relative fair value of each unit of accounting. We defer the recognition of revenue for the fair value of installation services to the period in which the installation occurs.
Revenue recognition from long-term contracts is recorded on a percentage-of-completion basis, generally using the cost-to-cost method of accounting where sales and profits are recorded based on the ratio of costs incurred to estimated total costs at completion. Recognition of profit on long-term contracts requires estimates of: the total contract value; the total cost at completion; and the measurement of progress towards completion. Contracts are combined when specific aggregation criteria stated in the American Institute of Certified Public Accountant’s (“AICPA”) Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), are met. Amounts representing contract change orders, claims or other items are included in sales only when they can be reliably estimated and realization is probable. When adjustments in contract value or estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. Anticipated losses on contracts or programs in progress are charged to earnings when identified.
Revenue recognition for the sale of software licenses is in accordance with the AICPA’s Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”). Typically, our capitalized software sales do not have acceptance criteria in the contracts and proper documentation of Vendor Specific Objective Evidence (“VSOE”) is obtained before revenue is allocated to the various elements of the arrangement in accordance with SOP 97-2.
Cost of Product Sales and Services
Cost of sales consists primarily of materials, labor and overhead costs incurred internally and paid to contract manufacturers to produce our products, personnel and other implementation costs incurred to install our products and train customer personnel and customer service and third party original equipment manufacturer costs to provide continuing support to our customers. Also included in cost of sales is the amortization of purchased technology intangible assets.
Shipping and handling costs are included as a component of costs of product sales in our consolidated statements of operations because we include in revenue the related costs that we bill our customers.
Presentation of Taxes Collected from Customers and Remitted to Government Authorities
We present taxes (e.g., sales tax) collected from customers and remitted to governmental authorities on a net basis (i.e., excluded from revenue).
Provisions for Excess and Obsolete Inventory Losses
Our inventory has been valued at the lower of cost or market. We balance the need to maintain prudent inventory levels to ensure competitive delivery performance with the risk of excess or obsolete inventory due to changing technology and customer requirements. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, anticipated end of product life and production requirements. The review of excess and obsolete inventory primarily relates to the microwave business segments. Several factors may influence the sale and use of our inventories, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be overstated or understated. In the future, if we determine that our inventory is overvalued, we would be required to recognize such costs in cost of product sales and services in our statement of operations at the time of such determination. In the case of goods which have been written down below cost at the close of a fiscal year, such reduced amount is considered the cost for subsequent accounting purposes. We did not make any material changes in the reserve methodology used to establish our inventory loss reserves during the past three fiscal years.
60
As of June 29, 2007, our reserve for excess and obsolete inventory was $14.2 million, or 10.3% of the gross inventory balance, which compares to a reserve of $18.2 million, or 21.5% of the gross inventory balance as of June 30, 2006. In the first two quarters of fiscal 2006, we had significant write-downs in inventory due to the discontinuance of legacy products in the International microwave segment. The accuracy of our forecasts of future product demand, including the impact of planned future product launches, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Goodwill and Intangible Assets (Restated)
Under the provision of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”), we are required to perform an annual (or under certain circumstances more frequent) impairment test of our goodwill. Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as one of our business segments, with its net book value or carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. We have not made any material changes in the methodology used to determine the valuation of our goodwill or the assessment of whether or not goodwill is impaired during the past three fiscal years.
There are many assumptions and estimates underlying the determination of the fair value of a reporting unit. These assumptions include projected cash flows, discount rates, comparable market prices of similar businesses, recent acquisitions of similar businesses made in the marketplace and a review of the financial and market conditions of the underlying business. We completed impairment tests as of June 29, 2007, with no adjustment to the carrying value of goodwill. Goodwill on our consolidated balance sheet as of June 29, 2007 and June 30, 2006 was $324.7 million and $28.3 million, respectively. The accuracy of our estimate of the fair value of our reporting units and future changes in the assumptions used to make these estimates could result in the recording of an impairment loss. A 10% decrease in our estimate of the fair value of the net assets acquired in the Stratex acquisition in our International microwave segment would lead to further tests for impairment as described above. A 10% decrease, however, in our estimate of our Network Operations and North American Microwave segments fair value would not lead to further tests for impairment as described above.
Income Taxes and Tax Valuation Allowances (Restated)
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our consolidated balance sheet, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We have not made any material changes in the methodologies used to determine our tax valuation allowances during the past three fiscal years.
