**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

** **

**ý****            QUARTERLY REPORT PURSUANT TO SECTION13 OR 15 (d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

 

**For thequarterly period ended September 30, 2001**

** **

**Commissionfile number: 0-15895**

 

 

**DMC STRATEX NETWORKS, INC.**

(Exactname of registrant specified in its charter)

 

| **Delaware**                              |   | **77-0016028**          |
|-------------------------------------------|--------|-------------------------|
| (State  or other jurisdiction             |   | (IRS  employer          |
| of  incorporation or organization)        |   | identification  number) |
|                                      |   |                    |
| **170  Rose Orchard Way**                 |   |                    |
| **San Jose, CA**                          |   | **95134**               |
| (Address  of Principal Executive Offices) |   | (Zip  Code)             |

 

Registrant'stelephone number, including area code:                     (408) 943-0777

 

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

                                                Yesý    No o

 

Thenumber of outstanding shares of the Registrant’s common stock, par value $.01per share, was 82,096,992 on  November7, 2001.

 

 

 

 

INDEX

 

 
| COVER PAGE                      |                                                                                             |
|---------------------------------|--------------------------------------------------------------------------------------------------|
|                            |                                                                                             |   |   |   |   |
| INDEX                           |                                                                                             |
|                            |                                                                                             |   |   |   |   |
| PART I - FINANCIAL  INFORMATION |                                                                                             |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             |   |   |   |   |
|                            | Item 1 - Financial  Statements                                                                   |   |   |   |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             | Condensed  Consolidated Balance Sheets |   |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             | Condensed  Consolidated Statements of Operations |   |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             | Condensed  Consolidated Statements of Cash Flows |   |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             | Notes  to Condensed Consolidated Financial Statements |   |
|                            |                                                                                             |   |   |   |   |
|                            | Item  2 - Management's Discussion and Analysis of Financial Condition and Results  of Operations |   |
|                            |                                                                                             |   |   |   |   |
|                            |                                                                                             | Factors  That May Affect Future Financial Results |   |
|                            |                                                                                             |   |   |   |   |
|                            | Item  3 - Quantitative and Qualitative Disclosures About Market Risk                             |   |
|                            |                                                                                             |   |   |   |   |
| PART II - OTHER INFORMATION     |                                                                                             |
|                            |                                                                                             |   |   |   |   |
|                            | Item  1 - Legal Proceedings                                                                      |   |   |   |
|                            | Item 6 -  Exhibits and Reports on Form 8-K                                                       |   |
|                            |                                                                                             |   |   |   |   |
| SIGNATURE                       |                                                                                             |

 

 

 

PARTI - FINANCIAL INFORMATION

ITEMI - FINANCIAL STATEMENTS

 

DMCSTRATEX NETWORKS, INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Inthousands)

 

 
|                                                 |   | **September  30, 2001** |    | **March  31, 2001** |   |
|------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                 |   | **(Unaudited)**         |    |                |   |
| **ASSETS**                                           |   |                    |    |                |   |
|                                                 |   |                    |    |                |   |
| **CURRENT  ASSETS:**                                 |   |                    |    |                |   |
| Cash  and cash equivalents                           |   | $                       | 48,543  |                | $      | 25,963 |   |
| Short-term  investments                              |   | 31,147                  |    | 11,895              |   |
| Accounts  receivable, net                            |   | 79,496                  |    | 116,427             |   |
| Inventories                                          |   | 76,628                  |    | 92,863              |   |
| Deferred  tax asset                                  |   | 1,202                   |    | 1,275               |   |
| Other  current assets                                |   | 7,503                   |    | 16,027              |   |
| **Total  current assets**                            |   | 244,519                 |    | 264,450             |   |
|                                                 |   |                    |    |                |   |
| **PROPERTY  AND EQUIPMENT, NET**                     |   | 50,255                  |    | 54,777              |   |
| **OTHER  ASSETS**                                    |   | 899                     |    | 7,553               |   |
| **Total  assets**                                    |   | $                       | 295,673 |                | $      | 326,780 |   |
|                                                 |   |                    |    |                |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       |   |                    |    |                |   |
|                                                 |   |                    |    |                |   |
| **CURRENT  LIABILITIES:**                            |   |                    |    |                |   |
| Short-term  borrowings                               |   | $                       | 1,297   |                | $      | - |   |
| Accounts  payable                                    |   | 40,006                  |    | 50,653              |   |
| Income  taxes payable                                |   | 1,251                   |    | 816                 |   |
| Accrued  liabilities                                 |   | 22,820                  |    | 15,448              |   |
| **Total  current liabilities**                       |   | 65,374                  |    | 66,917              |   |
|                                                 |   |                    |    |                |   |
|                                                 |   |                    |    |                |   |
| **STOCKHOLDERS’  EQUITY:**                      |   |                    |    |                |   |
| Common  stock and paid-in capital                    |   | 455,543                 |    | 383,275             |   |
| Accumulated  deficit                                 |   | (212,840                | )       | (110,283            | )      |
| Accumulated  other comprehensive loss                |   | (12,404                 | )       | (13,129             | )      |
| **Total  stockholders’ equity**                 |   | 230,299                 |    | 259,863             |   |
| **Total  liabilities and stockholders’ equity** |   | $                       | 295,673 |                | $      | 326,780 |   |

 

Seeaccompanying Notes to Condensed Consolidated Financial Statements.

 

 

DMCSTRATEX NETWORKS, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(Inthousands, except per share amounts)

(Unaudited)

 

 
|                                                 |   | **Three  Months Ended September 30,** |    | **Six  Months Ended September 30,** |   |
|------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                 |   | **2001**                              |    | **2000**                            |   | **2001** |   | **2000** |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Net  sales**                                       |   | $                                     | 60,898  |                                | $      | 105,433 |   | $ | 137,582 |   | $ | 192,167 |   |
| Cost  of sales                                       |   | 49,134                                |    | 72,110                              |   | 105,671 |   | 128,333 |   |
| Inventory valuation  charges                         |   | 39,360                                |    | -                                   |   | 63,304 |   | - |   |
| **Gross  profit (loss)**                             |   | (27,596                               | )       | 33,323                              |   | (31,393 | ) | 63,834 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Operating  Expenses**                              |   |                                  |    |                                |   |   |   |   |   |
| Research  and development                            |   | 4,774                                 |    | 5,722                               |   | 10,693 |   | 12,004 |   |
| Selling,  general and administrative                 |   | 14,968                                |    | 16,035                              |   | 30,686 |   | 30,633 |   |
| Restructuring  and asset valuation charges           |   | 8,500                                 |    | -                                   |   | 19,501 |   | - |   |
| **Total  operating expenses**                        |   | 28,242                                |    | 21,757                              |   | 60,880 |   | 42,637 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Operating  income (loss)**                         |   | (55,838                               | )       | 11,566                              |   | (92,273 | ) | 21,197 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Other  income (expense):**                         |   |                                  |    |                                |   |   |   |   |   |
| Interest income                                      |   | 791                                   |    | 1,665                               |   | 1,339 |   | 3,485 |   |
| Interest  expense                                    |   | (30                                   | )       | (13                                 | )      | (52 | ) | (29 | ) |
| Other  income (expense), net                         |   | (488                                  | )       | (80                                 | )      | (1,687 | ) | (870 | ) |
| Permanent  impairment of investments                 |   | -                                     |    | -                                   |   | (8,339 | ) | - |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Income  (loss) before provision for income taxes** |   | (55,565                               | )       | 13,138                              |   | (101,012 | ) | 23,783 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| Provision  for income taxes                          |   | 922                                   |    | 1,971                               |   | 1,544 |   | 3,568 |   |
| **Net  income (loss)**                               |   | $                                     | (56,487 | )                                   | $      | 11,167 |   | $ | (102,556 | ) | $ | 20,215 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Basic  earnings (loss) per share**                 |   | $                                     | (0.72   | )                                   | $      | 0.15 |   | $ | (1.35 | ) | $ | 0.28 |   |
| **Diluted  earnings (loss) per share**               |   | $                                     | (0.72   | )                                   | $      | 0.15 |   | $ | (1.35 | ) | $ | 0.26 |   |
|                                                 |   |                                  |    |                                |   |   |   |   |   |
| **Basic  weighted average shares outstanding**       |   | 78,477                                |    | 73,441                              |   | 76,209 |   | 73,128 |   |
| Impact  of diluted stock options and warrants        |   | -                                     |    | 3,311                               |   | - |   | 3,723 |   |
| **Diluted  weighted average shares outstanding**     |   | 78,477                                |    | 76,752                              |   | 76,209 |   | 76,851 |   |

 

See accompanying Notes to CondensedConsolidated Financial Statements.

