-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZlCrQvjJA+qbe9eNv7hjBxbdZnUOJn1oTvFaILGwMt3oMZQuDqWSVSMpNsBVmBF VGTm1ziZtSuns1dbzMOn3A== 0001169232-02-002122.txt : 20021016 0001169232-02-002122.hdr.sgml : 20021016 20021016080210 ACCESSION NUMBER: 0001169232-02-002122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020731 FILED AS OF DATE: 20021016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP /DE/ CENTRAL INDEX KEY: 0000023197 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112139466 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07928 FILM NUMBER: 02789936 BUSINESS ADDRESS: STREET 1: 105 BAYLIS RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5167778900 MAIL ADDRESS: STREET 1: 105 BAYLIS ROAD CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH LABORATORIES INC DATE OF NAME CHANGE: 19780425 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19831215 FORMER COMPANY: FORMER CONFORMED NAME: COMTECH INC DATE OF NAME CHANGE: 19870503 10-K 1 d52183_10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2002 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-7928 COMTECH TELECOMMUNICATIONS CORP. (Exact Name of Registrant as Specified in its Charter) Delaware 11-2139466 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 105 Baylis Road Melville, New York 11747 (Address of Principal Executive Offices) Registrant's telephone number, including area code (631) 777-8900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share Series A Junior Participating Cumulative Preferred Stock par value $.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: |X| NO: |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the Nasdaq National Market on October 11, 2002 was approximately $46,547,000. The number of shares of the registrant's common stock outstanding on October 11, 2002 was 7,509,821. DOCUMENTS INCORPORATED BY REFERENCE. Certain portions of the document listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K: Proxy Statement for Annual Meeting of Shareholders to be held December 10, 2002 Part III INDEX PART I ITEM 1. BUSINESS 1 Overview 1 Business Strategies 2 Important Developments 3 Telecommunications Transmission Business Segment 4 RF Microwave Amplifier Business Segment 5 Mobile Data Communications Services Business Segment 6 Sales, Marketing and Customer Support 6 Backlog 6 Manufacturing and Service 7 Research and Development 7 Patents and Licenses 7 Competition 8 Key Personnel/Employees 8 Compliance with Federal, State and Local Environment Protection Laws 8 ITEM 2. PROPERTIES 8 ITEM 3. LEGAL PROCEEDINGS 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10 Dividends 10 Approximate Number of Equity Security Holders 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 Overview 12 Critical Accounting Policies 14 i Results of Operations 15 Comparison of Fiscal 2002 and 2001 15 Comparison of Fiscal 2001 and 2000 16 Liquidity and Capital Resources 18 Recent Accounting Pronouncements 18 Forward-Looking Statements and Risk Factors 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 24 ITEM 11. EXECUTIVE COMPENSATION 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24 ITEM 14. CONTROLS AND PROCEDURES 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 25 SIGNATURES 27 CERTIFICATIONS 28 SUBSIDIARIES 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1 ii Note: As used in this Annual Report on Form 10-K, the terms "Comtech," "we" and "our company" mean Comtech Telecommunications Corp. and Comtech's subsidiaries. PART I ITEM 1. BUSINESS Overview We design, develop, produce and market sophisticated wireless telecommunications transmission products and solid state high-power broadband amplifiers for commercial and government purposes. Our telecommunications products are used in point-to-point and point-to-multipoint telecommunications transmission and reception applications such as satellite communications, over-the-horizon microwave systems, and cable and broadcast television. Our broadband amplifier products are used in communications, cellular and medical instrumentation and defense systems. We also offer satellite mobile data communications services. Our products meet the high performance requirements of our customers by drawing upon proprietary expertise in key microwave amplification and transmission technologies developed over more than 35 years of operations. Demand for our products over the past five years has been driven by the global commercial and domestic government expansion of telecommunications services such as satellite systems, broadcast, cellular telephone systems, over-the-horizon microwave systems and the Internet. However, fiscal 2002 was adversely impacted by the significant downturn in capital spending in the telecommunications sector. Telecommunications Industry Trends The demand for telecommunications is largely tied to emerging economies seeking to modernize their infrastructure and increasingly information-intensive markets introducing new telecommunications services. The telecommunications industry has expanded rapidly over the last decade. Such rapid expansion has resulted in excess capacity which has reduced capital spending in fiscal 2002. Long-term, the industry, particularly in the wireless area, is poised for growth due to the following: Deregulation and Privatization. Many developing countries that had previously not committed significant resources to or place a high priority on developing and upgrading their communications systems are now doing so, primarily through deregulation and privatization. A significant number of these countries do not have the resources, or have large geographic areas or terrain that make it difficult, to install extensive land-based networks on a cost-effective basis. This provides an opportunity for satellite and other wireless communications services systems to meet the requirement for communications services in these countries. Growing Demand for Data Communications Services. Factors contributing to the growing demand for communications services include worldwide economic development and the increasing globalization of commerce. Businesses have a growing need for higher bandwidth services to communicate with their customers and employees around the world and are increasingly reliant upon Internet and multimedia applications. We expect demand for these kinds of higher bandwidth services to grow in both developed and developing countries. Increasing Cost-Effectiveness. The relative cost-effectiveness of satellite and other wireless telecommunications services is a major factor driving the growth in areas with rapidly developing telecommunications infrastructures. These developing infrastructures often cover large geographic areas, where population concentrations that are separated by significant distances require a technology whose cost and speed of implementation is relatively insensitive to distance. Technological Advances. Technological advances continue to increase the capacity of telecommunications networks and reduce the overall cost of the systems and the services they deliver. This increases the number of potential end users for the services and expands the available market. We believe that recent technological developments, such as bandwidth on demand and signal processing methods, will continue to stimulate demand. 1 Product and Service Segments We conduct our business through three decentralized but complementary product and service segments: telecommunications transmission, RF microwave amplifiers, and our mobile data communications services business. The segments operate through individual operating units, each of which maintains its own sales, marketing, product development and manufacturing functions. We believe that this organizational structure allows the key personnel of each operating unit to be more responsive to their particular markets and customers. Brief descriptions of our business segments and operating units follow. Telecommunications transmission - Products in this segment include modems, frequency up converters and down converters, solid state high-power amplifiers, VSAT transceivers and antennas for satellite ground station applications and adaptive modems and microwave radios for over-the-horizon microwave communications systems. Primary markets include satellite systems integrators and communications service providers, defense contractors and oil companies. Customers include, among others, Globecomm Systems, Hughes Network Systems, DirecTV, ATT Alascom, Northrop Grumman, BP Amoco, Exxon Mobil and the U.S. government. RF microwave amplifiers - This segment provides solid state high-power broadband amplifier products in the microwave and radio frequency (RF) spectrums for a wide range of applications, including cellular and wireless instrumentation, medical systems, jamming and identification friend or foe (IFF) and other defense systems. Target markets are communications service providers, cellular and PCS telephony system manufacturers and defense contractors. Customers include, among others, Motorola, Ericsson, Nokia Telecommunications, Condor Systems, Siemens Medical Systems, Lucent Technologies, Northrop Grumman, Raytheon, Lockheed Martin and the U.S. government. Mobile data communications services - This segment provides secure, real time two-way location of and messaging between mobile platforms, such as land vehicles, rail and aircraft, or remotely placed fixed site sensors and headquarters through our Germantown, Maryland gateway satellite earth station. The network employs leased satellite capacity to communicate between the mobile platform and user headquarters via satellite, terrestrial and Internet links. Depending upon the end-user's needs, our system can be configured to provide a wide range of data applications, ranging from simple location tracking to messaging, e-mail, broadcasting of information and various other sensor monitoring. See note 11 to the Consolidated Financial Statements for more information regarding segment net sales, operating income (loss) and total assets as of and for the fiscal years ended July 31, 2002, 2001 and 2000. We believe that the global expansion of telecommunications, particularly in developing countries in Asia, South America, the Middle East and Europe, represents a key opportunity for growth in our telecommunications business. Included as international sales are sales made to domestic companies for inclusion in products which are sold to international customers. Sales for use by international customers represented approximately 41.2%, 46.2% and 71.4% of our total net sales in fiscal years 2002, 2001 and 2000, respectively. Sales to the U.S. government represented 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. Our product designs are based on both analog and digital microwave technologies. Digital microwave technology can significantly enhance performance of telecommunications systems. We have invested significant resources in developing our technological expertise, and work closely with customers and potential customers to develop product lines in market niches where we believe our expertise can enable us to become a leading supplier. Business Strategies We manage our business with the following principal corporate strategies: o Operate on a decentralized basis to maximize responsiveness to customers. o Continue product innovation through investment in research and development. 2 o Capitalize on synergies among our business segments to secure larger contracts. o Pursue acquisitions and investments in complementary businesses, technologies, products and services. Specific operating strategies for our business segments include: Telecommunications transmission. o Continue broadening our line of satellite earth station products to better serve our customers with a full line of video, data and voice products. o Enhance our existing products to serve rapidly developing markets requiring higher speed and greater bandwidth, such as emerging applications for wireless Internet access. o Maintain our market leadership in over-the-horizon microwave technologies by broadening applications and increasing product performance. RF microwave amplifiers. o Continue to incorporate the latest advances in solid state device electronics to broaden our product line bandwidth and high-power capabilities. o Encourage system integrators and end users to outsource their requirements to the Company rather than pursue this specialized field in-house. o Combine high-power amplifiers and solid state switches for advanced communications applications. Mobile data communications services. o Maximize the opportunities available to supply the Logistics Command under the U.S. Army contract. o Pursue identified opportunities to offer our products and services to other government agencies. o Penetrate the emerging markets for commercial uses, particularly in the land mobile and remote sensing markets. Important Developments In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, for approximately $54.2 million in cash. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. We prepaid $19.2 million of this debt in August 2001. We combined this operation with our existing Arizona Comtech Communications Corp. satellite operations included in our telecommunications transmissions segment. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for $12.7 million. The purchase price was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears an interest rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our New York Comtech PST Corp. operation in our RF microwave amplifiers segment. On July 31, 2002, we acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. for $7.0 million in cash. The purchase price was financed from internal Company funds. This operation is included in our telecommunications transmission segment. 3 Telecommunications Transmission Business Segment The demand for telecommunications is largely tied to emerging economies seeking to modernize their infrastructure and increasingly information-intensive markets introducing new telecommunications services. Advances in technology have lowered per-unit communications costs, increased product reliability and encouraged a proliferation of new enhanced communications products and services. In making procurement decisions, customers for telecommunications transmission equipment must weigh the relative cost and advantages of the six presently available transmission technologies: copper cable, fiber optic cable, high frequency radio systems, wireless microwave systems, over-the-horizon microwave systems and satellite systems. Rarely is a complete communications network or system based solely on one of these technologies. Transmission of information can be routed through a combination of technologies, each employed where most cost-effective. Our products are used in systems employing satellite, over-the-horizon microwave, terrestrial line-of-sight microwave and wireless technologies. Copper Cable, the traditional transmission medium most familiar to customers, is being replaced and supplemented by the other media, particularly for high-volume broadband and long distance transmissions where it has substantial capacity, cost and reliability limitations. Fiber Optic Cable is best suited to high-volume broadband, point-to-point, short or long distance links where its advantages - capacity, quality and security - justify the long lead-time and high cost to equip and install a network. High frequency (HF) radio systems employ long wavelengths which are propagated beyond line-of-sight distance either by surface waves traveling along the earth's perimeter or by skywave reflection of the transmitted waves off different layers of the ionosphere. This mode of transmission is very limited in capacity. Wireless and line-of-sight microwave communications systems generally used for point-to-point communications, employ signals with extremely short wavelengths which travel only in line-of-sight paths over relatively short distances, generally under 30 miles, can be quickly and easily installed, require relatively low initial capital investment and provide broadband capacity which can be upgraded and expanded over time. Over-the-horizon microwave communication systems transmit signals over distances from 30 to 600 miles by reflection of the transmitted signals off the troposphere, an atmospheric layer located approximately seven miles above the earth's surface. Such systems offer a high level of reliability and security, are limited in capacity but are used for transmission over unfriendly terrain. Satellite communications systems have grown and diversified in response to demand for efficient broadband and reliable long distance voice and video communication and digital information exchange. In a satellite communications system, information is relayed to and from microwave transmitting and receiving stations on the ground by means of low earth orbit (LEO), medium earth orbit (MEO), or geostationary earth orbit (GEO) satellites, which are generally placed in an orbit from 600 to 22,300 miles above the earth's equator. Satellite communications systems are particularly useful where long-range, broadband high capacity and high quality point-to-point or point-to-multipoint communication transmission is desirable. As few as three GEO satellites can provide global communications coverage. These systems, which use microwave technology, are well suited for rapid introduction of long distance service in remote areas or where communication alternatives are unavailable, such as mobile, shipboard or defense applications. Our Comtech EF Data Corp. operating unit, located in Tempe, Arizona, designs, develops, manufactures and markets equipment used in commercial and defense satellite communications. The equipment includes modems, frequency up converters and down converters, solid state power amplifiers and satellite VSAT transceivers, which combine our frequency converters with solid state, high-power amplifiers. These products comprise a broad range of receiving and transmitting equipment offering a variety of state-of-the-art technical capabilities with respect to performance, complexity and value. Our turbo codec modem product line offers significantly improved performance, power and bandwidth performance over traditional systems. This operating unit is a combination and integration of our Comtech Communications Corp. subsidiary with the acquired EF Data product line. The 4 acquisition of EF Data's business expanded Comtech's growing telecommunications capabilities and enhanced Comtech's product offerings, distribution reach and market presence. Additionally, it enabled Comtech to enter the satellite networking solution business. Our Comtech AHA Corporation operating unit, located in Pullman, Washington, designs, develops and markets forward error correction integrated circuits and data coding technology solutions for telecommunications systems customers. This new subsidiary was formed as a result of our acquisition on July 31, 2002 of certain assets and liabilities of Advanced Hardware Architectures, Inc. Comtech AHA Corporation's products include the latest generation forward error correction technology, called Turbo Product Codec (TPC). These patented TPC chips are an important enabling technology included in Comtech EF Data Corp.'s bandwidth efficient modems. Comtech AHA Corporation has also developed chips used in other telecommunication applications, as well as data compression for copiers and tape storage. Our Comtech Systems, Inc. operating unit, located in Orlando, Florida, has a product line consisting primarily of equipment for over-the-horizon microwave systems and networks. It has a turnkey capability that ranges from system and network planning through equipment and system training and operation and maintenance programs. It also supplies satellite telecommunications systems by combining its products with equipment manufactured by our other operating units and third parties. Comtech Systems, Inc. markets its products and services to oil and gas companies and other commercial users, foreign defense commands and system prime contractors. We believe that Comtech Systems, Inc.'s products, which employ our patented adaptive modem digital transmission technology, offer high-speed data (8 mbs) benefits over the traditional analog and digital (2 mbs) over-the-horizon microwave products offered by its competition. Our Comtech Antenna Systems, Inc. operating unit, located in St. Cloud, Florida, designs, manufactures, and markets a wide variety of fiberglass and aluminum antennas for over-the-horizon microwave and satellite communication applications, including distributed network programming, cable and broadcast television and radio as well as other forms of information and entertainment distribution. Comtech Antenna Systems, Inc. designs antennas for specific types of telecommunications systems and, typically, sells standardized products to independent distributors, prime contractors and end-user customers. Comtech Antenna Systems, Inc.'s antenna product line includes fixed and mobile antenna systems and specialized multi-beam satellite antenna systems that are capable of receiving signals simultaneously from many independent satellites located up to 60 degrees apart. RF Microwave Amplifier Business Segment Amplifiers reproduce signals with greater power, current or voltage amplitude. Indispensable in the world of signal processing, amplifiers can be as tiny as a microchip for a hearing aid or as massive as a multi-story building for transmitting radio signals to submerged submarines or to outer space. In telecommunications, solid state high-power amplifiers are used to amplify signals for radiation from transmitting antennas in satellite or other wireless telecommunications systems. They are also used to amplify signals in defense, radar and electronic jamming systems. In the laboratory, solid state, high-power amplifiers are used to test the performance of high power microwave and wireless electronic system components used in cellular and PCS networks. Solid state, high-power amplifiers are also used in electromagnetic compatibility and susceptibility testing. The proliferation of electronic systems in products such as automobiles, computers, wireless telephones, radios, televisions, medical equipment, aircraft and other products has led to increasingly serious problems with electromagnetic interference. Manufacturers, therefore, test these electronic systems for electromagnetic compatibility and susceptibility using broadband high-power RF microwave amplifiers such as those we manufacture. For example, such testing may be used to determine whether the various electronic systems in a commercial aircraft are likely to be affected by the use of laptop computers, wireless telephones or video games by passengers in flight. We believe our Comtech PST Corp. operating unit, located in Melville, New York, is one of a small number of independent companies designing, developing, manufacturing and marketing broadband high-power large signal amplifiers in the microwave and RF spectrums. Our recent acquisition of assets and product lines from MPD Technologies, Inc. discussed above, further expands our product offerings in this segment for applications, including wireless and aircraft air-to-ground satellite telecommunications, medical oncology systems, instrumentation and defense systems. Comtech PST Corp. sells its products to domestic and foreign commercial users, government 5 agencies and prime contractors. We believe it is an innovative supplier of these amplifiers and related processing equipment. Mobile Data Communications Services Business Segment The demand for mobile data communications services and products has increased dramatically in recent years for both government and commercial applications. This demand has been driven by advances in digital technology coupled with the need to better locate, track, manage, monitor and communicate with mobile and fixed assets. The transmission of information may be done over various systems, i.e., terrestrial, cellular or satellite, depending on the most cost-effective approach to meet the application's requirements. We are continuing to develop and market a Web-enabled, satellite-based mobile data communications system.Through our satellite earth station gateway in Germantown, Maryland, we can route signals to and from mobile or fixed, remote terminals via leased satellite capacity. Customers can access their messages or data through an Internet or terrestrial connection to their headquarters' Web sites. In early 1999, Comtech Mobile Datacom Corp. led a multi-company team in competing for the U.S. Army's Movement Tracking System (MTS), a system being deployed by the U.S. Army for global use in tracking its assets and communicating by message in real time with these vehicles from fixed and mobile command centers. The contract was awarded to Comtech Mobile Datacom Corp. in June 1999. The contract allows for purchases of up to $418.2 million of equipment and services over an eight-year period, and is also open to other government agencies to procure their tracking and messaging requirements. Through July 31, 2002, we have received orders for $34.5 million under this contract, which can be terminated by the U.S. Army at any time. We are working with the U.S. Army to increase the future level of funding for this program in light of the lower than anticipated level of funding to date. Sales, Marketing and Customer Support Each of our operating units conducts its own sales and marketing efforts. In some instances, our operating units may bundle other units' products. Sales and marketing strategies vary with particular markets served and include direct sales through sales, marketing and engineering personnel, sales through independent representatives, value-added resellers or a combination of the foregoing. Our operating units enter into sales distribution agreements for certain products with distributors. Unlike sales representatives, who merely find customers on a commission basis, some of our distributors purchase products from us for resale. We intend to continue to expand domestic and international marketing efforts through independent sales representatives, distributors and value-added resellers. Our management, technical and marketing personnel establish and maintain relationships with customers. Our strategy includes a commitment to provide ongoing customer support for our systems and equipment. This support involves providing direct access to engineering staff or trained technical representatives to resolve technical or operational issues. Our international sales (including sales to prime contractors' international customers) from all three business segments represented approximately 41.2%, 46.2% and 71.4% of total net sales in fiscal 2002, 2001 and 2000, respectively. We expect that international sales will remain a substantial portion of our total sales for the foreseeable future. Domestic commercial sales represented approximately 25.0%, 30.7% and 19.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. The balance of our sales were to U.S. government departments or agencies and represented 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, sales to the U.S. Army for the Movement Tracking System represented 13.2% of our total net sales. There were no customers in fiscal 2001 which constituted 10% or more of our total net sales. Sales to one customer, a major U.S. aerospace prime contractor, represented 43.1% of our total net sales for fiscal 2000. A substantial portion of our sales may be derived from a relatively small number of large customer contracts. Backlog Our backlog as of July 31, 2002 and 2001 was approximately $44.1 million and $50.1 million, respectively. We expect that a substantial majority of the backlog as of July 31, 2002 will be recognized as sales during fiscal 2003. We received advance payments aggregating approximately $2.2 million as of July 31, 2002 in connection with 6 orders included in the backlog at that date. At July 31, 2002, approximately 40.9% of that backlog consisted of U.S. government contracts, subcontracts and government funded programs, approximately 33.7% consisted of orders for use by foreign customers (including sales to prime contractors' international customers) and approximately 25.4% consisted of orders for use by domestic commercial customers. Our backlog consists solely of orders believed to be firm. In the case of contracts with departments or agencies of the U.S. government, including our MTS contract discussed above, orders are only included in backlog to the extent funding has been obtained for such orders. All of the contracts in our backlog are subject to cancellation at the convenience of the customer or for default in the event that we are unable to perform under the contract. Variations in backlog from time to time are attributable, in part, to the timing of our preparation and submission of contract proposals, the timing of contract awards and the delivery schedules on specific contracts. As a result, we believe our backlog at any point in the fiscal year is not necessarily indicative of the total sales anticipated for any particular future period. Our Comtech Antenna and Comtech EF Data businesses operate under short lead times and usually generate sales out of inventory, as is also the case for a significant portion of our Comtech PST amplifier business. Manufacturing and Service Our manufacturing operations consist principally of the assembly and testing of electronic products we design and build from purchased fabricated parts, printed circuits and electronic components and, in the case of antennas, the casting of fiberglass antennas. We employ formal quality management programs and other training programs, including International Standards Organization's (ISO 9000) quality procedure registration programs. Our Comtech PST Corp., Comtech Systems, Inc. and Comtech EF Data Corp. operating units have been qualified for ISO 9001. Our ability to deliver products to customers on a timely basis is dependent, in part upon the availability and timely delivery by subcontractors and suppliers of the components and subsystems that we use in manufacturing our products. Electronic components and raw materials used in our products are generally obtained from independent suppliers. Some components are standard items and are available from a number of suppliers. Others are manufactured to our specifications by subcontractors. We obtain certain components and subsystems from a single source or a limited number of sources. We believe that most components and equipment are available from existing or alternative suppliers and subcontractors. A significant interruption in the delivery of such items could have a material adverse effect on our business and results of operations. Research and Development The technology used in our products is subject to rapid development and frequent change. Our business position is in large part contingent upon the continuous refinement of our scientific and engineering expertise and the development, either through research and development or acquisitions, of new or enhanced products and technologies. A majority of our sales in fiscal 2002 were of products developed by us or acquired through acquisitions within the past five years. Our aggregate research and development expenditures (internal and customer funded) were 11.0%, 8.7% and 10.4% of total net sales in fiscal 2002, 2001 and 2000, respectively. We reported internal research and development expenses of $11.0 million, $10.2 million and $2.6 million in fiscal 2002, 2001 and 2000, respectively, representing 9.3%, 7.5% and 4.0% of total net sales, respectively, for these periods. A portion of our research and development efforts relates to the adaptation of our basic technology to specialized customer requirements and is recoverable under such contracts, and such expenditures are not included in our research and development expenses for financial reporting purposes. During fiscal 2002, 2001 and 2000, we were reimbursed by customers for such activities in the amounts of $2.0 million, $1.7 million and $4.3 million, respectively. Patents and Licenses Although we own or hold licenses for a number of patents, licenses and patents have been of substantially less significance in our business than our scientific and engineering know-how, production techniques, the timely application of our technology and the design, development and marketing capabilities of our personnel. Generally, we rely on the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect such knowledge and techniques. However, Comtech AHA's TPC chips are protected by patents which are significant in protecting this proprietary technology. In addition, Comtech Systems' 8mbs adaptive modem for 7 over-the-horizon microwave applications is protected by patents and is the only modem in the world capable of 8mbs of transmission over a troposcatter channel. Competition Our product businesses are highly competitive and characterized by rapid technological change. In addition, the number of potential customers for our products is limited. Our growth and financial condition depend, among other things, on our ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of our competitors are substantially larger, have significantly greater financial, marketing, research and development, technological and operating resources and broader product lines than we do. A significant technological breakthrough by others, including smaller competitors or new companies could have a material adverse effect on our business. In addition, certain of our customers have technological capabilities in our product areas and could choose to replace our products with their own. In the market for mobile data communications services, there are several much larger competitors with existing systems. The most prominent of these competitors is Qualcomm Incorporated. Existing competitors are aggressively pricing their products and services and may continue to do so in the future. We anticipate that new competitors will enter the market in the future. Competitors continue to offer new value-added products and services, which we may be unable to match on a timely or cost-effective basis. Increased competition may impact margins throughout the industry. We believe that competition in all of our markets is based primarily on product performance, reputation, delivery times, customer support and price. Due to our decentralized organizational structure and proprietary know-how, we believe we have the ability to develop, produce and to deliver equipment on a cost-effective basis faster than many of our competitors. Key Personnel/Employees We believe our success is dependent upon the continued contributions of our key management personnel, including the key management at each of our operating units, and depends to a significant extent upon Fred Kornberg, our Chairman, Chief Executive Officer and President. Many of our key personnel, particularly the key engineers, would be difficult to replace, and are not subject to employment or non-competition agreements. Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe we have been successful to date in recruiting and retaining key personnel, we may not be successful in attracting and retaining the personnel we require in order to continue to grow and operate profitably. The management skills that have been appropriate for our business in the past may not continue to be appropriate if our business continues to grow and diversify. At July 31, 2002, we had 626 employees, 316 of whom were engaged in production and production support, 178 in research and development and other engineering support and 132 in marketing and administrative functions. None of the employees are represented by a labor union. We believe that our employee relations are good. Compliance with Federal, State and Local Environment Protection Laws We are subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products, particularly in connection with the fabrication of fiberglass antennas by Comtech Antenna Systems, Inc. We believe that we are currently in compliance, in all material respects, with such regulations and that we have obtained all necessary environmental permits to conduct our business. To date, compliance with federal, state or local environment protection laws has not had a material effect on our capital expenditures, earnings or competitive position, and we do not expect that such compliance will have a material effect in the future. ITEM 2. PROPERTIES Our corporate offices are located in a portion of the 46,000-square foot facility on more than two acres of land in Melville, New York, which also houses Comtech PST. We lease this facility from a partnership controlled by our Chairman, Chief Executive Officer and President. The lease, as amended, provides for our use of the premises as 8 they now exist for a term of ten years through December 2011. We have a right of first refusal in the event of a sale of the facility. The base annual rental under the lease is subject to adjustments. We lease the 32,000-square foot facility on eight acres of land used by Comtech Antenna Systems, Inc. in St. Cloud, Florida from an unrelated third party. The lease provides for our exclusive use of the premises as they now exist for a term expiring September 2003. We have the option to extend the term of the lease for an additional five-year period. The base annual rental under the lease is subject to adjustments. We lease a 72,500-square foot facility for Comtech Systems, Inc. in Orlando, Florida from an unrelated third party. The lease provides for the exclusive use of the premises as they now exist through April 2007. The base annual rental is subject to adjustments. We lease a 113,000-square foot facility in Tempe, Arizona for our Comtech EF Data Corp. operating unit from an unrelated third party. The lease provides for the exclusive use of the premises as they now exist through February 2006. We have the option to extend the term of the lease for an additional five-year period. We lease 10,500-square feet of space located in Germantown, Maryland that is used by Comtech Mobile Datacom Corp. from an unrelated third party. This lease provides for the exclusive use of the premises as they now exist through August 2004. We lease 6,000-square feet of space located in Pullman, Washington that is used by Comtech AHA Corporation from an unrelated third party. This lease provides for the exclusive use of the premises as they now exist through July 2005. ITEM 3. LEGAL PROCEEDINGS In or about December 2000, two former employees, Shiv Verma and Robert Levin, commenced an action in the United States District Court, District of New Jersey, against the Company and others asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's common stock for a purchase price of $.10 per share, and other relief. The Company asserted defenses against the claims and interposed certain counterclaims and third-party claims against NJL, Inc., a company then controlled by Mr. Verma. In April 2002, Mr. Levin dismissed his claims against the Company, and the Company in return dismissed its counterclaims against him, without payment of any monies by either party, with both the Company and Mr. Levin executing general releases. On July 22, 2002, the District Judge dismissed Verma's complaint with prejudice and the Company's counterclaims against Verma without prejudice. On August 8, 2002, the Company voluntarily dismissed its third-party claims against defendant NJL, Inc., without prejudice. As a result, there are no claims or counterclaims pending by or against any party to the action, and the case has been closed on the Court's docket. We are subject to certain other legal actions, which arise, in the normal course of business. We believe that the outcome of these actions will not have a material effect on our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended July 31, 2002. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock trades on the Nasdaq National Market under the symbol "CMTL". The following table shows the quarterly range of the high and low sale prices for our common stock as reported by the Nasdaq National Market. Such prices do not include retail markups, markdowns, or commissions. Common Stock ------------ High Low ---- --- Fiscal Year Ended 7-31-01 First Quarter $19.88 12.00 Second Quarter 19.50 9.00 Third Quarter 19.00 11.00 Fourth Quarter 17.99 11.45 Fiscal Year Ended 7-31-02 First Quarter $16.45 12.50 Second Quarter 13.83 11.15 Third Quarter 12.90 8.25 Fourth Quarter 10.72 6.31 Dividends We have never paid cash dividends on our common stock and we intend to continue this policy for the foreseeable future. We expect to use earnings to finance the development and expansion of our businesses. Our Board of Directors reviews our dividend policy periodically. The payment of dividends in the future will depend upon our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors. Approximate Number of Equity Security Holders As of October 11, 2002 there were approximately 705 holders of the Company's common stock. Such number of record owners was determined from the Company shareholders' records and does not include beneficial owners of the Company's common stock held in the name of various security holders, dealers and clearing agencies. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table shows selected historical consolidated financial data for the Company. Detailed historical financial information is included in the audited consolidated financial statements for fiscal years 2002 and 2001. 10
Years Ended July 31, (In thousands, except per share amounts) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Consolidated Statement of Operations Data: Net sales $ 119,357 135,931 66,444 37,886 30,114 Cost of sales 78,780 87,327 45,942 26,405 21,330 --------- --------- --------- --------- --------- Gross profit 40,577 48,604 20,502 11,481 8,784 Expenses: Selling, general and administrative 22,512 22,707 12,058 6,554 6,013 Research and development 11,041 10,190 2,644 2,022 1,319 In-process research and development 2,192 -- 10,218 -- -- Amortization of intangibles 1,471 2,552 230 78 -- --------- --------- --------- --------- --------- 37,216 35,449 25,150 8,654 7,332 --------- --------- --------- --------- --------- Operating income (loss) 3,361 13,155 (4,648) 2,827 1,452 Other expenses (income): Interest expense 3,061 4,015 381 204 234 Interest income (452) (2,303) (1,511) (65) (36) Other (income) expense, net (28) 841 201 (39) (30) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 780 10,602 (3,719) 2,727 1,284 Provision (benefit) for income taxes (368) 3,888 85 (3,754) 180 --------- --------- --------- --------- --------- Income (loss) from continuing operations 1,148 6,714 (3,804) 6,481 1,104 Discontinued operations: Loss from operations of discontinued segment (less applicable income tax benefit of $79 in 2000 and $320 in 1999) -- -- (137) (622) -- Loss on disposal of discontinued segment, including provision of $430 for operating losses during phase out period (net of income tax benefit of $306) -- -- -- (594) -- --------- --------- --------- --------- --------- Net income (loss) $ 1,148 6,714 (3,941) 5,265 1,104 ========= ========= ========= ========= ========= Basic income (loss) per share: Income (loss) from continuing operations $ 0.15 0.91 (0.67) 1.56 0.28 Loss from discontinued operations -- -- (0.02) (0.29) -- --------- --------- --------- --------- --------- Basic income (loss) $ 0.15 0.91 (0.69) 1.27 0.28 ========= ========= ========= ========= ========= Diluted income (loss) per share: Income (loss) from continuing operations $ 0.15 0.85 (0.67) 1.42 0.27 Loss from discontinued operations -- -- (0.02) (0.27) -- --------- --------- --------- --------- --------- Diluted income (loss) $ 0.15 0.85 (0.69) 1.15 0.27 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding - Basic 7,461 7,348 5,663 4,143 3,902 Potential dilutive common shares 344 562 -- 430 264 --------- --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted 7,805 7,910 5,663 4,573 4,166 ========= ========= ========= ========= =========
(Continued) 11 Other Consolidated Operating Data: Backlog at period-end $ 44,121 50,094 50,538 38,637 15,452 New orders 113,384 135,487 78,345 61,071 30,842 Research and development-internal and customer funded 13,070 11,846 6,916 3,801 1,675 EBITDA (1) 10,783 19,730 7,954 4,337 2,658
(1) Earnings from continuing operations before interest, taxes, depreciation and amortization and non-recurring items (primarily in-process research and development charges).