Our consolidated balance sheet as of June 29, 2007 includes a current deferred tax asset of $4.1 million, a non-current deferred income tax asset of $0.5 million and a non-current deferred tax liability of $29.4 million. This compares to a net non-current deferred tax asset of $9.6 million as of June 30, 2006. For all jurisdictions for which we have deferred tax, we expect that our existing levels of pre-tax earnings are sufficient to generate the amount of future taxable income needed to realize these tax assets. Our valuation allowance related to deferred income taxes, which is reflected in our consolidated balance sheet, was $96.9 million as of June 29, 2007 and $69.2 million as of June 29, 2006. The increase in valuation allowance from fiscal 2006 to fiscal 2007 is primarily due to us
61
establishing a valuation allowance on the deferred tax assets acquired in the merger. The accuracy of our deferred tax assets, if we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
U.S. income taxes have not been provided on $6.4 million of undistributed earnings of foreign subsidiaries because of our intention to reinvest these earnings indefinitely. The determination of unrecognized deferred U.S. tax liability for foreign subsidiaries is not practicable. Tax loss and credit carryforward as of June 29, 2007 have expiration dates ranging between one year and no expiration in certain instances. The amount of U.S. tax loss carryforwards was $108.0 million and credit carryforwards was $20.8 million as of June 29, 2007. The amount of foreign tax loss carryforwards was $24.0 million. The utilization of a portion of the net operating loss (“NOL”) is subject to an annual limitation under Section 382 of the Internal Revenue Code due to a change of ownership. Income taxes paid were $6.6 million in fiscal 2007.
The effective tax rate in the fiscal year ended June 29, 2007 was impacted unfavorably by a valuation allowance recorded on certain deferred tax assets where it was determined it was not more likely than not that the assets would be realized, certain purchase accounting adjustments and foreign tax credits.
A deferred tax liability in the amount of $40.8 million has been recognized in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” for the difference between the assigned values for purchase accounting purposes and the tax bases of the assets and liabilities acquired as a result of the Stratex acquisition. This resulted in a $40.8 million increase to goodwill. In addition, we also recorded a valuation allowance under purchase accounting on $94.0 million of acquired deferred tax assets in the opening balance sheet of Stratex Networks under purchase accounting. We have recorded the valuation allowance because we have determined that it was not more likely than not that the assets would be realized. Any realization of these deferred tax assets in the future will be reflected as a reduction to goodwill.
We have established our international headquarters in Singapore and have received a favorable tax ruling resulting from an application filed by us with the Singapore Economic Development Board (EDB) effective January 26, 2007. This favorable tax ruling calls for a 10% effective tax rate to be applied over a five year period provided certain milestones and objectives are met. We are certain that we will meet all requirements as outlined by EDB.
We have entered into a tax sharing agreement with Harris Corporation effective on January 26, 2007, the date of the merger. The tax sharing agreement addresses, among other things, the settlement process associated with pre-merger tax liabilities and tax attributes that are attributable to the MCD business when it was a division of Harris Corporation. There were no settlement payments recorded in the fiscal year ended June 29, 2007.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Accruals for tax contingencies are provided for in accordance with the requirements of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.”
For periods prior to January 26, 2007, income tax expense has been determined as if we had been a stand-alone entity, although the actual tax liabilities and tax consequences applied only to Harris. In such periods, income tax expense related to income taxes paid or to be paid in international 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.
Impact of Recently Issued Accounting Pronouncements
As described in “Note C — Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements, there are accounting pronouncements that have recently been issued but have not yet been implemented by us. Note C describes the potential impact that these pronouncements are expected to have on our financial position, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks. For a discussion of such policies and procedures and the related risks, see “Financial Risk Management” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated),” which is incorporated by reference into this Item 7A.
62
Item 8. Financial Statements and Supplementary Data (Restated).
| | | | | |
Index to Financial StatementsGovernance and Nominating | | Page4 | | John J. Quicke*
Dr. James Stoffel
John Mutch
| | • Develops and implements policies and practices relating to corporate governance • Reviews and monitors implementation of our policies and procedures • Reviews the process by which management identifies and mitigates key areas of risk and reviews critical risk areas with the Board • Assists in developing criteria for open positions on the Board • Reviews and recommends nominees for election of directors to the Board • Reviews and recommends policies, if needed for selection of candidates for directors |
* Chairman of Committee
Audit Committee
The Audit Committee is primarily responsible for selecting, and approving the services performed by, our independent registered public accounting firm, as well as reviewing our accounting practices, corporate financial reporting and system of internal controls over financial reporting. No material amendments to the Audit Committee Charter were made during fiscal year 2017. During fiscal year 2017, the Audit Committee was comprised of independent, non-employee members of our Board who were “financially sophisticated” under the NASDAQ Listing Rules.