 

DMC STRATEX NETWORKS, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Inthousands)

(Unaudited)

 
|                                                                                   |   | **Six  Months Ended September 30,** |     |
|----------------------------------------------------------------------------------------|--------|-------------------------------------|----------|
|                                                                                   |   | **2001**                            |     | **2000** |   |
| **Cash  flows from operating activities:**                                             |   |                                |     |   |   |
| Net  income (loss)                                                                     |   | $                                   | (102,556 | ) | $ | 20,215 |   |
| Adjustments  to reconcile net income (loss) to net cash used for operating activities: |   |                                |     |   |   |
| Depreciation  and amortization                                                         |   | 9,704                               |     | 8,406 |   |
| Impairment  loss                                                                       |   | 8,339                               |     | - |   |
| Non-cash  restructuring expenses                                                       |   | 2,105                               |     | - |   |
| Inventory  valuation charges                                                           |   | 63,116                              |     | - |   |
| Provision  for uncollectible accounts                                                  |   | 5,805                               |     | 327 |   |
| Provision  for inventory reserves                                                      |   | 1,249                               |     | 902 |   |
| Provision  for warranty reserves                                                       |   | 5,114                               |     | 3,135 |   |
| Changes  in assets and liabilities                                                     |   |                                |     |   |   |
| Decrease  (increase) in accounts receivable                                            |   | 29,249                              |     | (31,591 | ) |
| Increase  in inventories                                                               |   | (40,829                             | )        | (41,674 | ) |
| Increase  in deferred tax assets                                                       |   | (594                                | )        | - |   |
| Decrease  (increase) in other current assets                                           |   | 664                                 |     | (2,454 | ) |
| Decrease  in other assets                                                              |   | 1,193                               |     | - |   |
| Increase  (decrease) in accounts payable                                               |   | (13,051                             | )        | 17,139 |   |
| Increase  in income tax payable                                                        |   | 658                                 |     | 2,722 |   |
| Increase  (decrease) in accrued liabilities                                            |   | 2,276                               |     | (8,026 | ) |
| **Net  cash used for operating activities**                                            |   | (27,558                             | )        | (30,899 | ) |
|                                                                                   |   |                                |     |   |   |
| **Cash  flows from investing activities:**                                             |   |                                |     |   |   |
| Purchase  of short-term investments                                                    |   | (75,731                             | )        | (48,224 | ) |
| Proceeds  from maturity/sale of short term investments                                 |   | 55,868                              |     | 65,717 |   |
| Purchase  of property and equipment                                                    |   | (5,072                              | )        | (11,007 | ) |
| Minority  Investments                                                                  |   | -                                   |     | (5,545 | ) |
| **Net  cash provided by (used for) investing activities**                              |   | (24,935                             | )        | 941 |   |
|                                                                                   |   |                                |     |   |   |
| **Cash  flows from financing activities:**                                             |   |                                |     |   |   |
| Short-term  borrowings                                                                 |   | 1,430                               |     | - |   |
| Payment  of capital lease obligations                                                  |   | -                                   |     | (113 | ) |
| Proceeds  from sales of Common Stock                                                   |   | 72,298                              |     | 7,206 |   |
| **Net  cash provided by financing activities**                                         |   | 73,728                              |     | 7,093 |   |
|                                                                                   |   |                                |     |   |   |
| Effect  of exchange rate changes in cash                                               |   | 1,345                               |     | (862 | ) |
|                                                                                   |   |                                |     |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                              |   | 22,580                              |     | (23,727 | ) |
| Cash  and cash equivalents at beginning of period                                      |   | 25,963                              |     | 58,339 |   |
| **Cash  and cash equivalents at end of period**                                        |   | $                                   | 48,543   |   | $ | 34,612 |   |
|                                                                                   |   |                                |     |   |   |
| **SUPPLEMENTAL  DATA**                                                                 |   |                                |     |   |   |
| Interest  paid                                                                         |   | $                                   | 214      |   | $ | 52 |   |
| Income  taxes paid                                                                     |   | $                                   | 716      |   | $ | 813 |   |

Seeaccompanying Notes to Condensed Consolidated Financial Statements.

 

DMC STRATEX NETWORKS, INC.

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

BASISOF PRESENTATION

 

Thecondensed consolidated financial statements include the accounts of DMC StratexNetworks, Inc. and its wholly-owned subsidiaries (the “Company”).  Intercompany accounts and transactions havebeen eliminated.  Certain prior yearsamounts have been reclassified to conform to current year presentation.

 

Whilethe financial information furnished is unaudited, the financial statementsincluded in this report reflect all adjustments (consisting only of normalrecurring adjustments) that the Company considers necessary for a fairpresentation of the results of operations for the interim periods covered andof the financial condition of the Company at the date of the interim balancesheet.  The results for interim periodsare not necessarily indicative of the results for the entire year.  The condensed consolidated financialstatements should be read in connection with the Company’s financial statementsincluded in its annual report and Form 10-K for the fiscal year ended March 31,2001, filed with the Securities and Exchange Commission on June 29, 2001.

 

CASHAND CASH EQUIVALENTS

 

Forpurposes of the consolidated statement of cash flows, the Company considers allhighly liquid debt instruments with an original maturity of three months orless to be cash equivalents.

 

INVESTMENTS

 

Weinvest our excess cash in high-quality marketable instruments to ensure thatcash is readily available for use in our current operations. Accordingly, allof our marketable securities are classified as “available-for-sale” inaccordance with the provisions of the Statement of Financial AccountingStandards (“SFAS”) No. 115. At September 30, 2001, our available-for-salesecurities had contractual maturities ranging from 1 day to 592 days, with aweighted average maturity of 59 days.

 

Allinvestments are reported at fair market value with the related unrealizedholding gains and losses reported as a component of accumulated othercomprehensive loss. Unrealized holding losses of approximately $0.3 millionwere recorded on the portfolio as of September 30, 2001.  There were realized losses of approximately$0.5 million during the second quarter of Fiscal 2002. These losses are on theCompany’s minority investments in non-marketable securities, included in otherassets. The Company determined that the carrying value for these certaininvestments exceeded their fair value and that these losses were other thantemporary in nature.

 

INVENTORIES

 

Inventories are stated at the lower ofcost (first-in, first-out) or market, where cost includes material, labor andmanufacturing overhead, net of applicable reserves.  Inventories consist of (in thousands): 

 

|             |   | **September 30, 2001** |   | **March 31, 2001** |   |
|------------------|--------|------------------------|--------|--------------------|--------|
|             |   | **(Unaudited)**        |   |               |   |
| Raw  materials   |   | $                      | 39,189 |               | $      | 46,295 |   |
| Work  in process |   | 19,133                 |   | 18,642             |   |
| Finished  goods  |   | 18,306                 |   | 27,926             |   |
|             |   | $                      | 76,628 |               | $      | 92,863 |   |

 

Inventory valuationcharges of $39.4 million were recorded for the three months ended September 30,2001, which were for excess inventories not expected to be realized.

 

OTHERASSETS

 

Included in other assetsare minority investments and goodwill. Goodwill has been amortized on a straight-line basis over the usefullife ranging from five to ten years.  Asof September 30, 2001, goodwill, gross of accumulated amortization, amounted to$1.8 million.  This goodwill was fullyamortized as of September 30, 2001.  Theminority investments were purchased for the promotion of business and strategicobjectives.  Investments in marketablesecurities are reported at fair value with unrealized gains and losses recordedin accumulated other comprehensive loss. Investments in non-marketable securities are recorded at the cost.  However, in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be disposed of,” wecontinually review these minority investments and goodwill to evaluate whether conditionshave occurred that would suggest an impairment of carrying value.

 

 

SHORT-TERM BORROWINGS

 

                The Company’s short-termborrowing consists of a non-revolving credit line outstanding in Brazil. Thecredit line is for $2.9 million with a variable interest rate of monthlynominal inter-bank deposit rate plus 0.8%. The interest rate is compoundeddaily and the effective annual interest rate as of September 30, 2001 is26.43%. The borrowings against the credit line are collateralized by theCompany’s accounts receivable balance of one customer. As of September 30, 2001the Company has borrowed $1.3 million against this credit line. The principalis due and payable by February 28, 2002.

 

 

ACCRUEDLIABILITIES

 

                Accrued liabilities included thefollowing (in thousands):

 

|                         |   | **September 30, 2001** |   | **March 31, 2001** |   |
|------------------------------|--------|------------------------|--------|--------------------|--------|
|                         |   | **(Unaudited)**        |   |               |   |
| Customer deposits            |   | $                      | 500    |               | $      | 886 |   |
| Accrued payroll and benefits |   | 2,995                  |   | 3,989              |   |
| Accrued commissions          |   | 859                    |   | 1,246              |   |
| Accrued warranty             |   | 4,596                  |   | 4,788              |   |
| Accrued restructuring        |   | 9,036                  |   | -                  |   |
| Other                        |   | 4,834                  |   | 4,539              |   |
|                         |   | $                      | 22,820 |               | $      | 15,448 |   |

 

CURRENCYTRANSLATION

 

The functional currencyof the Company's subsidiaries located in the United Kingdom and New Zealand isthe U.S. dollar. Accordingly, all of the monetary assets and liabilities ofthese subsidiaries are remeasured into U.S. dollars at the current exchangerate as of the applicable balance sheet date, and all non-monetary assets andliabilities are remeasured at historical rates. Sales and expenses areremeasured at the average exchange rate prevailing during the period. Gains andlosses resulting from the remeasurement of these subsidiaries' financialstatements are included in the consolidated statements of operations.  The Company’s other internationalsubsidiaries use their respective local currency as their functionalcurrency.  Assets and liabilities ofthese subsidiaries are translated at the local current exchange rates in effectat the balance sheet date, and income and expense accounts are translated atthe average exchange rates during the period. The resulting translation adjustments are included in accumulated othercomprehensive loss.

 

DERIVATIVEFINANCIAL INSTRUMENTS

 

EffectiveApril 1, 2001, the Company adopted Financial Accounting Standard No. 133“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),which requires that all derivatives be recorded on the balance sheet at fairvalue.  Changes in the fair value ofderivatives that do not qualify, or are not effective as hedges, must berecognized currently in earnings.

 

TheCompany continues its policy of hedging forecasted and actual foreign currencyrisk with forward contracts that generally expire within nine months.  Derivatives are employed to eliminate,reduce, or transfer selected foreign currency risks that can be confidentlyidentified and quantified. Specifically, we hedge foreign currency risksrelating to firmly committed backlog, open purchase orders and non-functionalcurrency monetary assets and liabilities. At September 30, 2001, the Companyhad forward foreign exchange contracts to exchange various foreign currenciesfor U.S. dollars in the gross amount of $50.2 million. The amount of unrealizedloss on these contracts at September 30, 2001 is $0.2 million. Derivativeshedging non-functional currency monetary assets and liabilities are recorded onthe balance sheet at fair value and recognized currently in earnings.