As of July 31, (In thousands) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Consolidated Balance Sheet Data: Total assets $ 126,586 146,988 126,031 29,847 19,710 Working capital 51,577 67,089 65,267 10,192 8,917 Long-term debt 28,683 42,000 37,900 -- -- Long-term capital lease obligations 1,294 2,157 908 959 1,445 Other long-term liabilities 58 259 367 -- -- Stockholders' equity 67,288 65,565 57,782 18,357 12,093
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We design, develop, produce and market sophisticated wireless telecommunications transmission products and systems and solid state high-power broadband amplifiers for commercial and government purposes. Our products are used in point-to-point and point-to-multipoint telecommunication applications such as satellite communications, over-the-horizon microwave systems, telephone systems and cable and broadcast television. Our broadband amplifier products are also used in cellular and PCS instrumentation testing, medical instrumentation and certain defense systems. Our business consists of three segments: telecommunications transmission, RF microwave amplifiers and mobile data communications services. Our sales are made to domestic and international customers, both commercial and governmental. International sales (including sales to prime contractors for end use by international customers) are expected to remain a substantial portion of our total sales for the foreseeable future due to the worldwide demand for wireless and satellite telecommunication products and services. At times, a substantial portion of our sales may be derived from a limited number of relatively large customer contracts, the timing of which cannot be predicted. Quarterly sales and operating results may be significantly affected by one or more of such contracts. Accordingly, we can experience significant fluctuations in sales and operating results from quarter to quarter. Sales consist of stand-alone products and systems. For the past several years, we have endeavored to achieve greater product sales as a percentage of total sales, because product sales generally have higher gross profit margins than systems sales. In the future, as our installed base of mobile data communications terminals is established, an increasing amount of our sales may be attributable to the recurring service revenue component of our mobile data communications services segment. We generally recognize income on contracts only when the products are shipped. However, when the performance of a contract will extend beyond a 12-month period, income is recognized on the percentage-of-completion method. Profits expected to be realized on contracts are based on total estimated sales value as related to estimated costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts-in-progress are recorded in the period in which such losses become known. 12 Since our contract with the U.S. Army for the Movement Tracking System is for an eight-year period, revenue recognition is based on the percentage-of-completion method. The gross margin is based on the estimated sales and expenses for the entire eight-year contract. The amount of revenue recognized has been limited to the amount of funded orders received from the U.S. Army. The portion of such orders representing service time revenue is being deferred until the service time is used by the customer. Significant changes in the estimates used to derive the gross profit margin can materially impact our operating results and financial condition in future periods (see Critical Accounting Policies below for more information). Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiency, price competition and general economic conditions. Selling, general and administrative expenses consist primarily of salaries and benefits for marketing, sales and administrative employees, advertising and trade show costs, professional fees and amortization of deferred compensation. Our research and development expenses relate to both existing product enhancement and new product development. A portion of our research and development efforts is related to specific contracts and is recoverable under those contracts because they are funded by the customers. Such customer-funded expenditures are not included in research and development expenses for financial reporting purposes, but are reflected in cost of sales. Comtech Wireless, Inc. designed and manufactured wireless local loop systems for the rural and remote telephony market. Due to disappointing results and uncertain prospects, effective July 31, 1999, we adopted a plan to liquidate Comtech Wireless, Inc. on or about January 31, 2000. The results of operations for the segment have been shown as a discontinued operation in the consolidated financial statements. In January 2000, we acquired certain assets and assumed certain liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. The acquisition was accounted for under the purchase method of accounting. The purchase price amounted to approximately $0.4 million, which principally represents the fair value of the initial 30,000 shares of common stock to be issued to Hill. The remaining 20,000 shares were placed in escrow and will only be released to the sellers if certain profit goals, as defined in the agreement are met and will be recorded at fair value on the date when the profit goals are met. This business is part of the RF microwave amplifiers segment. The excess of the purchase price over the net assets acquired of approximately $0.6 million, net of amortization, is included in goodwill in the accompanying consolidated balance sheet. In July 2000, we acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation for cash. The acquisition was accounted for under the purchase method of accounting. Accordingly, we allocated the purchase price to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of the acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $26.8 million, of which $10.2 million was allocated to in-process research and development and expensed as of the acquisition date. Forty million dollars of the purchase price was supplied through institutional secured borrowings bearing interest at 9.25% due in installments through 2005, and the balance from internal company funds. In April 2001, we acquired certain assets and product lines of MPD Technologies, Inc. for cash. The acquisition was accounted for under the purchase method of accounting. Accordingly, we recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $9.8 million. The purchase price was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The secured borrowing bears interest at a rate of 8.5% and requires interest only payments through June 2005 at which time the entire principal is due. We combined this operation with our Comtech PST Corp. operation in our RF microwave amplifiers segment. On July 31, 2002, we acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. for cash. The acquisition was accounted for under the purchase method of accounting. Accordingly, we allocated the purchase price to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6.3 million, of which $2.2 million was allocated to in-process research and development and expensed as of the acquisition date. 13 Critical Accounting Policies The Company considers certain accounting policies to be critical due to the estimation process involved in each. Revenue Recognition on Long-Term Contracts As discussed above, when the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known. Some of the Company's largest contracts, including its contract with the U.S. Army for the Movement Tracking System, are accounted for using the percentage-of-completion method. If the Company does not accurately estimate the total sales and related costs on such contracts, the estimated gross margins may be significantly impacted or losses may need to be recognized in future periods. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations and financial position. The cumulative orders to-date under the Movement Tracking System contract have been far below the Army's initial requirements. The Company is currently in active discussions with the Army to address the funding shortfalls experienced to date on this program. The ultimate resolution of these discussions could result in, among other things, material changes to the estimates used in applying the percentage-of-completion method of accounting. Impairment of Intangible Assets As of July 31, 2002, the Company's intangible assets, including goodwill, aggregated $30.6 million. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company's results of operations. Provisions for Excess and Obsolete Inventory We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical and future usage trends. The review of excess and obsolete inventory primarily relates to our telecommunications transmission and RF microwave amplifier segments. Several factors may influence the sale and use of our inventories, including our decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in the Company's financial statements at the time of such determination. Any such charges could be material to the Company's results of operations and financial position. Allowance for Doubtful Accounts We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers' current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we have obtained credit insurance for certain international customers that we have determined could be a credit risk. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates 14 and financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to the Company's results of operations and financial position. Results of Operations The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our net sales:
Year Ended July 31, ------------------------------------------------------------------------ 2002 2001 2000 --------------------- --------------------- ---------------------- Net sales 100.0% 100.0% 100.0% Gross margin 34.0 35.8 30.9 Selling, general and administrative expenses 18.9 16.7 18.1 Research and development expenses 9.3 7.5 4.0 Amortization of intangibles 1.2 1.9 0.4 Operating income (loss) from continuing operations 2.8 9.7 (7.0) Interest expense (income), net 2.2 1.3 (1.7) Income (loss) before income taxes 0.7 7.8 (5.6) Net income (loss) 1.0 4.9 (5.9)
Comparison of Fiscal 2002 and 2001 Net Sales. Consolidated net sales were $119.4 million and $135.9 million for fiscal 2002 and 2001, respectively, representing a decrease of $16.5 million or 12.1%. The decrease was primarily due to the weak economic environment, particularly in our telecommunications transmission segment. Sales from our telecommunications transmission segment were $78.6 million in fiscal 2002, as compared to sales of $106.3 million in fiscal 2001, a decrease of $27.7 million or 26.1%. We believe sales in this segment will continue to be adversely impacted until conditions in the telecommunications industry improve. Our telecommunications transmission segment represented 65.9% of total net sales in fiscal 2002 as compared to 78.2% in fiscal 2001. In fiscal 2002, sales from our RF microwave amplifier segment were $22.8 million as compared to $16.4 million in fiscal 2001. This increase of $6.4 million or 39.0% was principally the result of the acquisition in April 2001 of certain assets and product lines of MPD Technologies, Inc. Our RF microwave amplifier segment represented 19.1% of total net sales in fiscal 2002 as compared to 12.1% in fiscal 2001. Sales from our mobile data communications segment were $18.0 million in fiscal 2002 as compared to $13.2 million in fiscal 2001, an increase of $4.8 million or 36.4%. This increase was due to increased sales of our Movement Tracking System to the U.S. Army. Sales from this segment represented 15.0% and 9.7% of total net sales in fiscal 2002 and 2001, respectively. In fiscal 2002, our sales to the U.S. Army for the Movement Tracking System represented 13.2% of our total net sales. There were no customers in fiscal 2001 which constituted 10% or more of our total net sales. International sales represented 41.2% of total net sales in fiscal 2002 as compared to 46.2% in fiscal 2001. Domestic commercial sales represented 25.0% of total net sales as compared to 30.7% in fiscal 2001 and sales to the U.S. government and its agencies represented 33.8% and 23.1% in fiscal 2002 and 2001, respectively. Gross Profit. Gross profit was $40.6 million and $48.6 million for fiscal 2002 and 2001, respectively, representing a decrease of $8.0 million or 16.5%. This decrease was primarily due to the reduced total level of sales discussed above. Gross margin, as a percentage of net sales, decreased to 34.0% in fiscal 2002 compared to 35.8% in fiscal 2001. The decrease in the gross margin percentage was driven by the significant decrease in telecommunications transmission segment sales which generally carry higher margins than sales from the other two segments. Selling, General and Administrative. Selling, general and administrative expenses were $22.5 million and $22.7 million in fiscal 2002 and 2001, respectively, representing a decrease of $0.2 million. The decrease is related to the reduction in sales during fiscal 2002. Research and Development. Research and development expenses were $11.0 million and $10.2 million in fiscal 2002 and 2001, respectively. Despite the softness in sales discussed above, we are continuing to invest in the future by enhancing our existing products and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 2002 and 2001, customers reimbursed us $2.0 million and $1.7 million, respectively, which amounts are not reflected in the reported research and development expenses. 15 In-Process Research and Development. In connection with the purchase of certain assets and liabilities of Advanced Hardware Architectures, Inc., $2.2 million of the purchase price was allocated to in-process research and development. This allocation was part of the overall purchase price allocation performed by an independent third party. The value of in-process research and development is based upon new product development projects that were underway at the time of the acquisition and are expected to eventually lead to new products but had not yet established technological feasibility and for which no future alternative use was identified. In accordance with generally accepted accounting principles ("GAAP"), we recorded a one-time charge of $2.2 million for the write-off of this amount. There was no in-process research and development expense in fiscal 2001. Amortization of Intangibles. Amortization of intangibles was $1.5 million and $2.6 million for fiscal 2002 and 2001, respectively, representing a decrease of $1.1 million. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separate intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives. We applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. If SFAS No. 142 had been effective August 1, 2000, approximately $1.4 million of amortization expense would not have been expensed in fiscal 2001. Operating Income. As a result of the foregoing factors, we had operating income from continuing operations of $3.4 million and $13.2 million in fiscal 2002 and 2001, respectively. Excluding the impact of the in-process research and development charge in fiscal 2002, operating income was $5.6 million. Interest Expense. Interest expense was $3.1 million and $4.0 million in fiscal 2002 and 2001, respectively. Additional interest on borrowings in connection with the acquisition of MPD Technologies, Inc. in April 2001 were more than offset by interest savings from the prepayment of $19.2 million of debt in August 2001. Interest Income. Interest income was $0.5 million and $2.3 million for fiscal 2002 and 2001, respectively. The decrease was the result of a lower level of investable funds during fiscal 2002, as well as lower interest rates. Other, Net. Our other income for fiscal 2002 was $28,000 as compared to other expense of $0.8 million for fiscal 2001. The amount in fiscal 2001 primarily related to the loss realized upon the sale in March 2001 of a short-term investment classified as available-for-sale, offset by royalty and other income received of $0.1 million. Provision (Benefit) for Income Taxes. During fiscal 2002, the Company conducted an independent study and identified certain research and experimentation tax credits, relating to the current and prior years, which can be used to offset regular income taxes. See note 9 to the consolidated financial statements. The total amount of these credits more than offset the provision for income taxes. The net effect was a benefit of $0.4 million for fiscal 2002. Comparison of Fiscal 2001 and 2000 Net Sales. Consolidated net sales were $135.9 million and $66.4 million for fiscal 2001 and 2000, respectively, representing an increase of $69.5 million or 104.6%. This increase was primarily due to the acquisition in July 2000 of EF Data. This business, which is included in our telecommunications transmission segment, increased our product offerings and broadened our customer base for satellite earth station equipment. Sales from our telecommunications transmission segment were $106.3 million or 78.2% of our total net sales in fiscal 2001 as compared to $53.3 million or 80.2% of our total net sales in fiscal 2000. Substantially all of the increase in the telecommunications transmission segment was the result of the EF Data acquisition. In fiscal 2001, sales from our RF microwave amplifier segment were $16.4 million as compared to $11.0 million in fiscal 2000. Approximately $2.7 million of this $5.4 million increase was due to the acquisition we completed in April 2001 of certain assets and product lines of MPD Technologies, Inc. This acquisition has increased our product offerings and our customer base in our RF microwave amplifier segment. The RF microwave amplifier segment was 12.1% of our total net sales in fiscal 2001 as compared to 16.5% in fiscal 2000. Sales from our mobile data communications services segment were $13.2 million or 9.7% of our total net sales in fiscal 2001 compared to $2.2 million or 3.3% in fiscal 2000. This increase of approximately $11.0 million was primarily due to increased sales of our Movement Tracking System to the U.S. Army. International sales represented 46.2% of total net sales in fiscal 2001 as compared to 71.4% in fiscal 2000. The decrease in the percentage of international sales reflects the absence in fiscal 2001 of significant revenues from one customer for over-the-horizon microwave equipment which occurred in fiscal 2000. Domestic sales represented 30.7% of total net sales in fiscal 2001 as compared to 19.8% in fiscal 2000. U.S. government sales represented 23.1% of total net sales in fiscal 2001 as compared to 8.8% in fiscal 2000. There were no customers in fiscal 2001 that represented 10% or more of our total sales. In fiscal 2000, sales to one customer, a 16 major U.S. prime contractor for ultimate sale to an international end user, represented 43.1% of total sales. Sales during the second half of fiscal 2001 were adversely impacted by the weakening economy. Particular softness was experienced in our telecommunications transmission segment as a result of the significant downturn in the telecommunications market. We believe sales will continue to be adversely impacted until such economic conditions improve. Gross Profit. Gross profit was $48.6 million and $20.5 million for fiscal 2001 and 2000, respectively, representing an increase of $28.1 million or 137.1%. This increase was primarily due to the increase in sales volume. Gross margin, as a percentage of net sales, was 35.8% and 30.9% in fiscal 2001 and 2000, respectively. The higher gross margin in fiscal 2001 was largely due to the increase in the sale of satellite earth station equipment products by our telecommunications transmission segment as a result of the EF Data acquisition. Those products generally have a lower per unit cost and yield a higher gross margin than most other products and systems we sell. Selling, General and Administrative. Selling, general and administrative expenses were $22.7 million and $12.1 million in fiscal 2001 and 2000, respectively, representing an increase of $10.6 million or 88.3%. This increase was the result of additional expenses, including additional personnel, sales and marketing expenses and other administrative expenses, required to support the higher sales volume. As a percentage of sales, these expenses were 16.7% and 18.1% of total net sales for fiscal 2001 and 2000, respectively. Research and Development. Research and development expenses were $10.2 million and $2.6 million in fiscal 2001 and 2000, respectively, representing an increase of approximately $7.6 million or 285.4%. The increase in fiscal 2001 was principally due to the continuation of research and development for the projects that were underway at the time of our acquisition of EF Data in July 2000, as well as for expenses related to new product development and product announcements for all of our businesses. As an investment for the future we are continually enhancing and developing new products and technologies. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 2001 and 2000, customers reimbursed us $1.7 million and $4.3 million, respectively, which amounts are not reflected in the reported research and development expenses. Amortization of Intangibles. Amortization of intangibles was $2.6 million and $230,000 for fiscal 2001 and 2000, respectively. The increase in fiscal 2001 was primarily due to the full year of amortization expense relating to goodwill and other identified intangibles associated with our acquisition of EF Data in July 2000. The increase also reflects the amortization of intangibles resulting from our April 2001 acquisition of MPD Technologies. In-Process Research and Development. There was no in-process research and development expense in fiscal 2001. In fiscal 2000, in connection with the acquisition of EF Data, $10.2 million of the purchase price was allocated to in-process research and development. Our financial statements for fiscal 2000 include a one-time charge of $10.2 million for the write-off of this amount in accordance with generally accepted accounting principles. Operating Income (Loss). As a result of the foregoing factors, we had operating income from continuing operations of $13.2 million in fiscal 2001 as compared to an operating loss from continuing operations in fiscal 2000 of $4.6 million. Excluding the impact of the in-process research and development charge in fiscal 2000, operating income was $5.6 million. Interest Expense. Interest expense was $4.0 million and $381,000 for fiscal 2001 and 2000, respectively, representing an increase of approximately $3.6 million. The increase was primarily due to the interest on the long term debt we incurred in connection with the acquisition of EF Data in July 2000. The original amount of the loan was $40.0 million payable over five years. In connection with our acquisition of certain assets and product lines from MPD Technologies, Inc. in April 2001, we borrowed an additional $10.0 million. Interest Income. Interest income was $2.3 million and $1.5 million for fiscal 2001 and 2000, respectively, representing an increase of $792,000. This increase in fiscal 2001 was primarily due to the increase in the amount of cash available in excess of working capital requirements, principally as result of the proceeds received from a follow-on stock offering completed in the third quarter of fiscal 2000. Other Expense, Net. Other expense, net was $841,000 and $201,000 for fiscal 2001 and 2000, respectively. The amount in fiscal 2001 related to a loss of $990,000 realized upon the sale in March 2001 of a short-term investment classified as available-for-sale, offset by royalty and other income of $149,000. The amount in fiscal 2000 primarily related to the loss realized upon the sale of a short-term investment classified as available-for-sale. 17 Provision for Income Taxes. The provision for income taxes in fiscal 2001 reflects an effective tax rate of 36.7%. The fiscal 2000 provision for income taxes was effected by a change in the valuation allowance. (See note 9 to the consolidated financial statements for further information regarding the provision for income taxes.) Liquidity and Capital Resources Our cash and cash equivalents position decreased to $15.5 million at July 31, 2002 from $36.2 million at July 31, 2001. During fiscal 2002, we prepaid $19.2 million of long-term debt and paid approximately $7.0 million, including expenses, for the acquisition of certain assets and liabilities of Advanced Hardware Architectures, Inc. Net cash provided by operating activities was $9.4 million in fiscal 2002. Such amount reflects (i) net income of $1.1 million, plus the impact of non-cash items such as depreciation and amortization aggregating $5.2 million, and the write-off of in-process research and development of $2.2 million; and (ii) the changes in working capital balances. Net cash used in investing activities in fiscal 2002 was $10.2 million. Cash of $3.2 million was used for capital expenditures and $7.0 million was used for the acquisition of Advanced Hardware Architectures, Inc. Net cash used in financing activities in fiscal 2002 was $19.9 million. We prepaid $19.2 million of long-term debt. Principal payments on capital lease obligations amounted to $1.1 million. These uses of cash were offset by proceeds from the sale of stock and exercise of stock options aggregating approximately $0.5 million. In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments as of July 31, 2002 will materially adversely affect our liquidity. At July 31, 2002 we had contractual cash obligations to repay debt (including capital lease obligations) and to make payments under operating leases. Payments due under these long-term obligations are as follows:
Obligations due by fiscal year (in thousands) 2004 2006 and and After Total 2003 2005 2007 2007 --------- --------- --------- --------- --------- Long-term debt $ 28,683 -- 28,683 -- -- Capital lease obligations 2,356 1,062 1,114 180 -- Operating lease commitments 14,359 3,484 6,132 2,334 2,409 --------- --------- --------- --------- --------- Total contractual cash obligations $ 45,398 4,546 35,929 2,514 2,409 ========= ========= ========= ========= =========
We have entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At July 31, 2002, the balance of these agreements was $0.5 million. We believe that our cash and cash equivalents will be sufficient to meet our operating cash requirements for the foreseeable future. In the event that we identify a significant acquisition that requires additional cash, we would seek to borrow additional funds or raise additional equity capital. Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. 18 In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Company adopted SFAS No. 145 on August 1, 2002. The adoption did not have a material impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect adoption of SFAS No. 146 will have a material impact on the Company's consolidated financial statements. Forward-Looking Statements and Risk Factors Many statements in this Form 10-K constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include: o Statements of goals, intentions and expectations; o Estimates of risks and of future costs and benefits; and o Statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by: o Management's estimates and projections of U.S. and international economic and business conditions; o Future laws and regulations; and o A variety of other matters, including those described below. Because of these uncertainties, actual future results may be materially different from the results indicated by these forward-looking statements, which are inherently predictive and speculative. The following are some of the risks that could cause actual results to differ significantly from those expressed or implied by such statements. All of our businesses are subject to rapid technological change; we must keep pace with changes to compete successfully. We are engaged in businesses characterized by rapid technological change, evolving industry standards, frequent new product announcements and enhancements, and changing customer demands. The introduction of products and services embodying new technologies and the emergence of new industry standards could render our products and services obsolete or non-competitive. The technology used in our products and services evolves rapidly, and our business position depends, in large part, on the continuous refinement of our scientific and engineering expertise and the development, either through internal research and development or acquisitions, of new or enhanced products and technologies. We may not have the economic or technological resources to be successful in such efforts and we may not be able to identify and respond to technological improvements made by our competitors in a timely or cost-effective fashion. A significant technological breakthrough by others, including smaller competitors or new firms, could have a material adverse impact on our business. A slowing economy and continued reduction in telecommunications equipment and systems spending may negatively affect our revenues and profitability. During the second half of fiscal 2001 and all of fiscal 2002, our revenues were negatively affected by the increasingly uncertain economic environment both in the overall market, and more specifically in the telecommunications sector. If the economy continues to slow, some of our customers may further reduce their budgets for spending on telecommunications equipment and systems. As a consequence, our current customers and other prospective customers may postpone, reduce or even forego the purchase of our products and systems, which could adversely affect our revenues and profitability. Our mobile data communications services business is subject to risk. Our mobile data communications services business has a limited operating history. It is subject to all of the risks inherent in the operation of a new business enterprise. Moreover, our business experience has been in producing products, not in providing services. We may not be able to implement and operate our mobile data communications services business successfully. In addition to the other risk factors described in this section, the risk factors applicable to our mobile data communications services business include the following: 19 o Although the U.S. Army contract obligates us to provide up to 56,000 mobile terminals and worldwide satellite services over an eight year period as and when ordered by the U.S. Army and at the fixed prices and other terms set forth in this contract, the U.S. Army is not obligated to purchase any terminals or services under this contract and may terminate this contract. Sales under the U.S. Army contract will be subject to unpredictable funding and deployment decisions. Through July 31, 2002, we have received orders for $34.5 million under this contract. o Certain components that we need have purchasing lead-time of four months or longer, and the U.S. Army contract requires us to provide mobile terminals within 90 days after we receive an order. o Our success in commercial markets will depend on, among other things, our ability to access the best distribution channels, the development of applications which create value for the customer and our ability to attract and retain qualified personnel. Delays in delivering terminals could also adversely affect our ability to obtain and retain commercial customers. o In general, as we seek to grow our mobile data communications services business, we anticipate that we will need to maintain a substantial inventory in order to provide terminals to our customers on a timely basis. If forecasted orders are not received, we might be left with large inventories of slow moving or unusable parts or terminals. This could result in an adverse effect on our business, results of operations, liquidity and financial position. o We lease the satellite capacity necessary to operate our system from third party satellite networks. We currently have a long-term lease with a satellite network operator (TMI) for satellite coverage in North America, Central America and the northern rim of South America. While several vendors have announced plans for new satellite systems, only one provider, INMARSAT, presently offers the global coverage that will be required under the U.S. Army contract. We cannot assure you that we will be able to obtain sufficient satellite capacity or geographical coverage from any vendor to operate our mobile data communications services system on acceptable terms or on a timely basis. o There are several existing competitors in the mobile data communications market that have established systems with sizable customer bases and much greater financial resources than us. The largest of these competitors is Qualcomm Incorporated. Existing competitors, including terrestrial service providers, are also aggressively pricing their products and services and may continue to do so in the future. Competitors continue to offer new value added products and services, which we may be unable to match on a timely or cost effective basis. Increased competition may impact margins throughout the industry. We anticipate that new competitors will enter the mobile data communications market in the future. o All satellite communications are subject to the risk that a satellite or ground station failure or a natural disaster may interrupt service. Interruptions in service could have a material adverse effect on our results of operations. With respect to U.S. satellite service, satellite network providers have arranged to provide back-up satellite and ground station service for each other in the event of catastrophic failure. o We believe that we own or have licensed all intellectual property rights necessary for the operation of our mobile data communications services business as currently contemplated. If our terminals or services are found to infringe on protected technology, we could be required to redesign our terminals, license the protected technology, and/or pay damages or other compensation to the infringed party. If we are unable to license protected technology used in our terminals or if we were required to redesign our terminals, we could be prohibited from making and selling our terminals or providing mobile data communications services. Due to many factors, including the amount of business represented by large contracts, our operating results are difficult to forecast and may be volatile. We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. One reason for this is that a significant portion of our business - primarily the over-the-horizon microwave systems and other products of our telecommunications transmission business segment and a portion of our RF microwave amplifier business segment - is derived from a limited number of relatively large customer 20 contracts, the timing of which cannot be predicted. While we generally recognize income on contracts when the products are shipped, income is recognized on the percentage-of-completion method when the performance of a contract will extend beyond a 12-month period. Our net sales and operating results also may vary significantly from period to period because of the following factors: product mix sold; fluctuating market demand; price competition; new product introductions by our competitors; fluctuations in foreign currency exchange rates; unexpected changes in delivery of components or subsystems; political instability; regulatory developments; and general economic conditions. Accordingly, you should not rely on period-to-period comparisons as indications of our future performance because these comparisons may not be meaningful. Our dependence on international sales may adversely affect us. Sales for use by international customers (including sales to prime contractors' international customers) represented approximately 41.2%, 46.2% and 71.4%, of our total net sales for the fiscal years ended July 31, 2002, 2001 and 2000, respectively. Approximately 33.9% of our backlog at July 31, 2002 consisted of orders for use by foreign customers. We expect that international sales will continue to be a substantial portion of our total sales. These sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price competitive), political and economic instability, availability of suitable export financing, tariff regulations, and other U.S. and foreign regulations that may apply to the export of our products and the generally greater difficulties of doing business abroad. We attempt to reduce the risk of doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in U.S. dollars, advance payments and irrevocable letters of credit in our favor. Foreign defense contracts generally contain provisions relating to termination at the convenience of the government. In addition, certain of our products and systems may require licenses from U.S. government agencies for export from the United States, and some of our products are not permitted to be exported. We cannot be sure of our ability to gain any licenses that may be required to export our products, and failure to receive required licenses could materially reduce our ability to sell our products outside the United States. Our dependence on component availability, subcontractor availability and performance and key suppliers may adversely affect us. We do not generally maintain a substantial inventory of components and subsystems. We obtain certain components and subsystems from a single source or a limited number of sources, but believe that most components and subsystems are available from alternative suppliers and subcontractors. A significant interruption in the delivery of such items, however, could have a material effect on our business and results of operations. Our backlog is subject to customer cancellation or modification. We currently have a backlog of orders, mostly under contracts that the customer may modify or terminate. We cannot assure you that our backlog will result in net sales. Our sales to the U.S. government are subject to funding and other risks. We sell our products and services to agencies of the U.S. government or to contractors or subcontractors under contracts with U.S. agencies. These sales accounted for approximately 33.8%, 23.1% and 8.8% of our total net sales in fiscal 2002, 2001 and 2000, respectively. As is customary for government sales, these sales are subject to various risks. These risks include the ability of the U.S. government to: o Change government policy which could reduce our business; o Terminate existing contracts for its convenience; and o Audit our contract-related costs and fees, including allocated indirect costs. A reduction in government agency budgets could cause us to experience declining net sales, increased pressure on operating margins and, in certain cases, net losses. The loss or significant cutback of a large program in which we participate, such as the mobile data communications services U.S. Army contract, could also materially adversely affect our future results of operations. All of our U.S. government contracts can be terminated by the U.S. government for its convenience. Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expenses and 21 profit on work completed prior to termination. In addition to the right of the U.S. government to terminate, U.S. government contracts are conditioned upon the continuing approval by Congress of the necessary spending. Congress usually appropriates funds for a given program on a fiscal-year basis even though contract performance may take more than one year. Consequently, at the beginning of a major program, the contract is usually not fully funded, and additional monies are normally committed to the contract only if, as and when appropriations are made by Congress for future fiscal years. The U.S. government may review our costs and performance on their contracts, as well as our accounting and general business practices. Based on the results of such audits, the U.S. government may adjust our contract-related costs and fees, including certain financing costs, goodwill, portions of research and development costs, and certain marketing expenses, which may not be reimbursable under U.S. government contracts. We obtain U.S. government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sufficient net sales to result in profitability. Acquisitions and strategic investments may divert our resources and management attention; results may fall short of expectations. We intend to continue pursuing selected acquisitions of and investments in businesses, technologies and product lines as a key component of our growth strategy. Any future acquisition or investment may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to intangible assets. Acquisitions involve numerous risks, including: o difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business; o diversion of management's attention from other business concerns; and o potential loss of key employees or customers of any acquired business. Our fixed price contracts subject us to risk. Almost all of our products and services are sold under fixed price contracts. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or increases in the cost of performance. Our markets are highly competitive. The markets for our products are highly competitive. We cannot assure you that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more commercially effective than our own. We expect the Department of Defense's increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market. Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition may intensify as businesses and foreign governments realize the market potential of telecommunications services. Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours. The loss of key technical or management personnel could adversely affect our business. Our success depends on the continued contributions of key technical management personnel, including the key management at each of our subsidiaries. Many of our key personnel, particularly the key engineers of our subsidiaries, would be difficult to replace, and are not subject to employment or noncompetition agreements. Our growth and future success will depend in large part upon our ability to attract and retain highly qualified engineering, sales and marketing personnel. Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense. Although we believe that we have been successful to date in recruiting and keeping key personnel, we may not be successful in attracting and retaining the personnel we will need to continue to grow and operate profitably. Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we continue to grow and diversify. 22 Our success also depends to a significant extent upon our President and Chief Executive Officer, Fred Kornberg. The loss of the services of Mr. Kornberg could have a material adverse effect on us. We have entered into an employment contract with Mr. Kornberg. Protection of our intellectual property is limited; we are subject to the risk of third party claims of infringement. Our businesses rely in large part upon our proprietary scientific and engineering "know-how" and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. However, patents are important to protecting our intellectual property rights in Comtech AHA's TPC chips and Comtech Systems' 8mbs adaptive modem. We rely upon the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect our intellectual property. We limit access to and distribution of our proprietary information. These efforts allow us to rely upon the knowledge and experience of our management and technical personnel to market our existing products and to develop new products. The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us or the failure to achieve our intellectual property objectives may have a material adverse effect on our business, financial condition and results of operations. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our operations are subject to environmental regulation. We are subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products, particularly in the fabrication of fiberglass antennas by our Comtech Antenna Systems, Inc. subsidiary. We believe that we are currently in compliance, in all material respects, with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations that could materially adversely affect our business, financial condition and results of operations. Our stock price is volatile. The stock market in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public companies. The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate significantly in the future as well. Factors that may have a significant impact on the market price of our stock include: o future announcements concerning us or our competitors; o receipt or non-receipt of substantial orders for products and services; o results of technological innovations; o new commercial products; o changes in recommendations of securities analysts; o government regulations; o proprietary rights or product or patent litigation; o changes in market conditions generally, particularly in the market for small cap stocks; and o limited public float. Shortfalls in our revenues or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock. We have never declared or paid cash dividends. We have never declared or paid a cash dividend and do not intend to declare any cash dividends on our common stock in the foreseeable future. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and short-term U.S. treasury securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Report, Consolidated Financial Statements, Notes to Consolidated Financial Statements and related financial schedule are listed in the Index to Consolidated Financial Statements and Schedule annexed hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Certain information concerning the directors and officers of the Company is incorporated by reference to the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held December 10, 2002 (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference to the Company's Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of its fiscal year. ITEM 14. CONTROLS AND PROCEDURES Not applicable. 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. and 2. Financial Statements and Financial Statement Schedule The Financial Statements filed as part of this report are listed in the accompanying Index to Consolidated Financial Statements and Schedule. (b) No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended July 31, 2002. (c) Exhibit index
Exhibit - ------- Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- 3(a) Certificate of Incorporation of the Registrant Exhibit 3(a) of the Registrant's 1987 Form 10-K 3(b) Amendment of the Certificate of Incorporation effecting the Exhibit 3(b) to the Registrant's 1991 Form 10-K 5 to 1 reverse stock split 3(c) Amended and restated By-Laws of the Registrant Exhibit 3(c) of Registrant's 1998 Form 10-K 3(d) Amendment to the Certificate of Incorporation increasing Exhibit 3(d) to the Registrant's 1994 Form 10-K authorized shares to 12 million 3(e) Amendment to the Certificate of Incorporation increasing the Exhibit 3(e) to Registrant's 1998 Form 10-K authorized shares to 17 million 3(f) Form of Certificate of Designation of the Series A Junior Exhibit 4(1) to the Registrant's Form 8-A/A dated Participating Preferred Stock December 23, 1998 3(g) Amendment to the Certificate of Incorporation increasing the Exhibit 3(g) to Registrant's 2000 Form 10-K authorized shares to 32 million 4(a) Rights Agreement dated as of December 15, 1998 between the Exhibit 4(1) to the Registrant's Form 8-A/A dated Registrant and American Stock Transfer and Trust Company, as December 23, 1998 Rights Agent 10(a) Amended and restated Employment Agreement dated October 9, Exhibit 10(a) to the Registrant's 2001 Form 10-K 2001 between the Registrant and Fred Kornberg 10(b) Lease and amendment thereto on the Melville Facility Exhibit 10(k) to the Registrant's 1992 Form 10-K 10(c) Amended and restated 1993 Incentive Stock Option Plan Appendix A to the Registrant's Proxy Statement dated November 3, 1997 10(d) Time Accelerated Restricted Stock Purchase Agreements between Exhibit 10(f) to the Registrant's 1999 Form 10-K Registrant and Principals of Comtech Mobile Datacom Corp. operating unit 10(e) Movement Tracking System Contract between Comtech Mobile Exhibit 10(g) to the Registrant's 1999 Form 10-K Datacom Corp. and U.S. Army's CECOM Acquisition Center dated June 24, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
25
Exhibit - ------- Incorporated By Number Description of Exhibit Reference to Exhibit ------ ---------------------- -------------------- 10(f) License Agreement between Vistar Telecommunications Inc. and Exhibit 10(h) to the Registrant's 1999 Form 10-K Comtech Mobile Datacom Corp. dated August 31, 1999 (certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment) 10(g)(1) 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 8, 1999 10(g)(2) Amendment to the 2000 Stock Incentive Plan Appendix A to the Registrant's Proxy Statement dated November 6, 2000 10(g)(3) Amendment to the 2000 Stock Incentive Plan 10(h) Asset Purchase Agreement between the Registrant, Comtech/AHA Acquisition Corp. and Advanced Hardware Architectures, Inc. 10(i)(1) Loan and Security Agreement between the Registrant and The Exhibit 10(k) to the Registrant's 2000 Form 10-K Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama, The Alabama Heritage Trust Fund, PEIRAF - Deferred Compensation Plan and State Employee'' Health Insurance Fund, dated July 7, 2000 10(i)(2) Amendment to the Loan and Security Agreement between the Registrant Exhibit 10(i)(2) to the Registrant's 2001 Form and The Teachers' Retirement System of Alabama, The Employees' 10-K Retirement System of Alabama, The Alabama Heritage Trust Fund, PEIRAF - Deferred Compensation Plan and State Employees' Health Insurance Fund, dated April 30, 2001 10(j) Asset Purchase Agreement between the Registrant and MPD Exhibit 2.1 to the Registrant's Form 8-K dated Technologies, Inc., dated March 2, 2001 April 30, 2001 10(k) 2001 Employee Stock Purchase Plan Appendix B to the Registrant's Proxy Statement dated November 6, 2000 21 Subsidiaries of the Registrant 23 Consent of KPMG LLP 99.1 Certifications of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 99.2 Certifications of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