The Board has determined that Mr. Mutch qualifies as an “audit committee financial expert,” as defined under Item 407(d)(5)(i) of Regulation S-K under the Securities Act of 1933 and the Exchange Act. Such status does not impose on any director duties, liabilities or obligations that are greater than the duties, liabilities or obligations otherwise imposed on a director as members of our Audit Committee and the Board.
Compensation Committee
The Compensation Committee has the authority and responsibility to approve our overall executive compensation strategy, to administer our annual and long-term compensation plans and to review and make recommendations to the Board regarding executive compensation. The Compensation Committee is comprised of independent, non-employee members of the Board in accordance with NASDAQ Listing Rules. During fiscal year 2017, the Compensation Committee utilized Pearl Meyer & Partners, LLC (“Pearl Meyer”) as an independent, third-party consulting firm.
Compensation Committee Interlock and Insider Participation
No member of the Compensation Committee was an officer or employee or former officer of the Company. None of our executive officers currently serves or in the past year has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.
Governance and Nominating Committee
Each member of the Governance and Nominating Committee met the independence requirements of the NASDAQ Listing Rules.
The Governance and Nominating Committee develops and implements policies and practices related to corporate governance consistent with sound corporate governance principles. The Governance and Nominating Committee also reviews the process by which management identifies and mitigates key areas of risk and reviews critical risk areas with the Board.
The Governance and Nominating Committee also recommends candidates to the Board and periodically reviews whether a more formal selection policy should be adopted. There is no difference in the manner in which the committee members evaluate nominees for director based on whether the nominee is recommended by a stockholder. We currently do not pay a third party to identify or assist in identifying or evaluating potential nominees, although we may in the future utilize the services of such third parties.
In reviewing potential candidates for the Board, the Governance and Nominating Committee considers the individual’s experience and background. Candidates for the position of director should exhibit proven leadership capabilities, high integrity, exercise high level responsibilities within their chosen career, and possess an ability to quickly grasp complex principles of business, finance, international transactions and communications technologies. In general, candidates who have held an established executive level position in business, finance, law, education, research, government or civic activity will be preferred.
Although the Governance and Nominating Committee has not adopted a formal diversity policy with regard to the selection of director nominees, diversity is one of the factors that the committee considers in identifying director nominees. When identifying and recommending director nominees, the Governance and Nominating Committee views diversity expansively to include, without limitation, concepts such as race, gender, national origin, differences of viewpoint, professional experience, education, skill and other qualities or attributes that contribute to board diversity. As part of this process, the Governance and Nominating Committee evaluates how a particular candidate would strengthen and increase the diversity of the Board in terms of how that candidate may contribute to the Board’s overall balance of perspectives, backgrounds, knowledge, experience, skill sets and expertise in substantive matters pertaining to the Company’s business.
In making its recommendations, the Governance and Nominating Committee bears in mind that the foremost responsibility of a director of a corporation is to represent the interests of the stockholders as a whole. The Governance and Nominating Committee intends to continue to evaluate candidates for election to the Board on the basis of the foregoing criteria.
Stockholder Communications with the Board
Stockholders who wish to communicate directly with the Board may do so by submitting a comment via the Company’s website at www.investors.aviatnetworks.com/contactBoard.cfm or by sending a letter addressed to: Aviat Networks, Inc., c/o Corporate Secretary, 860 N. McCarthy Blvd., Suite 200, Milpitas, California 95035. The Corporate Secretary monitors these communications and provides a summary of all received messages to the Board at its regularly scheduled meetings. When warranted by the nature of communications, the Corporate Secretary will request prompt attention by the appropriate committee or independent director of the Board, independent advisors or management. The Corporate Secretary may decide in her judgment whether a response to any stockholder communication is appropriate.
Code of Conduct
We implemented our Code of Conduct effective January 26, 2007. All of our employees, including the CEO, CFO and Principal Accounting Officer, are required to abide by the Code of Conduct to help ensure that our business is conducted in a consistently ethical and legal manner. The Audit Committee has adopted a written policy, and management has implemented a reporting system, intended to encourage our employees to bring to the attention of management and the Audit Committee any complaints regarding the integrity of our internal system of controls over financial reporting, or the accuracy or completeness of financial or other information related to our financial statements.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Directors, executive officers and greater than 10% holders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. Based solely on our review of Forms 3 and 4 received during fiscal year 2017, and Forms 5 (or any written representations) received with respect to fiscal year 2017, we believe that all directors, officers, executive officers and 10% stockholders complied with all applicable Section 16(a) filing requirements during fiscal year 2017.
Family Relationships
There are no family relationships among our directors and executive officers.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons or nominees has been:
the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading SEC to have violated a federal or state securities or commodities law.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview and Summary
This Compensation Discussion and Analysis, which has been prepared by management, is intended to help our stockholders understand our executive compensation philosophy, objectives, policies, practices, and decisions. It is also intended to provide context for the compensation information for our Chief Executive Officer, Chief Financial Officer and the three other most highly
compensated executive officers (our “named executive officers”) detailed in the Summary Compensation Table below and in the other tables and narrative discussion that follow.
