**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended December 31, 2001**

 

**Commissionfile number: 0-15895**

 

**DMC STRATEX NETWORKS, INC.**

(Exact name of registrantspecified 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)             |
|                                                      |   |                   |
| **(408)  943-0777**                                       |
| Registrant’s telephone  number, including area code: |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes**ý    **No**o**

 

The number of outstanding shares of the Registrant’s common stock, parvalue $.01 per share, was 82,300,674 on February 7, 2002.

 

 

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                       |                                                                                                  |
|                                 |                                                                                                       |  |  |  |  |  |

 

2

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PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

 

DMC STRATEX NETWORKS,INC.

CONDENSED CONSOLIDATEDBALANCE SHEETS

(In thousands)

 
|                                                 |   | **December  31, 2001** |    | **March 31,  2001** |   |
|------------------------------------------------------|--------|------------------------|---------|---------------------|--------|
|                                                 |   | **(Unaudited)**        |    |                |   |
| **ASSETS**                                           |   |                   |    |                |   |
|                                                 |   |                   |    |                |   |
| **CURRENT ASSETS:**                                  |   |                   |    |                |   |
| Cash and cash  equivalents                           |   | $                      | 40,687  |                | $      | 25,963 |   |
| Short-term  investments                              |   | 37,440                 |    | 11,895              |   |
| Accounts  receivable, net                            |   | 56,338                 |    | 116,427             |   |
| Inventories, net                                     |   | 39,961                 |    | 92,863              |   |
| Deferred tax  asset                                  |   | 1,226                  |    | 1,275               |   |
| Other current  assets                                |   | 7,197                  |    | 16,027              |   |
| **Total current assets**                             |   | 182,849                |    | 264,450             |   |
|                                                 |   |                   |    |                |   |
| **PROPERTY AND EQUIPMENT, NET**                      |   | 46,311                 |    | 54,777              |   |
| **OTHER  ASSETS**                                    |   | 1,569                  |    | 7,553               |   |
| **Total assets**                                     |   | $                      | 230,729 |                | $      | 326,780 |   |
|                                                 |   |                   |    |                |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       |   |                   |    |                |   |
|                                                 |   |                   |    |                |   |
| **CURRENT  LIABILITIES:**                            |   |                   |    |                |   |
| Accounts payable                                     |   | $                      | 28,840  |                | $      | 50,653 |   |
| Income taxes  payable                                |   | 1,230                  |    | 816                 |   |
| Accrued  liabilities                                 |   | 25,090                 |    | 15,448              |   |
| **Total current liabilities**                        |   | 55,160                 |    | 66,917              |   |
|                                                 |   |                   |    |                |   |
|                                                 |   |                   |    |                |   |
| **STOCKHOLDERS’  EQUITY:**                      |   |                   |    |                |   |
| Common stock and  paid-in capital                    |   | 456,263                |    | 383,275             |   |
| Accumulated  deficit                                 |   | (270,268               | )       | (110,283            | )      |
| Accumulated  other comprehensive loss                |   | (10,426                | )       | (13,129             | )      |
| **Total  stockholders’ equity**                 |   | 175,569                |    | 259,863             |   |
| **Total liabilities and stockholders’  equity** |   | $                      | 230,729 |                | $      | 326,780 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

3

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DMC STRATEX NETWORKS,INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands, except pershare amounts)

(Unaudited)

 
|                                                 |   | **Three  Months Ended December 31,** |    | **Nine Months  Ended December 31,** |   |
|------------------------------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
|                                                 |   | **2001**                             |    | **2000**                            |   | **2001** |   | **2000** |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Net  sales**                                       |   | $                                    | 45,170  |                                | $      | 115,194 |   | $ | 182,752 |   | $ | 307,361 |   |
| Cost of sales                                        |   | 40,066                               |    | 79,448                              |   | 145,737 |   | 207,781 |   |
| Inventory  valuation charges                         |   | 39,427                               |    | —                              |   | 102,731 |   | — |   |
| **Gross  profit (loss)**                             |   | (34,323                              | )       | 35,746                              |   | (65,716 | ) | 99,580 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Operating  Expenses**                              |   |                                 |    |                                |   |   |   |   |   |
| Research and  development                            |   | 4,130                                |    | 5,673                               |   | 14,824 |   | 17,677 |   |
| Selling, general  and administrative                 |   | 13,667                               |    | 16,654                              |   | 44,354 |   | 47,287 |   |
| Restructuring  and asset valuation charges           |   | 5,089                                |    | —                              |   | 24,589 |   | — |   |
| **Total  operating expenses**                        |   | 22,886                               |    | 22,327                              |   | 83,767 |   | 64,964 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Operating income (loss)**                          |   | (57,209                              | )       | 13,419                              |   | (149,483 | ) | 34,616 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Other income (expense):**                          |   |                                 |    |                                |   |   |   |   |   |
| Interest income                                      |   | 708                                  |    | 967                                 |   | 2,047 |   | 4,451 |   |
| Interest expense                                     |   | (9                                   | )       | (17                                 | )      | (61 | ) | (46 | ) |
| Other income  (expense), net                         |   | (202                                 | )       | (281                                | )      | (1,889 | ) | (1,151 | ) |
| Permanent  impairment of investments                 |   | (505                                 | )       | —                              |   | (8,844 | ) | — |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Income  (loss) before provision for income taxes** |   | (57,217                              | )       | 14,088                              |   | (158,230 | ) | 37,870 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| Provision for  income taxes                          |   | 211                                  |    | 2,113                               |   | 1,755 |   | 5,680 |   |
| **Net income (loss)**                                |   | $                                    | (57,428 | )                                   | $      | 11,975 |   | $ | (159,985 | ) | $ | 32,190 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Basic  earnings (loss) per share**                 |   | $                                    | (0.70   | )                                   | $      | 0.16 |   | $ | (1.98 | ) | $ | 0.44 |   |
| **Diluted earnings (loss) per share**                |   | $                                    | (0.70   | )                                   | $      | 0.16 |   | $ | (1.98 | ) | $ | 0.42 |   |
|                                                 |   |                                 |    |                                |   |   |   |   |   |
| **Basic weighted average shares  outstanding**       |   | 82,084                               |    | 73,591                              |   | 80,934 |   | 73,283 |   |
| Impact of  dilutive stock options and warrants       |   | —                               |    | 2,490                               |   | — |   | 3,491 |   |
| **Diluted weighted average shares  outstanding**     |   | 82,084                               |    | 76,081                              |   | 80,934 |   | 76,774 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

4

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DMC STRATEX NETWORKS,INC.

CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                                   |   | **Nine  Months Ended December 31,** |       |
|----------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                   |   | **2001**                            | ** ** | **2000** |   |
| **Cash  flows from operating activities:**                                             |   |                                |       |   |   |
| Net income  (loss)                                                                     |   | $                                   | (159,985   | ) | $ | 32,190 |   |
| Adjustments to reconcile net income (loss) to net  cash used for operating activities: |   |                                |       |   |   |
| Depreciation and  amortization                                                         |   | 14,804                              |       | 12,959 |   |
| Permanent  impairment of investment losses                                             |   | 8,844                               |       | — |   |
| Non-cash  restructuring expenses                                                       |   | 2,105                               |       | — |   |
| Loss on disposal  of property and equipment                                            |   | 517                                 |       | — |   |
| Inventory  valuation charges                                                           |   | 102,731                             |       | — |   |
| Provision for  uncollectible accounts                                                  |   | 6,370                               |       | 659 |   |
| Provision for  inventory reserves                                                      |   | 1,257                               |       | 1,456 |   |
| Provision for  warranty reserves                                                       |   | 7,714                               |       | 5,444 |   |
| Changes in  assets and liabilities                                                     |   |                                |       |   |   |
| Decrease  (increase) in accounts receivable                                            |   | 53,166                              |       | (43,222 | ) |
| Increase in  inventories                                                               |   | (39,800                             | )          | (65,072 | ) |
| Decrease  (increase) in deferred tax assets                                            |   | (114                                | )          | 48 |   |
| Decrease  (increase) in other current assets                                           |   | 8,947                               |       | (2,453 | ) |
| Increase in  other assets                                                              |   | (59                                 | )          | (1,475 | ) |
| Increase  (decrease) in accounts payable                                               |   | (31,034                             | )          | 18,262 |   |
| Increase in  income tax payable                                                        |   | 314                                 |       | 4,820 |   |
| Increase  (decrease) in accrued liabilities                                            |   | 1,970                               |       | (16,334 | ) |
| **Net  cash used for operating activities**                                            |   | (22,253                             | )          | (52,718 | ) |
|                                                                                   |   |                                |       |   |   |
| **Cash  flows from investing activities:**                                             |   |                                |       |   |   |
| Purchase of  short-term investments                                                    |   | (103,875                            | )          | (48,224 | ) |
| Proceeds from  maturity/sale of short term investments                                 |   | 77,405                              |       | 83,155 |   |
| Purchase of  property and equipment                                                    |   | (10,638                             | )          | (15,534 | ) |
| Purchase of  minority investments                                                      |   | —                              |       | (13,045 | ) |
| Proceeds from  sale of minority investments                                            |   | 117                                 |       | — |   |
| **Net  cash provided by (used for) investing activities**                              |   | (36,991                             | )          | 6,352 |   |
|                                                                                   |   |                                |       |   |   |
| **Cash flows from financing  activities:**                                             |   |                                |       |   |   |
| Payment of  capital lease obligations                                                  |   | —                              |       | (145 | ) |
| Proceeds from  sales of Common Stock                                                   |   | 73,018                              |       | 8,578 |   |
| **Net  cash provided by financing activities**                                         |   | 73,018                              |       | 8,433 |   |
|                                                                                   |   |                                |       |   |   |
| Effect of  exchange rate changes on cash                                               |   | 950                                 |       | (1,553 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                              |   | 14,724                              |       | (39,486 | ) |
| Cash and cash  equivalents at beginning of period                                      |   | 25,963                              |       | 58,339 |   |
| **Cash  and cash equivalents at end of period**                                        |   | $                                   | 40,687     |   | $ | 18,853 |   |
|                                                                                   |   |                                |       |   |   |
| **SUPPLEMENTAL  DATA**                                                                 |   |                                |       |   |   |
| Interest paid                                                                          |   | $                                   | 138        |   | $ | 53 |   |
| Income taxes  paid                                                                     |   | $                                   | 961        |   | $ | 1,132 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

5

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DMC STRATEX NETWORKS,INC

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

BASIS OF PRESENTATION

 

The condensed consolidated financial statementsinclude the accounts of DMC Stratex Networks, Inc. and its wholly-ownedsubsidiaries (the “Company”). Intercompany accounts and transactions have been eliminated.  Certain prior years amounts have beenreclassified to conform to current year presentation.