Exhibits to this Annual Report on Form 10-K are available from the Company upon request and payment to the Company for the cost of reproduction. 26 SIGNATURE Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. October 16, 2002 By: /s/ Fred Kornberg - ---------------- -------------------------------------- (Date) Fred Kornberg, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title ---------------------------- ------------------------------------ October 16, 2002 /s/ Fred Kornberg Chairman of the Board - ---------------------------------- ---------------------------- Chief Executive Officer and President (Date) Fred Kornberg (Principal Executive Officer) October 16, 2002 /s/ Robert G. Rouse Senior Vice President and - ---------------------------------- ---------------------------- Chief Financial Officer (Date) Robert G. Rouse (Principal Financial and Accounting Officer) October 16, 2002 /s/ George Bugliarello Director - ---------------------------------- ---------------------------- (Date) George Bugliarello October 16, 2002 /s/ Richard L. Goldberg Director - ---------------------------------- ---------------------------- (Date) Richard L. Goldberg October 16, 2002 /s/ Edwin Kantor Director - ---------------------------------- ---------------------------- (Date) Edwin Kantor October 16, 2002 /s/ Ira Kaplan Director - ---------------------------------- ---------------------------- (Date) Ira Kaplan October 16, 2002 /s/ Gerard R. Nocita Director - ---------------------------------- ---------------------------- (Date) Gerard R. Nocita
27 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Fred Kornberg, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Fred Kornberg, Chief Executive Officer and President of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President 28 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Robert G. Rouse, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Robert G. Rouse, Senior Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer 29 SUBSIDIARIES The following is a list of the subsidiaries of the Company as of October 11, 2002: Subsidiary State of Incorporation - ---------- ---------------------- Telecommunications Transmission Business Segment Comtech Antenna Systems, Inc. Delaware Comtech EF Data Corp. Delaware Comtech Systems, Inc. Delaware Comtech AHA Corporation Delaware RF Microwave Amplifier Business Segment Comtech PST Corp. New York Mobile Data Communications Services Business Segment Comtech Mobile Datacom Corp. Delaware 30 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Page ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Balance Sheets at July 31, 2002 and 2001 F-3 Statements of Operations for each of the years in the three-year period ended July 31, 2002 F-4 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 2002 F-5 Statements of Cash Flows for each of the years in the three-year period ended July 31, 2002 F-6, F-7 Notes to Consolidated Financial Statements F-8 to F-25 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves S-1 Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto. F-1 KPMG Independent Auditors' Report The Board of Directors and Stockholders Comtech Telecommunications Corp.: We have audited the consolidated financial statements of Comtech Telecommunications Corp. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also audited the consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Comtech Telecommunications Corp. and subsidiaries as of July 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Melville, New York October 15, 2002 F-2 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 2002 and 2001
Assets 2002 2001 ------------- ------------- Current assets: Cash and cash equivalents $ 15,510,000 36,205,000 Accounts receivable, less allowance for doubtful accounts of $795,000 in 2002 and $845,000 in 2001 27,435,000 27,374,000 Inventories, net 33,996,000 36,732,000 Prepaid expenses and other current assets 1,407,000 1,151,000 Deferred tax asset - current 2,492,000 2,634,000 ------------- ------------- Total current assets 80,840,000 104,096,000 Property, plant and equipment, net 11,889,000 11,778,000 Goodwill and other intangibles with indefinite lives, net of accumulated amortization of $1,648,000 17,726,000 17,657,000 Intangibles with definite lives, net of accumulated amortization of $2,681,000 in 2002 and $1,210,000 in 2001 12,902,000 10,162,000 Other assets, net 661,000 569,000 Deferred tax asset - non-current 2,568,000 2,726,000 ------------- ------------- Total assets $ 126,586,000 146,988,000 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ -- 5,900,000 Current installments of capital lease obligations (including payable to related party of $155,000 in 2001) 1,062,000 1,097,000 Accounts payable 9,529,000 11,014,000 Accrued expenses and other current liabilities 11,859,000 13,615,000 Deferred service revenue 4,343,000 2,073,000 Income taxes payable 2,470,000 3,308,000 ------------- ------------- Total current liabilities 29,263,000 37,007,000 Long-term debt, less current installments 28,683,000 42,000,000 Capital lease obligations, less current installments 1,294,000 2,157,000 Other long-term liabilities 58,000 259,000 ------------- ------------- Total liabilities 59,298,000 81,423,000 Stockholders' equity: Preferred stock, par value $.10 per share; shares authorized and unissued 2,000,000 -- -- Common stock, par value $.10 per share; authorized 30,000,000 shares, issued 7,602,921 shares in 2002 and 7,511,105 shares in 2001 760,000 751,000 Additional paid-in capital 67,883,000 67,490,000 Accumulated deficit (825,000) (1,973,000) ------------- ------------- 67,818,000 66,268,000 Less: Treasury stock (93,750 shares in 2002 and 82,500 shares in 2001) (185,000) (184,000) Deferred compensation (345,000) (519,000) ------------- ------------- Total stockholders' equity 67,288,000 65,565,000 ------------- ------------- Total liabilities and stockholders' equity $ 126,586,000 146,988,000 ============= =============
Commitments and contingencies See accompanying notes to consolidated financial statements. F-3 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended July 31, 2002, 2001 and 2000
2002 2001 2000 ------------- ------------- ------------- Net sales $ 119,357,000 135,931,000 66,444,000 Cost of sales 78,780,000 87,327,000 45,942,000 ------------- ------------- ------------- Gross profit 40,577,000 48,604,000 20,502,000 Expenses: Selling, general and administrative 22,512,000 22,707,000 12,058,000 Research and development 11,041,000 10,190,000 2,644,000 In-process research and development 2,192,000 -- 10,218,000 Amortization of intangibles 1,471,000 2,552,000 230,000 ------------- ------------- ------------- 37,216,000 35,449,000 25,150,000 ------------- ------------- ------------- Operating income (loss) from continuing operations 3,361,000 13,155,000 (4,648,000) Other expenses (income): Interest expense 3,061,000 4,015,000 381,000 Interest income (452,000) (2,303,000) (1,511,000) Other, net (28,000) 841,000 201,000 ------------- ------------- ------------- Income (loss) from continuing operations before income taxes 780,000 10,602,000 (3,719,000) Provision (benefit) for income taxes (368,000) 3,888,000 85,000 ------------- ------------- ------------- Income (loss) from continuing operations 1,148,000 6,714,000 (3,804,000) Discontinued operations (Note 13): Loss from operations of discontinued segment (net of applicable income tax benefit of $79,000) -- -- (137,000) ------------- ------------- ------------- Net income (loss) $ 1,148,000 6,714,000 (3,941,000) ============= ============= ============= Basic income (loss) per share: Income (loss) from continuing operations $ 0.15 0.91 (0.67) Loss from discontinued operations -- -- (0.02) ------------- ------------- ------------- Basic income (loss) $ 0.15 0.91 (0.69) ============= ============= ============= Diluted income (loss) per share: Income (loss) from continuing operations $ 0.15 0.85 (0.67) Loss from discontinued operations -- -- (0.02) ------------- ------------- ------------- Diluted income (loss) $ 0.15 0.85 (0.69) ============= ============= ============= Weighted average number of common shares outstanding - Basic 7,461,000 7,348,000 5,663,000 Potential dilutive common shares 344,000 562,000 -- ------------- ------------- ------------- Weighted average number of common and common equivalent shares outstanding assuming dilution - Diluted 7,805,000 7,910,000 5,663,000 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended July 31, 2002, 2001 and 2000
Accumulated Common Stock Additional Other ------------ Paid-in Comprehensive Accumulated Shares Amount Capital Income Deficit ------ ------ ------- ------ ------ Balance July 31, 1999 4,471,368 $ 447,000 $ 23,801,000 $ -- $ (4,746,000) Amortization of deferred compensation -- -- -- -- -- Stock issued in acquisition of Hill Engineering 30,000 3,000 368,000 -- -- Stock options exercised 188,117 18,000 404,000 -- -- Unrealized loss on securities net of reclassification adjustment -- -- -- (113,000) -- Warrants exercised 14,691 1,000 (1,000) -- -- Shares issued in connection with public offering 2,645,000 266,000 42,168,000 -- -- Net loss -- -- -- -- (3,941,000) ------------ ------------ ------------ ------------ ------------ Balance July 31, 2000 7,349,176 735,000 66,740,000 (113,000) (8,687,000) Amortization of deferred compensation -- -- -- -- -- Unrealized loss on securities net of reclassification adjustment -- -- -- 113,000 -- Stock options exercised 97,146 10,000 265,000 -- -- Employee stock purchase plan shares purchased 14,112 1,000 157,000 -- -- Warrants exercised 50,671 5,000 328,000 -- -- Net income -- -- -- -- 6,714,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2001 7,511,105 751,000 67,490,000 -- (1,973,000) Amortization of deferred compensation -- -- -- -- -- Termination of unvested restricted shares issued pursuant to employee stock award agreement -- -- (52,000) -- -- Stock options exercised 59,048 6,000 167,000 -- -- Employee stock purchase plan shares purchased 26,419 2,000 237,000 -- -- Warrants exercised 6,349 1,000 41,000 -- -- Net income -- -- -- -- 1,148,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2002 7,602,921 $ 760,000 $ 67,883,000 $ -- $ (825,000) ============ ============ ============ ============ ============ Treasury Stock -------------- Deferred Stockholders' Comprehensive Shares Amount Compensation Equity Income ------ ------ ------------ ------ ------ Balance July 31, 1999 82,500 $ (184,000) $ (961,000) $ 18,357,000 $ 5,265,000 Amortization of deferred compensation -- -- 252,000 252,000 -- Stock issued in acquisition of Hill Engineering -- -- -- 371,000 -- Stock options exercised -- -- -- 422,000 -- Unrealized loss on securities net of reclassification adjustment -- -- -- (113,000) (113,000) Warrants exercised -- -- -- -- -- Shares issued in connection with public offering -- -- -- 42,434,000 -- Net loss -- -- -- (3,941,000) (3,941,000) ------------ ------------ ------------ ------------ ------------ Balance July 31, 2000 82,500 (184,000) (709,000) 57,782,000 (4,054,000) Amortization of deferred compensation -- -- 190,000 190,000 -- Unrealized loss on securities net of reclassification adjustment -- -- -- 113,000 113,000 Stock options exercised -- -- -- 275,000 -- Employee stock purchase plan shares purchased -- -- -- 158,000 -- Warrants exercised -- -- -- 333,000 -- Net income -- -- -- 6,714,000 6,714,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2001 82,500 (184,000) (519,000) 65,565,000 6,827,000 Amortization of deferred compensation -- -- 122,000 122,000 -- Termination of unvested restricted shares issued pursuant to employee stock award agreement 11,250 (1,000) 52,000 (1,000) -- Stock options exercised -- -- -- 173,000 -- Employee stock purchase plan shares purchased -- -- -- 239,000 -- Warrants exercised -- -- -- 42,000 -- Net income -- -- -- 1,148,000 1,148,000 ------------ ------------ ------------ ------------ ------------ Balance July 31, 2002 93,750 $ (185,000) $ (345,000) $ 67,288,000 $ 1,148,000 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 2002, 2001 and 2000
2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 1,148,000 6,714,000 (3,941,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations -- -- 137,000 Loss on sale of marketable investment securities -- 990,000 88,000 Depreciation and amortization 5,230,000 6,575,000 2,149,000 Write-off of in-process research and development 2,192,000 -- 10,218,000 Provision for bad debt allowance 269,000 39,000 -- Provision for inventory reserves 1,698,000 264,000 244,000 Deferred income tax expense (benefit) 300,000 580,000 (1,298,000) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 300,000 (3,059,000) (2,111,000) Inventories 1,199,000 (8,132,000) (4,580,000) Prepaid expenses and other current assets 451,000 (568,000) (412,000) Other assets 140,000 (335,000) (293,000) Accounts payable (2,030,000) (246,000) 3,048,000 Accrued expenses and other current liabilities (2,736,000) (1,846,000) 3,059,000 Deferred service revenue 2,270,000 2,073,000 -- Income taxes payable (838,000) 1,859,000 1,449,000 Other liabilities (201,000) (108,000) 367,000 ------------ ------------ ------------ Net cash provided by continuing operations 9,392,000 4,800,000 8,124,000 Net cash used by discontinued operations -- -- (151,000) ------------ ------------ ------------ Net cash provided by operating activities 9,392,000 4,800,000 7,973,000 ------------ ------------ ------------ Cash flows from investing activities: Purchases of marketable investment securities -- (1,330,000) (37,015,000) Proceeds from sale of marketable securities -- 19,221,000 18,000,000 Purchases of property, plant and equipment (3,081,000) (2,776,000) (1,185,000) Purchase of technology license (91,000) (563,000) -- Payment for business acquisitions, net of cash received (7,055,000) (3,682,000) (63,138,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities (10,227,000) 10,870,000 (83,338,000) ------------ ------------ ------------ Cash flows from financing activities: Borrowings under line of credit facility -- -- 1,000,000 Repayments of borrowings under line of credit facility -- -- (1,000,000) Borrowings under loan agreement -- 10,000,000 40,000,000 Repayment of borrowings under loan agreement (19,217,000) (2,100,000) -- Principal payments on capital lease obligations (1,097,000) (718,000) (800,000) Proceeds from issuance of common stock, net 239,000 158,000 42,434,000 Proceeds from exercises of stock options and warrants 215,000 608,000 422,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities (19,860,000) 7,948,000 82,056,000 ------------ ------------ ------------
(Continued) F-6 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 2002, 2001 and 2000
2002 2001 2000 ------------ ---------- ---------- Net increase (decrease) in cash and cash equivalents $(20,695,000) 23,618,000 6,691,000 Cash and cash equivalents at beginning of period 36,205,000 12,587,000 5,896,000 ------------ ---------- ---------- Cash and cash equivalents at end of period $ 15,510,000 36,205,000 12,587,000 ============ ========== ========== Supplemental cash flow disclosure Cash paid during the period for: Interest $ 3,099,000 3,898,000 134,000 ============ ========== ========== Income taxes $ 237,000 1,425,000 500,000 ============ ========== ========== Non cash investing and financing activities: Acquisition of property, equipment and technology license through capital leases $ 199,000 2,456,000 567,000 ============ ========== ========== Capital stock issued in connection with business acquisition $ -- -- 371,000 ============ ========== ==========
See accompanying notes to consolidated financial statements. F-7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements July 31, 2002 and 2001 (1) Summary of Significant Accounting and Reporting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries (the Company), all of which are wholly owned.All significant intercompany balances and transactions have been eliminated in consolidation. (b) Nature of Business We design, develop, produce and market sophisticated products and systems that are used by telecommunications and defense companies and service providers in a broad range of applications. The Company's business is highly competitive and characterized by rapid technological change. In addition, the number of potential customers for the Company's products is limited. The Company's growth and financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of electronic equipment users. Many of the Company's competitors are substantially larger, have significantly greater financial, marketing and operating resources and broader product lines than does the Company. A significant technological breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on the Company's business. In addition, certain of the Company's customers have technological capabilities in the Company's product areas and could choose to replace the Company's products with their own. International sales expose the Company to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company's products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States and foreign regulations that may apply to the export of the Company's products, as well as the generally greater difficulties of doing business abroad. The Company attempts to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance payments and irrevocable letters of credit in its favor. (c) Revenue Recognition Revenue on long-term, fixed price contracts are generally recorded based on the relationship of total costs incurred to date to total projected final costs or, alternatively, as deliveries are made. Revenues on other contract orders are recognized under the units of delivery method. Under this method, revenues are recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final contract costs. Contract costs include material, direct labor, manufacturing overhead and other direct costs. Retainages and estimated earnings in excess of amounts billed on certain multi-year programs are reported as unbilled receivables. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses are determined. Revenue not associated with long-term contracts is recognized when the earnings process is complete, generally upon shipment or customer acceptance. (d) Cash and Cash Equivalents Cash equivalents are temporary cash investments with a maturity of three months or less when purchased. Cash equivalents at July 31, 2002 and 2001 amounted to $8,990,000 and $27,412,000, respectively. These investments are carried at cost, which approximates market. F-8 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (e) Statement of Cash Flows The Company acquired equipment and a technology license financed by capital leases in the amounts of $199,000, $2,456,000, and $567,000 in 2002, 2001 and 2000, respectively. (f) Marketable Investment Securities Marketable investment securities at July 31, 2000 consisted of a mutual fund investment classified as available-for-sale and recorded at fair value. Such investment securities were sold in fiscal 2001. Unrealized holding gains and losses, net of the related tax effect on these available-for-sale securities, are excluded from earnings and are reported as a component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available-for-sales securities are determined on a specific identification basis. (g) Inventories Work-in-progress inventory reflects all accumulated production costs, which are comprised of direct production costs and overhead, reduced by amounts attributable to units delivered. These inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined. Raw materials and components and work-in-process inventory are stated at the lower of cost or market, computed on the first-in, first-out ("FIFO") method. (h) Long-Lived Assets The Company's plant and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives (building and improvements - 40 years, equipment - three to eight years) under the straight-line method. Capitalized values of properties under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer amortized. See Note 15 for further discussion regarding amortization of goodwill. The Company periodically reviews goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If the goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs. The Company defines its reporting units to be the same as its business segments. The Company assesses the recoverability of the carrying value of its other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. (i) Research and Development Costs The Company charges research and development costs to operations as incurred, except in those cases in which such costs are reimbursable under customer-funded contracts. In fiscal 2002, 2001 and 2000, the Company was reimbursed by customers for such activities in the amount of $2,029,000, $1,656,000 and $4,272,000 respectively. F-9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with SFAS No. 128, "Earnings per Share". Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercises of stock options and warrants, if dilutive, outstanding during each period. (l) Financial Instruments The Company believes that the book value of its current monetary assets and liabilities approximates fair value as a result of the short-term nature of such assets and liabilities. The Company further believes that the fair market value of its capital lease obligations does not differ materially from the carrying value. As a result of the higher interest rate on the Company's long-term debt as compared to current interest rates on similar debt, management believes the fair market value of its long-term debt is approximately $1.2 million higher than its carrying value. (m) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results may differ from those estimates. (n) Reclassifications Certain reclassifications have been made to previously reported consolidated financial statements to conform to the 2002 presentation. (o) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has elected not to implement the fair value based accounting method for employee stock options of SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected to disclose the pro forma net income per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (p) Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. F-10 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Acquisitions In January 2000, the Company acquired certain assets and assumed certain liabilities of Hill Engineering Inc. ("Hill") in exchange for 50,000 shares of the Company's common stock. Such shares were issued and placed in escrow and will be released to the sellers as follows: (i) 30,000 shares on January 21, 2001; (ii) 10,000 shares on January 31, 2001 assuming Hill meets certain profit goals; and (iii) 10,000 shares on January 31, 2002 also assuming Hill meets certain profit goals. Since neither of such profit goals were met, if Hill does not meet cumulative profit goals by January 31, 2005, the 20,000 escrow shares will be returned to the Company. The acquisition has been accounted for as a purchase. The purchase price amounted to approximately $371,000, which principally represents the fair value of the initial 30,000 shares of common stock issued to Hill. The remaining 20,000 shares will be recorded at fair value on the date if and when the profit goals are met. This business operates in the RF microwave amplifiers segment. The accompanying consolidated financial statements reflect this acquisition at the fair value of the assets acquired ($652,000) and liabilities assumed ($871,000) and include the operations of Hill from the date of acquisition.The excess of the purchase price over the net assets acquired of approximately $606,000 is included in goodwill and other intangibles with indefinite lives in the accompanying consolidated balance sheet. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The operations of Hill are not material to the operations of the Company. Pro forma results of operations were not provided as their effect on the consolidated operations was not material. In July 2000, the Company acquired the business of EF Data, the satellite communications division of Adaptive Broadband Corporation, at an adjusted cost of $54,158,000. The preliminary cash purchase price of $61,500,000 was partially financed with $40 million supplied through institutional secured borrowings. Direct acquisition costs amounted to $1,696,000.Based upon the acquisition agreement, an adjustment to the purchase price in the amount of $9,038,000 was due the Company. This amount was received by the Company in September 2000. The acquisition was accounted for under the purchase method of accounting. The cost of the acquisition has been allocated to the assets and the liabilities assumed based on their estimated fair values at the date of the acquisition. The purchase price allocation reflects $930,000 of adjustments for pre-acquisition contingencies recorded in fiscal 2001. The excess of the cost over the fair value of the net assets acquired amounted to approximately $26,818,000, of which $10,218,000 was allocated to in-process research and development and was expensed as of the acquisition date, $7,508,000 was recorded as purchased technology which is being amortized over seven years, $3,577,000 was recorded as other purchased intangibles which were being amortized over five to seven years and $5,515,000 was recorded as goodwill. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The in-process research and development charge is included in the accompanying consolidated statement of operations for the year ended July 31, 2000. The acquisition cost was allocated as follows (in thousands): Historical book value of net assets acquired $27,340 Adjustments to record assets and liabilities at fair value: Fair value of in-process research and development 10,218 Fair value of existing technology 7,508 Fair value of assembled workforce 2,835 Fair value of customer base 742 Excess of the purchase price over the fair value of net assets 5,515 ------- $54,158 ======= An independent third-party appraiser was used to assess and value the purchased in-process research and development, existing technology, assembled workforce and customer base from the acquisition. The valuation of existing technology and in-process research and development was determined for products under development, based upon the estimated future revenues to be earned upon commercialization of the products. The percentage of the cash flows allocated to the purchased in-process research and development was derived from the estimated percentage complete for each of the projects. These cash flows were discounted back to their net present value. The resulting projected net cash flows from such projects reflects management's estimates of revenues and operating profits related to such projects. The workforce and customer base valuation was based upon replacement cost. F-11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The operating results of EF Data have been included in the consolidated statements of operations from the acquisition date (July 10, 2000). The Company's unaudited pro forma results for fiscal year 2000 assuming the merger occurred on August 1, 1999 is as follows:
(in thousands, except per share amounts) 2000 -------- Net revenues $153,479 Net income 187 Basic income per share 0.03 Diluted income per share 0.03 Weighted average shares 5,663 Weighted average shares assuming dilution 6,280
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the merger been in effect August 1, 1999, or the future results of operations. In April 2001, the Company acquired certain assets and product lines of MPD Technologies, Inc. for $12,718,000 including transaction costs of $764,000. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company has recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $9,791,000 of which $1,800,000 was allocated to customer base which was being amortized over eight years, $1,800,000 was allocated to existing technology which is being amortized over six years and $6,191,000 was allocated to goodwill. See Note 15 for discussion regarding the Company's adoption of SFAS No. 142, including the amortization of goodwill. The purchase price of $12,718,000 was financed through $10 million of institutional secured borrowings and the balance from internal company funds. The acquisition cost was allocated as follows (in thousands): Historical book value of net assets acquired $ 2,927 Adjustments to record assets and liabilities at fair value: Fair value of existing technology 1,800 Fair value of customer base 1,800 Excess of the purchase price over the fair value of net assets 6,191 ------- $12,718 ======= An independent third-party appraiser was used to assess and value the existing technology and customer base from the acquisition. The valuation of existing technology was determined for products acquired, based upon the estimated future revenues to be earned from the products. The customer base valuation was based upon replacement cost. The operating results of MPD Technologies have been included in the consolidated statements of operations from the acquisition date (April 30, 2001). The Company's unaudited pro forma results for fiscal years 2000 and 2001 assuming the merger occurred on August 1, 1999 and August 1, 2000 are as follows:
(in thousands, except per share amounts) 2000 2001 -------- ------- Net revenues $ 88,848 153,485 Net income (loss) (6,117) 7,104 Basic income (loss) per share (1.08) 0.97 Diluted income (loss) per share (1.08) 0.90 Weighted average shares 5,663 7,348 Weighted average shares assuming dilution 5,663 7,910
F-12 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the merger been in effect August 1, 1999 and August 1, 2000, or the future results of operations. On July 31, 2002, the Company acquired certain assets and assumed certain liabilities of Advanced Hardware Architectures, Inc. ("AHA") for $6,985,000, including transaction costs of $185,000. The purchase price is subject to adjustment based on AHA's net tangible assets as of July 31, 2002. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company has recorded the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $6,312,000 of which $2,192,000 was allocated to in-process research and development and was expensed as of the acquisition date, $4,032,000 was allocated to existing and core technology and trade name and is being amortized over nine years and $88,000 was allocated to order backlog and is being amortized over six months. The in-process research and development charge is included in the accompanying consolidated statement of operations for the year ended July 31, 2002. The acquisition cost was allocated as follows (in thousands): Historical book value of net assets acquired $ 673 Adjustments to record assets and liabilities at fair value: Fair value of in-process research and development 2,192 Fair value of existing and core technology and trade name 4,032 Fair value of order backlog 88 ------ $6,985 ====== An independent third-party appraiser was used to assess and value the in-process research and development, existing technology, core technology, trade name and order backlog. The valuation of the in-process research and development and existing technology was based on the value of the cash flows that the asset can be expected to generate in the future. The valuation of the core technology and trade name was based on the capitalization of the royalties saved because the Company owns the asset. The valuation of the order backlog was based on the replacement cost approach. Sales and income for fiscal 2002 and 2001 relating to the AHA assets acquired would not have been material to the Company's results of operations for those periods. (3) Accounts Receivable Accounts receivable consists of the following at July 31, 2002 and 2001:
2002 2001 ----------- ---------- Accounts receivable from commercial customers $15,424,000 18,336,000 Unbilled receivables (including retainages) on contracts-in-progress 9,304,000 5,939,000 Amounts receivable from the United States government and its agencies 3,502,000 3,944,000 ----------- ---------- 28,230,000 28,219,000 Less allowance for doubtful accounts 795,000 845,000 ----------- ---------- Accounts receivable, net $27,435,000 27,374,000 =========== ==========
In the opinion of management, substantially all of the unbilled balances will be billed and collected during fiscal 2003. F-13 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Inventories Inventories consist of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Raw materials and components $15,920,000 18,718,000 Work-in-process and finished goods 21,365,000 20,294,000 ----------- ----------- 37,285,000 39,012,000 Less: Reserve for anticipated losses on contracts and inventory reserves 3,289,000 2,280,000 ----------- ----------- Inventories, net $33,996,000 36,732,000 =========== =========== (5) Property, Plant and Equipment Property, plant and equipment consists of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Equipment $24,481,000 22,681,000 Leasehold improvements 2,030,000 1,964,000 Facilities financed by capital lease -- 2,450,000 Equipment financed by capital lease 2,345,000 2,146,000 ----------- ----------- 28,856,000 29,241,000 Less accumulated depreciation and amortization 16,967,000 17,463,000 ----------- ----------- $11,889,000 11,778,000 =========== =========== Depreciation and amortization expense on property, plant and equipment amounted to approximately $3,527,000, $3,711,000, and $1,562,000, for the years ended July 31, 2002, 2001 and 2000, respectively. (6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Customer advances and deposits $ 2,173,000 2,089,000 Accrued wages and benefits 2,918,000 3,663,000 Accrued commissions 1,125,000 1,021,000 Accrued warranty 2,975,000 4,336,000 Other 2,668,000 2,506,000 ----------- ----------- $11,859,000 13,615,000 =========== =========== (7) Capital Lease Obligations Capital lease obligations consist of the following at July 31, 2002 and 2001: 2002 2001 ----------- ----------- Obligations under capital leases $ 2,356,000 3,254,000 Less current installments 1,062,000 1,097,000 ----------- ----------- $ 1,294,000 2,157,000 =========== =========== The obligations under capital leases which related to the Melville, New York facility were included in fiscal 2001 only. The balance of the capital lease obligations in both years related to certain equipment and a technology license. The net carrying value of assets under capital lease was $3,207,000 and $3,789,000 at July 31, 2002 and 2001, respectively. F-14 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Future minimum lease payments under capital leases as of July 31, 2002 are: Years ending July 31, 2003 $1,214,000 2004 946,000 2005 254,000 2006 159,000 2007 30,000 ---------- Total minimum lease payments 2,603,000 Less amounts representing interest (at rates varying from 6.55% to 9.5%) 247,000 ---------- 2,356,000 Less current installments 1,062,000 ---------- Obligations under capital leases, net of current installments $1,294,000 ==========
In December 1991, the Company and a partnership controlled by the Company's Chairman, Chief Executive Officer and President entered into an agreement in which the Company leases from the partnership its corporate headquarters and Melville production facility. The lease was for an initial term of ten years. For financial reporting purposes, the Company capitalized the lease at inception in the amount of $2,450,000, net of deferred interest of $1,345,000. In December 2001, the Company exercised its option for an additional ten-year period. For financial reporting purposes, the lease for the extension period is an operating lease. The annual rentals, of approximately $482,000 for fiscal 2002, are subject to annual adjustments equal to the lesser of 5% or the change in the Consumer Price Index. (8) Long-term Debt In July 2000, in connection with the acquisition of EF Data, the Company entered into a secured loan agreement with The Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama, the Alabama Heritage Trust Fund, PEIRAF - Deferred Compensation Plan, and State Employees' Health Insurance Fund which provided a term loan in the amount of $40,000,000, expiring on June 30, 2005. Costs incurred to obtain the financing amounted to $289,000 and are included in other assets, net of amortization, in the accompanying consolidated balance sheet. Borrowings under the term loan are evidenced by promissory notes and are secured by all of the Company's assets. The principal amount of the loan outstanding bears interest at the per annum rate of 9.25%. The loan agreement contains restrictive covenants, which, among other things, requires the Company to maintain certain financial ratios. At July 31, 2002, the Company was in compliance with such covenants. In August 2001, the Company made a partial principal prepayment of $19,217,000 against the loans, in addition to scheduled principal payments in fiscal 2001 aggregating $2,100,000. In April 2001, in connection with the acquisition of MPD Technologies, the Company borrowed an additional $10,000,000 from the Teachers' Retirement System of Alabama, The Employees' Retirement System of Alabama and PEIRAF - Deferred Compensation Plan. Costs incurred to obtain the financing amounted to $164,000 and are included in other assets, net of amortization, in the accompanying consolidated balance sheet. The loan which is evidenced by promissory notes and is secured by all of the Company's assets, bears interest on the principal amount outstanding at the per annum rate of 8.50%. The loan requires interest only payments through June 2005 at which time the entire principal is due and is subject to the same restrictive covenants discussed above. F-15 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Future minimum debt payments as of July 31, 2002 are: Years ended July 31, 2003 $ -- 2004 9,833,000 2005 18,850,000 ----------- Total minimum debt payments 28,683,000 Less current installments -- ----------- Long-term debt, less current installments $28,683,000 =========== (9) Income Taxes The provision (benefit) for income taxes on continuing operations included in the accompanying consolidated statements of operations consists of the following: Year ended July 31, ------------------- 2002 2001 2000 ----------- --------- ---------- Federal - current $ (706,000) 2,834,000 1,004,000 Federal - deferred 306,000 503,000 (1,204,000) State and local - current 38,000 474,000 446,000 State and local - deferred (6,000) 77,000 (161,000) ----------- --------- ---------- $ (368,000) 3,888,000 85,000 =========== ========= ========== The provision (benefit) for income taxes on income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 34% as a result of the following:
2002 2001 2000 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Computed "expected" tax expense $ 265,000 34.0% 3,605,000 34.0% (1,338,000) (34.0%) Increase (reduction) in income taxes resulting from: Change in the beginning of the year valuation allowance for deferred tax assets 100,000 12.8 (300,000) (2.8) 1,623,000 41.2 Generation of research and experimentation credits: Current year (400,000) (51.3) -- -- -- -- Prior years (416,000) (53.4) -- -- -- -- State and local income taxes, net of Federal benefit 21,000 2.7 363,000 3.4 188,000 4.8 Other 62,000 8.0 220,000 2.1 (388,000) (9.8) ---------- ---------- ---------- ---------- ---------- ---------- $ (368,000) (47.2%) 3,888,000 36.7% 85,000 2.2% ========== ========== ========== ========== ========== ==========
F-16 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2002 and 2001 are presented below.
2002 2001 ------------ ------------ Deferred tax assets: Allowance for doubtful accounts receivable $ 95,000 98,000 Intangibles 4,673,000 4,796,000 Inventory and warranty reserves 1,226,000 1,303,000 Plant and equipment, principally due to capitalized leases and differences in depreciation -- 481,000 Compensation and commissions, principally due to accrual for financial reporting purposes 736,000 423,000 Deferred compensation 211,000 116,000 Other 226,000 243,000 Alternative minimum tax credit carryforward 209,000 -- Less valuation allowance (2,200,000) (2,100,000) ------------ ------------ Total deferred tax assets 5,176,000 5,360,000 Deferred tax liabilities: Plant and equipment, principally due to capitalized leases and differences in depreciation (116,000) -- ----------- ------------ Net deferred tax assets $ 5,060,000 5,360,000 ============ ============
The Company provides for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS 109 requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets and liabilities, management considers whether it is more likely than not that some portion or all of them will not be realized. As of July 31, 2002 and 2001, the Company's deferred tax asset has been offset by a valuation allowance related to the extended write off period of in-process research and development from the acquisitions of EF Data and AHA. The Company must generate approximately $19,600,000 of taxable income to fully utilize its deferred tax assets. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. (10) Stockholders' Equity (a) Common Stock Offering In February and March 2000, the Company sold an aggregate of 2,645,000 shares of its common stock in a public offering resulting in net proceeds to the Company of $42,434,000. (b) Stock Option, Stock Purchase and Warrant Agreements The Company has stock option and stock purchase plans and warrant agreements as follows: 1993 Incentive Stock Option Plan - The 1993 Incentive Stock Option Plan, as amended, provides for the granting to key employees and officers of incentive and non-qualified stock options to purchase up to 1,042,500 shares of the Company's common stock at prices generally not less than the fair market value at the date of grant with the exception of anyone who, prior to the grant, owns more than 10% of the voting power, the exercise price cannot be less than 110% of the fair market value. In addition, it provided formula grants to non-employee members of the Board of Directors. The term of the options may be no more than ten years. However, for incentive stock options granted to any employee who, prior to the granting of the option, owns stock representing more than 10% of the voting power, the option term may be no more than five years. As of July 31, 2002, the Company had granted incentive stock options representing the right to purchase an aggregate of 1,086,515 shares at prices ranging between $1.50 - $11.94 per share, of which 140,468 options were canceled and 544,540 are outstanding at July 31, 2002.To date, 401,507 shares have been exercised. Outstanding awards have been transferred to the 2000 Stock F-17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Incentive Plan. The terms applicable to these awards prior to the transfer continue to apply. The plan was terminated by the Board of Directors in December 1999 due to the approval by the shareholders of the 2000 Stock Incentive Plan. 2000 Stock Incentive Plan - The 2000 Stock Incentive Plan, as amended, provides for the granting to all employees and consultants of the Company (including prospective employees and consultants) non-qualified stock options, stock appreciation rights, restricted stock, performance shares, performance units and other stock-based awards. In addition, employees of the Company are eligible to be granted incentive stock options. Non-employee directors of the Company are eligible to receive non-discretionary grants of nonqualified stock options subject to certain limitations. The aggregate number of shares of common stock which may be issued may not exceed 1,100,000 plus the shares that were transferred to the Plan relating to outstanding awards that were previously granted under the 1982 Incentive Stock Option Plan and the 1993 Incentive Stock Option Plan. The Stock Option Committee of the Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and non-qualified stock options may not have a term exceeding ten years or no more than five years in the case of an incentive stock option granted to a stockholder who owns stock representing more than 10% of the voting power. As of July 31, 2002, the Company had granted incentive stock options representing the right to purchase an aggregate of 669,700 shares at prices ranging between $9.35 - $17.84 of which 50,500 options were canceled and 619,200 are outstanding at July 31, 2002. There have been no exercises. All options granted have been incentive stock options at prices equal to the fair market value of the stock on the date of grant. Warrants Issued Pursuant to Acquisition - In connection with an acquisition in fiscal 1999, the Company issued warrants to the acquiree's owners and creditors to purchase 150,000 shares of the Company's common stock at an exercise price of $6.57. The warrants, which contain transferability restrictions, are exercisable for a period of five years commencing September 24, 1998, and shares purchased through the exercise of these warrants contain voting restrictions. Through fiscal 2002, warrants to purchase 87,020 shares were exercised. Employee Stock Purchase Plan - The Comtech Telecommunications Corp. 2001 Employee Stock Purchase Plan ("The Purchase Plan") was approved by the shareholders on December 12, 2000. Pursuant to the Purchase Plan, 300,000 shares of the Company's common stock will be reserved for issuance. The Purchase Plan is intended to provide eligible employees of the Company the opportunity to acquire common stock in the Company at 85% of fair market value at date of issuance through participation in the payroll-deduction based employee stock purchase plan. Through fiscal 2002, the Company issued 40,531 shares of its common stock to participating employees in connection with the Purchase Plan. F-18 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (c) Option Activity The following table sets forth summarized information concerning the Company's stock options: Weighted average Number of shares exercise price ---------------- -------------- Outstanding at July 31, 1999 904,395 $ 3.40 Granted 109,500 12.02 Expired/canceled (40,268) 5.69 Exercised (189,949) 2.71 ---------- ---------- Outstanding at July 31, 2000 783,678 4.65 Granted 434,700 12.62 Expired/canceled (21,400) 9.05 Exercised (98,950) 3.13 ---------- ---------- Outstanding at July 31, 2001 1,098,028 7.86 Granted 183,000 13.79 Expired/canceled (59,700) 9.38 Exercised (57,588) 2.98 ---------- ---------- Outstanding at July 31, 2002 1,163,740 $ 8.95 ========== ========== Options exercisable at July 31, 2002 433,380 $ 6.33 ========== ========== Options available for grant at July 31, 2002 571,710 ========== The options outstanding as of July 31, 2002 are summarized in ranges as follows: Range of exercise Weighted average Number of options Weighted average price exercise price outstanding remaining life ----------------- ----------------- ----------------- ---------------- $1.50 - 3.99 $ 2.97 391,140 5 years 4.00 - 7.50 6.48 113,100 6 years 7.51 - 12.00 11.19 297,000 8 years 12.01 - 17.84 14.34 362,500 9 years (d) Stock-Based Compensation Plans The Company accounts for its stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the following pro forma amounts:
2002 2001 2000 ---------- --------- ---------- Net income (loss) As reported $1,148,000 6,714,000 (3,941,000) Pro forma $ 628,000 5,818,000 (4,617,000) Net income (loss) per share As reported Basic $ 0.15 0.91 (0.69) Diluted $ 0.15 0.85 (0.69) Pro forma Basic $ 0.08 0.79 (0.82) Diluted $ 0.08 0.74 (0.82)
F-19 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The per share weighted-average fair value of stock options granted during 2002, 2001 and 2000 was $6.48, $9.07 and $9.14, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2002 - expected dividend yield of 0%, risk-free interest rate of 4.29%, expected volatility of 54.10% and an expected option life of 5 years. 2001 - expected dividend yield of 0%, risk-free interest rate of 5.16%, expected volatility of 72.94% and an expected option life of 5 years. 2000 - expected dividend yield of 0%, risk-free interest rate of 6.04%, expected volatility of 82.74% and an expected option life of 5 years. (e) Restricted Common Stock In February 1994, a total of 180,000 restricted shares of the Company's common stock were granted by the Board of Directors to the principal officers of one of the Company's operating units, Comtech Communications Corp, ("CCC"), at a cost of $.10 per share. The award related to services to be provided over future years and, as a result, the stock awards were subject to certain restriction which could be removed earlier upon CCC attaining certain business plan milestones, as provided in the agreement, but no later than ten years from the date of the award. The excess of market value over cost of the shares awarded of $633,000 was recorded as deferred compensation and was being amortized to expense over a ten-year period subject to the aforementioned accelerated provisions, if appropriate, as evaluated on an annual basis. The deferred compensation was reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheet. In July 2000, the Company combined the operations of CCC with Comtech EF Data and the principal officers of CCC were made principal officers of the combined companies. The remaining unamortized balance of $136,000 of deferred compensation was expensed in fiscal 2000. In October 1998, a total of 225,000 restricted shares of the Company's common stock were granted by the Board of Directors to the principal officers and employees of the Company's new subsidiary, Comtech Mobile Datacom Corp. ("CMDC"), at a cost of $.10 per share. The award relates to services to be provided over future years and, as a result, the stock awards are subject to certain restrictions which may be removed earlier upon CMDC attaining certain business plan milestones, as provided in the agreement, but no later than ten years from the date of the award. These awards also automatically vest upon the employees' retirement or termination of employment by the Company without cause. The excess of market value over cost of the shares awarded of $1,041,000 was recorded as deferred compensation and is being amortized to expense over a ten-year period subject to the aforementioned accelerated provisions, if appropriate, as evaluated on an annual basis. The deferred compensation is reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheets. (11) Segment and Principal Customer Information Reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While the Company's results of operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in three segments: (i) Telecommunications Transmission, (ii) RF Microwave Amplifiers and (iii) Mobile Data Communications Services. Telecommunications Transmission products include modems, frequency converters, satellite VSAT transceivers and antennas and over-the-horizon microwave communications products and systems. RF Microwave Amplifier products include high-power amplifier products that use the microwave and radio frequency spectrums. Mobile Data Communications Services include two-way messaging links between mobile platforms or remote sites and user headquarters using satellite, terrestrial microwave or Internet links. Unallocated assets consist principally of cash, deferred tax assets and intercompany receivables. Unallocated losses result from such corporate expenses as legal, accounting and executive. Intersegment sales in fiscal 2002 by the telecommunications transmission segment to the RF microwave amplifiers F-20 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued segment were $3,250,000 at approximately break-even. Intersegment sales in fiscal 2000 and 2001 were not material. Fiscal 2002 and 2000 operating income in the telecommunications transmission segment includes in-process research and development charges of $2,192,000 and $10,218,000, respectively.
