UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form l0-Q
(Mark One) | ||
[X] |
QUARTERLY REPORT PURSUANT TO SECTION l3 or l5(d)
OF THE SECURITIES EXCHANGE ACT OF l934 |
For the quarterly period ended September 27, 2002
or
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number l-3863
HARRIS CORPORATION
(321) 727-9l00
Delaware
34-0276860
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
l025 West NASA Boulevard
Melbourne, Florida
32919
(Address of principal executive offices)
(Zip Code)
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of l934 during the preceding l2 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes X No
The number of shares outstanding of the registrants common stock, as of November 4, 2002 was 66,432,190 shares.
HARRIS CORPORATION
FORM 10-Q
For the Quarter Ended September 27, 2002
INDEX
Part I | Financial Information: | Page | ||||||
|
||||||||
ITEM 1. | Financial Statements (unaudited): | |||||||
Condensed Consolidated Statement of Income for the Quarters
ended
September 27, 2002 and September 28, 2001 |
2 | |||||||
Condensed Consolidated Balance Sheets at September 27, 2002
and
June 28, 2002 |
3 | |||||||
Condensed Consolidated Statement of Cash Flows for the
Quarters
ended September 27, 2002 and September 28, 2001 |
4 | |||||||
Notes to Condensed Consolidated Financial Statements | 5 | |||||||
ITEM 2. |
Managements Discussion and Analysis of Financial Condition
and
Results of Operations |
10 | ||||||
ITEM 3. | Quantitative and Qualitative Disclosure About Market Risk | 19 | ||||||
ITEM 4. | Controls and Procedures | 20 | ||||||
Part II | Other Information: | |||||||
ITEM 1. | Legal Proceedings | 21 | ||||||
ITEM 2. | Changes in Securities and Use of Proceeds | 21 | ||||||
ITEM 3. | Defaults Upon Senior Securities | 22 | ||||||
ITEM 4. | Submission of Matters to a Vote of Security Holders | 22 | ||||||
ITEM 5. | Other Information | 22 | ||||||
ITEM 6. | Exhibits and Reports on Form 8-K | 22 | ||||||
Signatures | 24 | |||||||
Certifications | 25 | |||||||
Exhibits | 27 |
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following information for the quarters ended September 27, 2002 and September 28, 2001 has not been audited by independent accountants, but in the opinion of management reflects all adjustments (consisting only of normal, recurring items) necessary for a fair presentation of the results for the indicated periods. The results of operations for the quarter ended September 27, 2002 are not necessarily indicative of the results for the full fiscal year.
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Quarter Ended | |||||||||
|
|||||||||
September 27, | September 28, | ||||||||
2002 | 2001 | ||||||||
|
|
||||||||
(In millions, except per share amounts) | |||||||||
Revenue from product sales and services
|
$ | 450.2 | $ | 443.4 | |||||
|
|||||||||
Cost of product sales and services
|
(335.3 | ) | (330.8 | ) | |||||
Engineering, selling and administrative expenses
|
(96.8 | ) | (99.6 | ) | |||||
Non-operating income
|
16.2 | 17.9 | |||||||
Interest income
|
1.6 | 3.2 | |||||||
Interest expense
|
(5.7 | ) | (8.2 | ) | |||||
|
|
|
|||||||
Income before income taxes
|
30.2 | 25.9 | |||||||
Income taxes
|
(10.3 | ) | (8.8 | ) | |||||
|
|
|
|||||||
Net income
|
$ | 19.9 | $ | 17.1 | |||||
|
|
|
|||||||
|
|||||||||
Net income per common share
|
|||||||||
Basic
|
$ | .30 | $ | .26 | |||||
Diluted
|
$ | .30 | $ | .26 | |||||
|
|||||||||
Cash dividends paid per common share
|
$ | .08 | $ | .05 | |||||
|
|||||||||
Average basic shares outstanding
|
66.2 | 65.7 | |||||||
Average diluted shares outstanding
|
66.6 | 66.0 |
See Notes to Condensed Consolidated Financial Statements
2
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions) | September 27, | June 28, | ||||||||
2002 | 2002 | |||||||||
(unaudited) | (audited) | |||||||||
|
|
|||||||||
Assets
|
||||||||||
Current Assets
|
||||||||||
Cash and cash equivalents
|
$ | 363.3 | $ | 226.2 | ||||||
Marketable securities
|
34.5 | 52.2 | ||||||||
Receivables
|
366.8 | 380.3 | ||||||||
Unbilled costs and accrued earnings on fixed-price contracts
|
175.6 | 178.6 | ||||||||
Inventories
|
231.9 | 233.2 | ||||||||
Current deferred income taxes
|
92.6 | 82.3 | ||||||||
Income taxes receivable
|
| 0.7 | ||||||||
|
|
|
||||||||
Total current assets
|
1,264.7 | 1,153.5 | ||||||||
|
||||||||||
Other Assets
|
||||||||||
Plant and equipment
|
267.1 | 270.6 | ||||||||
Goodwill
|
221.5 | 215.2 | ||||||||
Non-current notes receivable
|
32.8 | 30.9 | ||||||||
Non-current deferred income taxes
|
23.8 | 26.0 | ||||||||
Other assets
|
162.2 | 162.3 | ||||||||
|
|
|
||||||||
|
707.4 | 705.0 | ||||||||
|
|
|
||||||||
|
$ | 1,972.1 | $ | 1,858.5 | ||||||
|
|
|
||||||||
|
||||||||||
Liabilities and Shareholders Equity
|
||||||||||
Current Liabilities
|
||||||||||
Short-term debt
|
$ | 13.7 | $ | 24.6 | ||||||
Accounts payable
|
99.8 | 99.2 | ||||||||
Compensation and benefits
|
99.7 | 111.8 | ||||||||
Other accrued items
|
104.0 | 106.6 | ||||||||
Advance payments and unearned income
|
88.8 | 82.1 | ||||||||
Income taxes payable
|
11.3 | | ||||||||
Current portion of long-term debt
|
1.1 | 1.3 | ||||||||
|
|
|
||||||||
Total current liabilities
|
418.4 | 425.6 | ||||||||
|
||||||||||
Other Liabilities
|
||||||||||
Long-term debt
|
402.3 | 283.0 | ||||||||
|
||||||||||
Shareholders Equity
|
||||||||||
Preferred Stock, without par value; 1,000,000 shares
authorized; none issued
|
| | ||||||||
Common Stock, $1.00 par value; 250,000,000 shares
authorized; issued and outstanding 66,410,088 shares at
September 27, 2002 and 66,342,340 shares at June 28, 2002
|
66.4 | 66.3 | ||||||||
Other capital
|
225.4 | 223.9 | ||||||||
Retained earnings
|
886.2 | 871.7 | ||||||||
Unearned compensation
|
(3.7 | ) | (2.1 | ) | ||||||
Accumulated other comprehensive income (loss)
|
(22.9 | ) | (9.9 | ) | ||||||
|
|
|
||||||||
Total shareholders equity
|
1,151.4 | 1,149.9 | ||||||||
|
|
|
||||||||
|
$ | 1,972.1 | $ | 1,858.5 | ||||||
|
|
|
See Notes to Condensed Consolidated Financial Statements
3
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Quarter Ended | |||||||||||
|
|||||||||||
(In millions) | September 27, | September 28, | |||||||||
2002 | 2001 | ||||||||||
|
|
||||||||||
Operating Activities
|
|||||||||||
Net income
|
$ | 19.9 | $ | 17.1 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|||||||||||
Depreciation and amortization
|
13.5 | 13.6 | |||||||||
Non-current deferred income tax
|
2.2 | 3.1 | |||||||||
Gain on the sale of securities available for sale
|
(4.4 | ) | (16.7 | ) | |||||||
Gain on the sale of LiveTV, LLC
|
(18.8 | ) | | ||||||||
Gain on the sale of GE Harris Energy Systems, LLC
|
| (10.3 | ) | ||||||||
(Increase) decrease in:
|
|||||||||||
Accounts and notes receivable
|
11.6 | 43.7 | |||||||||
Unbilled costs and inventories
|
4.3 | (16.3 | ) | ||||||||
Increase (decrease) in:
|
|||||||||||
Accounts payable and accrued expenses
|
(14.1 | ) | (50.4 | ) | |||||||
Advance payments and unearned income
|
6.7 | 3.9 | |||||||||
Income taxes
|
8.5 | 1.4 | |||||||||
Other
|
(3.6 | ) | 16.4 | ||||||||
|
|
|
|||||||||
Net cash provided by operating activities
|
25.8 | 5.5 | |||||||||
|
|
|
|||||||||
Investing Activities
|
|||||||||||
Cash paid for acquired businesses
|
| (8.6 | ) | ||||||||
Additions of plant and equipment
|
(9.8 | ) | (9.5 | ) | |||||||
Cash paid for strategic investments
|
(2.2 | ) | (2.1 | ) | |||||||
Proceeds from the sale of securities available for sale
|
5.3 | 17.5 | |||||||||
Proceeds from the sale of LiveTV, LLC
|
19.0 | | |||||||||
Proceeds from the sale of GE Harris Energy Systems, LLC
|
| 23.0 | |||||||||
|
|
|
|||||||||
Net cash provided by investing activities
|
12.3 | 20.3 | |||||||||
|
|
|
|||||||||
Financing Activities
|
|||||||||||
Increase (decrease) in debt, net
|
103.5 | (33.8 | ) | ||||||||
Proceeds from sale of common stock
|
0.4 | 0.8 | |||||||||
Cash dividends
|
(5.3 | ) | (3.3 | ) | |||||||
|
|
|
|||||||||
Net cash provided by (used in) financing activities
|
98.6 | (36.3 | ) | ||||||||
|
|
|
|||||||||
Effect of exchange rate changes on cash and cash equivalents
|
0.4 | 0.3 | |||||||||
|
|
|
|||||||||
Net increase (decrease) in cash and cash equivalents
|
137.1 | (10.2 | ) | ||||||||
|
|||||||||||
Cash and cash equivalents at beginning of quarter
|
226.2 | 103.0 | |||||||||
|
|
|
|||||||||
Cash and cash equivalents at end of quarter
|
$ | 363.3 | $ | 92.8 | |||||||
|
|
|
See Notes to Condensed Consolidated Financial Statements
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2002
Note A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and changes in cash flows in conformity with accounting principles generally accepted in the United States. In the opinion of management, such financial statements reflect all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results for the quarter ended September 27, 2002 are not necessarily indicative of the results that may be expected for the full fiscal year. For further information refer to the Consolidated Financial Statements and related Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (Fiscal 2002 Form 10-K).