 

While the financial information furnished isunaudited, the financial statements included in this report reflect alladjustments (consisting only of normal recurring adjustments) that the Companyconsiders necessary for a fair presentation of the results of operations forthe interim periods covered and of the financial condition of the Company atthe date of the interim balance sheet. The results for interim periods are not necessarily indicative of theresults for the entire year.  Thecondensed consolidated financial statements should be read in connection withthe Company’s financial statements included in its annual report and Form 10-Kfor the fiscal year ended March 31, 2001, filed with the Securities andExchange Commission on June 29, 2001.

 

CASH AND CASH EQUIVALENTS

 

For purposes of the consolidated statement of cashflows, the Company considers all highly liquid debt instruments with anoriginal maturity of three months or less to be cash equivalents.

 

The Company has issued letters of credit to variouscustomers through a financial institution for bid and performance bonds. Inconnection with the issuance of these letters of credit, the Company hasrestricted $0.5 million of cash as collateral for these specific obligations.

 

SHORT-TERM INVESTMENTS

 

We invest our excess cash in high-quality marketableinstruments to ensure that cash is readily available for use in our currentoperations. Accordingly, all of our short-term investments are classified as“available-for-sale” in accordance with the provisions of the Statement ofFinancial Accounting Standards (“SFAS”) No. 115. All investments are reportedat fair market value with the related unrealized holding gains and lossesreported as a component of accumulated other comprehensive loss. Unrealizedholding losses on the portfolio as of December 31, 2001 were insignificant. AtDecember 31, 2001, our available-for-sale securities had contractual maturitiesranging from 1 day to 500 days, with a weighted average maturity of 59 days.

 

6

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INVENTORIES

 

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

 
|            |   | **December  31, 2001** |   | **March 31,  2001** |   |
|-----------------|--------|------------------------|--------|---------------------|--------|
|            |   | **(Unaudited)**        |   |                |   |
|            |   |                   |   |                |   |   |   |
| Raw materials   |   | $                      | 24,292 |                | $      | 46,295 |   |
| Work in process |   | 8,741                  |   | 18,642              |   |
| Finished goods  |   | 6,928                  |   | 27,926              |   |
|            |   | $                      | 39,961 |                | $      | 92,863 |   |

 

The Company recorded inventory valuation charges of$39.4 million during the third quarter of Fiscal 2002. This inventory valuationcharge consisted of a $5.4 million charge for certain purchase commitments, a$1.7 million charge for loss on impairment of manufacturing equipment andcharges of $32.3 million for excess inventories not expected to be realized.During the nine months ended December 31, 2001 the Company recorded inventoryvaluation charges of $102.7 million, which consisted of a $9.4 million chargefor purchase commitments, a $1.9 million charge for loss on impairment ofmanufacturing equipment and charges of $91.4 million for excess inventories notexpected to be realized.

 

OTHER ASSETS

 

Included in other assets are minority investments andnotes receivable. The minority investments were purchased for the promotion ofbusiness and strategic objectives. Minority investments in marketable securities are classified as“available-for-sale” in accordance with the provisions of the Statement ofFinancial Accounting Standards (“SFAS”) No. 115 and reported at fair value withunrealized gains and losses recorded in accumulated other comprehensiveloss.  Minority investments innon-marketable securities are recorded at cost.  However, in accordance with Statement of Financial AccountingStandards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be disposed of,” we continually review theseminority investments to evaluate whether conditions have occurred that wouldsuggest a permanent impairment of carrying value. There were impairment lossesof approximately $0.5 million during the third quarter of Fiscal 2002 on theCompany’s minority investments in certain marketable and non-marketablesecurities. The Company determined that the carrying value for these certaininvestments exceeded their fair value and that these losses were other thantemporary in nature. During the first nine months of Fiscal 2002, the Companyrecorded $8.8 million as an impairment loss. This loss consisted of $4.5 million loss on our minority investments inmarketable securities, $3.4 million loss on our minority investments innon-marketable securities and $0.9 million loss on short-term investments inmarketable securities. The Company determined that

 

7

----

 

the carrying value for these certain investmentsexceeded their fair value and that these losses were other than temporary innature.

 

During Fiscal 2002, the Company accepted long-terminterest bearing notes receivable from one of its customers. Accordingly, therelated accounts receivable has been classified as notes receivable in othercurrent assets and other assets. The notes receivable are for $1.8 million and$0.5 million with annual interest rates of 10.5% and 9.96%, respectively.  The notes receivable require semi-annualpayments over three years including interest. These notes are secured by aguarantee from the customer’s parent corporation.

 

ACCRUED LIABILITIES

 

Accrued liabilities included the following (inthousands):

 
|                         |   | **December  31, 2001** |   | **March 31,  2001** |   |
|------------------------------|--------|------------------------|--------|---------------------|--------|
|                         |   | **(Unaudited)**        |   |                |   |
|                         |   |                   |   |                |   |
| Customer deposits            |   | $                      | 207    |                | $      | 886 |   |
| Accrued payroll and benefits |   | 2,846                  |   | 3,989               |   |
| Accrued commissions          |   | 1,055                  |   | 1,246               |   |
| Accrued warranty             |   | 4,707                  |   | 4,788               |   |
| Accrued restructuring        |   | 11,258                 |   | —              |   |
| Other                        |   | 5,017                  |   | 4,539               |   |
|                         |   | $                      | 25,090 |                | $      | 15,448 |   |

CURRENCY TRANSLATION

 

The functional currency of the Company’s subsidiarieslocated in the United Kingdom and New Zealand is the U.S. dollar. Accordingly,all of the monetary assets and liabilities of these subsidiaries are remeasuredinto U.S. dollars at the current exchange rate as of the applicable balancesheet date, and all non-monetary assets and liabilities are remeasured athistorical rates. Sales and expenses are remeasured at the average exchangerate prevailing during the period. Gains and losses resulting from theremeasurement of these subsidiaries’ financial statements are included in theconsolidated statements of operations. The Company’s other international subsidiaries use their respectivelocal currency as their functional currency. Assets and liabilities of these subsidiaries are translated at the localcurrent exchange rates in effect at the balance sheet date, and income andexpense accounts are translated at the average exchange rates during theperiod.  The resulting translationadjustments are included in accumulated other comprehensive loss.

 

The Company has a subsidiary in Argentina. However,the recent Argentine Peso crisis is not likely to have a material impact on thefinancial position of the Company.

 

8

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DERIVATIVE FINANCIAL INSTRUMENTS

 

Effective April 1, 2001, the Company adopted FinancialAccounting Standard No. 133 “Accounting for Derivative Instruments and HedgingActivities” (“FAS 133”), which requires that all derivatives be recorded on thebalance sheet at fair value.  Changes inthe fair value of derivatives that are not designated, or are not effective ashedges, must be recognized currently in earnings.

 

The Company continues its policy of hedging forecastedand actual foreign currency risk with forward contracts that generally expirewithin nine months.  Derivatives areemployed to eliminate, reduce, or transfer selected foreign currency risks thatcan be identified and quantified with confidence. Specifically, we hedgeforeign currency risks relating to firmly committed backlog, open purchaseorders and non-functional currency monetary assets and liabilities. At December31, 2001, the Company had forward foreign exchange contracts with a notionalface value of $42.2 million. The amount of unrealized loss on these contractsat December 31, 2001 is $0.1 million. Derivatives hedging non-functionalcurrency monetary assets and liabilities are recorded on the balance sheet atfair value and changes in fair value are recognized currently in earnings.

 

Occasionally, the Company has euro denominated firmbacklog from customers in countries not participating in the euro.  Under FAS 133, these contracts are treatedas embedded derivatives with changes in fair value recognized in earnings.   The change in fair value as of December 31,2001 was insignificant. As of December 31, 2001 the Company had $3.8 million inU.S. dollar equivalent euro denominated backlog from customers innon-participating countries.

 

Additionally, we hedge forecasted non-U.S dollar salesand non-U.S dollar purchases. In accordance with FAS 133, hedges of suchanticipated transactions are designated and documented at inception as “cashflow hedges” and are evaluated for effectiveness, excluding time value, atleast quarterly. The Company records effective changes in the fair value ofthese cash flow hedges in accumulated other comprehensive income (“OCI”) untilthe transaction occurs, at which time the changes are reclassified to revenueand cost of sales, respectively.  Allamounts accumulated in OCI at quarter end will be reclassified to earningswithin the next 12 months. A loss of $0.1 million was recognized in other income and expense for the thirdquarter of Fiscal 2002 related to excluding time value from effectivenesstesting and ineffectiveness resulting from forecasted transactions that did notoccur.