 

TheCompany has from time to time Euro denominated firm backlog from customers incountries not participating in the Euro. Under FAS 133, these contracts are treated as embedded derivatives withchanges in fair value recognized in earnings. As of September 30, 2001 the Company had $3.0 million in U.S. dollarequivalent Euro denominated backlog from customers in non-participatingcountries.

 

Inaccordance with FAS 133, hedges of anticipated transactions are designated anddocumented at inception as “cash flow hedges” and are evaluated foreffectiveness, excluding time value, at least quarterly. The Company recordseffective changes in the fair value of derivative instruments designated ascash flow hedges of forecasted non-U.S. dollar sales and non-U.S. dollarpurchases in accumulated other comprehensive income (“OCI”) until thetransaction occurs, at which time the changes are reclassified to revenue andcost of sales, respectively.  Allamounts accumulated in OCI at quarter end will be reclassified to earningswithin the next 12 months.  Immaterialamounts were recognized in other income and expense for the second quarter offiscal 2002 related to excluding time value from effectiveness testing andineffectiveness resulting from forecasted transactions that did not occur.

 

Thefollowing table summarizes the activity in OCI, with regard to the effectivechanges in fair value of derivative instruments, for the first half of Fiscal2002 (in thousands):

 

|                              |   | ** Six Months Ended  September 30, 2001** |   |
|-----------------------------------|--------|------------------------------------------------|--------|
|                              |   |                                           |   |
| Beginning balance                 |   | $                                              | -      |   |
| Transition Adjustments            |   | 262                                            |   |
| Net Changes                       |   | 127                                            |   |
| Reclassifications to  Revenue:    |   |                                           |   |
| From Transition Adjustments       |   | 27                                             |   |
| From Current Period  Transactions |   | 174                                            |   |
| Ending balance                    |   | $                                              | 590    |   |

 

 

CONCENTRATIONOF CREDIT RISK

 

Accounts receivable concentrated with certaincustomers primarily in the telecommunications industry and in certaingeographic locations may subject the Company to concentration of credit risk.Three customers accounted for approximately 15%, 10% and 10% of net sales forthe second quarter of Fiscal 2002, respectively. For the first half of Fiscal2002, one customer accounted for 11% of net sales. Two customers accounted forapproximately 15% and 11%, respectively of the total accounts receivablebalance at the end of the second quarter of Fiscal 2002. No other customeraccounted for more than 10% of the total accounts receivable balance at the endof the second quarter of Fiscal 2002. The Company expects to collect most of these amounts during the thirdquarter of Fiscal 2002. However, $5.0 million of reserves for uncollectibleaccounts has been recorded for accounts receivable related to customers inArgentina and Russia in the second quarter of Fiscal 2002 and is shown as assetvaluation charges on the income statement. In addition to sales in NorthAmerica and Western Europe, the Company actively markets and sells products inAfrica, Asia, Eastern Europe, the Middle East and South America.  The Company performs on-going creditevaluations of its customers’ financial conditions and generally requires nocollateral, although sales to Asia, Eastern Europe and the Middle East areprimarily paid through letters of credit.

 

 

REVENUERECOGNITION

 

Werecognize revenue pursuant to Staff Accounting Bulletin No. 101 (“SAB 101”),“Revenue Recognition in Financial Statements” issued by the Securities andExchange Commission.  Accordingly,revenue is recognized when all four of the following criteria are met: (i)persuasive evidence of an arrangement exists; (ii) delivery of the productsand/or services has occurred; (iii) the selling price is fixed and determinableand (iv) collectibility is reasonably assured.

 

Inaccordance with SAB 101, revenues from product sales are recognized uponshipment, except when product sales are combined with significant post-shipmentinstallation services provided over an extended period of time. Under thisexception, revenue is deferred until such services have been performed. Revenuefrom product sales is net of third-party commissions and duty charges. Servicerevenue, which is 10.9% of net sales for the three months ended September 30,2001 and less than 10% of net sales for the three months ended September 30,2000, is recognized when the related services are performed.

 

NET INCOME PER SHARE

 

Basic earnings per share are computed bydividing net income by the weighted average number of common shares outstandingduring the period.   Diluted earningsper share are computed by dividing net income by the weighted average number ofcommon shares and potentially dilutive securities outstanding during theperiod.

 

 

LITIGATION AND CONTINGENCIES

 

The Company is subjectto legal proceedings and claims that arise in the normal course of itsbusiness.  In the opinion of management,these proceedings should not have a material adverse effect on the business,financial position, and results of operations of the Company.

 

 

 RESTRUCTURING AND ASSET VALUATION CHARGES

 

During the secondquarter of Fiscal 2002 the Company recorded restructuring and asset valuationcharges of $8.5 million, consisting of $5.0 million for uncollectible accountsreceivable, $2.5 million for lease termination costs and $1.0 million for theloss on impairment of equipment. The restructuring charges related to theconsolidation of the Company’s U.S. operations by relocating its Seattle,Washington manufacturing facility to its San Jose, California facility.

 

In the quarter endedJune 30, 2001, the Company recorded restructuring charges of $11.0 million,consisting of $5.7 million for employee severance and benefits, $4.4 millionfor facility-related costs (including $3.7 million for lease termination costsand $0.7 million for the loss on disposal of fixed assets), $0.5 million forlegal costs and $0.4 million for the write off of goodwill. This restructuringcharge included the consolidation of the Company’s U.S. operations byrelocating its Seattle, Washington manufacturing facility to its San Jose,California facility, as well as reductions in force worldwide. The Companyreduced its headcount by approximately 320 employees in the first quarter ofFiscal 2002, with reductions affecting all functional areas and affectingvarious locations.

 

 

Thecomponents of the restructuring and asset valuation charges recorded in thefirst and second quarters of Fiscal 2002 are as follows (in millions):

 
|                                             |   | ** Three Months Ended  June 30, 2001** |   | **Three  Months Ended  September 30, 2001** |   | **Six Months  Ended  September 30, 2001** |   |
|--------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
| Restructuring Charges:                           |   |                                        |   |                                        |   |                                      |   |
| Severance  and Benefits                          |   | $                                           | 5.7    |                                        | $      | -                                         |   | $ | 5.7 |   |
| Facilities  and Other                            |   | 5.3                                         |   | 3.5                                         |   | 8.8                                       |   |
| Total  Restructuring Charges                     |   | $                                           | 11.0   |                                        | $      | 3.5                                       |   | $ | 14.5 |   |
| Asset  Valuation Charges                         |   | $                                           | -      |                                        | $      | 5.0                                       |   | $ | 5.0 |   |
| Total  Restructuring and Asset Valuation Charges |   | $                                           | 11.0   |                                        | $      | 8.5                                       |   | $ | 19.5 |   |

 

The following tablesummarizes the balance of the restructuring accrual as of September 30, 2001and the type and  amount ofrestructuring costs utilized during the second quarter of Fiscal 2002 (inmillion):

 
|                                                          |   | **Severance  and Benefits** |      | **Facilities  and Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|-----------------------------|-----------|---------------------------|--------|-----------|--------|
| Balance as of June 30, 2001                                   |   | $                           |  4.8 |                      | $      |  4.2 |   | $ |  9.0 |   |
| Activities  during the three months ended September 30, 2001: |   |                        |      |                      |   |      |   |
| Provision                                                     |   | -                           |      | 3.5                       |   | 3.5       |   |
| Cash  charges                                                 |   | (2.0                        | )         | (0.5                      | )      | (2.5      | )      |
| Non-cash  charges                                             |   | -                           |      | (1.0                      | )      | (1.0      | )      |
| Balance  as of September 30, 2001                             |   | $                           | 2.8       |                      | $      | 6.2       |   | $ | 9.0 |   |

 

Total cash outlay forthe restructuring charges is expected to be $12.4 million. The remaining $7.1million of restructuring and asset valuation charges are non-cash chargesrelated to the write-off of receivables, goodwill and the loss on impairment ofequipment. The Company expects all the cash charges of restructuring to be paidout during Fiscal 2002 with the exception of severance and benefits costs ofapproximately $0.1 million, which will be paid off in Fiscal 2003 and vacatedbuilding lease obligations of $5.2 million, which are expected to be paid offover the next ten years.

 

 

COMPREHENSIVEINCOME

 

In June 1997, theFinancial Accounting Standards Board (“FASB”) issued Statement on FinancialAccounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,”which establishes standards for reporting and display of comprehensive incomeand its components (revenue, expenses, gains and losses) in a full set ofgeneral-purpose financial statements. The following table reconcilescomprehensive income under the provisions of SFAS 130 (in thousands) for:

 
|                                         |   | **Three  Months Ended September 30,** |    | **Six  Months Ended September 30,** |   |
|----------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                         |   | **2001**                              |    | **2000**                            |   | **2001** |   | **2000** |   |
|                                         |   |                                  |    |                                |   |   |   |   |   |
| Net income (loss)                            |   | $                                     | (56,487 | )                                   | $      | 11,167 |   | $ | (102,556 | ) | $ | 20,215 |   |
| Other comprehensive income(loss) net of tax: |   |                                  |    |                                |   |   |   |   |   |
| Unrealized currency gain (loss)              |   | (983                                  | )       | (5,026                              | )      | (1,904 | ) | (6,059 | ) |
| Unrealized holding gain (loss)on investments |   | (59                                   | )       | (306                                | )      | 2,629 |   | (1,539 | ) |
| Comprehensive income (loss)                  |   | $                                     | (57,529 | )                                   | $      | 5,835 |   | $ | (101,831 | ) | $ | 12,617 |   |

 

 

OPERATING SEGMENT ANDGEOGRAPHIC INFORMATION

 

 

The Company is organizedinto two operating segments: products and services.  The Company’s Chief Executive Officer has been identified as theChief Operating Decision-Maker as defined by Statement of Financial AccountingStandards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterpriseand Related Information.” Resources are allocated to each of these segmentsusing information on their revenues and operating profits before interest andtaxes.