Note B Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Retirement Obligations (Statement 143). Statement 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. We have adopted the provisions of Statement 143 for fiscal 2003, which did not result in a material impact to our financial position.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Statement 144 supersedes Statement of Financial Accounting Standards No. 121, but retains its fundamental provisions for the (a) recognition and measurement of impairment of long-lived assets to be held and used, and (b) measurement of long-lived assets to be disposed of by sale. Statement 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 for segments of a business to be disposed of, but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. We have adopted the provisions of Statement 144 for fiscal 2003, which did not result in a material impact to our financial position.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (Statement 145). Statement 145 updates, clarifies and simplifies existing accounting pronouncements. Statement 145 rescinds Statement of Financial Accounting Standards No. 4 (Statement 4), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses because Statement 4 has been rescinded. Statement 145 amends Statement of Financial Accounting Standards No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASBs goal of requiring similar accounting treatment for transactions that have similar economic effects. Statement 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. We have adopted the provisions of Statement 145 for fiscal 2003, which did not result in a material impact to our financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (Issue 94-3). The principal difference between Statement 146 and Issue 94-3 relates to Statement 146s requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entitys commitment to an exit plan. A fundamental conclusion reached by the FASB in Statement 146 is that an entitys commitment to a plan, by itself, does not create
5
an obligation that meets the definition of a liability.
Therefore, this Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. We are
assessing whether or not the adoption of Statement 146 will have a
material impact on our consolidated financial statements.
Note C Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Comprehensive income (loss) for the quarters ended September 27, 2002 and
September 28, 2001 were $6.9 million and $(14.5) million, respectively.
The components of accumulated other comprehensive income (loss), net of
related tax, at September 27, 2002 and June 28, 2002 are as follows:
Note D Receivables
Receivables are summarized below:
Note E Inventories and Unbilled Costs
Inventories are summarized below:
(In millions)
September 27,
June 28,
2002
2002
$
2.3
$
12.8
(24.5
)
(22.8
)
(0.7
)
0.1
$
(22.9
)
$
(9.9
)
(In millions)
September 27,
June 28,
2002
2002
$
369.3
$
383.7
13.3
13.3
382.6
397.0
(15.8
)
(16.7
)
$
366.8
$
380.3
(In millions)
September 27,
June 28,
2002
2002
$
49.1
$
42.9
26.8
28.2
156.0
162.1
$
231.9
$
233.2
Unbilled costs and accrued earnings on fixed-price contracts are net of progress payments of $215.7 million at September 27, 2002 and $217.8 million at June 28, 2002.
6
Note F Plant and Equipment
Plant and equipment are summarized below:
Note G Net Income Per Share
Average outstanding shares used in the computation of net income per share are
as follows:
Note H Non-Operating Income
The components of non-operating income are as follows:
(In millions)
September 27,
June 28,
2002
2002
$
12.3
$
12.3
275.5
274.2
561.7
563.2
849.5
849.7
(582.4
)
(579.1
)
$
267.1
$
270.6
Quarter Ended
(In millions)
September 27,
September 28,
2002
2001
66.4
65.9
(0.2
)
(0.2
)
66.2
65.7
66.4
65.9
0.4
0.3
(0.2
)
(0.2
)
66.6
66.0
Quarter Ended
(In millions)
September 27,
September 28,
2002
2001
$
5.1
$
16.7
(0.7
)
18.8
10.3
(0.9
)
(2.1
)
(6.1
)
(7.0
)
$
16.2
$
17.9
On September 27, 2002, we completed the sale of our minority ownership in our LiveTV, LLC (LiveTV) venture to JetBlue Airways Corporation (JetBlue). Pursuant to the Membership Interest Purchase Agreement entered into between us, the other owners of the equity of LiveTV and JetBlue, JetBlue acquired all of the equity interests in LiveTV. Under the terms of the agreement, JetBlue paid us $19 million cash for our interest in LiveTV. JetBlue also repaid approximately $40 million of LiveTV debt, roughly half of which was guaranteed by us. We recorded a gain of $18.8 million for this transaction.
Note I Long-Term Debt
On August 26, 2002, we completed the private placement of $150 million of our 3.5% Convertible Debentures due 2022. The debentures initially carry an annual interest rate of 3.5 percent. The Convertible Debentures offering was made only to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the Securities Act) and outside the United States pursuant to Regulation S under the Securities Act. The interest rate on the convertible
7
debentures will be reset, within a specified range, in 2007, 2012 and 2017. These debentures are unsecured obligations convertible into shares of our common stock at an initial conversion price of $45.25 per share, subject to adjustment, under any of the following circumstances: (i) during any calendar quarter if the closing sale price of our common stock, for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the previous calendar quarter, is more than 110 percent of the applicable conversion price per share of our common stock on such last trading day, (ii) if we have called the debentures for redemption, (iii) upon the occurrence of specified credit rating events with respect to the debentures, or (iv) upon the occurrence of specified corporate transactions. The debentures were issued at 100 percent of the principal amount, less a discount of 2.5 percent to the initial purchasers. We may redeem the debentures commencing August 2007 at 100 percent of the principal amount plus accrued interest, if any. Holders may require us to repurchase the debentures, in whole or in part, on specified dates in 2007, 2012 and 2017 or upon the occurrence of certain other events at 100 percent of the principal amount plus accrued interest, if any. We incurred $4.7 million in debt issuance costs related to the issuance of the Convertible Debentures, which costs are being amortized on a straight-line basis over a five-year period and reflected as a portion of interest expense in the Condensed Consolidated Statement of Income.
Also, during the quarter ended September 27, 2002, we paid $30.5 million to retire our 6.38% notes due 2002.
Note J Business Segments
We are structured primarily around the markets we serve and operate in five business segments Government Communications Systems, RF Communications, Microwave Communications, Network Support and Broadcast Communications. Our Government Communications Systems segment engages in advanced research and develops, designs and produces advanced communication and information processing systems. Our RF Communications segment performs advance research and develops, designs, manufactures and sells tactical radio products and provides services related to tactical radio products. Our Microwave Communications segment designs, manufactures and sells microwave radio products and provides services related to microwave radio products. Our Network Support segment designs, manufactures and sells telephone test equipment and systems; develops, designs, produces and sells network management systems; and provides services related to these products and systems. Our Broadcast Communications segment designs, manufactures and sells television and radio transmission products; develops, designs, produces and sells automation and control systems and studio products; and provides services related to these products and systems.
The accounting policies of the operating segments are the same as those described in the Significant Accounting Policies footnote in our Fiscal 2002 Form 10-K. We evaluate each segments performance based on their operating income, which we define as their profit or loss from operations before income taxes excluding interest income and expense, equity income, goodwill amortization and gains or losses from securities and other investments. Intersegment sales, which are insignificant, are accounted for at prices comparable to unaffiliated customers. Corporate eliminations below represent the elimination of intersegment sales.
Total assets by business segment are summarized below:
(In millions)
September 27,
June 28,
2002
2002
$
399.9
$
401.1
119.5
119.4
436.1
457.4
84.1
91.1
352.4
336.0
580.1
453.5
$
1,972.1
$
1,858.5
8
Segment revenue, segment operating income and a reconciliation of segment
operating income to income before income taxes follows:
Quarter Ended
(In millions)
September 27,
September 28,
2002(2)
2001(3)
$
252.0
$
216.0
63.8
53.1
56.0
79.8
13.2
13.4
67.9
82.3
(2.7
)
(1.2
)
$
450.2
$
443.4
$
23.7
$
18.7
14.8
8.4
(7.3
)
(5.4
)
(2.7
)
(4.3
)
1.9
7.5
(12.3
)
(11.9
)
16.2
17.9
(4.1
)
(5.0
)
$
30.2
$
25.9
(1) | Non-operating income includes equity income, royalties, gains and losses from the sale of securities available for sale, write-downs of securities available for sale and other investments, and investments made in marketing and technology projects. Additional information regarding non-operating income is set forth in Note H Non-Operating Income. | |
(2) | First quarter fiscal 2003 Non-operating income includes an $18.8 million pretax gain on the sale of our minority interest in our LiveTV, LLC venture. | |
(3) | First quarter fiscal 2002 Non-operating income includes a $10.3 million pretax gain from the sale of our minority interest in our GE Harris Energy Control Systems, LLC joint venture. |
Note K Reclassifications
Certain prior-year amounts have been reclassified on the financial statements to conform to current year classifications.
9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information that management believes is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Condensed Consolidated Financial Statements and related Notes to Financial Statements appearing elsewhere in this report. Except for the historical information contained here, the discussions in this document contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Forward-Looking Statements and Factors that May Affect Future Results.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the Significant Accounting Policies footnote in our Notes to Financial Statements included in our Fiscal 2002 Form 10-K. Critical accounting policies are those that require application of managements most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include: (i) revenue recognition on long-term contracts and contract estimates, (ii) provisions for excess and obsolete inventory losses, (iii) accounts and finance receivables allowance for doubtful accounts and credit losses, (iv) valuation of marketable securities and strategic investments, and (v) impairment testing of goodwill and other acquired intangible assets. For additional discussion of our critical accounting policies, see our Managements Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2002 Form 10-K.
RESULTS OF OPERATIONS
Revenue for the first quarter of fiscal 2003 was $450.2 million, an increase of 1.5 percent compared to the first quarter of fiscal 2002. The increase in revenues resulted primarily from increased revenues in the Government Communications Systems and RF Communications segments, which were partially offset by decreased revenues in the Microwave Communications and Broadcast Communications segments. Income before income taxes in the first quarter of fiscal 2003 was $30.2 million compared to $25.9 million for the first quarter of fiscal 2002. The increase in income before income taxes resulted primarily from growth in operating income in our Government Communications Systems and RF Communications segments, which was partially offset by lower operating income in our Broadcast Communications segment and a greater operating loss in our Microwave Communications segment.
10
Comparative Statement of Income
Our comparative statement of income is as follows:
Quarter Ended
Percent
September 27,
September 28,
Increase/
(In millions)
2002
2001
(Decrease)
$
450.2
$
443.4
1.5
%
(335.3
)
(330.8
)
1.4
%
114.9
112.6
2.0
%
25.5
%
25.4
%
(96.8
)
(99.6
)
(2.8
)%
21.5
%
22.5
%
16.2
17.9
(9.5
)%
1.6
3.2
(50.0
)%
(5.7
)
(8.2
)
(30.5
)%
30.2
25.9
16.6
%
6.7
%
5.8
%
(10.3
)
(8.8
)
17.0
%
$
19.9
$
17.1
16.4
%
4.4
%
3.9
%
Gross Margin: Gross margin as a percent of revenue was 25.5 percent in the first quarter of fiscal 2003 compared to 25.4 percent in the first quarter of fiscal 2002. The increase was due primarily to an improved gross margin as a percent of sales related to our RF Communications segment, which was offset by lower gross margins in our Broadcast Communications and Network Support segments products.
Engineering, Selling and Administrative Expenses: Engineering, selling and administrative expenses decreased $2.8 million and as a percent of revenue decreased from 22.5 percent in the first quarter of fiscal 2002 to 21.5 percent in the first quarter of fiscal 2003. The decrease was due primarily to non-recurring charges that were incurred in the first quarter of fiscal 2002 related to a workforce reduction in our Microwave Communications segment. Also, the impact of cost reductions taken in fiscal 2002 in our Microwave Communications and Network Support segments resulted in reduced engineering, selling and administrative expenses in the first quarter of fiscal 2003 when compared to the prior years first quarter. These decreases were partially offset by increased engineering, selling and administrative expenses in our RF Communications segment primarily related to increased research and development spending.
