Stratex Networks, Inc. Form 10-K (3/31/2003)

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 þ No o

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 the Form 10-K or any amendment to this Form 10-K. þ

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

State the aggregate market value of the voting stock held by non-affiliates of the registrant (based on the last reported sale price of $2.80 per share on the Nasdaq National Market as of May 13, 2003): Approximately $113,502,080.

As of May 13, 2003, there were 82,868,919 shares of Common Stock, par value $0.01 per share, outstanding.


1.	Portions of the registrant’s Annual Report to Stockholders for the year ended March 31, 2003 are incorporated by reference into Parts I and II of this Annual Report on Form 10-K. With the exception of those portions which are incorporated by reference, the registrant’s Annual Report to Stockholders for the year ended March 31, 2003 is not deemed filed as part of this Annual Report on Form 10-K.

2.	Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on July 15, 2003 are incorporated by reference into Part II, Item 5 and Part III of this Annual Report on Form 10-K.

The following Business Section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Factors That May Affect Future Financial Results” and elsewhere in, or incorporated by reference into, this Form 10-K.

Our Internet Web site address is www.stratexnet.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We will also provide the reports in electronic or paper form free of charge upon request. Furthermore, all reports we file with the Commission are available free of charge via EDGAR through the Commission’s Web site at www.sec.gov. In addition, the public may read and copy materials filed by us at the Commission’s public reference room located at 450 Fifth St., N.W., Washington, D.C., 20549.

Stratex Networks, Inc., formerly known as Digital Microwave Corporation, and DMC Stratex Networks, Inc. was incorporated in California in 1984 and reorganized as a corporation in 1987 under the laws of the State of Delaware. In August 2002, we changed our name from DMC Stratex Networks, Inc. to Stratex Networks, Inc. (“the Company”). We design, manufacture and market advanced wireless solutions for worldwide telephone network interconnection and broadband wireless access. We provide our customers with a broad product line, which contains products that operate using a variety of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a variety of transmission capacities, typically ranging from 64 Kilobits to 2XOC-3 or 311 Megabits per second (Mbps). Our broad product line allows us to market and sell our products to service providers worldwide with varying interconnection and access requirements. We design our products to meet the requirements of mobile communications networks and fixed broadband access networks worldwide. Our products typically enable our customers to deploy and expand their wireless infrastructure and market their services rapidly to subscribers, so that service providers can realize a return on their investments in frequency allocation licenses and network equipment.

We have sold over 256,000 microwave radios, which have been installed in over 110 countries. We market our products to service providers directly, as well as indirectly through our relationships with original equipment manufacturer (“OEM”) base station suppliers.

Worldwide demand for high performance and high capacity broadband access, high-speed data communications and fixed and mobile cellular communications continues to grow. This growth results from (i) the rapid establishment of mobile and fixed telecommunications infrastructures in developing countries, (ii) the business and consumer need for internet broadband access, (iii) changes in the regulatory environment, (iv) technological advances, particularly in the wireless telecommunications market, and (v) the deployment of private communications networks. Given their relatively low cost and ease of deployment, wireless solutions are attractive to new service providers establishing competing telecommunications services in developed countries, expansion of existing telecommunications infrastructures to satisfy increasing usage, and to telecommunications service providers in developing countries seeking to rapidly increase the availability and quality of telecommunications and internet access services. The upgrade and expansion of existing networks and the deployment of new networks are both expected to continue to offer business opportunities for wireless infrastructure suppliers. Wireless infrastructure suppliers address the requirements of both mobile communications networks and fixed access networks.

The use of cellular telephone and other wireless services and devices continues to increase due to technological advances and increasing consumer demand for connectivity to telecommunications services. The

demand for fixed broadband access networks has also increased due to data transmission requirements resulting from Internet access demand.

Wireless networks are constructed using microwave radios and other equipment to connect cell sites, switching systems, other wireline transmission systems and other fixed access facilities. Wireless networks range in size from a single transmission link connecting two buildings to complex networks comprised of thousands of wireless connections. The architecture of a network is influenced by several factors, including the available radio frequency spectrum, coordination of frequencies with existing infrastructure, application requirements, environmental factors and local geography.

Regulatory authorities in different jurisdictions allocate different portions of the radio frequency spectrum for various telecommunications services. In addition, most individual networks require radio links operating at several frequencies and the transmission of voice and data, which typically requires different transmission capacities. Moreover, networks in different locations are constructed using different combinations of frequencies and with different transmission capacities. No single transmission frequency or transmission capacity predominates in the global market.

Whether expanding existing networks or deploying new networks, service providers must choose between constructing networks using wireline and fiber infrastructure or wireless infrastructure or a combination of these options. Wireline and fiber connectivity solutions typically require significant installation periods and may be relatively expensive to install. For cellular telephony in developed countries where wireline and fiber infrastructures are in place, new service providers may have the option to lease networks from traditional service providers, but may choose not to do so because leasing arrangements must be entered into with their competitors, which may be comparatively expensive and do not generally allow control over the network. In developing countries, many service providers install wireless networks because such networks are generally faster to install and may be less expensive than traditional wireline networks. As a result, many service providers deploy wireless networks as an alternative to the construction or leasing of traditional wireline networks. For broadband access networks, the service providers can use fiber or wireless connectivity. Similar to cellular telephone networks, wireless broadband access is typically less expensive to install and can be installed more rapidly than a wireline or fiber alternative.

Digital microwave and millimeter-wave transmission systems offer numerous advantages over competing transmission technologies, including lower cost of implementation and rapid deployment. Digital microwave systems can be deployed in a matter of weeks and typically require lower infrastructure investments and installation lead times than alternative transmission technologies.

We believe that as broadband access and telecommunications requirements grow, wireless systems will continue to be used as transmission links to support a variety of existing and expanding communications networks and applications. In this regard, we believe that wireless systems will be used to address the connection requirements of several markets and applications, including the broadband access market, cellular applications, private networks and wireless analog replacement applications.

We believe that the use of standard design platforms for both hardware and software components in the development of our products enables us to more rapidly introduce and commercially ship new products and product enhancements to address changing market demands. The use of standard design platforms, flexible architectures and components, and software configurable features allows us to offer our customers high-performance products with a high degree of flexibility and functionality. Flexible architectures and components facilitate system scalability, allow customers to acquire additional features at a relatively low incremental cost, and, reduce the development time of new features. The use of standard design platforms also enables us to manufacture our products in a cost-effective manner. The software features of many of our products provide our customers with a greater degree of flexibility in installing, operating and maintaining their networks.

Our strategy is to build on the strength of our current products, which offer point-to-point solutions, and our strong customer sales, service and support organization to improve our position as a leading provider of integrated wireless solutions for mobile cellular broadband wireless access and private networks. Key elements of our strategy include:

Maintain a Comprehensive Product Line. We anticipate that the requirements of our customers will continue to evolve as the telecommunications services markets change and expand. In this regard, since our customers often do not know the exact frequency band and capacity needs of their networks at the time they are awarded franchises, our broad product line provides them with the flexibility to respond to individual market needs and to coordinate frequencies with existing infrastructure and other significant variables. We intend to continue to expand our product lines in response to the varying worldwide requirements of wireless networks.

Address Worldwide Market Opportunities. We believe that we are well positioned to address worldwide market opportunities for wireless infrastructure suppliers. For example, in some African and Asian countries there are mobile telecommunications infrastructures being built for the first time; new competing mobile networks are being built in many countries as customer demand increases; telecommunications infrastructures are being expanded worldwide; and broadband access networks are being constructed to meet data access requirements. We believe that maintaining close proximity to our customers provides us with a competitive advantage in securing orders for our products and in servicing our customers. Local offices enable us to better understand the local issues and requirements of our customers and to address our customers’ individual geographic, regulatory, and infrastructure requirements. As a result, we have developed a global sales, service and support organization with offices in Europe, Africa, Asia, New Zealand, Australia, the Middle East and the Americas. With our twenty-four sales or support offices worldwide, we can normally respond quickly to our customers’ needs and provide prompt on-site technical support.

Leverage Distribution Channels. We market our products to service providers directly, as well as indirectly through our relationships with OEM base station suppliers, such as Motorola, Inc., Lucent Technologies, Nortel Networks and Siemens AG, as well as through our relationships with system integrators. We also market our products through independent agents and distributors in certain countries. We intend to leverage upon such relationships and our direct worldwide presence with service providers to expand our customer base and enhance our global presence.

Focus on Business Expansion into Emerging Applications. We believe that we can leverage our core technical competencies and our global sales, service and support organization to enter into growing business applications for our products, including wireless local loop, data access, wireless data transport, and alternative local telephone facilities access.

For financial information by operating segment and product category, see Note 6 to the Consolidated Financial Statements of our 2003 Annual Report to Stockholders.

Our principal product families include the AltiumMX, XP4^TM, DART^TM, DXR® 700, DXR® 200, DXR® 100, ProVision® and VeloxLE^TM.

AltiumMX. The AltiumMX digital microwave radio is the latest generation of the Altium product, which originally began volume shipments in January 1999, and provides high capacity solutions in microwave and millimeter wave bands. The AltiumMX, a Synchronous Optical Networks (SONET)/ Synchronous Digital Hierarchy (SDH) capable digital microwave radio, can wirelessly extend or complete SONET and SDH transport networks to complement, or be an alternative to, fiber deployment. Altium additionally features a fully integrated SDM add/drop multiplexer option. Key attributes of size, performance, flexibility and rapid deployment bring benefits to both interconnect and access applications. Altium/ AltiumMX digital microwave radios operate at frequencies of 7, 8, 11, 13, 15, 18, 23, 26 and 38 GHz and at OC-3/ STSM-1 capacity of 155 Mbps or 2XOC-3 capacity of 311 Mbps. Initial shipments of the Altium began in mid 2002.

Altium incorporates the Vantex^TM chipset, which we introduced in February 2001, utilizing features such as high-order Quadrature Amplitude Modulation (QAM) (up to 256 QAM), forward error correction, and adaptive equalization. These are all essential components in high-performance wireless radio products. With products enabled by the Vantex chipset, we can achieve required capacities in a single chip with significant cost savings. We are developing additional products based on Altium to meet customer requirements.

XP4 Plus. The XP4 Plus Series of digital microwave radios provides low-to-medium capacity microwave radio systems for cellular base station connections and fixed wireless access. The XP4 Plus digital microwave radio is deployed worldwide and has comprehensive regulatory approvals for a wide variety of applications and conditions. The XP4 Plus digital microwave radio is simple to install and commission through the front panel controls. Options include protection (redundancy), high power, Simple Network Management Protocol (SNMP), Automatic Transmit Power Control (ATPC), and a 100BT Ethernet interface. With broad platform coverage from 7 to 38 GHz, international deployment capacities of 2/4/8/16xE1 and 1xE3, and U.S. deployment frequencies of 15-38 GHz, and capacities of 4/ 8xDS-1 and 1xDS-3, the XP4 Plus digital microwave radio meets operators’ requirements in a single platform.

DART. The DART microwave radio offers a low cost single E1 or DS-1 data stream transmission and is designed for a smaller cell site in a wireless network, typically referred to as microcell/ picocell, and last-mile access requirements. DART radio’s compact, all-outdoor design connects directly to base station equipment via a single twisted-pair cable, making it very easy to install and a viable, cost effective alternative to leased line facilities. The DART radio can also be used in the build out of wireless Internet access networks. Features of the DART microwave radio include its compact, integrated outdoor unit, low power consumption, programmability from laptop computers, and Simple Network Management Protocol (SNMP) compatibility. Available frequencies range from 15 GHz to 38 GHz.

DXR 700. The DXR 700 product family is a high performance radio platform that operates across a range of capacities from 2x2 Mbps to 45 Mbps, using efficient 16 and 64 QAM modulation. A set of advanced features (including forward error correction and an adaptive equalizer) target medium- and long-distance link requirements. Optional errorless diversity protection switching delivers optimal performance under the most difficult radio transmission conditions. The DXR 700 platform covers multiple frequencies from 2 GHz to 11 GHz.

DXR 200. The DXR 200 product line provides an integrated, modular, linking solution for a wide variety of communications systems in markets with low to medium capacity transmission requirements. The DXR 200’s integrated modular design allows it to support a variety of configurations, which can incorporate multiple features in the unit to accommodate the differing communications needs of our customers, overcome difficult radio frequency environments, accommodate multiple data speeds and support multiple communication protocols. The DXR 200 can operate in frequency bands from 300 MHz to 2.7 GHz.

DXR 100. The DXR 100 product line is designed to address medium and long distances, trunking applications and capacities higher than those addressed by the DXR 200. The DXR 100 microwave radio supports these higher capacity environments using spectrum efficient transmission techniques, including Quadrature Phase Shift Keying (QPSK) or QAM modulation and low error rate technologies, including forward error correction and adaptive equalization. It provides low to medium capacity links for cellular applications, basic telephony transmission and customer access applications, particularly in urban areas. The DXR 100 microwave radio supports a variety of data rates with high spectrum efficiencies and maintains signal reception in harsh or difficult radio frequency environments.

ProVision. The ProVision element manager is a centralized network monitoring and control system for all of our products. Based on a UNIX® system platform, the ProVision element manager can expand to manage small systems as well as large networks. The ProVision management system is built on open standards, and it seamlessly integrates into higher-level managers through available interfaces. The ProVision element manager is compatible with all our management-enabled radios, including the Altium, Altium MX, XP4, DXR and DART radio families, as well as our prior radio products.

VeloxLE^TM. is a license-exempt radio platform that has been integrated into Stratex Networks’ product portfolio to provide the flexibility of both licensed and license-exempt products in a single network solution. It is available in 2.4 and 5.8 GHz, and 1, 2, or 4 T1/ E1 configurations. All versions include a bridged Ethernet port supporting up to 8 Mbps. This bandwidth is shared with the E1/ T1 traffic.

We intend to continue to focus significant resources on product development to maintain our competitiveness and to support our entry into new wireless opportunities, including wireless data transport and alternative local telephone facilities access. Programs currently in progress, if successfully completed, could result in new products and additions to current product families that will have the capability to handle greater amounts of voice and data traffic at increased cost-effectiveness with increased flexibility for our customers.

There can be no assurance that we will be successful in developing and marketing any of the products currently being developed, that we will not experience difficulties that could further delay or prevent the successful development, introduction and sale of future products, or that these products will adequately meet the requirements of the marketplace and achieve market acceptance. For a more detailed discussion regarding development of future products, see also “Research and Development.”

We market our products to customers in the telecommunications industry worldwide. Our customers include service providers, which incorporate our products into their telecommunications networks to deliver services directly to consumers, and OEMs, who provide and install integrated systems to service providers.

Although we have a large customer base, during any given quarter, a small number of customers may account for a significant portion of our net sales. In certain circumstances, we sell our products to service providers through OEMs, which provide the service providers with access to financing and in some instances, protection from fluctuations in foreign currency exchange rates. Our top two customers in net sales for fiscal 2003 were MTN Nigeria Communications Ltd (11%) and Motorola (Thailand) Ltd. (10%). Our top customer in net sales for fiscal 2002 was Beijing Telecom Equipment Factory (15%). No customers accounted for more than 10% of net sales for fiscal year 2001. At March 31, 2003, two of our customers accounted for approximately 25% and 11% of our $50.1 million backlog. Between April 1, 2002 and March 31, 2003, we sold our products to a number of service providers, in Asia and the Pacific, (including Motorola (Thailand) Ltd, and Tata Teleservices Limited) in Europe, the Middle East and Africa (including General Data Communications, Jordan Mobile Telephone Services, MTN Networks (Pvt) Limited and PTK Centertel SP); and in the Americas (including Telcel Radiomovil DIPSA S.A. de C.V. and Telefonica). While management considers our relationships with each of our major customers to be good, there can be no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue to be at levels of previous periods, or that we will be able to obtain orders from new customers. Our customers typically are not contractually obligated to purchase any quantity of products in a particular period, and product sales to major customers have varied widely from period to period. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or our failure to gain additional customers could have a material adverse effect on our business, financial condition and results of operations.

We believe that a direct and continuing relationship with service providers is a competitive advantage in attracting new customers and satisfying existing ones. As a result, we offer our products and services principally through our own sales, service and support organization, which allows us to closely monitor the needs of our customers. We have offices in the United States, Mexico, Colombia, Argentina, Brazil, the United Kingdom, Croatia, Portugal, France, Poland, Germany, Greece, South Africa, the United Arab Emirates, India, Singapore, the People’s Republic of China, Malaysia, Thailand, the Philippines, New Zealand and Australia. Our local offices provide us with a better understanding of our customers’ needs and enable us to respond to local issues and unique local requirements.

We have informal, and in some cases formal, relationships with OEM base station suppliers. Such relationships increase our ability to pursue the limited number of major contract awards each year. In addition, such relationships provide our customers with easier access to financing and to integrated system providers with a variety of equipment and service capabilities. There can be no assurance that we will continue to be able to maintain and develop such relationships or, that if such relationships are developed, they will be successful. In selected countries, we also market our products through independent agents and distributors, as well as system integrators.

As of March 31, 2003, we employed approximately 270 employees in our sales marketing, service and support organization. Sales personnel are highly trained to provide the customer with assistance in selecting and configuring a digital microwave system suitable for the customer’s particular needs. Our customer service and support personnel provide customers with training, installation, service and maintenance of our systems under contract. We generally offer a conditional warranty for all customers on all of our products. We provide warranty and post-warranty services from our manufacturing locations in the United States and New Zealand and our service centers in the United Kingdom and the Philippines.

We believe that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our success. Accordingly, we allocate, and intend to continue to allocate, a significant portion of our resources to research and development efforts. During fiscal 2003, we invested $14.4 million or 7.3% of net sales on research and development, compared to $18.5 million or 8.1% of net sales in fiscal 2002 and $24.0 million or 5.7% of net sales in fiscal 2001. We expect our research and development spending to be slightly higher in fiscal 2004 as we design and deliver our new product family called Eclipse^TM near the end of calendar 2003. As of March 31, 2003, we employed a total of approximately 112 people in our research and development organizations in San Jose, California and Wellington, New Zealand.

The market for our products is characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future performance depends on a number of factors, including our ability to identify emerging technological trends in our target markets, to develop and maintain competitive products, to enhance our products by adding innovative features that differentiate our products from those of our competitors, and to manufacture and bring products to market quickly at cost-effective prices. We believe that the use of flexible architectures and components assists in the rapid deployment of new products and enhancements to satisfy customer, industry and market needs. We believe that to remain competitive in the future, we will need to continue to develop new products, which require the investment of significant financial resources in product development. There can be no assurance, however, that we will successfully complete the development of any future products, that such products will achieve market acceptance or that such products will be capable of being manufactured at competitive prices in sufficient volumes. In the event that such products are not developed in a timely manner, do not gain market acceptance or are not manufacturable at competitive prices, our business, financial condition and results of operations could be harmed.

Our manufacturing operations consist primarily of software configuration, system test and quality management of Out-door Units (“ODUs”) and In-door Units (“IDUs”). The manufacturing process consists primarily of demand planning and management, supply chain management, process engineering and system configuration. We have two manufacturing facilities, which presently are located in San Jose, California, and Wellington, New Zealand. We also work very closely with two key manufacturing suppliers to produce the majority of our products based primarily on Stratex Networks designs and developed processes. The manufacturing operations in San Jose, California and Wellington, New Zealand are certified to International Standards Organization (ISO) 9001, a recognized international quality standard. The manufacturing facility in Wellington, New Zealand is also certified to ISO 14001, an internationally recognized environmental quality standard. As of March 31, 2003, we employed 104 people in manufacturing.

During the first quarter of fiscal 2003, we entered into an agreement to outsource the majority of our San Jose, California manufacturing operations to Microelectronics Technology Inc. (“MTI”) in Taiwan. Under the terms of our agreement with MTI for the transfer of our manufacturing operations to them, MTI has assumed assembly, integration and testing of our Altium product family, as well as assembly and testing of the ODU portion of our XP4 product. The agreement also provides for continuing cooperation between the companies for future products now being developed. We are retaining product design and research and development functions for these products.

Our manufacturing operations are highly dependent upon the delivery of completed ODUs and IDUs provided by our outside suppliers in a timely manner. In addition, we depend for the most part upon subcontractors to integrate and test the IDUs and ODUs for delivery to customers. We do not generally enter into volume purchase agreements with any of our suppliers, and no assurance can be given that such materials, components and subsystems will be available in the quantities required by us, if at all. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and deliver our products in a timely manner and, depending on the customer, subject us to delay penalties. There can be no assurance that we will not experience material supply problems that will cause delays in the future.

From time to time, we have experienced delays and other supply problems with our suppliers, but such delays and other problems have not had a significant impact on our operating results. We maintain continual communication between our management and the management of our key suppliers to ensure that production requirements and constraints are taken into account in each of our respective production plans.

Our backlog at March 31, 2003 was $50.1 million, compared with $94.1 million at March 31, 2002. We only include orders scheduled for delivery within twelve months in our backlog. Product orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period because of the timing of orders, delivery intervals, customer and product mix, and the possibility of changes in delivery schedules and additions or cancellations of orders.

The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We expect that competition will increase. Many of our competitors have more extensive engineering, manufacturing and marketing capabilities and significantly greater financial, technical, and personnel resources than us. In addition, some of our competitors may have greater name recognition, broader product lines, a larger installed base of products and longer-standing customer relationships. Our existing and potential competitors include established and emerging companies, such as Alcatel, Ceragon Networks, L.M. Ericsson, the Microwave Communications Division of Harris Corporation, NEC, Nera Telecommunications, Nokia, P-COM, Sagem AS, SIAE, and Siemens AG, as well as several private companies currently in the start-up stage. Some of our competitors have product lines that compete with ours, and are also OEMs through which we market and sell our products. Some of our largest customers could internally develop the capability to manufacture products similar to those manufactured by us and, as a result, their demand for our products and services may decrease. We believe that our ability to compete successfully will depend on a number of factors both within and outside our control, including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and our competitors, and the ability of our customers to obtain financing. We cannot assure you that we will have the financial resources, technical expertise, or marketing, sales, distribution, and customer service and support capabilities to compete successfully. For a more detailed discussion of the competition we face, see “Factors That May Affect Future Financial Results — Competition could harm our ability to maintain or improve our position in the market and could decrease our revenues.”

Radio communications are subject to regulation by governmental laws and international treaties. Our equipment must conform to domestic and international requirements established to avoid interference among users of microwave frequencies and to permit interconnection of telecommunications equipment. We believe that we have complied with such rules and regulations with respect to our existing products. Any delays in compliance with respect to future products could delay the introduction of such products. In addition, radio transmission is subject to regulation by foreign laws and international treaties. Equipment to support these services can be marketed only if permitted by suitable frequency allocations and regulations. Failure by the regulatory authorities to allocate suitable frequency spectrum could harm our business, financial condition and results of operations.

The regulatory environment in which we operate is subject to change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact our operations by restricting development efforts by us and our customers, making current systems obsolete or increasing the opportunity for additional competition. Any such regulatory changes could harm our business, financial condition and results of operations. We might deem it necessary or advisable to modify our systems to operate in compliance with such regulations. Such modifications could be extremely expensive and time-consuming to complete.

Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We rely upon a combination of trade secrets, trademarks, patents and contractual rights to protect our intellectual property. For example, we presently have seven patents, including one foreign patent, and two pending patents covering our products. In addition, we enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. There can be no assurance that any steps taken by us will be adequate to deter misappropriation or impede independent third party development of similar technologies. In the event that such intellectual property arrangements are insufficient, our business, financial condition and results of operations could be harmed. Moreover, there can be no assurance that the protection provided to our intellectual property by the laws and courts of foreign nations will be substantially similar to the remedies available under United States law or that third parties will not assert infringement claims against us.

While our ability to compete may be affected by our ability to protect our intellectual property, we believe that, because of the rapid pace of technological change in the wireless telecommunications industry, our innovative skills, technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property. Trade secret, trademark, copyright and patent protections are important but must be supported by other factors such as the expanding knowledge, ability and experience of our personnel, new product introductions and product enhancements. Although we continue to implement protective measures and intend to defend vigorously our intellectual property rights, there can be no assurance that these measures will be successful.

The wireless telecommunication industry is characterized by frequent allegations of patent infringement among competitors and considerable related litigation. We may in the future be notified that we are infringing certain patent or other intellectual property rights of others. Although there are currently no such pending lawsuits against us or unresolved notices that we are infringing upon intellectual property rights of others, there can be no assurance that litigation or infringement claims will not occur in the future. Such litigation or claims could result in substantial costs and diversion of resources and could harm our business, financial condition and results of operations. In the event of an adverse result of any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms.

As of March 31, 2003, we employed 587 full-time and temporary employees. None of our employees are represented by a collective bargaining agreement. Our future performance will depend in large measure on our ability to attract and retain highly skilled employees. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting and retaining highly skilled employees. We have never experienced a work stoppage and believe our relationship with our employees is good. Due to the macroeconomic and capital spending issues affecting the telecommunications industry, we undertook a reduction in work force of approximately 23% during fiscal 2003.

The statements contained in this Annual Report on Form 10-K concerning our future products, expenses, revenues, gross margins, liquidity and cash needs, as well as our plans and strategies, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements, trend analyses and other information contained herein about the markets for our services and products and trends in revenue, as well as other statements identified by the use of forward-looking terminology, including “anticipate,” “believe,” “plan,” “estimate,” “expect,” “goal” and “intend”, or the negative of these terms or other similar expressions, constitute forward-looking statements. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. The forward looking statements in this Annual Report include, without limitation, statements regarding:


	•	Our belief that as broadband access and telecommunications requirements grow, wireless systems will continue to be used as transmission links to support a variety of existing and expanding communications networks and applications;

	•	Our belief that wireless systems will be used to address the connection requirements of several markets and applications;

	•	Our belief that the use of standard design platforms for both hardware and software components in the development of our products enables us to more rapidly introduce and commercially ship new products and product enhancements to address changing market demands;

	•	Our anticipation that the requirements of our customers will continue to evolve as the telecommunications services markets change and expand;

	•	Our intent to continue to expand our product lines in response to the varying worldwide requirements of wireless networks;

	•	Our belief that we are well positioned to address worldwide market opportunities for wireless infrastructure suppliers;

	•	Our belief that maintaining close proximity to our customers provides us with a competitive advantage in securing orders for our products and in servicing our customers;

	•	Our intent to leverage upon our business relationships and our direct worldwide presence with service providers to expand our customer base and enhance our global presence;

	•	Our belief that we can leverage our core technical competencies and our global sales, service and support organization to enter into growing business applications for our products, including wireless local loop, data access, wireless data transport, and alternative local telephone facilities access;

	•	Our intent to continue to focus significant resources on product development to maintain our competitiveness and to support our entry into new wireless opportunities, including wireless data transport and alternative local telephone facilities access;

	•	Our belief that a direct and continuing relationship with service providers is a competitive advantage in attracting new customers and satisfying existing ones;


	•	Our belief that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our success;

	•	Our intent to continue to allocate a significant portion of our resources to research and development efforts;

	•	Our expectation that research and development spending to be slightly higher in fiscal 2004 as we design and deliver our new product family called Eclipse™ near the end of calendar 2003;

	•	Our intent to design and deliver our new product family called Eclipse™ near the end of calendar 2003;

	•	Our belief that the use of flexible architectures and components assists in the rapid deployment of new products and enhancements to satisfy customer, industry and market needs;

	•	Our belief that to remain competitive in the future, we will need to continue to develop new products, which require the investment of significant financial resources in product development;

	•	Our belief that our ability to compete successfully will depend on a number of factors both within and outside our control;

	•	Our belief that our leased facilities are adequate to meet our anticipated needs for the foreseeable future; and

	•	Our belief that the ultimate disposition of proceedings to which we are subject to and which arise in the normal course of business will not harm our consolidated financial position, liquidity or results of operations.

Numerous factors, including the risk factors discussed below, economic and competitive conditions, timing and volume of incoming orders, shipment volumes, product margins and foreign exchange rates, could cause actual results to differ materially from those described in these statements, and prospective investors and stockholders should carefully consider these factors set forth below and elsewhere in evaluating these forward-looking statements.

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

In addition, we compete for acquisition and expansion opportunities with many entities that have substantially greater resources than we have. Furthermore, any acquisition we contemplate and subsequently complete may encourage certain of our competitors to enter into additional business combinations, to accelerate product development, or to engage in aggressive price reductions or other competitive practices, thereby creating even more powerful or aggressive competitors.

We believe that our ability to compete successfully will depend on a number of factors both within and outside our control, including price, quality, availability, customer service and support, breadth of product line,

product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and our competitors, the ability of our customers to obtain financing, and uncertainty of regional socio- and geopolitical factors. We cannot assure you that we will have the financial resources, technical expertise, or marketing, sales, distribution, and customer service and support capabilities to compete successfully.

If we fail to maintain our relationships with original equipment manufacturers, our distribution channels could be harmed, which could cause our revenues to decrease.

We have relationships with OEM base station suppliers and in selected countries we also market our products through independent agents and distributors. These relationships increase our ability to pursue the limited number of major contract awards each year. In addition, these relationships are intended to provide our customers with easier access to financing and to integrated systems providers with a variety of equipment and service capabilities. We may not be able to continue to maintain and develop these relationships or, if these relationships are developed, they may not be successful. Our inability to establish or maintain these distribution relationships could restrict our ability to market our products and thereby result in significant revenue shortfalls. If these revenue shortfalls occur, our business, financial condition and results of operations may be harmed.

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

We participate in a highly volatile industry that is characterized by vigorous competition for market share and rapid technological development. These factors could result in aggressive pricing practices and growing competition both from start-up companies and from well-capitalized telecommunication systems providers, which, in turn, could decrease our revenues. In response to changes in our industry and market conditions, we may restructure our activities to more strategically realign our resources. This includes assessing whether we should consider disposing of, or otherwise exiting, businesses and reviewing the recoverability of our tangible and intangible assets. Any decision to limit investment in our tangible and intangible assets or to dispose of or otherwise exit businesses may result in the recording of accrued liabilities for special charges, such as workforce reduction costs. In June 2002, we entered into an agreement with Microelectronics Technology Inc. (“MTI”) to outsource our San Jose, California manufacturing operations to MTI. As a result of changes associated with this agreement, as well as other reductions in operating expenses and facilities, we reduced our worldwide headcount by approximately 23% and recorded restructuring charges of $28.2 million in fiscal 2003. Additionally, accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets could change as a result of such assessments and decisions, and could harm our results of operations.

Because of the severe economic downturn in the world economy, and bankruptcies and financial difficulties in the competitive local exchange carrier (“CLEC”) business, the demand for our products and services may decrease.

Due to the continued economic downturn in the world economy, as well as the global tightening of the capital markets for telecommunications and mobile cellular projects during calendar 2002 and the first calendar quarter of 2003, our business opportunities have decreased in Europe, China and the Americas. To the extent that the economic downturn and the global tightening of the capital markets continue, the demand for our products and services may decrease further in these countries and geographic regions. The continuing decline in financial condition of CLECs, including those currently involved in bankruptcy proceedings, may continue to have a negative impact on our financial results. In the fourth quarter of fiscal 2003 we received demand letters from the bankruptcy estate trustees of prior CLEC customers who had previously declared bankruptcy. The bankruptcy trustees for these companies are claiming that we received preference payments, as defined in the United States Bankruptcy Code, totaling $10.8 million. We intend to vigorously defend ourselves against these claims. Because of the inherent uncertainties of litigation in general and our analysis of the issues presented by these threatened litigations is not yet complete, we cannot assure you that the ultimate

outcomes will be in our favor. If we do not ultimately prevail against these claims, we will be required to remit to the counsel to the unsecured creditors for the benefit of such creditors some or all of the $10.8 million. Repayment of these amounts could have a negative impact on our results of operations. We have recorded an amount of $7.5 million in the fourth quarter of fiscal year 2003 which we believe is appropriate given the current uncertainty of these claims. Repayment in excess of the amounts reserved of these amounts could have a negative impact on our results of operations.

In addition, the terrorist attack of September 11, 2001, the subsequent military response by the United States, the aftermath of the U.S. war against Iraq, and the general socio- and geopolitical conditions in the Middle East, have negatively impacted, and may continue to negatively impact, the economy in general. This could impact our current and future business in the Middle East and could result in our customers delaying or canceling the purchase of our products, which would have a significant negative impact on our revenues.

Consolidation within the telecommunications industry and among suppliers could decrease our revenues.

The telecommunications industry has experienced significant consolidation among its participants, and we expect this trend to continue. Some operators in this industry have experienced financial difficulty and have filed, or may file, for bankruptcy protection. Other operators may merge and one or more of our competitors may supply products to such companies that have merged or will merge. This consolidation could result in purchasing decision delays by the merged companies and decrease opportunities for us to supply our products to the merged companies. We may also see similar consolidation among suppliers, which may further decrease our opportunity to market and sell our products.

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

Because a significant amount of our revenues comes from a few customers, the termination of any of these customer relationships may harm our business.

Sales of our products are concentrated in a small number of customers. Two customers accounted for approximately 11% and 10% of net sales for fiscal 2003 and one customer accounted for 15% of net sales for fiscal year 2002. No customers accounted for more than 10% of net sales during fiscal year 2001. Three customers accounted for approximately 16%, 16% and 14%, respectively, of the total accounts receivable balance at the end of fiscal 2003. Three customers accounted for approximately 16%, 15% and 12%, respectively, of the total accounts receivable balance at the end of fiscal 2002. The worldwide telecommunications industry is dominated by a small number of large corporations, and we expect that a significant portion of our future product sales will continue to be concentrated in a limited number of customers. In addition, our customers typically are not contractually obligated to purchase any quantity of products in any particular period, and product sales to major customers have varied widely from period to period. In addition, as a result of the global tightening of the capital markets for the telecommunications and mobile cellular projects in calendar year 2002 and first quarter of calendar year 2003, the demand for our products and services has decreased and may continue to decrease. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or our inability to gain additional customers could result in further declines

in our revenues. If these revenue declines occur, our business, financial condition, and results of operations would be harmed.

Due to our significant volume of international sales, we are susceptible to a number of political, economic and geographic risks that could harm our business if they occur.

We are highly dependent on sales to customers outside the United States. During fiscal 2001, 2002, and 2003, sales to international customers accounted for 69%, 92% and 95% of our net sales, respectively. In fiscal 2001, 2002, and 2003, sales to the Middle East/ Africa region accounted for approximately 10%, 11% and 21% of our net sales, respectively. Also a significant portion of our international sales are in lesser developed countries. We expect that international sales will continue to account for the majority of our net product sales for the foreseeable future. As a result, the occurrence of any international, political, economic or geographic event that adversely affects our business could result in significant revenue shortfalls. These revenue shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks and challenges of doing business internationally include:


	•	unexpected changes in regulatory requirements;

	•	fluctuations in foreign currency exchange rates;

	•	imposition of tariffs and other barriers and restrictions;

	•	management and operation of an enterprise spread over various countries;

	•	burden of complying with a variety of foreign laws;

	•	general economic and geopolitical conditions, including inflation and trade relationships;

	•	war and acts of terrorism;

	•	currency exchange controls;

	•	unforeseen changes in export regulations; and

	•	the current severe acute respiratory syndrome and its effect on our suppliers and customers in Asia.

In addition, in order to maintain competitiveness in an environment of restrictive third party financing, we may have to offer customer financing that is recorded on our balance sheet. This may result in deferred revenue recognition and additional credit risk.

The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver our products, could cause our products to be produced in an untimely or unsatisfactory manner.

Our manufacturing operations, which have been substantially subcontracted, are highly dependent upon the delivery of materials by outside suppliers in a timely manner. We have significant operations in the United Kingdom and New Zealand, and outsourcing arrangements in Asia. Also, we depend in part upon subcontractors to assemble major components and subsystems used in our products in a timely and satisfactory manner. Sales of our Altium and XP4 products for fiscal 2003 accounted for approximately 64% of total revenues. We do not generally enter into long-term or volume purchase agreements with any of our suppliers, and we cannot assure you that such materials, components and subsystems will be available to us at such time and in quantities we require, if at all. In addition, due to the rapid and increasingly severe economic downturn, our suppliers have experienced and are continuing to experience various financial difficulties, which may impact their ability to supply the materials, components and subsystems that we require. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and deliver our products to our customers in a timely manner. We cannot assure you that we will not experience material supply problems or component or subsystem delays in the future. Also, our subcontractors may not be able to maintain the quality of our products, which might result in a large number of product returns by customers and could harm our business, financial condition and results of operations.

Additional risks associated with the outsourcing of our manufacturing operations to MTI in Taiwan could include, among other things: (i) political risks due to political issues between Taiwan and The People’s Republic of China, (ii) risk of natural disasters in Taiwan, which is subject to earthquakes and typhoons, (iii) economic and regulatory developments and (iv) the possible effects of the current severe respiratory syndrome and (v) other events leading to the disruption of manufacturing operations.

The global tightening of capital markets for the telecommunications and mobile cellular projects may result in inventory, which we cannot sell or be required to sell at distressed prices.

Many of our current and potential customers require significant capital funding to finance their telecommunications and mobile cellular projects, which include the purchase of our products and services. Due to the on going tightening of capital markets worldwide, available funding for these projects has been and may continue to be unavailable to some customers and thereby slow or halt the purchase of our products and services. This reduction in demand has resulted in excess inventories on hand, and could result in additional excess inventories in the future. If funding continues to be unavailable to our customers or their customers, we may be forced to take additional reserves for excess inventory. Or we may have to extend more and longer credit terms to our customers, which could negatively impact our cash and possibly result in higher bad debt expense. We cannot assure you that we will be successful in matching our inventory purchases with anticipated shipment volumes. As a result, we may fail to control the amount of inventory on hand and may be forced to take unanticipated additional reserves. Such additional inventory reserves, if required, would decrease our profits.

If we fail to manage our internal development or successfully integrate acquired businesses, we may not effectively manage our growth and our business may be harmed.

Future growth of our operations depends, in part, on our ability to introduce new products and develop enhancements to existing products to meet the emerging trends in our industry. We have pursued, and will continue to pursue, growth opportunities through internal development, minority investments and acquisitions of complementary businesses and technologies. We are unable to predict whether and when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed and successfully integrated. Once integrated, acquired businesses may not achieve comparable levels of revenues, profitability or productivity to our existing business or otherwise perform as expected. Also, acquisitions may involve difficulties in the retention of personnel, diversion of management’s attention, risks of our customers and the customers of acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition, unexpected legal liabilities, and tax and accounting issues. Our failure to manage growth effectively could harm our business, financial condition and results of operations.

The unpredictability of our quarter-to-quarter results may harm the trading price of our common stock.

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


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

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

	•	timing of new product introductions by us or our competitors;

	•	changes in the mix of products sold by us;

	•	cost and availability of components and subsystems;

	•	downward pricing pressure on our products;

	•	adoption of new technologies and industry standards;

	•	competitive factors, including pricing, availability and demand for competing products;

	•	war and acts of terrorism;


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

	•	fluctuations in foreign currency exchange rates;

	•	regulatory developments;

	•	general economic conditions worldwide;

	•	claims or litigation related to the continuing decline in financial conditions of CLECs including but not limited to those CLECs currently involved in bankruptcy proceedings; and

	•	the current severe acute respiratory syndrome and its effect on our suppliers and customers in Asia.

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

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

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

If we are unable to protect our intellectual property rights adequately, we may be deprived of legal recourse against those who misappropriate our intellectual property.

Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We currently rely upon a combination of trade secrets, trademark, patents and contractual rights to protect our intellectual property. In addition, we enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. We cannot assure you that any steps taken by us will be adequate to deter misappropriation or impede independent third party development of similar technologies. In the event that such intellectual property arrangements are insufficient, our business, financial condition and results of operations could be harmed. We have significant operations in the United Kingdom and New Zealand, and outsourcing arrangements in Asia. We cannot assure you that the protection provided to our intellectual property by the laws and courts of foreign nations will be substantially similar to the remedies available under United States law. Furthermore, we cannot assure you that third parties will not assert infringement claims against us based on foreign intellectual property rights and laws that are different from those established in the United States.

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

The wireless telecommunications industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. We may in the future be notified that we are infringing upon certain patent or other intellectual property rights of others. Such litigation or claims could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages, cease the licensing of allegedly infringing technology or the sale of allegedly infringing products and expend significant resources to develop

non-infringing technology or to obtain licenses for the infringing technology. We cannot assure you that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be available to us on commercially reasonable terms, if at all.

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

Radio communications are subject to regulation by United States and foreign laws and international treaties. Generally, our products must conform to a variety of United States and international requirements established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of such products.

In addition, both in the United States and internationally, we are affected by the allocation and auction of the radio frequency spectrum by governmental authorities. Such governmental authorities may not allocate sufficient radio frequency spectrum for use by our products or we may not be successful in obtaining regulatory approval for our products from these authorities. Historically, in many developed countries, the unavailability of frequency spectrum has inhibited the growth of wireless telecommunications networks. In addition, to operate in a jurisdiction, we must obtain regulatory approval for our products. Each jurisdiction in which we market our products has its own regulations governing radio communications. Products that support emerging wireless telecommunications services can be marketed in a jurisdiction only if permitted by suitable frequency allocations, auctions and regulations, and the process of establishing new regulations is complex and lengthy. If we are unable to obtain sufficient allocation of radio frequency spectrum by the appropriate governmental authority or obtain the proper regulatory approval for our products, our business, financial condition and results of operations may be harmed.

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

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

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

The regulatory environment in which we operate is subject to change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact our operations by restricting development efforts by us and our customers, making current products and systems in the industry obsolete or increasing the opportunity for additional competition. Any such regulatory changes could harm our business, financial condition and results of operations. It may be necessary or advisable in the future to modify our products to operate in compliance with such regulations. Such modifications could be extremely expensive and time-consuming to complete.

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the telecommunications industry in which we compete, or the economies of the countries in which we do business and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has

experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could lower the market price of our common stock.

Our corporate offices and principal research and development facilities are located in San Jose, California in one leased building of approximately 60,000 square feet. We have vacated two other buildings in San Jose of approximately 73,000 square feet; however, we have ongoing lease commitments for these buildings. We also lease three buildings in Milpitas, California totaling 80,000 square feet. Two of these buildings are used for warehousing. We have vacated the other building of approximately 28,000 square feet. We have an ongoing lease commitment for the vacated building. In the vacated building, we have sub-tenants occupying the majority of the building. Although we have discontinued our Seattle, Washington operations, we have ongoing lease commitments. The Seattle facility consists of two leased buildings aggregating approximately 101,000 square feet of office and manufacturing space.

We also own a 44,000 square foot service and repair facility in Hamilton, Scotland and lease 11,500 square feet of office space in Coventry, England, of which 10,000 square feet has been vacated and a termination lease agreement is currently being negotiated. We lease 25,000 square feet of office space and own an additional 28,000 square feet of office and manufacturing space in Wellington, New Zealand. Additionally we lease an aggregate of approximately 32,000 square feet worldwide for sales, customer service and support offices. We believe these facilities are adequate to meet our anticipated needs for the foreseeable future.

We may be a defendant at any time in various suits and are subject to various claims that arise in the normal course of business. In the opinion of management, the ultimate disposition of these proceedings will not harm our consolidated financial position, liquidity or results of operations.

The section labeled “Quarterly Financial Data” and “Other Equity Compensation Plan Information” appearing in our 2003 Annual Report to Stockholders is incorporated herein by reference.

The section labeled “Selected Consolidated Financial Data” appearing in our 2003 Annual Report to Stockholders is incorporated herein by reference.

The information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2003 Annual Report to Stockholders is incorporated herein by reference.

The information appearing under the caption “Quantitative and Qualitative Disclosures About Market Risk” in our 2003 Annual Report to Stockholders is incorporated herein by reference.

The consolidated financial statements and supplementary data, and related notes and Report of Independent Auditors appearing in our 2003 Annual Report to Stockholders are incorporated herein by reference.

We filed Form 8-K on June 13, 2002 regarding our change in certifying accountants.

The section labeled “Directors and Executive Officers” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on July 15, 2003 is incorporated herein by reference.

The section entitled “Compensation of Directors and Certain Executive Officers,” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on July 15, 2003 is incorporated herein by reference.

The section labeled “Security Ownership of Certain Beneficial Owners and Management” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on July 15, 2003 is incorporated herein by reference.

In response to the SEC’s Release No. 33-8048, the following information is being provided:

The equity compensation plans not approved by the security holders include the 1996 and 1998 Plans. The 1996 Plan authorizes 1,000,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with us. The 1996 Plan will terminate on the date on which all shares available have been issued. The 1998 Non-Officer Employee Stock Option Plan (the “1998 Plan”) became effective on January 2, 1998 and authorizes 500,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with us. The 1998 Plan will terminate on the date on which all shares available have been issued.

The section labeled “Certain Relationships and Related Transactions” of our definitive Proxy Statement to be filed hereafter for the annual meeting of stockholders to be held on July 15, 2003 is incorporated herein by reference.

(a) Evaluation and disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (Evaluation Date) within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in our internal controls, or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

(a) The following documents have been filed as a part of this Annual Report on Form 10-K.


	The following consolidated financial statements are contained in our 2003 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8:


	(i) Consolidated Balance Sheets as of March 31, 2003 and 2002.

	(ii) Consolidated Statements of Operations for each of the three years in the period ended March 31, 2003.

	(iii) Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended March 31, 2003.

	(iv) Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2003.

	(v) Notes to Consolidated Financial Statements.

	(vi) Reports of Independent Auditors.


	The following consolidated financial statement schedule for each of the three years in the period ended March 31, 2003 is submitted herewith:


	Schedule II: Valuation and Qualifying Accounts and Reserves.

	Reports of Independent Auditors on Schedule.

	Schedules not listed above have been omitted because they are not applicable or required, or information required to be set forth therein is included in the Consolidated Financial Statements, including the Notes thereto, incorporated herein by reference.


	The exhibits listed on the Exhibit Index beginning on Page 32 hereof.