(in thousands) Mobile Data Fiscal 2002 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $78,613 22,822 17,922 -- 119,357 Operating income (loss) 5,250 1,209 207 (3,305) 3,361 Interest income 99 3 5 345 452 Interest expense 2,157 904 -- -- 3,061 Depreciation and amortization 3,718 1,188 194 130 5,230 Expenditure for long-lived assets, including intangibles 8,640 930 510 14 10,094 Total assets 62,738 25,564 19,308 18,976 126,586 (in thousands) Mobile Data Fiscal 2001 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $ 106,348 16,385 13,198 -- 135,931 Operating income (loss) 17,051 (470) (191) (3,235) 13,155 Interest income 211 8 4 2,080 2,303 Interest expense 3,728 287 -- -- 4,015 Depreciation and amortization 4,995 1,159 229 192 6,575 Expenditure for long-lived assets, including intangibles 4,506 11,895 142 128 16,671 Total assets 64,116 25,067 16,596 41,209 146,988 (in thousands) Mobile Data Fiscal 2000 Telecommunications RF Microwave Communications Un- - ----------- Transmission Amplifiers Services Allocated Total ------------ ---------- -------- --------- ----- Net sales $53,311 10,968 2,165 -- 66,444 Operating income (loss) 254 52 (2,350) (2,604) (4,648) Interest income -- -- -- 1,511 1,511 Interest expense 282 99 -- -- 381 Depreciation and amortization 974 763 159 253 2,149 Expenditure for long-lived assets, including intangibles 27,166 1,356 286 5 28,813 Total assets 68,018 9,693 4,286 44,034 126,031
In fiscal 2002, sales to the U.S. Army by our mobile data communications segment represented 13.2% of total net sales. Sales to one customer in fiscal 2000 represented 43.1% of total net sales. Such sales were made from the telecommunications transmission business segment. No customer represented more than 10% of sales in fiscal 2001. During fiscal 2002, 2001 and 2000, approximately 33.8%, 23.1% and 8.8%, respectively, of the Company's net sales resulted from contracts with the United States government and its agencies. Export sales comprised 41.2%, 46.2% and 71.4% of net sales in fiscal 2002, 2001 and 2000, respectively. Export sales include sales to domestic companies for inclusion in products, which will be sold to international customers. F-21 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Commitments and Contingencies (a) Operating Leases The Company is obligated under noncancellable operating lease agreements. At July 31, 2002, the future minimum lease payments under operating leases are as follows: 2003 $ 3,484,000 2004 3,175,000 2005 2,957,000 2006 1,514,000 2007 820,000 Thereafter 2,409,000 ----------- Total $14,359,000 =========== Lease expense charged to operations was $3,318,000, $2,236,000 and $474,000 in fiscal 2002, 2001 and 2000, respectively. (b) United States Government Contracts Certain of the Company's contracts are subject to audit by applicable governmental agencies. Until such audits are completed, the ultimate profit on these contracts cannot be determined; however, it is management's belief that the final contract settlements will not have a material adverse effect on the Company's consolidated financial position or results of operations. (c) Litigation In or about December 2000, two former employees, Shiv Verma and Robert Levin, commenced an action in the United States District Court, District of New Jersey, against the Company and others asserting, among other things, breach of certain restricted stock agreements and seeking unspecified monetary damages, specific performance of the restricted stock agreements, including the issuance of an aggregate 225,000 shares of the Company's common stock for a purchase price of $.10 per share, and other relief. The Company asserted defenses against the claims and interposed certain counterclaims and third-party claims against NJL, Inc., a company then controlled by Mr. Verma. In April 2002, Mr. Levin dismissed his claims against the Company, and the Company in return dismissed its counterclaims against him, without payment of any monies by either party, with both the Company and Mr. Levin executing general releases. On July 22, 2002, the District Judge dismissed Verma's complaint with prejudice and the Company's counterclaims against Verma without prejudice. On August 8, 2002, the Company voluntarily dismissed its third-party claims against defendant NJL, Inc., without prejudice. As a result, there are no claims or counterclaims pending by or against any party to the action, and the case has been closed on the Court's docket. We are subject to certain other legal actions, which arise, in the normal course of business. We believe that the outcome of these actions will not have a material effect on our consolidated financial position or results of operations. (d) Employment Contract Mr. Kornberg, the Company's Chairman of the Board of Directors, Chief Executive Officer and President is employed pursuant to an agreement, which was amended and restated in October 2001, which provides, among other things, for his employment until 2003 at a current base compensation of $395,000 per annum and incentive compensation equal to 3.5% of the Company's pre-tax income plus such additional amounts, if any, as the Board of Directors may from time to time determine. The employment period is automatically extended for successive two year periods unless either party gives notice of non-extension at F-22 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued least six months in advance of the scheduled termination date. The agreement also provides for payment to Mr. Kornberg in the event of a change in control of the Company. (13) Discontinued Operations In early fiscal 1999, the Company acquired the assets and assumed certain liabilities of Comtech Wireless, Inc. ("CWI"). Based upon CWI's disappointing fiscal 1999 results of operations and its uncertain future prospects, effective July 31, 1999, the Board of Directors approved a plan to liquidate CWI by January 31, 2000. Costs and expenses, and cash flows associated with CWI have been excluded from the respective captions in the accompanying statements of operations and statements of cash flows. During fiscal 2000, the Company liquidated the operations of CWI and recorded a loss of $137,000 net of applicable income taxes. (14) Stockholder Rights Plan On December 15, 1998, the Company's Board of Directors approved the adoption of a stockholder rights plan in which one stock purchase right ("Right") was distributed as a dividend on each outstanding share of the Company's common stock to stockholders of record at the close of business on January 4, 1999. Under the plan, the Rights will be exercisable only if triggered by a person or group's acquisition of 15% or more of the Company's common stock. If triggered, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of the Company's common shares for 50% of their market value at that time. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the plan. This Right to purchase common stock at a discount will not be triggered by a person or group's acquisition of 15% or more of the common stock pursuant to a tender or exchange offer which is for all outstanding shares at a price and on terms that Comtech's Board of Directors determines (prior to acquisition) to be adequate and in the best interest of the Company and its stockholders. The Rights will expire on December 15, 2008. (15) Accounting for Business Combinations, Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies the criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and SFAS No. 142 effective August 1, 2001. As of July 31, 2001, $4,609,000 of intangibles, net of accumulated amortization of $768,000, were reclassified as intangibles with indefinite lives. F-23 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", we discontinued the amortization of goodwill and intangible assets with indefinite lives as of the beginning of fiscal 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of amortization of goodwill and intangible assets with indefinite lives, net of the related income tax effect, follows:
(in thousands, except per share amounts) 2001 2000 --------- ------- Reported net income (loss) $ 6,714 (3,941) Exclude amortization of goodwill and intangible assets with indefinite lives, net of income taxes 889 168 --------- ----- Adjusted proforma net income (loss) $ 7,603 (3,773) Basic earnings (loss) per share: As reported $ 0.91 (0.69) Adjusted proforma $ 1.03 (0.67) Diluted earnings (loss) per share: As reported $ 0.85 (0.69) Adjusted proforma $ 0.96 (0.67)
Intangibles with definite lives arising from acquisitions as of July 31, 2002 are as follows: Gross Carrying Accumulated Net Amount Amortization Book Value -------------- ------------ ----------- Existing technology $11,851,000 2,582,000 9,269,000 Core Technology 1,315,000 -- 1,315,000 Technology license 2,154,000 99,000 2,055,000 Trade name 175,000 -- 175,000 Order backlog 88,000 -- 88,000 ----------- ----------- ----------- Total $15,583,000 2,681,000 12,902,000 =========== =========== =========== Amortization expense for the twelve months ended July 31, 2002, 2001 and 2000 was $1,471,000, $2,552,000 and $230,000, respectively. The estimated amortization expense for the fiscal years ending July 31, 2003, 2004, 2005, 2006 and 2007 is $2,016,000, $1,928,000, $1,928,000, $1,928,000 and $1,792,000, respectively. Intangibles with indefinite lives by reporting unit as of July 31, 2002 are as follows: Telecommunications transmission $ 7,870,000 RF microwave amplifiers 8,422,000 Mobile data communications services 1,434,000 ----------- $17,726,000 =========== F-24 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (16) Unaudited Quarterly Financial Data The following is a summary of unaudited quarterly operating results (amount in thousands, except per share data):
Fiscal 2002 First Quarter Second Quarter Third Quarter Fourth Quarter Total ----------- ------------- -------------- ------------- -------------- ------- Net sales $ 31,045 30,525 29,262 28,525 119,357 Gross profit 10,805 9,119 9,898 10,755 40,577 Net income 902 148 409 (311)** 1,148** Diluted income per share $0.11 0.02 0.05 (0.04) 0.15* Fiscal 2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total ----------- ------------- -------------- ------------- -------------- ------- Net sales $ 39,846 33,111 32,322 30,652 135,931 Gross profit 13,108 12,656 12,343 10,497 48,604 Net income 2,007 1,872 1,527 1,308 6,714 Diluted income per share $0.25 0.24 0.19 0.16 0.85*
* Income per share information for the full fiscal year may not equal the total of the quarters within the year as a result of (i) a loss in a quarter or the full year, and (ii) rounding. ** Includes pre-tax in-process research and development charge in the fourth quarter of fiscal 2002 of $2,192,000. F-25 Schedule II COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended July 31, 2002, 2001 and 2000
Column A Column B Column C Additions Column D Column E ------------- -------------- ---------------------------------------- -------------- ------------- (1) (2) Balance at Charged to other Transfers beginning of Charged to cost accounts - (deductions) Balance at Description period and expenses describe describe end of period ------------- -------------- ----------------- ------------------ -------------- -------------- Allowance for doubtful accounts - accounts receivable: Year ended July 31, 2002 $ 845,000 269,000 (C) -- (319,000)(D) $ 795,000 2001 806,000 39,000 (C) -- - 845,000 2000 145,000 -- -- 661,000 (E) 806,000 Inventory reserves: Year ended July 31, 2002 $ 2,280,000 1,698,000 (A) -- (689,000)(B) $ 3,289,000 2001 2,529,000 264,000 (A) -- (513,000)(B) 2,280,000 2000 1,170,000 244,000 (A) -- 1,115,000 (E) 2,529,000
(A) Increase in reserves for obsolete and slow moving inventory and losses on contracts. (B) Write-off of inventory. (C) Increase in allowance for doubtful accounts. (D) Write-off of uncollectible receivables. (E) Acquired in acquisitions. S-1 EX-10.(G)(3) 3 d52183_ex10g3.txt AMENDMENT TO THE 2000 STOCK INCENTIVE PLAN THE COMTECH TELECOMMUNICATIONS CORP. ------------------------------------------------ 2000 STOCK INCENTIVE PLAN ------------------------------------------------ AMENDED AND RESTATED (EFFECTIVE OCTOBER 9, 2001) ARTICLE I PURPOSE The purpose of The Comtech Telecommunications Corp. 2000 Stock Incentive Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company: (i) to offer employees of and Consultants to the Company and its Affiliates stock-based incentives and other equity interests in the Company, thereby creating a means to raise the level of stock ownership by employees and Consultants in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company's stockholders; and (ii) to make equity based awards to Non-Employee Directors, thereby creating a means to attract, retain and reward such Non-Employee Directors and strengthen the mutuality of interests between Non-Employee Directors and the Company's stockholders. ARTICLE II DEFINITIONS For purposes of this Plan, the following terms shall have the following meanings: 2.1 "Acquisition Event" has the meaning set forth in Section 4.2(d). 2.2 "Affiliate" means each of the following: (i) any Subsidiary; (ii) any Parent; (iii) any corporation, trade or business (including, without limitation, a partnership or limited liability company) which is directly or indirectly controlled 50% or more (whether by ownership of stock, assets or an equivalent ownership interest or voting interest) by the Company or one of its Affiliates; and (iv) any other entity in which the Company or any of its Affiliates has a material equity interest and which is designated as an "Affiliate" by resolution of the Committee. 2.3 "Award" means any award under this Plan of any: (i) Stock Option; (ii) Stock Appreciation Right; (iii) Restricted Stock; (iv) Performance Share; (v) Performance Unit; (vi) Other Stock-Based Award; or (vii) other award providing benefits similar to (i) through (vi) designed to meet the requirements of a Foreign Jurisdiction. 2.4 "Board" means the Board of Directors of the Company. 2.5 "Cause" means, with respect to a Participant's Termination of Employment or Termination of Consultancy: (i) in the case where there is no employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate and the Participant at the time of the grant of the Award (or where there is such an agreement but it does not define "cause" (or words of like import)), termination due to a Participant's commission of a fraud or a felony in connection with his or her duties as an employee of the Company or an Affiliate, willful misconduct or any act of disloyalty, dishonesty, fraud, breach of trust or confidentiality as to the Company or an Affiliate or any other act which is intended to cause or may reasonably be expected to cause economic or reputational injury to the Company or an Affiliate; or (ii) in the case where there is an employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate and the Participant at the time of the grant of the Award that defines "cause" (or words of like import), as defined under such agreement; provided, however, that with regard to any agreement that conditions "cause" on occurrence of a change in control, such definition of "cause" shall not apply until a change in control actually takes place and then only with regard to a termination thereafter. With respect to a Participant's Termination of Directorship, "cause" shall mean an act or failure to act that constitutes cause for removal of a director under applicable Delaware law. 2.6 "Change in Control" has the meaning set forth in Article XIII or Article XIV, as applicable. 2.7 "Code" means the Internal Revenue Code of 1986, as amended. Any reference to any section of the Code shall also be a reference to any successor provision. 2.8 "Committee" means: (a) with respect to the application of this Plan to Eligible Employees and Consultants, a committee or subcommittee of the Board appointed from time to time by the Board, which committee or subcommittee shall consist of two or more non-employee directors, each of whom is intended to be, to the extent required by Rule 16b-3, a "non-employee director" as defined in Rule 16b-3 and, to the extent required by Section 162(m) of the Code and any regulations thereunder, an "outside director" as defined under Section 162(m) of the Code; provided, however, that if and to the extent that no Committee exists which has the authority to administer this Plan, the functions of the Committee shall be exercised by the Board and all references 2 herein to the Committee shall be deemed to be references to the Board; and (b) with respect to the application of this Plan to Non-Employee Directors, the Board. 2.9 "Common Stock" means the common stock, $.10 par value per share, of the Company. 2.10 "Company" means Comtech Telecommunications Corp., a Delaware corporation, and its successors by operation of law. 2.11 "Consultant" means any advisor or consultant to the Company or its Affiliates. 2.12 "Detrimental Activity" means (a) the disclosure to anyone outside the Company or its Affiliates, or the use in any manner other than in the furtherance of the Company's or its Affiliate's business, without written authorization from the Company, of any confidential information or proprietary information, relating to the business of the Company or its Affiliates, acquired by a Participant prior to the Participant's Termination; (b) activity while employed that results, or if known could result, in the Participant's Termination that is classified by the Company as a Termination for Cause; (c) any attempt, directly or indirectly, to solicit, induce or hire (or the identification for solicitation, inducement or hire) any non-clerical employee of the Company or its Affiliates to be employed by, or to perform services for, the Participant or any person or entity with which the Participant is associated (including, but not limited to, due to the Participant's employment by, consultancy for, equity interest in, or creditor relationship with such person or entity) or any person or entity from which the Participant receives direct or indirect compensation or fees as a result of such solicitation, inducement or hire (or the identification for solicitation, inducement or hire) without, in all cases, written authorization from the Company; (d) any attempt, directly or indirectly, to solicit in a competitive manner any current or prospective customer of the Company or its Affiliates without, in all cases, written authorization from the Company; (e) the Participant's Disparagement, or inducement of others to do so, of the Company or its Affiliates or their past and present officers, directors, employees or products; (f) without written authorization from the Company, the rendering of services for any organization, or engaging, directly or indirectly, in any business, which is competitive with the Company or its Affiliates, or which organization or business, or the rendering of services to such organization or business, is otherwise prejudicial to or in conflict with the interests of the Company or its Affiliates, or (g) breach of any agreement between the Participant and the Company or an Affiliate (including, without limitation, any employment agreement or non-competition or non-solicitation agreement). Unless otherwise determined by the Committee at grant, Detrimental Activity shall not be deemed to occur after the end of the one-year period following the Participant's Termination. For purposes of subsections (a), (c), (d) and (f) above, the Chief Executive Officer and the General Counsel of the Company shall each have authority to provide the Participant with written authorization to engage in the activities contemplated thereby and no other person shall have authority to provide the Participant with such authorization. 3 2.13 "Disparagement" means making comments or statements to the press, the Company's or its Affiliates' employees, consultants or any individual or entity with whom the Company or its Affiliates has a business relationship which would adversely affect in any manner: the conduct of the business of the Company or its Affiliates (including, without limitation, any products or business plans or prospects), or the business reputation of the Company or its Affiliates, or any of their products, or their past or present officers, directors or employees. 2.14 "Disability" means, with respect to an Eligible Employee, Consultant or Non-Employee Director, a permanent and total disability, as determined by the Committee in its sole discretion, provided that in no event shall any disability that is not a permanent and total disability, as defined in Section 22(e)(3) of the Code, shall be treated as a Disability. A Disability shall only be deemed to occur at the time of the determination by the Committee of the Disability. 2.15 "Effective Date" means the effective date of this Plan as defined in Article XVIII. 2.16 "Eligible Employee" means each employee of the Company or an Affiliate. 2.17 "Exchange Act" means the Securities Exchange Act of 1934, as amended. Any references to any section of the Exchange Act shall also be a reference to any successor provision. 2.18 "Family Member" shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than 50% of the voting interests. 2.19 "Fair Market Value" means, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, as of any date, the last sales price for the Common Stock on the applicable date: (i) as reported on the principal national securities exchange on which it is then traded or the Nasdaq Stock Market, Inc. or (ii) if not traded on any such national securities exchange or the Nasdaq Stock Market, Inc. as quoted on an automated quotation system sponsored by the National Association of Securities Dealers, Inc. If the Common Stock is not readily tradable on a national securities exchange, the Nasdaq Stock Market, Inc. or any automated quotation system sponsored by the National Association of Securities Dealers, Inc., its Fair Market Value shall be set in good faith by the Committee. Notwithstanding anything herein to the contrary, "Fair Market Value" means the price for Common Stock set by the Committee in good faith based on reasonable methods set forth under Section 422 of the Code and the regulations thereunder including, without limitation, a method utilizing the average of 4 prices of the Common Stock reported on the principal national securities exchange on which it is then traded during a reasonable period designated by the Committee. For purposes of the grant of any Stock Option, the applicable date shall be the date for which the last sales price is available at the time of grant. For purposes of the conversion of a Performance Unit to shares of Common Stock for reference purposes, the applicable date shall be the date determined by the Committee in accordance with Section 10.1. For purposes of the exercise of any Stock Appreciation Right, the applicable date shall be the date a notice of exercise is received by the Committee or, if not a day on which the applicable market is open, the next day that it is open. 2.20 "Foreign Jurisdiction" means any jurisdiction outside of the United States including, without limitation, countries, states, provinces and localities. 2.21 "Incentive Stock Option" means any Stock Option awarded to an Eligible Employee under this Plan intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. 2.22 "Limited Stock Appreciation Right" means an Award of a limited Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right made pursuant to Section 7.5 of this Plan. 2.23 "Non-Employee Director" means a director of the Company who is not an active employee of the Company or an Affiliate and who is not an officer, director or employee of the Company or any Affiliate. 2.24 "Non-Qualified Stock Option" means any Stock Option awarded under this Plan that is not an Incentive Stock Option. 2.25 "Non-Tandem Stock Appreciation Right" means a Stock Appreciation Right entitling a Participant to receive an amount in cash or Common Stock (as determined by the Committee in its sole discretion) equal to the excess of: (i) the Fair Market Value of a share of Common Stock as of the date such right is exercised, over (ii) the aggregate exercise price of such right. 2.26 "Other Stock-Based Award" means an Award of Common Stock and other Awards made pursuant to Article XI that are valued in whole or in part by reference to, or are payable in or otherwise based on, Common Stock, including, without limitation, an Award valued by reference to performance of an Affiliate. 2.27 "Parent" means any parent corporation of the Company within the meaning of Section 424(e) of the Code. 2.28 "Participant" means any Eligible Employee or Consultant to whom an Award has been made under this Plan and each Non-Employee Director of the Company; provided, however, that a Non-Employee Director shall be a Participant for purposes of the Plan solely with respect to awards of Stock Options pursuant to Article XIII. 2.29 "Performance Criteria" has the meaning set forth in Exhibit A. 5 2.30 "Performance Cycle" has the meaning set forth in Section 10.1. 2.31 "Performance Goal" means the objective performance goals established by the Committee in accordance with Section 162(m) of the Code and based on one or more Performance Criteria. 2.32 "Performance Period" has the meaning set forth in Section 9.1. 2.33 "Performance Share" means an Award made pursuant to Article IX of this Plan of the right to receive Common Stock or, as determined by the Committee in its sole discretion, cash of an equivalent value at the end of the Performance Period or thereafter. 2.34 "Performance Unit" means an Award made pursuant to Article X of this Plan of the right to receive a fixed dollar amount, payable in cash or Common Stock (or a combination of both) as determined by the Committee in its sole discretion, at the end of a specified Performance Cycle or thereafter. 2.35 "Plan" means The Comtech Telecommunications Corp. 2000 Stock Incentive Plan. 2.36 "Reference Stock Option" has the meaning set forth in Section 7.1. 2.37 "Restricted Stock" means an Award of shares of Common Stock under this Plan that is subject to restrictions under Article VIII. 2.38 "Restriction Period" has the meaning set forth in Section 8.3(a) with respect to Restricted Stock. 2.39 "Retirement" means a Termination of Employment or Termination of Consultancy without Cause by a Participant at or after age 65 or such earlier date after age 50 as may be approved by the Committee with regard to such Participant. With respect to a Participant's Termination of Directorship, Retirement shall mean the failure to stand for reelection or the failure to be reelected at or after a Participant has attained age 65 or, with the consent of the Board, before age 65 but after age 50. 2.40 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provisions. 2.41 "Section 162(m) of the Code" means Section 162(m) of the Code and any Treasury regulations thereunder. 2.42 "Securities Act" means the Securities Act of 1933, as amended. Any reference to any section of the Securities Act shall also be a reference to any successor provision. 2.43 "Stock Appreciation Right" or "SAR" means the right pursuant to an Award granted under Article VII. 6 2.44 "Stock Option" or "Option" means any option to purchase shares of Common Stock granted to Eligible Employees or Consultants under Article VI or to Non-Employee Directors under Article XIII. 2.45 "Subsidiary" means any subsidiary corporation of the Company within the meaning of Section 424(f) of the Code. 2.46 "Tandem Stock Appreciation Right" means a Stock Appreciation Right entitling the holder to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount in cash or Common Stock (as determined by the Committee in its sole discretion) equal to the excess of: (i) the Fair Market Value, on the date such Stock Option (or such portion thereof) is surrendered, of the Common Stock covered by such Stock Option (or such portion thereof), over (ii) the aggregate exercise price of such Stock Option (or such portion thereof). 2.47 "Ten Percent Stockholder" means a person owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, its Subsidiaries or its Parent. 2.48 "Termination of Consultancy" means, with respect to a Consultant, that the Consultant is no longer acting as a consultant to the Company or an Affiliate. In the event an entity shall cease to be an Affiliate, there shall be deemed a Termination of Consultancy of any individual who is not otherwise a Consultant to the Company or another Affiliate at the time the entity ceases to be an Affiliate. In the event that a Consultant becomes an Eligible Employee upon the termination of his consultancy, the Committee, in its sole and absolute discretion, may determine that no Termination of Consultancy shall be deemed to occur until such time as such Consultant is no longer a Consultant or an Eligible Employee. 2.49 "Termination of Directorship" means, with respect to a Non-Employee Director, that the Non-Employee Director has ceased to be a director of the Company. 2.50 "Termination of Employment" means: (i) a termination of employment (for reasons other than a military or personal leave of absence granted by the Company) of a Participant from the Company and its Affiliates; or (ii) when an entity which is employing a Participant ceases to be an Affiliate, unless the Participant otherwise is, or thereupon becomes, employed by the Company or another Affiliate. In the event that an Eligible Employee becomes a Consultant upon the termination of his employment, the Committee, in its sole and absolute discretion, may determine that no Termination of Employment shall be deemed to occur until such time as such Eligible Employee is no longer an Eligible Employee or a Consultant. 2.51 "Transfer" means anticipate, alienate, attach, sell, assign, pledge, encumber, charge, hypothecate or otherwise transfer and "Transferred" has a correlative meaning. 7 ARTICLE III ADMINISTRATION 3.1 The Committee. The Plan shall be administered and interpreted by the Committee. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with the requirements of Rule 16b-3 and Section 162(m) of the Code shall not affect the validity of Awards, grants, interpretations or other actions of the Committee. 3.2 Grants of Awards. The Committee shall have full authority to grant to Eligible Employees and Consultants, pursuant to the terms of this Plan: (i) Stock Options; (ii) Tandem Stock Appreciation Rights and Non-Tandem Stock Appreciation Rights; (iii) Restricted Stock; (iv) Performance Shares; (v) Performance Units; (vi) Other Stock-Based Awards; and (vii) other awards providing benefits similar to (i) through (vi) designed to meet the requirements of Foreign Jurisdictions. All Awards shall be granted by, confirmed by, and subject to the terms of, a written agreement executed by the Company and the Participant. In particular, the Committee shall have the authority: (a) to select the Eligible Employees and Consultants to whom Awards may from time to time be granted hereunder; (b) to determine whether and to what extent Awards, including any combination of two or more Awards, are to be granted hereunder to one or more Eligible Employees or Consultants; (c) to determine, in accordance with the terms of this Plan, the number of shares of Common Stock to be covered by each Award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder (including, but not limited to, the exercise or purchase price (if any), any restriction or limitation, any vesting schedule or acceleration thereof and any forfeiture restrictions or waiver thereof, regarding any Award and the shares of Common Stock relating thereto, based on such factors, if any, as the Committee shall determine, in its sole discretion); (e) to determine whether and under what circumstances a Stock Option may be settled in cash, Common Stock and/or Restricted Stock under Section 6.3(d) or, with respect to Stock Options granted to Non-Employee Directors, Section 13.4(d); (f) to determine whether, to what extent and under what circumstances to provide loans (which shall bear interest at the rate the Committee shall provide) to Eligible Employees and Consultants in order to exercise Stock Options under this Plan or to purchase Awards under this Plan (including shares of Common Stock); 8 (g) to determine whether a Stock Option is an Incentive Stock Option or Non-Qualified Stock Option, whether a Stock Appreciation Right is a Tandem Stock Appreciation Right or Non-Tandem Stock Appreciation Right or whether an Award is intended to satisfy Section 162(m) of the Code; (h) to determine whether to require an Eligible Employee or Consultant, as a condition of the granting of any Award, not to sell or otherwise dispose of shares of Common Stock acquired pursuant to the exercise of an Option or an Award for a period of time as determined by the Committee, in its sole discretion, following the date of the acquisition of such Option or Award; (i) to modify, extend or renew an Award, subject to Article XV herein, provided, however, that if an Award is modified, extended or renewed and thereby deemed to be the issuance of a new Award under the Code or the applicable accounting rules, the exercise price of an Award may continue to be the original exercise price even if less than the Fair Market Value of the Common Stock at the time of such modification, extension or renewal; and (j) to offer to buy out an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time such offer is made. 3.3 Guidelines. Subject to Article XV hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of this Plan and any Award issued under this Plan (and any agreements relating thereto); and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to effectuate the purpose and intent of this Plan. The Committee may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, Foreign Jurisdictions to comply with applicable tax and securities laws and may impose any limitations and restrictions that it deems necessary to comply with the applicable tax and securities laws of such Foreign Jurisdictions. To the extent applicable, this Plan is intended to comply with Section 162(m) of the Code and the applicable requirements of Rule 16b-3 and shall be limited, construed and interpreted in a manner so as to comply therewith. 3.4 Decisions Final. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Company, the Board or the Committee (or any of its members) arising out of or in connection with this Plan shall be within the absolute discretion of all and each of them, as the case may be, and shall be final, binding and conclusive on the Company and all employees and Participants and their respective heirs, executors, administrators, successors and assigns. 9 3.5 Reliance on Counsel. The Company, the Board or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of such counsel. 3.6 Procedures. If the Committee is appointed, the Board shall designate one of the members of the Committee as chairman and the Committee shall hold meetings, subject to the By-Laws of the Company, at such times and places as it shall deem advisable. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all the Committee members in accordance with the By-Laws of the Company, shall be fully as effective as if it had been made by a vote at a meeting duly called and held. The Committee shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. 3.7 Designation of Consultants/Liability. (a) The Committee may designate employees of the Company and professional advisors to assist the Committee in the administration of this Plan and may grant authority to officers to execute agreements or other documents on behalf of the Committee. (b) The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of this Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of any such counsel, consultant or agent shall be paid by the Company. The Committee, its members and any employee of the Company designated pursuant to paragraph (a) above shall not be liable for any action or determination made in good faith with respect to this Plan. To the maximum extent permitted by applicable law, no officer of the Company or member or former member of the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any Award granted under it. To the maximum extent permitted by applicable law or the Certificate of Incorporation or By-Laws of the Company and to the extent not covered by insurance, each officer and member or former member of the Committee shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with this Plan, except to the extent arising out of such officer's, member's or former member's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, directors or members or former officers, directors or members may have under applicable law or under 10 the Certificate of Incorporation or By-Laws of the Company or any Affiliate. Notwithstanding anything else herein, this indemnification will not apply to the actions or determinations made by an individual with regard to Awards granted to him or her under this Plan. ARTICLE IV SHARE AND OTHER LIMITATIONS 4.1 Shares. (a) General Limitation. The aggregate number of shares of Common Stock which may be issued or used for reference purposes under this Plan or with respect to which Awards may be granted shall not exceed 1,100,000 shares of Common Stock (subject to any increase or decrease pursuant to Section 4.2) with respect to all types of Awards, plus 882,935 shares of Common Stock relating to outstanding awards assumed by this Plan under Section 4.4 for a total of 1,982,935 shares of Common Stock. The shares of Common Stock available under this Plan may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company. If any Stock Option or Stock Appreciation Right granted under this Plan expires, terminates or is canceled for any reason without having been exercised in full or, with respect to Stock Options, the Company repurchases any Stock Option, the number of shares of Common Stock underlying such unexercised or repurchased Stock Option or any unexercised Stock Appreciation Right shall again be available for the purposes of Awards under this Plan. If any shares of Restricted Stock, Performance Shares or Performance Units awarded under this Plan to a Participant are forfeited or repurchased by the Company for any reason, the number of forfeited or repurchased shares of Restricted Stock, Performance Shares or Performance Units shall again be available for the purposes of Awards under this Plan. If a Tandem Stock Appreciation Right is granted or a Limited Stock Appreciation Right is granted in tandem with a Stock Option, such grant shall only apply once against the maximum number of shares of Common Stock which may be issued under this Plan. In determining the number of shares of Common Stock available for Awards other than Awards of Incentive Stock Options, if Common Stock has been exchanged by a Participant as full or partial payment of exercise price or withholding taxes, or if the number shares of Common Stock otherwise deliverable has been reduced for the payment of exercise price or withholding taxes, the number of shares of Common Stock exchanged as payment for the payment of exercise price or withholding taxes, or reduced, shall again be available for purposes of Awards under this Plan. (b) Individual Participant Limitations. (i) The maximum number of shares of Common Stock subject to any Award of Stock Options, Stock Appreciation Rights, Performance Shares or shares of Restricted Stock for which 11 the grant of such Award or the lapse of the relevant Restriction Period is subject to the attainment of Performance Goals in accordance with Section 8.3(a)(ii) herein which may be granted under this Plan during any fiscal year of the Company to each Eligible Employee or Consultant shall be 100,000 shares per type of Award (subject to any increase or decrease pursuant to Section 4.2), provided that the maximum number of shares of Common Stock for all types of Awards does not exceed 100,000 during any fiscal year of the Company. If a Tandem Stock Appreciation Right is granted or a Limited Stock Appreciation Right is granted in tandem with a Stock Option, it shall apply against the Eligible Employee's or Consultant's individual share limitations for both Stock Appreciation Rights and Stock Options. (ii) There are no annual individual Eligible Employee or Consultant share limitations on Restricted Stock for which the grant of such Award or the lapse of the relevant Restriction Period is not subject to attainment of Performance Goals in accordance with Section 8.3(a)(ii) hereof. (iii) The maximum value at grant of Performance Units which may be granted under this Plan during any fiscal year of the Company to each Eligible Employee or Consultant shall be $100,000. Each Performance Unit shall be referenced to one share of Common Stock and shall be charged against the available shares under this Plan at the time the unit value measurement is converted to a referenced number of shares of Common Stock in accordance with Section 10.1. (iv) The individual Participant limitations set forth in this Section 4.1(b) shall be cumulative; that is, to the extent that shares of Common Stock for which Awards are permitted to be granted to an Eligible Employee or a Consultant during a fiscal year are not covered by an Award to such Eligible Employee or Consultant in a fiscal year, the number of shares of Common Stock available for Awards to such Eligible Employee or Consultant shall automatically increase in the subsequent fiscal years during the term of the Plan until used. 4.2 Changes. (a) The existence of this Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company or any Affiliate, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting Common Stock, the dissolution or liquidation of the Company or any Affiliate, any sale or transfer of all or part of the assets or business of the Company or any Affiliate or any other corporate act or proceeding. 12 (b) Subject to the provisions of Section 4.2(d), in the event of any such change in the capital structure or business of the Company by reason of any stock split, reverse stock split, stock dividend, combination or reclassification of shares, recapitalization, or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase any Common Stock or securities convertible into Common Stock, or any other corporate transaction or event having an effect similar to any of the foregoing and effected without receipt of consideration by the Company, then the aggregate number and kind of shares which thereafter may be issued under this Plan, the number and kind of shares or other property (including cash) to be issued upon exercise of an outstanding Stock Option or other Awards granted under this Plan and the purchase price thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under this Plan, and any such adjustment determined by the Committee in good faith shall be final, binding and conclusive on the Company and all Participants and employees and their respective heirs, executors, administrators, successors and assigns. (c) Fractional shares of Common Stock resulting from any adjustment in Options or Awards pursuant to Section 4.2(a) or (b) shall be aggregated until, and eliminated at, the time of exercise by rounding-down for fractions less than one-half and rounding-up for fractions equal to or greater than one-half. No cash settlements shall be made with respect to fractional shares eliminated by rounding. Notice of any adjustment shall be given by the Committee to each Participant whose Award has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of this Plan. (d) In the event of a merger or consolidation in which the Company is not the surviving entity or in the event of any transaction that results in the acquisition of substantially all of the Company's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all or substantially all of the Company's assets (all of the foregoing being referred to as "Acquisition Events"), then the Committee may, in its sole discretion, terminate all outstanding Stock Options and Stock Appreciation Rights, effective as of the date of the Acquisition Event, by delivering notice of termination to each Participant at least 30 days prior to the date of consummation of the Acquisition Event, in which case during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each such Participant shall have the right to exercise in full all of his or her Stock Options and Stock Appreciation Rights that are then outstanding (without regard to any limitations on exercisability otherwise contained in the Stock Option or Award Agreements), but any such exercise shall be contingent upon and subject to the occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise pursuant thereto shall be null and void. 13 If an Acquisition Event occurs but the Committee does not terminate the outstanding Stock Options and Stock Appreciation Rights pursuant to this Section 4.2(d), then the provisions of Section 4.2(b) shall apply. 4.3 Minimum Purchase Price. Notwithstanding any provision of this Plan to the contrary, if authorized but previously unissued shares of Common Stock are issued under this Plan, such shares shall not be issued for a consideration which is less than as permitted under applicable law. 4.4 Assumption of Awards. Awards that were granted prior to the Effective Date under the (i) Comtech Telecommunications Corp. 1982 Incentive Stock Option Plan (the "1982 Plan"), and (ii) Comtech Telecommunications Corp. 1993 Incentive Stock Option Plan, as amended (the "1993 Plan"), shall be transferred and assumed by this Plan as of the Effective Date. Notwithstanding the foregoing, such Awards shall continue to be governed by the terms of the applicable agreement in effect prior to the Effective Date. ARTICLE V ELIGIBILITY 5.1 General Eligibility. All Eligible Employees and Consultants and prospective employees of and Consultants to the Company and its Affiliates are eligible to be granted Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares, Performance Units, Other Stock-Based Awards and awards providing benefits similar to each of the foregoing designed to meet the requirements of Foreign Jurisdictions under this Plan. Eligibility for the grant of an Award and actual participation in this Plan shall be determined by the Committee in its sole discretion. The vesting and exercise of Awards granted to a prospective employee or Consultant are conditioned upon such individual actually becoming an Eligible Employee or Consultant. 5.2 Incentive Stock Options. All Eligible Employees of the Company, its Subsidiaries and its Parent (if any) are eligible to be granted Incentive Stock Options under this Plan. Eligibility for the grant of an Award and actual participation in this Plan shall be determined by the Committee in its sole discretion. 5.3 Non-Employee Directors. Non-Employee Directors are only eligible to receive an Award of Stock Options in accordance with Article XIII of the Plan. 14 ARTICLE VI STOCK OPTIONS 6.1 Stock Options. Each Stock Option granted hereunder shall be one of two types: (i) an Incentive Stock Option intended to satisfy the requirements of Section 422 of the Code; or (ii) a Non-Qualified Stock Option. 