Non-operating Income: Non-operating income decreased from $17.9 million in the first quarter of fiscal 2002 to $16.2 million in the first quarter of fiscal 2003. Non-operating income in the first quarter of fiscal 2002 included a $10.3 million gain from the sale of our minority interest in our GE Harris Energy Control Systems, LLC joint venture and $16.7 million in gains from the sale of marketable securities available for sale. Non-operating income in the first quarter of fiscal 2003 included an $18.8 million gain from the sale of our minority interest in our LiveTV venture and $5.1 million in gains from the sale of marketable securities available for sale. The gain from the sale of our minority interest in our LiveTV venture represents an example of how Harris, over the years, has realized commercial value from technology developed in the Government Communications Systems segment.
Interest Income and Interest Expense: Interest income of $1.6 million in the first quarter of fiscal 2003 decreased 50.0 percent from interest income of $3.2 million in the first quarter of fiscal 2002 primarily due to interest received from the U.S. government in the prior year that resulted from the overpayment of taxes. Interest expense decreased from $8.2 million in the first quarter of fiscal 2002 to $5.7 million in the first quarter of fiscal 2003 due to lower short-term debt borrowings and interest rates.
Income Taxes: The provision for income taxes as a percentage of pretax income remained unchanged at 34.0 percent in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. Both fiscal 2003 and fiscal 2002 tax rates were lower than the federal and state statutory rate and benefited from the impact of export sales.
11
Return on Revenue: Income before income taxes as a percentage of revenue was 6.7 percent in the first quarter of fiscal 2003 versus 5.8 percent in the first quarter of fiscal 2002. The increase was due primarily to the reasons previously discussed.
Segment Revenue, Segment Operating Income and Income Before Income Taxes
We are structured primarily around the markets we serve and operate in five business segments, which are Government Communications Systems, RF Communications, Microwave Communications, Network Support and Broadcast Communications. Corporate eliminations represent the elimination of inter-segment sales.
Segment revenue, segment operating income and a reconciliation of segment
operating income to income before income taxes are as follows:
Quarter Ended
Percent
September 27,
September 28,
Increase/
(In millions)
2002
2001
(Decrease)
$
252.0
$
216.0
16.7
%
63.8
53.1
20.2
%
56.0
79.8
(29.8
)%
13.2
13.4
(1.5
)%
67.9
82.3
(17.5
)%
(2.7
)
(1.2
)
$
450.2
$
443.4
1.5
%
$
23.7
$
18.7
26.7
%
9.4
%
8.7
%
14.8
8.4
76.2
%
23.2
%
15.8
%
(7.3
)
(5.4
)
35.2
%
(13.0
)%
(6.8
)%
(2.7
)
(4.3
)
(37.2
)%
(20.5
)%
(32.1
)%
1.9
7.5
(74.7
)%
2.8
%
9.1
%
(12.3
)
(11.9
)
3.4
%
16.2
17.9
(9.5
)%
1.6
3.2
(50.0
)%
(5.7
)
(8.2
)
(30.5
)%
$
30.2
$
25.9
16.6
%
6.7
%
5.8
%
(1) | First quarter fiscal 2003 includes an $18.8 million pretax gain on the sale of our minority interest in our LiveTV venture. First quarter fiscal 2002 includes a $10.3 million pretax gain from the sale of our minority interest in our GE Harris Energy Control Systems, LLC joint venture. |
Government Communications Systems Segment: Revenues from the Government Communications Systems segment in the first quarter of fiscal 2003 of $252.0 million increased 16.7 percent from the first quarter of fiscal 2002 and operating income of $23.7 million increased 26.7 percent from the first quarter of fiscal 2002. An outstanding contract win rate and increased government spending are driving excellent results. Also, the strong sales and earnings growth underscores the general health of this segment across its major business areas including airborne, spaceborne and ground communications. The segments operating margin continues to benefit from higher performance award fees.
12
During the quarter, we won a 15-year, $1.7 billion contract to integrate and modernize the FAAs Telecommunications Infrastructure. Total value of the program, including options, could reach $3.5 billion through 2017. The program, for which we are the prime contractor, will consolidate telecommunications at more than 5,000 FAA facilities nationwide. Also during the quarter, we were awarded a contract to provide operations and maintenance services for the U.S. Air Force Satellite Control Networks communications functions at Schriever AFB, Colorado and Onizuka AFS, California. Contract options could increase the overall value for us to $355 million through 2009. We were also awarded a subcontract from Lockheed Martin to design and test the wireless transmission system architecture for the U.S. Armys Warfighter Information Network. The production phase of the program, if awarded to the Lockheed Martin team in 2005, could increase our total value of the program to $1 billion over a 15-year period. In addition, we have contracted with The Boeing Company for an initial six-year, $90 million military satellite communications hardware design, development, and integration project for the U.S. Air Forces Family of Beyond Line-of-Sight Terminal (FAB-T) program. FAB-T will provide the warfighter with protected wideband satellite communications on strategic aircraft and at remote ground terminals. An extensive production phase is expected to follow this design and development phase.
RF Communications Segment:
Revenues from the RF Communications segment
increased 20.2 percent in the first quarter of fiscal 2003 when compared to the
same quarter last year. The War on Terrorism continues to drive these
outstanding results. The business is responding to urgent requirements for its
industry-leading Falcon
®
II tactical radios from a broad base of government
customers, including the U.S. Special Operations Command, the U.S. Army
Communications-Electronics Command, United Kingdom Ministry of Defence and
other allied nations. Operating income increased from $8.4 million in the first
quarter of fiscal 2002 to $14.8 million in the first quarter of fiscal 2003.
The increase was due primarily to the higher sales volume and improved margins
from the sale of
Falcon
®
II radios.
Design and development activities for two major contracts are now fully underway in the RF Communications segment where we are providing systems architecture for programs that are redefining the worlds tactical radios of the futurethe U.S. Joint Tactical Radio System Program and the United Kingdoms Bowman Tactical Radio Programme.
Microwave Communications Segment: Revenues from the Microwave Communications segment decreased 29.8 percent in the first quarter of fiscal 2003 compared to the prior-year quarter. This segment had an operating loss of $7.3 million in the first quarter of fiscal 2003 compared to an operating loss of $5.4 million in the first quarter of fiscal 2002. While the segments North American microwave business was again solid, there was further weakening in international wireless telecom markets. Additionally, a supplier ceased operations, which resulted in a reduction in international sales in the quarter by about $5 million. The supplier has since been replaced.
Over the last several quarters, capital constraints in the international arena have significantly limited the number of economically sound microwave opportunities and, in general, are limiting the procurement ability of our international customers. In reaction to this market weakness, the segments breakeven level of sales was lowered considerably during the last fiscal year through cost-cutting actions. With the timing of a market rebound still unclear, additional actions are now planned to further reduce costs and drive greater efficiencies. The actions include the consolidation of research and development in the U.S. from three locations to one East Coast location and a related reduction in engineering staff. Other non-engineering cost reduction actions also are planned across the segment. With these planned actions, this segment is targeting quarterly breakeven sales of approximately $65 million. We anticipate non-recurring costs of $7-to-$8 million related to these actions during fiscal 2003.
Network Support Segment: Revenues from the Network Support segment decreased 1.5 percent in the first quarter of fiscal 2003 when compared to the first quarter of fiscal 2002 as this segment continues to suffer from the collapse of the DSL build-out and lower spending from the Regional Bell Operating Companies. This segment had a $2.7 million operating loss in the first quarter of fiscal 2003 compared to an operating loss of $4.3 million in the first quarter of fiscal 2002. Cost cutting programs are helping to minimize losses in this telecom business and additional cost reductions are planned.
Broadcast Communications Segment: Although typically not a seasonally strong quarter, first quarter results for the Broadcast Communications segment were weaker than expected. Many of the smaller-market broadcasters are installing the minimum amount of equipment necessary to temporarily comply with the FCCs digital conversion mandate, thereby delaying purchases of more expensive systems that eventually will be required. Revenues from the Broadcast Communications segment decreased 17.5 percent in the first quarter of fiscal 2003 compared to the same quarter last year. The decline in sales volume reduced operating income in the first quarter of fiscal 2003 to $1.9 million, compared to $7.5 million operating income in the first quarter of fiscal 2002.
13
While our results in this segment were a disappointment in the first quarter, the fundamentals in the business remain strong. We are the infrastructure vendor of choice and we continue to maintain a significant market position. The Federal Communications Commission and the U.S. Congress are holding firm to schedules to convert from analog to digital TV broadcasting. Deadlines for broadcasters to achieve full-power requirements are expected to be established within the next twelve months. In addition, the digital conversion for radio broadcasting is now underway. During the first quarter, we booked an order from Digital One, Inc., one of the nations premier radio broadcast groups, for the first major commercial high-definition radio implementation of In-Band On-Channel (IBOC) digital audio technology.
LIQUIDITY AND FINANCIAL POSITION
Net cash provided by operating activities: Net cash provided by operating activities was $25.8 million for the first quarter of fiscal 2003 compared to $5.5 million for the first quarter of fiscal 2002. In the first quarter of fiscal 2003, strong capital management, particularly in our Government Communications Systems and RF Communications segments, primarily drove positive cash flows from operating activities. In the first quarter of fiscal 2002, operating losses and lower sales volumes in our Microwave Communications and Network Support segments resulted in negative cash flows particularly in accounts payable and inventory, which were partially offset by positive cash flows in accounts receivable. Also, in the prior year an increase in working capital needs on a higher sales volume generated negative cash flow in our Broadcast Communications segment.
Net cash provided by investing activities: Net cash provided by investing activities was $12.3 million for the first quarter of fiscal 2003 compared to $20.3 million for the first quarter of fiscal 2002. Cash provided by investing activities in the first quarter of fiscal 2003 was due primarily to the receipt of proceeds from the sale of securities available for sale of $5.3 million and the $19.0 million of proceeds from the sale of our interest in our LiveTV venture. Cash provided by investing activities in the first quarter of fiscal 2002 included $17.5 million in proceeds from the sale of securities available for sale and $23.0 million in proceeds from the sale of our minority interest in our GE Harris Energy Systems, LLC joint venture, which was partially offset by $8.6 million cash paid for acquisitions.
Additions of plant and equipment in the first quarter of fiscal 2003 were $9.8 million versus $9.5 million in the first quarter of fiscal 2002 with no single large item accounting for the change. Total additions for us in fiscal 2003 are expected to be in the $70 million to $75 million range.
Net cash provided by (used in) financing activities: Net cash provided by financing activities was $98.6 million for the first quarter of fiscal 2003 compared to net cash used by financing activities of $36.3 million for the first quarter of fiscal 2002. The increase is attributable to the receipt of $146.3 million in net proceeds from the private placement of our $150 million 3.5% Convertible Debentures due 2022 during the first quarter of fiscal 2003, which was offset by the repayment of our $30.5 million 6.38% notes due 2002.