 

9

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The following table summarizes the activity in OCI,with regard to the effective changes in fair value of derivative instruments,for the first nine months of Fiscal 2002 (in thousands):

 
|                              |   | **Nine  Months Ended   December 31, 2001** |   |
|-----------------------------------|--------|--------------------------------------------|--------|
|                              |   |                                       |   |
| Beginning  balance                |   | $                                          | — |   |
| Transition  Adjustments           |   | 262                                        |   |
| Net Changes                       |   | (172                                       | )      |
| Reclassifications  to Revenue:    |   |                                       |   |
| From Transition  Adjustments      |   | 14                                         |   |
| From Current  Period Transactions |   | 49                                         |   |
| Ending balance                    |   | $                                          | 153    |   |

 

 

CONCENTRATION OF 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.One customer accounted for approximately 16% of net sales for the third quarterof Fiscal 2002. For the first nine months of Fiscal 2002, two customersaccounted for 16% and 10% of net sales, respectively. Two customers accountedfor approximately 21% and 11%, respectively of the total accounts receivablebalance at the end of the third quarter of Fiscal 2002. No other customeraccounted for more than 10% of the total accounts receivable balance at the endof the third quarter of Fiscal 2002. The Company actively markets and sellsproducts in Africa, Asia, Europe, the Middle East and America. The Companyperforms on-going credit evaluations of its customers’ financial conditions andgenerally requires no collateral, although sales to Asia, Eastern Europe andthe Middle East are primarily paid through letters of credit.

 

REVENUE RECOGNITION

 

We recognize revenue pursuant to Staff AccountingBulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements”issued by the Securities and Exchange Commission.  Accordingly, revenue is recognized when all four of the followingcriteria are met: (i) persuasive evidence of an arrangement exists; (ii)delivery of the products and/or services has occurred; (iii) the selling priceis fixed and determinable and (iv) collectibility is reasonably assured.

 

In accordance with SAB 101, revenues from productsales are recognized upon shipment, except when product sales are combined withsignificant post-shipment installation services provided over an extendedperiod of time. Under this exception, revenue is deferred until such serviceshave been performed. Revenue from product sales is net of third-partycommissions and duty charges. Service revenue, which is 15.8% of net sales forthe three months ended December 31, 2001 and less than 10% 

 

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of net sales for the three months ended December 31,2000, is recognized when the related services are performed. Service revenuefor the nine months ended December 31, 2001 and December 31, 2000 is 11.2% and7.5% of net sales, respectively.

 

NET INCOME PER SHARE

 

Basic earnings per share are computed by dividing netincome by the weighted average number of common shares outstanding during theperiod.   Diluted earnings per share arecomputed by dividing net income by the weighted average number of common sharesand potentially dilutive securities outstanding during the period.

 

LITIGATION AND CONTINGENCIES

 

The Company is subject to legal proceedings and claimsthat arise in the normal course of its business.  In the opinion of management, these proceedings should not have amaterial adverse effect on the business, financial position, and results ofoperations of the Company.

 

RESTRUCTURING AND ASSET VALUATION CHARGES

 

Due to macroeconomic and capital spending issuesaffecting the telecommunications industry, the Company announced arestructuring program in the first quarter of Fiscal 2002 to focus on profitcontribution by reducing expenses and improving operational efficiency. Thisrestructuring program included consolidation of the Company’s U.S. operationsby relocating its Seattle, Washington manufacturing facility to its San Jose,California facility, and a worldwide reduction in workforce. In connection withthis restructuring program, the Company recorded restructuring charges in firstquarter of Fiscal 2002.

 

During the second quarter of Fiscal 2002, additionalcharges were recorded in connection with the abandonment of the Seattle,Washington manufacturing facility as more information became availableregarding the lease termination costs associated with this facility.

 

During the third quarter of Fiscal 2002, the Companyannounced an additional restructuring program due to the extended weakness inthe telecommunications industry. This restructuring program included worldwideworkforce reductions and consolidation of additional excess facilities.

 

In connection with these restructuring programs, theCompany recorded restructuring charges of $5.1 million during the third quarterof Fiscal 2002, which consisted of $2.7 million for employee severance andbenefits and $2.4 million for lease termination costs. This restructuringcharge related to reductions in workforce worldwide and lease termination costsfor vacating a portion of our facilities in San Jose, California and inCoventry, United Kingdom. The Company reduced its headcount by approximately 85employees in the third quarter of Fiscal 2002, with reductions affecting allfunctional areas and affecting various locations. As of December 31, 2001, 81employees have been terminated.

 

In the first nine months ended December 30, 2001, theCompany recorded restructuring and asset valuation charges of $24.6 million,consisting of $8.4 million for employee severance and benefits, $11.2 millionfor facility-related and other costs (including $8.6 million for leasetermination costs, $1.7 million for the loss on impairment of equipment, $0.5million for legal costs, $0.4 million for the write off of goodwill) and $5.0million 

 

11

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for uncollectible accounts receivable. The Companyreduced its headcount by approximately 405 employees in the first nine monthsof Fiscal 2002, with reductions affecting all functional areas and affectingvarious locations. As of December 31, 2001, 396 employees have been terminated.

 

The facilities consolidation expenses include paymentsrequired under a lease contract, less applicable sublease income after theproperty was abandoned. To determine the lease loss, certain assumptions weremade related the (1) time period over which the building will remain vacant,(2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees.The lease loss is an estimate under SFAS No. 5, “Accounting for Contingencies,”and represents the low end of the estimate of time to sublease and actualsublease rates.

 

The components of the restructuring and assetvaluation charges recorded in the first, second and third quarters of Fiscal2002 are as follows (in millions):

 
|                                             |   | **Three  Months Ended June 30, 2001** |   | **Three  Months Ended September 30, 2001** |   | **Three  Months Ended December 31, 2001** |   | **Nine  Months Ended December 31, 2001** |   |
|--------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
| Restructuring Charges:                           |   |                                       |   |                                       |   |                                      |   |                                     |   |
|                                             |   |                                       |   |                                       |   |                                      |   |                                     |   |
| Severance and  Benefits                          |   | $                                          | 5.7    |                                       | $      | —                                    |   | $                                        | 2.7    |   | $ | 8.4 |   |
| Facilities and  Other                            |   |  5.3                                  |   | 3.5                                        |   | 2.4                                       |   | 11.2                                     |   |
|                                             |   |                                       |   |                                       |   |                                      |   |                                     |   |
| Total  Restructuring Charges                     |   | $                                          | 11.0   |                                       | $      | 3.5                                       |   | $                                        | 5.1    |   | $ | 19.6 |   |
| Asset Valuation  Charges                         |   | $                                          | — |                                       | $      | 5.0                                       |   | $                                        | — |   | $ | 5.0 |   |
| Total  Restructuring and Asset Valuation Charges |   | $                                          | 11.0   |                                       | $      | 8.5                                       |   | $                                        | 5.1    |   | $ | 24.6 |   |

 

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The following table summarizes the balance of therestructuring accrual as of December 31, 2001 and the type and amount ofrestructuring costs utilized during the first, second and third quarter ofFiscal 2002 (in millions):

 
|                              |   | **Severance   and Benefits** |   | **Facilities    and Other** |   | **Total** |   |
|-----------------------------------|--------|------------------------------|--------|-----------------------------|--------|-----------|--------|
| Balance as of  April 1, 2001      |   | $                            | 0.0    |                        | $      | 0.0       |   | $ | 0.0 |   |
| Provision                         |   | 5.7                          |   | 5.3                         |   | 11.0      |   |
| Cash payments                     |   | (0.9                         | )      | —                      |   | (0.9      | )      |
| Non-cash  expenses                |   | —                       |   | (1.1                        | )      | (1.1      | )      |
| Balance as of  June 30, 2001      |   | $                            | 4.8    |                        | $      | 4.2       |   | $ | 9.0 |   |
| Provision                         |   | —                       |   | 3.5                         |   | 3.5       |   |
| Cash payments                     |   | (2.0                         | )      | (0.5                        | )      | (2.5      | )      |
| Non-cash  expenses                |   | —                       |   | (1.0                        | )      | (1.0      | )      |
| Balance as of  September 30, 2001 |   | $                            | 2.8    |                        | $      | 6.2       |   | $ | 9.0 |   |
| Provision                         |   | 2.7                          |   | 2.4                         |   | 5.1       |   |
| Cash payments                     |   | (2.2                         | )      | (0.5                        | )      | (2.7      | )      |
| Non-cash  expenses                |   | —                       |   | (0.1                        | )      | (0.1      | )      |
| Balance as of  December 31, 2001  |   | $                            | 3.3    |                        | $      | 8.0       |   | $ | 11.3 |   |

 

Total cash outlay for the restructuring and assetvaluation charges is expected to be approximately $17.5 million. The remaining$7.1 million 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 restructuring charges to be paidout during Fiscal 2002 with the exception of severance and benefits costs ofapproximately $1.0 million, which will be paid out in Fiscal 2003, $0.5million, which will be paid out in Fiscal 2004 and vacated building leaseobligations of $7.8 million and $0.8 million, which are expected to be paid outover the next ten years and twenty years, respectively.

 

COMPREHENSIVE INCOME

 

In June 1997, the Financial Accounting Standards Board(“FASB”) issued Statement on Financial Accounting Standards No. 130 (“SFAS130”), “Reporting Comprehensive Income,” which establishes standards forreporting and display of comprehensive income and its components (revenue,expenses, gains and losses) in a full set of general-purpose financialstatements. The following table reconciles comprehensive income under theprovisions of SFAS 130 (in thousands) for:

 

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|                                           |   | **Three  Months Ended   December 31,** |    | **Nine  Months Ended   December 31,** |   |
|------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                           |   | **2001**                               |    | **2000**                              |   | **2001** |   | **2000** |   |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Net income (loss)                              |   | $                                      | (57,428 | )                                     | $      | 11,975 |   | $ | (159,985 | ) | $ | 32,190 |   |
| Other  comprehensive income (loss) net of tax: |   |                                   |    |                                  |   |   |   |   |   |
| Unrealized currency gain (loss)                |   | 1,750                                  |    | 2,521                                 |   | (154 | ) | (3,538 | ) |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Unrealized  holding gain (loss)on investments  |   | 228                                    |    | (5,025                                | )      | 2,857 |   | (6,564 | ) |
| Comprehensive  income (loss)                   |   | $                                      | (55,450 | )                                     | $      | 9,471 |   | $ | (157,282 | ) | $ | 22,088 |   |

 

During the nine months ended December 31, 2001, theCompany recorded a permanent impairment for certain investments of  $8.8 million. $2.5 million of thisimpairment loss had been recorded as unrealized holding loss as of March 31,2001.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the FASB issued SFAS No.’s 141 and 142,“Business Combinations” and “Goodwill and Other Intangibles”. SFAS 141 requiresall business combinations initiated after June 30, 2001 to be accounted forusing the purchase method. Under SFAS 142, goodwill is no longer subject toamortization over its estimated useful life. Rather, goodwill is subject to atleast an annual assessment for impairment applying a fair-value based test.Additionally, an acquired intangible asset should be separately recognized ifthe benefit of the intangible asset is obtained through contractual or otherlegal rights, or if the intangible asset can be sold, transferred, licensed,rented, or exchanged, regardless of the acquirer’s intent to do so. As theCompany has no goodwill recorded on its balance sheet as of December 31, 2001,these pronouncements are not expected to have a material impact on itsfinancial position or results of operations, when adopted effective April 1,2002.