To understand our approach to executive compensation, you should read the entire Compensation Discussion and Analysis that follows. The following brief summary introduces the major topics covered:
The cornerstone of our executive compensation program is pay for performance. Accordingly, while we pay competitive base salaries and other benefits, our named executive officers’ compensation opportunity is heavily weighted toward variable pay.
The objectives of our executive compensation program are to reward superior performance, motivate our executives to achieve our goals and attract and retain a strong management team.
The Compensation Committee oversees our compensation program. The Compensation Committee makes the majority of executive compensation decisions, but also makes recommendations on certain aspects of the program to the full Board. The Compensation Committee is composed solely of independent directors. In its work, the Compensation Committee is assisted by independent compensation consultants engaged by the Compensation Committee.
In reviewing the elements of our executive compensation program - base salary, annual incentives, long-term incentives and post-termination compensation - our Compensation Committee reviews market data from similar companies.
Our competitive positioning philosophy is to set compensation at approximately the 50th percentile of compensation at peer group companies with allowances for internal factors such as tenure, individual performance and the nature of the relative scope and complexity of the role.
Our annual incentive program is based on specific Company financial performance goals for the fiscal year, and includes provisions to “claw back” any excess amounts paid in the event of a later correction or restatement of our financial statements.
We believe the compensation program for the named executive officers supported our strategic priorities and aligned compensation earned with the Company’s financial performance in fiscal year 2017. Moreover, we believe that in our emphasis on long term stockholder value creation results in an executive compensation program structure that is beneficial to our Company and our stockholders.
Compensation Governance Best Practices
The Compensation Committee believes that a demonstrated commitment to best practices in compensation governance is itself an essential component of our approach to executive compensation. The following practices are some examples of this commitment:
Pay for performance: A substantial portion of our executives’ compensation opportunity is tied to achieving specified corporate objectives. In fiscal year 2017, 100% of the Annual Incentive Plan (“AIP”) was performance based and at-risk, subject to achievement of certain financial objectives. Under our Long-Term Incentive Plan (“LTIP”), half of the equity awards were in the form of performance shares subject to achievement of a targeted financial measure.
Mix of short-term and long-term compensation: Short term compensation for our executive officers is comprised of base salaries and the AIP, which pays out only to the extent that the Company meets its financial targets. Our LTIP, representing long term compensation, is comprised of performance shares and service-based restricted stock. Performance shares are earned, if the performance criteria are met, at the end of a three-year plan cycle, while service-based restricted stock vests over a three-year period.
Independent compensation consultant: The Compensation Committee directly retains the services of Pearl Meyer, an independent compensation consultant, to advise it in determining reasonable and market-based compensation policies.
Prohibition on hedging and pledging: Our executive officers, together with all other employees, are prohibited from engaging in hedging, pledging or similar transactions with respect to our securities.
No perquisites: Our executive officers are not provided with club memberships, personal use of corporate aircraft or any other perquisite or special benefits other than our occasional provision of relocation expense reimbursement.
No single trigger change of control acceleration: Except for a market-based stock unit award of 50,000 shares made to Michael Pangia, our President and Chief Executive Officer, which is subject to accelerated vesting upon a change of control, as described below under “Potential Payments Upon Termination or Change of Control”, change of control arrangements in employment agreements with our executive officers provide for acceleration of vesting for outstanding equity awards only in the event that we are both subject to a change in control and the executive officer’s employment terminates thereafter for reasons specified in the employment agreements.
Clawback: We have a clawback policy that entitles us to recover all or a portion of any performance-based compensation, including cash and equity components, if our financial statements are restated as a result of errors, omissions or fraud.
Strong compensation risk management: The Compensation Committee reviews and analyzes the risk profile of our compensation programs and practices on an annual basis.
Compensation Philosophy and Objectives
The primary objectives of our total executive compensation program are to use compensation as a tool to recruit, retain, and develop outstanding executives and create long term value for our shareholders. The following principles guide our overall compensation program:
reward superior performance;
motivate our executives to achieve strategic, operational, and financial goals;
enable us to attract and retain a world-class management team; and
align outcomes and rewards with stockholder expectations.
Each year, the Compensation Committee reviews the executive compensation program to ensure our executive compensation policies and programs remain appropriately aligned with our evolving business needs and to consider best compensation practices. Our executive compensation programs are reviewed to ensure that they achieve a balance between providing strong retention and performance incentives to our executives while accommodating a meaningful and continuing effort to manage both the Company’s share burn rate and the dilutive effects of equity awards to the Company’s stockholders.