In fiscal 2000, our Board of Directors approved a share repurchase program, which authorizes us to repurchase up to 15 million shares of our common stock periodically in the open market, in negotiated or block transactions or pursuant to tender offers. In fiscal 2002 and the first quarter of fiscal 2003, we did not repurchase any shares of our common stock. An authorization to repurchase an additional 1.7 million shares under this repurchase program still exists. At this time, we have not determined whether or not we will repurchase any of our stock under the remaining authorization during the remainder of fiscal 2003.
14
Our comparative financial position is as follows:
As of
As of
September 27,
June 28,
Percent
2002
2002
Increase/
(In millions, except per share amounts)
(Unaudited)
(Audited)
(Decrease)
$
363.3
$
226.2
60.6
%
34.5
52.2
(33.9
)%
866.9
875.1
(0.9
)%
418.4
425.6
(1.7
)%
$
846.3
$
727.9
16.3
%
$
221.5
$
215.2
2.9
%
$
23.8
$
26.0
8.5
%
$
417.1
$
308.9
35.0
%
$
1,151.4
$
1,149.9
0.1
%
26.6
%
21.2
%
$
17.34
$
17.33
0.1
%
Cash and cash equivalents: Cash increased $137.1 million in the first quarter of fiscal 2003 due primarily to the net receipt of $146.3 million from the private placement of convertible debentures, cash provided by operating activities of $25.8 million as noted above, cash receipts related to the sale of our interest in our LiveTV venture of $19.0 million and the sale of securities available for sale of $5.3 million. These increases were partially offset by a $30.5 million reduction in debt, $9.8 million in additions of plant and equipment and $5.3 million cash dividends paid.
Marketable securities: Marketable securities decreased from $52.2 million as of June 28, 2002 to $34.5 million as of September 27, 2002. The decrease was primarily due to the sale of a portion of our holdings in Intersil Corporation and Advanced Fibre Communications, Inc., and a reduction in the quoted market price of Intersil Corporation stock.
Working capital: Working capital increased 16.3 percent from $727.9 million as of June 28, 2002 to $846.3 million as of September 27, 2002. The $118.4 million increase was due primarily to increases in cash and cash equivalents as discussed above.
Goodwill: Goodwill increased from $215.2 million as of June 28, 2002 to $221.5 million as of September 27, 2002. The increase was due primarily to the final allocation of the purchase price related to the acquisition of Hirschmann Multimedia Communications Network.
Non-current deferred income taxes: The asset related to non-current deferred income taxes was $26.0 million as of June 28, 2002 versus a $23.8 million as of September 27, 2002.
Total debt and capitalization: Total debt increased from $308.9 million as of June 28, 2002, representing 21.2 percent of total capital (defined as the sum of total debt plus shareholders equity) to $417.1 million as of September 27, 2002, representing 26.6 percent of total capital. The increase was primarily due to the private placement of our $150 million 3.5% convertible debentures during the first quarter of fiscal 2003, which was offset by the repayment of our $30.5 million 6.38% notes.
Capital Structure and Resources: We have available committed syndicated credit facilities with various banks that currently provide for borrowings up to $325.5 million. The credit facilities consist of a $212.5 million 3-Year Credit Agreement, which expires in May of 2004 and a $113 million 364-Day Credit Agreement that expires in May of 2003. Interest rates on borrowings under these facilities and related fees are determined by a pricing matrix based upon our long-term debt rating assigned by Standard and Poors Ratings Group and Moodys Investors Service. The availability of these facilities is not contingent upon our debt rating. We are not required to maintain compensating balances in connection with these
15
agreements. At September 27, 2002 no amounts were borrowed under these facilities, but availability of borrowings under these facilities does enable us to issue commercial paper. The financial covenants contained in these facilities include, among others, maintenance of consolidated tangible net worth of not less than $779 million (which amount was initially $700 million and is subject to further increase), maintenance of a total debt to earnings before interest, taxes, depreciation and amortization ratio of not more than 3.0 and a limit on total debt to $800 million. These credit facilities also include negative covenants (i) limiting the creation of liens or other encumbrances, (ii) limiting certain sale and leaseback transactions, and (iii) limiting certain sales or other dispositions of assets other than in the ordinary course of business. In addition, these facilities include certain provisions for acceleration of maturity in the case of a (a) cross default with other indebtedness in an amount in excess of $25 million, (b) final uninsured judgment in excess of $25 million which remains unpaid or discharged, or (c) change of control, including if a person or group of persons acquires more than 25 percent of our voting stock.
We also have an effective shelf registration statement filed with the Securities and Exchange Commission, which provides for the issuance of debt securities of up to $500 million. We also have outstanding unsecured long-term debt of $250 million which we issued in public offerings in the mid-1990s and which have final maturities in excess of 20 years.
Management currently believes that existing cash, funds generated from operations, sales of marketable securities, the credit facilities and access to the public and private debt markets will be sufficient to provide for our anticipated requirements for working capital, capital expenditures and any stock repurchases, if any, under the current repurchase program for the next 12 months and the foreseeable future.
Our debt is currently rated BBB by Standard and Poors Rating Group and Baa2 by Moodys Investors Service. We expect to maintain operating ratios, fixed-charge coverage ratios and balance sheet ratios sufficient for retention of these debt ratings. There are no assurances that our credit ratings will not be reduced in the future; however, our ratings have been recently affirmed by these agencies. If our credit rating is lowered below investment grade then we may not be able to issue short-term commercial paper, but would instead need to borrow under our other credit facilities or look for other alternatives. As of September 27, 2002, we had no commercial paper outstanding.
On August 26, 2002, we completed the private placement of $150 million of our 3.5% Convertible Debentures due 2022. The debentures are unsecured obligations convertible into shares of our common stock at an initial conversion price of $45.25 per share, subject to adjustment. The debentures were issued at 100 percent of the principal amount, less a discount of 2.5 percent to the initial purchasers. We may redeem the debentures commencing August 2007 at 100 percent of the principal amount plus accrued interest. Holders may require us to repurchase the debentures, in whole or in part, on specified dates in 2007, 2012 and 2017 or upon the occurrence of certain other events at 100 percent of the principal amount plus accrued interest. The debentures initially bear interest at an annual rate of 3.5 percent. The interest rate will be reset in August 2007, 2012 and 2017, but in no event will it be reset below 3.5 percent or above 5.5 percent per annum. More information regarding the terms of the debentures can be found in the related Indenture, dated August 26, 2002. On October 29, 2002, we filed a Registration Statement on Form S-3 relating to the potential resale of the debentures and underlying common stock by the holders.
Off-Balance Sheet Items: In the first quarter of fiscal 2003, we repaid our $30.5 million 6.38% notes payable to banks, which had come due, and completed the private placement of our 3.5% convertible debt securities, which is previously described. No other material changes occurred in our contractual cash obligations to repay debt and to make payments under operating leases from those disclosed in our Fiscal 2002 Form 10-K. Also, our commitments and contingent liabilities on outstanding letters of credit, guarantees and other arrangements have not changed materially from those disclosed in our Fiscal 2002 Form 10-K except for our release from our guarantee of borrowings for our LiveTV venture. This release was received in connection with the sale of our interest in LiveTV, which took place during the first quarter of fiscal 2003.
16
OUTLOOK
Our two government businesses are performing exceptionally well in markets driven by increased government spending. Continued solid performance is expected from these businesses. Our broadcast business is expanding its footprint in domestic and international markets and is the market leader in the worldwide conversion to digital standards. Although the continuing decline in international telecom spending is very disappointing, we believe that the wireless infrastructure build-out for cellular systems will eventually resume. We also believe that we are taking all the steps needed to ensure our ability to take full advantage of our leadership position in the market when it recovers. With the international telecom market showing no signs of near-term recovery, however, our outlook for the rest of fiscal year 2003 has dampened. We are confident that the additional actions we are taking in our telecom businesses will help ensure a significant improvement in earnings as the market recovers.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of our plans, strategies and objectives for future operations; any statements concerning new products, services or developments; any statements regarding future economic conditions, performance or outlook; statements as to the outcome of contingencies; statements as to the value of our contract awards and programs; statements of belief or expectation; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as believes, expects, may, should, would, will, intends, plans, estimates, anticipates and similar words. You should not place undue reliance on these forward-looking statements, which reflect our managements opinions only as of the date of the filing of this report. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Our consolidated results and the forward-looking statements could be affected by many factors, including:
| uncertain economic conditions, which make it difficult to estimate growth in our markets and, as a result, future income and expenditures; | ||
| the severe telecommunications slow-down, which has had and may continue to have a negative affect on our telecom businesses; | ||
| our ability to meet cost reduction goals; | ||
| financial and government and regulatory risks relating to international sales and operations, including fluctuations in foreign currency exchange rates and the effectiveness of our currency hedging program; | ||
| government import and export policies and other government regulations; | ||
| the fair values of our portfolio of passive investments, which values are subject to significant volatility or erosion; | ||
| our ability to continue to develop new products that achieve market acceptance; | ||
| strategic acquisitions and the risks and uncertainties related thereto, including our ability to manage and integrate acquired businesses; | ||
| potential changes in government or customer priorities due to program reviews or revisions to strategic objectives, including potential failure to fund government contracts; | ||
| risks inherent with large long-term fixed price contracts, particularly the ability to contain cost overruns; | ||
| termination of government contracts; | ||
| the performance of critical subcontractors or suppliers; | ||
| potential claims that we are infringing the intellectual property rights of third parties; | ||
| the successful resolution of patent infringement claims and the ultimate outcome of other litigation and legal matters; | ||
| the affect of competitive products and pricing; | ||
| the ability to recruit and retain qualified personnel; and | ||
| general economic conditions in the markets in which we operate. |
The forward-looking statements contained in this report are made as of the date hereof and we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events, or otherwise.
17
Additional details and discussions concerning some of the factors that could effect our forward-looking statements or results are set forth in Exhibit 99.1 of this report, entitled Forward-Looking Statements and Factors that May Affect Future Results, which Exhibit is incorporated herein by reference.
18
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates, fluctuations in the market value of our equity securities available for sale and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.
Foreign Exchange and Currency: We use foreign exchange contracts and options to hedge both balance sheet and off-balance sheet foreign currency commitments. Generally, these foreign exchange contracts offset foreign currency denominated inventory and purchase commitments from suppliers, accounts receivable from and future committed sales to customers and intercompany loans. We believe the use of foreign currency financial instruments should reduce the risks, which arise from doing business in international markets. At September 27, 2002, we had open foreign exchange contracts with a notional amount of $92.3 million, of which $43.6 million were classified as cash flow hedges and $48.7 million were classified as fair value hedges. This compares to total foreign exchange contracts with a notional amount of $83.5 million as of June 28, 2002, of which $44.8 million were classified as cash flow hedges and $38.7 million were classified as fair value hedges. At September 27, 2002, contract expiration dates range from less than one month to thirty-four months with a weighted average contract life of 0.6 years.