 

OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company is organized into two operating segments:products and services.  The Company’s ChiefExecutive Officer has been identified as the Chief Operating Decision-Maker asdefined by Statement of Financial Accounting Standards No. 131 (“SFAS 131”),“Disclosures about Segments of an Enterprise and Related Information.”Resources are allocated to each of these segments using information on theirrevenues and operating profits before interest and taxes.

 

The products operating segment includes the Altium,DXR, SPECTRUM II and XP4 digital microwave systems for digital transmissionmarkets. The Company designs, 

 

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develops, and manufactures these products in San Jose,California, Wellington, New Zealand and Campinas, Brazil. Prior to June 30,2001, the Company designed, developed and manufactured the XP4 family ofproducts in Seattle, Washington. The services operating segment includes,without limitation, installation, repair, network design, path surveys,integration and other services.  TheCompany maintains regional service centers in San Jose, California;Lanarkshire, Scotland; and Clark Field, Pampanga, Philippines.

 

The following table sets forth revenues and operatingincome (loss) by operating segments (in thousands) for:

 
|                     |   | **Three  Months Ended   December 31,** |   | **Nine  Months Ended   December 31,** |   |
|--------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                     |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
|                     |   |                                   |   |                                  |   |   |   |   |   |
| Products:                |   |                                   |   |                                  |   |   |   |   |   |
| Revenues                 |   | $                                      | 38,053 |                                  | $      | 106,480 |   | $ | 162,326 |   | $ | 284,253 |   |
| Operating income  (loss) |   | (58,052                                | )      | 13,708                                |   | (152,141 | ) | 34,553 |   |
|                     |   |                                   |   |                                  |   |   |   |   |   |
| Services:                |   |                                   |   |                                  |   |   |   |   |   |
| Revenues                 |   | 7,117                                  |   | 8,714                                 |   | 20,426 |   | 23,108 |   |
| Operating income  (loss) |   | 843                                    |   | (289                                  | )      | 2,658 |   | 63 |   |
|                     |   |                                   |   |                                  |   |   |   |   |   |
| Total:                   |   |                                   |   |                                  |   |   |   |   |   |
| Revenues                 |   | $                                      | 45,170 |                                  | $      | 115,194 |   | $ | 182,752 |   | $ | 307,361 |   |
| Operating income  (loss) |   | (57,209                                | )      | 13,419                                |   | (149,483 | ) | 34,616 |   |

 

The following table sets forth revenues from unaffiliated customers byproduct (in thousands) for:

 
|           |   | **Three  Months Ended   December 31,** |   | **Nine  Months Ended   December 31,** |   |
|----------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|           |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
|           |   |                                   |   |                                  |   |   |   |   |   |
| Altium         |   | $                                      | 6,154  |                                  | $      | 34,536 |   | $ | 41,626 |   | $ | 81,354 |   |
| DXR            |   | 7,273                                  |   | 9,261                                 |   | 23,715 |   | 28,302 |   |
| SPECTRUM II    |   | 5,121                                  |   | 23,536                                |   | 34,007 |   | 77,710 |   |
| XP4            |   | 19,334                                 |   | 38,247                                |   | 62,100 |   | 92,150 |   |
| Other Products |   | 171                                    |   | 900                                   |   | 878 |   | 4,737 |   |
| Total Products |   | 38,053                                 |   | 106,480                               |   | 162,326 |   | 284,253 |   |
| Total Services |   | 7,117                                  |   | 8,714                                 |   | 20,426 |   | 23,108 |   |
| Total Revenues |   | $                                      | 45,170 |                                  | $      | 115,194 |   | $ | 182,752 |   | $ | 307,361 |   |

 

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The following table sets forth revenues from unaffiliated customers bygeographic region (in thousands) for:

 
|                |   | **Three  Months Ended   December 31,** |   | **Nine  Months Ended   December 31,** |   |
|---------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
|                |   |                                   |   |                                  |   |   |   |   |   |
| Africa              |   | $                                      | 3,704  |                                  | $      | 6,550 |   | $ | 18,623 |   | $ | 16,584 |   |
| Brazil              |   | 2,889                                  |   | 1,070                                 |   | 18,732 |   | 2,514 |   |
| China               |   | 6,778                                  |   | 11,675                                |   | 32,675 |   | 23,244 |   |
| Europe/Middle  East |   | 17,142                                 |   | 23,137                                |   | 55,941 |   | 73,163 |   |
| Mexico              |   | 2,949                                  |   | 2,813                                 |   | 9,881 |   | 40,807 |   |
| United States       |   | 4,588                                  |   | 50,139                                |   | 15,054 |   | 99,232 |   |
| Other Americas      |   | 1,312                                  |   | 8,232                                 |   | 11,802 |   | 23,587 |   |
| Other  Asia/Pacific |   | 5,808                                  |   | 11,578                                |   | 20,044 |   | 28,230 |   |
| Total Revenues      |   | $                                      | 45,170 |                                  | $      | 115,194 |   | $ | 182,752 |   | $ | 307,361 |   |

 

Long-lived assets by country and consisting of netproperty and equipment was as follows (in thousands):

 
|                         |   | **December  31, 2001** |   | **March 31,  2001** |   |
|------------------------------|--------|------------------------|--------|---------------------|--------|
|                         |   | **(Unaudited)**        |   |                |   |
| United States                |   | $                      | 22,144 |                | $      | 33,127 |   |
| United Kingdom               |   | 17,644                 |   | 15,490              |   |
| Other foreign  countries     |   | 6,523                  |   | 6,160               |   |
| Property and  equipment, net |   | $                      | 46,311 |                | $      | 54,777 |   |

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion in ‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations’’ contains trend analyses and otherforward-looking statements. The statements contained in this Quarterly Reporton Form 10-Q that are not purely historical concerning our future products,expenses, revenues, gross margins, liquidity and cash needs, as well as ourplans and strategies, contain forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995 and Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Exchange Act of1934, as amended. Such forward-looking statements include statements relatingto collection of our accounts receivable, sales of our Spectrum II product, occurrencesof restructuring charges, selling, general and administrative expenses,research and development expenses, cash charges for restructuring, the need foradditional financing, use of proceeds from the sale of our common stock, thecost of upgrading our systems in connection with the euro conversion andforeign currency hedging activities. All statements, trend analyses and otherinformation contained herein about the markets for our services and productsand trends in revenue, as well as other statements identified by the use offorward-looking terminology, including ‘‘anticipate,’’ ‘‘believe,’’ ‘‘plan,’’ ‘‘estimate,’’ ‘‘expect,’’‘‘goal’’ and ‘‘intend’’ or the negative of these terms or other similarexpressions constitute forward-looking statements.  These forward-looking statements are based on currentexpectations, and we assume no obligation to update this information.  Numerous factors, including the risk factorsdiscussed below, economic and competitive conditions, timing and volume ofincoming orders, shipment --volumes, product margins and foreign exchangerates, could cause actual results to differ materially from those described inthese statements, and prospective investors and stockholders should carefullyconsider these factors set forth elsewhere herein, including those contained inthe section, “Factors That May Affect Future Financial Results,” beginning onpage 26, in evaluating these forward-looking statements.

 

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**Results of Operations**

 

The following table sets forth the percentage relationships of certainitems from our condensed consolidated statements of operations as percentagesof net sales:

 
|                                             |   | **Three  Months Ended December 31,** |   | **Nine  Months Ended December 31,** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                             |   | **(Unaudited)**                      |   |                                |   | **(Unaudited)** |   |   |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Net sales                                        |   | 100.0                                | %      | 100.0                               | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                    |   | 88.7                                 |   | 69.0                                |   | 79.8 |   | 67.6 |   |
| Inventory valuation charges                      |   | 87.3                                 |   | —                              |   | 56.2 |   | — |   |
| Gross profit  (loss)                             |   | (76.0                                | )      | 31.0                                |   | (36.0 | ) | 32.4 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Research and  development                        |   | 9.1                                  |   | 4.9                                 |   | 8.1 |   | 5.8 |   |
| Selling, general  and administrative             |   | 30.3                                 |   | 14.5                                |   | 24.3 |   | 15.4 |   |
| Restructuring  and asset valuation charges       |   | 11.3                                 |   | —                              |   | 13.4 |   | — |   |
| Operating income  (loss)                         |   | (126.7                               | )      | 11.6                                |   | (81.8 | ) | 11.2 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Interest income                                  |   | 1.6                                  |   | 0.8                                 |   | 1.1 |   | 1.5 |   |
| Interest expense                                 |   | 0.0                                  |   | 0.0                                 |   | 0.0 |   | 0.0 |   |
| Other income  (expense), net                     |   | (0.4                                 | )      | (0.2                                | )      | (1.0 | ) | (0.4 | ) |
| Permanent  impairment of investments             |   | (1.1                                 | )      | —                              |   | (4.9 | ) | — |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Income (loss)  before provision for income taxes |   | (126.6                               | )      | 12.2                                |   | (86.6 | ) | 12.3 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Provision for  income taxes                      |   | 0.5                                  |   | 1.8                                 |   | 1.0 |   | 1.8 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Net income  (loss)                               |   | (127.1                               | )%     | 10.4                                | %      | (87.6 | )% | 10.5 | % |