	(b) We filed one Form 8-K on June 13, 2002.

	(c) We filed one Form 8-K on August 19, 2002.

	(d) See Item 15(a)3 above.

	(e) See Item 15(a)2 above.

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ CHARLES D. KISSNER



	Charles D. Kissner
	Chairman of the Board and
	Chief Executive Officer

That the undersigned officers and directors of Stratex Networks, Inc. do hereby constitute and appoint Charles D. Kissner and Carl A. Thomsen, and each of them, the lawful attorney and agent or attorneys and agents with power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents, or either of them, determine may be necessary or advisable or required to enable Stratex Networks, Inc. to comply with the Securities and Exchange Act of 1934, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Form 10-K Report. Without limiting the generality of the foregoing power and authority, the powers include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Form 10-K report or amendment or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agents or either of them, shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.

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.

We have audited the consolidated financial statements of Stratex Networks, Inc. and subsidiaries (“formerly DMC Stratex Networks, Inc. and hereafter referred to as “the Company”) as of March 31, 2003, and for the year then ended, and have issued our report thereon dated April 25, 2003; such financial statements and report are included in your 2003 Annual Report to Stockholders and are incorporated herein by reference. Our audit also included the 2003 financial statement schedule of the Company listed in Item 15a(2). This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit. In our opinion, the 2003 financial statement schedule listed in Item 15a(2), when considered in relation to the 2003 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The financial statement schedule, for the years ended March 31, 2002 and 2001, was audited by other auditors who have ceased operations. Those auditors expressed an opinion, in their report dated April 22, 2002, that such 2002 and 2001 financial statement schedule, when considered in relation to the 2002 and 2001 basic consolidated financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein.

The following report of Arthur Andersen LLP (“Andersen”) is a copy of the original report dated April 22, 2002, rendered on the schedule listed in item 14a(2) of included in the Form 10-K for the year ended March 31, 2002. The SEC has provided regulatory relief designed to allow public companies to dispense with the requirements to file a reissued report and consent of Andersen in certain circumstances. After reasonable efforts, we have not been able to obtain a reissued report from Andersen.

We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in DMC Stratex Networks, Inc.’s 2002 Annual Report incorporated by reference in this Form 10-K, and have issued our report thereon dated April 22, 2002. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in item 14a(2) is the responsibility of our management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.


	1. I have reviewed this annual report on Form 10-K of Stratex Networks, Inc. (the “registrant”);

	2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this 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;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our required evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	By	/s/ CHARLES D. KISSNER



	Charles D. Kissner
	Chairman and Chief Executive Officer


	1. I have reviewed this annual report on Form 10-K of Stratex Networks, Inc. (the “registrant”);

	2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this 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;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our required evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

29 EX-4.5 3 f89373exv4w5.txt EXHIBIT 4.5 EXHIBIT 4.5 LOAN AND SECURITY AGREEMENT by and between STRATEX NETWORKS, INC., AS BORROWER and SILICON VALLEY BANK, AS LENDER January 21, 2003 1. ACCOUNTING AND OTHER TERMS............................................................................. 1 2. LOAN AND TERMS OF PAYMENT.............................................................................. 1 2.1 Promise to Pay................................................................................ 1 2.2 Overadvances.................................................................................. 2 2.3 General Provisions Relating to the Advances................................................... 2 2.4 Permitted Uses of Advance Proceeds............................................................ 2 2.5 Interest Rate, Payments....................................................................... 3 2.6 Fees.......................................................................................... 4 3. CONDITIONS OF ADVANCES................................................................................. 4 3.1 Conditions Precedent to Initial Credit Extension.............................................. 4 3.2 Conditions Precedent to all Credit Extensions................................................. 5 3.3 Procedure for the Borrowing of Advances....................................................... 5 3.4 Conversion and Continuation Elections......................................................... 6 3.5 Special Provisions Governing LIBOR Advances................................................... 7 3.6 Additional Requirements/Provisions Regarding LIBOR Advances................................... 8 3.7 Calculation of Interest and Fees.............................................................. 10 4. CREATION OF SECURITY INTEREST.......................................................................... 11 4.1 Grant of Security Interest.................................................................... 11 4.2 Authorization to File Financing Statements.................................................... 11 5. REPRESENTATIONS AND WARRANTIES......................................................................... 11 5.1 Due Organization and Authorization............................................................ 11 5.2 Collateral.................................................................................... 11 5.3 Litigation.................................................................................... 11 5.4 No Material Adverse Change in Financial Statements............................................ 12 5.5 Solvency...................................................................................... 12 5.6 Regulatory Compliance......................................................................... 12 5.7 Subsidiaries; Investments..................................................................... 12 5.8 Full Disclosure............................................................................... 12 6. AFFIRMATIVE COVENANTS.................................................................................. 13 6.1 Government Compliance......................................................................... 13 6.2 Financial Statements, Reports, Certificates................................................... 13 6.3 Inventory..................................................................................... 13 6.4 Taxes......................................................................................... 13

6.5 Insurance..................................................................................... 14 6.6 Depository Accounts........................................................................... 14 6.7 Financial Covenants........................................................................... 14 6.8 Further Assurances............................................................................ 14 7. NEGATIVE COVENANTS..................................................................................... 15 7.1 Dispositions.................................................................................. 15 7.2 Changes in Control, Business.................................................................. 15 7.3 Mergers or Acquisitions....................................................................... 15 7.4 Indebtedness.................................................................................. 15 7.5 Encumbrance................................................................................... 15 7.6 Subordinated Debt............................................................................. 15 7.7 Compliance.................................................................................... 16 8. EVENTS OF DEFAULT...................................................................................... 16 8.1 Payment Default............................................................................... 16 8.2 Covenant Default.............................................................................. 16 8.3 Material Adverse Change....................................................................... 16 8.4 Attachment.................................................................................... 16 8.5 Insolvency.................................................................................... 17 8.6 Other Agreements.............................................................................. 17 8.7 Judgments..................................................................................... 17 8.8 Misrepresentations............................................................................ 17 9. BANK'S RIGHTS AND REMEDIES............................................................................. 17 9.1 Rights and Remedies........................................................................... 17 9.2 Power of Attorney............................................................................. 18 9.3 Bank Expenses................................................................................. 18 9.4 Bank's Liability for Collateral............................................................... 19 9.5 Remedies Cumulative........................................................................... 19 9.6 Demand Waiver................................................................................. 19 10. NOTICES................................................................................................ 19 11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER............................................................. 19 12. GENERAL PROVISIONS..................................................................................... 20 12.1 Successors and Assigns........................................................................ 20 12.2 Indemnification............................................................................... 20

12.3 Time of Essence............................................................................... 20 12.4 Severability of Provision..................................................................... 20 12.5 Amendments in Writing, Integration............................................................ 20 12.6 Counterparts.................................................................................. 20 12.7 Survival...................................................................................... 20 12.8 Confidentiality............................................................................... 21 12.9 Attorneys' Fees, Costs and Expenses........................................................... 21 13. DEFINITIONS............................................................................................ 21 13.1 Definitions................................................................................... 21