More specifically, the foreign exchange contracts classified as cash flow hedges are primarily being used to hedge currency exposures from cash flows anticipated from the United Kingdom Bowman Programme in our RF Communications segment. This contract for our tactical radio products was awarded in the second quarter of fiscal 2002. Under the contract, the customer pays in Pounds Sterling (GBP). We also have payments to local suppliers in GBP on this program. We have hedged the forecasted sales and vendor payments denominated in GBP to maintain our anticipated profit margin in U.S. dollars. As of September 27, 2002, we estimate that a pretax loss of $2.4 million would be reclassified into earnings from comprehensive income within the next thirty-four months related to these transactions. The net gain or loss included in our earnings for the first quarter of fiscal 2003 and 2002 representing the amount of fair value and cash flow hedges ineffectiveness was not material. No amounts were recognized in our earnings for the first quarter of fiscal 2003 and 2002 related to the component of the derivatives instruments gain or loss excluded from the assessment of hedge effectiveness. In addition, no amounts were recognized in our earnings for the first quarter of fiscal 2003 and 2002 related to hedged firm commitments that no longer qualify as fair value hedges. No material reclassification of gains and losses into earnings from comprehensive income is expected to result from transactions or events related to commitments to customers or suppliers within the next twelve months. All of these derivatives were recorded at their fair value on the balance sheet in accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (Statement 133).
Factors that could impact the effectiveness of our hedging programs include accuracy of sales estimates, volatility of currency markets and the cost and availability of hedging instruments. A 10 percent adverse change in currency exchange rates for our foreign currency derivatives held at September 27, 2002 would have an impact of approximately $8.6 million on the fair value of such instruments. This quantification of exposure to the market risk associated with foreign exchange financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments.
Marketable Securities: We also currently have a portfolio of marketable equity securities available for sale. These investments result from the retained interest in sold or spun-off businesses and the investment into start-up companies that have technology or products that are of interest to us. The fair market value of these securities at September 27, 2002 was $34.5 million, compared to $52.2 million at June 28, 2002. This decrease was due primarily to the sale of some of these investments in the first quarter of fiscal 2003 and a decrease in these securities quoted market prices. The corresponding unrealized gain is included as a component of shareholders equity. These investments historically have had higher volatility than most market indices. A 10 percent adverse change in the quoted market price of marketable equity securities would have an impact of approximately $3.4 million on the fair market value of these securities.
We utilize option contracts in the form of cashless collars to hedge anticipated cash flows from the sale of marketable securities. Contracts are generally one year or less. At September 27, 2002, we had open option contracts for 75,000 shares of Intersil Corporation stock at a weighted average strike price of $29.74, which compares to 175,000 shares at a weighted average strike price of $32.26 as of June 28, 2002. All of these collars were classified as cash flow hedges and recorded at their fair value on the balance sheet in accordance with Statement 133. The fair market value of these collars reflected in the caption Other assets on the Condensed Consolidated Balance Sheet was $1.3 million at September 27, 2002 and $1.9 million at June 28, 2002.
19
Factors that could impact the effectiveness of our hedging programs include accuracy of cash flow estimates, volatility of security markets, and the cost and availability of hedging instruments. A 10 percent adverse change in the quoted market price of Intersil Corporation stock would have an impact of approximately $0.2 million on the fair value of such instruments.
Interest Rates: We utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposures to changes in interest rates. We do not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2003, although there can be no assurances that interest rates will not change significantly.
Item 4. Controls and Procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2002, 43 plaintiffs filed suit against 23 defendants, including us, in the United States District Court for the Eastern District of New York (the Schwinger matter). The complaint seeks redress for injuries suffered by the plaintiffs as a result of defendants allegedly emitting toxins into the environment located in and near Hicksville, New York. Five defendants are classified as Verizon defendants and have allegedly released radioactive and toxic materials. The remaining defendants, including us, have been accused of releasing non-radioactive materials. The plaintiffs claimed damages that exceeded $360.0 million. In September, we received an amended complaint, which added approximately 141 plaintiffs bringing the number of plaintiffs to 184. The claim for damages in the amended complaint appears to have doubled from the original complaint. A court order is expected setting forth future deadlines and addressing discovery issues. We believe that our liability in this matter, if any, is not significant. While not formally served, we received a copy of a class action complaint related to the Schwinger matter naming the same defendants. The case was brought by nine nominative plaintiffs and contains allegations identical to the Schwinger matter. The complaint requests unspecified damages that will be determined at trial. We anticipate filing a motion to dismiss in each case and to vigorously defend each action.
On July 29, 2002, we received a demand letter from Bourdex Telecommunications Limited (Bourdex), a Nigeria-based Microwave Communications Division customer, alleging (i) breach of contract for microwave products and services, and (ii) deceit. A meeting was held on August 19 in London involving our counsel, Bourdex, and Bourdexs counsel. Based upon this meeting and our analysis, it is our belief that there is little legal basis for Bourdexs claim of $22.3 million in damages. In accordance with the contract, we submitted an arbitration request pursuant to the International Chamber of Commerces Procedural Rules asking for a determination that we fully complied with the contract. The arbitration will take place in Geveva, Switzerland. On October 22, 2002, we received documents from the International Court of Arbitration advising that Bourdex has submitted an arbitration claim increasing its damage demand from $22.3 million to $130.0 million. No date has been set for arbitration. We intend to vigorously defend against this demand.
Item 2. Changes in Securities and Use of Proceeds.
On August 26, 2002, we completed a private placement of $150 million of our 3.5% Convertible Debentures due 2022. Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., SunTrust Capital Markets, Inc. and Wachovia Securities, Inc. acted as the initial purchasers of the debentures. The debentures were offered and sold to the initial purchasers in reliance upon Section 4(2) of the Securities Act. In connection with this offering and sale, we paid the initial purchasers a commission equal to 2.5 percent of the principal amount of the debentures.
The debentures will initially bear interest at an annual rate of 3.5 percent per year, which will be reset on August 15, 2007, August 15, 2012, and August 15, 2017, to a rate per annum equal to the interest rate payable 120 days prior to such reset date on 5-year U.S. Treasury Notes. In no event, however, will the interest rate be reset below 3.5 percent or above 5.5 percent per year.
Holders of the debentures will have the right to convert each of their debentures into shares of our common stock prior to the stated maturity under any of the following circumstances:
(i) | during any calendar quarter if the closing sale price of our common stock, for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the previous calendar quarter, is more than 110 percent of the applicable conversion price per share of our common stock on such last trading day, | |
(ii) | debentures called for redemption may be surrendered for conversion until the close of business on the business day immediately preceding the redemption date, | |
(iii) | during any period that the long-term credit rating assigned to the debentures by either of Moodys Investors Service Inc. or Standard & Poors Ratings Group is at or below Bal or BB+, respectively, or if the debentures are no longer rated by either of these ratings services, or if the rating for the debentures has been suspended by either of these ratings services, or |
21
(iv) | upon the occurrence of specified corporate transactions, including if we make a significant distribution to holders of our common stock or if we are a party to specified consolidations or mergers or to a transfer of all or substantially all of our properties and assets. |
For each $1,000 of debentures surrendered for conversion, a holder initially will receive 22.0994 shares of our common stock. This represents an initial conversion price of $45.25 per share of our common stock based on the issue price of the debentures. The conversion rate may be adjusted for certain reasons.
We may redeem the convertible debentures commencing August 18, 2007, at a price equal to 100 percent of the principal amount plus accrued interest, if any. Holders may require us to repurchase the debentures, in whole or in part, on specified dates in 2007, 2012, and 2017 or upon the occurrence of certain other events including a change of control, at a price equal to 100 percent of the principal amount plus accrued interest, if any.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
22
of our principal executive officer and our principal financial officer. This Form 8-K was furnished under Item 9 (Regulation FD Disclosure) of Form 8-K. | ||||
(iv) | We filed with the Commission a Current Report on Form 8-K on September 9, 2002, relating to the agreement to sell our equity interest in LiveTV, LLC to JetBlue Airways Corporation. | |||
(v) | We filed with the Commission a Current Report on Form 8-K on September 27, 2002, relating to the closing of the sale of our equity interest in LiveTV, LLC to JetBlue Airways Corporation. |
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HARRIS
CORPORATION
(Registrant) |
||
Date: November 5, 2002 |
By:
/s/Bryan R. Roub
|
|
Bryan R. Roub
Senior Vice President and Chief Financial Officer (principal financial officer and duly authorized officer) |
24
I, Phillip W. Farmer, Chairman, President, and Chief Executive Officer of Harris Corporation, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Harris Corporation; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
(a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and | ||
(c) | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and | ||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and |
6. | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
November 5, 2002 |
/s/ Phillip W. Farmer
|
|
NAME: PHILLIP W. FARMER | ||
TITLE: CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER |
25
I, Bryan R. Roub, Senior Vice President and Chief Financial Officer of Harris Corporation, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Harris Corporation; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
(a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and | ||
(c) | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and | ||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and |
6. | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
November 5, 2002 |
/s/ Bryan R. Roub
|
|
NAME: BRYAN R. ROUB | ||
TITLE: SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER |
26
EXHIBIT INDEX
Exhibit No.
Under Reg.
S-K, Item 601
Description
(12)
Computation of Ratio of Earnings to Fixed Charges
(99)
Additional Exhibits:
(99.1)
Forward-Looking Statements and Factors that May
Affect Future Results.
(99.2)
Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(99.3)
Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(99.4)
Instrument of Resignation of Trustee and Appointment
and Acceptance of Successor Trustee among Harris
Corporation, JPMorgan Chase Bank, as Resigning
Trustee, and The Bank of New York, as Successor
Trustee, dated as of November 1, 2002 (effective
November 15, 2002)
27
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Quarter Ended ------------------- ------------------- September 27, September 28, (In millions, except ratios) 2002 2001 ------------------- ------------------- EARNINGS: Net Income $ 19.9 $ 17.1 Plus: Income taxes 10.3 8.8 Fixed charges 7.5 10.0 Amortization of capitalized interest - - Less: Interest capitalized during the period - - Undistributed earnings in equity investments - - --------- -------- $ 37.7 $ 35.9 ========= ======== FIXED CHARGES: Interest expense $ 5.7 $ 8.2 Plus: Interest capitalized during the period - - Portion of rents deemed representative of the interest factor 1.8 1.8 --------- -------- $ 7.5 $ 10.0 ========= ======== RATIO OF EARNINGS TO FIXED CHARGES 5.03 3.59 |
EXHIBIT 99.1
FORWARD-LOOKING STATEMENTS
AND FACTORS THAT MAY AFFECT FUTURE RESULTS
WE CURRENTLY ARE EXPERIENCING UNCERTAIN ECONOMIC CONDITIONS, WHICH MAKES IT DIFFICULT TO ESTIMATE GROWTH IN OUR MARKETS AND, AS A RESULT, FUTURE INCOME AND EXPENDITURES.
Current conditions in the domestic and global economies are extremely uncertain. As a result, it is difficult to estimate the level of growth for the economy as a whole. It is even more difficult to estimate growth in various parts of the economy, including some of the markets in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates of growth in the markets we serve, the prevailing economic uncertainty renders estimates of future income and expenditures even more difficult than usual. As a result, we may make significant investments and expenditures but never realize the anticipated benefits, which could affect adversely our results of operations. The future direction of the overall domestic and global economies will have a significant impact on our overall performance.