 

*Net Sales*

Net sales for the third quarter of Fiscal 2002 decreased to $45.2million, compared to $115.2 million reported in the third quarterof Fiscal 2001. This decrease is attributable to continued weakness of theglobal economy, slowdown in telecommunications equipment buildout levels due tocapital expenditure constraints being faced by our customers and decreasedsales to competitive local exchange carriers (CLECs) in the United States dueto collapse of the CLEC business. Compared to the third quarter of Fiscal 2001,revenues of all product lines have decreased. Our Altium product line net salesexperienced a significant decrease to $6.2 million in the third quarter ofFiscal 2002, from $34.5 million in the comparable quarter of Fiscal 2001.  This decrease is primarily due to customersdelaying longer term high capacity needs, in favor of using lower costmid-capacity products to meet near term needs. Net sales of our Spectrum IIproduct line decreased to $5.1 million in the third quarter of Fiscal 2002 from$23.5 million in the comparable quarter of Fiscal 2001, primarily due to theproduct continuing towards its planned end of life. We expect sales of ourSpectrum II product will continue to decline in 

 

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absolute dollars. Our XP4 product line net sales decreased to $19.3million in the third quarter of Fiscal 2002, from $38.2 million in thecomparable quarter of Fiscal 2001. Service revenue was $7.1 million in thethird quarter of Fiscal 2002, compared to $8.7 million in the third quarter ofFiscal 2001. Though the product revenue in the third quarter of Fiscal 2002 hasdeclined significantly as compared to the third quarter of Fiscal 2001, servicerevenue has not experienced a significant decline. This is primarily due to anincrease in service contracts and projects as a result of our increased effortsto position ourselves as a complete solution provider in the market.

 

Net sales to U.S. customers were $4.6 million in the third quarter ofFiscal 2002, compared to $50.1 million in the third quarter of Fiscal 2001 dueto decreased sales to CLECs. Net sales to China decreased significantly to $6.8million in the third quarter of Fiscal 2002 from $11.7 million in the thirdquarter of Fiscal 2001, primarily due to slower network deployment in thatregion due to continuing weakness in the global economy. Though net sales toAfrica in the third quarter of Fiscal 2002 decreased to $3.7 million ascompared to $6.6 million in the third quarter of Fiscal 2001, in the first ninemonths of Fiscal 2002 net sales to Africa increased to $18.6 million from $16.6million in the first nine months on Fiscal 2001. This is primarily due to oursecuring a number of large projects in Central Africa and since revenue onthese projects is recognized only on completion of phases of the projects, thesales figures in this region do not show a constant pattern of growth.  Net sales to the Europe and Middle Eastregion decreased to $17.1 million in the third quarter of Fiscal 2002 from$23.1 million in the third quarter of Fiscal 2001 due to the global economicdownturn. Net sales in the Other Asia/Pacific region also experienced asignificant decrease to $5.8 million in the third quarter of Fiscal 2002 from$11.6 million in the third quarter of Fiscal 2001.

 

Net sales for the first nine months of Fiscal 2002 were $182.8 million,compared to $307.4 million reported in the first nine months of Fiscal 2001.This decrease is due to continued weakness of the global economy, slowdown intelecommunications equipment buildout levels due to capital expenditure constraintsbeing faced by customers and decreased sales to competitive local exchangecarriers (CLECs) in the United States due to the collapse of the CLEC business.The decrease in net sales was primarily due to decreased sales of our Altium,XP4 and Spectrum II product lines, because of the reasons described above. Netsales of the DXR product line also decreased to $23.7 million in the first ninemonths of Fiscal 2002 from $28.3 million in the first nine months of Fiscal2001 primarily due to the worldwide economic downturn.

 

Net sales to U.S. customers decreased to $15.1 million in the firstnine months of Fiscal 2002 compared to $99.2 million in the first nine monthsof Fiscal 2001 due to the reasons described above. However, sales to customersin Brazil increased significantly to $18.7 million in the first nine months ofFiscal 2002 from $2.5 million in the first nine months of Fiscal 2001 due tosales to a new customer there. Net sales to Mexico decreased significantly to$9.9 million in the first nine months of Fiscal 2002, compared to $40.8 millionin the first nine months of Fiscal 2001 due to a decrease in capitalexpenditures by our customers in that region. We experienced sales declines inthe Europe and Middle East region to $55.9 million in the first nine months ofFiscal 2002 from $73.2 million in the first nine months of Fiscal 2001 due tothe global economic downturn. Net sales to China increased significantly to$32.7 million in the first nine months of Fiscal 2002 compared to $23.2 millionin the first nine months of Fiscal 2001 due to increased capacity availabilityin the first quarter of Fiscal 2002, to fulfill backlog of orders from China,as a result of lower overall sales in other regions. For the quarter endedDecember 31, 2001, one of our customers accounted for 16% of our net sales forthe quarter and two customers accounted 

 

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for 26% and 16% of our backlog as of December 31, 2001, respectively.For the first nine months of Fiscal 2002, two customers accounted for 16% and10% of net sales, respectively.

 

During the third quarter of Fiscal 2002, we received $65.9 million innew orders shippable over the next 12 months, compared to $133.6 million in thethird quarter of Fiscal 2001, representing a decrease of approximately 51%.During the first nine months of Fiscal 2002 we received $208.1 million in neworders shippable over the next 12 months, compared to $392.1 million in thefirst nine months of Fiscal 2001, representing a decrease of 47%. The backlogat December 31, 2001 was $110.3 million compared to $160.3 million at March 31,2001. Orders in our current backlog are subject to changes in deliveryschedules or to cancellation at the option of the purchaser without significantpenalty. We include in our backlog purchase orders for which a deliveryschedule has been specified for product shipment within one year. Due to theadverse economic environment, certain customers were unable to confirm shipmentof their orders within one year; therefore, we reduced backlog by $32.0 millionin the third quarter of Fiscal 2002 to account for these orders. We review ourbacklog on an ongoing basis and make adjustments to it if required.Accordingly, although useful for scheduling production, backlog as of anyparticular date may not be a reliable measure of sales for any future period.

 

*Gross Profit*

Gross profit as a percentage of net sales, before inventory valuationcharges, decreased to 11.3% in the third quarter of Fiscal 2002, compared to agross profit of 31.0% in the third 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 (76.0)% due to inventory valuationcharges of $39.4 million taken in the third quarter of Fiscal 2002 for excessinventories based upon a detailed evaluation of inventory on hand and currentlyforecasted requirements.

 

Gross profit as a percentage of net sales, before inventory valuationcharges, decreased to 20.2% in the first nine months of Fiscal 2002 compared to32.4% in the first nine months of Fiscal 2001. This decrease was primarily due to reasons mentioned above. Gross profitpercentage was further reduced to (36.0)% due to inventory valuation chargesof  $102.7 million taken in the firstnine months of Fiscal 2002 for excess inventories based upon a detailedevaluation of inventory on hand and currently forecasted requirements.

 

*Research and Development*

In the third quarter of Fiscal 2002, research and development expensesdecreased to $4.1 million from $5.7 million in the third quarter of Fiscal2001.  This decrease was primarily dueto completion of the consolidation of our Seattle, Washington research anddevelopment facility operations to our San Jose, California facility.  As a percentage of net sales, research anddevelopment expenses increased to 9.1% in the third quarter of Fiscal 2002,compared to 4.9% in the third quarter of Fiscal 2001 primarily because the rateof the decrease in net sales exceeded the rate of the decrease of research anddevelopment expenses in absolute dollars. We expect research and developmentexpenses to continue to decline slightly during the remainder of Fiscal 2002 aswe continue to refine our new product development schedules.

 

In the first nine months of Fiscal year 2002, research and developmentexpenses decreased to $14.8 million from $17.7 million in the first nine monthsof Fiscal 2001 due to closure of our Seattle, Washington operations. As apercentage of net sales, research and development expenses increased to 8.1% inthe first nine 

 

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months of Fiscal 2002, compared to 5.8% in the first nine months ofFiscal 2001 primarily because the rate of the decrease in net sales exceededthe rate of the decrease of research and development expenses in absolutedollars.

 

*Selling, General and Administrative*

In the third quarter of Fiscal 2002, selling, general andadministrative expenses decreased to $13.7 million from $16.7 million in thethird quarter of Fiscal 2001. This decrease was a result of a reduction inworkforce and other cost reduction measures that were taken in the first ninemonths of Fiscal 2002. As a percentage of net sales, selling, general andadministrative expenses increased to 30.3% in the third quarter of Fiscal 2002,compared to 14.5% in the comparable quarter of Fiscal 2001 primarily becausethe rate of the decrease in net sales exceeded the rate of the decrease ofselling, general and administrative expenses in absolute dollars. We expect ourselling, general and administrative expenses will continue to decrease duringthe fourth quarter of Fiscal 2002 as a result of these cost reductions.

 

Selling, general and administrative expenses in the first nine monthsof Fiscal 2002 decreased to $44.4 million compared to $47.3 million in thefirst nine months of Fiscal 2001. As a percentage of net sales, selling,general and administrative expenses increased to 24.3% in the first nine monthsof Fiscal 2002, compared to 15.4% in the first nine months 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.

 

*Restructuringand Asset Valuation Charges*

Due to macroeconomic and capital spending issues affecting thetelecommunications industry, we announced a restructuring program in the firstquarter of Fiscal 2002 to focus on profit contribution by reducing expenses andimproving operational efficiency. This restructuring program includedconsolidation of the our U.S. operations by relocating our Seattle, Washingtonmanufacturing facility to our San Jose, California facility, and a worldwidereduction of workforce. In connection with this restructuring program, theCompany recorded restructuring charges in first quarter of Fiscal 2002.

 

During the second quarter of Fiscal 2002, additional charges wererecorded in connection with the abandonment of the Seattle, Washingtonmanufacturing facility as more information became available regarding the leasetermination costs associated with this facility.