Executive Compensation Process
The Compensation Committee is responsible for establishing and implementing executive compensation policies and programs in a manner consistent with our compensation objectives and principles. The Compensation Committee, which is comprised solely of independent directors, reviews and approves the features and design of our executive compensation program, and approves the compensation levels, individual AIP objectives and total compensation targets for our executive officers other than our CEO. The independent members of the Board approve the compensation level, individual AIP objectives, and financial targets for our CEO. The Compensation Committee also monitors executive succession planning and monitors our performance as it relates to overall compensation policies for employees, including benefit and savings plans.
In discharging its responsibilities, the Compensation Committee may engage outside consultants and consult with our Human Resources Department as well as internal and external legal or accounting advisors, as the Compensation Committee determines to be appropriate. The Compensation Committee considers recommendations from our CEO and senior management when making decisions regarding our executive compensation program and compensation of our executive officers. Following each fiscal year end, our CEO, assisted by our Human Resources Department, assesses the performance of all named executive officers and other officers. Following this annual performance review process, our CEO recommends base salary and incentive and equity awards for our named executive officers and other officers to the Compensation Committee. Based on input from our CEO and management, as well as from independent consultants, if any are used, and, in the case of the CEO’s compensation, the Compensation Committee’s evaluation of the CEO’s performance, the Compensation Committee determines what changes, if any, should be made to the executive compensation program and either sets or recommends to the full Board the level of each compensation element for all of our officers.
Independent Compensation Consultant for Compensation Committee
The Compensation Committee has the authority under its charter to engage the services of outside advisors, experts and others for assistance. Accordingly, the Compensation Committee has hired Pearl Meyer as an independent consultant to advise the Compensation Committee on matters related to the compensation of the Company’s executive officers. All services that Pearl Meyer provided Aviat in fiscal year 2017 were approved by the Compensation Committee and were related to executive or Board compensation. Pearl Meyer provides an annual review of the Company’s compensation practices, reviews and makes recommendations regarding Aviat’s compensation peer groups, and provides independent input to the Compensation Committee on programs and practices.
Compensation Committee Advisor Independence
The Compensation Committee has considered the independence of Pearl Meyer pursuant to the NASDAQ Listing Rules and related SEC rules finalized in 2012, and has found no conflict of interest in Pearl Meyer continuing to provide advice to the Compensation Committee. The Compensation Committee is also regularly advised by the Company’s primary outside counsel, Olshan Frome Wolosky LLP (“Olshan”). Pursuant to the NASDAQ Listing Rules and related SEC rules, the Compensation Committee has
found no conflict of interest in Olshan continuing to provide advice to the Compensation Committee. The Compensation Committee reassesses the independence of its advisors annually.
Consideration of Say on Pay Results
Each year at our annual meeting, we conduct an advisory vote of our stockholders on our executive compensation program. Although this vote is not binding on the Board or us, we believe that it is important for our stockholders to have an opportunity to express their views regarding our executive compensation philosophy, program and practices as disclosed in our proxy statement on an annual basis. The Board and our Compensation Committee value stockholders’ opinions and, to the extent there is any significant vote against the compensation of our named executive officers, the Compensation Committee evaluates whether any actions are warranted or appropriate.
At our 2016 Annual Meeting, 98% of the votes cast on the advisory vote on executive compensation supported our named executive officers’ compensation as disclosed in the proxy statement. Our Compensation Committee evaluated these results, considered investor feedback and took into account many other factors in evaluating our executive compensation programs as discussed in the Compensation Discussion and Analysis. Although none of our Compensation Committee’s subsequent actions or decisions with respect to the compensation of our executive officers were directly attributable to the results of the vote, our Compensation Committee took the vote outcome into consideration in the course of its deliberations. Our Compensation Committee believes that stockholder feedback and concerns on executive compensation matters should be considered as part of its deliberations and intends to consider the results of future advisory votes in its compensation review process.
Competitive Benchmarking
Our compensation program for all of our officers is addressed in the context of competitive compensation practices. Our management and Compensation Committee consider external data to assist in benchmarking total target compensation. For fiscal year 2017, targets for total cash and cash-based compensation (base salary and short-term incentive compensation), long-term incentives and total direct compensation (base salary and short-term and long-term incentive compensation) for Messrs. Pangia, Marimon and Stumpe were set based on data collected from our peer group companies and from a published survey source, the Radford Global Technology Survey, for our other named executive officers. In considering data from the Radford Global Technology Survey, we focused on results for technology companies with annual revenues of less than $500 million. The peer group companies selected and used for compensation comparisons are reflective of our market for executive talent and business line competitors. Also, the overall composition of the peer group reflects companies of similar complexity and size to us.