 

Theproducts operating segment includes the Altium, DXR, SPECTRUM II and XP4digital microwave systems for digital transmission markets. The Companydesigns, develops, and manufactures these products in San Jose, California,Wellington, New Zealand and Campinas, Brazil. Prior to June 30, 2001, theCompany designed, developed and manufactured the XP4 family of products inSeattle, Washington. The services operating segment includes, withoutlimitation, installation, repair, network design, path surveys, integration andother services.  The Company maintainsregional service centers in San Jose, California; Lanarkshire, Scotland; andClark Field, Pampanga, Philippines.  Three customers accounted for approximately 15%, 10% and 10% of netsales for the second quarter of Fiscal 2002, respectively. For the first halfof Fiscal 2002, one customer accounted for 11% of net sales.

 

 

The following table setsforth revenues and operating income (loss) by operating segments (in thousands)for:

 
|                     |   | **Three  Months Ended September 30,** |   | **Six  Months Ended September 30,** |   |
|--------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                     |   | **2001**                              |   | **2000**                            |   | **2001** |   | **2000** |   |
|                     |   |                                  |   |                                |   |   |   |   |   |
| Products:                |   |                                  |   |                                |   |   |   |   |   |
| Revenues                 |   | $                                     | 54,248 |                                | $      | 97,463 |   | $ | 124,273 |   | $ | 177,773 |   |
| Operating  income (loss) |   | (56,755                               | )      | 11,786                              |   | (94,088 | ) | 20,845 |   |
|                     |   |                                  |   |                                |   |   |   |   |   |
| Services:                |   |                                  |   |                                |   |   |   |   |   |
| Revenues                 |   | 6,650                                 |   | 7,970                               |   | 13,309 |   | 14,394 |   |
| Operating  income (loss) |   | 917                                   |   | (220                                | )      | 1,815 |   | 352 |   |
|                     |   |                                  |   |                                |   |   |   |   |   |
| Total:                   |   |                                  |   |                                |   |   |   |   |   |
| Revenues                 |   | $                                     | 60,898 |                                | $      | 105,433 |   | $ | 137,582 |   | $ | 192,167 |   |
| Operating  income (loss) |   | (55,838                               | )      | 11,566                              |   | (92,273 | ) | 21,197 |   |
|                          |        |                                       |        |                                     |        |  |  |  |  |  |  |  |  |  |

 

 

 

The following table sets forth revenues fromunaffiliated customers by product (in thousands) for:

 

 
|            |   | **Three Months Ended September 30,** |   | **Six Months Ended September 30,** |   |
|-----------------|--------|--------------------------------------|--------|------------------------------------|--------|
|            |   | **2001**                             |   | **2000**                           |   | **2001** |   | **2000** |   |
|            |   |                                 |   |                               |   |   |   |   |   |
| Altium          |   | $                                    | 15,837 |                               | $      | 23,068 |   | $ | 35,472 |   | $ | 46,818 |   |
| DXR             |   | 8,174                                |   | 8,843                              |   | 16,442 |   | 19,041 |   |
| SPECTRUM  II    |   | 9,504                                |   | 29,543                             |   | 28,886 |   | 54,174 |   |
| XP4             |   | 20,348                               |   | 34,009                             |   | 42,766 |   | 53,939 |   |
| Other Products  |   | 385                                  |   | 2,000                              |   | 707 |   | 3,801 |   |
| Total  Products |   | 54,248                               |   | 97,463                             |   | 124,273 |   | 177,773 |   |
| Total  Services |   | 6,650                                |   | 7,970                              |   | 13,309 |   | 14,394 |   |
| Total  Revenues |   | $                                    | 60,898 |                               | $      | 105,433 |   | $ | 137,582 |   | $ | 192,167 |   |

 

The following table sets forth revenues fromunaffiliated customers by geographic region (in thousands) for:

 
|               |   | **Three Months Ended September 30,** |   | **Six Months Ended September 30,** |   |
|--------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|               |   | **2001**                             |   | **2000**                           |   | **2001** |   | **2000** |   |
|               |   |                                 |   |                               |   |   |   |   |   |
| Africa             |   | $                                    | 11,367 |                               | $      | 6,159 |   | $ | 14,919 |   | $ | 10,034 |   |
| Brazil             |   | 10,071                               |   | 1,131                              |   | 15,843 |   | 1,444 |   |
| China              |   | 5,983                                |   | 8,308                              |   | 25,897 |   | 11,569 |   |
| Europe/Middle East |   | 13,630                               |   | 23,506                             |   | 38,799 |   | 50,026 |   |
| Mexico             |   | 2,636                                |   | 12,176                             |   | 6,932 |   | 37,994 |   |
| United  States     |   | 4,678                                |   | 34,967                             |   | 10,466 |   | 49,093 |   |
| Other  Americas    |   | 4,397                                |   | 9,081                              |   | 10,490 |   | 15,355 |   |
| Other Asia/Pacific |   | 8,136                                |   | 10,105                             |   | 14,236 |   | 16,652 |   |
| Total Revenue      |   | $                                    | 60,898 |                               | $      | 105,433 |   | $ | 137,582 |   | $ | 192,167 |   |

 

 

Long-livedassets by country and consisting of net property and equipment was as follows(in thousands):

 

|                               |   | **September 30,  2001** |   | **March 31,  2001** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                               |   | **(Unaudited)**         |   |                |   |
| United States                      |   | $                       | 25,995 |                | $      | 33,127 |   |
| United Kingdom                     |   | 17,799                  |   | 15,490              |   |
| Other foreign  countries           |   | 6,461                   |   | 6,160               |   |
| Total property and  equipment, net |   | $                       | 50,255 |                | $      | 54,777 |   |

 

 

SUBSEQUENT EVENTS

 

In October 2001, the Company implementedan additional restructuring program and reduced the workforce by approximately85 employees, including temporary employees, with reductions affecting allfunctional areas and affecting various locations. These restructuring chargeswill occur in the third quarter of Fiscal 2002.

 

ITEM 2 - MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion in ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations’’contains trend analyses and other forward-looking statements. The statementscontained in this Quarterly Report on Form 10-Q that are not purely historicalconcerning our future products, expenses, revenues, gross margins, liquidityand cash needs, as well as our plans and strategies, contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 and Section 27A of the Securities Act of 1933, as amended, and Section21E of the Exchange Act of 1934, as amended. Such forward-looking statementsinclude statements relating to collection of our accounts receivable, sales ofour Spectrum II product, occurrences of restructuring charges, selling, generaland administrative expenses, research and development expenses cash charges forrestructuring, the need for additional financing, use of proceeds from the saleof our common stock, the cost of upgrading our systems in connection with theeuro conversion and foreign currency hedging activities. All statements, trendanalyses and other information contained herein about the markets for ourservices and products and trends in revenue, as well as other statementsidentified by the use of forward-looking terminology, including  ‘‘anticipate,’’ ‘‘believe,’’ ‘‘plan,’’‘‘estimate,’’ ‘‘expect,’’ ‘‘goal’’ and ‘‘intend’’ or the negative of theseterms or other similar expressions constitute forward-looking statements.  These forward-looking statements are basedon current expectations, and we assume no obligation to update thisinformation.  Numerous factors,including the risk factors discussed below, economic and competitiveconditions, timing and volume of incoming orders, shipment volumes, productmargins and foreign exchange rates, could cause actual results to differmaterially from those described in these statements, and prospective investorsand stockholders should carefully consider these factors set forth elsewhereherein, including those contained in the section, “Factors That May AffectFuture Financial Results,” beginning on page 24, in evaluating theseforward-looking statements.

 

**Resultsof Operations**

 

Thefollowing table sets forth the percentage relationships of certain items fromour condensed consolidated statements of operations as percentages of net sales:

 
|                                               |   | **Three  Months Ended September 30,** |   | **Six  Months Ended September 30,** |   |
|----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                               |   | **2001**                              |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Net sales                                          |   | 100.0                                 | %      | 100.0                               | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                      |   | 80.7                                  |   | -                                   |   | 76.8 |   | - |   |
| Inventory valuation charges                        |   | 64.6                                  |   | 68.4                                |   | 46.0 |   | 66.8 |   |
| Gross  profit (loss)                               |   | (45.3                                 | )      | 31.6                                |   | (22.8 | ) | 33.2 |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Research  and development                          |   | 7.8                                   |   | 5.4                                 |   | 7.8 |   | 6.3 |   |
| Selling,  general and administrative               |   | 24.6                                  |   | 15.2                                |   | 22.3 |   | 15.9 |   |
| Restructuring  and asset valuation charges         |   | 14.0                                  |   | -                                   |   | 14.2 |   | - |   |
| Operating  income (loss)                           |   | (91.7                                 | )      | 11.0                                |   | (67.1 | ) | 11.0 |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Interest  income                                   |   | 1.3                                   |   | 1.6                                 |   | 1.0 |   | 1.9 |   |
| Interest  expense                                  |   | 0.1                                   |   | -                                   |   | - |   | - |   |
| Other  income (expense), net                       |   | (0.8                                  | )      | (0.1                                | )      | (1.2 | ) | (0.5 | ) |
| Impairment  of investments                         |   | -                                     |   | -                                   |   | (6.1 | ) | - |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Income  (loss) before   provision for income taxes |   | (91.3                                 | )      | 12.5                                |   | (73.4 | ) | 12.4 |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Provision  for income taxes                        |   | 1.5                                   |   | 1.9                                 |   | 1.1 |   | 1.9 |   |
|                                               |   |                                  |   |                                |   |   |   |   |   |
| Net  income (loss)                                 |   | (92.8                                 | )%     | 10.6                                | %      | (74.5 | )% | 10.5 | % |
|                                                    |        |                                       |        |                                     |        |  |  |  |  |  |