 

During the third quarter of Fiscal 2002, we announced an additionalrestructuring program due to the extended weakness in the telecommunicationsindustry. This restructuring program included worldwide workforce reductionsand consolidation of additional excess facilities.

 

In connection with these restructuring programs, we recorded restructuringcharges of $5.1 million during the third quarter of Fiscal 2002, whichconsisted of $2.7 million for employee severance and benefits and $2.4 millionfor lease termination costs. This restructuring charge related to reductions inworkforce worldwide and lease termination costs for vacating a portion of ourfacilities in San Jose, California and in Coventry, United Kingdom. We reducedour headcount by approximately 85 employees in the third quarter of Fiscal2002, with reductions affecting all functional areas and affecting variouslocations. As of December 31, 2001, 81 employees have been terminated.

 

In the first nine months ended December 30, 2001, we recordedrestructuring and asset valuation charges of $24.6 million, consisting of $8.4million for employee severance and benefits, $11.2 million for facility-relatedcosts (including $8.6 million for lease termination costs, $1.7 million for theloss on impairment of equipment, $0.5 million for legal costs, $0.4 million forthe write off of goodwill) and $5.0 million for uncollectible accountsreceivable. We reduced our headcount by approximately 405 employees in thefirst nine months of Fiscal 2002, with reductions affecting all functionalareas and affecting various locations. As of December 31, 2001, 396 employeeshave been terminated.

 

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The facilities consolidation expenses include payments required under alease contract, less applicable sublease income after the property wasabandoned. To determine the lease loss, certain assumptions were made relatedthe (1) time period over which the building will remain vacant, (2) subleaseterms, (3) sublease rates and (4) an estimate of brokerage fees. The lease lossis an estimate under SFAS No. 5, “Accounting for Contingencies,” and representsthe low end of the estimate of time to sublease and actual sublease rates.

 

The components of the restructuring and asset valuation chargesrecorded in the first, second and third quarters of Fiscal 2002 are as follows (inmillions):

 
|                                             |   | **Three  Months Ended   June 30, 2001** |   | **Three  Months Ended   September 30, 2001** |   | **Three  Months Ended   December 31, 2001** |   | **Nine  Months Ended   December 31, 2001** |   |
|--------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| Restructuring  Charges:                          |   |                                    |   |                                         |   |                                        |   |                                       |   |
|                                             |   |                                    |   |                                         |   |                                        |   |                                       |   |
| Severance and  Benefits                          |   | $                                       | 5.7    |                                         | $      | —                                      |   | $                                          | 2.7    |   | $ | 8.4 |   |
| Facilities and  Other                            |   | 5.3                                     |   | 3.5                                          |   | 2.4                                         |   | 11.2                                       |   |
|                                             |   |                                    |   |                                         |   |                                        |   |                                       |   |
| Total  Restructuring Charges                     |   | $                                       | 11.0   |                                         | $      | 3.5                                         |   | $                                          | 5.1    |   | $ | 19.6 |   |
| Asset Valuation  Charges                         |   | $                                       | — |                                         | $      | 5.0                                         |   | $                                          | — |   | $ | 5.0 |   |
| Total  Restructuring and Asset Valuation Charges |   | $                                       | 11.0   |                                         | $      | 8.5                                         |   | $                                          | 5.1    |   | $ | 24.6 |   |

 

The following table summarizes the balance of the restructuring accrualas of December 31, 2001 and the type and amount of restructuring costs utilizedduring the first, second and third quarter of Fiscal 2002 (in millions):

 
|                              |   | **Severance  and Benefits** |   | **Facilities  and Other** |   | **Total** |   |
|-----------------------------------|--------|-----------------------------|--------|---------------------------|--------|-----------|--------|
| Balance as of  April 1, 2001      |   | $                           | 0.0    |                      | $      | 0.0       |   | $ | 0.0 |   |
| Provision                         |   | 5.7                         |   | 5.3                       |   | 11.0      |   |
| Cash payments                     |   | (0.9                        | )      | —                    |   | (0.9      | )      |
| Non-cash  expenses                |   | —                      |   | (1.1                      | )      | (1.1      | )      |
| Balance as of  June 30, 2001      |   | $                           | 4.8    |                      | $      | 4.2       |   | $ | 9.0 |   |
| Provision                         |   | —                      |   | 3.5                       |   | 3.5       |   |
| Cash payments                     |   | (2.0                        | )      | (0.5                      | )      | (2.5      | )      |
| Non-cash  expenses                |   | —                      |   | (1.0                      | )      | (1.0      | )      |
| Balance as of  September 30, 2001 |   | $                           | 2.8    |                      | $      | 6.2       |   | $ | 9.0 |   |
| Provision                         |   | 2.7                         |   | 2.4                       |   | 5.1       |   |
| Cash payments                     |   | (2.2                        | )      | (0.5                      | )      | (2.7      | )      |
| Non-cash  expenses                |   | —                      |   | (0.1                      | )      | (0.1      | )      |
| Balance as of  December 31, 2001  |   | $                           | 3.3    |                      | $      | 8.0       |   | $ | 11.3 |   |

 

Total cash outlay for the restructuring charges is expected to be $17.5million. The remaining $7.1 million of restructuring and asset valuationcharges are non-cash charges related to the write-off of receivables, goodwilland the loss on impairment of equipment. We expect all the cash charges ofrestructuring to be paid out during Fiscal 2002 with the exception of severance

 

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and benefits costs of approximately $1.0 million, which will be paidoff in Fiscal 2003, $0.5 million, which will be paid off in Fiscal 2004 andvacated building lease obligations of $7.8 million and $0.8 million, which areexpected to be paid off over the next ten years and twenty years, respectively.

 

We will continue to review our costs and there could be additionalrestructuring charges in the fourth quarter of Fiscal 2002.

 

*OtherIncome (Expense)*

Interest income decreased to $0.7 million in the third quarter ofFiscal 2002 from $1.0 million in the third quarter of Fiscal 2001, primarilydue to lower interest rates as compared to the third quarter of Fiscal 2001.

 

During the third quarter of Fiscal 2002, we recorded an impairment lossof $0.5 million on certain of our minority investments in marketable andnon-marketable securities. We determined that the carrying value for thesecertain investments exceeded their fair value and that these losses were otherthan temporary in nature.

 

In the first nine months of Fiscal 2002, interest income decreased to$2.0 million from $4.5 million in the first nine months of Fiscal 2001primarily due to lower average cash balances and lower interest rates ascompared to the first half of Fiscal 2001. During the first nine months ofFiscal 2002, we recorded $8.8 million as a permanent impairment loss oninvestments.  This loss consisted of a$4.5 million loss on our minority investments in marketable securities, a $3.4million loss on our minority investments in non-marketable securities and a$0.9 million loss on short-term investments in marketable securities. Wedetermined that the carrying value for these investments exceeded their fairvalue and that these losses were other than temporary in nature.

 

*Provision for Income Taxes*

In the third quarter of Fiscal 2002, we provided for income taxes tocover certain foreign subsidiaries that have generated taxable income, whilerecording no provision or benefit from U.S. operations due to the net loss forthe period. We continue to provide a 100% valuation allowance for our deferredtax assets related to our U.S. operations.

 

**LiquidityAnd Capital Resources**

 

Net cash used for operating activities in the first nine months ofFiscal 2002 was $22.3 million, compared to net cash used for operatingactivities of $52.7 million in the first nine months of Fiscal 2001. Thedecrease in cash used for operating activities was primarily the result of adecrease in accounts receivable. Accounts receivable decreased by $53.2 million during the first ninemonths of Fiscal 2002 due to collections from customers and decreasedsales.  Inventories increased net of theinventory valuation charges by $39.8 million in the first nine months of Fiscal2002 due to the inability to decrease inventory at the same rate as the declinein demand. Accounts payable decreased by $31.0 million in the first nine monthsof Fiscal 2002 due to a decrease in the purchase volume of inventory and loweroperating expenses in the first nine months of Fiscal 2002. Other accruedliabilities increased $2.0 million in the first nine months of Fiscal 2002 ascompared to a decrease of $16.3 million in the same period of Fiscal 2001 dueto restructuring costs accrued.

 

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Purchases of property and equipment were $10.6 million in the firstnine months of Fiscal 2002 compared to $15.5 million in the first nine monthsof Fiscal 2001. The planned decrease in capital expenditures was made inresponse to an overall slowdown in the global economy.

 

Cash provided by financing activities was mainly from proceeds from thesale of our common stock to two existing shareholders. On August 10, 2001, weraised an aggregate amount of approximately $70.9 million from the sale of7,927,851 shares of our common stock in a direct primary issuance of shares inan offering registered with the Securities and Exchange Commission pursuant toour “shelf” Registration Statement on Form S-3 (File No. 333-50820), whichbecame effective on December 7, 2000. We expect that these funds will be used for general corporate andworking capital purposes. The remaining proceeds from the sale of common stockwere derived from the exercise of employee stock options and the employee stockpurchase plan.

 

At December 31, 2001, our principal sources of liquidity consisted of$78.1 million in cash and cash equivalents and short-term investments.  However, depending on the growth of ourbusiness, we may require additional financing which may not be available to usin the required time frame on commercially reasonable terms, if at all. Webelieve that we have the financial resources needed to meet our businessrequirements for at least the next 12 months.

 

**EuropeanMonetary Union**

 

In January 1999, a new currency called the “euro” was introduced incertain Economic and Monetary Union (“EMU”) countries. During 2002, all EMUcountries are 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.

 

**Quantitativeand Qualitative Disclosures about Market Risk**

 

The primary objective of our short-term investment activities is topreserve principal while at the same time maximize yields, withoutsignificantly increasing risk.  Ourshort-term investments are for fixed interest rates; therefore, changes ininterest rates will not generate a gain or loss on these investments unlessthey are sold prior to maturity.  Actualgains and losses due to the sale of our investments prior to maturity have beenimmaterial.  Investments are generallynot held for more than one year. The average length of investments held at theend of the third quarter of Fiscal 2002 was 59 days and had an average yield of2.38% per annum.