For fiscal year 2017, these peer group companies included:
|
| |
| ADTRAN Inc. | Bel Fuse, Inc. |
| CalAmp Corp. | Calix, Inc. |
| Cohu, Inc. | Comtech Telecommunications Corp. |
| DragonWave, Inc. | Extreme Networks, Inc. |
| Harmonic Inc. | Infinera Corporation |
| Ixia | KVH Industries |
| MRV Communications | NeoPhotonics Corporation |
| Novatel Wireless, Inc. | ShoreTel, Inc. |
| Sonus Networks, Inc. | |
Each year, the Compensation Committee reviews the appropriateness of the comparison group used for assessing the compensation of our CEO and other named executive officers. We made significant modifications to the peer group since fiscal year 2016 so that our peer group roster better reflects our company size and business model, and also reflects merger and acquisition activity in our sector. We removed Aruba Networks and Emulex Corporation since they are no longer publicly traded, and added KVH Industries and Novatel Wireless to bolster our overall sample size and position peer median. revenue and market capitalization more closely to that of our company.
Data for our peer group companies was collected directly from these companies’ proxy statements.
Total Compensation Elements
Our executive compensation program includes four major elements:
•base salary
•annual incentive program
•long-term compensation — equity incentives
•post-termination compensation
Each named executive officer’s performance is measured against factors such as long and short-term strategic goals and financial measures of our performance, including factors such as revenue, operating income, cash flow from operations, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and earnings per share.
Our compensation policy and practice is to target total compensation levels for all officers, including our named executive officers, nominally at the 50th percentile for similar positions as derived from the market composite data, assuming experience in the position and competent performance. The Compensation Committee may decide to target total compensation above or below the 50th percentile for similar positions in unique circumstances based on an individual’s background, experience, and relative complexity and scope of the applicable role. Though compensation levels may differ among our named executive officers based upon competitive factors and the role, responsibilities and performance of each named executive officer, there are no material differences in our compensation policies or in the manner in which total direct compensation opportunity is determined for any of our named executive officers. Because our CEO has significantly greater duties, responsibilities and accountabilities than our other named executive officers, the total compensation opportunity for the CEO is higher than for our other named executive officers. In determining CEO and other named executive officer compensation, the Board also considers the ratio between our CEO’s compensation and the average compensation of our other named executive officers as compared with similar ratios for peer group companies. For fiscal year 2017, that ratio was 2.58, compared to a median ratio of 2.41 in the peer group companies.
Base Salary
Base salaries are provided as compensation for day-to-day responsibilities and services to us. Executive salaries are reviewed annually. Our CEO generally makes recommendations to the Compensation Committee in August of each year regarding the base pay of each named executive officer, other than himself. The Compensation Committee considers each executive officer’s responsibilities, as well as the Company’s performance and recommended increases in base salary for select named executive officers and other officers. In fiscal year 2017, the CEO recommended and the Compensation Committee approved, that the base salaries for named executive officers be held flat at fiscal 2016 levels. Our CEO’s base salary is unchanged since fiscal year 2011. Additional details concerning the compensation for our named executive officers for fiscal year 2017 are set forth in the Summary Compensation Table below.
Annual Incentive Plan
The short-term incentive element of our executive compensation program is currently comprised of our AIP. Our AIP is designed to motivate our executives to focus on achievement of our short-term financial goals. The CEO reviews his recommendations for each named executive officer with the Compensation Committee, taking into account market data obtained from Pearl Meyer, the Compensation Committee’s independent consultant. Based on recommendations by the CEO, and as specified in any applicable employment agreement, the Compensation Committee recommends to the Board an annual incentive compensation target, expressed as a percentage of base salary, for each executive officer in August. Each named executive officer’s target annual incentive percentage is benchmarked against the 50th percentile within the market composite for his or her specific role. The Compensation Committee also recommends to the Board specific Company financial performance measures and targets including the relative weighting and payout thresholds. The financial targets are aligned with our Board-approved annual operating plan, and during the year periodic reports are made to the Board about our performance compared with the targets. Under the AIP, a significant portion of the executive’s annual compensation is tied directly to our financial performance. The target amount of annual incentive compensation under our AIP, expressed as a percentage of base salary, generally increases with an executive’s level of management responsibility. AIP target incentive can represent up to 100% of the base salary compensation for our named executive officers and may be paid in the form of cash, stock or a combination of the two. For fiscal year 2017, AIP target incentives were set at 100% of base salary for Mr. Pangia, 70% of base salary for Mr. Stumpe and 65% of base salary for our other named executive officers. If performance results meet target levels, our executives can earn up to a maximum of 100% of their target incentive. No incentive can be earned for performance below the minimum threshold.