THE SEVERE TELECOMMUNICATIONS SLOWDOWN HAS HAD A NEGATIVE IMPACT ON OUR TELECOM BUSINESSES AND CONTINUED WEAKNESS COULD FURTHER HURT OUR OPERATIONS.
During the past year there has been a severe downturn and tightening of capital markets for the telecommunication, cellular and wireless telephone industry in general. Additionally, the Competitive Local Exchange Carrier ("CLEC") business has experienced a severe downturn and many CLECs have ceased operations or have scaled back operations significantly. This slowdown has had an adverse impact upon our network support and microwave businesses and continued weakness may have an adverse impact on the development of the market for our broadband wireless access products.
IN RESPONSE TO THE SLOWDOWN IN OUR TELECOM BUSINESS, WE HAVE UNDERTAKEN COST REDUCTIONS WHICH MAY NOT YIELD THE BENEFITS WE EXPECT AND COULD HAVE ADVERSE EFFECTS ON OUR FUTURE BUSINESS.
In connection with the slowdown in our telecom business, we have undertaken cost-cutting measures intended to reduce our breakeven level of sales and to improve our results. Actions include the consolidation of our Microwave Communications Division's research and development in the United States from three locations to one location and related reductions in engineering staff and other cost-reduction actions. We are also implementing cost-cutting programs at our Network Support Division.
There are risks inherent in our efforts to reduce costs. These include the risk that we will not be able to reduce expenditures quickly enough and sustain them at a level necessary to restore profitability to our telecom businesses, and that we may have to undertake additional cost-cutting measures. In addition, there is the risk that cost-cutting initiatives will impair our ability to effectively develop and market products and remain competitive. Each of the above measures could have a long-term effect on these businesses by reducing our pool of technical talent, decreasing or slowing improvements in our products, making it more difficult for us to respond to customers, and limiting our ability to hire and retain key personnel.
WE DEPEND ON THE U.S. GOVERNMENT FOR A SIGNIFICANT PORTION OF OUR SALES, AND THE LOSS OF THIS RELATIONSHIP OR A SHIFT IN GOVERNMENT FUNDING COULD HAVE ADVERSE CONSEQUENCES ON OUR BUSINESS.
Approximately 54 percent of our net sales in fiscal 2002 were to the U.S. Government. Therefore, any significant disruption or deterioration of our relationship with the U.S. Government could significantly reduce our revenues. Our U.S. Government programs must compete with programs managed by other defense contractors for a limited number of programs and for uncertain levels of funding. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and likely will continue these efforts in the future. The U.S. Government may choose to use other defense contractors for its limited number of defense programs. In addition, the funding of defense programs also competes with nondefense spending of the U.S. Government. Budget decisions made by the U.S. Government are outside of our control and have long-term consequences for our business. A shift in government defense spending to
other programs in which we are not involved, or a reduction in U.S. Government defense spending generally, could have adverse consequences on our business.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM INTERNATIONAL SALES AND ARE SUBJECT TO THE RISKS OF DOING BUSINESS IN FOREIGN COUNTRIES INCLUDING FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES.
In fiscal 2002, revenues from products exported from the U.S. or manufactured abroad were 22 percent of our total sales. Approximately 56 percent of our international business in fiscal 2002 was transacted in local currency environments. Losses resulting from currency rate fluctuations can adversely affect our results. We expect that international sales will continue to account for a significant portion of our total sales. As a result, we are subject to risks of doing business internationally, including:
- currency exchange controls, fluctuations of currency and currency revaluations,
- the laws, regulations and policies of foreign governments relating to investments and operations, as well as U.S. laws affecting the activities of U.S. companies abroad,
- changes in regulatory requirements, including imposition of tariffs or embargoes, export controls and other trade restrictions,
- uncertainties and restrictions concerning the availability of funding, credit or guarantees,
- the difficulty of managing an organization doing business in many countries,
- import and export licensing requirements and regulations,
- taxes,
- uncertainties as to local laws and enforcement of contract and intellectual property rights and occasional requirements for onerous contract clauses, and
- rapid changes in government, economic and political policies, political or civil unrest or the threat of international boycotts or U.S. anti-boycott legislation.
While these factors or the impact of these factors are difficult to predict, any one or more of them could adversely affect our operations in the future.
THE FAIR VALUES OF OUR PORTFOLIO OF PASSIVE INVESTMENTS ARE SUBJECT TO SIGNIFICANT PRICE VOLATILITY OR EROSION.
We maintain portfolio holdings of various issuers and types of securities. These securities generally are classified as available-for-sale and, consequently, are recorded on our balance sheet at fair value. Part of our portfolio includes minority equity investments in several publicly-traded companies. Because the majority of these securities represent investments in technology companies, the fair market values of these securities are subject to significant price volatility and, in general, suffered a significant decline during fiscal 2002. In addition, the realizable value of these securities is subject to market and other conditions. We also have invested in numerous privately held companies, many of which still can be considered in the start-up or developmental stages. These investments are illiquid and are inherently risky as the markets for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire investment in these companies.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE.
Both our commercial and defense businesses are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future performance depends on a number of factors, including our ability to:
- identify emerging technological trends in our target markets,
- develop and maintain competitive products,
- enhance our products by adding innovative features that differentiate our products from those of our competitors, and
- manufacture and bring cost-effective products to market quickly.
We believe that, in order to remain competitive in the future, we will need to continue to develop new products, which will require the investment of significant financial resources in new product development. The need to make these expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures ultimately will lead to the timely development of new products. Due to the design complexity of some of our products, we may experience delays in completing development and introducing new products in the future. Any delays could result in increased costs of development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our products, especially our broadband wireless access products, will develop as we currently anticipate. The failure of our products to gain market acceptance could reduce significantly our revenues and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing products that gain market acceptance in advance of our products or that our competitors will not develop new products that cause our existing products to become obsolete. If we fail in our new product development efforts or our products fail to achieve market acceptance more rapidly than those of our competitors, our revenues will decline and our business, financial condition and results of operations will be adversely affected.
WE CANNOT PREDICT THE CONSEQUENCES OF FUTURE TERRORIST ACTIVITIES, BUT THEY MAY AFFECT ADVERSELY THE MARKETS IN WHICH WE OPERATE, OUR ABILITY TO INSURE AGAINST RISKS, OUR OPERATIONS OR OUR PROFITABILITY.
The terrorist attacks in the United States on September 11, 2001, as well as the U.S.-led response and the potential for future terrorist activities, have created economic and political uncertainties that could have a material adverse effect on our business and the prices of our securities. These matters have caused uncertainty in the world's financial and insurance markets and may increase significantly the political, economic and social instability in the geographic areas in which we operate. These matters also have caused the premiums charged for our insurance coverages to increase and may cause some coverages to be unavailable altogether. While our government businesses have benefited from the War on Terrorism these developments may affect adversely our business and profitability and the prices of our securities in ways that we cannot predict at this time.
WE HAVE MADE, AND MAY CONTINUE TO MAKE, STRATEGIC ACQUISITIONS THAT INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES.
We have made, and we may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include:
- the difficulty in integrating newly-acquired businesses and operations in an efficient and cost-effective manner and the risk that we encounter significant unanticipated costs or other problems associated with integration,
- the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions,
- the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets,
- the risk that we assume significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources of any indemnifying parties,
- the potential loss of key employees of the acquired businesses, and
- the risk of diverting the attention of senior management from our existing operations.
WE DEPEND SIGNIFICANTLY ON OUR GOVERNMENT CONTRACTS, WHICH ARE ONLY PARTIALLY FUNDED, SUBJECT TO IMMEDIATE TERMINATION, AND HEAVILY REGULATED AND AUDITED. THE TERMINATION OR FAILURE TO FUND ONE OR MORE OF THESE CONTRACTS COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Over its lifetime, a government program may be implemented by the award of many different individual contracts and subcontracts. The funding of government programs in the United States is subject to Congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs often receive only partial funding initially, and additional funds are committed only as Congress makes further appropriations. The termination of funding for a government program would result in a loss of anticipated future revenues attributable to that program. That could have an adverse impact on our operations. In addition, the termination of a program or the failure to commit additional funds to a program that already has been started could result in lost revenue.
Generally, government contracts are subject to oversight audits by government representatives. In addition, the contracts generally contain provisions permitting termination, in whole or in part, without prior notice at the government's convenience upon the payment of compensation only for work done and commitments made at the time of termination. We can give no assurance that one or more of our government contracts will not be terminated under these circumstances. Also, we can give no assurance that we would be able to procure new government contracts to offset the revenues lost as a result of any termination of our government contracts. Because a significant portion of our revenues are dependent on our procurement, performance and payment under our government contracts, the loss of one or more large contracts could have an adverse impact on our financial condition.
Our government business also is subject to specific procurement regulations and a variety of socioeconomic and other requirements. These requirements, although customary in government contracts, increase our performance and compliance costs. These costs might increase in the future, thereby reducing our margins, which could have an adverse effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records and recording of costs. The termination of a government contract or relationship as a result of any of these acts would have an adverse impact on our operations and could have an adverse effect on our reputation and ability to procure other government contracts in the future. We currently are cooperating with certain government representatives in investigations relating to potential violations of foreign corrupt practices, export controls and other laws. No assurance can be given that the outcome of these investigations will not have a material adverse effect on our financial condition or our business as a whole.
WE ENTER INTO FIXED-PRICE CONTRACTS THAT COULD SUBJECT US TO LOSSES IN THE EVENT THAT WE HAVE COST OVERRUNS.
Sometimes, we enter into contracts on a firm, fixed-price basis. During fiscal 2002 approximately 33 percent of our total Government Communications Systems and RF Communications segments' sales were from fixed-price contracts. This allows us to benefit from cost savings, but it carries the burden of potential cost overruns since we assume all of the cost risk. If our initial estimates are incorrect, we can lose money on these contracts. Government contracts can expose us to potentially large losses because the government can compel us to complete a project or, in certain circumstances, pay the entire cost of its replacement by another provider regardless of the size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these projects involve new technologies and applications and can last for years, unforeseen events, such as technological difficulties, fluctuations in the price of raw materials, problems with other contractors and cost overruns, can result in the contractual price becoming less favorable or even unprofitable to us over time. Furthermore, if we do not meet project deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts we may not realize their full benefits. Our results of operations are dependent on our ability to maximize our earnings from our
contracts. Lower earnings caused by cost overruns and cost controls would have an adverse impact on our financial results.
THIRD PARTIES HAVE CLAIMED IN THE PAST AND MAY CLAIM IN THE FUTURE THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM SELLING PRODUCTS.
Third parties have claimed in the past and may claim in the future that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may cover some of our technology, products and services.
Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. Moreover, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products.
We often rely on licenses of intellectual property useful for our businesses. We cannot assure you that these licenses will be available in the future on favorable terms or at all.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our financial condition.
Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of these patents or trademark registrations. In addition, our patents may not provide us a significant competitive advantage.
We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and our competitive position may be harmed before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share.
THE OUTCOME OF LITIGATION IN WHICH WE HAVE BEEN NAMED AS A DEFENDANT IS UNPREDICTABLE AND AN ADVERSE DECISION IN ANY SUCH MATTER COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
We are defendants in a number of litigation matters. These claims may divert financial and management resources that would otherwise be used to benefit our operations. Although we believe that we have meritorious defenses to the claims made in each and all of the litigation matters to which we have been named a party, and intend to contest each lawsuit vigorously, no assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material adverse affect on our financial position.
WE ARE SUBJECT TO CUSTOMER DEMAND FOR FINANCING AND CUSTOMER CREDIT RISK.
The competitive environment in which we operate historically has required us, and many of our principal competitors, to provide medium-term and long-term customer financing. Customer financing arrangements may include all or a portion of the purchase price for our products and services, as well as working capital. We also may assist customers in obtaining financing from banks and other sources. Our success for some of our businesses may be dependent, in part, upon our ability to provide customer financing on competitive terms.
While we generally have been able to place a portion of our customer financings with third-party lenders or to otherwise insure a portion of this risk, a portion of these financings is provided directly by us. There can be higher risks associated with some of these financings, particularly when provided to start-up operations such as local network providers, to customers in developing countries or to customers in specific financing-intensive areas of the telecommunications industry. If customers fail to meet their obligations, losses could be incurred and such losses could have an adverse effect on us. Our losses could be much greater if it becomes more difficult to place or insure against these risks with third parties. This also may put us at a competitive disadvantage to competitors with greater financial resources. We have various programs in place to monitor and mitigate customer credit risk; however, we cannot assure you that such measures will be effective in reducing our exposure to our customers' credit risk. Continued weakness in the general economy, and the telecommunications industry in particular, may result in increased defaults by customers and increased losses.
WE OPERATE IN HIGHLY COMPETITIVE BUSINESSES.
We operate in highly competitive businesses that are sensitive to technological advances. Although successful product and systems development is not dependent necessarily on substantial financial resources, some of our competitors in each of our businesses are larger and can maintain higher levels of expenditures for research and development than we can. Our competitors in our commercial communications businesses include large multinational communications companies, as well as smaller companies with developing technology expertise. Our competitors for U.S. Government contracts typically are large, technically competent firms with substantial assets. We concentrate in each of our businesses on the market opportunities that we believe are compatible with our resources, overall technological capabilities and objectives. Principal competitive factors in these businesses are cost-effectiveness, product quality and reliability, technological capabilities, service, ability to meet delivery schedules and the effectiveness of dealers in international areas. We cannot assure you that we will be able to compete successfully against our current or future competitors or that the competitive pressures that we face will not result in reduced revenues and market share.
WE DEPEND ON THE RECRUITMENT AND RETENTION OF QUALIFIED PERSONNEL, AND OUR FAILURE TO ATTRACT AND RETAIN SUCH PERSONNEL COULD AFFECT ADVERSELY OUR BUSINESS.
Due to the specialized nature of some of our businesses, our future performance is dependent upon the continued services of our executive officers and key engineering personnel. Our prospects depend upon our ability to attract and retain qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for personnel, particularly people with key technology skills, is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to successfully compete for these personnel or the cost of competing for these personnel could seriously harm our business, results of operations and financial condition.
ACCOUNTING ESTIMATES IMPACT OUR FINANCIAL REPORTING.
In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in the Notes to Financial Statements contained in our 2002 Form 10-K. The application of certain of these policies places significant demands on our judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition on long-term contracts and contract estimates, provisions for excess and obsolete inventory losses, accounts and finance receivables allowance for doubtful accounts and credit losses, valuation of marketable securities and strategic investments, and goodwill and other acquired intangible assets. Actual results may vary from those estimates.
For example, standard "percentage of completion" accounting for multi-year contracts requires us to make estimates about future expenses associated with those contracts. These estimates, including changes we make in these estimates, affect current reported results. In addition, our financial results and our financial condition in subsequent periods are affected by positive and negative variances between our estimates and actual income and expense items recognized in those periods. We regularly evaluate these estimates and make changes based upon developments during a reporting period.
EXHIBIT 99.2
CERTIFICATION
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE
UNITED STATES CODE AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Harris Corporation ("Harris") for the fiscal quarter ended September 27, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Phillip W. Farmer, Chairman, President, and Chief Executive Officer of Harris, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. ss.1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Harris.
Dated: November 5, 2002 /s/ Phillip W. Farmer -------------------------------------- Name: Phillip W. Farmer Title: Chairman, President, and Chief Executive Officer |
EXHIBIT 99.3
CERTIFICATION
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE
UNITED STATES CODE AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Harris Corporation ("Harris") for the fiscal quarter ended September 27, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Bryan R. Roub, Senior Vice President and Chief Financial Officer of Harris, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. ss.1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Harris.
Dated: November 5, 2002 /s/ Bryan R. Roub -------------------------------------- Name: Bryan R. Roub Title: Senior Vice President and Chief Financial Officer |
Exhibit 99.4
INSTRUMENT OF RESIGNATION OF TRUSTEE AND APPOINTMENT
AND ACCEPTANCE OF SUCCESSOR TRUSTEE
among
HARRIS CORPORATION,
JPMORGAN CHASE BANK, as Resigning Trustee, and
THE BANK OF NEW YORK,
as Successor Trustee
INSTRUMENT OF RESIGNATION OF TRUSTEE AND APPOINTMENT AND ACCEPTANCE OF SUCCESSOR TRUSTEE (this "INSTRUMENT"), dated as of November 1, 2002, by and among HARRIS CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "COMPANY"), JPMORGAN CHASE BANK (as successor by merger with Chemical Bank), a banking corporation duly organized and existing under the laws of the State of New York ("Prior Trustee"), and THE BANK OF NEW YORK, a banking corporation duly organized and existing under the laws of the State of New York ("SUCCESSOR TRUSTEE").
R E C I T A L S :
WHEREAS, the Company and the Prior Trustee entered into an Indenture dated as of May 1, 1996 (the "Indenture"; certain capitalized terms used and not otherwise defined herein having the respective meanings attributed thereto in the Indenture), providing for the issuance of debt securities from time to time;
WHEREAS, on the date hereof the following Securities are issued and outstanding under the Indenture (1) $150,000,000 of the Company's 6.35% Debentures due February 1, 2028, and (2) $1,360,000 of the Company's 6.65% Debentures due August 1, 2006, ($100,000,000 of which were originally issued); and
WHEREAS, Section 8.10 of the Indenture provides that the Trustee may at any time resign by giving written notice of such resignation to the Company, and by mailing a notice to the Holders of then Outstanding Securities as the names and addresses of such Holders appear in the Security Register; and
WHEREAS, the Prior Trustee desires to resign as Trustee, Security Registrar and Paying Agent in accordance with the provisions of the Indenture; and
WHEREAS, Section 8.10 of the Indenture provides that if the Prior Trustee shall resign, the Company shall, by order of the Board of Directors, promptly appoint a Successor Trustee; and
WHEREAS, Section 8.10 of the Indenture provides that any successor Trustee appointed in accordance with the Indenture shall execute, acknowledge, and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment under the Indenture, and thereupon the resignation of the predecessor Trustee shall become effective and such successor Trustee, without any further act, deed, or conveyance, shall become vested with all rights, powers, duties, and obligations of the predecessor Trustee; and
WHEREAS, the Company desires to appoint the Successor Trustee as Trustee, Security Registrar, and Paying Agent to succeed the Prior Trustee in such capacities under the Indenture; and
WHEREAS, the Successor Trustee having its principal corporate trust office at 101 Barclay Street, Corporate Trust Administration - 8W, New York, New York 10286, has declared that it is eligible to serve as successor Trustee, Security Registrar, and Paying Agent under the provisions of Sections 8.08 and 8.09 of the Indenture and is willing to accept such appointment as successor Trustee, Security Registrar, and Paying Agent under the Indenture; and
WHEREAS, the Company has been authorized, by order of the Board of Directors to appoint The Bank of New York as successor Trustee, Security Registrar and Paying Agent under the Indenture and to execute and deliver this Instrument and to perform the acts to be performed by it as contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company, the Successor Trustee and the Prior Trustee hereby consent and agree as follows:
1. RESIGNATION OF PRIOR TRUSTEE. The Prior Trustee hereby notifies the Company that the Prior Trustee is hereby resigning as Trustee, Security Registrar, and Paying Agent under the Indenture. The resignation of the Prior Trustee as Trustee, Security Registrar, and Paying Agent under the Indenture shall become effective pursuant to Section 8.10 of the Indenture on the Effective Date (as defined in Section 13) following the execution, acknowledgement and delivery of a counterpart of this Instrument to the Company and to the Prior Trustee by the Successor Trustee. The Company hereby accepts the resignation of the Prior Trustee as Trustee, Security Registrar, and Paying Agent under the Indenture.
2. APPOINTMENT OF SUCCESSOR TRUSTEE. The Company, pursuant to Section 8.10 of the Indenture, hereby appoints the Successor Trustee as successor Trustee under the Indenture, to succeed to all of the rights, powers, duties, obligations, immunities, and trusts of the Prior Trustee as Trustee under the Indenture, as Paying Agent and as Security Registrar under the Indenture, and as an office or agency where notices and demands to or upon the Company in respect of the Securities or the Indenture may be served, and for any and all other functions or duties as Trustee or such office or agency under the Indenture, all with like effect as if originally named as Trustee, Security Registrar and Paying Agent and such office or agency under the Indenture, such appointment to take effect pursuant to Section 8.11 of the Indenture on the Effective Date following the execution, acknowledgement and delivery of a counterpart of this Instrument to the Company and to the Prior Trustee by the Successor Trustee.
3. ACCEPTANCE BY SUCCESSOR TRUSTEE. The Successor Trustee hereby:
(a) Accepts its appointment as successor Trustee, Security Registrar, and Paying Agent under the Indenture and accepts and assumes the rights, powers, duties, obligations, immunities, and trusts imposed upon it by the Indenture, subject to the terms and conditions contained therein, and agrees to perform and exercise said rights, powers, duties, obligations, immunities, and trusts upon such terms and conditions, with like effect as if originally named as Trustee under the Indenture; and
(b) Requests (i) the Prior Trustee to execute and deliver this Instrument as an agreement of transfer and (ii) the Company to execute and deliver this Instrument as an agreement of further assurance and confirmation, all as contemplated by Section 8.11 of the Indenture.
In accepting appointment as Successor Trustee under the Indenture, the Successor Trustee undertakes to exercise and perform only the rights, powers, duties, obligations, immunities, and trusts imposed upon the Successor Trustee as successor Trustee under the Indenture.