6.2 Grants. The Committee shall have the authority to grant to any Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify, shall constitute a separate Non-Qualified Stock Option. The Committee shall have the authority to grant any Consultant one or more Non-Qualified Stock Options (with or without Stock Appreciation Rights). Notwithstanding any other provision of this Plan to the contrary or any provision in an agreement evidencing the grant of a Stock Option to the contrary, any Stock Option granted to an Eligible Employee of an Affiliate (other than an Affiliate which is a Parent or a Subsidiary) shall be a Non-Qualified Stock Option. 6.3 Terms of Stock Options. Stock Options granted under this Plan shall be subject to the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable: (a) Exercise Price. The exercise price per share of Common Stock purchasable under an Incentive Stock Option or a Stock Option intended to be "performance-based" for purposes of Section 162(m) of the Code shall be determined by the Committee at the time of grant, but shall not be less than 100% of the Fair Market Value of the share of Common Stock at the time of grant; provided, however, that if an Incentive Stock Option is granted to a Ten Percent Stockholder, the exercise price shall be no less than 110% of the Fair Market Value of the Common Stock. The exercise price per share of Common Stock purchasable under a Non-Qualified Stock Option shall be determined by the Committee. (b) Stock Option Term. The term of each Stock Option shall be fixed by the Committee; provided, however, that no Stock Option shall be exercisable more than 10 years after the date such Stock Option is granted; and further provided that the term of an Incentive Stock Option granted to a Ten Percent Stockholder shall not exceed 5 years. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant. If the Committee provides, in its discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, 15 that such Stock Option is exercisable only in installments or within certain time periods), the Committee may waive such limitations on the exercisability at any time at or after grant in whole or in part (including, without limitation, waiver of the installment exercise provisions or acceleration of the time at which such Stock Option may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time and from time to time during the Stock Option term by giving written notice of exercise to the Committee specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price as follows: (i) in cash or by check, bank draft or money order payable to the order of the Company; (ii) if the Common Stock is traded on a national securities exchange, the Nasdaq Stock Market, Inc. or quoted on a national quotation system sponsored by the National Association of Securities Dealers, through a "cashless exercise" procedure whereby the Participant delivers irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the purchase price; or (iii) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, the relinquishment of Stock Options or by payment in full or in part in the form of Common Stock owned by the Participant for a period of at least 6 months or such other period as may be required to avoid an accounting charge against the Company's earnings (and for which the Participant has good title free and clear of any liens and encumbrances) based on the Fair Market Value of the Common Stock on the payment date as determined by the Committee). No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for. (e) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Eligible Employee during any calendar year under this Plan and/or any other stock option plan of the Company, any Subsidiary or any Parent exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options. In addition, if an Eligible Employee does not remain employed by the Company, any Subsidiary or any Parent at all times from the time an Incentive Stock Option is granted until 3 months prior to the date of exercise thereof (or such other period as required by applicable law), such Stock Option shall be treated as a Non-Qualified Stock Option. Should any provision of this Plan not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend this Plan accordingly, without the necessity of obtaining the approval of the stockholders of the Company. (f) Form, Modification, Extension and Renewal of Stock Options. Subject to the terms and conditions and within the limitations of this Plan, Stock 16 Options shall be evidenced by such form of agreement or grant as is approved by the Committee, and the Committee may (i) modify, extend or renew outstanding Stock Options granted under this Plan (provided that the rights of a Participant are not reduced without his consent), and (ii) accept the surrender of outstanding Stock Options (up to the extent not theretofore exercised) and authorize the granting of new Stock Options in substitution therefor (to the extent not theretofore exercised). (g) Other Terms and Conditions. Stock Options may contain such other provisions, which shall not be inconsistent with any of the terms of this Plan, as the Committee shall deem appropriate including, without limitation, permitting "reloads" such that the same number of Stock Options are granted as the number of Stock Options exercised, shares used to pay for the exercise price of Stock Options or shares used to pay withholding taxes ("Reloads"). With respect to Reloads, the exercise price of the new Stock Option shall be the Fair Market Value on the date of the "reload" and the term of the Stock Option shall be the same as the remaining term of the Stock Options that are exercised, if applicable, or such other exercise price and term as determined by the Committee. (h) Detrimental Activity. Unless otherwise determined by the Committee at grant, (i) in the event the Participant engages in Detrimental Activity prior to any exercise of the Stock Option, all Stock Options (whether vested or unvested) held by the Participant shall thereupon terminate and expire, (ii) as a condition of the exercise of a Stock Option, the Participant shall be required to certify (or shall be deemed to have certified) at the time of exercise in a manner acceptable to the Company that the Participant is in compliance with the terms and conditions of the Plan and that the Participant has not engaged in, and does not intend to engage in, any Detrimental Activity, and (iii) in the event the Participant engages in Detrimental Activity during the one year period following the later of (x) Participant's Termination of Employment or (y) the date the Stock Option is exercised, that any Stock Options shall be immediately forfeited (whether or not then vested) and the Company shall be entitled to recover from the Participant at any time within one year after the later of (x) or (y), and the Participant shall pay over to the Company, an amount equal to any gain realized as a result of the exercise of any Stock Options (whether at the time of exercise or thereafter). ARTICLE VII STOCK APPRECIATION RIGHTS 7.1 Tandem Stock Appreciation Rights. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option (a "Reference Stock Option") granted under this Plan ("Tandem Stock Appreciation Rights"). In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant 17 of such Reference Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Reference Stock Option. Consultants shall not be eligible for a grant of Tandem Stock Appreciation Rights granted in conjunction with all or part of an Incentive Stock Option. 7.2 Terms and Conditions of Tandem Stock Appreciation Rights. Tandem Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article XII and the following: (a) Term. A Tandem Stock Appreciation Right or applicable portion thereof granted with respect to a Reference Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the Reference Stock Option, except that, unless otherwise determined by the Committee, in its sole discretion, at the time of grant, a Tandem Stock Appreciation Right granted with respect to less than the full number of shares covered by the Reference Stock Option shall not be reduced until and then only to the extent the exercise or termination of the Reference Stock Option causes the number of shares covered by the Tandem Stock Appreciation Right to exceed the number of shares remaining available and unexercised under the Reference Stock Option. (b) Exercisability. Tandem Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Reference Stock Options to which they relate shall be exercisable in accordance with the provisions of Article VI and this Article VII. (c) Method of Exercise. A Tandem Stock Appreciation Right may be exercised by a Participant by surrendering the applicable portion of the Reference Stock Option. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in this Section 7.2. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Tandem Stock Appreciation Rights have been exercised. (d) Payment. Upon the exercise of a Tandem Stock Appreciation Right, a Participant shall be entitled to receive up to, but no more than, an amount in cash and/or Common Stock (as chosen by the Committee in its sole discretion at grant, or thereafter if no rights of a Participant are reduced) equal in value to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the Reference Stock Option, multiplied by the number of shares in respect of which the Tandem Stock Appreciation Right shall have been exercised. (e) Deemed Exercise of Reference Stock Option. Upon the exercise of a Tandem Stock Appreciation Right, the Reference Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been 18 exercised for the purpose of the limitation set forth in Article IV of this Plan on the number of shares of Common Stock to be issued under this Plan. (f) Detrimental Activity. Unless otherwise determined by the Committee at grant, (i) in the event the Participant engages in Detrimental Activity prior to any exercise of Tandem Stock Appreciation Rights, all Tandem Stock Appreciation Rights (whether vested or unvested) held by the Participant shall thereupon terminate and expire, (ii) as a condition of the exercise of a Tandem Stock Appreciation Right, the Participant shall be required to certify (or shall be deemed to have certified) at the time of exercise in a manner acceptable to the Company that the Participant is in compliance with the terms and conditions of the Plan and that the Participant has not engaged in, and does not intend to engage in, any Detrimental Activity, and (iii) in the event the Participant engages in Detrimental Activity during the one year period following the later of (x) Participant's Termination of Employment or (y) the date the Tandem Stock Appreciation Right is exercised, that any Tandem Stock Appreciation Rights shall be immediately forfeited (whether or not then vested) and the Company shall be entitled to recover from the Participant at any time within one year after the later of (x) or (y), and the Participant shall pay over to the Company, an amount equal to any gain realized as a result of the exercise (whether at the time of exercise or thereafter). 7.3 Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights may also be granted without reference to any Stock Option granted under this Plan. 7.4 Terms and Conditions of Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article XII and the following: (a) Term. The term of each Non-Tandem Stock Appreciation Right shall be fixed by the Committee, but shall not be greater than ten (10) years after the date the right is granted. (b) Exercisability. Non-Tandem Stock Appreciation Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant. If the Committee provides, in its discretion, that any such right is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitation on the exercisability at any time at or after grant in whole or in part (including, without limitation, waiver of the installment exercise provisions or acceleration of the time at which rights may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion. 19 (c) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (b) above, Non-Tandem Stock Appreciation Rights may be exercised in whole or in part at any time and from time to time during the option term, by giving written notice of exercise to the Company specifying the number of Non-Tandem Stock Appreciation Rights to be exercised. (d) Payment. Upon the exercise of a Non-Tandem Stock Appreciation Right a Participant shall be entitled to receive, for each right exercised, up to, but no more than, an amount in cash and/or Common Stock (as chosen by the Committee in its sole discretion at grant, or thereafter if no rights of a Participant are reduced) equal in value to the excess of the Fair Market Value of one share of Common Stock on the date the right is exercised over the Fair Market Value of one share of Common Stock on the date the right was awarded to the Participant. (e) Detrimental Activity. Unless otherwise determined by the Committee at grant, (i) in the event the Participant engages in Detrimental Activity prior to any exercise of Non-Tandem Stock Appreciation Rights, all Non-Tandem Stock Appreciation Rights (whether vested or unvested) held by the Participant shall thereupon terminate and expire, (ii) as a condition of the exercise of a Tandem Stock Appreciation Right, the Participant shall be required to certify (or shall be deemed to have certified) at the time of exercise in a manner acceptable to the Company that the Participant is in compliance with the terms and conditions of the Plan and that the Participant has not engaged in, and does not intend to engage in, any Detrimental Activity, and (iii) in the event the Participant engages in Detrimental Activity during the one year period following the later of (x) Participant's Termination of Employment or (y) the date the Non-Tandem Stock Appreciation Right is exercised, that any Non-Tandem Stock Appreciation Rights shall be immediately forfeited (whether or not then vested) and the Company shall be entitled to recover from the Participant at any time within one year after the later of (x) or (y), and the Participant shall pay over to the Company, an amount equal to any gain realized as a result of the exercise (whether at the time of exercise or thereafter). 7.5 Limited Stock Appreciation Rights. The Committee may, in its sole discretion, grant a Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right as a Limited Stock Appreciation Right. Limited Stock Appreciation Rights may be exercised only upon the occurrence of a Change in Control or such other event as the Committee may, in its sole discretion, designate at the time of grant or thereafter. Upon the exercise of limited Stock Appreciation Rights, except as otherwise provided in an Award agreement, the Participant shall receive in cash or Common Stock, as determined by the Committee, an amount equal to the amount (i) set forth in Section 7.2(d) with respect to Tandem Stock Appreciation Rights, or (ii) set forth in Section 7.4(d) with respect to Non-Tandem Stock Appreciation Rights, as applicable. 20 ARTICLE VIII RESTRICTED STOCK 8.1 Awards of Restricted Stock. Shares of Restricted Stock may be issued to Eligible Employees or Consultants either alone or in addition to other Awards granted under this Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient (subject to Section 8.2), the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. The Committee may condition the grant or vesting of Restricted Stock upon the attainment of specified performance goals, including established Performance Goals in accordance with Section 162(m) of the Code, or such other factors as the Committee may determine, in its sole discretion. 8.2 Awards and Certificates. An Eligible Employee or Consultant selected to receive Restricted Stock shall not have any rights with respect to such Award, unless and until such Participant has delivered to the Company a fully executed copy of the applicable Award agreement relating thereto and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions: (a) Purchase Price. The purchase price of Restricted Stock shall be fixed by the Committee. Subject to Section 4.3, the purchase price for shares of Restricted Stock may be zero to the extent permitted by applicable law, and, to the extent not so permitted, such purchase price may not be less than par value. (b) Acceptance. Awards of Restricted Stock must be accepted within a period of 90 days (or such shorter period as the Committee may specify at grant) after the Award date by executing a Restricted Stock Award agreement and by paying whatever price (if any) the Committee has designated thereunder. (c) Legend. Each Participant receiving shares of Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of The Comtech Telecommunications Corp. 2000 Stock Incentive Plan (the "Plan") and an Agreement entered into between the registered owner and the Company dated 21 _______. Copies of such Plan and Agreement are on file at the principal office of the Company." (d) Custody. The Committee may require that any stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition to the grant of such Award of Restricted Stock, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such Award. 8.3 Restrictions and Conditions on Restricted Stock Awards. Shares of Restricted Stock awarded pursuant to this Plan shall be subject to Article XII and the following restrictions and conditions: (a) Restriction Period; Vesting and Acceleration of Vesting. (i) The Participant shall not be permitted to Transfer shares of Restricted Stock awarded under this Plan during the period or periods set by the Committee (the "Restriction Period") commencing on the date of such Award, as set forth in the Restricted Stock Award agreement and such agreement shall set forth a vesting schedule and any events which would accelerate vesting of the shares of Restricted Stock. Within these limits, based on service, attainment of Performance Goals pursuant to Section 8.3(a)(ii) below and/or such other factors or criteria as the Committee may determine in its sole discretion, the Committee may provide for the lapse of such restrictions in installments in whole or in part, or may accelerate the vesting of all or any part of any Restricted Stock Award and/or waive the deferral limitations for all or any part of any Restricted Stock Award. (ii) Objective Performance Goals, Formulae or Standards. If the grant of shares of Restricted Stock or the lapse of restrictions is based on the attainment of Performance Goals, the Committee shall establish the Performance Goals and the applicable vesting percentage of the Restricted Stock Award applicable to each Participant or class of Participants in writing prior to the beginning of the applicable fiscal year or at such later date as otherwise determined by the Committee and while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. With regard to a Restricted Stock Award that is intended to comply with Section 162(m) of the Code, to the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable Performance Goals shall be based on one or more of the Performance Criteria set forth in Exhibit A hereto. (b) Rights as Stockholder. Except as provided in this subsection (b) and subsection (a) above and as otherwise determined by the Committee, the Participant shall have, with respect to the shares of Restricted Stock, all of the 22 rights of a holder of shares of Common Stock of the Company including, without limitation, the right to receive any dividends, the right to vote such shares and, subject to and conditioned upon the full vesting of shares of Restricted Stock, the right to tender such shares. The Committee may, in its sole discretion, determine at the time of grant that the payment of dividends shall be deferred until, and conditioned upon, the expiration of the applicable Restriction Period. (c) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant. All legends shall be removed from said certificates at the time of delivery to the Participant except as otherwise required by applicable law. (d) Detrimental Activity. Unless otherwise determined by the Committee at grant, each Award of Restricted Stock shall provide that in the event the Participant engages in Detrimental Activity prior to, or during the one year period following the later of Termination of Employment or any vesting of Restricted Stock, the Committee may direct (at any time within one year thereafter) that all unvested Restricted Stock shall be immediately forfeited to the Company and that the Participant shall pay over to the Company an amount equal to the gain realized at the time of vesting of any Restricted Stock. ARTICLE IX PERFORMANCE SHARES 9.1 Award of Performance Shares. Performance Shares may be awarded either alone or in addition to other Awards granted under this Plan. The Committee shall, in its sole discretion, determine the Eligible Employees and Consultants to whom and the time or times at which such Performance Shares shall be awarded, the duration of the period (the "Performance Period") during which, and the conditions under which, a Participant's right to Performance Shares will be vested and the other terms and conditions of the Award in addition to those set forth in Section 9.2. Each Performance Share awarded shall be referenced to one share of Common Stock. Except as otherwise provided herein, the Committee shall condition the right to payment of any Performance Share Award upon the attainment of objective Performance Goals established pursuant to Section 9.2(c) below and such other non-performance based factors or criteria as the Committee may determine in its sole discretion. 9.2 Terms and Conditions. A Participant selected to receive Performance Shares shall not have any rights with respect to such Awards, unless and until such Participant has delivered a fully executed copy of a Performance Share Award agreement evidencing the Award to the Company and has otherwise complied with the following terms and conditions: 23 (a) Earning of Performance Share Award. At the expiration of the applicable Performance Period, the Committee shall determine the extent to which the Performance Goals established pursuant to Section 9.2(c) are achieved and the percentage of each Performance Share Award that has been earned. (b) Payment. Following the Committee's determination in accordance with subsection (a) above, shares of Common Stock or, as determined by the Committee in its sole discretion, the cash equivalent of such shares shall be delivered to the Participant, in an amount equal to such Participant's earned Performance Share Award. Notwithstanding the foregoing, except as may be set forth in the agreement covering the Award, the Committee may, in its sole discretion and in accordance with Section 162(m) of the Code, award an amount less than the earned Performance Share Award and/or subject the payment of all or part of any Performance Share Award to additional vesting and forfeiture conditions as it deems appropriate. (c) Objective Performance Goals, Formulae or Standards. The Committee shall establish the objective Performance Goals for the earning of Performance Shares based on a Performance Period applicable to each Participant or class of Participants in writing prior to the beginning of the applicable Performance Period or at such later date as permitted under Section 162(m) of the Code and while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate, if and only to the extent permitted under Section 162(m) of the Code, provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. To the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable Performance Goals shall be based on one or more of the Performance Criteria set forth in Exhibit A hereto. (d) Dividends and Other Distributions. At the time of any Award of Performance Shares, the Committee may, in its sole discretion, award an Eligible Employee or Consultant the right to receive the cash value of any dividends and other distributions that would have been received as though the Eligible Employee or Consultant had held each share of Common Stock referenced by the earned Performance Share Award from the last day of the first year of the Performance Period until the actual distribution to such Participant of the related share of Common Stock or cash value thereof. Such amounts, if awarded, shall be paid to the Participant as and when the shares of Common Stock or cash value thereof are distributed to such Participant and, at the discretion of the Committee, may be paid with interest from the first day of the second year of the Performance Period until such amounts and any earnings thereon are distributed. The applicable rate of interest shall be determined by the Committee in its sole discretion; provided, however, that for each fiscal year or part thereof, the 24 applicable interest rate shall not be greater than a rate equal to the four-year U.S. Government Treasury rate on the first day of each applicable fiscal year. (e) Detrimental Activity. Unless otherwise determined by the Committee at grant, each Award of Performance Shares shall provide that in the event the Participant engages in Detrimental Activity prior to, or during the one year period following the later of Termination of Employment or any vesting of Performance Shares, the Committee may direct (at any time within one year thereafter) that all unvested Performance Shares shall be immediately forfeited to the Company and that the Participant shall pay over to the Company an amount equal to the gain realized at the time of vesting of any Performance Shares. ARTICLE X PERFORMANCE UNITS 10.1 Awards of Performance Units. Performance Units may be awarded either alone or in addition to other Awards granted under this Plan. The Committee shall, in its sole discretion, determine the Eligible Employees to whom and the time or times at which such Performance Units shall be awarded, the duration of the period (the "Performance Cycle") during which, and the conditions under which, a Participant's right to Performance Units will be vested and the other terms and conditions of the Award in addition to those set forth in Section 10.2. Performance Units shall be awarded in a dollar amount determined by the Committee and shall be converted for purposes of calculating growth in value to a referenced number of shares of Common Stock based on the Fair Market Value of shares of Common Stock at the close of trading on the first business day following the announcement of the annual financial results of the Company for the fiscal year of the Company immediately preceding the fiscal year of the commencement of the relevant Performance Cycle, provided that the Committee may provide that the minimum price for such conversion shall be the Fair Market Value on the date of grant. Each Performance Unit shall be referenced to one share of Common Stock. Except as otherwise provided herein, the Committee shall condition the right to payment of any Performance Unit Award upon the attainment of objective Performance Goals established pursuant to Section 10.2(a) and such other non-performance based factors or criteria as the Committee may determine in its sole discretion. The cash value of any fractional Performance Unit Award subsequent to conversion to shares of Common Stock shall be treated as a dividend or other distribution under Section 10.2(e) to the extent any portion of the Performance Unit Award is earned. 10.2 Terms and Conditions. The Performance Units awarded pursuant to this Article 10 shall be subject to the following terms and conditions: 25 (a) Performance Goals. The Committee shall establish the objective Performance Goals for the earnings of Performance Units based on a Performance Cycle applicable to each Participant or class of Participants in writing prior to the beginning of the applicable Performance Cycle or at such later date as permitted under Section 162(m) of the Code and while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate, if and only to the extent permitted under Section 162(m) of the Code, provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. To the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable Performance Goals shall be based on one or more of the Performance Criteria set forth in Exhibit A hereto. (b) Vesting. At the expiration of the Performance Cycle, the Committee shall determine and certify in writing the extent to which the Performance Goals have been achieved, and the percentage of the Performance Units of each Participant that have vested. (c) Payment. Subject to the applicable provisions of the Award agreement and this Plan, at the expiration of the Performance Cycle, cash and/or shares of Common Stock (as the Committee may determine in its sole discretion at grant, or thereafter if no rights of a Participant are reduced) shall be delivered to the Participant in payment of the vested Performance Units covered by the Performance Unit Award. Notwithstanding the foregoing, except as may be set forth in the agreement covering the Award, the Committee may, in its sole discretion, and to the extent applicable and permitted under Section 162(m) of the Code, award an amount less than the earned Performance Unit Award and/or subject the payment of all or part of any Performance Unit Award to additional vesting and forfeiture conditions as it deems appropriate. (d) Accelerated Vesting. Based on service, performance and/or such other factors or criteria, if any, as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Performance Unit Award and/or waive the deferral limitations for all or any part of such Award. (e) Dividends and Other Distributions. At the time of any Award of Performance Units, the Committee may, in its sole discretion, award an Eligible Employee or Consultant the right to receive the cash value of any dividends and other distributions that would have been received as though the Eligible Employee or Consultant had held each share of Common Stock referenced by the earned Performance Unit Award from the last day of the first year of the Performance Cycle until the actual distribution to such Participant of the related share of Common Stock or cash value 26 thereof. Such amounts, if awarded, shall be paid to the Participant as and when the shares of Common Stock or cash value thereof are distributed to such Participant and, at the discretion of the Committee, may be paid with interest from the first day of the second year of the Performance Cycle until such amounts and any earnings thereon are distributed. The applicable rate of interest shall be determined by the Committee in its sole discretion; provided, however, that for each fiscal year or part thereof, the applicable interest rate shall not be greater than a rate equal to the four-year U.S. Government Treasury rate on the first day of each applicable fiscal year. (f) Detrimental Activity. Unless otherwise determined by the Committee at grant, each Award of Performance Units shall provide that in the event the Participant engages in Detrimental Activity prior to, or during the one year period following the later of Termination of Employment or any vesting of Performance Units, the Committee may direct (at any time within one year thereafter) that all unvested Performance Units shall be immediately forfeited to the Company and that the Participant shall pay over to the Company an amount equal to the gain realized at the time of vesting of any Performance Units which had vested in the period referred to above. ARTICLE XI OTHER STOCK-BASED AWARDS 11.1 Other Awards. Other Stock-Based Awards may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Performance Units. Subject to the provisions of this Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock to be awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Common Stock under such Awards upon the completion of a specified performance period. 11.2 Terms and Conditions. Other Stock-Based Awards made pursuant to this Article XI shall be subject to the following terms and conditions: (a) Non-Transferability. Subject to the applicable provisions of the Award agreement and this Plan, shares of Common Stock subject to Awards made under this Article XI may not be Transferred prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (b) Dividends. Unless otherwise determined by the Committee at the time of Award, subject to the provisions of the Award agreement and this Plan, the recipient of an Award under this Article XI shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to 27 the number of shares of Common Stock covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion. (c) Vesting. Any Award under this Article XI and any Common Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award agreement, as determined by the Committee, in its sole discretion. (d) Waiver of Limitation. The Committee may, in its sole discretion, waive in whole or in part any or all of the limitations imposed hereunder (if any) with respect to any or all of an Award under this Article XI. (e) Price. Common Stock or Other Stock-Based Awards issued on a bonus basis under this Article XI may be issued for no cash consideration; Common Stock or Other Stock-Based Awards purchased pursuant to a purchase right awarded under this Article XI shall be priced as determined by the Committee. Subject to Section 4.3, the purchase price of shares of Common Stock or Other Stock-Based Awards may be zero to the extent permitted by applicable law, and, to the extent not so permitted, such purchase price may not be less than par value. The purchase of shares of Common Stock or Other Stock-Based Awards may be made on either an after-tax or pre-tax basis, as determined by the Committee; provided, however, that if the purchase is made on a pre-tax basis, such purchase shall be made pursuant to a deferred compensation program established by the Committee, which will be deemed a part of this Plan. (f) Detrimental Activity. Other Stock-Based Awards under this Article XI and any Common Stock covered by any such Award shall be forfeited in the event the Participant engages in Detrimental Activity under such conditions set forth by the Committee in the Award agreement. ARTICLE XII NON-TRANSFERABILITY AND TERMINATION OF EMPLOYMENT/CONSULTANCY 12.1 Non-Transferability. No Stock Option, Stock Appreciation Right, Performance Unit, Performance Share or Other Stock-Based Award shall be Transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options and all Stock Appreciation Rights shall be exercisable, during the Participant's lifetime, only by the Participant. Tandem Stock Appreciation Rights shall be Transferable, to the extent permitted above, only with the underlying Stock Option. Shares of Restricted Stock under Article VIII may not be Transferred prior to the date on which shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. No Award shall, except as otherwise specifically provided by law or herein, be Transferable in any manner, and any attempt to Transfer any such Award shall be void, and no such Award shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be 28 entitled to such Award, nor shall it be subject to attachment or legal process for or against such person. Notwithstanding the foregoing, the Committee may determine at the time of grant or thereafter, that a Non-Qualified Stock Option that is otherwise not transferable pursuant to this Section 12.1 is transferable to a Family Member in whole or in part and in such circumstances, and under such conditions, as specified by the Committee. A Non-Qualified Stock Option that is transferred to a Family Member pursuant to the preceding sentence may not be subsequently transferred otherwise than by will or by the laws of descent and distribution. 12.2 Termination of Employment or Termination of Consultancy. The following rules apply with regard to the Termination of Employment or Termination of Consultancy of a Participant: (a) Rules Applicable to Stock Options and Stock Appreciation Rights. Unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter: (i) Termination by Reason of Death, Disability or Retirement. If a Participant's Termination of Employment or Termination of Consultancy is by reason of death, Disability or Retirement, all Stock Options and Stock Appreciation Rights held by such Participant may be exercised, to the extent exercisable at the Participant's Termination of Employment or Termination of Consultancy, by the Participant (or, in the case of death, by the legal representative of the Participant's estate) at any time within a period of one year from the date of such Termination of Employment or Termination of Consultancy, but in no event beyond the expiration of the stated terms of such Stock Options and Stock Appreciation Rights; provided, however, that, in the case of Retirement, if the Participant dies within such exercise period, all unexercised Stock Options and Non-Tandem Stock Appreciation Rights held by such Participant shall thereafter be exercisable, to the extent to which they were exercisable at the time of death, for a period of one year from the date of such death, but in no event beyond the expiration of the stated term of such Stock Options and Non-Tandem Stock Appreciation Rights. (ii) Involuntary Termination Without Cause. If a Participant's Termination of Employment or Termination of Consultancy is by involuntary termination without Cause, all Stock Options and Stock Appreciation Rights held by such Participant may be exercised, to the extent exercisable at Termination of Employment or Termination of Consultancy, by the Participant at any time within a period of 90 days from the date of such Termination of Employment or Termination of Consultancy, but in no event beyond the expiration of the stated term of such Stock Options and Stock Appreciation Rights. (iii) Voluntary Termination. If a Participant's Termination of Employment or Termination of Consultancy is voluntary (other than a voluntary termination described in Section 12.2(a)(iv)(B) below), all Stock Options and Stock Appreciation Rights held by such Participant may be exercised, to the 29 extent exercisable at Termination of Employment or Termination of Consultancy, by the Participant at any time within a period of 30 days from the date of such Termination of Employment or Termination of Consultancy, but in no event beyond the expiration of the stated terms of such Stock Options and Stock Appreciation Rights. Notwithstanding the foregoing, effective for Stock Options and Stock Appreciation Rights granted on or after October 19, 2000, if a Participant's Termination of Employment or Termination of Consultancy is voluntary, all Stock Options and Stock Appreciation Rights held by such Participant shall thereupon terminate and expire as of the date of such Termination of Employment or Termination of Consultancy. (iv) Termination for Cause. If a Participant's Termination of Employment or Termination of Consultancy (A) is for Cause or (B) is a voluntary termination (as provided in subsection (iii) above) within 90 days after an event which would be grounds for a Termination of Employment or Termination of Consultancy for Cause, all Stock Options and Stock Appreciation Rights held by such Participant shall thereupon terminate and expire as of the date of such Termination of Employment or Termination of Consultancy. (b) Rules Applicable to Restricted Stock. Subject to the applicable provisions of the Restricted Stock Award agreement and this Plan, upon a Participant's Termination of Employment or Termination of Consultancy for any reason during the relevant Restriction Period, all Restricted Stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee at grant or thereafter. (c) Rules Applicable to Performance Shares and Performance Units. Subject to the applicable provisions of the Award agreement and this Plan, upon a Participant's Termination of Employment or Termination of Consultancy for any reason during the Performance Period, the Performance Cycle or other period or restriction as may be applicable for a given Award, the Performance Shares or Performance Units in question will vest (to the extent applicable and to the extent permissible under Section 162(m) of the Code) or be forfeited in accordance with the terms and conditions established by the Committee at grant or thereafter. (d) Rules Applicable to Other Stock-Based Awards. Subject to the applicable provisions of the Award agreement and this Plan, upon a Participant's Termination of Employment or Termination of Consultancy for any reason during any period or restriction as may be applicable for a given Award, the Other Stock-Based Awards in question will vest or be forfeited in accordance with the terms and conditions established by the Committee at grant or thereafter. 30 ARTICLE XIII NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS 13.1 Stock Options. The terms of this Article XIII shall apply only to Stock Options granted to Non-Employee Directors. 13.2 Grants. Without further action by the Board or the stockholders of the Company, each Non-Employee Director shall, subject to the terms of the Plan, be granted: (a) Stock Options to purchase 3,000 shares of Common Stock as of the date the Non-Employee Director begins service as a Non-Employee Director on the Board, provided that the Non-Employee Director began service on or after the Effective Date; and (b) In addition to Stock Options granted pursuant to (a) above, Stock Options: (i) to purchase 5,000 shares of Common Stock as of the August 1 of each year, commencing August 1, 2002, provided he or she has not, as of such day, experienced a Termination of Directorship and provided further that he or she has been a Non-Employee Director for at least six months as of such August 1 date; and (ii) to purchase 1,500 shares of Common Stock as of November 1, 2001. 13.3 Non-Qualified Stock Options. Stock Options granted under this Article XIII shall be Non-Qualified Stock Options. 13.4 Terms of Stock Options. Stock Options granted under this Article XIII shall be subject to the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Board shall deem desirable: (a) Stock Option Price. The Stock Option price per share of Common Stock purchasable under a Stock Option shall equal 100% of the Fair Market Value of the share of Common Stock at the time of grant. (b) Stock Option Term. The term of each Stock Option shall be ten (10) years. (c) Exercisability. Stock Options granted to Non-Employee Directors pursuant to Section 13.2 shall vest and become exercisable on the first anniversary of date of grant, provided that the Stock Option may become vested only during the continuance of his or her service as a director of the Company. (d) Method of Exercise. Subject to whatever waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time and from time to time during the Stock Option term, by giving written notice of exercise to the Company specifying the number of shares to be 31 purchased. Such notice shall be accompanied by payment in full of the purchase price as follows: (i) in cash or by check, bank draft or money order payable to the Company; (ii) if the Common Stock is traded on a national securities exchange, through a "cashless exercise" procedure whereby the Participant delivers irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the purchase price; or (iii) such other arrangement for the satisfaction of the purchase price, as the Board may accept. If and to the extent determined by the Board in its sole discretion at or after grant, payment in full or in part may also be made in the form of Common Stock owned by the Participant for at least 6 months (or such other period as may be required to avoid an accounting charge against the Company's earnings) (and for which the Participant has good title free and clear of any liens and encumbrances) based on the Fair Market Value of the Common Stock on the payment date. No shares of Common Stock shall be issued until payment, as provided herein, therefor has been made or provided for. (e) Form, Modification, Extension and Renewal of Stock Options. Subject to the terms and conditions and within the limitations of the Plan, a Stock Option shall be evidenced by such form of agreement or grant as is approved by the Board, and the Board may modify, extend or renew outstanding Stock Options granted under the Plan (provided that the rights of a Participant are not reduced without his consent). 13.5 Termination of Directorship. The following rules apply with regard to Stock Options upon the Termination of Directorship: (a) Termination of Directorship by Reason of Death, Disability or Otherwise Ceasing to be a Director. Except as otherwise provided herein, upon the Termination of Directorship by reason of death, disability, resignation, failure to stand for reelection or failure to be reelected or otherwise, all outstanding Stock Options exercisable and not exercised shall remain exercisable to the extent exercisable on such date of Termination of Directorship by the Participant or, in the case of death, by the Participant's estate or by the person given authority to exercise such Stock Options by his or her will or by operation of law, at any time prior to the expiration of the stated term of such Stock Option. (b) Cancellation of Options. Except as provided in Section 13.6, no Stock Options that were not exercisable as of the date of Termination of Directorship shall thereafter become exercisable upon a Termination of Directorship for any reason or no reason whatsoever, and such Stock Options shall terminate and become null and void upon a Termination of Directorship. If a Non-Employee Director's Termination of Directorship is for Cause, all Stock Options held by the Non-Employee Director shall thereupon terminate and expire as of the date of termination. 13.6 Acceleration of Exercisability. All Stock Options granted to a Non-Employee Director and not previously exercisable shall become fully exercisable upon 32 such Director's death, and all Stock Options granted to Non-Employee Directors and not previously exercisable shall become fully exercisable immediately upon a Change in Control (as defined in Section 14.2). 