For fiscal year 2017, the AIP provided for an all cash payout. The performance metric was based on the achievement of an adjusted EBITDA target with a potential payout triggered at threshold adjusted EBITDA targets. The total available cash pool was restricted to specific percentages of adjusted EBITDA. Adjusted EBITDA was calculated by excluding charges for share-based compensation, restructuring and other one-time/non-recurring income or expenses from GAAP-based EBITDA. The threshold amounts were established and approved in August 2016. The plan provided for no payout if the minimum adjusted EBITDA threshold was not met, and a total available cash pool equal to 20% of adjusted EBITDA for achievement, between the minimum threshold and a target threshold.
Table 1
Fiscal Year 2017 Annual Incentive Plan - Minimum, Target and Maximum Thresholds
|
| | | | | | |
| | | | | Results-Driven Entitlement |
| Fiscal Year 2017 Annual Incentive Plan | | Performance | | Payout |
| Metric | | Tiers | | ($) | | (As % of Award Target) |
| Adjusted EBITDA | | Minimum Threshold | | $910,000 | | 6% |
| | Target Threshold | | $15,250,000 | | 100% |
| | Maximum Threshold | | $15,250,000 | | 100% |
In fiscal year 2017, the AIP did not guarantee payout of the specified threshold and target amounts, and the Compensation Committee considered the adjusted EBITDA thresholds to be challenging. During the 2017 fiscal year, we achieved the minimum threshold target for AIP awards; therefore, all named executive officers received a payout as shown in the summary compensation table.
Long-Term Compensation — Equity Incentives
The Compensation Committee uses the LTIP as a means for determining awards of stock appreciation rights, restricted shares, restricted stock units, performance shares, and other stock-based awards to our officers and other executives based on multi-year performance. All of the LTIP awards are granted under our 2007 Stock Equity Plan (“2007 Plan”).
Our LTIP is designed to motivate our executives to focus on achievement of our long-term financial goals. Equity awards motivate our executives to achieve our long-term goals and to the extent our results affect our stock price, link such results with the performance of our stock over a three to four-year period. Using equity awards helps us to retain executives, encourage share ownership and maintain a direct link between our executive compensation program and the value and appreciation in the value of our stock.
Performance Shares. In past fiscal years, the Compensation Committee recommended performance share awards that are earned, if the specified performance criteria are met, at the end of a three-year plan cycle. The maximum possible entitlement to performance shares will occur if 100% of the specified target is achieved. In addition, irrespective of Company performance versus target, there is no entitlement to performance shares unless the award recipient continues to be employed throughout the multi-year period. Performance shares are subject to repurchase by the Company at $0.01 per share if eligible employment ends during the performance measurement period and to the extent the maximum performance is not achieved during the performance measurement period.
Service-Based Restricted Stock. Service-based restricted stock awards are awards of stock at the start of a vesting period which is subject to repurchase for nominal consideration if the specified vesting conditions are not satisfied. In addition to their use as a component of the LTIP, awards of service-based restricted stock may be made on a selective basis to individual executives primarily to facilitate retention and succession planning or to replace the value of equity awards that may have been forfeited as a result of the executive’s leaving a former employer. For compensation planning purposes, awards of service-based restricted stock are valued at the fair market value of the shares on the date of award, which is the closing price on the NASDAQ Global Select Market on that date, without reduction to reflect vesting or other conditions.
In fiscal year 2017, LTIP awards were composed of 50% performance-based and 50% service-based restricted stock. The performance shares required both achievement of an adjusted EBITDA target specific to fiscal year 2017 performance and certain service requirements. The adjusted EBITDA target for fiscal year 2017 was set at $1.00. This measure was determined by taking into consideration that management’s primary focus was to achieve profitability by increasing operating efficiency and also considering adjusted EBITDA for the past three fiscal years, which were negative: In fiscal Year 2014 adjusted EBITDA was -$26.2million, in fiscal year 2015 adjusted EBITDA was -$11.0 million and in fiscal year 2016 adjusted EBITDA was -$11.7 million. During the 2017 fiscal year, we achieved the adjusted EBITDA target, therefore, the performance-based stock was earned.
Awards that are earned do not vest until the end of the three-year period which is after fiscal year 2020.
Vesting of service-based restricted stock required continued employment through the third anniversary of date of grant.