THIS LOAN AND SECURITY AGREEMENT dated January 21, 2003, between SILICON VALLEY BANK ("BANK"), whose address is 3003 Tasman Drive, Santa Clara, California 95054, and Stratex Networks, Inc., a Delaware corporation ("BORROWER"), whose address is 170 Rose Orchard Way, San Jose, California 95134, provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1. ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1 PROMISE TO PAY. Borrower promises to pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding the Committed Revolving Line minus the sum of (i) all amounts for services utilized under the Cash Management Services Sublimit (as defined in SECTION 2.1.4), and (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). (b) To obtain an Advance, Borrower must follow the procedures set forth in SECTION 3.3(a). (c) The Bank's obligation to make Credit Extensions terminates on the Revolving Maturity Date, when all Advances are immediately payable. (d) Bank's obligation to make Credit Extensions will terminate if an Event of Default (as herein defined) has occurred or there exists any event, condition, or act which with notice or lapse of time, or both, would constitute an Event of Default. 2.1.2 LETTERS OF CREDIT SUBLIMIT. Bank will issue or have issued Letters of Credit for Borrower's account not exceeding the Committed Revolving Line minus the sum of (a) the outstanding principal balance of the Advances, and (b) the Cash Management Services Sublimit. Each Letter of Credit will have an expiry date of no later than eighteen (18) months after the Revolving Maturity Date, and Borrower's reimbursement obligation will be fully secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. 1. 2.1.3 FX FORWARD CONTRACTS. Borrower may enter into foreign exchange contracts with the Bank under which Borrower commits to purchase from or sell to Bank a set amount of foreign currency on a specified date (the "SETTLEMENT DATE"). Foreign exchange contracts with a Settlement Date of two (2) or more business days (as applicable in the country of the contract foreign currency) after the contract date (each, a "FX Forward Contract") are subject to a reserve of ten percent (10%) of each outstanding FX Forward Contract in a maximum aggregate amount equal to $2,000,000 (the "FX Reserve"). The aggregate amount of FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve. 2.1.4 CASH MANAGEMENT SERVICES SUBLIMIT. Borrower may use amounts not to exceed the Committed Revolving Line minus the sum of (a) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), and (b) the outstanding principal balance of the Advances (without duplication for any drawn but unreimbursed Letters of Credit) for Bank's cash management services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in various cash management services agreements related to such services (collectively, the "CASH MANAGEMENT SERVICES"). The aggregate amount utilized for Cash Management Services (the "CASH MANAGEMENT SERVICES SUBLIMIT") will at all times reduce the amounts available to be borrowed under the Committed Revolving Line or otherwise available for Letters of Credit under the Committed Revolving Line. Any amounts Bank pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Advances under the Committed Revolving Line and will accrue interest at the rate for Advances. 2.2 OVERADVANCES. If Borrower's aggregated Obligations under Sections 2.1.1, 2.1.2, and 2.1.3 exceed the Committed Revolving Line, Borrower must immediately pay Bank the excess. 2.3 GENERAL PROVISIONS RELATING TO THE ADVANCES. Each Advance shall, at Borrower's option in accordance with the terms of this Agreement, be either in the form of a Prime Rate Advance or a LIBOR Advance; provided that in no event shall Borrower maintain at any time LIBOR Advances having more than two (2) different Interest Periods. Borrower shall pay interest accrued on the Advances at the rates and in the manner set forth in SECTION 2.5(a). Amounts borrowed by Borrower under the Committed Revolving Line may be repaid and, prior to the Revolving Maturity Date, and subject to the applicable terms and conditions precedent in Sections 3.1, 3.2, and 3.3, reborrowed. 2.4 PERMITTED USES OF ADVANCE PROCEEDS. The Advances shall be used solely for working capital and other general business requirements of Borrower. 2. 2.5 INTEREST RATE, PAYMENTS. (a) INTEREST RATE. Each Advance shall bear interest on the outstanding principal amount thereof from the date when made, continued or converted until paid in full at a rate per annum equal to the Prime Rate or Adjusted LIBOR, as the case may be. After an Event of Default occurs and so long as such Event of Default continues, including after an acceleration of the Obligations pursuant to SECTION 9.1(a) (whether before or after entry of judgment to the extent permitted by law), Obligations shall accrue interest at five (5) percent above the rate effective immediately before the Event of Default; provided, however, that on and after the expiration of any Interest Period applicable to any LIBOR Advance outstanding on the date of occurrence of such Event of Default or acceleration, the Effective Amount of such LIBOR Advance shall, during the continuance of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Prime Rate plus five (5) percent. Payment or acceptance of the increased interest provided in this SECTION 2.5(a) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank. (b) PAYMENTS. Pursuant to the terms of SECTION 3.7, interest on each Advance shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of any Advance pursuant to this Agreement for the portion of any Advance so prepaid and upon payment (including prepayment) in full thereof. All accrued but unpaid interest on the Advances shall be due and payable on the Revolving Maturity Date. (c) LIMITATIONS ON INTEREST RATES. Notwithstanding any provision in this Agreement or any of the other Loan Documents, the total liability for payments in the nature of interest shall not exceed the applicable limits imposed by any applicable federal or state interest rate laws. If any payments in the nature of interest, additional interest and other charges made hereunder or under any of the Loan Documents are held to be in excess of the applicable limits imposed by any applicable federal or state law, the amount held to be in excess shall be considered payment of principal under the Advances and the indebtedness evidenced thereby shall be reduced by such amount in the inverse order of maturity so that the total liability for payments in the nature of interest, additional interest and other charges shall not exceed the applicable limits imposed by any applicable federal or state interest rate laws. (d) GENERAL PROVISIONS. Bank may debit any of Borrower's deposit accounts including Account Number 3300389009 (the "DESIGNATED DEPOSIT ACCOUNT") for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 p.m. (Pacific time) are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 3. 2.6 FEES. Borrower will pay: (a) SET-UP FEE. On the Closing Date, a fully earned, non-refundable set-up fee equal to .45% of the Committed Revolving Line (the "SET-UP FEE"). (b) LETTER OF CREDIT FEE. Upon the issuance of a Letter of Credit, a fully earned, non-refundable Letter of Credit fee equal to ..75% per annum of the face amount of the issued Letter of Credit. (c) BANK EXPENSES. All Bank Expenses (including reasonable attorneys' fees and reasonable expenses) incurred through and after the date of this Agreement when due. 3. CONDITIONS OF ADVANCES 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that the following have been satisfied, all in form and substance satisfactory to Bank: (a) Borrower shall have executed and delivered the Loan Documents; (b) Borrower shall have delivered an executed one or more Control Agreements by and among Borrower, Bank, and securities intermediary(y)(ies) as is necessary for Bank to obtain control (within the meaning of the applicable provision of the Code) over any Collateral Accounts (as defined in SECTION 6.8 hereof) that hold, in the aggregate, assets valued in an amount equal to at least 1.25 times the Committed Revolving Line; (c) Borrower shall have delivered an executed Control Agreement by and among Borrower, Bank, and SVB Securities; (d) Borrower shall have delivered the Operating Documents and a good standing certificate of Borrower from the State of Delaware; (e) Borrower shall have delivered the Corporate Borrowing Resolutions; (f) Borrower shall have paid all costs and fees, including the Set-up Fee and Bank Expenses, then due; and (g) Borrower shall have delivered to Bank, in addition to the documents required in SECTION 3.2, all documents, certificates, and other assurances that Bank or its counsel may reasonably request. 4. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligation to make each Credit Extension, including the initial Credit Extension, is subject to the condition precedent that the following shall have been satisfied, all in form and substance satisfactory to Bank: (a) timely receipt of a Notice of Borrowing; (b) unless otherwise waived by Bank, the Control Agreements shall be in full force and effect; and (c) the representations and warranties in SECTION 5 must be true on the date of the Notice of Borrowing and on the Funding Date or the date any other Credit Extension is made, and no Event of Default may have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of SECTION 5 remain true. 3.3 PROCEDURE FOR THE BORROWING OF ADVANCES. (a) Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, including SECTION 3.1 and SECTION 3.2 for Advances made on the Closing Date and SECTION 3.2 for all Advances, each Advance shall be made upon Borrower's irrevocable written notice delivered to Bank in the form of a Notice of Borrowing, each executed by a Responsible Officer of Borrower or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to such reliance. Such Notice of Borrowing must be received by Bank prior to 11:00 a.m. (Pacific time), (i) at least three (3) Business Days prior to the requested Funding Date, in the case of LIBOR Advances, and (ii) at least one (1) Business Day prior to the requested Funding Date, in the case of Prime Rate Advances, specifying: (i) the amount of the Advance, which, if a LIBOR Advance is requested, shall be in an aggregate minimum principal amount of $1,000,000 or in any integral multiple of $1,000,000 in excess thereof; (ii) the requested Funding Date, which shall be a Business Day; (iii) whether the Advance is to be comprised of LIBOR Advances or Prime Rate Advances; and (iv) the duration of the Interest Period applicable to any such LIBOR Advances included in such notice; provided that if the Notice of Borrowing shall fail to specify the duration of the Interest Period for any Advance comprised of LIBOR Advances, such Interest Period shall be one (1) month. (b) The proceeds of all such Advances will then be made available to Borrower on the Funding Date by Bank by transfer to the Designated Deposit Account and, 5. subsequently, by wire transfer to such other account as Borrower may instruct in the Notice of Borrowing. No Advances shall be deemed made to Borrower, and no interest shall accrue on any such Advance, until the related funds have been deposited in the Designated Deposit Account. 3.4 CONVERSION AND CONTINUATION ELECTIONS. (a) So long as (1) no Event of Default or event which with notice, passage of time, or both would constitute an Event of Default exists; (2) no party hereto shall have sent any notice of termination of this Agreement; and (3) Borrower shall have complied with such customary procedures as Bank has established from time to time for Borrower's requests for LIBOR Advances, Borrower may, upon irrevocable written notice to Bank: (i) elect to convert on any Business Day, Prime Rate Advances in an amount equal to $1,000,000 or any integral multiple of $1,000,000 in excess thereof into LIBOR Advances; (ii) elect to continue on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date (or any part thereof in an amount equal to $1,000,000 or any integral multiple of $1,000,000 in excess thereof); provided, that if the aggregate amount of LIBOR Advances shall have been reduced, by payment, prepayment, or conversion of part thereof, to be less than $1,000,000, such LIBOR Advances shall automatically convert into Prime Rate Advances, and on and after such date the right of Borrower to continue such Advances as, and convert such Advances into, LIBOR Advances shall terminate; or (iii) elect to convert on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date (or any part thereof in an amount equal to $1,000,000 or any integral multiple of $1,000,000 in excess thereof) into Prime Rate Advances. (b) Borrower shall deliver a Notice of Conversion/Continuation in accordance with Section 10 to be received by Bank prior to 11:00 a.m. (Pacific time) at least (i) three (3) Business Days in advance of the Conversion Date or Continuation Date, if any Advances are to be converted into or continued as LIBOR Advances; and (ii) one (1) Business Day in advance of the Conversion Date, if any Advances are to be converted into Prime Rate Advances, in each case specifying: (i) the proposed Conversion Date or Continuation Date; (ii) the aggregate amount of the Advances to be converted or continued which, if any Advances are to be converted into or continued as LIBOR Advances, shall be in an aggregate minimum principal amount of $1,000,000 or in any integral multiple of $1,000,000 in excess thereof; (iii) the nature of the proposed conversion or continuation; and (iv) the duration of the requested Interest Period. 6. (c) If upon the expiration of any Interest Period applicable to any LIBOR Advances, Borrower shall have timely failed to select a new Interest Period to be applicable to such LIBOR Advances, Borrower shall be deemed to have elected to convert such LIBOR Advances into Prime Rate Advances. (d) Any LIBOR Advances shall, at Bank's option, convert into Prime Rate Advances in the event that (i) an Event of Default, or event which with notice, the passage of time, or both would constitute an Event of Default, shall exist, (ii) the Agreement shall terminate, or (iii) the aggregate principal amount of the Prime Rate Advances which have been previously converted to LIBOR Advances, or the aggregate principal amount of existing LIBOR Advances continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceed the Committed Revolving Line. Borrower agrees to pay Bank, upon demand by Bank (or Bank may, at its option, charge the Designated Deposit Account or any other account Borrower maintains with Bank) any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost, or expense incurred by Bank, as a result of the conversion of LIBOR Advances to Prime Rate Advances pursuant to any of the foregoing. (e) Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR market to fund any LIBOR Advances, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Advances. 3.5 SPECIAL PROVISIONS GOVERNING LIBOR ADVANCES. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to LIBOR Advances as to the matters covered: (a) DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable on each Interest Rate Determination Date, Bank shall determine (which determination shall, absent manifest error in calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply to the LIBOR Advances for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower. (b) INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Bank shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any LIBOR Advance, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Advance on the basis provided for in the definition of LIBOR, Bank shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Borrower of such determination, whereupon (i) no Advances may be made as, or converted to, LIBOR Advances until such time as Bank notifies Borrower that the circumstances giving rise to such notice no longer exist, and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Borrower with respect to Advances in respect of which such determination was made shall be deemed to be rescinded by Borrower. 7. (c) COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Borrower shall compensate Bank, upon written request by Bank (which request shall set forth the manner and method of computing such compensation), for all reasonable losses, expenses and liabilities, if any (including any interest paid by Bank to lenders of funds borrowed by it to make or carry its LIBOR Advances and any loss, expense or liability incurred by Bank in connection with the liquidation or re-employment of such funds) such that Bank may incur: (i) if for any reason (other than a default by Bank or due to any failure of Bank to fund LIBOR Advances due to illegality or impracticability under Section 3.6(d)) a borrowing or a conversion to or continuation of any LIBOR Advance does not occur on a date specified in a Notice of Borrowing or a Notice of Conversion/Continuation, as the case may be, or (ii) if any principal payment or any conversion of any of its LIBOR Advances occurs on a date prior to the last day of an Interest Period applicable to that Advance. (d) ASSUMPTIONS CONCERNING FUNDING OF LIBOR ADVANCES. Calculation of all amounts payable to Bank under this SECTION 3.5 and under SECTION 3.3 shall be made as though Bank had actually funded each of its relevant LIBOR Advances through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of LIBOR Rate in an amount equal to the amount of such LIBOR Advance and having a maturity comparable to the relevant Interest Period; provided, however, that Bank may fund each of its LIBOR Advances in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this SECTION 3.5 and under SECTION 3.3. (e) LIBOR ADVANCES AFTER DEFAULT. After the occurrence of and during the continuation of an Event of Default, (i) Borrower may not elect to have an Advance be made or continued as, or converted to, a LIBOR Advance after the expiration of any Interest Period then in effect for such Advance and (ii) subject to the provisions of SECTION 3.5(c), any Notice of Conversion/Continuation given by Borrower with respect to a requested conversion/continuation that has not yet occurred shall be deemed to be rescinded by Borrower and be deemed a request to convert or continue Advances referred to therein as Prime Rate Advances. 3.6 ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR ADVANCES. (a) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Advance prior to the last day of the Interest Period for such Advance, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets, the offshore currency markets, or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive absent manifest error. (b) Borrower shall pay Bank, upon demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any costs 8. incurred by Bank that Bank determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any Advances relating thereto (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), in each case resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any Advances (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which Bank has its principal office); (ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with, or other liabilities of Bank (including any Advances or any deposits referred to in the definition of LIBOR); or (iii) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities). Bank will notify Borrower of any event occurring after the Closing Date which will entitle Bank to compensation pursuant to this SECTION 3.6 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for compensation under this SECTION 3.6. Determinations and allocations by Bank for purposes of this SECTION 3.6 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Advances, of making or maintaining Advances, or on amounts receivable by it in respect of Advances, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error. (c) If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation, or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a "PARENT") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change, or compliance (taking into consideration policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within fifteen (15) days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section 3.6(c) and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. (d) If, at any time, Bank, in its sole and absolute discretion, determines that (i) the amount of LIBOR Advances for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, or (ii) LIBOR does not 9. accurately reflect the cost to Bank of lending the LIBOR Advances, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make the LIBOR Advances shall terminate; provided, however, Advances shall not terminate if Bank and Borrower agree in writing to a different interest rate applicable to LIBOR Advances. (e) If it shall become unlawful for Bank to continue to fund or maintain any LIBOR Advances, or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the Advances in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to SECTION 3.6(a)). Notwithstanding the foregoing, to the extent a determination by Bank as described above relates to a LIBOR Advance then being requested by Borrower pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Borrower shall have the option, subject to the provisions of SECTION 3.5(c), to (i) rescind such Notice of Borrowing or Notice of Conversion/Continuation by giving notice (by telefacsimile or by telephone confirmed in writing) to Bank of such rescission on the date on which Bank gives notice of its determination as described above, or (ii) modify such Notice of Borrowing or Notice of Conversion/Continuation to obtain a Prime Rate Advance or to have outstanding Advances converted into or continued as Prime Rate Advances by giving notice (by telefacsimile or by telephone confirmed in writing) to Bank of such modification on the date on which Bank gives notice of its determination as described above. 3.7 CALCULATION OF INTEREST AND FEES. Interest on the Advances and all fees payable hereunder shall be computed on the basis of a 365-day year and the actual number of days elapsed in the period during which such interest accrues. In computing interest on any Advance, the date of the making of such Advance shall be included and the date of payment shall be excluded; provided, however, that if any Advance is repaid on the same day on which it is made, such day shall be included in computing interest on such Advance. (a) PRIME RATE ADVANCES. Each change in the interest rate of the Prime Rate Advances based on changes in the Prime Rate shall be effective on the effective date of such change and to the extent of such change. Bank shall give Borrower prompt notice of any such change in the Prime Rate; provided, however, that any failure by Bank to provide Borrower with notice hereunder shall not affect Bank's right to make changes in the interest rate of the Prime Rate Advances based on changes in the Prime Rate. Interest on Prime Rate Advances is payable monthly by debit to the Designated Deposit Account on each Interest Payment Date. Bank shall provide Borrower a statement of interest four (4) days prior to each Interest Payment Date applicable to Prime Rate Advances. (b) LIBOR ADVANCES. The interest rate applicable to each LIBOR Advance shall be determined in accordance with SECTION 3.5(a) hereunder. Subject to SECTIONS 3.5 and 3.6, such rate shall apply during the entire Interest Period applicable to such LIBOR Advance, and interest calculated thereon shall be payable on the Interest Payment Date applicable to such LIBOR Advance. 10. 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations. 4.2 AUTHORIZATION TO FILE FINANCING STATEMENTS. Borrower authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions, as Bank deems necessary, in order to protect or perfect Bank's security interest in the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change. 5.2 COLLATERAL. Borrower has good title to the Collateral, free of Liens except Permitted Liens. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 LITIGATION. Except as shown in the Disclosure Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower's Responsible Officers, threatened by or against Borrower or any Subsidiary in which an adverse decision could reasonably be expected to cause a Material Adverse Change. 11. 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 5.5 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has generally timely filed all (a) required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP and where failure to do so could cause an Event of Default, and (b) filings required by the Securities and Exchange Commission. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. 5.7 SUBSIDIARIES; INVESTMENTS. Borrower does not own any stock, partnership interest or other equity securities except as disclosed in the Disclosure Schedule. 5.8 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such written certificates and written statements to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading. Bank recognizes that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results. 12. 6. AFFIRMATIVE COVENANTS Borrower will do all of the following for so long as Bank has an obligation to lend or there are outstanding Obligations: 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in their jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to cause a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, for which noncompliance could have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) within five (5) Business Days of filing, copies of all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (ii) as soon as available, but no later than thirty (30) days after the end of each month, a cash holding report in form and substance satisfactory to Bank; (iii) as soon as available, but no later than forty-five (45) days after the end of each fiscal year, a one (1) year (prepared on a quarterly basis) financial projections of Borrower on a Consolidated basis, including a pro forma balance sheet and statements of income and cash flows and showing projected operating revenues, expenses and debt service of Borrower on a Consolidated basis; (iv) a prompt report of any material infringements to its Intellectual Property (collectively, "IP INFRINGEMENTS"); (v) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $2,000,000 or more, or in which an adverse decision could reasonably be expected to cause a Material Adverse Change (collectively, "MATERIAL LITIGATION"); and (vi) other financial information Bank reasonably requests. (b) Borrower will deliver to Bank with its Forms 10-K and 10-Q a Compliance Certificate signed by a Responsible Officer in the form of EXHIBIT D. 6.3 INVENTORY. Borrower will keep all Inventory in good and marketable condition, and free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $2,000,000. 6.4 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower 13. is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts standard for Borrower's industry, and as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank in Bank's reasonable discretion. At Bank's request, Borrower will deliver certificates of insurance showing the Bank as an additional insured, as applicable, and that the Bank will be provided at least twenty (20) days notice of cancellation of any policy. If an Event of Default has occurred and is continuing, proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. 6.6 DEPOSITORY ACCOUNTS. Borrower will maintain a depository account or accounts with Bank, one of which shall be the Designated Deposit Account for purposes of debiting amounts owed to Bank hereunder. 6.7 FINANCIAL COVENANTS. Borrower will maintain: (a) TANGIBLE NET WORTH. As measured at the last day of each fiscal quarter of Borrower, Tangible Net Worth of at least $105,000,000. (b) LIQUIDITY COVERAGE. As measured at the last day of each calendar month, a ratio of (1) unrestricted cash and Cash Equivalents plus (i) short-term, marketable securities of Borrower, minus (ii) outstanding Cash Management Services, and minus (iii) the FX Reserve divided by (2) the aggregate amount of the Obligations of not less than 1.50 to 1.00. 6.8 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank reasonably requests to effect the purposes of this Agreement, including executing and delivering and causing any applicable depositary bank, securities intermediary or commodity intermediary at or with which any Deposit Account, Securities Account, or Commodity Account (collectively, the "COLLATERAL ACCOUNTS") is maintained to execute and deliver a Control Agreement with respect to such Collateral Accounts as is necessary for Bank to obtain control (within the meaning of the applicable provision of the Code) over such Collateral Accounts that hold, in the aggregate, assets valued in an amount equal to at least 1.25 times the Committed Revolving Line. In addition, Borrower will take all commercially reasonable actions necessary to ensure that it is certified by the Secretary of State of the State of California as qualified to transact business in California under the name "Stratex Networks, Inc." within thirty (30) days from the date hereof. 14. 7. NEGATIVE COVENANTS Borrower will not do any of the following without Bank's prior written consent, which will not be unreasonably withheld, for so long as Bank has an obligation to lend or there are any outstanding Obligations: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "TRANSFER"), or permit any of its Subsidiaries to Transfer, all or any material part of its business or property, except for Transfers of (a) assets in the ordinary course of business; (b) licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (c) worn-out or obsolete assets. 7.2 CHANGES IN CONTROL, BUSINESS. Permit or suffer any Change in Control or engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (collectively, "MERGERS OR ACQUISITIONS"), except that Borrower may enter into Mergers or Acquisitions so long as no Event of Default has occurred and is continuing or would result from any such Mergers or Acquisitions. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of the Collateral, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for (a) Permitted Liens, or (b) Transfers of Accounts in the ordinary course of Borrower's business in exchange for cash or other unencumbered Property to an entity or entities regularly engaged in the purchase of such Accounts, or permit any Collateral not to be subject to the first priority security interest granted here, subject to Permitted Liens. 7.6 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 15. 