13.7 Changes. (a) The Awards to a Non-Employee Director shall be subject to Sections 4.2(a), (b) and (c) of the Plan and this Section 13.7, but shall not be subject to Section 4.2(d). (b) If the Company shall not be the surviving corporation in any merger or consolidation, or if the Company is to be dissolved or liquidated, then, unless the surviving corporation assumes the Stock Options or substitutes new Stock Options which are determined by the Board in its sole discretion to be substantially similar in nature and equivalent in terms and value for Stock Options then outstanding, upon the effective date of such merger, consolidation, liquidation or dissolution, any unexercised Stock Options shall expire without additional compensation to the holder thereof; provided, that, the Board shall deliver notice to each Non-Employee Director at least 30 days prior to the date of consummation of such merger, consolidation, dissolution or liquidation which would result in the expiration of the Stock Options and during the period from the date on which such notice of termination is delivered to the consummation of the merger, consolidation, dissolution or liquidation, such Participant shall have the right to exercise in full, effective as of such consummation, all Stock Options that are then outstanding (without regard to limitations on exercise otherwise contained in the Stock Options) but contingent on occurrence of the merger, consolidation, dissolution or liquidation, and, provided that, if the contemplated transaction does not take place within a 90 day period after giving such notice for any reason whatsoever, the notice, accelerated vesting and exercise shall be null and void and, if and when appropriate, new notice shall be given as aforesaid. ARTICLE XIV CHANGE IN CONTROL PROVISIONS 14.1 Benefits. In the event of a Change in Control of the Company, except as otherwise provided by the Committee upon the grant of an Award, the Participant shall be entitled to the following benefits: (a) Except to the extent provided in the applicable Award agreement, the Participant's employment agreement with the Company or an Affiliate, as approved by the Committee, or other written agreement approved by the Committee (as such agreement may be amended from time to time), (i) Awards granted and not previously exercisable shall become exercisable upon a Change in Control, (ii) restrictions to which any shares of Restricted Stock granted prior to the Change in Control are subject shall lapse upon a Change in Control, and 33 (iii) the conditions required for vesting of any unvested Performance Units and/or Performance Shares shall be deemed to be satisfied upon a Change in Control. (b) The Committee, in its sole discretion, may provide for the purchase of any Stock Option by the Company or an Affiliate for an amount of cash equal to the excess of the Change in Control Price (as defined below) of the shares of Common Stock covered by such Stock Options, over the aggregate exercise price of such Stock Options. For purposes of this Section 14.1, Change in Control Price shall mean the higher of (i) the highest price per share of Common Stock paid in any transaction related to a Change in Control of the Company, or (ii) the highest Fair Market Value per share of Common Stock at any time during the sixty (60) day period preceding a Change in Control. (c) Notwithstanding anything to the contrary herein, unless the Committee provides otherwise at the time a Stock Option is granted hereunder or thereafter, no acceleration of exercisability shall occur with respect to such Stock Options if the Committee reasonably determines in good faith, prior to the occurrence of the Change in Control, that the Stock Options shall be honored or assumed, or new rights substituted therefor (each such honored, assumed or substituted stock option hereinafter called an "Alternative Option"), by a Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Option must meet the following criteria: (i) the Alternative Option must be based on stock which is traded on an established securities market, or which will be so traded within 30 days of the Change in Control; (ii) the Alternative Option must provide such Participant with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Stock Option, including, but not limited to, an identical or better exercise schedule; and (iii) the Alternative Option must have economic value substantially equivalent to the value of such Stock Option (determined at the time of the Change in Control). For purposes of Incentive Stock Options, any assumed or substituted Stock Option shall comply with the requirements of Treasury Regulation ss. 1.425-1 (and any amendments thereto). (d) Notwithstanding anything else herein, the Committee may, in its sole discretion, provide for accelerated vesting of an Award or accelerated lapsing of restrictions on shares of Restricted Stock at any time. 14.2 Change in Control. A "Change in Control" shall be deemed to have occurred: 34 (a) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c), or (d) of this section) or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (c) upon a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (a) above) acquires more than 50% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (d) upon the stockholders of the Company approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 35 ARTICLE XV TERMINATION OR AMENDMENT OF PLAN Notwithstanding any other provision of this Plan, the Board or the Committee may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of this Plan (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Article XVII), or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such Participant and, provided further, without the approval of the shareholders of the Company in accordance with the laws of the State of Delaware, to the extent required by the applicable provisions of Rule 16b-3 or Section 162(m) of the Code, or, to the extent applicable to Incentive Stock Options, Section 422 of the Code, no amendment may be made which would (i) increase the aggregate number of shares of Common Stock that may be issued under this Plan; (ii) increase the maximum individual Participant limitations for a fiscal year under Section 4.1(b); (iii) change the classification of employees or Consultants eligible to receive Awards under this Plan; (iv) decrease the minimum option price of any Stock Option or Stock Appreciation Right; (v) extend the maximum option period under Section 6.3; (vi) materially alter the Performance Criteria for the Award of Restricted Stock, Performance Units or Performance Shares as set forth in Exhibit A; or (vii) require stockholder approval in order for this Plan to continue to comply with the applicable provisions of Section 162(m) of the Code or, to the extent applicable to Incentive Stock Options, Section 422 of the Code. In no event may this Plan be amended without the approval of the stockholders of the Company in accordance with the applicable laws of the State of Delaware to increase the aggregate number of shares of Common Stock that may be issued under this Plan, decrease the minimum exercise price of any Stock Option or Stock Appreciation Right, or to make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Company's securities are listed or traded at the request of the Company. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Article IV above or as otherwise specifically provided herein, no such amendment or other action by the Committee shall impair the rights of any holder without the holder's consent. ARTICLE XVI UNFUNDED PLAN 16.1 Unfunded Status of Plan. This Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. 36 ARTICLE XVII GENERAL PROVISIONS 17.1 Legend. The Committee may require each person receiving shares pursuant to an Award under this Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. In addition to any legend required by this Plan, the certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on Transfer. All certificates for shares of Common Stock delivered under this Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed or any national securities association system upon whose system the Stock is then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 17.2 Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 17.3 Right to Employment/Consultancy. Neither this Plan nor the grant of any Award hereunder shall give any Participant or other employee or Consultant any right with respect to continuance of employment or Consultancy by the Company or any Affiliate, nor shall they be a limitation in any way on the right of the Company or any Affiliate by which an employee is employed or a Consultant is retained to terminate his employment or Consultancy at any time. 17.4 Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. Upon the vesting of Restricted Stock, or upon making an election under Code Section 83(b), a Participant shall pay all required withholding to the Company. Any such withholding obligation with regard to any Participant may be satisfied, subject to the consent of the Committee, by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 17.5 Listing and Other Conditions. 37 (a) As long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to an Award shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Stock Option with respect to such shares shall be suspended until such listing has been effected. (b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Stock Option shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company. (c) Upon termination of any period of suspension under this Section 17.5, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Stock Option. 17.6 Governing Law. This Plan shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws). 17.7 Construction. Wherever any words are used in this Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. 17.8 Other Benefits. No Award payment under this Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its subsidiaries nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation. 17.9 Costs. The Company shall bear all expenses included in administering this Plan, including expenses of issuing Common Stock pursuant to any Awards hereunder. 38 17.10 No Right to Same Benefits. The provisions of Awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years. 17.11 Death/Disability. The Committee may in its discretion require the transferee of a Participant to supply it with written notice of the Participant's death or Disability and to supply it with a copy of the will (in the case of the Participant's death) or such other evidence as the Committee deems necessary to establish the validity of the transfer of an Award. The Committee may also require that the agreement of the transferee to be bound by all of the terms and conditions of this Plan. 17.12 Section 16(b) of the Exchange Act. All elections and transactions under this Plan by persons subject to Section 16 of the Exchange Act involving shares of Common Stock are intended to comply with any applicable exemptive condition under Rule 16b-3. The Committee may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of this Plan and the transaction of business thereunder. 17.13 Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 17.14 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of this Plan, and shall not be employed in the construction of this Plan. ARTICLE XVIII EFFECTIVE DATE OF PLAN The Plan shall become effective upon adoption by the Board (i.e., October 19, 1999), subject to the approval of this Plan by the stockholders of the Company in accordance with the requirements of the laws of the State of Delaware or such later date as provided in the adopting resolution. ARTICLE XIX TERM OF PLAN No Award shall be granted pursuant to this Plan on or after the tenth anniversary of the earlier of the date this Plan is adopted or the date of stockholder approval, but Awards granted prior to such tenth anniversary may extend beyond that date. 39 EXHIBIT A PERFORMANCE CRITERIA Performance Goals established for purposes of conditioning the grant of an Award of Restricted Stock based on performance or the vesting of performance-based Awards of Restricted Stock, Performance Units and/or Performance Shares shall be based on one or more of the following performance criteria ("Performance Criteria"): (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, income before income taxes and extraordinary items, net income, earnings before income tax, earnings before interest, taxes, depreciation and amortization or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company's bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders' equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in the fair market value of the shares of the Company's common stock; and (x) the growth in the value of an investment in the Company's common stock assuming the reinvestment of dividends. For purposes of item (i) above, "extraordinary items" shall mean all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to a corporate transaction (including, without limitation, a disposition or acquisition) or related to a change in accounting principle, all as determined in accordance with standards established by Opinion No. 30 of the Accounting Principles Board. In addition, such Performance Criteria may be based upon the attainment of specified levels of Company (or subsidiary, division or other operational unit of the Company) performance under one or more of the measures described above relative to the performance of other corporations. To the extent permitted under Code Section 162(m), but only to the extent permitted under Code Section 162(m) (including, without limitation, compliance with any requirements for stockholder approval), the Committee may: (i) designate additional business criteria on which the Performance Criteria may be based or (ii) adjust, modify or amend the aforementioned business criteria. THE COMTECH TELECOMMUNICATIONS CORP. 2000 STOCK INCENTIVE PLAN AMENDED AND RESTATED (EFFECTIVE OCTOBER 9, 2001) TABLE OF CONTENTS Page ---- ARTICLE I PURPOSE..............................................................1 ARTICLE II DEFINITIONS.........................................................1 2.1 "Acquisition Event"................................................1 2.2 "Affiliate"........................................................1 2.3 "Award"............................................................2 2.4 "Board"............................................................2 2.5 "Cause"............................................................2 2.6 "Change in Control"................................................2 2.7 "Code".............................................................2 2.8 "Committee"........................................................2 2.9 "Common Stock".....................................................3 2.10 "Company"..........................................................3 2.11 "Consultant".......................................................3 2.12 "Detrimental Activity".............................................3 2.13 "Disparagement"....................................................4 2.14 "Disability".......................................................4 2.15 "Effective Date"...................................................4 2.16 "Eligible Employee"................................................4 2.17 "Exchange Act".....................................................4 2.18 "Family Member"....................................................4 2.19 "Fair Market Value"................................................4 2.20 "Foreign Jurisdiction".............................................5 2.21 "Incentive Stock Option"...........................................5 2.22 "Limited Stock Appreciation Right".................................5 2.23 "Non-Employee Director"............................................5 2.24 "Non-Qualified Stock Option".......................................5 2.25 "Non-Tandem Stock Appreciation Right"..............................5 2.26 "Other Stock-Based Award"..........................................5 2.27 "Parent"...........................................................5 2.28 "Participant"......................................................5 2.29 "Performance Criteria".............................................5 2.30 "Performance Cycle"................................................6 2.31 "Performance Goal".................................................6 2.32 "Performance Period"...............................................6 2.33 "Performance Share"................................................6 2.34 "Performance Unit".................................................6 2.35 "Plan".............................................................6 2.36 "Reference Stock Option"...........................................6 2.37 "Restricted Stock".................................................6 2.38 "Restriction Period"...............................................6 2.39 "Retirement".......................................................6 2.40 "Rule 16b-3".......................................................6 i 2.41 "Section 162(m) of the Code".......................................6 2.42 "Securities Act"...................................................6 2.43 "Stock Appreciation Right" or "SAR"................................6 2.44 "Stock Option" or "Option".........................................7 2.45 "Subsidiary".......................................................7 2.46 "Tandem Stock Appreciation Right"..................................7 2.47 "Ten Percent Stockholder"..........................................7 2.48 "Termination of Consultancy".......................................7 2.49 "Termination of Directorship"......................................7 2.50 "Termination of Employment"........................................7 2.51 "Transfer".........................................................7 ARTICLE III ADMINISTRATION.....................................................8 3.1 The Committee......................................................8 3.2 Grants of Awards...................................................8 3.3 Guidelines.........................................................9 3.4 Decisions Final....................................................9 3.5 Reliance on Counsel...............................................10 3.6 Procedures........................................................10 3.7 Designation of Consultants/Liability..............................10 ARTICLE IV SHARE AND OTHER LIMITATIONS........................................11 4.1 Shares............................................................11 4.2 Changes...........................................................12 4.3 Minimum Purchase Price............................................14 4.4 Assumption of Awards..............................................14 ARTICLE V ELIGIBILITY.........................................................14 5.1 General Eligibility...............................................14 5.2 Incentive Stock Options...........................................14 5.3 Non-Employee Directors............................................14 ARTICLE VI STOCK OPTIONS......................................................15 6.1 Stock Options.....................................................15 6.2 Grants............................................................15 6.3 Terms of Stock Options............................................15 ARTICLE VII STOCK APPRECIATION RIGHTS.........................................17 7.1 Tandem Stock Appreciation Rights..................................17 7.2 Terms and Conditions of Tandem Stock Appreciation Rights..........18 7.3 Non-Tandem Stock Appreciation Rights..............................19 7.4 Terms and Conditions of Non-Tandem Stock Appreciation Rights......19 7.5 Limited Stock Appreciation Rights.................................20 ARTICLE VIII RESTRICTED STOCK.................................................21 8.1 Awards of Restricted Stock........................................21 8.2 Awards and Certificates...........................................21 8.3 Restrictions and Conditions on Restricted Stock Awards............22 ARTICLE IX PERFORMANCE SHARES.................................................23 9.1 Award of Performance Shares.......................................23 9.2 Terms and Conditions..............................................23 ARTICLE X PERFORMANCE UNITS...................................................25 ii 10.1 Awards of Performance Units.......................................25 10.2 Terms and Conditions..............................................25 ARTICLE XI OTHER STOCK-BASED AWARDS...........................................27 11.1 Other Awards......................................................27 11.2 Terms and Conditions..............................................27 ARTICLE XII NON-TRANSFERABILITY AND TERMINATION OF EMPLOYMENT/CONSULTANCY....28 12.1 Non-Transferability...............................................28 12.2 Termination of Employment or Termination of Consultancy...........29 ARTICLE XIII NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS........................31 13.1 Stock Options.....................................................31 13.2 Grants............................................................31 13.3 Non-Qualified Stock Options.......................................31 13.4 Terms of Stock Options............................................31 13.5 Termination of Directorship.......................................32 13.6 Acceleration of Exercisability....................................32 13.7 Changes...........................................................33 ARTICLE XIV CHANGE IN CONTROL PROVISIONS......................................33 14.1 Benefits..........................................................33 14.2 Change in Control.................................................34 ARTICLE XV TERMINATION OR AMENDMENT OF PLAN...................................36 ARTICLE XVI UNFUNDED PLAN.....................................................36 16.1 Unfunded Status of Plan...........................................36 ARTICLE XVII GENERAL PROVISIONS...............................................37 17.1 Legend............................................................37 17.2 Other Plans.......................................................37 17.3 Right to Employment/Consultancy...................................37 17.4 Withholding of Taxes..............................................37 17.5 Listing and Other Conditions......................................37 17.6 Governing Law.....................................................38 17.7 Construction......................................................38 17.8 Other Benefits....................................................38 17.9 Costs.............................................................38 17.10 No Right to Same Benefits......................................39 17.11 Death/Disability...............................................39 17.12 Section 16(b) of the Exchange Act..............................39 17.13 Severability of Provisions.....................................39 17.14 Headings and Captions..........................................39 ARTICLE XVIII EFFECTIVE DATE OF PLAN..........................................39 ARTICLE XIX TERM OF PLAN......................................................39 iii EX-10.(H) 4 d52183_ex10h.txt ASSET PURCHASE AGREEMENT EXECUTION COPY ASSET PURCHASE AGREEMENT between COMTECH TELECOMMUNICATIONS CORP., COMTECH/AHA ACQUISITION CORP. and ADVANCED HARDWARE ARCHITECTURES, INC. Dated as of June 25, 2002 EXECUTION COPY TABLE OF CONTENTS PAGE ---- ARTICLE I THE TRANSACTION......................................................1 1.1. Sale and Purchase of Assets..........................................1 1.2. Assumption of Certain Liabilities....................................3 1.3. Consent of Third Parties.............................................6 1.4. Closing..............................................................6 1.5. Purchase Price.......................................................6 1.6. Post-Closing Adjustment to Purchase Price............................6 1.7. Deliveries and Proceedings at Closing................................8 1.8. Allocation of Consideration..........................................9 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER............................9 2.1. Qualification; No Interest in Other Entities.........................9 2.2. Authorization and Enforceability....................................10 2.3. No Violation of Laws or Agreements..................................10 2.4. Financial Statements................................................10 2.5. No Changes..........................................................11 2.6. Contracts...........................................................12 2.7. Permits and Compliance With Laws....................................13 2.8. Environmental Matters...............................................14 2.9. Consents............................................................14 2.10. Title...............................................................14 2.11. Sufficiency of Assets...............................................14 2.12. Taxes...............................................................14 2.13. Patents and Intellectual Property Rights............................15 2.14. Accounts Receivable.................................................18 2.15. Labor Relations.....................................................18 2.16. Employee Benefit Plans..............................................18 2.17. Absence of Undisclosed Liabilities..................................19 2.18. No Pending Litigation or Proceedings................................19 2.19. Products Liability..................................................19 2.20. Insurance...........................................................20 2.21. Relationship with Suppliers.........................................20 2.22. WARN Act............................................................20 2.23. Condition of Assets.................................................20 2.24. Transactions with Related Parties...................................20 2.25. Brokerage...........................................................20 2.26. Disclosures.........................................................20 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER...........................21 3.1. Organization and Good Standing......................................21 3.2. Authorization and Enforceability....................................21 ii EXECUTION COPY 3.3. No Violation of Laws or Agreements..................................21 3.4. Consents............................................................21 3.5. Brokerage...........................................................22 ARTICLE IV COVENANTS..........................................................22 4.1. Change of Name......................................................22 4.2. Public Announcement.................................................22 4.3. Further Assurances..................................................22 4.4. Cooperation.........................................................22 4.5. Post-Closing Obligation to Employees................................23 4.6. Taxes...............................................................24 4.7. Certain Taxes and Expenses..........................................24 4.8. Maintenance of Books and Records....................................24 4.9. Collection of Receivables...........................................24 4.10. Product Returns.....................................................25 4.11. Exclusive Dealing...................................................25 4.12. Right of Inspection.................................................25 4.13. Conduct of Business.................................................26 4.14. Compliance With Bulk Transfer Act...................................26 4.15. Disclosure of Changes...............................................26 4.16. Stockholder Approval................................................26 4.17. Updating Schedules..................................................26 ARTICLE V CONDITIONS TO CLOSING...............................................26 5.1. Conditions Precedent to Obligations of Buyer........................26 5.2. Conditions Precedent to Obligations of Seller.......................28 ARTICLE VI INDEMNIFICATION AND CERTAIN ADDITIONAL COVENANTS...................29 6.1. Indemnification Obligations...........................................29 ARTICLE VII TERMINATION.......................................................32 7.1. Termination...........................................................32 7.2. Effect of Termination.................................................33 ARTICLE VIII MISCELLANEOUS....................................................33 8.1. Construction........................................................33 8.2. Nature and Survival of Covenants and Representations................33 8.3. Notices.............................................................33 8.4. Successors and Assigns..............................................34 8.5. Exhibits and Schedules..............................................35 8.6. Governing Law.......................................................35 8.7. Consent to Jurisdiction.............................................35 8.8. Severability........................................................35 8.9. No Third Party Beneficiaries........................................35 8.10. Amendment and Waiver................................................35 iii EXECUTION COPY 8.11. Counterparts........................................................36 8.12. Headings............................................................36 8.13. Certain Defined Terms...............................................36 8.14. Entire Agreement....................................................36 8.15. Parent..............................................................37 DEFINED TERMS PAGE ---- 2000 Financial Statements.....................................................11 2001 Financial Statements.....................................................11 Acquired Assets................................................................2 Acquired Liabilities...........................................................3 Advanced Hardware Architectures...............................................22 Affiliate.....................................................................36 Agreement......................................................................1 associate.....................................................................20 Authority.....................................................................36 Beneficiary...................................................................23 Benefit Plans.................................................................19 Business.......................................................................1 Buyer..........................................................................1 Buyer Indemnified Parties.....................................................29 Buyer Terminating Breach......................................................33 Buyer Transaction Documents....................................................9 CERCLA........................................................................14 Closing........................................................................6 Closing Date...................................................................6 Closing Date Payment...........................................................6 Closing Net Asset Statement....................................................7 Code...........................................................................9 Consultant....................................................................18 Contracts......................................................................2 Damages.......................................................................29 employee pension benefit plan..................................................5 employee welfare benefit plan..................................................5 Employees.....................................................................19 Environmental Laws............................................................14 Equipment and Other Tangible Personal Property.................................2 ERISA..........................................................................5 Excluded Assets................................................................3 finally determined.............................................................7 Financial Statements..........................................................11 FIRPTA Affidavit...............................................................8 iv EXECUTION COPY GAAP...........................................................................5 including.....................................................................33 including without limitation..................................................33 Indemnified Party.............................................................30 Indemnifying Party............................................................30 Intellectual Property.........................................................17 Intercompany Payables..........................................................5 IP ...........................................................................17 Leasehold Property............................................................14 Leasehold Real Property Interests..............................................2 Licensed IP...................................................................18 Lien..........................................................................36 Litigation Conditions.........................................................30 Lockbox Account...............................................................25 Material Adverse Effect.......................................................37 Net Asset Value................................................................7 noncompetition................................................................13 Noncompetition Agreement.......................................................8 nonsolicitation...............................................................13 OSHA..........................................................................14 Parent.........................................................................1 Permits........................................................................2 Person........................................................................37 Premises.......................................................................3 Prime Rate.....................................................................8 Purchase Price.................................................................6 Purchased IP..................................................................18 qualifying event..............................................................23 Retained Liabilities...........................................................4 Review Period..................................................................7 Seller.........................................................................1 Seller Account Parties........................................................25 Seller Indemnified Parties....................................................29 Seller Terminating Breach.....................................................32 Seller Transaction Documents...................................................9 Seller's Accountants...........................................................7 Seller's knowledge............................................................37 single employer...............................................................36 stay...........................................................................4 strict liability...............................................................4 Tax...........................................................................15 Taxes.........................................................................15 Third Accounting Firm..........................................................7 Third Party Claim.............................................................30 Transaction Documents..........................................................9 Transferred Employees.........................................................23 v EXECUTION COPY Work Permits..................................................................18 worms.........................................................................17 vi EXECUTION COPY TABLE OF EXHIBITS Exhibit A - Form of Voting and Proxy Agreement Exhibit B - Form of Escrow Agreement Exhibit C - Form of Noncompetition Agreement Exhibit D - Form of General Warranty Assignment Exhibit E - FIRPTA Affidavit of Seller Exhibit F - Form of Opinion of Counsel to Seller Exhibit 5.1(f) Tyco Submarine Systems, Ltd. Release & Settlement Agreement vii ASSET PURCHASE AGREEMENT This is an ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of June 25, 2002, by and among ADVANCED HARDWARE ARCHITECTURES, INC. ("Seller"), a Delaware corporation having its principal place of business at 2345 NE Hopkins Court, Pullman, Washington 99163-5601, COMTECH TELECOMMUNICATIONS CORP. ("Parent"), a Delaware corporation, and COMTECH/AHA ACQUISITION CORP. ("Buyer"), a Delaware corporation and wholly owned subsidiary of Parent. Background Seller is engaged in the business of design, development and marketing of high value integrated circuit solutions and semiconductors, including technology involving single-chip lossless compression and decompression integrated circuits based on the Adaptive Lossless Data Compression algorithm (the "Business"). Buyer desires to purchase substantially all of the assets, properties and rights of the Business, and Seller desires to sell such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. As contemplated herein, Seller shall submit the transactions contemplated hereby to its stockholders for their approval pursuant to Section 271 of the Delaware General Corporation Law. Accordingly, concurrently with the execution and delivery of this Agreement and as a condition and inducement to Parent's willingness to enter into this Agreement, certain holders of the shares of preferred stock and common stock of Seller ("Seller Stock") with voting power (determined on a fully diluted basis) sufficient to approve this Agreement and the transactions contemplated hereby, are entering into an agreement with Parent in the form attached hereto as Exhibit A (the "Voting and Proxy Agreement") granting Parent the right to vote such shares of Seller Stock in accordance with the terms set forth in the Voting and Proxy Agreement. Terms THEREFORE, in consideration of the mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE TRANSACTION 1.1. Sale and Purchase of Assets. (a) Subject to the terms and conditions of this Agreement, on the Closing Date (as defined in Section 1.4), Seller shall sell, assign, transfer, deliver and convey to Buyer the Acquired Assets, free and clear of all Liens (as defined in Section 8.13) for the Purchase Price specified below in Section 1.5. (b) As used herein, the term "Acquired Assets" means all of Seller's right, title, and interest in, under and to all of the assets, properties and rights constituting, or used in, the Business as a going concern of every kind, nature and description other than Excluded Assets (as defined in Section 1.1(c) below), wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the following assets, properties and rights constituting, or used in, the Business: (i) all leaseholds and subleaseholds in real property, together with all easements, rights of way, uses, licenses, hereditaments, tenements, privileges and other appurtenances thereto, comprising all real property leaseholds or subleaseholds of Seller more particularly described in Schedule 1.1(b)(i) hereto (the "Leasehold Real Property Interests"); (ii) all equipment, furnishings, furniture, fixtures, computer equipment, computer hardware, office equipment, office supplies, motor vehicles, goods, spare and repair parts and other tangible personal property (the "Equipment and Other Tangible Personal Property"); (iii) the Purchased IP (as defined in Section 2.13); (iv) accounts, notes and other receivables; (v) all prepaid items and unbilled receivables and fees; (vi) Intellectual Property (as defined in Section 2.13), goodwill, licenses and sublicenses granted and obtained with respect thereto, and rights and remedies against infringements thereof, and rights to protection of interests therein under the laws of all jurisdictions; (vii) subject to Sections 1.2(a) and 1.3 hereof, all rights of Seller under the contracts, agreements and instruments relating to (A) the sale by Seller of its products or (B) the purchase or other acquisition by Seller of Purchased IP and (C) the grant to Seller of rights in or relating to the Licensed IP (as defined in Section 2.13); and (viii) other contracts, agreements, purchase orders or instruments to which Seller is a party that are listed in Schedule 1.1(b)(viii) hereto ("Scheduled Contracts," and together with the contracts, agreements and instruments described in (vii) above, the "Contracts"); (ix) subject to Section 1.3, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority (as defined in Section 8.13) and all pending applications therefor (the "Permits"); (x) books, records, ledgers, files, documents (including originally executed copies of all Contracts, correspondence, tax returns, memoranda, forms, lists (including customer or licensee lists), new product development materials, creative materials, advertising 2 and promotional materials, studies, reports, whether in hard copy or electronic or magnetic format, in each instance, to the extent relating to, or otherwise material to the conduct of, the Business or the Employees (as defined in Section 2.16); (xi) all rights, choses in action, claims and entitlements arising out of occurrences before or after the Closing Date, including third party warranties and guarantees and other similar contractual rights as to third parties held by or in favor of Seller or its Affiliates that relate to any of the Acquired Assets otherwise described in this Section 1.1(b); and (xii) all assets and properties reflected on the Closing Net Asset Statement referred to in Section 1.6. (c) As used herein, the term "Excluded Assets" means all of Seller's (i) cash and cash equivalents, (ii) real property and buildings located at [2365] NE Hopkins Court, Pullman, Washington (the "Premises"), and (iii) any and all rights of Seller in and to any real property associated with the operations of the Business formerly conducted in Oregon and the United Kingdom. 1.2. Assumption of Certain Liabilities. (a) Subject to the terms and conditions of this Agreement, except as otherwise specifically provided in this Section 1.2 (including in respect of the Retained Liabilities, as set forth in paragraph (b) below) or in Section 1.3, Buyer hereby assumes and agrees to pay, discharge or perform, as appropriate, the following specific liabilities and obligations of Seller (the "Acquired Liabilities"): (i) the liabilities and obligations of Seller arising in the regular and ordinary course of the Business that are reflected on the face of the Closing Net Asset Statement (excluding any notes or schedules thereto) in accordance with Section 1.6, but only to the extent of the amount reflected thereon; (ii) all liabilities and obligations of Seller that are required to be performed or fulfilled, in whole or in part, on or after the Closing Date under the Contracts, except that Buyer shall not assume or agree to pay, discharge or perform any liabilities or obligations under any Contracts (A) that were required to be performed or fulfilled on or prior to the Closing Date or (B) that arise out of any breach or default (including for this purpose any event which, with notice or lapse of time, or both, would constitute such a breach or default) by Seller of any provision of any Contract, including liabilities or obligations arising out of any failure to perform any agreement, contract, commitment or lease in accordance with its terms prior to the Closing; and (iii) the costs, up to $15,000, of the financial audit report of the Business for the five-month period ended May 31, 2002, requested by Buyer as a condition to Closing set forth in Section 5.1(g) below. (b) Buyer is not assuming any liabilities, commitments or obligations (contingent or absolute, known or unknown and whether or not determinable as of the Closing) of Seller except for the Acquired Liabilities as specifically and expressly provided for above, whether 3 such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Acquired Liabilities are being retained by Seller (the "Retained Liabilities"), who shall remain liable therefor in accordance with the terms of this Agreement. Seller shall indemnify Buyer from all Retained Liabilities, including any Retained Liabilities created by statute or common law, in accordance with Section 6.1 hereof. Without limiting the foregoing, all of the following shall be considered Retained Liabilities and not Acquired Liabilities for the purposes of this Agreement: (i) all liabilities and obligations of Seller or its Affiliates under any agreements, contracts, leases or licenses to which Seller or any such Affiliate is a party on the Closing Date, other than (a) Contracts, and (b) obligations of Seller reflected on the face of the Closing Net Asset Statement (excluding any notes or schedules thereto); (ii) all obligations arising prior to the Closing under the Contracts that are required under the terms of the applicable Contract to be performed by Seller or its Affiliates prior to the Closing, and all liabilities or obligations arising from any breach or default or alleged breach or default by Seller or its Affiliates of a Contract; (iii) except to the extent of Product warranties covered by Section 1.2(a)(i) above, any product liability, breach of contract, product warranty, product return or similar claim, regardless of when made or asserted, which arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made or alleged to have been made or which is imposed or asserted to be imposed by operation of law (including by reason of any "strict liability" or related theory of tort law), in connection with any product licensed, leased or sold by, or any service performed by or on behalf of, Seller or its Affiliates prior to the Closing, including any such claim relating to any Purchased IP and any such claim seeking recovery for consequential damages, lost revenue or income; (iv) any federal, state, foreign or local Tax (as defined in Section 2.12(b)) (A), including any federal, state, foreign or local Tax payable with respect to the business, assets (other than Buyer's Taxes accruing from and after the Closing with respect to the Acquired Assets), properties or operations of Seller, or its Affiliates, or (B) incident to or arising as a consequence of the negotiation or consummation by Seller or its Affiliates of this Agreement and the transactions contemplated hereby; (v) any liability or obligation with respect to compensation of any nature owed to any employees, former employees, agents or independent contractors of Seller, whether or not employed by Buyer after the Closing Date, that (A) arises out of or relates to the employment or service provider relationship between Seller or its Affiliates and any such individuals, or (B) arises out of or relates to events or conditions occurring on or before the Closing Date, including any obligation to grant options or pay severance, retention or "stay" bonuses, or similar arrangements; (vi) all liabilities and obligations of Seller under any "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security 4 Act of 1974, as amended ("ERISA")) maintained by Seller or any of its Affiliates, any "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) maintained by Seller or any of its Affiliates, and any other written or oral plan, agreement or arrangement maintained by Seller or any of its Affiliates involving direct or indirect compensation to employees of Seller or its Affiliates, including insurance coverage, severance benefits, disability benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement compensation of any employees of Seller or its Affiliates, including any such liabilities and obligations which arise on or before the Closing Date; (vii) any liability or obligation of Seller or its Affiliates arising or incurred in connection with the negotiation, preparation and execution of this Agreement and the transactions contemplated hereby, and fees and expenses of counsel, accountants, brokers, finders and other experts; (viii) any indebtedness for borrowed money, including any indebtedness secured by a Lien on any Acquired Assets, any liabilities arising from any guaranty, suretyship or similar arrangement, any liabilities under any letter of credit and any liabilities under any lease of any property (whether real, personal or mixed) which in conformity with generally accepted accounting principles ("GAAP") is or should be accounted for as a capital lease; (ix) except as otherwise expressly set forth herein, any liability or obligation of Seller or its Affiliates relating to any business, division or operations not constituting the Business, including any business, division or operations previously sold by Seller or its Affiliates, and any liabilities or obligations arising out of any disposition of such business, division or operations; (x) any liability or obligation of Seller arising out of any notice, claim, demand, action or proceeding based on or relating to any actual or alleged infringement, dilution, violation or misappropriation of any patent, copyright, trademark, trade secret or other intellectual property right of any third party including any such notice, claim, demand, action or proceeding arising out of any indemnification obligation to customers or licensees under any Contract; provided, however, that Seller shall not be obligated to indemnify Buyer with respect to any Retained Liability described in this Section 1.2(b)(x) unless Seller had knowledge on or before the Closing of any such alleged infringement, dilution, violation or misappropriation; (xi) any liability of Seller or the Business to any Affiliate of Seller incurred prior to the Closing (the "Intercompany Payables"); or (xii) any other liability of Seller or its Affiliates whatsoever, including any liability arising out of or relating to the ownership or operation of the Acquired Assets and the Business on or prior to the Closing Date (including any predecessor operations), including any claims, obligations or litigation arising out of or relating to events or conditions occurring on or before the Closing Date (including the threatened or pending litigation set forth on Schedule 2.18 hereto), regardless of when made or asserted, except, in the case of this subparagraph (xii), for the Acquired Liabilities as specifically and expressly set forth herein. 