Recovery of Executive Compensation
Our executive compensation program permits us to recover or “clawback” all or a portion of any performance-based compensation, including equity awards, if our financial statements are restated as a result of errors, omissions, or fraud. The amount which may be recovered will be the amount by which the affected compensation exceeded the amount that would have been payable
had the financial statements been initially filed as restated, or any greater or lesser amount that the Compensation Committee or our Board shall determine. In no case will the amount to be recovered by us be less than the amount required to be repaid or recovered as a matter of law. Recovery of such amounts by us would be in addition to any actions imposed by law, enforcement agencies, regulators, or other authorities.
Hedging and Pledging Prohibition
Our executive officers, as well as all other employees, are prohibited from engaging in hedging, pledging or similar transactions with respect to our securities where the transaction is designed or intended to decrease the risks associated with holding our securities. This prohibition includes transactions involving puts, call, collars or other derivative securities.
Perquisites
Our executive officers participate in the same group insurance and employee benefit plans as our other full-time U.S. employees. We do not provide special benefits or other perquisites to our executive officers.
Stock Ownership Guidelines
While we do not have a minimum stock ownership requirement for members of the Board and our named executive officers, the corporate governance guidelines adopted by the Board encourage the ownership of our common stock. The Compensation Committee is satisfied that the stock and other equity holdings among our executive officers are sufficient at this time to provide appropriate motivation to align this group’s long-term interests with those of our stockholders.
Tax and Accounting Considerations
Tax Considerations. The Compensation Committee generally considers the federal income tax and financial accounting consequences of the various components of the executive compensation program in making decisions about executive compensation. The Compensation Committee believes that achieving the compensation objectives discussed above is more important than the benefit of tax deductibility and the executive compensation programs may, from time to time, limit the tax deductibility of compensation. Nevertheless, when not inconsistent with these objectives, the Compensation Committee endeavors to award compensation that will be deductible for income tax purposes. Internal Revenue Code Section 162(m) may limit the tax deductions that a public company can claim for compensation to some of its named executive officers. The Company does not guarantee that any compensation intended to qualify as deductible performance-based compensation under Section 162(m) so qualifies.
Accounting Considerations. The Compensation Committee also considers the accounting implications of various forms of executive compensation. In its financial statements, the Company records salaries and performance-based compensation such as bonuses as expenses in the amount paid or to be paid to the named executive officers. Accounting rules also require the Company to record an expense in its financial statements for equity awards, even though equity awards are not paid as cash to employees. The accounting expense of equity awards to employees is calculated in accordance with GAAP. The Compensation Committee believes that the many advantages of equity compensation, as discussed above, more than compensate for the non-cash accounting expense associated with them.
Benefits under the 401(k) Plan and Generally Available Benefit Programs
In fiscal year 2017, our named executive officers were eligible to participate in the health and welfare programs that are generally available to all full-time U.S.-based employees, including medical, dental, vision, life, short-term and long-term disability insurance, employee counseling assistance, flexible spending accounts and accidental death and dismemberment insurance.
In addition, the named executive officers and all other eligible U.S.-based employees can participate in our tax-qualified 401(k) Plan. Under the 401(k) Plan, all eligible employees can receive matching contributions from the Company of 2.5% of compensation contributed. Each employee under the age of 50 can contribute a maximum of $17,500 during each calendar year, and each employee over the age of 50 can contribute a maximum of $23,000. We do not provide defined benefit pension plans or defined contribution retirement plans to the named executive officers or other employees other than the 401(k) Plan, or as required in certain countries other than the United States, for legal or competitive reasons.
We adopted an employee stock purchase plan effective November 19, 2009 and commencing on July 3, 2010, under which named executive officers and all other eligible U.S.-based employees can elect, on a quarterly basis, to apply a portion of their cash compensation to purchase shares of our common stock at a 5% discount. An employee’s total purchases in any year cannot exceed $25,000 in value or 15% of his or her salary, whichever is less. Furthermore, an employee may not purchase more than 48 shares of common stock annually under the employee stock purchase plan.
The 401(k) Plan, employee stock purchase plan and the other benefit programs allow us to remain competitive and enhance employee loyalty and productivity. These benefit programs are primarily intended to provide all eligible employees with competitive and quality healthcare, financial contributions for retirement and to enhance hiring and retention.
Post-Termination Compensation
Employment agreements have been established with each of our named executive officers. These agreements provide for certain payments and benefits to the employee if his or her employment with us is terminated. These arrangements are discussed in more detail below. We have determined that such payments and benefits are an integral part of a competitive compensation package for our named executive officers. For additional information regarding our employment agreements with our named executive officers, see the discussion under “Potential Payments Upon Termination or Change of Control.”
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis herein. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Amendment and in our proxy statement.
|
| | |
| | | 64 | |
| | | 65 | |
| | | 66 | |
| | | 67 | |
| | | 68 | |
| | | 69 | |
| | | 122 | Board of Directors |