 

We are exposed to equity price risks on the marketable portion ofequity securities included in our portfolio of investments purchased for thepromotion of business and strategic objectives.  These investments are generally in companies in thetelecommunications industry sector, many of which are small capitalizationstocks.  We typically have not attemptedto reduce or eliminate our 

 

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market exposure on these securities. A 20% adverse change in equityprices would result in an approximate $0.1 million decrease in the fair valueof our available-for-sale securities as of December 31, 2001.

 

As of December 31, 2001, unrealized losses on investments wereinsignificant. 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. Duringthe nine months ended December 31, 2001, the Company recorded a permanentimpairment for certain investments of $8.8 million. $2.5 million of this impairment loss had been recorded asunrealized holding loss as of March 31, 2001.

 

We routinely use forward foreign exchange contracts to hedge our netexposures, by currency, related to the monetary assets and liabilities of ouroperations denominated in non-functional currencies. In addition, we enter intoforward foreign exchange contracts to establish with certainty the U.S. dollaramount of future firm commitments denominated in a foreign currency. Theprimary business objective of this hedging program is to minimize the gains andlosses resulting from exchange rate changes. At December 31, 2001 and 2000, weheld forward contracts in the aggregate amount of $42.2 million and $45.2million, respectively, primarily in British pounds, Brazilian reals, NewZealand dollars and the euro. The amount of unrealized loss on these contractsat December 31, 2001 was $0.1 million.

 

Given our foreign exchange position, a 10% adverse change in foreignexchange rates upon which these foreign exchange contracts are based wouldresult in exchange gains and losses. In all material aspects, these exchangegains and losses would be fully offset by exchange gains and losses on theunderlying net monetary exposures and firm commitments for which the contractsare designated as hedges. We do not expect material exchange rate gains andlosses from unhedged foreign currency exposures.

 

We do not enter into foreign currency transactions for trading orspeculative purposes.  We attempt tolimit our exposure to credit risk by executing foreign contracts withhigh-quality financial institutions. A discussion of our accounting policiesfor derivative financial instruments is included in the notes to the financialstatements.

 

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**FactorsThat May Affect Future Financial Results**

 

**Competitioncould harm our ability to maintain or improve our position in the market andcould decrease our revenues.**

 

The wireless interconnection and access business is a specializedsegment of the wireless telecommunications industry and is extremelycompetitive, and we expect that competition will increase. Many of ourcompetitors have more extensive engineering, manufacturing and marketingcapabilities and significantly greater financial, technical, and personnelresources than us. In addition, some of our competitors may have greater namerecognition, broader product lines, a larger installed base of products andlonger–standing customer relationships. Our existing and potentialcompetitors include established and emerging companies, such as Alcatel,Ceragon Networks, L.M. Ericsson, Microwave Communications Division of HarrisCorporation, NEC, Nera, Nokia, P-COM, Inc, Sagem AS, SIAE, Siemens AG, as wellas several private companies currently in the startup stage. Some of ourcompetitors have product lines that compete with ours, and are also originalequipment manufacturers (OEMs) through which we market and sell our products.Some of our largest customers could internally develop the capability tomanufacture 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 compete successfully will depend on anumber of factors both within and outside our control, including price,quality, availability, customer service and support, breadth of product line,product performance and features, rapid time-to-market delivery capabilities,reliability, timing of new product introductions by us, our customers and ourcompetitors, and the ability of our customers to obtain financing. We cannotassure you that we will have the financial resources, technical expertise, ormarketing, sales, distribution, and customer service and support capabilitiesto compete successfully.

 

**If wefail to maintain our relationships with original equipment manufacturers, ourdistribution channels could be harmed, which could cause our revenues todecrease.**

 

We have relationships with OEM base station suppliers and in selectedcountries we also market our products through independent agents anddistributors. These relationships increase our ability to pursue the limitednumber of major contract awards each year. In addition, these relationships areintended to provide our customers with easier access to financing and tointegrated systems providers with a variety of equipment and servicecapabilities. We may not be able to continue to maintain and develop theserelationships or, if these relationships are developed, they may not besuccessful. Our inability to establish or maintain these distributionrelationships could restrict our ability to market our products and therebyresult in significant revenue shortfalls. If these revenue shortfalls occur,our business, financial condition or results of operations may be harmed.

 

**Ourindustry is volatile and subject to frequent changes, and we may not be able torespond effectively or in a timely manner to these changes.**

 

We participate in a highly volatile industry that is characterized byvigorous competition for market share and rapid technological development.These factors could result in aggressive pricing practices and growingcompetition both from start-up companies and from well-capitalizedtelecommunication systems providers, which, in turn, could decrease ourrevenues. In response to changes in our industry and market conditions, we mayrestructure our activities to more strategically realign our resources. Thisincludes assessing whether we should consider 

 

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disposing of or otherwise exiting businesses and reviewing therecoverability of our tangible and intangible assets. Any decision to limitinvestment in our tangible and intangible assets or to dispose of or otherwiseexit businesses may result in the recording of accrued liabilities for specialcharges such as workforce reduction costs. Additionally, accounting estimateswith respect to the useful life and ultimate recoverability of our carryingbasis of assets could change as a result of such assessments and decisions, andcould harm our results of operations.

 

**Becauseof the severe economic downturn in the United States economy, and bankruptciesand financial difficulties in the competitive local exchange carrier business,the demand for our products and services may decrease.**

 

Due to the rapid and increasingly severe economic downturn in theUnited States, as well as, the global tightening of the capital markets for thetelecommunications and mobile cellular projects during calendar 2001, ourbusiness opportunities in the United States, Europe, Asia and other countriesand geographic regions where we conduct business have diminished. To the extentthat the economic downturn and the global tightening of the capital marketscontinue, the demand for our products and services may decrease further inthese countries and geographical regions. In addition, the terrorist attack ofSeptember 11, 2001, the subsequent military response by the United States andfuture events occurring in response to or in connection with the attacks mayhave, and may continue to, negatively impact the economy in general. This couldresult in our customers delaying or canceling the purchase of our products,which would have a significant negative impact on our revenues. Due in part tothe economic downturn, we undertook a worldwide reduction in work force ofapproximately 40% and closed our Seattle, Washington facility in the first ninemonths of Fiscal 2002. In addition, due to the collapse of the CLEC business inthe United States, we expect little, if any, business from the CLEC market inFiscal 2002. This will result in a significant revenue decline in Fiscal 2002as compared to Fiscal 2001.

 

**Consolidationwithin the telecommunications industry and among suppliers could decrease ourrevenues.**

 

The telecommunications industry has experienced significantconsolidation among its participants, and we expect this trend to continue.Some operators in this industry have experienced financial difficulty and have,or may, file for bankruptcy protection or are acquired by other operators.Other operators may merge and one or more of our competitors may supplyproducts to such companies that have merged or will merge. This consolidationcould result in purchasing decision delays by the merged companies and decreaseopportunities for us to supply our products to the merged companies. We may alsosee similar consolidation among suppliers which may further decrease ouropportunity to market and sell our products.

 

**Ouraverage sales prices are declining, which is decreasing our gross profitmargins.**

 

Currently, manufacturers of digital microwave telecommunicationsequipment are experiencing, and are likely to continue to experience, on-goingprice pressure, which has resulted, and is expected to continue to result, indownward pricing pressure on our products. As a result, we have experienced, andexpect to continue to experience, declining average sales prices for ourproducts. Our future profitability is dependent upon our ability to improvemanufacturing efficiencies, reduce costs of materials used in our products, andto continue to introduce new products and product enhancements. Our inabilityto respond to increased price competition will harm our business, financialcondition and results of operations. Since our customers frequently negotiatesupply arrangements far in advance of delivery dates, we must often commit toprice 

 

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reductions for our products before we are aware of how, or if, costreductions can be obtained. As a result, current or future price reductioncommitments could, and any inability by us to respond to increased pricecompetition would, harm our business, financial condition and results ofoperations.

 

**Financialdifficulties confronting our customers expose us to increased credit risks andmay decrease our revenues and profitability.**

 

CLECs, which comprised a significant segment of our customers in Fiscal2001 have since, faced severe financial difficulties. 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 addition, in the second quarter of Fiscal 2002, werecorded an asset valuation charge of $5.0 million against some of our foreignaccounts receivable. If the economic downturn continues, we may be forced totake additional reserves for receivables, which would decrease our profits.

 

**Becausea significant amount of our revenues comes from a few customers, thetermination of any of these customer relationships may harm our business.**

 

Sales of our products are concentrated in a small number of customers.For the quarter ended December 31, 2001, one of our customers accounted for 16%of our net sales for the quarter and two customers accounted for 26% and 16% ofour backlog as of December 31, 2001, respectively. For the first nine months ofFiscal 2002, one customer accounted for 16% 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 calendar year 2001, the demand for our products andservices has decreased and may continue to decrease. The loss of any existingcustomer, a significant reduction in the level of sales to any existingcustomer, or our inability to gain additional customers could result in furtherdeclines in our revenues. If these revenue declines occur, our business,financial condition, and results of operations would be harmed.

 

**Due toour significant volume of international sales, we are susceptible to a numberof political, economic and geographic risks that could harm our business ifthey occur.**

 

We are highly dependent on sales to customers outside the UnitedStates. During the fiscal years 1999, 2000 and 2001, sales to internationalcustomers accounted for 87%, 79% and 69% of our net sales, respectively. Salesto international customers for the first nine months of Fiscal 2002 accountedfor 92% of our net sales. We expect that international sales will continue toaccount for the majority of our net product sales for the foreseeable future.As a result, the occurrence of any international, political, economic orgeographic events that adversely affects our business could result insignificant revenue shortfalls. These revenue shortfalls could cause our business,financial condition and results of operations to be harmed. Some of the risksand challenges of doing business internationally include:

 

•              unexpected changes in regulatoryrequirements;

 

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•              fluctuations in foreign currencyexchange rates;

 

•              imposition of tariffs and otherbarriers and restrictions;

 

•              management and operation of anenterprise spread over various countries;

 

•              burden of complying with a varietyof foreign laws; and

 

•              general economic and geopoliticalconditions, including inflation and trade relationships.