5 1.3. Consent of Third Parties. Seller is assigning to Buyer, and Buyer is assuming, the Contracts and the Permits which are to be transferred to Buyer as and to the extent provided in this Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent of the other party thereto or any other third party, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets if an attempted assignment without any such consent would constitute a breach or violation thereof. In order, however, to provide Buyer the full realization and value of every Contract and Permit of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions and do or cause to be done all such things as shall in the reasonable opinion of Buyer or its counsel be necessary or proper (a) to assure that the rights of Seller under such Contracts and Permits shall be preserved for the benefit of or transferred or issued to Buyer and (b) to facilitate receipt of the consideration to be received by Seller in and under every such Contract and Permit, which consideration shall be held for the benefit of, and shall be delivered to, Buyer. Nothing in this Section 1.3 shall in any way diminish Seller's obligations hereunder to obtain all consents and approvals and to take all such other actions prior to or at Closing as are necessary to enable Seller to convey or assign good and marketable title free and clear of Liens (other than Permitted Exceptions) to all the Acquired Assets to Buyer. 1.4. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") or the "Closing Date" shall occur no later than the second business day after the satisfaction or waiver of the conditions set forth in Article 5 hereof. Seller and Buyer each shall use its reasonable efforts to cause such conditions to be satisfied as soon as practicable after the date hereof. 1.5. Purchase Price. (a) Purchase Price. The aggregate purchase price to be paid by Buyer for the purchase of the Acquired Assets is $6,800,000 (the "Purchase Price"), payable as provided in the succeeding sentence, and the assumption of the Acquired Liabilities. Of such $6,800,000, (i) $6,050,000 shall be payable in cash at the Closing (the "Closing Date Payment"), and (ii) $750,000 shall be in cash to be deposited by Buyer in escrow (the "Escrowed Amount") for payment, in whole or in part, to Seller and/or Buyer, pursuant to an escrow agreement in the form of Exhibit B hereto (the "Escrow Agreement"). Notwithstanding anything to the contrary in the preceding sentence, the Purchase Price is subject to adjustment as provided in Section 1.6 below. (b) Payment of Closing Date Payment. The Closing Date Payment shall be paid by the Buyer on the Closing Date by federal or other wire transfer to the account or accounts designated by Seller in writing at least two (2) business days prior to the Closing. 1.6. Post-Closing Adjustment to Purchase Price. (a) Within ninety (90) days after the Closing, Buyer shall prepare and deliver to Seller a statement (the "Closing Net Asset Statement") of the Net Asset Value of the Business, as of the Closing Date, determined in accordance with GAAP and this Agreement. For purposes 6 hereof, (x) "Net Asset Value" with respect to the Business means (1) all Acquired Assets minus (2) all Acquired Liabilities, in each case as such assets and liabilities are accrued and reflected on the Closing Net Asset Statement; provided, however, that the amount for intangibles shall not be more than the amount on the Most Recent Balance Sheet (i.e., $256,000). Seller agrees to cooperate and agrees to request that BDO Seidman ("Seller's Accountants") cooperate, with Buyer and Buyer's accountants in connection with the preparation of the Closing Net Asset Statement, and, in connection therewith, shall provide to Buyer and Buyer's accountants such books, records and information as may be reasonably requested from time to time. (b) Except as otherwise provided in this Section 1.6(b), the Closing Net Asset Statement delivered by Buyer to Seller shall be deemed to be and shall be final, binding and conclusive on the parties hereto. Seller may dispute any amounts reflected on the Closing Net Asset Statement, but only on the basis that such amounts were not calculated in accordance with GAAP or this Agreement; provided, however, that Seller shall notify Buyer in writing of each disputed amount, and specify the amount thereof in dispute, within twenty (20) days of Seller's receipt of the Closing Net Asset Statement (such 20-day period hereinafter referred to as the "Review Period"). Any and all portions of the Closing Net Asset Statement which are not subject to dispute by Seller shall be deemed final and binding on the parties hereto, provided that such portions are not related to or affected by the disputed amount. In the event of a dispute with respect to the Closing Net Asset Statement, Buyer and Seller shall attempt to reconcile their differences and any written resolution mutually agreed by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a written resolution to such effect within ten (10) Business Days of receipt of Seller's written notice of dispute to Buyer, Buyer and Seller shall submit the amounts remaining in dispute for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall, within ten (10) Business Days after such submission, determine and report to the parties upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer, on the one hand, and Seller, on the other, so that Seller's share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Seller to the Third Accounting Firm that is unsuccessfully disputed by Seller (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by Seller to the Third Accounting Firm, and Buyer's share shall be the balance of such fees and disbursements. (c) Schedule 1.6(c) hereto sets forth the forecasted balance sheet of Seller as of February 28, 2002 (the "Most Recent Balance Sheet"), adjusted to reflect the Excluded Assets and the Retained Liabilities. The Most Recent Balance Sheet reflects a net asset value (i.e., Acquired Assets minus Acquired Liabilities) of $922,238. If the Net Asset Value as finally determined exceeds such $922,238, then the Purchase Price shall be increased, on a dollar-for-dollar basis, by such amount, and Buyer shall pay Seller the amount in cash by federal or other wire transfer of immediately available funds to an account or accounts designated by Seller. If the Net Asset Value as finally determined is less than such $922,238, then the Purchase Price shall be decreased, on a dollar-for-dollar basis, by such amount, and Seller shall pay Buyer the amount in cash by federal or other wire transfer of immediately available funds to an account or 7 accounts designated by Buyer. Buyer or Seller, as the case may be, shall make any payment required as a result of an adjustment to the Purchase Price pursuant to this Section 1.6 within ten (10) Business Days after the amount has been finally determined in accordance with Section 1.6(b) (it being understood that with respect to any portion of the Closing Net Asset Statement which is not subject to dispute by Seller, the phrase "finally determined" shall mean the expiration of the Review Period), together with interest thereon for the period commencing on the Closing Date through the date on which such amount is paid, calculated at the rate announced by Citibank, N.A. from time to time as its prime or base interest rate for business loans (the "Prime Rate"). 1.7. Deliveries and Proceedings at Closing. At the Closing: (a) Deliveries to Buyer. Seller shall deliver to Buyer: (i) the Escrow Agreement, duly executed by Seller; (ii) the Noncompetition Agreement substantially in the form of Exhibit C hereto (the "Noncompetition Agreement"), duly executed by Seller; (iii) general warranty assignments for all Leasehold Property (as defined in Section 2.10) duly executed and acknowledged by Seller, each substantially in the form of Exhibit D hereto; (iv) the Foreign Investment in Real Property Tax Act Certification and Affidavit, duly executed by Seller, substantially in the form of Exhibit E hereto (the "FIRPTA Affidavit"); (v) an opinion of counsel to Seller, substantially in the form of Exhibit F hereto; (vi) the Purchased IP, by electronic means reasonably acceptable to Buyer; (vii) evidence of the consent and approval of third parties for the Contracts set forth on Schedule 1.7(a)(vii); (viii) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); (ix) all agreements, records and other documents required by this Agreement; (x) a receipt for the payment of the Closing Date Payment, duly executed by Seller; (xi) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer, be necessary to vest in Buyer good, valid and marketable title to the Acquired 8 Assets in accordance with Section 1.1 hereof, including evidence of release and removal of all Liens on the Acquired Assets. (b) Deliveries By Buyer to Seller. Buyer shall deliver to Seller: (i) wire transfer, to the account(s) specified by Seller, of immediately available funds in an amount equal to the Closing Date Payment; (ii) wire transfer, to the account specified by the Escrow Agent under the Escrow Agreement, of immediately available funds in an amount equal to the Escrowed Amount; (iii) the Escrow Agreement, duly executed by Buyer; and (iv) the Noncompetition Agreement, duly executed by Buyer. (c) Transaction Documents. The agreements, instruments and documents referenced in this Section 1.7, together with this Agreement and such other agreements and instruments required to be delivered pursuant to this Agreement, are referred to herein collectively as the "Transaction Documents." The Transaction Documents to be executed and delivered by Seller hereunder are referred to herein collectively as "Seller Transaction Documents." The Transaction Documents to be executed and delivered by Buyer hereunder are referred to herein collectively as "Buyer Transaction Documents." 1.8. Allocation of Consideration. The consideration paid by Buyer to Seller shall be allocated among the Acquired Assets on the basis of a valuation report of a valuation or accounting firm selected by Buyer. Buyer and Seller shall each report the federal, state and local income and other tax consequences of the transactions contemplated by this Agreement (which for purposes of this Agreement includes the Transaction Documents) in a manner consistent with such allocation, including the preparation and filing of Form 8594 under Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor form or successor provision of any future tax law, or any comparable provision of state or local tax law), with their respective federal, state and local income tax returns for the taxable year that includes the Closing Date and shall not take any position contrary thereto in connection with any amended return. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: 2.1. Qualification; No Interest in Other Entities. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as and where currently being 9 conducted. Seller is qualified to do business and is in good standing as a foreign corporation in the jurisdictions in which the nature of the business conducted by it or the ownership or use of the assets and properties constituting its business make such qualification necessary, except for such jurisdictions the failure to qualify in which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect (as defined in Section 8.13). (b) No shares of any corporation or any ownership or other investment or equity interest, either of record, beneficially or equitably, in any Person, are included in the Acquired Assets. 2.2. Authorization and Enforceability. Seller has full corporate power and authority to make, execute, deliver and perform this Agreement and the other Seller Transaction Documents to which it is a party, and the execution, delivery and performance of this Agreement and the other Seller Transaction Documents to which it is a party by Seller have been duly authorized by all necessary corporate action on the part of Seller, with the exception of the approval of the holders of a majority of the outstanding Seller Stock. This Agreement has been, and as of the Closing Date the other Seller Transaction Documents have been, duly executed and delivered by Seller. This Agreement is a legal, valid and binding obligation of Seller, enforceable in accordance with its terms. As of the Closing Date, the other Seller Transaction Documents are the legal, valid and binding obligations of Seller, enforceable in accordance with their respective terms. 2.3. No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the other Seller Transaction Documents do not, and the consummation of the transactions contemplated by this Agreement and the other Seller Transaction Documents will not, (a) contravene any provision of the Certificate of Incorporation or Bylaws or similar organizational document of Seller or (b) to Seller's knowledge, violate, conflict with, result in a material breach of, or constitute a material default (or an event which might, with the passage of time or the giving of notice, or both, constitute a material default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature upon any of the Acquired Assets or give to others any interests or rights therein under, (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract or other agreement, oral or written, to which Seller is a party or by which the Business or any of the Acquired Assets may be bound in writing, (ii) any Permit, authorization, franchise, governmental approval or authorization or (iii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, including any bulk sales laws. 2.4. Financial Statements. The books of account and related records of Seller for the Business fairly reflect in reasonable detail all assets, liabilities and transactions relating to the Business and are in accordance with GAAP. Schedule 2.4 contains the Seller's audited financial statements as of the period ended December 31, 2000 (the "2000 Financial Statements") and Seller's unaudited financial statements as of and for the annual period ended December 31, 2001 (the "2001 Financial Statements" and together with the 2000 Financial Statements, the "Financial Statements"). The Financial Statements (a) are correct and complete in all material respects and are substantially in accordance with the books and records of Seller; (b) fairly present the results of operations, financial position, assets and liabilities of the Business as of 10 their respective dates or for the periods covered thereby; (c) have been prepared in accordance with GAAP on a basis consistent with past practice; and (d) reflect accurately all costs and expenses of the Seller as if the Seller was independent and not affiliated with any other corporation or business. 2.5. No Changes. Since December 31, 2001, Seller has conducted the Business only in the ordinary course of business consistent with past practice. Without limiting the foregoing, since such date, except as disclosed in Schedule 2.5 hereto, with respect to the Business there has not been: (a) any material change in the business, assets, liabilities, condition (financial or otherwise), results of operations or prospects of the Business (other than changes in the ordinary course of business consistent with past practice, none of which changes, individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect); (b) (i) any material change in the salaries or other compensation payable or to become payable to, or (ii) any advance (excluding advances for ordinary business expenses) or loan greater than $25,000 to, any Employee or (iii) any material change or addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other employee benefit plan) to which any of the Employees are entitled, or (iv) any material payments to any employee benefit plan or any other pension, retirement, profit-sharing, bonus or similar plan except payments in the ordinary course of business; (c) any incurrence, assumption or guarantee of any obligation or liability (absolute, accrued, contingent or otherwise) other than in the ordinary course of business consistent with past practice and which has not had and could not reasonably be expected to have a Material Adverse Effect; (d) any discharge or satisfaction of any Liens against or in favor of the Business, or payment or satisfaction of any obligation or liability of or relating to the Business, (whether absolute, accrued, contingent or otherwise) other than (i) liabilities shown on the 2001 Financial Statements, or (ii) liabilities incurred since the date of the 2001 Financial Statements in the ordinary course of business which have not had or could not reasonably be expected to have a Material Adverse Effect; (e) any change or any threat of any change in any of its relations with, or any loss or threat of loss of any of the suppliers, clients, customers, licensees, licensors or employees of the Business which, individually or in the aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect, or any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or payment of accounts payable of the Business or the provision of discounts, rebates or allowances; (f) any material modification, amendment or termination of any, or the entering into of any material contract, agreement, lease, plan or commitment to which Seller is a party or by which it is bound or any cancellation, modification or waiver of any material debts or claims held by Seller (including any such debts or claims of an Affiliate of Seller) or any waiver of any 11 other material rights of Seller, in each case solely in respect of a Scheduled Contract or other Acquired Asset or Acquired Liability, or otherwise related to the Business; (g) any damage, destruction or loss affecting the Business in excess of $50,000, whether or not covered by insurance; (h) any material change by Seller in its method of accounting or keeping its books of account or accounting practice that relates to the Business; (i) any disposition of or failure to keep in effect any rights in, to or for the use of any Intellectual Property; (j) any sale, lease, license, transfer or other disposition of any assets, properties or rights of the Business, except licenses of Purchased IP in the ordinary course of business consistent with past practice; (k) any dividend, distribution or payment (including the declaration or setting aside therefor, or agreement with respect thereto) in respect of its capital shares or redemption, repurchase or acquisition (or agreement with respect thereto) of any of its capital shares, or the payment of any Intercompany Payables; (l) any Contract to make any capital expenditures in excess of $50,000 or any Contract to make capital expenditures in an amount which, when aggregated with any other such Contract, exceeds $50,000; or (m) any mortgage, pledge or subjection to Lien of any kind of any Acquired Assets. 2.6. Contracts. Schedule 2.6 hereto contains a list of the following contracts and other agreements (written or oral) relating to the Business or by which Seller or any assets or properties of Seller (including any Acquired Assets or Acquired Liabilities) are bound or affected (irrespective of whether Seller or any Affiliate thereof is a party thereto): (a) any agreement (or group of related agreements) for the licensing, lease or sale of Purchased IP or other products, or other personal property, or for the furnishing or receipt of services (including maintenance or support services in respect of Purchased IP), the performance of which (i) will extend over a period of more than one year, (ii) has resulted in a loss to the Business in excess of $50,000 or (iii) will involve consideration in excess of $50,000; (b) any agreement (or group of related agreements) for the lease of (i) personal property to or from any Person providing for lease payments in excess of $50,000 per annum or (ii) real property to or from any Person; (c) any agreement organizing, forming or governing a partnership, joint venture or similar arrangement; 12 (d) any agreement prohibiting or restricting competition, soliciting persons for employment, soliciting customers for business or otherwise containing "noncompetition" or "nonsolicitation" provisions; (e) any agreement (or group of related agreements) under which the Business or Seller has created, incurred, assumed, or guaranteed any indebtedness for borrowed money in an amount greater than $50,000, or any capitalized lease obligation under which any of the Acquired Assets are subject to a Lien; (f) any material agreement under which the consequences of a default or termination will likely have a Material Adverse Effect; (g) any material commission, distribution, dealer, representative or sales agency agreement related to the Business; (h) any agreement for the employment of any individual on a part-time, consulting, or other similar basis providing annual compensation in excess of $50,000 or providing severance or other post-termination benefits; (i) any other agreement (or group of related agreements) related to the Acquired Assets not otherwise described in paragraphs (a)-(h) above and continuing over a period of more than one (1) year from the date hereof or exceeding $50,000 in value. Seller has delivered to Buyer a correct and complete copy of each written agreement listed in Schedule 2.6 and a written summary setting forth the terms and conditions of each oral agreement referred to therein. With respect to each contract listed on Schedule 2.6, except as disclosed on Schedule 2.6, (i) the agreement is legal, valid, binding, enforceable, and in full force and effect; (ii) Seller is not, and to Seller's knowledge, no other party thereto, is in material breach or default, and no event has occurred (or, to Seller's knowledge, is likely to occur) which with notice or lapse of time (or both) would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; (iii) neither Seller, nor to Seller's knowledge, any other party has repudiated or threatened to repudiate any provision of any Scheduled Contract and (iv) Buyer's acquisition of the Acquired Assets at the Closing will not give rise to a material breach, default or violation by Seller of any Scheduled Contract and will not require the consent or approval of any third party except as otherwise expressly set forth herein. 2.7. Permits and Compliance With Laws. Except as disclosed in Schedule 2.7, Seller possesses and, to Seller's knowledge, is in compliance in all material respects with all permits, approvals, franchises, governmental authorities and registrations required to operate the Business and own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes. Except as disclosed in Schedule 2.7, to Seller's knowledge, Seller has conducted the Business and is now doing so in compliance with all applicable laws, rules, regulations, ordinances, codes, judgments and orders (including immigration laws, the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA") and the Americans with Disabilities Act). All Permits are in full force and effect, and there are no proceedings pending or, to Seller's knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any Permits. On the Closing Date, the Permits in full 13 force and effect which will be transferred to Buyer, to the extent permissible to do so under applicable law or regulation, will constitute, to Seller's knowledge, all of the Permits required for Buyer's possession, ownership and use of the Acquired Assets and operation of the Business. 2.8. Environmental Matters. To Seller's knowledge, the business, assets and properties of Seller are and have been operated and maintained in compliance, in all material respects, with all applicable federal, state, city, county and local environmental protection laws and regulations (collectively, "Environmental Laws"). To Seller's knowledge, no event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute material non-compliance by Seller with, or a material violation by Seller of, Environmental Laws. To Seller's knowledge, neither Seller nor any of Seller's Affiliates, has caused or knows of a disposal, discharge or release (as defined in the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA")) of wastes, pollutants, contaminants or hazardous or toxic substances, on or from any site which currently is or formerly was owned, leased, occupied or used by Seller or any of Seller's Affiliates. To Seller's knowledge, there is no site (a) which is listed, or proposed for listing on a registry or inventory of inactive hazardous waste sites or sites potentially requiring investigation or response maintained by any Authority and which currently is or formerly was owned, leased, occupied or used by Seller or its Affiliates or (b) with respect to which Seller or its Affiliates has received notice that Seller is considered to be a potentially responsible person for cleanup or other liability in respect of Environmental Laws or about which information has been requested from Seller or its Affiliates. 2.9. Consents. Except as specified in Schedule 2.9, no consent, approval or authorization of, or registration or filing with, any Authority or, to Seller's knowledge, any other Person is required in connection with the execution, delivery and performance of this Agreement or the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby, including in connection with the assignment of Scheduled Contracts to Buyer. 2.10. Title. Seller has and is conveying to Buyer at Closing (by general warranty assignments in the case of Leasehold Real Property Interests ("Leasehold Property")) indefeasible, good and valid title to all of the Acquired Assets constituting personal property (including the Purchased IP) and a good, valid and marketable leasehold interest in all Leasehold Property. Except as specified in Schedule 2.10, none of the Acquired Assets is subject to any Lien. 2.11. Sufficiency of Assets. No Affiliate of Seller has any ownership interests, Lien or other right, interest or title in or to any of the assets, rights or properties constituting or used in the conduct of the Business, including any assets, rights or properties (other than Excluded Assets) constituting or used in the conduct of the Business formerly conducted in Oregon and the United Kingdom. 2.12. Taxes. (a) To Seller's knowledge, Seller and its Affiliates have (i) filed all returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (ii) paid all Taxes that are shown to 14 have come due pursuant to such returns or reports and (iii) paid all other Taxes for which a notice of assessment or demand for payment has been received. To Seller's knowledge, all such returns or reports relating to the Business have been prepared in accordance with all applicable laws. Schedule 2.12 lists all jurisdictions in which Seller has filed income, employment, sales and use and personal and real property tax returns with respect to the Business during the past three fiscal years. Except as disclosed in Schedule 2.7, there are no ongoing Tax audits or examinations or, to Seller's knowledge, threatened tax disputes with respect to the Business or Acquired Assets. The Seller is not a party to any tax sharing or tax allocation agreement. (b) As used herein "Taxes" and "Tax" mean any U.S. or non-U.S. federal, state, and local income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise tax, including any interest, penalty or addition thereto, whether disputed or not. 2.13. Patents and Intellectual Property Rights. (a) Schedule 2.13(a) contains a complete and accurate list of all material patents and patent applications, trademarks, service marks, trade names, material copyrights (including computer software programs), and registrations and applications for registration of industrial designs, copyrights, mask works, trademarks, service marks, trade names, trade dress and domain names used or held for use by Seller in the conduct of the Business specifying as to each such item, as applicable: (i) the owner of the item, (ii) the jurisdictions in which the item is issued or registered or in which any application for issuance or registration has been filed, (iii) the respective issuance, registration, or application number of the item, and (iv) the date of application and issuance or registration of the item. (b) Schedule 2.13(b) contains a complete and accurate list of all material licenses, sublicenses, consents and other agreements (whether written or otherwise): (i) pertaining to any patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, mask works, trade secrets, computer software (other than standard, commercially available off-the-shelf software), web site design, or other Intellectual Property used by Seller in the conduct of the Business, or (ii) by which Seller licenses or otherwise authorizes a third party to use such Intellectual Property. Neither Seller nor, to Seller's knowledge, any other party is in breach of or default under any such license or other agreement, and except as set forth on Schedule 2.13(b), each such license or other agreement, to Seller's knowledge, is now and, subject to obtaining any required consent to the assignment thereof by Seller to Buyer, upon the Closing shall be, valid and in full force and effect. (c) Except as set forth in Schedule 2.13(c), Seller owns or is licensed or otherwise has the right to use, and has the right to bring actions for the infringement or other violation of, all trademarks, service marks, trade names, copyrights, inventions, technology, know-how, designs, formulae, trade secrets, trade dress, mask works, confidential and proprietary information, computer software, domain names and other Intellectual Property used in the operation of the Business or necessary for the operation of the Business as it is currently conducted. 15 (d) Except as set forth on Schedule 2.13(d), the Business as currently conducted, including the design, development, use, import, manufacture, license and sale of the products, technology or services of the Business, does not infringe, dilute, misappropriate or otherwise violate the patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, mask works, trade secrets or other Intellectual Property rights of any third party, and no claim has been made or notice given to that effect. To Seller's knowledge, the products, technology and services currently under development in connection with the Business do not infringe, dilute, misappropriate or otherwise violate the patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, mask works, trade secrets or other Intellectual Property rights of any third party, and no claim has been made or notice given to that effect. To Seller's knowledge, no third party has violated or infringed any of Seller's patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other Intellectual Property rights. Except as set forth in Schedule 2.13(d), Seller has not given any indemnification to any third party against infringement of such Intellectual Property rights. (e) Except as set forth in Schedule 2.13(e), all of the patents, industrial design registrations, trademark and service mark registrations, copyright registrations, mask work registrations and domain name registrations indicated in Schedule 2.13(a) are valid and in full force, are held of record in the name of Seller, and are not the subject of any cancellation or reexamination proceeding or any other proceeding challenging their extent or validity. Except as set forth in Schedule 2.13(e), Seller is the applicant of record in all patent applications, and applications for trademark, service mark, trade dress, industrial design, copyright, mask work and domain name registration indicated in Schedule 2.13(a), and no opposition, extension of time to oppose, interference, rejection, or refusal to register has been received in connection with any such application. (f) Seller has taken reasonable and customary steps to protect its confidential or proprietary information, including, without limitation, obtaining customary written non-disclosure agreements from employees, consultants and other third parties at or prior to the time of disclosure by Seller of any such confidential or proprietary information. (g) Schedule 2.13(g) contains a complete and accurate list of all material Purchased IP. Except as set forth on Schedule 2.13(g), Seller owns all right, title and interest in and to the material Purchased IP, free and clear of all Liens and other encumbrances, including claims or rights of joint owners and employees, agents, consultants or other parties involved in the development, creation, marketing, maintenance or enhancement of such computer software. To Seller's knowledge, the Purchased IP consists entirely of material: (i) which was created as a work for hire (as defined under U.S. copyright law) by a person or persons who were at the time of creation the regular, full-time, salaried employees of Seller, all rights in which are now owned by Seller or (ii) the IP ownership of which was fully and irrevocably transferred to Seller pursuant to a written agreement executed by the owner thereof. Except as set forth on Schedule 2.13(b), no Purchased IP has been licensed, sold, rented or otherwise transferred to any third party. (h) Schedule 2.13(h) contains a complete and accurate list of all material Licensed IP. Schedule 2.13(h) sets forth a list of all license fees, rents, royalties or other charges that, to 16 Seller's knowledge, Seller is required to or obligated to pay with respect to Licensed IP. Seller, to its knowledge, is in compliance in all material respects with all applicable provisions of such agreements and such agreements are now, and immediately following the Closing shall be, in full force and effect. The transactions contemplated under this Agreement do not and will not trigger any provision under any license or agreement related to the Licensed IP to renegotiate or increase the license, support or other fees or charges due under such license or agreement. All the licenses relating to Licensed IP constitute Contracts and, pursuant to the assignment of the Contracts to Buyer occurring hereunder, Buyer will succeed to all the rights of Seller to the Licensed IP. (i) The Purchased IP and the Licensed IP constitute all of the IP used in the Business as presently conducted. To Seller's knowledge, except as set forth on Schedule 2.13(i), all of the Purchased IP and Licensed IP is fully and adequately documented, and Seller has made adequate provision for the maintenance and enhancement of the Purchased IP and the Licensed IP for its continued use in the Business as presently conducted. To Seller's knowledge, except as set forth in Schedule 2.3(i) all of the Purchased IP and Licensed IP performs in material conformance with the applicable specifications and documentation for such Purchased IP and Licensed IP. To Seller's knowledge, the Purchased IP and the Licensed IP do not contain any viruses, "worms," cancelbots, disabling or malicious code. (j) The information technology systems included in the Acquired Assets, including all computer hardware, software, firmware and telecommunications systems used in the Business, perform in material conformance with the applicable specifications or documentation for such systems. Seller has taken commercially reasonable steps to provide for the archival, back-up, recovery and restoration of the critical business data of the Business, to the extent such data is included in the Acquired Assets. (k) As used herein, "Intellectual Property" or "IP" means, collectively, any and all of the following in any jurisdiction throughout the world: (i) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, re-examination, utility, model and design patents, patent applications, patent registrations and applications for patent registrations, (ii) copyrights (including computer software in source code or object code form) and registrations and applications for registration of copyrights, (iii) trade secrets and legal rights therein, (iv) trademarks, service marks, trade dress, logos, slogans, trade names and corporate names (whether or not registered), including all variations, derivations, combinations, registrations and applications for registration or renewals of the foregoing and all goodwill associated therewith, (v) Internet domain names and registrations and applications for registration or renewals thereof, (vi) all other intellectual property and proprietary rights and (vii) all remedies against past, present and future infringement or other violation of any of the foregoing rights and rights of protection of interest therein under the laws of all jurisdictions. (l) As used herein, "Licensed IP" means any Intellectual Property owned by parties other than Seller (and any related documentation) that is licensed to or used by Seller or are otherwise used in the Business. (m) As used herein, "Purchased IP" means any Intellectual Property owned by Seller (and any related documentation) that is used by Seller or otherwise used in the Business. 17 2.14. Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Financial Statements or arising since the date thereof are valid and genuine; have arisen solely out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; are not subject to valid defenses, set-offs or counterclaims; and will be collected within ninety (90) days after the billing at the full recorded amount thereof less, in the case of accounts receivable appearing on the Closing Net Asset Statement, the recorded allowance for collection losses on the Closing Net Asset Statement. The allowances for collection losses on the balance sheets included in the Financial Statements have been determined in accordance with GAAP consistent with past practice. 2.15. Labor Relations. (a) Except as disclosed on Schedule 2.15(a) hereto: (i) no Employee is represented by any union or other labor organization; (ii) there is no unfair labor practice charge pending or, to Seller's knowledge, threatened against Seller relating to any of the Employees as relates to the Business; (iii) there are no negotiations or strikes, disputes, slow downs or stoppages relating to any of the Employees or the Business pending or, to Seller's knowledge, threatened against or involving Employees or the Business; and (iv) no labor grievance relating to any of the Employees or Former Employees as relates to the Business is pending. (b) With respect to each Employee on or before the Closing Date, Seller will have paid all accrued but unused vacation time, and all other accrued compensation, and satisfied all other employment-related payments and debts to such Employee in conjunction with the Seller's termination of such Employee's employment, such that, on the Closing Date, such Employees will not be owed any further compensation or other payment from Seller. (c) Each individual who has provided consulting services to Seller and who, at the time he or she provided such services, was not a then-current employee of Seller is referred to in this paragraph (d) as a "Consultant" with respect to any time period during which such individual provided consulting services to Seller but was not an employee of Seller. Each Consultant is or was (at the time such consulting services were provided to Seller but such Consultant was not an employee of Seller), an independent contractor of Seller and not an employee of Seller under all then-applicable federal, state and local laws, including but not limited to the Code, applicable workers compensation law and applicable unemployment insurance law. (d) Schedule 2.15(d) sets forth a list of all Employees who hold a temporary work authorization, including H-1B, F-1 or J-1 visas or work authorizations (the "Work Permits"), setting forth the name of the employee, the type of Work Permit and the length of time remaining on such Work Permit. 2.16. Employee Benefit Plans. (a) Schedule 2.16(a) lists the name, job title, current base salary or hourly wage, date of hire, 2001 vacation entitlement, social security number (as applicable) and assigned location of all salaried and non-union hourly employees actively employed as of the Closing 18 Date by Seller or any of its Affiliates whose primary responsibilities relate to the Business. No such individual is on short-term disability or approved leave of absence. All individuals included on Schedule 2.16(a) are herein referred to as the "Employees." (b) To Seller's knowledge, set forth on Schedule 2.16(b) is a true and complete list (designated on a salary and hourly basis) of each material pension, retirement, supplemental retirement, deferred compensation, excess benefit, profit sharing, employment, bonus, incentive, stock purchase, stock ownership, stock option, stock appreciation right, severance, salary continuation, termination, change-of-control, health, life, disability, group insurance, vacation, holiday, sick-day, sabbatical and fringe benefit plan, program, contract, or arrangement (whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic and including any that have been frozen) maintained, contributed to, or required to be contributed to, by Seller or any of Seller's Affiliates in respect of any Employee of Seller, or under which Seller or any of Seller's Affiliates has any liability with respect to any Employee (the "Benefit Plans"). 2.17. Absence of Undisclosed Liabilities. Except as disclosed in Schedule 2.17 hereto, Seller, to its knowledge, has no liabilities with respect to the Business, either direct or indirect, matured, or unmatured or absolute, contingent or liquidated, except: (a) those liabilities set forth in the Most Recent Balance Sheet and not heretofore paid or discharged; (b) liabilities arising in the ordinary course of business under any Contract; and (c) those liabilities incurred, in or as a result of the normal and ordinary course of business since the date of the Most Recent Balance Sheet and reflected in the books and records related to the Business or that could, to Seller's knowledge, reasonably be expected to have a Material Adverse Effect. 2.18. No Pending Litigation or Proceedings. Except as set forth on Schedule 2.18, there are no actions, suits, investigations or proceedings (including any arbitration or mediation proceedings) pending against or, to Seller's knowledge, threatened against Seller in respect of the Business, or affecting the Business or any of the Acquired Assets. Except as disclosed in Schedule 2.18 hereto, there are currently no outstanding judgments, decrees or orders of any court, arbitrator or Authority against Seller or any Affiliate of Seller, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets. Seller has heretofore provided Buyer with a list setting forth generally a description of settlements or similar amounts paid in respect of any actions, suits, investigation or proceedings, actual or threatened, to the extent such settlement or payment occurred after December 31, 2001 (excluding workers' compensation claims) binding on any of Seller or any Affiliates of Seller with respect to the Business. 2.19. Products Liability. Except as set forth on Schedule 2.19, to Seller's knowledge, there are no (a) liabilities, fixed or contingent, with respect to any products of the Business that are based on a theory of strict product liability or negligence (as distinct from product warranty claims described in clause (b) below), or (b) liabilities of Seller, fixed or contingent, which have been asserted, with respect to the Business for the breach of any express or implied product 19 warranty with respect to any product manufactured, licensed or sold by Seller, or services provided by Seller in the conduct of the Business. 2.20. Insurance. Seller has been covered in all material respects, and at all relevant times in the last five years by insurance in scope and amount that Seller believes is reasonable for the business in which it is engaged and the liabilities it has actually incurred in respect of the Business during such five year period. 2.21. Relationship with Suppliers. Seller knows of no written or oral communication, fact, event or action which exists or has occurred within six months prior to the date of this Agreement, which would lead Seller reasonably to believe that any current supplier or licensor to Seller of items material to the Business, which items cannot be replaced at comparable cost and the loss of which would likely have a Material Adverse Effect, will terminate or adversely modify its business relationship with the Business. 