7.7 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8. EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 PAYMENT DEFAULT. If Borrower fails to pay (a) the principal or interest portion of any Advance within three (3) Business Days after their due date, or (b) any other Obligations within three (3) Business Days after being notified by Bank that such Obligations are due and payable. During any cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period); 8.2 COVENANT DEFAULT. If Borrower does not perform any obligation in SECTION 6 (other than any obligation under SECTIONS 6.2 or 6.5) or violates any covenant in SECTION 7; or If Borrower does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within ten (10) days after it occurs, or if the default cannot be cured within ten (10) days or cannot be cured after Borrower's attempts to cure such default within the ten (10) day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than thirty (30) days) to attempt to cure the default. During the additional cure period, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during any cure period); 8.3 MATERIAL ADVERSE CHANGE. If a Material Adverse Change occurs; 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10) days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a 16. material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any material portion of Borrower's assets by any government agency and is not paid within ten (10) days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made while (a) the stay is in effect, or (b) Borrower contests the action, whichever is applicable); 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and is not dismissed or stayed within thirty (30) days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $2,000,000 or that could cause a Material Adverse Change; 8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $2,000,000 is rendered against Borrower, is not covered by insurance, and is unsatisfied and unstayed for ten (10) days (but no Credit Extensions will be made before the judgment is stayed or satisfied); or 8.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement at the time made now or later in any warranty or representation in this Agreement or in any writing delivered to Bank to induce Bank to enter this Agreement or any Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in SECTION 8.5 occurs, all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; 17. (c) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (d) Request that Borrower provide cash in an amount equal to the amount of the outstanding Letters of Credit to serve as collateral for such Letters of Credit; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Terminate any FX Forward Contracts; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Borrower's rights under all licenses and all franchise agreements inure to Bank's benefit; and (h) Dispose of the Collateral according to the Code. 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (a) endorse Borrower's name on any checks or other forms of payment or security; (b) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (c) make, settle, and adjust all claims under Borrower's insurance policies; (d) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (e) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest in the Collateral regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in SECTION 6.5 and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then 18. applicable Prime Rate. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.4 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices and the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.5 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.6 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10. NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A party may change its notice address by giving the other party written notice. 11. CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 19. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys' fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in SECTION 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 20. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (a) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (b) to prospective transferees or purchasers of any interest in the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee or purchasers agreement of the terms of this provision), (c) as required by law, regulation, subpoena, or other order, (d) as required in connection with Bank's examination or audit, and (e) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (x) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank, or (y) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 13. DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" is defined on EXHIBIT A hereto. "ADJUSTED LIBOR" means, for each Interest Period in respect of LIBOR Advances comprising part of the same Advances, an interest rate per annum (rounded upward to the nearest 1/16th of one percent (0.0625%)) equal to the sum of (a) LIBOR for such Interest Period divided by one (1) minus the Reserve Requirement for such Interest Period plus (b) two percent (2%). "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). 21. "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BUSINESS DAY" is any day other than a Saturday, Sunday or other day on which banking institutions in the State of California are authorized or required by law or other governmental action to close, except that if any determination of a "Business Day" shall relate to a LIBOR Advance, the term "Business Day" shall also mean a day on which dealings are carried on in the London interbank market, and if any determination of a "Business Day" shall relate to an FX Forward Contract, the term "Business Day" shall mean a day on which dealings are carried on in the country of settlement of the foreign (i.e., non-Dollar) currency. "CASH EQUIVALENTS" means highly liquid marketable securities held by Borrower with a remaining maturity of three (3) months or less in accordance with GAAP. "CASH MANAGEMENT SERVICES" are defined in SECTION 2.1.4. "CHANGE IN CONTROL" means any change, whether by a single transaction or a series of transactions, in the Person or Persons who control sufficient voting rights accorded to the owners of Borrower's stock (directly or indirectly, whether by stock ownership, contract, or otherwise) to direct the management of Borrower; provided, however, this provision shall not be violated by any sale of the stock (and related voting rights) of Borrower by Borrower through the New York Stock Exchange, the American Stock Exchange, NASDAQ or other public securities markets in which stocks of companies are regularly traded in the United States. "CLOSING DATE" is the date of this Agreement. "CODE" is the Uniform Commercial Code, as applicable. "COLLATERAL" is the property described on EXHIBIT A hereto. "COMMITTED REVOLVING LINE" is $22,500,000. "COMMODITY ACCOUNT" has the meaning ascribed to it in the Code. "CONSOLIDATED" refers, with respect to any Person, to the consolidation of accounts of such Person and its Subsidiaries in accordance with GAAP. "CONSOLIDATED TOTAL ASSETS" means, at any date of determination, the total Consolidated assets of Borrower, except goodwill, trade names, copyrights, trademarks, service marks, and other intangible items such as unamortized debt discount and expenses and research and development expenses except pre-paid expenses. "CONSOLIDATED TOTAL LIABILITIES" is on any date of determination, obligations that should, under GAAP, be classified as liabilities on Borrower's Consolidated balance sheet, including all Indebtedness, but excluding all Subordinated Debt. 22. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices, but "CONTINGENT OBLIGATION" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "CONTINUATION DATE" means any date on which Borrower elects to continue a LIBOR Advance into another Interest Period. "CONTROL AGREEMENTS" means, collectively, the separate control agreements entered into among Borrower, Bank and the depositary bank, securities intermediary, or commodity intermediary at which Borrower maintains a deposit account, securities account, or a commodity account, pursuant to which Bank obtains control (within the meaning of the applicable provision of the Code) over such deposit account, securities account, or commodity account. "CONVERSION DATE" means any date on which Borrower elects to convert a Prime Rate Advance to a LIBOR Advance or a LIBOR Advance to a Prime Rate Advance. "CREDIT EXTENSION" is each Advance, Letter of Credit, FX Forward Contract, Cash Management Services, or any other extension of credit by Bank for Borrower's benefit. "DEPOSIT ACCOUNTS" is defined on EXHIBIT A hereto. "DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto as SCHEDULE A. "DOLLARS," "DOLLARS" and "$" each mean lawful money of the United States. "EFFECTIVE AMOUNT" means with respect to any Advances on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowing and prepayments or repayments thereof occurring on such date. "EQUIPMENT" is defined on EXHIBIT A hereto. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "FX FORWARD CONTRACT" is defined in SECTION 2.1.3. "FX RESERVE" is defined in Section 2.1.3. 23. "FUNDING DATE" means the date funds are advanced to Borrower for any Advance. "GAAP" is generally accepted accounting principles. "GOVERNMENTAL AUTHORITY" means (a) any foreign, federal, state, county, or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court or administrative tribunal or (d) with respect to any Person, any arbitration tribunal or other non-governmental authority to whose jurisdiction that Person has consented. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services (such as reimbursement and other obligations for surety bonds and letters of credit that are carried as liabilities on Borrower's balance sheet) other than Contingent Obligations, (b) obligations evidenced by notes, bonds, debentures or similar instruments, and (c) capital lease obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INTELLECTUAL PROPERTY" is defined on EXHIBIT A hereto. "INTEREST PAYMENT DATE" means, with respect to any LIBOR Advance, the last day of each Interest Period applicable to such LIBOR Advance and, with respect to Prime Rate Advances, the twentieth (20th) day of each month (or, if the twentieth day of the month does not fall on a Business Day, then on the first Business Day following such date), and each date a Prime Rate Advance is converted into a LIBOR Advance to the extent of the amount converted to a LIBOR Advance. "INTEREST PERIOD" means, as to any LIBOR Advance, the period commencing on the date of such LIBOR Advance, or on the conversion/continuation date on which the LIBOR Advance is converted into or continued as a LIBOR Advance, and ending on the date that is one (1), two (2), or three (3), months thereafter, in each case as Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion/Continuation; provided, however, that (a) no Interest Period with respect to any LIBOR Advance shall end later than the Revolving Maturity Date, (b) the last day of an Interest Period shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, (c) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of a LIBOR Advance, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day, (d) any Interest Period pertaining to a LIBOR Advance that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period, and (e) interest shall accrue from and include the first Business Day of an Interest Period but exclude the last Business Day of such Interest Period. 24. "INTEREST RATE DETERMINATION DATE" means each date for calculating the LIBOR for purposes of determining the interest rate in respect of an Interest Period. The Interest Rate Determination Date shall be the second Business Day prior to the first day of the related Interest Period for a LIBOR Advance. "INVENTORY" is defined on EXHIBIT A hereto. "INVESTMENT" is any beneficial ownership (including stock, partnership interest or other securities) of any Person, or any loan, advance or capital contribution to any Person. "LETTER OF CREDIT" is defined in SECTION 2.1.2. "LIBOR" means, for any Interest Rate Determination Date with respect to an Interest Period for any Advance to be made, continued as or converted into a LIBOR Advance, the rate of interest per annum determined by Bank to be the per annum rate of interest at which deposits in United States Dollars are offered to Bank in the London interbank market in which Bank customarily participates at 11:00 a.m. (local time in such interbank market) two (2) Business Days prior to the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Advance. "LIBOR ADVANCE" means an Advance that bears interest based on Adjusted LIBOR. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, the Control Agreements, any note, or notes or guaranties executed by Borrower, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MATERIAL ADVERSE CHANGE" is any of the following: (a) a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (b) a material impairment of the prospect of repayment of any portion of the Obligations; or (c) a material impairment of the value or priority of Bank's security interests in the Collateral. "NOTICE OF BORROWING" means a notice given by Borrower to Bank in accordance with SECTION 3.2(a), substantially in the form of EXHIBIT B, with appropriate insertions. "NOTICE OF CONVERSION/CONTINUATION" means a notice given by Borrower to Bank in accordance with SECTION 3.4, substantially in the form of EXHIBIT C, with appropriate insertions. "OBLIGATIONS" are all debts, principal, interest, Bank Expenses and other amounts Borrower owes to Bank now or hereafter arising, including Cash Management Services, Letters of Credit, and the FX Reserve, if any and including interest accruing after Insolvency Proceedings begin and all debts, liabilities, or obligations of Borrower assigned to Bank. 25. "OPERATING DOCUMENTS" shall mean the Borrower's certificate of incorporation, as currently filed with the State of Delaware, and its bylaws in current form, each with all current modifications and amendments thereto. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Disclosure Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) Indebtedness secured by Permitted Liens; and (f) Any other Indebtedness not to exceed $5,000,000 in the aggregate outstanding at any time. "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Disclosure Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a licensor or under any license or sublicense, if the licenses and sublicenses permit granting Bank a security interest; (e) Leases or subleases granted in the ordinary course of Borrower's business, including in connection with Borrower's leased premises or leased property; (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase; 26. (g) Liens securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money) or statutory obligations, (ii) Contingent Obligations in respect of surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature, in each case incurred in the ordinary course of business; provided all such Liens in the aggregate could not (even if enforced), with reasonable likelihood, cause or result in a Material Adverse Change; and (h) Liens on cash collateral securing reimbursement obligations to issuing banks under standby letters of credit, foreign exchange contracts, or other transactions in the ordinary course of business. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "PRIME RATE ADVANCE" means an Advance that bears interest based on the Prime Rate. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, whether tangible or intangible. "REGULATORY CHANGE" means, with respect to Bank, any change on or after the date of this Agreement in United States federal, state, or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class of lenders including Bank, of or under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "REQUIREMENT OF LAW" means, as to any Person, any law (statutory or common), treaty, rule, regulation, guideline or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its Property or to which the Person or any of its Property is subject. "RESERVE REQUIREMENT" means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental, or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which Adjusted LIBOR is to be determined as provided in the definition of LIBOR or (b) any category of extensions of credit or other assets which include Advances. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer, the Controller, and the Treasurer of Borrower. 27. "REVOLVING MATURITY DATE" is January 20, 2004. "SECURITIES ACCOUNT" is an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's indebtedness owed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and approved by Bank in writing. "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. "TANGIBLE NET WORTH" is, on any date, the Consolidated Total Assets of Borrower and its Subsidiaries minus (i) any amounts attributable to reserves not already deducted from assets; (ii) restricted cash; and (iii) Consolidated Total Liabilities. [Signature page follows.] 28. IN WITNESS WHEREOF, the parties have duly authorized and caused this Agreement to be executed as of the date first written above. BORROWER: STRATEX NETWORKS, INC. By:________________________________________ By: ______________________ Title: ____________________________________ Title: ___________________ BANK: SILICON VALLEY BANK By: _______________________________________ Title _____________________________________ [Signature page to Loan and Security Agreement] SCHEDULE A DISCLOSURE SCHEDULE The exact and correct corporate name of Borrower is: Stratex Networks, Inc. Borrower's state of formation: California - January 4, 1984 Reincorporated: Delaware - February 13, 1987 Borrower has operated under only the following other names (if none, so state): Dyna Lynx Corporation, Digital Microwave Corporation, DMC Stratex Networks, Inc. All addresses at which the Borrower does business in the United States with total assets in excess of $100,000 are as follows (attach additional sheets if necessary and include all warehouse addresses): 1. 170 Rose Orchard Way, San Jose, CA 95134 (Principal Offices) 2. 130 Rose Orchard Way, San Jose, CA 95134 3. 1533 California Circle, Milpitas, CA 95035 (vacated - to be subleased) 4. 482 South Abbott Avenue, Milpitas, CA 95035 (stockroom) 5. 472 South Abbott Avenue, Milpitas, CA 95035 (warehouse) Borrower has deposit accounts and/or investment accounts located only at the following institutions in the United States (include account numbers): Union Bank of California: 1. Concentration/SWEEP Account No. 64501-54545 2. LC Collateral Account No. 64501-54529 (Restricted) 3. FX Collateral Account No. 64501-54537 (Restricted) 4. Controlled Disbursement Account No. 90800-08462 (zero balance account "ZBA") 5. Payroll Account No. 64501-54596 (ZBA) 6. Medical Payments Account No. 64501-54553 (ZBA) 7. Disability Payments Account No. 64501-54561 (ZBA) Bank of America: 1. Concentration/SWEEP Account No. 12334-25035 2. Nations Fund LC Collateral Account No. 020100004205217 (Restricted) 3. Controlled Disbursement Account No. 87650-00780 (ZBA) 4. Payroll Account No. 12332-25036 (ZBA) 5. Medical Claims Account No. 12336-25039 (ZBA) 6. Voluntary Disability Account No. 12330-25037 (ZBA) Liens existing on the Closing Date: 1. Security interest on restricted cash accounts indicated above 2. Liens on leasehold improvements under facility leases 3. Debenture dated June 15, 1990, as amended, in favor of National Bank of New Zealand for NZ$15,000,000 covering all of the assets of Stratex Networks (NZ) Limited, a wholly owned subsidiary of Stratex Networks, Inc., to support obligations of the subsidiary to the bank 1 Investments (including Securities Accounts) existing on the Closing Date: 1. Lehman Brothers, Inc.: Investment Account No. 833-79289-18-265 2. CIBC Oppenheimer: Investment Account No. 232-29693 3. Granger Telecom UK Ltd.: 214,950 Ordinary Shares (zero book value) 4. Interwave Communications International Ltd.: 17,076 Common Shares (zero book value) 5. fSona Corporation: 227,272 Shares Series C Pref. Stock (zero book value) 6. Aperto Networks, Inc.: 638,297 Shares Series B Pref. Stock (zero book value) 7. Ensemble Communications, Inc.: 772,210 Shares Special Common Series C and 81,833 Shares Special Common Series D (zero book value) Indebtedness (including Subordinated Debt): None Borrower is not currently subject to litigation that would have a material adverse effect on the Borrower's financial condition, except the following (attach additional comments, if needed): None material Federal Tax ID Number: 77-0016028 Organizational Numbers: 1. Delaware ID No. 21177-84 2. California ID No. C-1584093 2 EXHIBIT A "Collateral" means of all of Borrower's right, title and interest in and to the following whether owned now or hereafter acquired or arising, and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all General Intangibles; all Investment Property; all Other Property; and any and all claims, rights and interests in any of the foregoing, and all guaranties and security for any of the foregoing, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, all of the foregoing, and all Borrower's Books relating to any of the foregoing. Notwithstanding the foregoing, "Collateral" shall not be deemed to include: A. Borrower's Intellectual Property; provided, however, the Collateral shall include the proceeds of all the Intellectual Property that are accounts, (i.e. accounts receivable) of Borrower, or general intangibles consisting of rights to payment, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property, then the Collateral shall automatically, and effective as of the Closing Date, include the Intellectual Property to the extent necessary to permit perfection of Bank's security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property. B. The following Deposit Accounts of Borrower: 1. National Fund LC Collateral Account No. 020100004205217 (Restricted cash used to support standby letters of credit issued by Bank of America) 2. Union Bank of California LC Collateral Account No. 64501-54529 (Restricted cash used to support standby letters of credit issued by Union Bank of California) 3. Union Bank of California FX Collateral Account No. 64501-54537 (Restricted cash used to support foreign currency contracts transacted with Union Bank of California) C. Other assets of Borrower subject to existing Liens: 1. All tangible and intangible assets of Stratex Networks (NZ) Limited, a wholly owned subsidiary of Borrower located in Wellington, New Zealand under a debenture dated June 15, 1990, as amended, in favor of National Bank of New Zealand in the amount of NZ$15,000,000 supporting general obligations of the subsidiary to the bank. 2. Leasehold improvements under various facility leases. 1 As used in this Agreement and in this Exhibit, the following terms have the following meanings: "Accounts" means all present and future "accounts" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower. "Deposit Accounts" means all present and future "deposit accounts" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit, whether maintained with Bank or other institutions. "Equipment" means all present and future "equipment" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing. "General Intangibles" means all present and future "general intangibles" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind. "Intellectual Property" means all present and future (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) computer software and computer software products; (g) designs and design rights; (h) technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; (j) all licenses or other rights to use any property or rights of a type described above. "Inventory" means all present and future "inventory" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is out of Borrower's custody or possession or in transit and including any returned goods and any documents of title representing any of the above. 2 "Investment Property" means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, and all other securities of every kind, whether certificated or uncertificated, "Other Property" means (a) the following as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and all rights relating thereto: all present and future "commercial tort claims", "documents", "instruments", "promissory notes", "chattel paper", "letters of credit", "letter-of-credit rights", "fixtures", "farm products" and "money"; and (b) all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code. 3 EXHIBIT B FORM OF NOTICE OF BORROWING STRATEX NETWORKS, INC. Date:______________ TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 Attention: Corporate Services Department RE: Loan and Security Agreement dated as of January 21, 2003 (as amended, modified, supplemented or restated from time to time, the "Loan Agreement"), by and between STRATEX NETWORKS, INC. as the borrower thereunder, and SILICON VALLEY BANK, as the lender (the "Bank"). Ladies and Gentlemen: The undersigned refers to the Loan Agreement, the terms defined therein and used herein as so defined, and hereby gives you notice irrevocably, pursuant to SECTION 3.3(a) of the Loan Agreement, of the borrowing of an Advance. 1. The Funding Date, which shall be a Business Day, of the requested Borrowing is _______________. 2. The aggregate amount of the requested Borrowing is $_____________. 3. The requested Advance shall consist of $___________ of Prime Rate Advances and $______ of LIBOR Advances. 4. The duration of the Interest Period for the LIBOR Advances included in the requested Advance shall be __________ months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Advance before and after giving effect thereto, and to the application of the proceeds therefrom, as applicable: (a) all representations and warranties of Borrower contained in the Loan Agreement are true, accurate and complete in all material respects as of the date hereof; provided, however, that those representations and warranties expressly referring to another date are true, accurate and complete in all material respects as of such date; and provided, further, that the representations and warranties set forth in SECTION 5 of the Loan Agreement shall be deemed to be made with respect to the financial statements most recently delivered to the Bank pursuant to SECTION 6.2 of the Loan Agreement; (b) no Event of Default has occurred and is continuing, or would result from such proposed Advance; and (c) the requested Advance will not cause the aggregate principal amount of the outstanding Advances to exceed, as of the designated Funding Date, the Committed Revolving Line minus the sum of (i) all amounts for services utilized under the Cash Management Services Sublimit, and (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). BORROWER STRATEX NETWORKS, INC. By: ____________________________ Name: __________________________ Title: _________________________ For internal Bank use only
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[See attached for additional wire instructions, if any] 2 LOAN PAYMENT/ADVANCE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00PM PST FAX TO:_________________ CLIENT NAME: __________________________________ DATE: ____________ - - LOAN PAYMENT: From Account # _______________________________ To Account # ________________ (Deposit Account #) (Loan Account #) Principal $_________________________________ and/or Interest $_________________ All Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects to on the date of the telephone transfer request for and advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE:_______________________________ Phone Number:______________ - - LOAN ADVANCE: COMPLETE OUTGOING WIRE REQUEST SECTION BELOW IF ALL OR A PORTION OF THE FUNDS FROM THIS LOAN ADVANCE ARE FOR AN OUTGOING WIRE. From Account # ___________________________ To Account # __________________ (Loan Account #) (Deposit Account #) Amount of Advance $____________________________ All Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects to on the date of the telephone transfer request for and advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE: _________________________ Phone Number: __________________ - - OUTGOING WIRE REQUEST COMPLETE ONLY IF ALL OR A PORTION OF FUNDS FROM THE LOAN ADVANCE ABOVE ARE TO BE WIRED. Deadline for same day processing is 12:00pm, PST Beneficiary Name: _____________________ Amount of Wire: $________________ Beneficiary Bank: _____________________ Account Number: __________________ City and State: _______________________ Beneficiary Bank Transit (ABA) #: ______________ Beneficiary Bank Code (Swift, Sort, Chip, etc.):________________________________ (FOR INTERNATIONAL WIRE ONLY) Intermediary Bank:______________________ Transit (ABA) #:________________ For Further Credit to:__________________________________________________________ Special Instruction:____________________________________________________________ 3 By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me (us). Authorized Signature: _________________ 2nd Signature (If Required): ________ Print Name/Title: _____________________ Print Name/Title: _____________________ Telephone #____________________________ Telephone # ___________________________ 4 EXHIBIT C FORM OF NOTICE OF CONVERSION/CONTINUATION STRATEX NETWORKS, INC. Date:__________________ TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 Attention: RE: Loan and Security Agreement dated as of January 21, 2003 (as amended, modified, supplemented or restated from time to time, the "Loan Agreement"), by and between STRATEX NETWORKS, INC. as the borrower thereunder, and SILICON VALLEY BANK, as the lender (the "Bank"). Ladies and Gentlemen: The undersigned refers to the Loan Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to SECTION 3.4 of the Loan Agreement, of the [conversion] [continuation] of the Advances specified herein, that: 1. The date of the [conversion] [continuation] is ________________, 2003. 2. The aggregate amount of the proposed Advances to be [converted] is $_______________________ or [continued] is $____________________. 3. The Advances are to be [converted into] [continued as] [LIBOR] [Prime Rate] Advances. 4. The duration of the Interest Period for the LIBOR Advances included in the [conversion] [continuation] shall be ____________ months. The undersigned, on behalf of Borrower, hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed [conversion] [continuation], before and after giving effect thereto and to the application of the proceeds therefrom: (a) All representations and warranties of Borrower stated in the Loan Agreement are true, accurate and complete in all material respects as of the date hereof; provided, however, that those representations and warranties expressly referring to another date are true, accurate and complete in all material respects as of such date; and provided, further, that the representations and warranties set forth in SECTION 5 of the Loan Agreement shall be deemed to be made with respect to the financial statements most recently delivered to Bank pursuant to SECTION 6.2 of the Loan Agreement. (b) No Default or Event of Default has occurred and is continuing, or would result from such proposed [conversion] [continuation]. BORROWER STRATEX NETWORKS, INC. By: ____________________________________ Name: __________________________________ Title: _________________________________ For internal Bank use only
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2 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK Date: 3003 Tasman Drive Santa Clara, CA 95054 FROM: STRATEX NETWORKS, INC. The undersigned Responsible Officer of Stratex Networks, Inc. ("Borrower") certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required financial reports and calculation of financial covenants supporting the certification. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" OR "OCCURRENCES" COLUMNS.
REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Form 10-Q + CC Quarterly within 5 days of filing with SEC Yes No Form 10-K + CC Annually within 5 days of filing with SEC Yes No OCCURRENCES* IP Infringements Prompt Yes No Material Litigation Prompt Yes No

FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Minimum Tangible Net Worth $105,000,000 $________ Yes No (Quarterly) Minimum Liquidity Ratio 1.50:1.00 _____:1.00 Yes No (Monthly)
* If yes, attached is a summary of the Material Litigation or IP Infringements not previously disclosed by Borrower. Sincerely, BANK USE ONLY STRATEX NETWORKS, INC. Received by:____________________________ AUTHORIZED SIGNER By: _______________________ Name: ____________________ Date:__________________________________ Verified:______________________________ AUTHORIZED SIGNER Date:__________________________________ Compliance Status: Yes No EX-10.7 4 f89373exv10w7.txt EXHIBIT 10.7 EXHIBIT 10.7 [LETTER HEAD OF DMC STRATEX NETWORKS] Charles D. Kissner 170 Rose Orchard Way San Jose, CA 95134 RE: EMPLOYMENT AGREEMENT Dear Chuck: This letter sets forth the terms of your continued employment with DMC Stratex Networks, Inc. (the "Company") as well as our understanding with respect to any termination of that employment relationship. This Agreement is effective as of May 14, 2002. 1. Position and Duties. You are employed by the Company as its Chairman and Chief Executive Officer, reporting to its Board of Directors (the "Board"). You accept continued employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your time, energy and skill to your duties at the Company. 2. Term of Employment. Your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below. 3. Compensation. You will be compensated by the Company for your services as follows: a. Salary: You will be paid a monthly base salary of at least $34,166.66, less applicable withholding, in accordance with the Company's normal payroll procedures. Your salary may be reviewed from time to time, and may be subject to adjustment based upon various factors including, but not limited to, your performance and the Company's profitability. Any adjustment to your salary shall be made at the sole discretion of the Board. Your base salary will not be reduced except as part of a salary reduction program that similarly affects all members of the executive staff reporting to you. Your base salary is also subject to adjustment as described in paragraph 3d. b. Bonus: To the extent that the Company has one, you will be eligible to participate in any Company executive incentive bonus plan. c. Benefits: You will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company medical, disability or other group insurance plans, as well as under the Company's business expense reimbursement and other policies. You will accrue paid vacation in accordance with the Company's vacation policy or other specific arrangements made by the Company. 1 Kissner Employment Agreement d. Expenses. The Company will reimburse you for reasonable travel and other business expenses incurred by you in the proper performance of your duties for the Company, in accordance with the Company's policies, as they may be amended in the Company's sole discretion. To the extent that you incur business/travel expenses that are outside/beyond the scope of the Company's business/travel expense reimbursement policies, you will not be reimbursed for such expenses. 4. Voluntary Termination. In the event that you voluntarily resign from your employment with the Company, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that if you voluntarily terminate your employment with the Company for any reason, you will provide the Company with at least 10 days' written notice of your resignation. The Company shall have the option, in its sole discretion, to make your resignation effective at any time prior to the end of such notice period, provided the Company pays you an amount equal to the base salary you would have earned through the end of the notice period. 5. Other Termination. Your employment may be terminated under the circumstances set forth below. a. Termination by Disability. If, by reason of any physical or mental incapacity, you have been or will be prevented from performing your then-current duties under this Agreement for more than three consecutive months, then, to the extent permitted by law, the Company may terminate your employment without any advance notice. Upon such termination, if you sign a general release of known and unknown claims in a form satisfactory to the Company, the Company will provide you with the severance payments and benefits described in Paragraph 5(d). Nothing in this paragraph shall affect your rights under any applicable Company disability plan; provided, however, that your severance payments will be offset by any disability income payments received by you so that the total monthly severance and disability income payments during your severance period shall not exceed your then-current base salary. b. Termination by Death. Your employment will terminate automatically upon your death. Upon such termination, the Company will provide your family/estate with the severance payments and benefits described in Paragraph 5(d). c. Termination for Cause: The Company may terminate your employment at any time for cause (as described below). If your employment is terminated by the Company for cause, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination for cause. For purposes of this Agreement, a termination "for cause" occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, misconduct or falsification of any employment or Company records; (ii) improper disclosure of the Company's confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company's reputation or business; (iv) your refusal or inability to perform any assigned duties (other than as a result of a disability) after written notice from the Company to you of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction (including any plea of guilty or no contest) for any criminal act that impairs your ability to perform your duties under this Agreement. 2 Kissner Employment Agreement d. Termination Without Cause: The Company may terminate your employment without cause at any time. If your employment is terminated by the Company without cause, and you sign a general release of known and unknown claims in a form satisfactory to the Company, you will receive the following severance benefits: i. severance payments at your final monthly base salary rate, plus $4,166.67 per month, for a period of 36 months following your termination; such payments will be made in accordance with the Company's normal payroll practices; ii. payment of the premiums necessary to continue your group health insurance under COBRA (or to purchase other comparable health insurance coverage on an individual or group basis if you are no longer eligible for COBRA coverage) until the earlier of (x) 36 months following your termination date; or (y) the date you first become eligible to participate in another employer's group health insurance plan; iii. the Company will pay you the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid to you at the time that incentive bonus is paid to other Company employees; iv. with respect to any stock options granted to you by the Company that are unvested as of the date of your termination, 60% of such unvested options will immediately vest and become exercisable as of the date of your termination, and you will be entitled to purchase any vested shares of stock that are subject to any stock options granted to you by the Company until the earlier of (x) 36 months following your termination date, or (y) the date on which the applicable option(s) expires; except as set forth in this subparagraph, your Company stock options will continue to be subject to and governed by the applicable stock option agreements between you and the Company; v. payment of your then-provided Company car allowance for the period described in subparagraph 5(d)(i); and vi. outplacement assistance selected and paid for by the Company. e. Resignation for Good Reason: If you resign from your employment with the Company for Good Reason (as defined in this paragraph), and you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(d). For purposes of this paragraph, "Good Reason" means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Board of said condition(s): i. a reduction in your base salary, other than a reduction that is similarly applicable to all members of the executive staff reporting to you; or ii. a material reduction in your employee benefits (including, but not limited to your travel expense reimbursement benefits in effect as of the date of this Agreement); or 3 Kissner Employment Agreement iii. the relocation of the Company's workplace at which you are officed to a location that is more than 75 miles from the Company's workplace prior to such relocation. The foregoing condition(s) shall not constitute "Good Reason" if you do not provide the Board with the notice described above within 45 days after you first become aware of the condition(s). f. Termination As a Result of Change of Control: If there is a Change of Control (as defined below), your employment with the Company will terminate upon such Change of Control. If, upon such termination, you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(d); provided, that the time period set forth in subparagraph 5(d)(i), (ii), and (iv)(x), shall be increased by an additional twelve (12) months. In addition, you shall receive a payment equal to the greater of (i) the average of the annual incentive bonus payments received by you, if any, for the previous three years, or (ii) your target incentive bonus for the year in which your employment terminates. Such payment will be made to you within 15 days following your execution of the general release of claims described above. The Company will also accelerate the vesting of all unvested stock options granted to you by the Company such that all of your Company stock options will be fully vested as of the date of your termination. 6. Change of Control/Good Reason. a. For purposes of this Agreement, a "Change of Control" of the Company shall mean: i. The direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept; ii. a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors; iii. a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; iv. the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); 4 Kissner Employment Agreement v. the complete liquidation or dissolution of the Company; vi. any reverse merger in which the Company is the surviving entity but in which securities possessing more than forty percent (40%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or vii. the acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership ( within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than forty percent (40%) of the total combined voting power of the Company's outstanding securities but excluding any such transaction or series of related transactions that the Administrator of the Company Stock Option Plan determines shall not be a Corporate Transaction. For the purposes of this Agreement, the terms "Continuing Directors," "Corporate Transaction," "Affiliate" and "Associate" shall have the meanings ascribed to such terms in the Company's Stock Option Plan. 7. Confidential and Proprietary Information: As a condition of your continued employment, and to the extent that you have not done so already, you agree to sign and abide by the Company's standard form of employee proprietary information/confidentiality/assignment of inventions agreement. 8. Termination Obligations. a. You agree that all property, including, without limitation, all equipment, proprietary information, documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to the Company and shall be returned to the Company promptly upon any termination of your employment. b. Upon your termination for any reason, and as a condition of your receipt of any severance benefits hereunder, you will promptly resign in writing from all offices and directorships then held with the Company or any affiliate of the Company. c. Following the termination of your employment with the Company for any reason, you shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company. You shall also cooperate in the defense of any action brought by any third party against the Company. 9. Federal Excise Tax Under Section 4999 of the Code. a. To the extent that any payments and benefits provided for in this Agreement or otherwise payable to you (the "Payments") constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the 5 Kissner Employment Agreement "Code"), and are subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the "Excise Tax"), the Company shall pay to you within ninety (90) days of the date you become subject to the Excise Tax, an additional one-time amount (the "Gross-Up Payment") equal to the sum of the Excise Tax imposed on the Payments and the Excise Tax imposed on the Gross-Up Payment in accordance with the following formula: E/(1 - R), where (i) "E" is the amount of the Excise Tax computed on the Payments determined without regard to payment of the Gross-Up Payment, and (ii) "R" is the rate of Excise Tax. The Company shall not pay to you the amount of any federal, state and local income or employment taxes imposed on the Payments or the Gross-Up Payment. b. Unless the Company and you otherwise agree in writing, any determination required under this Subsection shall be made in writing by independent public accountants appointed by the Company and reasonably acceptable to you (the "Accountants"), whose determination shall be conclusive and binding upon you and the Company for all purposes. The Company shall bear all costs the Accountants may reasonably incur in connection with such determination, and the Company and you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Subsection. c. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax you are repaying), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. d. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment to you in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 10. Other Activities. In order to protect the Company's valuable proprietary information, you agree that during your employment and for a period of two years following the termination of your employment with the Company for any reason, you will not, as a compensated or uncompensated officer, director, consultant, advisor, partner, joint venturer, investor, independent contractor, employee or otherwise, provide any labor, services, advice or assistance to any entity, or its successor, which is a direct competitor of the Company (and specifically identified as such in the Company's Form 10K), unless specifically permitted to do so in writing by the Company or its successor. You acknowledge and agree that the restrictions contained in the preceding sentence are reasonable and necessary, as there is a significant risk that your provision of labor, services, advice or assistance to any of those competitors could result in the inevitable disclosure of the Company's proprietary information. You further acknowledge and agree that the restrictions contained in this paragraph will not preclude you from engaging in any trade, business or profession that you are qualified to engage in. 6 Kissner Employment Agreement 11. Dispute Resolution. In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this Agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race, sexual orientation, disability or other discrimination or harassment), you and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. You and the Company hereby knowingly and willingly waive your respective rights to have any such disputes or claims tried to a judge or jury. Provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by you or the Company. 12. Severability. If any provision of this Agreement is deemed invalid, illegal or unenforceable, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected. 13. Applicable Withholding. All salary, bonus, severance and other payments identified in this Agreement are subject to applicable withholding by the Company. 14. Assignment. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your obligations under this Agreement. 15. Entire Agreement. This Agreement and the agreements referred to above constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral, including your Employment Agreement dated August 8, 1998 with the Company. This Agreement sets forth our entire agreement regarding the Company's obligation to provide you with severance benefits upon any termination of your employment, and you shall not be entitled to receive any other severance benefits from the Company pursuant to any Company severance plan, policy or practice. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized representative of the Company. 7 Kissner Employment Agreement Chuck, we look forward to continuing to work with you at DMC Stratex Networks, Inc. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of the terms of this Agreement. Sincerely, DMC Stratex Networks, Inc. By: ___________________________________ V. Frank Mendicino Chairman of Compensation Committee of the Board of Directors I agree to and accept continued employment with DMC Stratex Networks, Inc. on the terms and conditions set forth in this Agreement. Date: _____________, 2002 _________________________________ Charles D. Kissner 8 EX-10.10 5 f89373exv10w10.txt EXHIBIT 10.10 EXHIBIT 10.10 [LOGO OF DMC STRATEX NETWORKS] Carl A. Thomsen 170 Rose Orchard Way San Jose, CA 95134 RE: EMPLOYMENT AGREEMENT Dear Carl: This letter sets forth the terms of your continued employment with DMC Stratex Networks, Inc. (the "Company") as well as our understanding with respect to any termination of that employment relationship. This Agreement is effective as of May 14, 2002. 1. Position and Duties. You are employed by the Company as its Senior Vice President of Finance and Chief Financial Officer, reporting to me. You accept continued employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your time, energy and skill to your duties at the Company. 2. Term of Employment. Your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below. 3. Compensation. You will be compensated by the Company for your services as follows: a. Salary: Effective July 1, 2002, you will be paid a monthly base salary of $24,500.00, less applicable withholding, in accordance with the Company's normal payroll procedures. Your salary may be reviewed from time to time, and may be subject to adjustment based upon various factors including, but not limited to, your performance and the Company's profitability. Any adjustment to your salary shall be made at the sole discretion of the Company. Your base salary will not be reduced except as part of a salary reduction program that similarly affects all members of the executive staff reporting to the Chief Executive Officer of the Company. b. Bonus: To the extent that the Company has one, you will be eligible to participate in any Company executive incentive bonus plan. c. Benefits: You will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company medical, disability or other group insurance plans, as well as under the Company's business expense reimbursement and other policies. You will accrue paid vacation in accordance with the Company's vacation policy or other specific arrangements made by the Company. 1 Carl Thomsen Employment Agreement 4. Voluntary Termination. In the event that you voluntarily resign from your employment with the Company, or in the event that your employment terminates as a result of your death, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that if you voluntarily terminate your employment with the Company for any reason, you will provide the Company with at least 10 days' written notice of your resignation. The Company shall have the option, in its sole discretion, to make your resignation effective at any time prior to the end of such notice period, provided the Company pays you an amount equal to the base salary you would have earned through the end of the notice period. 5. Other Termination. Your employment may be terminated under the circumstances set forth below. a. Termination by Disability. If, by reason of any physical or mental incapacity, you have been or will be prevented from performing your then-current duties under this Agreement for more than three consecutive months, then, to the extent permitted by law, the Company may terminate your employment without any advance notice. Upon such termination, if you sign a general release of known and unknown claims in a form satisfactory to the Company, the Company will provide you with the severance payments and benefits described in Paragraph 5(c). Nothing in this paragraph shall affect your rights under any applicable Company disability plan; provided, however, that your severance payments will be offset by any disability income payments received by you so that the total monthly severance and disability income payments during your severance period shall not exceed your then-current base salary. b. Termination for Cause or Death: The Company may terminate your employment at any time for cause (as described below). If your employment is terminated by the Company for cause, or if your employment terminates as a result of your death, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination for cause. Provided, however, that if your employment terminates as a result of your death, the Company will also pay your estate the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid at the time that incentive bonus is paid to other Company employees. For purposes of this Agreement, a termination "for cause" occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, misconduct or falsification of any employment or Company records; (ii) improper disclosure of the Company's confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company's reputation or business; (iv) your refusal or inability to perform any assigned duties (other than as a result of a disability) after written notice from the Company to you of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction (including any plea of guilty or no contest) for any criminal act that impairs your ability to perform your duties under this Agreement. c. Termination Without Cause: The Company may terminate your employment without cause at any time. If your employment is terminated by the Company 2 Carl Thomsen Employment Agreement without cause, and you sign a general release of known and unknown claims in a form satisfactory to the Company, you will receive the following severance benefits: i. severance payments at your final base salary rate for a period of eighteen (18) months following your termination; such payments will be made in accordance with the Company's normal payroll practices; ii. payment of the premiums necessary to continue your group health insurance under COBRA until the earlier of (x) eighteen (18) months following your termination date; (y) the date you first became eligible to participate in another employer's group health insurance plan, or (z) the date on which you are no longer eligible for COBRA coverage; iii. the Company will pay you the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid to you at the time that incentive bonus is paid to other Company employees; iv. with respect to any stock options granted to you by the Company, you will cease vesting upon your termination date; however, you will be entitled to purchase any vested shares of stock that are subject to those options until the earlier of (x) eighteen (18) months following your termination date, or (y) the date on which the applicable option(s) expires; except as set forth in this subparagraph, your Company stock options will continue to be subject to and governed by the applicable stock option agreements between you and the Company; v. payment of your then-provided Company car allowance for the period described in subparagraph 5(c)(i); and vi. outplacement assistance selected and paid for by the Company. d. Resignation for Good Reason: If you resign from your employment with the Company for Good Reason (as defined in this paragraph), and you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c). For purposes of this paragraph, "Good Reason" means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Company's Chief Executive Officer of said condition(s): i. a reduction in your base salary of 20% or more, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or ii. a material reduction in your employee benefits, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or iii. the relocation of the Company's workplace at which you are officed to a location that is more than 75 miles from the Company's workplace prior to such relocation. 3 Carl Thomsen Employment Agreement The foregoing condition(s) shall not constitute "Good Reason" if you do not provide the Chief Executive Officer with the notice described above within 45 days after you first become aware of the condition(s). e. Termination As a Result of Change of Control: If there is a Change of Control (as defined below), your employment with the Company will terminate upon such Change of Control. If, upon such termination, you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c); provided, that the time period set forth in subparagraph 5(c)(i), (ii to a maximum of 18 months), (iv)(x), and (v) shall be increased by an additional twelve (12) months. In addition, you shall receive a payment equal to the greater of (i) the average of the annual incentive bonus payments received by you, if any, for the previous three years, or (ii) your target incentive bonus for the year in which your employment terminates. Such payment will be made to you within 15 days following your execution of the general release of claims described above. The Company will also accelerate the vesting of all unvested stock options granted to you by the Company such that all of your Company stock options will be fully vested as of the date of your termination. 6. Change of Control/Good Reason. a. For purposes of this Agreement, a "Change of Control" of the Company shall mean: i. The direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept; ii. a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors; iii. a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; iv. the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); v. the complete liquidation or dissolution of the Company; 4 Carl Thomsen Employment Agreement vi. any reverse merger in which the Company is the surviving entity but in which securities possessing more than [forty percent (40%)] of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or vii. the acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership ( within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than [forty percent (40%)] of the total combined voting power of the Company's outstanding securities but excluding any such transaction or series of related transactions that the Administrator of the Company Stock Option Plan determines shall not be a Corporate Transaction. For the purposes of this Agreement, the terms "Continuing Directors," "Corporate Transaction," "Affiliate" and "Associate" shall have the meanings ascribed to such terms in the Company's Stock Option Plan. 7. Confidential and Proprietary Information: As a condition of your continued employment, and to the extent that you have not done so already, you agree to sign and abide by the Company's standard form of employee proprietary information/confidentiality/assignment of inventions agreement. 8. Termination Obligations. a. You agree that all property, including, without limitation, all equipment, proprietary information, documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to the Company and shall be returned to the Company promptly upon any termination of your employment. b. Upon your termination for any reason, and as a condition of your receipt of any severance benefits hereunder, you will promptly resign in writing from all offices and directorships then held with the Company or any affiliate of the Company. c. Following the termination of your employment with the Company for any reason, you shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company. You shall also cooperate in the defense of any action brought by any third party against the Company. 9. Federal Excise Tax Under Section 4999 of the Code. a. To the extent that any payments and benefits provided for in this Agreement or otherwise payable to you (the "Payments") constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and are subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the "Excise Tax"), the Company shall pay to you within ninety (90) days of 5 Carl Thomsen Employment Agreement the date you become subject to the Excise Tax, an additional one-time amount (the "Gross-Up Payment") equal to the sum of the Excise Tax imposed on the Payments and the Excise Tax imposed on the Gross-Up Payment in accordance with the following formula: E/(1 - R), where (i) "E" is the amount of the Excise Tax computed on the Payments determined without regard to payment of the Gross-Up Payment, and (ii) "R" is the rate of Excise Tax. The Company shall not pay to you the amount of any federal, state and local income or employment taxes imposed on the Payments or the Gross-Up Payment. b. Unless the Company and you otherwise agree in writing, any determination required under this Subsection shall be made in writing by independent public accountants appointed by the Company and reasonably acceptable to you (the "Accountants"), whose determination shall be conclusive and binding upon you and the Company for all purposes. The Company shall bear all costs the Accountants may reasonably incur in connection with such determination, and the Company and you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Subsection. c. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax you are repaying), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. d. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment to you in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 10. Other Activities. In order to protect the Company's valuable proprietary information, you agree that during your employment and for a period of [one] year[s] following the termination of your employment with the Company for any reason, you will not, as a compensated or uncompensated officer, director, consultant, advisor, partner, joint venturer, investor, independent contractor, employee or otherwise, provide any labor, services, advice or assistance to any entity, or its successor, which is a direct competitor of the Company (and specifically identified as such in the Company's Form 10K), unless specifically permitted to do so in writing by the Company or its successor. You acknowledge and agree that the restrictions contained in the preceding sentence are reasonable and necessary, as there is a significant risk that your provision of labor, services, advice or assistance to any of those competitors could result in the inevitable disclosure of the Company's proprietary information. You further acknowledge and agree that the restrictions contained in this paragraph will not preclude you from engaging in any trade, business or profession that you are qualified to engage in. 11. Dispute Resolution. In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this Agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of 6 Carl Thomsen Employment Agreement breach of contract, wrongful termination or age, sex, race, sexual orientation, disability or other discrimination or harassment), you and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. You and the Company hereby knowingly and willingly waive your respective rights to have any such disputes or claims tried to a judge or jury. Provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by you or the Company. 12. Severability. If any provision of this Agreement is deemed invalid, illegal or unenforceable, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected. 13. Applicable Withholding. All salary, bonus, severance and other payments identified in this Agreement are subject to applicable withholding by the Company. 14. Assignment. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your obligations under this Agreement. 15. Entire Agreement. This Agreement and the agreements referred to above constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral, including your Employment Agreement dated December 1, 1998, with the Company. This Agreement sets forth our entire agreement regarding the Company's obligation to provide you with severance benefits upon any termination of your employment, and you shall not be entitled to receive any other severance benefits from the Company pursuant to any Company severance plan, policy or practice. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized representative of the Company. 7 Carl Thomsen Employment Agreement Carl, we look forward to continuing to work with you at DMC Stratex Networks, Inc. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of the terms of this Agreement. Sincerely, DMC Stratex Networks, Inc. By: ___________________________________ Charles D. Kissner Chairman and Chief Executive Officer I agree to and accept continued employment with DMC Stratex Networks, Inc. on the terms and conditions set forth in this Agreement. Date: ______________, 2002 _________________________________ Carl Thomsen 8 EX-10.11 6 f89373exv10w11.txt EXHIBIT 10.11 EXHIBIT 10.11 [LOGO OF DMC STRATEX NETWORKS] [Executive] [Address] RE: EMPLOYMENT AGREEMENT Dear (Name of Executive): This letter sets forth the terms of your continued employment with DMC Stratex Networks, Inc. (the "Company") as well as our understanding with respect to any termination of that employment relationship. This Agreement is effective as of May 14, 2002. 1. Position and Duties. You are employed by the Company as its ______________________, reporting to [me]. You accept continued employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your full business time, energy and skill to your duties at the Company. 2. Term of Employment. Your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to the provisions of Paragraphs 4 and 5 below. 3. Compensation. You will be compensated by the Company for your services as follows: (a) Salary: Effective July 1, 2002, you will be paid a monthly base salary of $ XX, less applicable withholding, in accordance with the Company's normal payroll procedures. Your salary may be reviewed from time to time (but no more frequently than annually), and may be subject to adjustment based upon various factors including, but not limited to, your performance and the Company's profitability. Any adjustment to your salary shall be made at the sole discretion of the Company. Your base salary will not be reduced except as part of a salary reduction program that similarly affects all members of the executive staff reporting to the Chief Executive Officer of the Company. (b) Bonus: To the extent that the Company has one, you will be eligible to participate in any Company executive incentive bonus plan. (c) Benefits: You will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company medical, disability or other group insurance plans, as well as under the Company's business expense reimbursement and other policies. You will accrue paid vacation in accordance with the Company's vacation policy or other arrangements made by the Company. 1 Officer Employment Agreement Specimen 4. Voluntary Termination. In the event that you voluntarily resign from your employment with the Company, or in the event that your employment terminates as a result of your death, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination. You agree that if you voluntarily terminate your employment with the Company for any reason, you will provide the Company with at least 10 days' written notice of your resignation. The Company shall have the option, in its sole discretion, to make your resignation effective at any time prior to the end of such notice period, provided the Company pays you an amount equal to the base salary you would have earned through the end of the notice period. 5. Other Termination. Your employment may be terminated under the circumstances set forth below. (a) Termination by Disability. If, by reason of any physical or mental incapacity, you have been or will be prevented from performing your then-current duties under this Agreement for more than three consecutive months, then, to the extent permitted by law, the Company may terminate your employment without any advance notice. Upon such termination, if you sign a general release of known and unknown claims in a form satisfactory to the Company, the Company will provide you with the severance payments and benefits described in Paragraph 5(c). Nothing in this paragraph shall affect your rights under any applicable Company disability plan; provided, however, that your severance payments will be offset by any disability income payments received by you so that the total monthly severance and disability income payments during your severance period shall not exceed your then-current base salary. (b) Termination for Cause or Death: The Company may terminate your employment at any time for cause (as described below). If your employment is terminated by the Company for cause, or if your employment terminates as a result of your death, you shall be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination for cause. Provided, however, that if your employment terminates as a result of your death, the Company will also pay your estate the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid at the time that incentive bonus is paid to other Company employees. For purposes of this Agreement, a termination "for cause" occurs if you are terminated for any of the following reasons: (i) theft, dishonesty, misconduct or falsification of any employment or Company records; (ii) improper disclosure of the Company's confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company's reputation or business; (iv) your refusal or inability to perform any assigned duties (other than as a result of a disability) after written notice from the Company to you of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction (including any plea of guilty or no contest) for any criminal act that impairs your ability to perform your duties under this Agreement. 2 Officer Employment Agreement Specimen (c) Termination Without Cause: The Company may terminate your employment without cause at any time. If your employment is terminated by the Company without cause, and you sign a general release of known and unknown claims in a form satisfactory to the Company, you will receive the following severance benefits: (i) severance payments at your final base salary rate for a period of 12 months following your termination; such payments will be made in accordance with the Company's normal payroll practices; (ii) payment of the premiums necessary to continue your group health insurance under COBRA until the earlier of (x) 12 months following your termination date; (y) the date you first became eligible to participate in another employer's group health insurance plan, or (z) the date on which you are no longer eligible for COBRA coverage; (iii) the Company will pay you the prorated portion of any incentive bonus that you would have earned during the incentive bonus period in which your employment terminates; such prorated bonus will be paid to you at the time that incentive bonus is paid to other Company employees; (iv) with respect to any stock options granted to you by the Company, you will cease vesting upon your termination date; however, you will be entitled to purchase any vested shares of stock that are subject to those options until the earlier of (x) 12 months following your termination date, or (y) the date on which the applicable option(s) expires; except as set forth in this subparagraph, your Company stock options will continue to be subject to and governed by the applicable stock option agreements between you and the Company; (v) payment of your then-provided Company car allowance for the period described in subparagraph 5(c)(i); and (vi) outplacement assistance selected and paid for by the Company. (d) Resignation for Good Reason: If you resign from your employment with the Company for Good Reason (as defined in this paragraph), and such resignation does not qualify as a Resignation for Good Reason Following a Change of Control as set forth in subparagraph (e) below, and you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c). For purposes of this paragraph, "Good Reason" means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Company's Chief Executive Officer of said condition(s): (i) a reduction in your base salary of 20% or more, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or (ii) a material reduction in your employee benefits, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or 3 Officer Employment Agreement Specimen (iii) the relocation of the Company's workplace at which you are officed to a location that is more than 75 miles from the Company's workplace prior to such relocation. The foregoing condition(s) shall not constitute "Good Reason" if you do not provide the Chief Executive Officer with the notice described above within 45 days after you first become aware of the condition(s). (e) Termination or Resignation For Good Reason Following a Change of Control: If, within 18 months following any Change of Control (as defined below), your employment is terminated by the Company without cause, or if you resign from your employment with the Company for Good Reason Following a Change of Control (as defined below), and you sign a general release of known and unknown claims in a form satisfactory to the Company, you shall receive the severance benefits described in Paragraph 5(c); provided, that the time period set forth in subparagraph 5(c)(i), (ii), (iv)(x), and (v) shall be increased by an additional twelve (12) months. In addition, you shall receive a payment equal to the greater of (i) the average of the annual incentive bonus payments received by you, if any, for the previous three years, or (ii) your target incentive bonus for the year in which your employment terminates. Such payment will be made to you within 15 days following your execution of the general release of claims described above. The Company will also accelerate the vesting of all unvested stock options granted to you by the Company such that all of your Company stock options will be fully vested as of the date of your termination/resignation. 