 

**Lack ofcomponent availability or the inability of our subcontractors to perform, orour key suppliers to manufacture and deliver our products, could cause ourproducts to be produced in an untimely or unsatisfactory manner.**

 

Our manufacturing operations are highly dependent upon the delivery ofmaterials by outside suppliers in a timely manner. Also, we depend in part uponsubcontractors to assemble major components and subsystems used in our productsin a timely and satisfactory manner. We do not generally enter into long-termor volume purchase agreements with any of our suppliers, and we cannot assureyou that such materials, components and subsystems will be available to us at suchtime and in quantities 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.

 

**Theglobal tightening of capital markets for the telecommunications and mobilecellular projects may result in inventory which we cannot sell or be requiredto sell at distressed prices.**

 

Many of our current and potential customers require significant capitalfunding to finance their telecommunications and mobile cellular projects, whichinclude the purchase of our products and services.  Due to the current tight capital markets worldwide, availablefunding for these projects has been and may continue to be unavailable to somecustomers and thereby slow or halt the purchase of our products andservices.  This has resulted in excessinventories on hand and could result in additional excess inventories in thefuture.  In the first nine months ofFiscal 2002, we recorded inventory valuation charges of $102.7 million forexcess inventory and supplier commitments resulting from the reduction in oursales volume compared to the prior fiscal year.  If funding continues to be unavailable to our customers or theircustomers, we may be forced to take additional reserves for excess inventory.  We cannot assure you that we will besuccessful in matching our inventory purchases with anticipated shipmentvolumes.  As a result, we may fail tocontrol the amount of inventory on hand and may be forced to take unanticipatedadditional reserves.  Such additionalinventory reserves, if required, would decrease our profits.

 

**If wefail to manage our internal development or successfully integrate acquiredbusinesses, we may not effectively manage our growth and our business may beharmed.**

 

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Future growth of our operations depends, in part, on our ability tointroduce new products and enhancements to existing products to meet theemerging trends in our industry. We have pursued, and will continue to pursue,growth opportunities through internal development, minority investments andacquisitions of complementary businesses and technologies. We are unable topredict whether and when any prospective acquisition candidate will becomeavailable or the likelihood that any acquisition will be completed and successfullyintegrated. Once integrated, acquired businesses may not achieve comparablelevels of revenues, profitability or productivity as our existing business orotherwise perform as expected. Also, acquisitions may involve difficulties inthe retention of personnel, diversion of management’s attention, risks of ourcustomers and customers of acquired businesses deferring purchase decisions asthey evaluate the impact of the acquisition, unexpected legal liabilities, andtax and accounting issues. Our failure to manage growth effectively could harmour business, financial condition and results of operations.

 

In addition, we compete for acquisition and expansion opportunitieswith many entities that have substantially greater resources than us.Furthermore, any acquisition we complete may encourage certain of ourcompetitors to enter into additional business combinations, to accelerateproduct development, or to engage in aggressive price reductions or othercompetitive practices, thereby creating even more powerful or aggressivecompetitors.

 

**Theunpredictability of our quarter-to-quarter results may harm the trading priceof our common stock.**

 

Our quarterly operating results may vary significantly in the futurefor a variety of reasons, many of which are outside of our control, and any ofwhich may harm our business. These factors include:

 

•              volume and timing of productorders received and delivered during the quarter;

 

•              our ability and the ability of ourkey suppliers to respond to changes made by customers in their orders;

 

•              timing of new productintroductions by us or our competitors;

 

•              changes in the mix of productssold by us;

 

•              cost and availability ofcomponents and subsystems;

 

**•**              downward pricing pressure on ourproducts;

 

•              adoption of new technologies andindustry standards;

 

•              competitive factors, includingpricing, availability and demand for competing products;

 

•              ability of our customers to obtainfinancing to enable their purchase of our products;

 

•              fluctuations in foreign currencyexchange rates;

 

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•              regulatory developments; and

 

•              general economic conditions in theUnited States and internationally.

 

Our quarterly results are difficult to predict and delays in productdelivery or closing of a sale can cause revenues and net income to fluctuatesignificantly from anticipated levels. In addition, we may increase spending inresponse to competition or to pursue new market opportunities. Accordingly, wecannot assure you that we will be able to sustain profitability in the future,particularly on a quarter-to-quarter basis.

 

**Becauseof intense competition for highly skilled personnel, we may not be able torecruit and retain qualified personnel.**

 

Due to the specialized nature of our business, our future performanceis highly dependent upon the continued services of our key engineeringpersonnel and executive officers, including Charles D. Kissner, who currentlyserves as our Chief Executive Officer and Chairman of the Board. The loss ofany key personnel could harm our business. Our prospects depend upon ourability to attract and retain qualified engineering, manufacturing, marketing,sales and management personnel for our operations. Competition for personnel isintense and we may not be successful in attracting or retaining qualifiedpersonnel. The failure of any key employee to perform in his or her currentposition or our inability to attract and retain qualified personnel could harmour business and deter our ability to expand our business.

 

**If weare unable to protect our intellectual property rights adequately, we may bedeprived of legal recourse against those who misappropriate our intellectualproperty.**

 

Our ability to compete will depend, in part, on our ability to obtainand enforce intellectual property protection for our technology in the UnitedStates and internationally. We currently rely upon a combination of tradesecrets, trademark, copyright, patents and contractual rights to protect ourintellectual property.  In addition, weenter into confidentiality and invention assignment agreements with ouremployees, and enter into non-disclosure agreements with our suppliers andappropriate customers so as to limit access to and disclosure of ourproprietary information. We cannot assure you that any steps taken by us willbe 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.

 

**Defendingagainst intellectual property infringement claims could be expensive and coulddisrupt our business.**

 

The wireless telecommunications industry is characterized by vigorousprotection and pursuit of intellectual property rights, which has resulted inoften protracted and expensive litigation. We may in the future be notifiedthat we are infringing certain patent or other intellectual property rights ofothers. Such litigation or claim could result in substantial costs anddiversion of 

 

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resources. In the event of an adverse result of any such litigation, wecould be required to pay substantial damages, cease the licensing of allegedlyinfringing technology or the sale of allegedly infringing products and expendsignificant resources to develop non-infringing technology or to obtainlicenses for the infringing technology. We cannot assure you that we would besuccessful in developing such non-infringing technology or that any license forthe infringing technology would be available to us on commercially reasonableterms, if at all.

 

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

 

Radio communications are subject to regulation by United States andforeign laws and international treaties. Generally, our products must conformto a variety of United States and international requirements established toavoid interference among users of transmission frequencies and to permitinterconnection of telecommunications equipment. Any delays in compliance withrespect to our future products could delay the introduction of suchproductions.

 

In addition, both in the United States and internationally, we areaffected by the allocation and auction of the radio frequency spectrum bygovernmental authorities. Such governmental authorities may not allocatesufficient radio frequency spectrum for use by our products or we may not besuccessful in obtaining regulatory approval for our products from theseauthorities. Historically, in many developed countries, the unavailability offrequency spectrum has inhibited the growth of wireless telecommunicationsnetworks. In addition, to operate in a jurisdiction, we must obtain regulatoryapproval for our products. Each jurisdiction in which we market our productshas its own regulations governing radio communications. Products that supportemerging wireless telecommunications services can be marketed in a jurisdictiononly if permitted by suitable frequency allocations, auctions and regulations,and the process of establishing new regulations is complex and lengthy. If weare unable to obtain sufficient allocation of radio frequency spectrum by theappropriate governmental authority or obtain the proper regulatory approval forour products, our business, financial condition or results of operations may beharmed.

 

**If wefail to develop products that meet our customers’ technical specifications on atimely basis, our business may be harmed.**

 

The existing and potential market for our products and technology arecharacterized by ever increasing performance requirements, evolving industrystandards, rapid technological changes and product obsolescence. Thesecharacteristics lead to frequent new products and technology introductions andenhancements, shorter product life cycles and changes in customer demands. Wecannot assure you that we will be successful in developing or marketing any ofour products currently being developed. Moreover, we cannot assure you that wewill not experience difficulties that could further delay or prevent thesuccessful development, introduction and sale of future products, or that theseproducts will adequately meet the requirements of the marketplace and achievemarket acceptance.

 

**We maynot successfully adapt to regulatory changes in our industry, which couldsignificantly impact the operation of our business.**

 

The regulatory environment in which we operate is subject to change.Regulatory changes, which are affected by political, economic and technicalfactors, could significantly impact our 

 

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operations by restricting development efforts by us and our customers,making current 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.

 

**Ourstock price may be volatile, which may lead to losses by investors.**

 

Announcements of developments related to our business, announcements bycompetitors, quarterly fluctuations in our financial results and generalconditions in the telecommunications industry in which we compete, or theeconomies of the countries in which we do business and other factors couldcause the price of our common stock to fluctuate, perhaps substantially. Inaddition, in recent years the stock market has experienced extreme pricefluctuations, which have often been unrelated to the operating performance ofaffected companies. These factors and fluctuations could lower the market priceof our common stock.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

For a description of our market risks, see page 24, “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Quantitative and Qualitative Disclosures About Market Risk.”

 

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PART II - OTHERINFORMATION

 

ITEM 1 — LEGALPROCEEDINGS

 

There are no material pending legal proceedingsagainst us.  We are, however, subject tolegal proceedings and claims that arise in the normal course of our business.

 

ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K

 

None

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 
|   |                                                          | DMC STRATEX NETWORKS, INC. |
|--------|---------------------------------------------------------------|----------------------------|
|   |                                                          |                       |
| Date:  | February 13, 2002                                             |                       | By | /s/ Carl A. Thomsen |
|   | Carl A. Thomsen                                               |
|   | Senior Vice President, Chief Financial Officer and  Secretary |
|   | (Duly Authorized Officer and Principal Financial  Officer)    |
|        |                                                               |                            |  |  |  |  |  |  |  |

 

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