4. TRANSFER OF TRUST. Pursuant to the request of the Successor Trustee as successor Trustee made in Paragraph 3 hereof, the Prior Trustee, as Trustee as aforesaid, pursuant to Section 8.11 of the Indenture, as of the Effective Date does hereby:
(a) Grant, give, bargain, sell, remise, release, confirm, set over, transfer, convey, and assign to the Successor Trustee, as successor Trustee under the Indenture, and to its successors and assigns forever, upon the trust expressed in the Indenture, all of the rights, powers, duties, obligations, immunities and trusts, which the Prior Trustee, as Trustee and as Security Registrar and Paying Agent and as such office or agency as aforesaid, has or may have under the Indenture;
(b) Pay over, assign, and deliver to the Successor Trustee any and all money and property held by the Prior Trustee as Trustee and Paying Agent under the Indenture;
(c) Agree that it shall execute and deliver such further instruments and shall do such other things as the Successor Trustee may reasonably require so as to more fully and certainly vest and confirm in the Successor Trustee all the rights, powers, and duties hereby assigned, transferred, delivered, and confirmed to the Successor Trustee as Trustee, Security Registrar, and Paying Agent under the Indenture.
5. CONFIRMATION OF TRANSFER OF TRUST. Pursuant to the request of the Successor Trustee as successor Trustee made in Paragraph 3 hereof, and in accordance with Section 8.11 of the Indenture, the Company, for the purpose of more fully and certainly vesting in and conferring to the Successor Trustee as successor Trustee and as Security Registrar and Paying Agent and as such office or agency all the rights, powers, duties, immunities and obligations vested or intended to have been vested in the Prior Trustee, as resigning Trustee, Security Registrar and Paying Agent and as such office or agency, as of the Effective Date hereby vests in the Successor Trustee all of the rights,
powers, duties, obligations, immunities, and trusts of the Trustee, Security Registrar, and Paying Agent with like effect as if the Successor Trustee had been originally named as Trustee, Security Registrar and Paying Agent and as such office or agency in the Indenture.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants that:
(a) The Company is a corporation validly incorporated and existing under the laws of the State of Delaware;
(b) The Indenture was validly and lawfully executed and delivered by the Company and the Securities were validly and lawfully issued by the Company;
(c) The Company has performed or fulfilled each covenant, agreement, and condition on its part to be performed or fulfilled under the Indenture on or prior to the date hereof;
(d) The Company will continue to perform its obligations under the Indenture;
(e) No default or Event of Default or, to the best of its knowledge, any event which with notice or the passage of time or both would constitute an Event of Default under the Indenture has occurred and is continuing as of the date hereof;
(f) The Company has not entered into any amendment or supplement to the Indenture, and the Indenture, as originally executed and delivered, remains in full force and effect; and
(g) $151,360,000 in principal amount of the Securities were outstanding as of the date of this Instrument and all interest due and payable, as of the date hereof, on the Securities has been duly paid by the Company; and
(h) This Instrument has been duly authorized, executed, and delivered on behalf of the Company and constitutes its legal, valid, and binding obligation.
7. REPRESENTATIONS OF THE PRIOR TRUSTEE. The Prior Trustee hereby represents and warrants that:
(a) To the best of its knowledge, no default or Event of Default or event which with notice or the passage of time or both would constitute an Event of Default under the Indenture has occurred and is continuing as of the date hereof;
(b) The Prior Trustee has not taken any action to withhold the giving of notice of any default or Event of Default or any event which with notice or the passage of time or both would constitute an Event of Default under the Indenture, and no waiver
of any provision of the Indenture which has been executed by the Prior Trustee or, to its knowledge, by the Holders is in force and continuing;
(c) $151,360,000 in principal amount of the Securities are outstanding as of the date of this Instrument;
(d) The Prior Trustee has made, or promptly will make, available for inspection by the Successor Trustee, originals of all documents relating to the trust created by the Indenture, and all records in the possession of its corporate trust department relating to the administration and status thereof, and will following the Effective Date furnish to the Successor Trustee (i) the originals of such documents and (ii) copies of any such records memoranda as may be reasonably requested by the Successor Trustee;
(e) The Prior Trustee has not entered into any amendment or supplement to the Indenture, and the Indenture, as originally executed and delivered, remains in full force and effect;
(f) There is no action, suit, or proceeding pending or, to the best of the knowledge of the Prior Trustee, threatened against the Prior Trustee before any court or governmental authority arising out of any action or omission by the Prior Trustee as Trustee, Security Registrar, or Paying Agent under the Indenture;
(g) As of the date of this Instrument, the Prior Trustee holds no property under the Indenture;
(h) There are no amounts due or owing to the Prior Trustee pursuant to Section 8.06 or any other provision of the Indenture and, therefore, all property and funds transferred to the Successor Trustee by the Prior Trustee are transferred free and clear of any lien or encumbrance with the exception of the lien in favor of the Holders pursuant to the Indenture;
(i) Interest on the Securities has been paid through July 31, 2002; and
(j) This Instrument has been duly authorized, executed, and delivered on behalf of the Prior Trustee and constitutes its legal, valid, and binding obligation.
8. REPRESENTATIONS OF THE SUCCESSOR TRUSTEE. The Successor Trustee hereby represents and warrants (a) that it is qualified under the provisions of Sections 8.08 and 8.09 of the Indenture and eligible to act as Trustee under the provisions of Section 8.10 of the Indenture, and (b) that this Instrument has been duly authorized, executed, and delivered on behalf of the Successor Trustee and constitutes its legal, valid, and binding obligation.
9. NOTIFICATION TO HOLDERS AND DTC. Promptly after the signing of this Instrument, in accordance with Section 8.10 of the Indenture, the Company and the Prior
Trustee will cause written notice of the resignation of the Prior Trustee as Trustee and the appointment of the Successor Trustee as successor Trustee under the Indenture to be mailed by first class mail, postage prepaid, to the Holders of Outstanding Securities as their names and addresses appear in the Security Register, each such notice to include the name of the Successor Trustee and the address of its principal corporate trust office. The form of notice referred to above shall be in substantially the form of Exhibit A hereto. No later than November 4, 2002, the Successor Trustee and Prior Trustee will provide the Depository Trust Company with any notices required by Rule 17Ad-16 of the Securities Exchange Act of 1934, as amended.
10. COUNTERPARTS. This Instrument may be executed in several counterparts, and by each party hereto upon a separate counterpart, each of which shall be an original and all of which, collectively, shall be deemed to constitute but a single agreement.
11. GOVERNING LAW. This Instrument and the rights and obligations of the parties hereunder shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts made and to be performed in said State.
12. NOTICES. Any notice, demand, request, or agreement in writing authorized by the Indenture or herein to be given to the Bank of New York as Successor Trustee under the Indenture shall be sufficiently given for all purposes, if delivered or mailed to 101 Barclay Street, Corporate Trust Administration - 8W, New York, New York 10286.
13. EFFECTIVENESS. The resignation, appointment and acceptance effected hereby shall be effective as of the opening of business on November 15, 2002 (the "Effective Date").
14. ACKNOWLEDGEMENT OF RECEIPT. The Company, the Prior Trustee and the Successor Trustee each hereby acknowledges receipt of an executed and acknowledged counterpart of this Instrument.
[The rest of this page is intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have caused this Instrument of Resignation of Trustee and Appointment and Acceptance of Successor Trustee to be executed by their respective officers thereunto duly authorized and their respective corporate seals duly attested to be hereunto affixed, all as of the 1st day of November 2002.
ATTEST: HARRIS CORPORATION [SEAL] /s/ Scott T. Mikuen By /s/ D.S. Wasserman ------------------------------ ------------------------------- Name: Scott T. Mikuen Name: David S. Wasserman Title: Assistant Secretary Title: Vice President - Treasurer ATTEST: THE BANK OF NEW YORK, as Successor Trustee [SEAL] /s/ Robert A. Massimillo By /s/ Mary LaGumina ------------------------------ ------------------------------- Name: Robert A. Massimillo Name: Mary LaGumina Title: Vice President Title: Vice President ATTEST: JPMORGAN CHASE BANK, as Prior Trustee [SEAL] /s/ David E. White By /s/ Roy Wessinger ------------------------------ ------------------------------- Name: David E. White Name: Roy Wessinger Title: Authorized Signatory Title: Authorized Signatory |
STATE OF FLORIDA } ss:
COUNTY OF BREVARD }
On the 5th day of November 2002, before me personally came David S. Wasserman to me known, who, being by me duly sworn, did depose and say that he is Vice President - Treasurer of HARRIS CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that one of the seals affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
/s/ Rebecca L. Parman ______________________________________ Notary Public |
Rebecca L. Parman My Commission CC98787 Expires December 13 2004
STATE OF NEW YORK } ss: COUNTY OF ROCKLAND } ----------------------- |
On the 4th day of November 2002, before me personally came Mary LaGumina, to me known, who, being by me duly sworn, did depose and say that she is Vice President of THE BANK OF NEW YORK, one of the corporations described in and which executed the above instrument; that she knows the corporate seal of said corporation; that one of the seals affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that she signed his name thereto by like authority.
/s/ Robert Hirsch __________________________________ Notary Public Robert Hirsch Notary Public, State of New York No. 01416076679 Qualified in Rockland County Commission Expires July 1, 2006 |
STATE OF ALABAMA } ss:
COUNTY OF JEFFERSON}
On the 1st day of November 2002, before me personally came Roy Wessinger, to me known, who, being by me duly sworn, did depose and say that he is an Authorized Officer of JPMORGAN CHASE BANK, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that one of the seals affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority.
/s/ Dian P. Wilson ----------------------------- Dian P. Wilson NOTARY PUBLIC STATE OF ALABAMA AT LARGE MY COMMISSION EXPIRES: AUGUST 23, 2004 BONDED THRU NOTARY PUBLIC UNDERWRITERS |
NOTICE TO HOLDERS
OF
RESIGNATION OF TRUSTEE
AND
APPOINTMENT OF SUCCESSOR TRUSTEE
$151,360,000 SECURITIES
OF
HARRIS CORPORATION
HARRIS CORPORATION NOTES DUE 2006: CUSIP NO. 413875AD7
HARRIS CORPORATION NOTES DUE 2028: CUSIP NO. 413875AF2
NOTICE IS HEREBY GIVEN by JPMORGAN CHASE BANK, as Trustee (the "Prior Trustee"), and HARRIS CORPORATION (the "Company") pursuant to the Indenture (the "Indenture"), dated as of May 1, 1996, between the Company and the Prior Trustee, as successor to Chemical Bank, that the Prior Trustee has resigned from the position of Trustee under the Indenture. Effective as of November 15, 2002, the Company has appointed The Bank of New York (the "Successor Trustee") to serve as Trustee under the Indenture. The address of the principal corporate trust office of the Successor Trustee is:
101 Barclay Street Corporate Trust Administration - 8W New York, New York 10286
All conditions to the resignation of the Prior Trustee and the appointment of the Successor Trustee under the Indenture have been satisfied.
This notice is provided to Holders by the Prior Trustee and the Company in satisfaction of their respective obligations under Sections 8.10(a) and 8.10(e) of the Indenture.
JPMORGAN CHASE BANK HARRIS CORPORATION
Dated: _________, 2002