6. Change of Control/Good Reason. (a) For purposes of this Agreement, a "Change of Control" of the Company shall mean: (i) The direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept; (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors; (iii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; 4 Officer Employment Agreement Specimen (iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); (v) the complete liquidation or dissolution of the Company; (vi) any reverse merger in which the Company is the surviving entity but in which securities possessing more than [forty percent (40%)] of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (vii) the acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership ( within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than [forty percent (40%)] of the total combined voting power of the Company's outstanding securities but excluding any such transaction or series of related transactions that the Administrator of the Company Stock Option Plan determines shall not be a Corporate Transaction. For the purposes of this Agreement, the terms "Continuing Directors," "Corporate Transaction," "Affiliate" and "Associate" shall have the meanings ascribed to such terms in the Company's Stock Option Plan. (b) For purposes of this Agreement, "Good Reason Following a Change of Control" means any of the following conditions, which condition(s) remain in effect 60 days after written notice from you to the Company's Chief Executive Officer of said condition(s): (i) a material and adverse change in your position, duties or responsibilities for the Company, as measured against your position, duties or responsibilities immediately prior to the Change of Control; or (ii) a reduction in your base salary, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company, as measured against your base salary immediately prior to the Change in Control; or (iii) a material reduction in your employee benefits, other than a reduction that is similarly applicable to all members of the executive staff reporting to the Chief Executive Officer of the Company; or (iv) the relocation of the Company's workplace at which you are officed to a location that is more than 75 miles from the Company's workplace prior to such relocation for the Company. The foregoing condition(s) shall not constitute "Good Reason Following a Change of Control" if you do not provide the Chief Executive Officer with the notice described above within 45 days after you first become aware of the condition(s). 5 Officer Employment Agreement Specimen 7. Confidential and Proprietary Information: As a condition of your continued employment, and to the extent that you have not done so already, you agree to sign and abide by the Company's standard form of employee proprietary information/confidentiality/assignment of inventions agreement. 8. Termination Obligations. (a) You agree that all property, including, without limitation, all equipment, proprietary information, documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by you in the course of or incident to your employment, belongs to the Company and shall be returned to the Company promptly upon any termination of your employment. (b) Upon your termination for any reason, and as a condition of your receipt of any severance benefits hereunder, you will promptly resign in writing from all offices and directorships then held with the Company or any affiliate of the Company. (c) Following the termination of your employment with the Company for any reason, you shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company. You shall also cooperate in the defense of any action brought by any third party against the Company. 9. Limitation of Payments and Benefits. To the extent that any of the payments and benefits provided for in this Agreement or otherwise payable to you (the "Payments") constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the amount of such Payments shall be either: the full amount of the Payments, or a reduced amount which would result in no portion of the Payments being subject to the excise tax imposed pursuant to Section 4999 of the Code (the "Excise Tax"), whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by you, on an after-tax basis, of the greatest amount of benefit. In the event that any Excise Tax is imposed on the Payments, you will be fully responsible for the payment of any and all Excise Tax, and the Company will not be obligated to pay all or any portion of any Excise Tax. 10. Other Activities. In order to protect the Company's valuable proprietary information, you agree that during your employment and for a period of [one] year[s] following the termination of your employment with the Company for any reason, you will not, as a compensated or uncompensated officer, director, consultant, advisor, partner, joint venturer, investor, independent contractor, employee or otherwise, provide any labor, services, advice or 6 Officer Employment Agreement Specimen assistance to any entity or its successor, which is a direct competitor of the Company (and specifically identified as such in the Company's Form 10K), unless specifically permitted to do so in writing by the Company or its successor. You acknowledge and agree that the restrictions contained in the preceding sentence are reasonable and necessary, as there is a significant risk that your provision of labor, services, advice or assistance to any of those competitors could result in the inevitable disclosure of the Company's proprietary information. You further acknowledge and agree that the restrictions contained in this paragraph will not preclude you from engaging in any trade, business or profession that you are qualified to engage in. 11. Dispute Resolution. In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this Agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race, sexual orientation, disability or other discrimination or harassment), you and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. You and the Company hereby knowingly and willingly waive your respective rights to have any such disputes or claims tried to a judge or jury. Provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by you or the Company. 12. Severability. If any provision of this Agreement is deemed invalid, illegal or unenforceable, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected. 13. Applicable Withholding. All salary, bonus, severance and other payments identified in this Agreement are subject to applicable withholding by the Company. 14. Assignment. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your obligations under this Agreement. 15. Entire Agreement. This Agreement and the agreements referred to above constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral, including your Employment Agreement dated ____________ with the Company. This Agreement sets forth our entire agreement regarding the Company's obligation to provide you with severance benefits upon any termination of your employment, and you shall not be entitled to receive any other severance benefits from the Company pursuant to any Company severance plan, policy or practice. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California. 17. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized representative of the Company. 7 Officer Employment Agreement Specimen ________________________, we look forward to continuing to work with you at DMC Stratex Networks, Inc. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of the terms of this Agreement. Sincerely, DMC Stratex Networks, Inc. By: _____________________________ I agree to and accept continued employment with DMC Stratex Networks, Inc. on the terms and conditions set forth in this Agreement. Date: ______________, 2002 _________________________________ 8 EX-10.15 7 f89373exv10w15.txt EXHIBIT 10.15 EXHIBIT 10.15 STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of the Committees appointed to administer the Plan. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. (c) "Applicable Laws" means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein. (d) "Assumed" means that (i) pursuant to a Corporate Transaction defined in Section 2(q)(i), 2(q)(ii) or 2(q)(iii), the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent in connection with the Corporate Transaction or (ii) pursuant to a Corporate Transaction defined in Section 2(q)(iv) or 2(q)(v), the Award is expressly affirmed by the Company. (e) "Award" means the grant of an Option, Restricted Stock, Share or other right or benefit under the Plan. (f) "Award Agreement" means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto. (g) "Board" means the Board of Directors of the Company. (h) "Cause" means, with respect to the termination by the Company or a Related Entity of the Grantee's Continuous Service, that such termination is for "Cause" as such term is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee's: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or a Related Entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; (iii) unauthorized use or disclosure of confidential information or trade secrets 1 of the Company or a Related Entity or (iv) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. (i) "Change in Control" means a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offer or do not recommend such stockholders accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors. (j) "Code" means the Internal Revenue Code of 1986, as amended. (k) "Committee" means any committee appointed by the Board to administer the Plan. (l) "Common Stock" means the common stock of the Company. (m) "Company" means Stratex Networks, Inc., a Delaware corporation. (n) "Consultant" means any person (other than an Employee or a Director, solely with respect to rendering services in such person's capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity. (o) "Continuing Directors" means members of the Board who either (i) have been Board members continuously for a period of at least thirty-six (36) months or (ii) have been Board members for less than thirty-six (36) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. (p) "Continuous Service" means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized 2 personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds ninety (90) days, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the expiration of such ninety (90) day period. (q) "Corporate Transaction" means any of the following transactions: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); (iii) the complete liquidation or dissolution of the Company; (iv) any reverse merger in which the Company is the surviving entity but in which securities possessing more than forty percent (40%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than forty percent (40%) of the total combined voting power of the Company's outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction. (r) "Covered Employee" means an Employee who is a "covered employee" under Section 162(m)(3) of the Code. (s) "Director" means a member of the Board or the board of directors of any Related Entity. (t) "Disability" means as defined under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, "Disability" means that a Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion. (u) "Employee" means any person, including an Officer or Director, who is an employee of the Company or any Related Entity. The payment of a director's fee by the Company or a Related Entity shall not be sufficient to constitute "employment" by the Company. 3 (v) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (w) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation The NASDAQ National Market or The NASDAQ Small Cap Market of The NASDAQ Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith. (x) "Good Reason" means the occurrence after a Corporate Transaction or Change in Control of any of the following events or conditions unless consented to by the Grantee (and the Grantee shall be deemed to have consented to any such event or condition unless the Grantee provides written notice of the Grantee's non-acquiescence within 30 days of the effective time of such event or condition): (i) a change in the Grantee's responsibilities or duties which represents a material and substantial diminution in the Grantee's responsibilities or duties as in effect immediately preceding the consummation of a Corporate Transaction or Change in Control; (ii) a reduction in the Grantee's base salary to a level below that in effect at any time within six (6) months preceding the consummation of a Corporate Transaction or Change in Control or at any time thereafter; or (iii) requiring the Grantee to be based at any place outside a 50-mile radius from the Grantee's job location or residence prior to the Corporate Transaction or Change in Control, except for reasonably required travel on business which is not materially greater than such travel requirements prior to the Corporate Transaction or Change in Control. (y) "Grantee" means an Employee, Director or Consultant who receives an Award pursuant to an Award Agreement under the Plan. 4 (z) "Immediate Family" means 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 Grantee's household (other than a tenant or employee), a trust in which these persons (or the Grantee) have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests. (aa) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (bb) "Non-Qualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (cc) "Officer" means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (dd) "Option" means an option to purchase Shares pursuant to an Award Agreement granted under the Plan. (ee) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (ff) "Performance - Based Compensation" means compensation qualifying as "performance-based compensation" under Section 162(m) of the Code. (gg) "Plan" means this 2002 Stock Incentive Plan. (hh) "Related Entity" means any Parent or Subsidiary of the Company and any business, corporation, partnership, limited liability company or other entity in which the Company or a Parent or a Subsidiary of the Company holds a substantial ownership interest, directly or indirectly. (ii) "Replaced" means that pursuant to a Corporate Transaction the Award is replaced with a comparable stock award or the Award is replaced with a cash incentive program of the successor entity or Parent thereof which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such Award. The determination of Award comparability shall be made by the Administrator and its determination shall be final, binding and conclusive. (jj) "Restricted Stock" means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator. 5 (kk) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor thereto. (ll) "Share" means a share of the Common Stock. (mm) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is ten million (10,000,000) Shares. Notwithstanding the foregoing and subject to the provisions of Section 10, below, of the number of Shares specified above, the maximum aggregate number of Shares which may be issued pursuant to all Awards other than Options is one million two hundred thousand (1,200,000) Shares. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock. (b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Plan Administrator. (i) Administration with Respect to Directors and Officers. With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. (ii) Administration With Respect to Consultants and Other Employees. With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. The Board may authorize one or more Officers to grant such Awards and may limit such authority as the Board determines from time to time. (iii) Administration With Respect to Covered Employees. Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as 6 Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the "Administrator" or to a "Committee" shall be deemed to be references to such Committee or subcommittee. (iv) Administration Errors. In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion: (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder; (ii) to determine whether and to what extent Awards are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder; (iv) to approve forms of Award Agreements for use under the Plan; (v) to determine the terms and conditions of any Award granted hereunder; (vi) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee's rights under an outstanding Award shall not be made without the Grantee's written consent and that any amendment to reduce the exercise price of any outstanding Option shall not be made without the approval of the Company's stockholders; (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan, including without limitation, any notice of Award or Award Agreement, granted pursuant to the Plan; (viii) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such rules or laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and (ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate. 7 5. Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company or a Parent or a Subsidiary of the Company. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time. 6. Terms and Conditions of Awards. (a) Type of Awards. The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) an Option with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise right or vesting provision related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions or (iii) Restricted Stock. An Award may consist of one or more such securities or benefits in any combination or alternative. (b) Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option with respect to which such Shares are granted. (c) Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total stockholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. (d) Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction. 8 (e) Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award (but only to the extent that such deferral programs would not result in an accounting compensation charge unless otherwise determined by the Administrator). The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program. (f) Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time. (g) Individual Award Limit. The maximum number of Shares with respect to which Options may be granted to any Grantee in any fiscal year of the Company shall be seven hundred fifty thousand (750,000) Shares. In connection with a Grantee's commencement of Continuous Service, the Grantee may be granted Options for up to an additional seven hundred fifty thousand (750,000) Shares, which shall not count against the limit set forth in the previous sentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitation with respect to a Grantee, if any Option is canceled, the canceled Option shall continue to count against the maximum number of Shares with respect to which Options may be granted to the Grantee. For this purpose, the repricing of an Option shall be treated as the cancellation of the existing Option and the grant of a new Option. (h) Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate. (i) Term of Award. The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term of any Award shall be no more than seven (7) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. (j) Transferability of Awards. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee's 9 Incentive Stock Option in the event of the Grantee's death on a beneficiary designation form provided by the Administrator. Other Awards shall be transferred by will and by the laws of descent and distribution, and during the lifetime of the Grantee, by gift and/or pursuant to a domestic relations order to members of the Grantee's Immediate Family to the extent and in the manner determined by the Administrator. (k) Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator. Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant. 7. Award Exercise or Purchase Price, Consideration, and Taxes. (a) Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than one-hundred percent (100%) of the Fair Market Value per Share on the date of grant. (iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (iv) In the case of other Awards, such price as is determined by the Administrator. (v) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award. (b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be 10 determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (i) cash or check in U.S. dollars; (ii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator); (iii) with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; or (iv) any combination of the foregoing methods of payment. (c) Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations. 8. Exercise of Award. (a) Procedure for Exercise; Rights as a Stockholder. (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement; provided, however, that no Award granted to an Employee, except for Restricted Stock or an Award granted under an Award Agreement described in Section 6(h), shall be exercisable prior to the first anniversary of the grant date. (ii) An Award shall be deemed to be exercised when written notice (including written notice provided via electronic transmission) of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to 11 the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(iii). Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 10, below. (b) Exercise of Award Following Termination of Continuous Service. (i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee's Continuous Service only to the extent provided in the Award Agreement. (ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee's Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first. (iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee's Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement. 9. Conditions Upon Issuance of Shares. (a) Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws. 10. Adjustments Upon Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Options may be granted to any Grantee in any fiscal year of the Company, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse 12 stock split, stock dividend, combination or reclassification of the Shares, or similar transaction affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive. Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award. 11. Corporate Transactions/Changes in Control. Termination of Award to Extent Not Assumed. (i) Corporate Transaction. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction. Acceleration of Award Upon Corporate Transaction/Change in Control. (ii) Corporate Transaction. Except as provided otherwise in an individual Award Agreement, in the event of a Corporate Transaction, for the portion of each Award that is neither Assumed nor Replaced, such portion of the Award shall automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at fair market value) for all of the Shares at the time represented by such portion of the Award, immediately prior to the specified effective date of such Corporate Transaction. (iii) Change in Control. The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Change in Control or at the time of an actual Change in Control and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Change in Control, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Change in Control. The Administrator may provide that any Awards so vested or released from such limitations in connection with a Change in Control, shall remain fully exercisable until the expiration or sooner termination of the Award. 13 Effect of Acceleration on Incentive Stock Options. The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Non-Qualified Stock Option. 12. Effective Date and Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of seven (7) years unless sooner terminated. Subject to Section 17, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective. 13. Amendment, Suspension or Termination of the Plan. (a) The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. In addition, any amendment to this Section 13(a) or Section 4(b)(vi) shall also require stockholder approval. (b) No Award may be granted during any suspension of the Plan or after termination of the Plan. (c) No amendment, suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall adversely affect any rights under Awards already granted to a Grantee, unless consented to by the Grantee. 14. Reservation of Shares. (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to the Grantee's Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or any Related Entity to terminate the Grantee's Continuous Service at any time, with or without Cause, and with or without notice. The ability of the Company or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that the Grantee's Continuous Service has been terminated for Cause for the purposes of this Plan. 16. No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed 14 compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 17. Stockholder Approval. The grant of Incentive Stock Options under the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted excluding Incentive Stock Options issued in substitution for outstanding Incentive Stock Options pursuant to Section 424(a) of the Code. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. The Administrator may grant Incentive Stock Options under the Plan prior to approval by the stockholders, but until such approval is obtained, no such Incentive Stock Option shall be exercisable. In the event that stockholder approval is not obtained within the twelve (12) month period provided above, all Incentive Stock Options previously granted under the Plan shall be exercisable as Non-Qualified Stock Options. 15 STRATEX NETWORKS, INC. 2002 NON-EMPLOYEE DIRECTOR OPTION PROGRAM ARTICLE I ESTABLISHMENT AND PURPOSE OF THE PROGRAM 1.01 ESTABLISHMENT OF PROGRAM The Stratex Networks, Inc. 2002 Non-Employee Director Option Program (the "Program") is adopted pursuant to the Stratex Networks, Inc. 2002 Stock Incentive Plan (the "Plan") and, in addition to the terms and conditions set forth below, is subject to the provisions of the Plan. 1.02 PURPOSE OF PROGRAM The purpose of the Program is to enhance the ability of the Company to attract and retain directors who are not Employees ("Non-Employee Directors") through a program of automatic Option grants. 1.03 EFFECTIVE DATE OF THE PROGRAM The Program is effective as of the date of 2002 Annual Stockholders Meeting, such effectiveness conditioned upon approval of the Plan by the Company's stockholders at such meeting. ARTICLE II DEFINITIONS Capitalized terms in this Program, unless otherwise defined herein, have the meaning given to them in the Plan. ARTICLE III OPTION TERMS 3.01 DATE OF GRANT AND NUMBER OF SHARES As of the effective date of the Plan, a Non-Qualified Stock Option to purchase thirty thousand (30,000) Shares shall be granted (the "Initial Grant") to each Non-Employee Director newly elected or appointed to the Board upon the date each such Non-Employee Director first becomes a Non-Employee Director. In addition, immediately following each annual meeting of the 16 Company's stockholders commencing with the 2002 Annual Stockholders Meeting, each Non-Employee Director who continues as a Non-Employee Director following such annual meeting shall be granted a Non-Qualified Stock Option to purchase ten thousand (10,000) Shares (a "Subsequent Grant"); provided that no Subsequent Grant shall be made to any Non-Employee Director who has not served as a director of the Company for at least three (3) years as of the time of such annual meeting. Each such Subsequent Grant shall be made on the date of the annual stockholders' meeting in question. In the event of a transaction described in Section 10 of the Plan, the Administrator, in its sole discretion, may determine whether to adjust the number of Shares to be subject to the automatic issuance of Initial Grants and Subsequent Grants that occur on or after such a transaction. No such adjustment to new Initial Grants and Subsequent Grants shall be made in the absence of an affirmative determination by the Administrator. However, the number of Shares underlying any Initial Grants and Subsequent Grants outstanding on the date of a transaction described in Section 10 of the Plan shall be subject to adjustment in accordance with Section 10 of the Plan. 3.02 VESTING Each Initial Grant under the Program shall be immediately exercisable as to all of the Shares subject to the Option. However, the Shares purchased under such Initial Grant shall be subject to repurchase by the Company, at the same exercise price paid per Share by the Non-Employee Director, upon the Non-Employee Director's cessation of Continuous Service prior to vesting in those Shares. Each Initial Grant shall vest as to one-third (1/3) of the Shares subject to the Option twelve (12) months after the date of grant and an additional one-third (1/3) of the Shares subject to the Option shall vest on each yearly anniversary of the date of grant thereafter, such that the Initial Grant will be fully vested three (3) years after its date of grant. For purposes this Program, the term "vest" shall mean, with respect to any Shares, that such Shares are no longer subject to repurchase by the Company; provided, however, that such Shares shall remain subject to other restrictions on transfer set forth in the underlying Award Agreement or in the Plan. Shares that have not vested are deemed "Restricted Shares." If the Non-Employee Director becomes vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Non-Employee Director becomes vested in the entire Share. Notwithstanding the foregoing, any Restricted Shares purchased under this Program will be subject to the provisions of the underlying Award Agreement and Section 11 of the Plan relating to the release of repurchase and forfeiture provisions in the event of a Corporate Transaction or Change of Control. Each Subsequent Grant under the Program shall be fully vested and exercisable as to all Shares subject to the Option on the date of grant. Subsequent Grants are not subject to repurchase by the Company. 3.03 EXERCISE PRICE The exercise price per Share of Common Stock of each Option granted under the Program shall be one hundred percent (100%) of the Fair Market Value per Share on the date of grant. 3.04 TERM 17 Each Option granted under the Program shall have a maximum term of five (5) years measured from the date of grant. 3.05 CORPORATE TRANSACTIONS/CHANGES IN CONTROL (a) In the event of a Corporate Transaction, each Option which is at the time outstanding under the Program automatically shall become fully vested and exercisable immediately prior to the effective date of such Corporate Transaction. Effective upon the consummation of the Corporate Transaction, all outstanding Options under the Program shall terminate. However, such Options shall not terminate if the Options are Assumed by the successor corporation or Parent thereof in connection with the Corporate Transaction. (b) In the event of a Change in Control (other than a Change in Control which also is a Corporate Transaction), each Option which is at the time outstanding under the Program automatically shall become fully vested and exercisable immediately prior to the specified effective date of such Change in Control. Each such Option shall remain so exercisable until the expiration or sooner termination of the applicable Option term. 3.05 OTHER TERMS The Administrator shall determine the remaining terms and conditions of the Options awarded under the Program. 18 STRATEX NETWORKS, INC. 2002 NON-EMPLOYEE DIRECTOR STOCK FEE PROGRAM ARTICLE I ESTABLISHMENT AND PURPOSE OF THE PROGRAM 1.01 ESTABLISHMENT OF PROGRAM The Stratex Networks, Inc. 2002 Non-Employee Director Stock Fee Program (the "Program") is adopted pursuant to the Stratex Networks, Inc. 2002 Stock Incentive Plan (the "Plan") and, in addition to the terms and conditions set forth below, is subject to the provisions of the Plan. 1.02 PURPOSE OF PROGRAM The purpose of the Program is to enhance the ability of the Company to attract and retain directors who are not Employees ("Non-Employee Directors") through a program of receiving Shares of the Company in lieu of annual retainer and meeting fees. 1.03 EFFECTIVE DATE OF THE PROGRAM The Program is effective as of the date of 2002 Annual Stockholders Meeting, such effectiveness conditioned upon approval of the Plan by the Company's stockholders at such meeting. ARTICLE II DEFINITIONS Capitalized terms in this Program, unless otherwise defined herein, have the meaning given to them in the Plan. ARTICLE III STOCK FEE PROGRAM TERMS 3.01 ELIGIBILITY As of the effective date of the Plan, each Non-Employee Director shall be eligible to elect to apply all or any portion of the annual retainer fee and meeting fees otherwise payable to such individual in cash to the acquisition of Shares under the Plan pursuant to the terms and conditions of this Program. 3.02 ELECTION PROCEDURE 19 (a) The Non-Employee Director must make the stock-in-lieu-of-fee election prior to the start of the calendar year for which the election is to be effective. Subject to the last sentence of this Section 3.02(a), the first calendar year for which any such election may be filed shall be the 2003 calendar year. The election, once filed, shall be irrevocable. The election for any upcoming calendar year may be filed at any time prior to the start of that year, but in no event later than December 31 of the immediately preceding calendar year. The Non-Employee Director may file a standing election to be in effect for two (2) or more consecutive calendar years or to remain in effect indefinitely until revoked by written instrument filed with the Administrator at least thirty (30) days prior to the start of the first calendar year for which such standing election is no longer to remain in effect. Any standing election filed under the Stock Fee Program of the DMC Stratex Networks, Inc. 1994 Stock Incentive Plan or the DMC Stratex Networks, Inc. 1999 Stock Incentive Plan shall be deemed a standing election under this Program without any further action by the Non-Employee Director in order to be administered in accordance with the terms of such previously filed standing election. (b) The election must be filed with the Administrator on the appropriate form provided by the Administrator for this purpose. On the election form, the Non-Employee Director must indicate the percentage or dollar amount of his or her annual retainer fee and/or his or her meeting fees to be applied to the acquisition of Shares. 3.03 ISSUE DATE FOR ANNUAL RETAINER FEE SHARES On the first trading day in January of the calendar year for which the election is effective, the portion of the annual retainer fee subject to such election shall automatically be applied to the acquisition of Shares by dividing the elected dollar amount by the Fair Market Value per Share of Common Stock on that trading day. The number of issuable Shares shall be rounded down to the next whole Share, and the issued Shares shall be held in escrow by the Secretary of the Company as "Restricted Shares" until the Non-Employee Director fully vests in such Restricted Shares. Such Restricted Shares shall not be assignable or transferable while they remain unvested, but the Non-Employee Director shall have full stockholder rights, including voting, dividend and liquidation rights, with respect to all Restricted Shares held in escrow on his or her behalf. 3.04 VESTING OF ANNUAL RETAINER FEE SHARES Upon completion of each calendar month of Continuous Service during the year for which the election applicable to the annual retainer fee is in effect, the Non-Employee Director shall vest in one-twelfth (1/12) of the Restricted Shares, and the stock certificate for those Shares shall be released from escrow. Notwithstanding the provisions of the Plan, immediate vesting in all Restricted Shares shall occur in the event (i) the Non-Employee Director should die or incurs a Disability during his or her Continuous Service or (ii) there should occur a Corporate Transaction or Change in Control while such individual remains in Continuous Service. Should such individual cease Continuous Service prior to vesting in one or more monthly installments of the Restricted Shares, then any Restricted Shares that remain unvested shall be canceled by the Company, and the Non-Employee Director shall not be entitled to any cash payment or other consideration from the Company with respect to the canceled Restricted Shares and shall have no further stockholder rights with respect to such Restricted Shares. 20 For purposes this Program, the term "vest" shall mean, with respect to any Restricted Shares, that such Restricted Shares are no longer subject to forfeiture to the Company or restrictions on assignability or transfer. If the Non-Employee Director becomes vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Non-Employee Director becomes vested in the entire Share. 3.05 ISSUE DATE FOR MEETING FEE SHARES On the first trading day following any meeting in a calendar year for which the election is effective, the portion of the meeting fee subject to such election shall automatically be applied to the acquisition of Shares by dividing the elected dollar amount by the Fair Market Value per Share of Common Stock on that trading day. The number of issuable Shares shall be rounded down to the next whole Share, and the Shares shall be issued as soon as practicable to the Non-Employee Director. 3.06 OTHER TERMS The Administrator shall determine the remaining terms and conditions of the Program. 