 

 

*Net Sales*

Net sales for the second quarter ofFiscal 2002 decreased to $60.9million, compared to $105.4 million reported inthe second quarter of Fiscal 2001. This decrease is due primarily to continuedweakness of the global economy, general ongoing restrictions on capital spendingin the telecommunications and mobile cellular market and decreased sales tocompetitive local exchange carriers (CLECs) in the United States, a few ofwhich have filed for Chapter 11 bankruptcy protection. Compared to the secondquarter of Fiscal 2001, revenues of all product lines have decreasedsignificantly, with exception of the DXR product line, which remained fairlyconstant. Net sales of our Spectrum II product line decreased to $9.5 millionin the second quarter of Fiscal 2002 from $29.5 million in the comparablequarter of Fiscal 2001, primarily due to the product continuing towards itsplanned end of life. We expect sales of our Spectrum II product will continueto decline in absolute dollars. Our Altium product line net sales decreased  to $15.8 million in the second quarter ofFiscal 2002, from $23.1 million in the comparable quarter of Fiscal 2001. OurXP4 product line net sales decreased to $20.3 million in the second quarter ofFiscal 2002, from $34.0 million in the comparable quarter of Fiscal 2001. Netsales to U.S. customers were $4.7 million in the second quarter of Fiscal 2002,compared to $35.0 million in the second quarter of Fiscal 2001 due to decreasedsales to CLECs. Net sales to Mexico decreased to $2.6 million in the secondquarter of Fiscal 2002, compared to $12.2 million in the second quarter ofFiscal 2001 primarily due to a decrease in capital expenditures by ourcustomers in that region. Net sales to Brazil increased significantly to $10.1million in the second quarter of Fiscal 2002 from $1.1 million in the secondquarter of Fiscal 2001, primarily due to sales to a new customer in Brazil. Netsales to Europe and Middle East region decreased to $13.6 million in the secondquarter of Fiscal 2002 from $23.5 million in the second quarter of Fiscal 2001due to the global economic downturn. Net sales to Africa increasedsignificantly to $11.4 million in the second quarter of Fiscal 2002 from $6.2million in the second quarter on Fiscal 2001, primarily due to our securing anumber of large projects in Central Africa. Service revenue was $6.7 million inthe second quarter of Fiscal 2002, compared to $8.0 million in the secondquarter of Fiscal 2001 primarily due to lower overall product revenue andrelated installation projects.

 

Netsales for the first half of Fiscal 2002 were $137.6 million, compared to $192.2million reported in the first half of Fiscal 2001 due to continued weakness ofthe global economy and ongoing restrictions over capital spending in thetelecommunications and mobile cellular market. The decrease in net sales wasprimarily due to decreased sales of our Altium, XP4 and Spectrum II productlines, because of the reasons described above. Sales to U.S. customersdecreased to $10.5 million in the first half of Fiscal 2002 compared to $49.1million in the first half of Fiscal 2001 due to the reasons described above.However, sales to customers in Brazil increased to $15.8 million in the firsthalf of Fiscal 2002 from $1.4 million in first half of Fiscal 2001 due to salesto a new customer there. Net sales to Mexico decreased to $6.9 million in thefirst half of Fiscal 2002, compared to $38.0 million in the first half ofFiscal 2001 due to a decrease in capital expenditures by our customers in thatregion. We experienced sales declines in the Europe and Middle East region to$38.8 million in the first half of Fiscal 2002 from $50.0 million in the firsthalf of Fiscal 2001 due to the global economic downturn. Net sales to Chinaincreased significantly to $25.9 million in the first half of Fiscal 2002compared to $11.6 million in the first half of Fiscal 2001 due to increasedcapacity availability in the first half of Fiscal 2002, to fulfill backlog ofChina orders, as a result of lower overall sales in other regions. For the quarterended September 30, 2001, three of our customers accounted for 15%, 10% and 10%of our net sales for the quarter, respectively and one customer accounted for20% of our backlog as of September 30, 2001. For the first half of Fiscal 2002,one customer accounted for 11% of the net sales.

 

During the second quarter of Fiscal 2002,we received $61.1 million in new orders shippable over the next 12 months,compared to $132.5 million in the second quarter of Fiscal 2001, representing adecrease of 54%. During the first half of Fiscal 2002 we received $142.2million in new orders shippable over the next 12 months, compared to $258.5million in first half of Fiscal 2001, representing a decrease of 45%. Thebacklog at September 30, 2001 was $123.0 million compared to $160.3 million atMarch 31, 2001.

 

We include in our backlog purchase orderswith respect to which a delivery schedule has been specified for productshipment within one year.  Orders in ourcurrent backlog are subject to changes in delivery schedules or to cancellationat the option of the purchaser without significant penalty.  Accordingly, although useful for schedulingproduction, backlog as of any particular date may not be a reliable measure ofsales for any future period.

 

***Gross Profit***

Grossprofit as a percentage of net sales, before inventory valuation charges,decreased to 19.3% in the second quarter of Fiscal 2002, compared to a grossprofit of 31.6% in the second quarter of Fiscal 2001 due to lower capacityutilization resulting from lower revenues and transition costs associated withthe closure and relocation of our Seattle, Washington facility. Our grossprofit percentage was further reduced to (45.3)% due to inventory valuationcharges of $39.4 million taken in the second quarter of Fiscal 2002 for excessinventories based upon a detailed evaluation of inventory on hand and currentlyforecasted requirements.

 

Grossprofit as a percentage of net sales, before inventory valuation charges,decreased to 23.2% in the first half of Fiscal 2002 compared to 33.2 % in thefirst half of Fiscal 2001.  Thisdecrease was primarily due to reasons mentioned above. Gross profit percentagewas further reduced to (22.8)% due to inventory valuation charges of  $63.3 million taken in the first half ofFiscal 2002 for excess inventories based upon a detailed evaluation ofinventory on hand and currently forecasted requirements.

 

***Research and Development***

Inthe second quarter of Fiscal 2002, research and development expenses decreasedto $4.8 million from $5.7 million in the second quarter of Fiscal 2001.  This decrease was primarily due to closingdown of our Seattle, Washington operations. As a percentage of net sales, research and development expensesincreased to 7.8% in the second quarter of Fiscal 2002, compared to 5.4% in thesecond quarter of Fiscal 2001 due to the decrease in net sales.

 

We expect research anddevelopment expenses to continue to decline during the remainder of Fiscal 2002due to the closure of our Seattle, Washington operations.

 

In the first half ofFiscal year 2002, research and development expenses decreased to $10.7 millionfrom $12.0 million in the first half of Fiscal 2001 due to closure of ourSeattle, Washington operations. As a percentage of net sales, research anddevelopment expenses increased to 7.8% in the first half of Fiscal 2002,compared to 6.3% in the first half of Fiscal 2001 due to the decrease in netsales.

 

***Selling, General and Administrative***

In the second quarter of Fiscal 2002,selling, general and administrative expenses decreased to $15.0 million from$16.0 million in the first quarter of Fiscal 2001. This decrease was a resultof reduction of workforce and other cost reduction measures that were taken inthe first quarter of Fiscal 2002. As a percentage of net sales, selling,general and administrative expenses increased to 24.6% in the second quarter ofFiscal 2002, compared to 15.2 % in the comparable quarter of Fiscal 2001primarily because the rate of the decrease in net sales exceeded the rate ofthe decrease of selling, general and administrative expenses in absolutedollars. We expect our selling, general and administrative expenses willcontinue to decrease as a result of a continued reduction in workforce and costreductions.

 

Selling, general and administrativeexpenses in the first half of Fiscal 2002 remained fairly constant at $30.7million compared to $30.6 million in the first half of Fiscal 2001. As apercentage of net sales, selling, general and administrative expenses increasedto 22.3% in the first half of Fiscal 2002, compared to 15.9% in the first halfof Fiscal 2001 primarily due to a decrease in net sales.

 

*Restructuring and Asset Valuation Charges*

During the second quarter of Fiscal 2002we recorded restructuring and asset valuation charges of $8.5 million,consisting of $5.0 million for uncollectible accounts receivable, $2.5 millionfor lease termination costs and $1.0 million for the loss on impairment ofequipment. The restructuring charges related to the consolidation of our U.S.operations by relocating our Seattle, Washington manufacturing facility to ourSan Jose, California facility.

 

Inthe quarter ended June 30, 2001, we recorded restructuring charges of $11.0million, consisting of $5.7 million for employee severance and benefits, $4.4million for facility-related costs (including $3.7 million for leasetermination costs and $0.7 million for the loss on disposal of fixed assets),$0.5 million for legal costs and $0.4 million for the write off of goodwill.This restructuring charge included the consolidation of our U.S. operations byrelocating our Seattle, Washington manufacturing facility to our San Jose,California facility, as well as reductions in workforce worldwide. We reducedour headcount by approximately 320 employees in the first quarter of Fiscal2002, with reductions affecting all functional areas and affecting variouslocations.

 

Total cash outlay for the restructuringcharges is expected to be $12.4 million. The remaining $7.1 million ofrestructuring and asset valuation charges are non-cash charges related to thewrite-off of receivables, goodwill and the loss on impairment of equipment. Weexpect all the cash charges of restructuring to be paid out during Fiscal 2002with the exception of severance and benefits costs of approximately $0.1million, which will be paid off in Fiscal 2003 and vacated building leaseobligations of $5.2 million, which are expected to be paid off over the nextten years.

 

InOctober 2001, we implemented an additional restructuring program and reducedthe workforce by approximately 85 employees, including temporary employees,with reductions affecting all functional areas and affecting various locations.These restructuring charges will occur in the third quarter of Fiscal 2002.