2.22. WARN Act. Seller has not employed one hundred (100) or more employees within the meaning of the WARN Act (29 USC ss.ss.2101 - 2109). 2.23. Condition of Assets. Each tangible Acquired Asset, to Seller's knowledge, is free from material defects, has been maintained in a manner deemed reasonable by Seller, and is in good operating condition and repair (subject to normal wear and tear). Except as described on Schedule 2.23, to the knowledge of Seller, Seller's inventory is saleable in the ordinary course of business subject to any reserve therefor reflected on the Most Recent Balance Sheet. 2.24. Transactions with Related Parties. Except as described in Schedule 2.24, since December 31, 2001, no Affiliate of Seller (and no officer or director of any such Affiliate, or any "associate" (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of such officer or director) has engaged in any of the following transactions: (a) borrowed money in a material amount from or loaned money in a material amount to Seller for the benefit of the Business; (b) asserted any material contractual or other claims, express or implied, of any kind whatsoever against Seller relating to the Business or the Acquired Assets or the Acquired Liabilities; or (c) acquired any interest in the Acquired Assets. 2.25. Brokerage. Except as set forth on Schedule 2.25, neither Seller nor its Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission, or any indemnification or limitation on liability, as a result of the transactions contemplated hereunder. Seller will be responsible for all liabilities and obligations set forth on Schedule 2.25. 2.26. Disclosures. No representation or warranty made by Seller in this Agreement, any Schedule hereto or certificate furnished by Seller to Buyer pursuant to this Agreement or the other Seller Transaction Documents contains any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein in light of the 20 circumstances under which they were made not misleading in any material respect. Seller has no reason to believe that any loss of any employee, agent, customer or supplier will result because of the consummation of the transactions contemplated hereby. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 3.1. Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 3.2. Authorization and Enforceability. Buyer has full corporate power and corporate authority to make, execute, deliver and perform this Agreement and the Buyer Transaction Documents. The execution, delivery and performance by Buyer of this Agreement and Buyer Transaction Documents have been duly authorized by all necessary corporate action on the part of Buyer, including, if required, stockholder approval. This Agreement has been, and as of the Closing Date the other Buyer Transaction Documents have been, duly executed and delivered by Buyer. This Agreement is a legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms. As of the Closing Date, the other Buyer Transaction Documents are legal, valid and binding obligations of Buyer, enforceable against it in accordance with their respective terms. 3.3. No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Buyer Transaction Documents do not, and the consummation of the transactions contemplated hereby and thereby will not (a) contravene any provision of the Certificate of Incorporation or Bylaws of Buyer; (b) violate, conflict with, result in a breach of, or constitute a default (or an event which might, with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation of any Lien of any nature whatsoever upon any of the Acquired Assets or give any other any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, or other agreement (written or oral) to which Buyer is a party, or by which Buyer may have rights or by which the Business or any of the Acquired Assets may be bound or affected, (ii) any permit, authorization, franchise, governmental approval or authorization or (iii) any judgment, injunction, writ, award, decree, restriction, ruling or order of any court, arbitrator or Authority, domestic or foreign, or any applicable constitution, law, ordinance, rule or regulation, including any bulk sales law. Buyer has had an opportunity to discuss the Business, management and financial affairs of Seller with directors, officers and management of Seller and has had the opportunity to review Seller's operations and facilities. Buyer has determined that the transactions contemplated by this Agreement are in the best interests of the stockholders of Buyer and are on terms that are fair to such stockholders. 3.4. Consents. No consent, approval or authorization of, or registration or filing with, any Authority is required in connection with the execution, delivery and performance of this 21 Agreement or the other Buyer Transaction Documents or the consummation of the transactions contemplated hereby or thereby by Buyer. 3.5. Brokerage. Buyer and its Affiliates have not made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereby. ARTICLE IV COVENANTS 4.1. Change of Name. (a) After the Closing, Seller shall change its corporate name (i) so as to delete the words "Advanced Hardware Architectures" (in any combination of upper case and lower case letters) and (ii) to adopt a new name not similar to its existing name, and Seller will cause a certificate of amendment to its certificate of incorporation effecting such change to be duly filed with the Secretary of State of the State of Delaware within five (5) Business Days from the Closing Date. Promptly after such filing, Seller will deliver proof of said filing to Buyer. On the Closing Date, Seller shall deliver to Buyer any and all required instruments deemed necessary by any and all applicable Governmental Authorities to terminate any previously filed assumed name or trade names listed on Schedule 4.1. Seller shall cause the same to be duly filed with all applicable governmental or quasi-governmental offices within ten (10) days after the Closing. Promptly after any such filing, Seller will deliver proof of said filing to Buyer. 4.2. Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of each other party, except (a) to its officers, directors, employees and representatives who need to know such information, (b) as may be reasonably necessary to comply with such party's covenants hereunder or to satisfy any of the conditions set forth in Article V hereof, or (c), in the case of Parent, as required by law or Nasdaq rule. 4.3. Further Assurances. Seller from time to time after the Closing, at Buyer's request, will execute, acknowledge and deliver to Buyer such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Buyer may reasonably require in order to vest more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Acquired Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement, the Transaction Documents and the transactions contemplated hereby and thereby. 4.4. Cooperation. Buyer and Seller shall cooperate with each other and shall cause their Affiliates, officers, employees, agents and representatives to cooperate with each other to ensure the orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 22 4.5. Post-Closing Obligation to Employees. (a) Effective as of 12:01 a.m. on the Closing Date, Seller shall cause the employment of all Employees who are employees of Seller (other than those individuals who are listed on Schedule 4.5(a) and those individuals who are not actively employed due to short-term disability or approved leave of absence, whose employment shall be terminated upon their return to active employment) to be terminated. Effective as of 12:01 a.m. on the Closing Date, Buyer shall offer employment to all Employees terminated in accordance with the preceding sentence on terms and conditions determined by Buyer. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." Nothing in this Section 4.5 shall limit Buyer's authority to terminate the employment of any Transferred Employee or any other Employee at any time and for whatever reason. (b) Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or former employees (or the Beneficiary of any Employee or former employee) who do not become Transferred Employees, including claims asserted against Buyer as a result of their termination by Seller or its Affiliates, whether or not in accordance with the terms of this Agreement. As used herein, "Beneficiary" means the Person(s) designated by an Employee or former employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under an employee benefit plan. (c) Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature owed to any Transferred Employee or the Beneficiary of any Transferred Employee that arises out of or relates to the employment relationship between Seller or any of its Affiliates and any Transferred Employee. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits (including, without limitation, any severance payments or benefits) that become due to any Transferred Employees as a result of their termination by Seller in accordance with Section 4.5(a). (d) Seller shall be responsible for all legally mandated health care continuation coverage for Employees and former employees and their covered dependents who had or have a loss of coverage due to a "qualifying event" (within the meaning of Section 603 of ERISA) which occurred or occurs on or prior to the Closing Date. (e) Seller shall retain liability for payment of any long-term or short-term disability benefits to any Employee or former employee that relate to a disability which first occurred prior to the Closing Date; provided, however, that Seller shall cease to be responsible for any such liability on and after the date that such Employee or former employee commences employment with Buyer. Notwithstanding any other provision of this Agreement to the contrary, any offer of employment by Buyer may be conditioned upon (i) any Employee or former employee having completed a physical examination, which will be performed by a physician chosen by Buyer, and (ii) Buyer's determination that the results of such test are acceptable. 23 4.6. Taxes. (a) Buyer and Seller shall: (i) each provide the other with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (ii) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding; and (iii) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Buyer and Seller shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting work papers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 4.7. Certain Taxes and Expenses. Seller shall be responsible for state and local sales, use, transfer, real property transfer, documentary stamp, recording and other similar taxes arising from and with respect to the sale and purchase of the Acquired Assets. The parties shall cooperate in giving effect to the foregoing. Buyer shall bear its accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement (it being understood that payment of Seller's expenses is dealt with in Section 1.2). 4.8. Maintenance of Books and Records. Buyer and Seller shall cooperate fully with one another after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets (whether in the possession of Seller or Buyer). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least thirty (30) days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 4.8 shall be during normal business hours and upon not less than two days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 4.9. Collection of Receivables. Seller shall if requested by Buyer, irrevocably authorize, instruct and direct that the account parties of all accounts, notes and receivables constituting Acquired Assets (such parties, the "Seller Account Parties") shall make and deliver all payments relating thereto on or after the Closing to such location, bank and account (the "Lockbox Account") as Buyer shall specify. If, notwithstanding such instruction, any of the Seller Account Parties remit payments on or after the Closing directly or indirectly to Seller or its Affiliates instead of to the Lockbox Account, Seller agrees promptly (and in any event no later 24 than two business days following receipt) to deliver all such payments (including but not limited to negotiable instruments which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller hereby designates, makes, constitutes and appoints Buyer (and all persons designated by Buyer) as its true and lawful attorney-in-fact to receive, give receipts for, take, endorse, assign, deliver, deposit, demand, collect, sue on, compound, and give acquittance for any and all information, documents, payments forms (including negotiable and non-negotiable instruments) and proceeds received by Buyer via the Lockbox Account or from Seller that relate to the accounts, notes and receivables of the Seller Account Parties constituting Acquired Assets, all in the sole discretion of Buyer. Seller shall use all reasonable efforts to assist Buyer in collecting in full from Seller Account Parties all amounts owed pursuant to all accounts, notes and receivables constituting Acquired Assets. 4.10. Product Returns. Seller shall be responsible for (and indemnify Buyer for), customer or licensee claims for product returns with respect to products (a) developed, manufactured by or for, or licensed or sold by Seller or (b) manufactured by or for Seller and licensed or sold by Buyer after the Closing, unless such returns result from product defects due primarily to Buyer's acts or omissions after the Closing or are Acquired Liabilities, and, provided such returns are accepted by Buyer under policies substantially the same as Seller's policies regarding returns and provided further, that Buyer shall promptly notify Seller upon learning of any claim for a product return or product warranty and shall supply Seller with information that Seller may reasonably request with respect thereto. Seller shall have the right to participate in, and shall be given reasonable prior written notice of, all discussions Buyer conducts with any customer or licensee in resolving the terms of any such return. Nothing in this Section 4.10 shall give rise to any liability of Seller for any claims based on the infringement of any third party's intellectual property rights. 4.11. Exclusive Dealing. In consideration of the expense and effort expended and to be expended by Buyer in connection with its due diligence investigation of the Business and the Acquired Assets, Seller shall deal exclusively with Buyer for the sale of the Business and the Acquired Assets prior to July 31, 2002. Neither Seller, nor any of its officers, directors, or stockholders, nor any of Seller's Affiliates, their officers, directors or stockholders, shall either directly or indirectly(whether through representative, agents, financial advisors, counsel or otherwise): (a) initiate, solicit, seek , or accept any inquiries or proposals with respect to (i) a sale of any of the Seller's assets or the Business or (ii) the sale or other disposition of the stock of Seller, whether by merger, consolidation, liquidation, or reorganization of Seller (collectively referred to as an "Acquisition Proposal"), (b) engage in any negotiations concerning, or provide information to, or have any discussions with, any person relating to an Acquisition Proposal or (c) otherwise cooperate in any effort or attempt to make, implement or accept an Acquisition Proposal or undermine Buyer's attempt to consummate the transaction contemplated herein. 4.12. Right of Inspection. From the date of this Agreement through the Closing Date, Seller shall permit Buyer and its authorized representatives, with reasonable notice to: (i) have full access to Seller's properties during regular business hours, (ii) make its employees and authorized representatives available to confer with Buyer and its authorized representatives, and (iii) make available to Buyer and its authorized representatives all books, papers and records relating to the Acquired Assets and the Business, or the Acquired Liabilities. 25 4.13. Conduct of Business. Except as otherwise provided in this Section 4.13, from the date of this Agreement until the Closing Date, Seller will conduct the Business in a commercially reasonable manner and in substantially the same manner as it has previously. Seller will use all commercially reasonable efforts to preserve and maintain its assets and all relationships with, and the goodwill of, suppliers, customers and Employees. Seller will not (a) do any act or omit to do any act that could reasonably be expected to cause a material breach or default of any material contract, obligation, lease, license, or other material agreement to which Seller is a party, (b) enter into any long-term supply contracts with any customers or (c) take any action or permit to occur any event of a type described in Section 2.5(a)-(m) hereof. 4.14. Compliance With Bulk Transfer Act. To the extent applicable, the parties agree to waive compliance with the provisions of any bulk transfer laws. Seller agrees to indemnify and hold Buyer harmless from and with respect to any liability that may accrue to Buyer arising out of such waiver. A waiver by Buyer of compliance with such bulk transfer laws shall not in any manner waive, nullify or limit Seller's warranties or indemnities under this Agreement. 4.15. Disclosure of Changes. Seller will promptly notify Buyer in writing of (a) any threatened lawsuit or claim; (b) any change that has a Material Adverse Effect; and (c) any material change in any representations or warranties of Seller set forth in this Agreement or in any exhibit, schedule, certificate or other document delivered to Buyer by Seller pursuant to this Agreement, if such material change would likely have a Material Adverse Effect. 4.16. Stockholder Approval. As promptly as practicable after the date hereof, Seller, acting through its Board of Directors, shall, subject to and in accordance with applicable law and its Certificate of Incorporation and Bylaws, (i) promptly and duly call, give notice of and hold a meeting of the holders of Seller Stock for the purpose of voting to (x) approve the principal terms of this Agreement, (ii) recommend to the stockholders of Seller that they vote in favor of the matters described in the preceding clause (i), (iii) include in any written material furnished to such holders such recommendation and (iv) take all reasonable and lawful action to solicit and obtain such vote in favor of the matters described in clause (i) above. At or prior to the Closing, Seller shall deliver to Parent a certificate of its Secretary setting forth the voting results from its stockholder meeting. 4.17. Updating Schedules. Notwithstanding anything to the contrary contained in this Agreement, Seller shall be entitled at or before the Closing to amend any and all schedules referred to in Article II hereof for the purpose solely of reflecting thereon events that have occurred after the date hereof; provided, however, that any such amendment of any schedule shall not impair in any respect Buyer's right, pursuant to Section 5.1 hereof, with respect to the condition set forth in Section 5.1(a). ARTICLE V CONDITIONS TO CLOSING 5.1. Conditions Precedent to Obligations of Buyer. The obligation of Buyer under this Agreement to consummate the transactions contemplated by this Agreement on the Closing Date 26 shall be subject to the satisfaction, at or prior to the Closing Date, of all of the following conditions, any one or more of which may be waived by Buyer: (a) Representations and Warranties Accurate. (i) The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects, as of the date of this Agreement, (ii) the representations and warranties of Seller contained in this Agreement and as modified by any amended schedule pursuant to Section 4.17 hereof shall be true and correct in all material respects as of the Closing Date, and (iii) each material adverse change in any such amended schedule, and all such changes that are in the aggregate materially adverse, shall be satisfactory to Buyer in its sole discretion. (b) Performance by Seller. Seller shall have performed and complied in all material respects with all covenants and agreements required to be performed or complied with by it hereunder on or prior to the Closing Date. (c) Consents. All consents required, and all notifications required to have been given, in connection with the consummation of the transactions contemplated by this Agreement and the Closing (including those set forth on Schedule 5.1(c) hereto) shall have been duly obtained, made or given and shall be in full force and effect, without the imposition upon Buyer of any condition, restriction or required undertaking. (d) Hi/fn, Inc. (i) Seller shall have effectively assigned to Buyer, or Buyer shall have entered into directly, a license agreement substantially on the terms of Seller's existing license with Hi/fn, Inc., pursuant to which Buyer shall have all the rights granted to Seller, including the right to use the licensed technology on all products developed by Seller (regardless of stage of development) or Buyer for consideration not in excess of $2.00 per unit, or (ii) Buyer shall have obtained a license with another party providing Buyer substantially comparable technology ("Alternate Technology") on terms, including economic terms, substantially comparable to the terms contemplated by the preceding clause (i), which other party shall be reasonably acceptable to Buyer in its discretion, including with respect to whether customers of the Business will desire to continue doing business with Buyer if Buyer will be relying upon such Alternate Technology for future products. (e) Mentor. Seller shall have effectively assigned to Buyer, or Buyer shall have entered into directly, a license agreement with Mentor, which license shall be satisfactory to Buyer, in its sole discretion. (f) Tyco Submarine Systems, Ltd. Seller, Tyco Telecommunications (US) Inc. and Tyco Submarine Systems, Ltd. shall have entered into a Release and Settlement Agreement substantially in the form of Exhibit 5.1(f) hereto, except that such agreement shall, by its terms, be assignable to Buyer as a successor of substantially all of the assets of Seller. (g) Audit Report. Seller shall have delivered to Buyer financial statements as of and for the five-month period ending May 31, 2002, together with the audit report thereon of BDO Seidman. (h) No Legal Prohibition. No suit, action, investigation, inquiry or other proceeding by any Governmental Entity or other Person shall have been instituted or threatened 27 which arises out of or relates to this Agreement, or the transactions contemplated hereby and no injunction, order, decree or judgment shall have been issued and be in effect or threatened to be issued by any Governmental Entity of competent jurisdiction, and no statute, rule or regulation shall have been enacted or promulgated by any Governmental Entity and be in effect, which in each case restrains or prohibits, in a material manner, the consummation of the transactions contemplated hereby. (i) Certificate. Buyer shall have received a certificate, dated the Closing Date, signed by a duly authorized officer of Seller, to the effect that the conditions set forth in Sections 5.1(a) (i) and (ii), 5.1(b), and 5.1(c) have been satisfied. (j) Seller Stockholder Approval. Seller shall have delivered to Buyer evidence of the necessary stockholder approval to duly authorize Seller to make, execute, deliver and perform this Agreement and the other Seller Transaction Documents to which Seller is a party. (k) Seller Transaction Documents. Buyer shall have received from Seller the executed Seller Transaction Documents. (l) No Material Adverse Change. No event, violation, circumstance or other matter shall have occurred that has had a Material Adverse Effect or can reasonably be expected to have a Material Adverse Effect. 5.2. Conditions Precedent to Obligations of Seller. The obligations of Seller under this Agreement to consummate the transactions contemplated by this Agreement on the Closing Date shall be subject to the satisfaction, at or prior to the Closing Date, of all of the following conditions, any one or more of which may be waived by Seller: (a) Representations and Warranties Accurate. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects, as of the date of this Agreement and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. (b) Performance by Buyer. Buyer shall have performed and complied in all material respects with all covenants and agreements required to be performed or complied with by it hereunder on or prior to the Closing Date. (c) No Legal Prohibition. No suit, action, investigation, inquiry or other proceeding by any Governmental Entity or other Person shall have been instituted or threatened which arises out of or relates to this Agreement or the transactions contemplated hereby and no injunction, order, decree or judgment shall have been issued and be in effect or threatened to be issued by any Governmental Entity of competent jurisdiction, and no statute, rule or regulation shall have been enacted or promulgated by any Governmental Entity and be in effect, which in each case restrains or prohibits, in a material manner, the consummation of the transactions contemplated hereby. (d) Certificate. Seller shall have received a certificate, dated the Closing Date, signed on behalf of Buyer by an officer of Buyer, to the effect that the conditions set forth in Sections 5.2(a) and 5.2(b) have been satisfied. 28 (e) Buyer Transaction Documents. Seller shall have received from Buyer the executed Buyer Transaction Documents. ARTICLE VI INDEMNIFICATION AND CERTAIN ADDITIONAL COVENANTS 6.1. Indemnification Obligations. Seller and Buyer agree as follows: (a) Seller's Indemnification Obligations. (i) Subject to the limitations contained in this Article VI, Seller shall indemnify Buyer and its Affiliates and the respective agents, advisors, representatives, directors and officers of Buyer and its Affiliates (the "Buyer Indemnified Parties") from, and hold the Buyer Indemnified Parties harmless from and against, any and all Damages arising out of or resulting from (A) any breach of any representation or warranty made by Seller in this Agreement, (B) any breach of any covenant or agreement made by Seller in this Agreement (other than in Section 4.10 or 4.11 hereof) or in any Seller Transaction Document, (C) any violation or liability arising under any bulk sales law, (D) any Retained Liability, (E) the reasonable costs of enforcing any Buyer Indemnified Party's rights hereunder, and (F) any breach of any covenant or agreement made in Section 4.10 or 4.11 hereof. (ii) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including governmental penalty or punitive damages and including reasonable costs of investigation, clean up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened incurred in connection with the successful enforcement of this Agreement). (b) Buyer's Indemnification Obligations. Buyer shall indemnify Seller and its agents, advisors and representatives and their respective directors, officers and other Affiliates (the "Seller Indemnified Parties") from, and hold the Seller Indemnified Parties harmless from and against, any and all Damages arising out of or resulting from (i) any breach of any representation warranty made by Buyer in this Agreement, (ii) any breach of any covenant or agreement made by Buyer in this Agreement or in any Buyer Transaction Document, (iii) any Acquired Liabilities, and (iv) the reasonable costs of enforcing any Seller Indemnified Party's rights hereunder. (c) Indemnification Procedures. (i) A party seeking indemnification pursuant to this Section 6.1 (an "Indemnified Party") shall give prompt notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered material actual prejudice thereby. The 29 Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party within ten (10) business days of receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be solely obligated to satisfy and discharge the Third Party Claim; (B) the defense of such Third Party Claim by the Indemnifying Party will not, in the reasonable judgment of the Indemnified Party, have any continuing material adverse effect on the Indemnified Party's business; and (C) the Indemnifying Party makes reasonably adequate provision to ensure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that may result (the conditions set forth in clauses (A), (B) and (C) are collectively referred to as the "Litigation Conditions"). (ii) Within ten (10) days after the Indemnifying Party has given notice to the Indemnified Party of its intended exercise of its right to defend a Third Party Claim, the Indemnified Party shall give notice to the Indemnifying Party of any objection thereto based upon the Litigation Conditions. If the Indemnified Party so objects, the Indemnified Party shall continue to defend the Third Party Claim until such time as such objection is withdrawn. If no such notice is given, or if any such objection is withdrawn, the Indemnifying Party shall be entitled to assume and conduct such defense, with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party, until such time as the Indemnified Party shall give notice that any of the Litigation Conditions, in its reasonable judgment, are no longer satisfied. (iii) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (iv) The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim as provided in this Agreement, shall not consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), enter into any compromise or settlement which commits the Indemnified Party to take, or to forbear to take, any action. The Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third Party Claim involves equitable or other non-monetary relief, and shall have the right to settle any Third Party Claim involving monetary damages with the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. (v) Any Buyer Indemnified Party shall be entitled to payment from the Escrowed Amount of any amount due such Buyer Indemnified Party pursuant to this Article VI and Seller shall give the escrow agent under the Escrow Agreement all such notices as shall be necessary to permit such payment from the Escrowed Amount. Subject to any Buyer 30 Indemnified Parties' claims under this Article VI that may be pending at such time, Seller shall be entitled to payment of the Escrowed Amount (or balance thereof, as the case may be) upon the date that is twelve (12) months after the Closing Date and Buyer shall give the escrow agent under the Escrow Agreement all such notices as shall be necessary to permit such payment to Seller. Amounts paid in respect of indemnification obligations of the parties, including any portion of the Escrowed Amount paid to the Buyer Indemnified Parties pursuant to the Escrow Agreement, shall be treated as an adjustment to the Purchase Price. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. (vi) No action or claim for Damages arising out of or resulting from a breach of representations or warranties shall be brought or made after the expiration of the period set forth in Section 8.2. (vii) The indemnification provided for in Section 6.1(a)(i)(A), Section 6.1(a)(i)(B), Section 6.1(b)(i) or Section 6.1(b)(ii) hereof shall not be required unless and until, at the time of any such determination, the aggregate amount of Damages otherwise subject to indemnification under this Section 6.1 exceeds $200,000, in which event the indemnified party or parties will be entitled to indemnification for the full amounts of their Damages; provided, however, that the foregoing limitation shall not apply to any claim based on (A) a breach of the representation set forth in Section 2.14 hereof or (B) a breach of any representation or warranty made in this Agreement constituting fraud. Notwithstanding anything to the contrary contained in this Agreement, Seller's maximum indemnity obligation under Section 6.1(a)(i)(A) or Section 6.1(a)(i)(B) for the payment of Damages, and Buyer's and any Buyer Indemnified Party's sole and exclusive remedy for any breach of any representation or warranty made by Seller in this Agreement or for the breach of any covenant or agreement made by Seller in this Agreement (other than Sections 4.10 or 4.11 hereof) or in any Seller Transaction Document shall in no event exceed the Escrowed Amount; provided, however, that the foregoing limitation shall not apply to any claim based on (x) a breach of the representation set forth in Section 2.14 hereof or (y) a breach of any representation, warranty, covenant or agreement made by Seller in this Agreement or any Seller Transaction Document constituting fraud. (viii) No right to indemnification under this Section 6.1 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto or the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. Notwithstanding anything to the contrary herein, Buyer shall have the right, irrespective of any knowledge of audit or investigation by Buyer, to rely fully on the representations, warranties and covenants of Seller contained herein. Seller acknowledge and agree that each of the representations and warranties of Seller in this Agreement is not to be affected or limited by any previous or other disclosures, express or implied, to Buyer, its officers, representatives or professional advisors. 31 ARTICLE VII TERMINATION 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Section 7.1(b) through (e), by written notice by the terminating party to the other party): (a) by mutual written consent duly authorized by an officer of Seller and an officer of Buyer; or (b) by either Buyer or Seller if the Closing shall not have occurred on or prior to July 31, 2002 (provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose willful failure to fulfill any material obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date); or (c) by either Buyer or the Seller if a Governmental Entity shall have (i) issued a non-appealable final judgment, order, injunction, decree or ruling or taken any other action or (ii) enacted, enforced or deemed applicable to the transactions contemplated hereby a Law in final form, in each case having the effect of permanently restraining, enjoining, prohibiting or making illegal the consummation of the transactions contemplated hereby (provided that the party seeking to terminate pursuant to this Section 7.1(c) shall have used commercially reasonable efforts to have any such judgment, order, injunction, decree, ruling or other action vacated or lifted); or (d) by Buyer, upon a material breach of any representation, warranty, covenant or agreement of the Seller set forth in this Agreement such that the conditions set forth in Section 5.1(a) or 5.1(b) would not be substantially satisfied (a "Seller Terminating Breach"), provided that, if such Seller Terminating Breach is curable prior to the expiration of thirty (30) days from notice to the Seller of its occurrence through the exercise of the Seller's commercially reasonable efforts, and for so long as the Seller continues to exercise such commercially reasonable efforts, Buyer may not terminate this Agreement under this Section 7.1(d) until the expiration of such period without such Seller Terminating Breach having been cured (but in no event shall the preceding proviso be deemed to extend the date set forth in Section 7.1(b)); or (e) by the Seller, upon a material breach of any representation, warranty, covenant or agreement of Buyer set forth in this Agreement such that the conditions set forth in Section 5.2(a) or 5.2(b) would not be substantially satisfied (a "Buyer Terminating Breach"), provided that, if such Buyer Terminating Breach is curable prior to the expiration of thirty (30) days from notice to Buyer of its occurrence through the exercise of Buyer's commercially reasonable efforts, and for so long as Buyer continues to exercise such commercially reasonable efforts, Seller may not terminate this Agreement under this Section 7.1(e) until the expiration of such period without such Buyer Terminating Breach having been cured (but in no event shall the preceding proviso be deemed to extend the date set forth in Section 7.1(b)). 32 7.2. Effect of Termination. Upon the termination of this Agreement pursuant to Section 7.1, each party's right of termination under Section 7.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 7.1, all further obligations of the parties under this Agreement will terminate, except that the obligations in Section 4.2 will survive; provided, however, that if this Agreement is terminated by a party because of the breach of this Agreement by the other party, or because one or more of the conditions to the terminating party's obligations under this Agreement is not satisfied as a result of the other party's failure to comply with its obligations under this Agreement, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. ARTICLE VIII MISCELLANEOUS 8.1. Construction. Buyer and Seller have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Buyer and Seller and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement or the other Transaction Documents. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean "including without limitation." Nothing in the Disclosure Schedules hereto shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the exception is described on the Disclosure Schedule with reasonable particularity and expressly refers to the applicable section of this Agreement. Section references refer to this Agreement unless otherwise specified. 8.2. Nature and Survival of Covenants and Representations. With respect to the several covenants, agreements, representations and warranties of the parties hereto in this Agreement or in any Disclosure Schedule or Exhibit hereto or any certificate or other document delivered pursuant to this Agreement: (a) the covenants and agreements (including in respect of Retained Liabilities and Acquired Liabilities and indemnification therefor) shall survive the Closing indefinitely; and (b) the representations and warranties shall survive until the date twelve (12) months after the Closing Date except that (i) the representations and warranties of Seller set forth in Sections 2.1, 2.2, 2.3, 2.10 and 2.11 and of Buyer set forth in Sections 3.1, 3.2 and 3.3 shall survive indefinitely; and (ii) the representations and warranties of Seller set forth in Sections 2.8, 2.12 and 2.16 shall survive until the statute of limitations applicable to such matters expires. 8.3. Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed duly given only upon delivery to the party personally (including by reputable overnight courier service), when faxed (with written confirmation of transmission having been received) during normal business hours or three days after being mailed by 33 registered or certified mail (return receipt requested), with postage and registration or certification fees thereon prepaid, addressed to the party at its address set forth below (or at such other address for a party as shall be specified by such party by like notice): If to Buyer: Comtech/AHA Acquisition Corp. c/o Comtech Telecommunications Corp. 105 Baylis Road Melville, New York 11747 Fax: (631) 777-8877 Attention: Fred Kornberg with a copy to: Proskauer Rose LLP 1585 Broadway New York, New York 10036-8299 Fax: (212) 969-2900 Attention: Robert A. Cantone, Esq. If to Seller: Advanced Hardware Architectures, Inc. 2345 NE Hopkins Court Pullman, Washington 99163-5601 Fax: Attention: with a copy to: White & Lee LLP 545 Middlefield Road, Suite 250 Menlo Park California 94025 Fax: (650) 470-4099 Attention: David R. Lee, Esq. 8.4. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto, except that Buyer may assign its rights under this Agreement to any Affiliate or any successor in interest to, or assignee of, Buyer or any of the Acquired Assets; provided that such Affiliate, successor in interest or assignee of Buyer agrees to be bound by all the terms and conditions of this Agreement, including Buyer's obligations to indemnify Seller under Section 6.1 below. 34 8.5. Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. 8.6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof. 8.7. Consent to Jurisdiction. Each of Buyer and Seller irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of the State of New York sitting in New York County and (b) the United States District Court for the Southern District of New York, for purposes of any suit, action or other proceeding arising out of this Agreement or transaction contemplated hereby (and agrees not to commence any action, suit or proceeding relating hereto except in such courts). Each of Buyer and Seller further agrees that service of any process, summons or document by U.S. registered mail to such party's respective address set forth in Section 8.3 shall be effective service of process for any action, suit or proceeding with respect to any matters to which it has been submitted to jurisdiction as set forth in the immediately preceding sentence. Each of Buyer and Seller irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in of (a) the Supreme Court of the State of New York sitting in New York County and (b) the United States District Court for the Southern District of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. 8.8. Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.9. No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto (and the Buyer Indemnified Parties and Seller Indemnified Parties referred to in Section 6.1) and their successors and permitted assigns any benefits, rights or remedies under or by reason of this Agreement. 8.10. Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (a) extend the time for the performance of any of the obligations of the other party; (b) waive any inaccuracies in representations and warranties by the other party; (c) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (d) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or 35 extension, as the case may be. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which any party may otherwise have at law or in equity. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.12. Headings. The headings preceding the text of the sections and paragraphs hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 8.13. Certain Defined Terms. As used herein, the terms below have the following definitions: (a) "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person, including, for any purpose relating to employee benefits, an entity that is, or at any relevant time was, together with the Seller, treated as a "single employer" under Section 414(b), 414(c), 414(m) or 414(o) of the Code. (b) "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof or any court or arbitrator). (c) "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, covenant, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). (d) "Material Adverse Effect" means any event, violation, inaccuracy, circumstance or other matter relating to the Acquired Assets or Acquired Liabilities that causes Buyer to incur actual damages in the aggregate amount of $200,000 or more, as determined at the time of such precipitating event, violation, inaccuracy circumstance or other matter. (e) "Person" means an individual, a corporation, a partnership, an association, a joint venture, a limited liability Seller, an Authority, a trust or other entity or organization. (f) "Seller's knowledge" means the actual knowledge of Pat Owsley, Consultant, Bill Thomson, President, Dawn Barnard, Controller, Bruce Willis, Operations Manager, Brad Linstrom, Test and Product Engineering Manager, and each member of the Board of Directors of Seller as constituted as of the date hereof. Seller's knowledge does not mean that Seller has made any actual inquiry, nor does it mean that Seller has made the inquiry that might have been made by a "reasonable" person under the circumstances. 8.14. Entire Agreement. This Agreement, together with the Disclosure Schedules and Exhibits hereto and the other Transaction Documents, constitutes the entire understanding of the 36 parties with respect to the subject matter hereof, supersedes any prior agreements or understandings, written or oral, between the parties with respect to the subject matter hereof. 8.15. Parent. Parent shall cause Buyer to perform each of its obligations under this Agreement. [Signature page follows] 37 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. COMTECH TELECOMMUNICATIONS CORP. By /s/ Michael D. Porcelain ------------------------------------------------ Name: Michael D. Porcelain Title: Vice President of Operational Finance COMTECH/AHA ACQUISITION CORP. By /s/ Robert McCollum ------------------------------------------------ Name: Robert McCollum Title: President ADVANCED HARDWARE ARCHITECTURES, INC. By /s/ William H. Thomson ------------------------------------------------ Name: William H. Thomson Title: President 38 EX-21 5 d52183_ex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES The following is a list of the subsidiaries of the Company as of October 11, 2002: Subsidiary State of Incorporation - ---------- ---------------------- Telecommunications Transmission Business Segment Comtech Antenna Systems, Inc. Delaware Comtech EF Data Corp. Delaware Comtech Systems, Inc. Delaware Comtech AHA Corporation Delaware RF Microwave Amplifier Business Segment Comtech PST Corp. New York Mobile Data Communications Services Business Segment Comtech Mobile Datacom Corp. Delaware EX-23 6 d52183_ex23.txt CONSENT OF KPMG LLP Exhibit 23 Independent Auditors' Consent The Board of Directors Comtech Telecommunications Corp.: We consent to incorporation by reference in the Registration Statements (Nos. 33-66278, 33-83584, 333-68967 and 333-51708) on Form S-8 of Comtech Telecommunications Corp. of our report dated October 15, 2002, relating to the consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries as of July 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2002 and related consolidated financial statement schedule, which report appears in the July 31, 2002 annual report on Form 10-K of Comtech Telecommunications Corp. and subsidiaries. Melville, New York October 15, 2002 EX-99.1 7 d52183_ex99-1.txt CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Fred Kornberg, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Fred Kornberg, Chief Executive Officer and President of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Fred Kornberg --------------------------------------- Fred Kornberg Chief Executive Officer and President EX-99.2 8 d52183_ex99-2.txt CERTIFICATIONS OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Robert G. Rouse, certify that: 1. I have reviewed this Annual Report on Form 10-K of Comtech Telecommunications Corp. ("Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statements 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual Report. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Comtech Telecommunications Corp. (the "Company") for the fiscal year ended July 31, 2002 (the "Annual Report"), I, Robert G. Rouse, Senior Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 16, 2002 /s/ Robert G. Rouse --------------------------------------- Robert G. Rouse Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----