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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

STRATEX NETWORKS, INC.

Registrant’s former name: DMC Stratex Networks, Inc.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

	Yes x   No o

The number of outstanding shares of the Registrant’s common stock, par value $.01 per share, was 82,776,027 on February 7, 2002.

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INDEX

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PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS

STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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BASIS OF PRESENTATION

	The condensed consolidated financial statements include the accounts of Stratex Networks, Inc. and its wholly-owned subsidiaries (the “Company”). Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation.
	While the financial information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in connection with the Company’s financial statements included in its annual report and Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange Commission on May 15, 2002.

CASH AND CASH EQUIVALENTS

	For purposes of the consolidated statement of cash flows, we consider all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents.
	As of December 31, 2002, we had $1.6 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. In connection with the issuance of these letters of credit, we held $0.7 million of cash as collateral for these specific obligations as of December 31, 2002. Also, as of December 31, 2002, we had outstanding forward foreign exchange contracts in the aggregate amount of $17.5 million, for which restricted cash of $0.7 million was held as collateral by one of the financial institutions utilized to hedge our foreign currency risk exposure.

SHORT- TERM INVESTMENTS

	We invest our excess cash in high-quality and easily marketable instruments. All of our marketable securities are classified as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). All investments are reported at fair market value with the related unrealized holding gains and losses reported as a component of accumulated other comprehensive loss. Unrealized holding losses on the portfolio as of December 31, 2002 were insignificant. At December 31, 2002, our available-for-sale securities had contractual maturities ranging from 1 day to 284 days, with a weighted average maturity of 51 days.
	There were impairment losses of approximately $0.4 million during the first nine months of fiscal 2003; all of these losses were on our equity investments, which are discussed in the “Other Assets” footnote below. There were impairment losses of approximately $8.8 million during the first nine months of fiscal 2002. Of this $8.8 million loss, $0.9 million

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	was on our short-term investments in marketable securities and the remaining $7.9 million was on our equity investments, which are discussed in the “Other Assets” footnote below.

INVENTORIES

	Inventories are stated at the lower of cost (first-in, first-out) or market, where cost includes material, labor and manufacturing overhead. We maintain an inventory reserve to record inventory at the lower of cost or market value. This reserve is calculated by comparing on hand quantities against backlog and forecasted revenues. Inventories, net of reserves, consist of (in thousands):

	In the first nine months of fiscal 2003, we realized a $2.1 million benefit due to the sale of inventory that had been fully reserved, due primarily to excess inventories not expected to be sold, in periods prior to the nine months ending December 31, 2002.

OTHER CURRENT ASSETS

	Other current assets included the following (in thousands):

	Non-trade receivables as of December 31, 2002 included $1.5 million from the sale of manufacturing assets and $0.6 million for transition costs due from Microelectronics Technology, Inc. related to an outsourcing agreement executed in June 2002. Non-trade receivables as of December 31, 2002 also included $0.8 million of interest receivable related to our short-term investments.

OTHER ASSETS

	Included in other assets are equity investments and long-term deposits for premises leased by us. Equity investments represent voting interest of less than 20% and are accounted for

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under the cost method because the Company is not able to exercise significant influence over the investee. Equity investments in marketable securities are classified as “available-for-sale” in accordance with the provisions of SFAS 115 and reported at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Equity investments in non-marketable securities are recorded at cost. We continually review these equity investments to evaluate whether conditions have occurred that would suggest an impairment of carrying value. Impairment losses of $0.4 million were recorded in the first nine months of fiscal 2003 on our equity investments in marketable securities, included in other assets. There were impairment losses of approximately $8.8 million during the first nine months of fiscal 2002. Of this $8.8 million loss, $0.9 million was on our short-term investments in marketable securities, which are discussed in the “Short-Term Investments” footnote above. The remaining $7.9 million loss was on our equity investments, which consisted of a $4.5 million loss on our minority investments in marketable equity securities and a $3.4 million loss on our equity investments in non-marketable securities. We determined that the recorded value for these certain investments exceeded their fair value and that these losses were other than temporary in nature.

ACCRUED LIABILITIES

	Accrued liabilities included the following (in thousands):

In accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), if the revenue recognition criteria are not met (as described in the revenue recognition footnote below), revenue is deferred. With certain of our customers, we have collected the amounts due; however, the revenue is deferred due to the reasons described above. The increase in accrued restructuring is due to additional restructuring charges in the first nine months of fiscal 2003, which are discussed in the “Restructuring Charges” footnote below.

CURRENCY TRANSLATION

	The functional currency of the Company’s subsidiaries located in the United Kingdom and New Zealand is the U.S. dollar. Accordingly, all of the monetary assets and liabilities of these subsidiaries are remeasured into U.S. dollars at the current exchange rate as of the applicable balance sheet date, and all non-monetary assets and liabilities are

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remeasured at historical rates. Sales and expenses are remeasured at the average exchange rate prevailing during the period. Gains and losses resulting from the remeasurement of the subsidiaries’ financial statements are included in the consolidated statements of operations. The Company’s other international subsidiaries use their local currency as their functional currency. Assets and liabilities of these subsidiaries are translated at the current exchange rates in effect at the balance sheet date, and income and expense accounts are translated at the average exchange rates during the period. The resulting translation adjustments are included in accumulated other comprehensive loss in the accompanying financial statements.

DERIVATIVE FINANCIAL INSTRUMENTS

	In accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), all derivatives are recorded on the balance sheet at fair value.
	Derivatives are employed to eliminate, reduce, or transfer selected foreign currency risks that can be identified and quantified. Our policy is to hedge forecasted and actual foreign currency risk with forward contracts that expire within twelve months. Specifically, we hedge foreign currency risks relating to firmly committed backlog, open purchase orders and non-functional currency monetary assets and liabilities. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance sheet at fair value and changes in fair value are recognized currently in earnings.
	Additionally, we hedge forecasted non-U.S. dollar sales and non-U.S. dollar purchases. In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as “cash flow hedges” and are evaluated for effectiveness, excluding time value, at least quarterly. We record effective changes in the fair value of these cash flow hedges in accumulated other comprehensive income (“OCI”) until the revenue is recognized or the related purchases are recognized in cost of sales, at which time the changes are reclassified to revenue and cost of sales, respectively. All amounts accumulated in OCI at quarter end will be reclassified to earnings within the next 12 months. A gain of $0.1 million was recognized in other income and expense in the first nine months of fiscal 2003 related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur.
	The following table summarizes the activity in OCI, with regard to the changes in fair value of derivative instruments, for the first nine months of fiscal 2003 (in thousands):

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CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us to concentrations of credit risk consist principally of temporary cash investments and trade receivables. We have cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of investments to financial institutions evaluated as highly creditworthy. Investments, under our policy, must have a rating, at the time of purchase, of A1 or P1 for short-term paper and a rating of A or better for long-term notes or bonds.