 

*Other Income (Expense)*

Interest income decreased to $0.8 millionin the second quarter of Fiscal 2002 from $1.7 million in the second quarter ofFiscal 2001, primarily due to lower average cash balances and lower interestrates as compared to the second quarter of Fiscal 2001.

 

In the first half of Fiscal 2002,interest income decreased to $1.3 million from $3.5 million in the first halfof Fiscal 2001 primarily due to lower average cash balances and lower interestrates as compared to first half of Fiscal 2001. During the first half of Fiscal2002, we recorded $8.3 million as an impairment loss.  This loss consisted of $4.1 million related to our minorityinvestments in non-marketable securities and a $4.2 million loss from investmentsin marketable securities. We determined that the carrying value for thesecertain investments exceeded their fair value and that these losses were otherthan temporary in nature.

 

***Provision forIncome Taxes***

In the second quarter ofFiscal 2002, we provided for income taxes to cover foreign subsidiaries thathave generated taxable income, while recording no provision or benefit fromU.S. operations due to the net loss for the period. We continue to provide a100% valuation allowance for our deferred tax assets related to our U.S.operations.

 

**LiquidityAnd Capital Resources**

 

Netcash used for operating activities in the first half of Fiscal 2002 was $25.6million, compared to net cash used for operating activities of $30.9 million inthe first half of Fiscal 2001. The decrease in cash used for operatingactivities was primarily the result of a decrease in accounts receivable.  Accounts receivable decreased by $29.2million during the first half of Fiscal 2002 due to collections from customersand decreased sales.  Inventoriesincreased by $40.8 million in the first half of Fiscal 2002 due to the decreasein sales and the inability to decrease inventory at the same rate as thedecline in demand. Accounts payable decreased by $13.1 million in the firsthalf of Fiscal 2002 due to a decrease in the purchase volume of inventory inthe first half of Fiscal 2002. Other accrued liabilities increased $2.3 millionin the first half of Fiscal 2002 as compared to a decrease of $8.0 million inthe same period of Fiscal 2001 due to restructuring costs accrued.

 

Purchasesof property and equipment were $5.1 million in the first half of Fiscal 2002compared to $11.0 million in the first half of Fiscal 2001. The planneddecrease in capital expenditures was made in response to an overall slowdown inthe global economy.

 

Cash provided by financing activities wasmainly from proceeds from the sale of our common stock to two existingshareholders. On August 10, 2001, we raisedan aggregate amount of approximately $70.9 million from the sale of 7,927,851shares of our common stock in a direct primary issuance of shares in anoffering registered with the Securities and Exchange Commission pursuant to our“shelf” Registration Statement on Form S-3 (File No. 333-50820), which becameeffective on December 7, 2000.  Weexpect that these funds will be used for general corporate and working capitalpurposes.  This sale of common stockwill alleviate requirements for a Structured Term Equity Program (STEPSM)underwriting agreement with CIBC World Markets Corp announced on July 20, 2001.  As such, post-effective Amendment No. 1 tothe Shelf Registration Statement covering the STEP and related underwritingagreement has been withdrawn, effective August 14, 2001. The remaining proceedsfrom the sale of common stock were derived from the exercise of employeestock options and the employee stock purchase plan.

 

Short-term borrowing is a non-revolvingcredit line outstanding in Brazil. The credit line is for $2.9 million with avariable interest rate of monthly nominal inter-bank deposit rate plus 0.8%.The interest rate is compounded daily and the effective annual interest rate asof September 30, 2001 is 26.43%. The borrowings against the credit line arecollateralized by the Company’s accounts receivable balance of one customer. Asof September 30, 2001 the Company has borrowed $1.3 million against this creditline. The principal is due and payable by February 28, 2002.

 

At September 30, 2001, our principalsources of liquidity consisted of $79.7 million in cash and cash equivalentsand short-term investments.  However,depending on the growth of our business, we may require additional financingwhich may not be available to us in the required time frame on commerciallyreasonable terms, if at all. We believe that we have the financial resourcesneeded to meet our business requirements for at least the next 12 months.

 

**European Monetary Union**

 

InJanuary 1999, a new currency called the “euro” was introduced in certainEconomic and Monetary Union (“EMU”) countries. During 2002, all EMU countriesare expected to be operating with the euro as their single currency.Uncertainty exists as to the effect the euro currency will have on themarketplace. Additionally, all of the rules and regulations have not yet beendefined and finalized by the European Commission with regard to the eurocurrency. We have assessed the effect the euro conversion has had and isexpected to have on our internal systems and the sale of our products. Althoughour European sales and operating transactions are generally based primarily inU.S. dollars or U.K. pounds sterling, neither of which is subject to the euroconversion, we have recorded and successfully received payment for salesdenominated in the euro. In addition, we have upgraded our internal computersystems to convert the European currencies to the euro and record thesetransactions in euros. The cost of upgrading our systems in connection with theeuro conversion was immaterial, and we believe our business, financialcondition or results of operations will not be adversely affected by theupgrade.

 

**Quantitative and Qualitative Disclosures about Market Risk**

 

The primary objective of our short-terminvestment activities is to preserve principal while at the same time maximizeyields, without significantly increasing risk. Our short-term investments are for fixed interest rates; therefore,changes in interest rates will not generate a gain or loss on these investmentsunless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior tomaturity have been immaterial. Investments are generally not held for more than one year. The averagelength of investments held at the end of the second quarter of Fiscal 2002 was59 days and had an average yield of 3.46 % per annum.

 

Weare exposed to equity price risks on the marketable portion of equitysecurities included in our portfolio of investments purchased for the promotionof business and strategic objectives. These investments are generally in companies in the telecommunications industrysector, many of which are small capitalization stocks.  We typically do not attempt to reduce oreliminate our market exposure on these securities. A 20% adverse change inequity prices would result in an approximate $0.1 million decrease in the fairvalue of our available-for-sale securities as of the end of the second quarterof Fiscal 2002.

 

Asof September 30, 2001, unrealized losses on investments were $0.3 million,relating to our investment in Endwave Corporation.  We consider this loss to be temporary in nature and accordinglythis unrealized loss has been recorded in accumulated other comprehensive lossand the investment has been recorded at fair value on our balance sheet.

 

Weroutinely use forward exchange contracts to hedge our net exposures, bycurrency, related to the monetary assets and liabilities of our operationsdenominated in non-functional currencies. In addition, we enter into forwardexchange contracts to establish with certainty the U.S. dollar amount of futurefirm commitments denominated in a foreign currency. The primary businessobjective of this hedging program is to minimize the gains and losses resultingfrom exchange rate changes. At September 30, 2001 and 2000, we held forwardcontracts in the aggregate amount of $50.2 million and $46.7 million,respectively, primarily in British pounds, Australian dollars, New Zealanddollars and Euro. The amount of unrealized loss on these contracts at September30, 2001 is $0.2 million.

 

Givenour foreign exchange position, a 10% adverse change in foreign exchange ratesupon which these foreign exchange contracts are based would result in exchangegains and losses. In all material aspects, these exchange gains and losseswould be fully offset by exchange gains and losses on the underlying netmonetary exposures and firm commitments for which the contracts are designatedas hedges. We do not expect material exchange rate gains and losses fromunhedged foreign currency exposures.

 

We do not enter into foreign currencytransactions for trading or speculative purposes.  We attempt to limit our exposure to credit risk by executingforeign contracts with high-quality financial institutions. A discussion of ouraccounting policies for derivative financial instruments is included in thenotes to the financial statements.

 

 

 

**Factors That May Affect Future Financial Results**

 

**The unpredictability of our quarter-to-quarter results mayharm the trading price of our common stock.**

 

Our quarterly operating results may varysignificantly in the future for a variety of reasons, many of which are outsideof our control, and any of which may harm our business. These factors include:

 

•               volumeand timing of product orders received and delivered during the quarter;

 

•               ourability and the ability of our key suppliers to respond to changes made bycustomers in their orders;

 

•               timingof new product introductions by us or our competitors;

 

•               changesin the mix of products sold by us;

 

•               costand availability of components and subsystems;

 

•               downwardpricing pressure on our products;

 

•               adoptionof new technologies and industry standards;

 

•               competitivefactors, including pricing, availability and demand for competing products;

 

•               abilityof our customers to obtain financing to enable their purchase of our products;

 

•               fluctuationsin foreign currency exchange rates;

 

•               regulatorydevelopments; and

 

•               generaleconomic conditions in the United States and internationally.

 

Our quarterly results are difficult topredict and delays in product delivery or closing of a sale can cause revenuesand net income to fluctuate significantly from anticipated levels. In addition,we may increase spending in response to competition or to pursue new marketopportunities. Accordingly, we cannot assure you that we will be able tosustain profitability in the future, particularly on a quarter-to-quarterbasis.

**Because a significant amount of our revenues comes from a fewcustomers, the termination of any of these customer relationships may harm ourbusiness.**

 

Sales of our products are concentrated ina small number of customers. For the quarter ended September 30, 2001, threecustomers accounted for 35% of our net sales. In addition, three of ourcustomers accounted for 36% of our backlog and one of these customers accountedfor 20% of our backlog as of September 30, 2001. For the first half ofFiscal 2002, one customer accounted for 11% of the net sales. The worldwidetelecommunications industry is dominated by a small number of largecorporations, and we expect that a significant portion of our future productsales will continue to be concentrated in a limited number of customers. Inaddition, our customers typically are not contractually obligated to purchaseany quantity of products in any particular period and product sales to majorcustomers have varied widely from period to period. In addition, as a result ofthe global tightening of the capital markets for the telecommunications andmobile cellular projects in the first nine months of calendar 2001, the demandfor our products and services has decreased and may continue to decrease. Theloss of any existing customer, a significant reduction in the level of sales toany existing customer, or our inability to gain additional customers couldresult in further declines in our revenues. If these revenue declines occur,our business, financial condition, and results of operations would be harmed.

 

**Due to our significant volume of international sales, we aresusceptible to a number of political, economic and geographic risks that couldharm our business if they occur.**

 

We are highly dependent on sales tocustomers outside the United States. During the fiscal years 1999, 2000 and2001, sales to international customers accounted for 87%, 79% and 69% of ournet sales, respectively. Sales to international customers for the first half ofFiscal 2002 accounted for 92% of our net sales. We expect that internationalsales will continue to account for the majority of our net product sales forthe foreseeable future. As a result, the occurrence of any international,political, economic or geographic events that adversely affects our businesscould result in significant revenue shortfalls. These revenue shortfalls couldcause our business, financial condition and results of operations to be harmed.Some of the risks and challenges of doing business internationally include:

 

•               unexpectedchanges in regulatory requirements;

 

•               fluctuationsin foreign currency exchange rates;

 

•               impositionof tariffs and other barriers and restrictions;

 

•               managementand operation of an enterprise spread over various countries;

 

•               burdenof complying with a variety of foreign laws; and

 

•               generaleconomic and geopolitical conditions, including inflation and traderelationships.

**Our average sales prices are declining, which is decreasingour gross profit margins.**

 

Currently, manufacturers of digitalmicrowave telecommunications equipment are experiencing, and are likely tocontinue to experience, on-going price pressure, which has resulted, and isexpected to continue to result, in downward pricing pressure on our products.As a result, we have experienced, and expect to continue to experience,declining average sales prices for our products. Our future profitability isdependent upon our ability to improve manufacturing efficiencies, reduce costsof materials used in our products, and to continue to introduce new productsand product enhancements. Our inability to respond to increased pricecompetition will harm our business, financial condition and results ofoperations. Since our customers frequently negotiate supply arrangements far inadvance of delivery dates, we must often commit to price reductions for ourproducts before we are aware of how, or if, cost reductions can be obtained. Asa result, current or future price reduction commitments could, and anyinability by us to respond to increased price competition would, harm ourbusiness, financial condition and results of operations.

 

**Competition could harm our ability to maintain or improve ourposition in the market and could decrease our revenues.**

 

The wireless interconnection and accessbusiness is a specialized segment of the wireless telecommunications industryand is extremely competitive, and we expect that competition will increase.Many of our competitors have more extensive engineering, manufacturing andmarketing capabilities and significantly greater financial, technical, andpersonnel resources than us. In addition, some of our competitors may havegreater name recognition, broader product lines, a larger installed base ofproducts and longer–standing customer relationships. Our existing andpotential competitors include established and emerging companies, such asAlcatel, Ceragon Networks, L.M. Ericsson, Microwave Communications Division ofHarris Corporation, NEC, Nera, Nokia, P-COM, Inc, Sagem AS, SIAE, Siemens AG,as well as several private companies currently in the startup stage. Some ofour competitors have product lines that compete with ours, and are alsooriginal equipment manufacturers (OEMs) through which we market and sell ourproducts. Some of our largest customers could internally develop the capabilityto manufacture products similar to those manufactured by us and, as a result,their demand for our products and services may decrease.

 

We believe that our ability to competesuccessfully will depend on a number of factors both within and outside ourcontrol, including price, quality, availability, customer service and support,breadth of product line, product performance and features, rapid time-to-marketdelivery capabilities, reliability, timing of new product introductions by us,our customers and our competitors, and the ability of our customers to obtainfinancing. We cannot assure you that we will have the financial resources,technical expertise, or marketing, sales, distribution, and customer serviceand support capabilities to compete successfully.

**If we fail to manage our internal development or successfullyintegrate acquired businesses, we may not effectively manage our growth and ourbusiness may be harmed.**

 

Future growth of our operations depends,in part, on our ability to introduce new products and enhancements to existingproducts to meet the emerging trends in our industry. We have pursued, and willcontinue to pursue, growth opportunities through internal development, minorityinvestments and acquisitions of complementary businesses and technologies. Weare unable to predict whether and when any prospective acquisition candidatewill become available or the likelihood that any acquisition will be completedand successfully integrated. Once integrated, acquired businesses may notachieve comparable levels of revenues, profitability or productivity as ourexisting business or otherwise perform as expected. Also, acquisitions mayinvolve difficulties in the retention of personnel, diversion of management'sattention, risks of our customers and customers of acquired businessesdeferring purchase decisions as they evaluate the impact of the acquisition, unexpectedlegal liabilities, and tax and accounting issues. Our failure to manage growtheffectively could harm our business, financial condition and results ofoperations.

 

In addition, we compete for acquisitionand expansion opportunities with many entities that have substantially greaterresources than us. Furthermore, any acquisition we complete may encouragecertain of our competitors to enter into additional business combinations, toaccelerate product development, or to engage in aggressive price reductions orother competitive practices, thereby creating even more powerful or aggressivecompetitors.

 

**Because of intense competition for highly skilled personnel,we may not be able to recruit and retain qualified personnel.**

 

Due to the specialized nature of ourbusiness, our future performance is highly dependent upon the continuedservices of our key engineering personnel and executive officers, includingCharles D. Kissner, who currently serves as our Chief Executive Officer andChairman of the Board. The loss of any key personnel could harm our business.Our prospects depend upon our ability to attract and retain qualifiedengineering, manufacturing, marketing, sales and management personnel for ouroperations. Competition for personnel is intense and we may not be successfulin attracting or retaining qualified personnel. The failure of any key employeeto perform in his or her current position or our inability to attract andretain qualified personnel could harm our business and deter our ability to expandour business.

 

**Because of the severe economic downturn in the United Stateseconomy, and bankruptcies and financial difficulties in the competitive localexchange carrier business, the demand for our products and services maydecrease.**

 

Due to the rapid and increasingly severeeconomic downturn in the United States, as well as, the global tightening ofthe capital markets for the telecommunications and mobile cellular projects inthe first nine months of calendar 2001, our business opportunities in theUnited States, Europe, Asia and other countries and geographic regions where weconduct business have diminished. To the extent that the economic downturn andthe global tightening of the capital markets continue, the demand for ourproducts and services will decrease further in these countries and geographicalregions. In addition, the terrorist attack of September 11, 2001, thesubsequent military response by the United States and future events occurringin response to or in connection with the attacks may negatively impact theeconomy in general.  In particular, thenegative impacts of these events may affect the wireless telecommunicationsindustry and competitive local exchange carriers (CLECs), which comprise asignificant segment of our customers. This would result in our customersdelaying or canceling the purchase of our products, which would have asignificant negative impact on our revenues. Due in part to the economicdownturn, we undertook a worldwide reduction in work force of approximately 30%and closed our Seattle, Washington facility in the first half of Fiscal 2002.In addition, we have announced a reduction in workforce of approximately 10% inthe third quarter of Fiscal 2002. In addition, the CLEC business in the UnitedStates accounted for approximately 25% of our total revenues in Fiscal 2001.Several of our major customers in this market, including Winstar and Teligent,filed for protection under Chapter 11 of the U.S Bankruptcy Code. Winstar andTeligent collectively accounted for 13% of our net sales for Fiscal 2001. As aresult, we expect little, if any, business from the CLEC market in Fiscal 2002.This will result in a significant revenue decline in Fiscal 2002 as compared toFiscal 2001.

 

**Financial difficulties confronting our customers expose us toincreased credit risks and may decrease our revenues and profitability.**

 

 CLECs which comprised a significant segment of our customers,faced severe financial difficulties in Fiscal 2001. As a result, our revenueswere exposed to greater risks related to customer credit than they have been inrecent periods. For Fiscal 2001, we recorded a reserve against receivables of$22.0 million for receivables that we were unable to collect from CLECs inthe United States. In the second quarter of Fiscal 2002, we recorded an assetvaluation charge of $5.0 million against some of our accounts receivable inArgentina and Russia. If the economic downturn continues, we may be forced totake additional reserves for receivables, if our customers fail to makepayments.

 

**The global tightening of capital markets for thetelecommunications and mobile cellular projects may result in inventory whichwe cannot sell or be required to sell at distressed prices.**

 

Many of our current and potentialcustomers require significant capital funding to finance theirtelecommunications and mobile cellular projects, which include the purchase ofour products and services.  Due to thecurrent tight capital markets worldwide, available funding for these projectshas been and may continue to be unavailable to some customers and thereby slowor halt the purchase of our products and services.  This has resulted in excess inventories on hand and could resultin additional excess inventories in the future.  In the first half of Fiscal 2002, we recorded inventory valuationcharges of $63.3 million for excess inventory and supplier commitmentsresulting from the reduction in our sales volume compared to the prior fiscalyear.  If funding continues to beunavailable to our customers or their customers, we may be forced to takeadditional reserves for excess inventory. We cannot assure you that we will be successful in matching ourinventory purchases with anticipated shipment volumes.  As a result, we may fail to control theamount of inventory on hand and may be forced to take unanticipated additionalreserves.  Such additional inventoryreserves, if required, would decrease our profits.

 

**Lack of component availability or the inability of oursubcontractors to perform, or our key suppliers to manufacture and deliver ourproducts, could cause our products to be produced in an untimely orunsatisfactory manner.**

 

Our manufacturing operations are highlydependent upon the delivery of materials by outside suppliers in a timelymanner. Also, we depend in part upon subcontractors to assemble majorcomponents and subsystems used in our products in a timely and satisfactorymanner. We do not generally enter into long-term or volume purchase agreementswith any of our suppliers, and we cannot assure you that such materials,components and subsystems will be available to us at such time and inquantities we require, if at all. In addition, due to the rapid andincreasingly severe economic downturn, our suppliers have experienced and arecontinuing to experience various financial difficulties which may impact theirability to supply the materials, components and subsystems that werequire.  Our inability to developalternative sources of supply quickly and on a cost-effective basis couldmaterially impair our ability to manufacture and deliver our products to ourcustomers in a timely manner. We cannot assure you that we will not experiencematerial supply problems or component or subsystem delays in the future.

**If we are unable to protect our intellectual property rightsadequately, we may be deprived of legal recourse against those whomisappropriate our intellectual property.**

 

Our ability to compete will depend, inpart, on our ability to obtain and enforce intellectual property protection forour technology in the United States and internationally. We currently rely upona combination of trade secrets, trademark, copyright, patents and contractualrights to protect our intellectual property. In addition, we enter into confidentiality and invention assignmentagreements with our employees, and enter into non-disclosure agreements withour suppliers and appropriate customers so as to limit access to and disclosureof our proprietary information. We cannot assure you that any steps taken by uswill be adequate to deter misappropriation or impede independent third partydevelopment of similar technologies. In the event that such intellectualproperty arrangements are insufficient, our business, financial condition andresults of operations could be harmed. Moreover, we have significant operationsin the United Kingdom and New Zealand, and our business is highly dependent onsales to customers outside the United States. We cannot assure you that theprotection provided to our intellectual property by the laws and courts offoreign nations will be substantially similar to the remedies available underUnited States law. Furthermore, we cannot assure you that third parties willnot assert infringement claims against us based on foreign intellectualproperty rights and laws that are different from those established in theUnited States.

 

**Defending against intellectual property infringement claimscould be expensive and could disrupt our business.**

 

The wireless telecommunications industryis characterized by vigorous protection and pursuit of intellectual propertyrights, which has resulted in often protracted and expensive litigation. We mayin the future be notified that we are infringing certain patent or otherintellectual property rights of others. Such litigation or claim could resultin substantial costs and diversion of resources. In the event of an adverseresult of any such litigation, we could be required to pay substantial damages,cease the licensing of allegedly infringing technology or the sale of allegedlyinfringing products and expend significant resources to develop non-infringingtechnology or to obtain licenses for the infringing technology. We cannotassure you that we would be successful in developing such non-infringingtechnology or that any license for the infringing technology would be availableto us on commercially reasonable terms, if at all.

 

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

 

Radio communications are subject toregulation by United States and foreign laws and international treaties.Generally, our products must conform to a variety of United States andinternational requirements established to avoid interference among users oftransmission frequencies and to permit interconnection of telecommunicationsequipment. Any delays in compliance with respect to our future products coulddelay the introduction of such productions.

 

In addition, both in the United Statesand internationally, we are affected by the allocation and auction of the radiofrequency spectrum by governmental authorities. Such governmental authoritiesmay not allocate sufficient radio frequency spectrum for use by our products orwe may not be successful in obtaining regulatory approval for our products fromthese authorities. Historically, in many developed countries, theunavailability of frequency spectrum has inhibited the growth of wirelesstelecommunications networks. In addition, to operate in a jurisdiction, we mustobtain regulatory approval for our products. Each jurisdiction in which wemarket our products has its own regulations governing radio communications.Products that support emerging wireless telecommunications services can bemarketed in a jurisdiction only if permitted by suitable frequency allocations,auctions and regulations, and the process of establishing new regulations iscomplex and lengthy. If we are unable to obtain sufficient allocation of radiofrequency spectrum by the appropriate governmental authority or obtain theproper regulatory approval for our products, our business, financial conditionor results of operations may be harmed.

 

**If we fail to maintain our relationships with original equipmentmanufacturers, our distribution channels could be harmed, which could cause ourrevenues to decrease.**

 

We have relationships with OEM basestation suppliers and in selected countries we also market our products throughindependent agents and distributors. These relationships increase our abilityto pursue the limited number of major contract awards each year. In addition,these relationships are intended to provide our customers with easier access tofinancing and to integrated systems providers with a variety of equipment andservice capabilities. We may not be able to continue to maintain and developthese relationships or, if these relationships are developed, they may not besuccessful. Our inability to establish or maintain these distribution relationshipscould restrict our ability to market our products and thereby result insignificant revenue shortfalls. If these revenue shortfalls occur, ourbusiness, financial condition or results of operations may be harmed.

 

**Increasing energy costs and power outages, which impactedcompanies in California earlier this year may adversely affect our Californiafacilities.**

 

We conduct most of our operations inCalifornia and rely on a continuous power supply to conduct operations.California's current energy crisis could substantially disrupt our operationsand increase our expenses. California has recently implemented, and may in thefuture continue to implement, rolling blackouts throughout the state. Ifblackouts interrupt our power supply, we may be temporarily unable to continueoperations at our California facilities. Any extended interruption in ourability to continue operations at our California facilities could delay thedevelopment of our products and disrupt communications with our customers, suppliersor manufacturing operations. Future interruptions could damage our reputationand could result in lost revenues, either of which could substantially harm ourbusiness and results of operations. Furthermore, shortages in wholesaleelectricity supplies have caused power prices to increase. If wholesale pricescontinue to increase, our operating expenses will likely increase andnegatively affect our operating results.

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

 

We participate in a highly volatileindustry that is characterized by vigorous competition for market share andrapid technological development. These factors could result in aggressivepricing practices and growing competition both from start-up companies and fromwell-capitalized telecommunication systems providers, which, in turn, coulddecrease our revenues. In response to changes in our industry and marketconditions, we may restructure our activities to more strategically realign ourresources. This includes assessing whether we should consider disposing of orotherwise exiting businesses and reviewing the recoverability of our tangibleand intangible assets. Any decision to limit investment in our tangible andintangible assets or to dispose of or otherwise exit businesses may result inthe recording of accrued liabilities for special charges such as workforcereduction costs. Additionally, accounting estimates with respect to the usefullife and ultimate recoverability of our carrying basis of assets could changeas a result of such assessments and decisions, and could harm our results ofoperations.

 

**Consolidation within the telecommunications industry andamong suppliers could decrease our revenues.**

 

The telecommunications industry hasexperienced significant consolidation among its participants, and we expectthis trend to continue. Some operators in this industry have experiencedfinancial difficulty and have, or may, file for bankruptcy protection or areacquired by other operators. Other operators may merge and one or more of ourcompetitors may supply products to such companies that have merged or willmerge. This consolidation could result in purchasing decision delays by themerged companies and decrease opportunities for us to supply our products tothe merged companies. We may also see similar consolidation among supplierswhich may further decrease our opportunity to market and sell our products.

 

**If we fail to develop products that meet our customers'technical specifications on a timely basis, our business may be harmed.**

 

The existing and potential market for ourproducts and technology are characterized by ever increasing performancerequirements, evolving industry standards, rapid technological changes andproduct obsolescence. These characteristics lead to frequent new products andtechnology introductions and enhancements, shorter product life cycles andchanges in customer demands. We cannot assure you that we will be successful indeveloping or marketing any of our products currently being developed.Moreover, we cannot assure you that we will not experience difficulties thatcould further delay or prevent the successful development, introduction andsale of future products, or that these products will adequately meet therequirements of the marketplace and achieve market acceptance.

 

**We may not successfully adapt to regulatory changes in ourindustry, which could significantly impact the operation of our business.**

 

The regulatory environment in which weoperate is subject to change. Regulatory changes, which are affected bypolitical, economic and technical factors, could significantly impact ouroperations by restricting development efforts by us and our customers, makingcurrent products and systems in the industry obsolete or increasing theopportunity for additional competition. Any such regulatory changes could harmour business, financial condition and results of operations. It may benecessary or advisable in the future to modify our products to operate incompliance with such regulations. Such modifications could be extremelyexpensive and time-consuming to complete.

 

**Our stock price may be volatile, which may lead to losses byinvestors.**

 

Announcements of developments related toour business, announcements by competitors, quarterly fluctuations in ourfinancial results and general conditions in the telecommunications industry inwhich we compete, or the economies of the countries in which we do business andother factors could cause the price of our common stock to fluctuate, perhapssubstantially. In addition, in recent years the stock market has experiencedextreme price fluctuations, which have often been unrelated to the operatingperformance of affected companies. These factors and fluctuations could lowerthe market price of our common stock.

 

ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a description of our market risks,see page 22, “Item 2 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Quantitative and Qualitative DisclosuresAbout Market Risk.”

 

PARTII - OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

                There are no material pendinglegal proceedings against us.  We are,however, subject to legal proceedings and claims that                 arise in the normal courseof our business.

 

ITEM 6 - EXHIBITS AND REPORTS ONFORM 8-K

 

 (a)          Exhibits

 

                For a list of exhibits to thisQuarterly Report on Form 10-Q, see the exhibit index located on page 35.

 

(b)           Reports on Form 8-K

 

                On July 16, 2001, we filed acurrent report on Form 8-K, dated June 21, 2001, reporting about the closure ofour Seattle,                 Washington manufacturingfacility and our preliminary earnings report for the first quarter of Fiscal2002.

 

                On August 24, 2001, we filed acurrent report on Form 8-K, dated August 13, 2001, reporting  the sale of 7,927,851 shares                 of our common stock inexchange for aggregate proceeds of approximately $70.9 million pursuant to theRegistration                 Statement on Form S-3(File No: 333-50820), which was declared effective on December 7, 2000.

 

**EXHIBIT INDEX**

 

Exhibit

Number                  Description

 

3.2         Amended and Restated Bylaws (Amendedand Restated as of October 17, 2001).

 

SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
|                                 |   | DMC  STRATEX NETWORKS, INC. |
|--------------------------------------|--------|-----------------------------|
|                                 |   |                        |   |
|                                 |   |                        |   |
| Date:    November 13, 2001 |   | By                          | /s/  Carl A. Thomsen |
|                                 |   |                        | Carl  A. Thomsen |
|                                 |   |                        | Senior Vice President,  Chief Financial Officer and Secretary |
|                                 |   |                        | (Duly Authorized  Officer and Principal Financial Officer) |
|                                 |   |                        |   |

 

** **