21 STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN 2002 NON-EMPLOYEE DIRECTOR OPTION PROGRAM NOTICE OF NON-QUALIFIED STOCK OPTION AWARD [PER PROGRAM, SINGLE TRIGGER ACCELERATION FOR NON-EMPLOYEE DIRECTORS - REMOVE THIS] Grantee's Name and Address: ___________________________________ ___________________________________ ___________________________________ You have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the "Notice"), the Stratex Networks, Inc. 2002 Stock Incentive Plan (the "Plan"), and the Stratex Networks, Inc. 2002 Non-Employee Director Option Program (the "Program"), as amended from time to time, and the Non-Qualified Stock Option Award Agreement (the "Option Agreement") attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan and the Program shall have the same defined meanings in this Notice. Award Number ___________________________________ Date of Award ___________________________________ Vesting Commencement Date ___________________________________ Exercise Price per Share $__________________________________ Total Number of Shares subject to the Option (the "Shares") ___________________________________ Total Exercise Price $__________________________________ Type of Option: Non-Qualified Stock Option Expiration Date: ___________________________________ Post-Termination Exercise Period: Three (3) Months Vesting Schedule: [FOR INITIAL GRANTS] NOTWITHSTANDING THE FOREGOING, THE SHARES SUBJECT TO THIS NOTICE WILL BE RELEASED FROM THE REPURCHASE RIGHT IN THE EVENT OF A CORPORATE TRANSACTION OR A CHANGE IN CONTROL, IN ACCORDANCE WITH SECTION 3.05 OF THE PROGRAM. PROVIDED THAT GRANTEE'S CONTINUOUS SERVICE IS NOT TERMINATED AND SUBJECT TO THE OTHER LIMITATIONS SET FORTH IN THIS NOTICE, THE PLAN, THE PROGRAM AND THE OPTION AGREEMENT, THE REPURCHASE RIGHT AS TO UNVESTED SHARES SHALL LAPSE IN ACCORDANCE WITH THE FOLLOWING SCHEDULE: ONE-THIRD (1/3) OF THE SHARES OF COMMON STOCK SUBJECT TO THE OPTION SHALL VEST TWELVE (12) MONTHS AFTER THE VESTING COMMENCEMENT DATE, AND AN ADDITIONAL ONE-THIRD (1/3) OF THE SHARES OF COMMON STOCK SUBJECT TO THE OPTION SHALL VEST ON EACH YEARLY ANNIVERSARY OF THE VESTING COMMENCEMENT DATE THEREAFTER.> [FOR SUBSEQUENT GRANTS] During any authorized leave of absence, the vesting of the Option as provided in this schedule shall be suspended after the leave of absence exceeds a period of ninety (90) days. Vesting of the Option shall resume upon the Grantee's termination of the leave of absence and return to service to the Company or a Related Entity. The Vesting Schedule of the Option shall be extended by the length of the suspension. IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, the Program and the Option Agreement. Stratex Networks, Inc., a Delaware corporation By: ________________________________________ Title: _____________________________________ THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE'S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). The Grantee acknowledges receipt of a copy of the Plan, the Program and the Option Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Plan, the Program and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan, the 23 Program and the Option Agreement. The Grantee hereby agrees that all disputes arising out of or relating to this Notice, the Plan, the Program and the Option Agreement shall be resolved in accordance with Section 20 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice. Dated: ______________________ Signed: ____________________________________ Grantee 24 AWARD NUMBER: ___________ STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN 2002 NON-EMPLOYEE DIRECTOR OPTION PROGRAM NON-QUALIFIED STOCK OPTION AWARD AGREEMENT 1. Grant of Option. Stratex Networks, Inc., a Delaware corporation (the "Company"), hereby grants to the Grantee (the "Grantee") named in the Notice of Non-Qualified Stock Option Award (the "Notice"), an option (the "Option") to purchase the Total Number of Shares of Common Stock subject to the Option (the "Shares") set forth in the Notice, at the Exercise Price per Share set forth in the Notice (the "Exercise Price") subject to the terms and provisions of the Notice, this Non-Qualified Stock Option Award Agreement (the "Option Agreement"), the Company's 2002 Stock Incentive Plan (the "Plan"), and the Company's 2002 Non-Employee Director Option Program (the "Program"), as amended from time to time, which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan and the Program shall have the same defined meanings in this Option Agreement. The Option is intended to qualify as a Non-Qualified Stock Option and not as an Incentive Stock Option as defined in Section 422 of the Code. 2. Exercise of Option. (a) Right to Exercise. The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement by delivery of an exercise notice (a form of which is attached as Exhibit A) or by other such procedure as specified from time to time by the Administrator. The Option shall be subject to the provisions of Section 3.05 of the Program relating to the exercisability or termination of the Option in the event of a Corporate Transaction or a Change in Control. No partial exercise of the Option may be for less than the lesser of five percent (5%) of the total number of Shares subject to the Option or the remaining number of Shares subject to the Option. The Grantee shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Administrator. In no event shall the Company issue fractional Shares. (b) Method of Exercise. The Option shall be exercisable only by delivery of an exercise notice (attached as Exhibit A) or by such procedure as specified from time to time by the Administrator which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The exercise notice shall be signed by the Grantee and shall be delivered in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Administrator to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price, which, 1 to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below. (c) Taxes. No Shares will be delivered to the Grantee or other person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income and employment tax withholding obligations, including, without limitation, such other tax obligations of the Grantee incident to the receipt of Shares. Upon exercise of the Option, the Company or the Grantee's employer may offset or withhold (from any amount owed by the Company or the Grantee's employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer's withholding obligations. 3. Method of Payment. Payment of the Exercise Price shall be made by any of the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (a) cash; (b) check; (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price); or (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. 4. Restrictions on Exercise. The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws. 5. Termination or Change of Continuous Service. In the event the Grantee's Continuous Service terminates, other than for Cause, the Grantee may, but only during the Post-Termination Exercise Period, exercise the portion of the Option that was vested at the date of such termination (the "Termination Date"). In the event of termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Option shall, except as otherwise determined by the Administrator, terminate concurrently with the termination of the 2 Grantee's Continuous Service (also the "Termination Date"). In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Grantee's change in status from Employee, Director or Consultant to any other status of Employee, Director or Consultant, the Option shall remain in effect and, except to the extent otherwise determined by the Administrator, continue to vest. Except as provided in Sections 6 and 7 below, to the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate. 6. Disability of Grantee. In the event the Grantee's Continuous Service terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the portion of the Option that was vested on the Termination Date. To the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. 7. Death of Grantee. In the event of the termination of the Grantee's Continuous Service as a result of his or her death, or in the event of the Grantee's death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee's termination of Continuous Service as a result of his or her Disability, the Grantee's estate, or a person who acquired the right to exercise the Option by bequest or inheritance, may exercise the portion of the Option that was vested at the date of termination, within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate. 8. Transferability of Option. The Option may not be transferred in any manner other than by will or by the laws of descent and distribution, provided, however, that the Option may be transferred to members of the Grantee's Immediate Family to the extent and in the manner authorized by the Administrator. The terms of the Option shall be binding upon the executors, administrators, heirs and successors of the Grantee. 9. Term of Option. The Option may be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. 10. Company's Repurchase Right. (a) Grant of Repurchase Right. The Company is hereby granted the right (the "Repurchase Right"), exercisable at any time during the ninety (90) day period following the Termination Date, to repurchase all or any portion of the Shares that have not vested pursuant to the terms of the Vesting Schedule purchased upon exercise of the Option (the "Share Repurchase Period"). (b) Exercise of the Repurchase Right. The Repurchase Right shall be exercisable by written notice delivered to the Grantee prior to the expiration of the Share Repurchase Period. The notice shall indicate the number of Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not later than the last day of the 3 Share Repurchase Period. On the date on which the repurchase is to be effected, the Company and/or its assigns shall pay to the Grantee in cash or cash equivalents (including the cancellation of any purchase-money indebtedness) an amount equal to the lower of the Exercise Price or Fair Market Value per Share for unvested Shares which are to be repurchased from the Grantee. Upon such payment or deposit into escrow for the benefit of the Grantee, the Company and/or its assigns shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest thereon or related thereto, and the Company shall have the right to transfer to its own name or its assigns the number of Shares being repurchased, without further action by the Grantee. (c) Assignment. Whenever the Company shall have the right to purchase Shares under this Repurchase Right, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations, to exercise all or a part of the Company's Repurchase Right. (d) Termination of the Repurchase Right. The Repurchase Right shall terminate with respect to any Shares for which it is not timely exercised. (e) Corporate Transaction/Change in Control. Notwithstanding the foregoing, Shares subject to the Repurchase Right will be released from the Repurchase Right in the event of a Corporate Transaction or a Change in Control, in accordance with Section 3.05 of the Program. 11. Transfer Restrictions for Unvested Shares. The Shares sold to the Grantee hereunder may not be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Grantee prior to the date that the Shares become vested pursuant to the Vesting Schedule set forth in the Notice. Any attempt to transfer Shares in violation of this Section 11 will be null and void and will be disregarded. 12. Escrow of Stock. For purposes of facilitating the enforcement of the provisions of the Repurchase Right, the Grantee agrees, immediately upon receipt of the certificate(s) for the Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached hereto as Exhibit B, executed in blank by the Grantee and the Grantee's spouse (if required for transfer) with respect to each such stock certificate, to the Secretary or Assistant Secretary of the Company, or their designee, to hold in escrow for so long as such Shares have not vested pursuant to the Vesting Schedule set forth in the Notice and are subject to Company's Repurchase Right, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Option Agreement in accordance with the terms hereof. The Grantee hereby acknowledges that the appointment of the Secretary or Assistant Secretary of the Company (or their designee) as the escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Option Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. The Grantee agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Subject to the provisions of any security agreement relating to Grantee's purchase of the Shares, upon the 4 vesting of Shares and termination of the Company's Repurchase Right as set forth in Section 10, the escrow holder will, upon request, transmit to the Grantee the certificate evidencing such Shares. 13. Additional Securities. Any securities or cash received (other than a regular cash dividend) as the result of ownership of the Shares (the "Additional Securities"), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of any transaction described in Section 10 of the Plan, shall be subject to the same conditions and restrictions as the Shares with respect to which they were issued, including, without limitation, the Vesting Schedule set forth in the Notice, and the Repurchase Right and retained in escrow in the same manner as the Shares with respect to which they relate. The Grantee shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Grantee may not direct the Company to sell any such warrant or option. If Additional Securities consist of a convertible security, the Grantee may exercise any conversion right, and any securities so acquired shall constitute Additional Securities. Appropriate adjustments to reflect the distribution of Additional Securities shall be made to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Company's capital structure. In the event of any change in certificates evidencing the Shares or the Additional Securities by reason of any recapitalization, reorganization or other transaction that results in the creation of Additional Securities, the escrow holder is authorized to deliver to the issuer the certificates evidencing the Shares or the Additional Securities in exchange for the certificates of the replacement securities. 14. Distributions. Subject to Section 10(e) and Section 13, the Company shall disburse to the Grantee all regular cash dividends with respect to the Shares and Additional Securities (whether vested or not), less any applicable withholding obligations. 15. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Option Agreement, the Notice, the Plan or the Program, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 16. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Option Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 17. Special Tax Election for Exercise of Option Subject to Forfeiture/Tax Consequences. Set forth below is a brief summary as of the date of this Option Agreement of some of the federal tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. 5 (a) Section 83 (b) Election For Exercise of Non-Qualified Stock Option Subject to Vesting. If the Shares are acquired hereunder pursuant to the exercise of a Non-Qualified Stock Option that has not vested pursuant to the Vesting Schedule set forth in the Notice, then the Grantee understands that under Code Section 83, the excess of the Fair Market Value of the Shares on the date any forfeiture restrictions applicable to the Shares lapse over the Exercise Price paid for the Shares will be reportable as ordinary income on the lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Company to repurchase the Shares pursuant to the Repurchase Right provided under Section 10. The Grantee understands that he/she may elect under Code Section 83(b) to be taxed at the time the Shares are acquired hereunder, rather than when and as the Shares cease to be subject to the forfeiture restrictions. Such election (the "83(b) Election") must be filed with the Internal Revenue Service within thirty (30) days after the date Shares are acquired upon exercise of the Option. Even if the Fair Market Value of the Shares on the date the Option is exercised equals the Exercise Price paid (and thus no tax is payable), the 83(b) Election must be made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS 83(b) ELECTION IS ATTACHED AS EXHIBIT C HERETO. THE GRANTEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY THE GRANTEE AS THE FORFEITURE RESTRICTIONS LAPSE. (b) FILING RESPONSIBILITY. THE GRANTEE ACKNOWLEDGES THAT IT IS THE GRANTEE'S SOLE RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY 83(b) ELECTION UNDER CODE SECTION 83(b), EVEN IF THE GRANTEE REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF. (c) Exercise of Vested Non-Qualified Stock Option. If pursuant to the Vesting Schedule set forth in the Notice, the Shares acquired upon exercise of the Option are not subject to any forfeiture restrictions, the Grantee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If the Grantee is a former Employee, the Company will be required to withhold from the Grantee's compensation or collect from the Grantee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of a Non-Qualified Stock Option, if Shares are held for more than one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes and subject to tax at a maximum rate of 20%. 18. Entire Agreement: Governing Law. The Notice, the Plan, the Program and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. 6 Nothing in the Notice, the Plan, the Program and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan, the Program and this Option Agreement are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan, the Program or this Option Agreement be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 19. Headings. The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. 20. Dispute Resolution The provisions of this Section 20 shall be the exclusive means of resolving disputes arising out of or relating to the Notice, the Plan, the Program and this Option Agreement. The Company, the Grantee, and the Grantee's assignees pursuant to Section 8 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Notice, the Plan, the Program and this Option Agreement by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan, the Program or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in the Santa Clara County Superior Court) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such courts. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 20 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 21. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice), with postage and fees prepaid, addressed to the other party at its address as shown beneath its signature in the Notice, or to such other address as such party may designate in writing from time to time to the other party. 7 EXHIBIT A STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN EXERCISE NOTICE Stratex Networks, Inc. 170 Rose Orchard Way San Jose, California 95134 Attention: Secretary 1. Exercise of Option. Effective as of today, ______________, ___ the undersigned (the "Grantee") hereby elects to exercise the Grantee's option to purchase ___________ shares of the Common Stock (the "Shares") of Stratex Networks, Inc. (the "Company") under and pursuant to the Company's 2002 Stock Incentive Plan, the Company's 2002 Non-Employee Director Option Program (the "Program"), as amended from time to time, and the Non-Qualified Stock Option Award Agreement (the "Option Agreement") and Notice of Non-qualified Stock Option Award (the "Notice") dated ______________, ________. Unless otherwise defined herein, the terms defined in the Plan and the Program shall have the same defined meanings in this Exercise Notice. 2. Representations of the Grantee. The Grantee acknowledges that the Grantee has received, read and understood the Notice, the Plan, the Program and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 8 of the Plan. The Grantee shall enjoy rights as a stockholder until such time as the Grantee disposes of the Shares or the Company and/or its assignee(s) exercises the Repurchase Right. Upon such exercise, the Grantee shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of the Option Agreement, and the Grantee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation. 4. Delivery of Payment. The Grantee herewith delivers to the Company the full Exercise Price for the Shares, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d) of the Option Agreement. 1 5. Tax Consultation. The Grantee understands that the Grantee may suffer adverse tax consequences as a result of the Grantee's purchase or disposition of the Shares. The Grantee represents that the Grantee has consulted with any tax consultants the Grantee deems advisable in connection with the purchase or disposition of the Shares and that the Grantee is not relying on the Company for any tax advice 6. Tax Election; Taxes. The Grantee shall provide the Company with a copy of any timely filed 83(b) Election relating to the purchase of the Shares. If the Grantee makes a timely 83(b) Election, the Grantee shall immediately pay the Company (or the Related Entity to which the Grantee provides service) the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding obligations. If the Grantee does not make a timely 83(b) Election, the Grantee shall, either at the time that the restrictions lapse under the Option Agreement, the Program and the Plan or at the time withholding is otherwise required by Applicable Law, pay the Company (or the Related Entity to which the Grantee provides service) the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding obligations. In addition, the Grantee agrees to satisfy all other applicable federal, state and local income and employment tax withholding obligations and herewith delivers to the Company the full amount of such obligations or has made arrangements acceptable to the Company to satisfy such obligations. 7. Restrictive Legends. The Grantee understands and agrees that the Company shall cause the legend set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A REPURCHASE RIGHT HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND REPURCHASE RIGHT ARE BINDING ON TRANSFEREES OF THESE SHARES. 8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this agreement shall inure to the benefit of the successors and assigns of the Company. This Exercise Notice shall be binding upon the Grantee and his or her heirs, executors, administrators, successors and assigns. 9. Headings. The captions used in this Exercise Notice are inserted for convenience and shall not be deemed a part of this agreement for construction or interpretation. 10. Dispute Resolution. The provisions of Section 20 of the Option Agreement shall be the exclusive means of resolving disputes arising out of or relating to this Exercise Notice. 2 11. Governing Law; Severability. This Exercise Notice is to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 12. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice) with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 13. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 14. Entire Agreement. The Notice, the Plan, the Program, and the Option Agreement are incorporated herein by reference, and together with this Exercise Notice constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan, the Program, the Option Agreement and this Exercise Notice (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. Submitted by: Accepted by: GRANTEE: STRATEX NETWORKS, INC. By: _______________________________ ___________________________ Title: ____________________________ (Signature) Address: Address: ___________________________ 170 Rose Orchard Way San Jose, California 95134 ___________________________ 3 EXHIBIT B STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE [PLEASE SIGN THIS DOCUMENT BUT DO NOT DATE IT. THE DATE AND INFORMATION OF THE TRANSFEREE WILL BE COMPLETED IF AND WHEN THE SHARES ARE ASSIGNED.] FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers unto _______________________, __________________ (____) shares of the Common Stock Stratex Networks, Inc., a Delaware corporation (the "Company"), standing in his name on the books of, represented by Certificate No. ____ herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer the said stock in the books of the Company with full power of substitution. DATED: ________________ ___________________________________ The undersigned spouse of ____________________ joins in this assignment. Dated: ___________________ ___________________________________ (Spouse of _____________ 1 EXHIBIT C ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the Internal Revenue Code, to include in gross income for 20__ the amount of any compensation taxable in connection with the taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are: TAXPAYER'S NAME: SPOUSE'S NAME: TAXPAYER'S SOCIAL SECURITY NO.: SPOUSE'S SOCIAL SECURITY NO.: TAXABLE YEAR: Calendar Year 20__ ADDRESS: 2. The property which is the subject of this election is __________ shares of common stock of Stratex Networks, Inc. 3. The property was transferred to the undersigned on ____________, 20__. 4. The property is subject to the following restriction: the right of repurchase of the shares of common stock by Stratex Networks, Inc. or its successor or assigns upon the cessation of service with Stratex Networks, Inc. or its successor or assigns prior to the lapse of the designated restriction period. The repurchase price shall be the lower of the original purchase price or the fair market value of the shares on the repurchase date. 5. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is: $_______ per share x ________ shares = $___________. 6. The undersigned paid $______ per share x _________ shares for the property transferred or a total of $______________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The undersigned taxpayer is the person performing the services in connection with the transfer of said property. 2 The undersigned will file this election with the Internal Revenue Service office to which he files his annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his income tax return for the taxable year in which the property is transferred. The undersigned understands that this election will also be effective as an election under _____________ law. Dated: _____________________________ ___________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: _____________________________ ___________________________________ Spouse of Taxpayer 3 STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN NOTICE OF STOCK OPTION AWARD [PER PLAN, ACCELERATION FOR NON-OFFICERS UNLESS ASSUMED - REMOVE THIS] Grantee's Name and Address: ___________________________________ ___________________________________ ___________________________________ You have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the "Notice"), the Stratex Networks, Inc. 2002 Stock Incentive Plan, as amended from time to time (the "Plan") and the Stock Option Award Agreement (the "Option Agreement") attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice. Award Number ___________________________________ Date of Award ___________________________________ Vesting Commencement Date ___________________________________ Exercise Price per Share $__________________________________ Total Number of Shares subject to the Option ___________________________________ Total Exercise Price $__________________________________ Type of Option: ________ Incentive Stock Option ________ Non-Qualified Stock Option Expiration Date: ___________________________________ Post-Termination Exercise Period: Three (3) Months Vesting Schedule: Subject to Grantee's Continuous Service and other limitations set forth in this Notice, the Plan and the Option Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and an additional 25% of the Shares subject to the Option shall vest on each yearly anniversary of the Vesting Commencement Date thereafter. During any authorized leave of absence, the vesting of the Option as provided in this schedule shall be suspended after the leave of absence exceeds a period of ninety (90) days. Vesting of the Option shall resume upon the Grantee's termination of the leave of absence and return to service to the Company or a Related Entity. The Vesting Schedule of the Option shall be extended by the length of the suspension. 4 In the event of the Grantee's change in status from Employee to Consultant or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Option shall continue only to the extent determined by the Administrator as of such change in status. In the event of termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Option shall terminate concurrently with the termination of the Grantee's Continuous Service. IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Option Agreement. Stratex Networks, Inc., a Delaware corporation By: _______________________________ Title: ____________________________ THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE'S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF GRANTEE'S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE'S RIGHT OR THE RIGHT OF THE GRANTEE'S EMPLOYER TO TERMINATE GRANTEE'S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, GRANTEE'S STATUS IS AT WILL. The Grantee acknowledges receipt of a copy of the Plan and the Option Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Grantee hereby agrees that all disputes arising out of or relating to this Notice, the Plan and the Option Agreement shall be resolved in accordance with Section 15 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice. Dated: ______________________ Signed: ___________________________ Grantee 5 AWARD NUMBER: ___________ STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN STOCK OPTION AWARD AGREEMENT 1. Grant of Option. Stratex Networks, Inc., a Delaware corporation (the "Company"), hereby grants to the Grantee (the "Grantee") named in the Notice of Stock Option Award (the "Notice"), an option (the "Option") to purchase the Total Number of Shares of Common Stock subject to the Option (the "Shares") set forth in the Notice, at the Exercise Price per Share set forth in the Notice (the "Exercise Price") subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the "Option Agreement") and the Company's 2002 Stock Incentive Plan, as amended from time to time (the "Plan"), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded. 2. Exercise of Option. (a) Right to Exercise. The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of Section 11 of the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction or Change in Control. No partial exercise of the Option may be for less than the lesser of five percent (5%) of the total number of Shares subject to the Option or the remaining number of Shares subject to the Option. The Grantee shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Administrator. In no event shall the Company issue fractional Shares. (b) The Option shall be exercisable only by delivery of an exercise notice (a form of which is attached as Exhibit A) or by other such procedure as specified from time to time by the Administrator which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The exercise notice shall be signed by the Grantee and shall be delivered in person, by certified mail, or by such other method (including 1 electronic transmission) as determined from time to time by the Administrator to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below. (c) Taxes. No Shares will be delivered to the Grantee or other person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income and employment tax withholding obligations, including, without limitation, such other tax obligations of the Grantee incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of the Option, the Company or the Grantee's employer may offset or withhold (from any amount owed by the Company or the Grantee's employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer's withholding obligations. 3. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (a) cash; (b) check; (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price); or (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. 4. Restrictions on Exercise. The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws. In addition, the Option, if an Incentive Stock Option, may not be exercised until such time as the Plan has been approved by the stockholders of the Company. 2 5. Termination or Change of Continuous Service. In the event the Grantee's Continuous Service terminates, other than for Cause, the Grantee may, but only during the Post-Termination Exercise Period, exercise the portion of the Option that was vested at the date of such termination (the "Termination Date"). In the event of termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Option shall, except as otherwise determined by the Administrator, terminate concurrently with the termination of the Grantee's Continuous Service (also the "Termination Date"). In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Grantee's change in status from Employee, Director or Consultant to any other status of Employee, Director or Consultant, the Option shall remain in effect and, except to the extent otherwise determined by the Administrator, continue to vest; provided, however, with respect to any Incentive Stock Option that shall remain in effect after a change in status from Employee to Director or Consultant, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change in status. Except as provided in Sections 6 and 7 below, to the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate. 6. Disability of Grantee. In the event the Grantee's Continuous Service terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the portion of the Option that was vested on the Termination Date; provided, however, that if such Disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. 7. Death of Grantee. In the event of the termination of the Grantee's Continuous Service as a result of his or her death, or in the event of the Grantee's death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee's termination of Continuous Service as a result of his or her Disability, the Grantee's estate, or a person who acquired the right to exercise the Option by bequest or inheritance, may exercise the portion of the Option that was vested at the date of termination, within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate. 8. Transferability of Option. The Option, if an Incentive Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Grantee only by the Grantee. The Option, if a Non-Qualified Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution, provided, however, that a Non-Qualified Stock Option may be transferred to members of the Grantee's Immediate Family to the extent and in the manner 3 authorized by the Administrator. The terms of the Option shall be binding upon the executors, administrators, heirs and successors of the Grantee. 9. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Option Agreement, the Notice or the Plan, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 10. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Option Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 11. Term of Option. The Option may be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. 12. Tax Consequences. Set forth below is a brief summary as of the date of this Option Agreement of some of the federal tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Incentive Stock Option. If the Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as income for purposes of the alternative minimum tax for federal tax purposes and may subject the Grantee to the alternative minimum tax in the year of exercise. However, the Internal Revenue Service issued proposed regulations which would subject the Grantee to withholding at the time the Grantee exercises an Incentive Stock Option for Social Security and Medicare taxes based upon the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. These proposed regulations are subject to further modification by the Internal Revenue Service and, if adopted, would be effective only for the exercise of Incentive Stock Options on or after January 1, 2003. (b) Exercise of Incentive Stock Option Following Disability. If the Grantee's Continuous Service terminates as a result of Disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Grantee must exercise an Incentive Stock Option within three (3) months of such termination for the Incentive Stock Option to be qualified as an Incentive Stock Option. (c) Exercise of Non-Qualified Stock Option. On exercise of a Non-Qualified Stock Option, the Grantee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If the Grantee is an Employee or a former Employee, the Company will be required to withhold from the Grantee's compensation or collect 4 from the Grantee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of a Non-Qualified Stock Option, if Shares are held for more than one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes and subject to tax at a maximum rate of 20%. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for more than one year after receipt of the Shares and are disposed more than two years after the Date of Award, any gain realized on disposition of the Shares also will be treated as capital gain for federal income tax purposes and subject to the same tax rates and holding periods that apply to Shares acquired upon exercise of a Non-Qualified Stock Option. If Shares purchased under an Incentive Stock Option are disposed of prior to the expiration of such one-year or two-year periods, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. 13. Entire Agreement: Governing Law. The Notice, the Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Option Agreement are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Option Agreement be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 14. Headings. The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. 15. Dispute Resolution The provisions of this Section 15 shall be the exclusive means of resolving disputes arising out of or relating to the Notice, the Plan and this Option Agreement. The Company, the Grantee, and the Grantee's assignees pursuant to Section 8 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Notice, the Plan and this Option Agreement by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to 5 resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in the Santa Clara County Superior Court) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 15 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 16. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice), with postage and fees prepaid, addressed to the other party at its address as shown beneath its signature in the Notice, or to such other address as such party may designate in writing from time to time to the other party. 6 EXHIBIT A STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN EXERCISE NOTICE Stratex Networks, Inc. 170 Rose Orchard Way San Jose, California 95134 Attention: Secretary 1. Exercise of Option. Effective as of today, ______________, ___ the undersigned (the "Grantee") hereby elects to exercise the Grantee's option to purchase ___________ shares of the Common Stock (the "Shares") of Stratex Networks, Inc. (the "Company") under and pursuant to the Company's 2002 Stock Incentive Plan, as amended from time to time (the "Plan") and the [ ] Incentive [ ] Non-Qualified Stock Option Award Agreement (the "Option Agreement") and Notice of Stock Option Award (the "Notice") dated ______________, ________. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Exercise Notice. 2. Representations of the Grantee. The Grantee acknowledges that the Grantee has received, read and understood the Notice, the Plan, and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. 4. Delivery of Payment. The Grantee herewith delivers to the Company the full Exercise Price for the Shares, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d) of the Option Agreement. 5. Tax Consultation. The Grantee understands that the Grantee may suffer adverse tax consequences as a result of the Grantee's purchase or disposition of the Shares. The Grantee represents that the Grantee has consulted with any tax consultants the Grantee deems advisable in connection with the purchase or disposition of the Shares and that the Grantee is not relying on the Company for any tax advice 6. Taxes. The Grantee agrees to satisfy all applicable federal, state and local income and employment tax withholding obligations and herewith delivers to the Company the full amount of such obligations or has made arrangements acceptable to the Company to satisfy such 7 obligations. In the case of an Incentive Stock Option, the Grantee also agrees, as partial consideration for the designation of the Option as an Incentive Stock Option, to notify the Company in writing within thirty (30) days of any disposition of any shares acquired by exercise of the Option if such disposition occurs within two (2) years from the Date of Award or within one (1) year from the date the Shares were transferred to the Grantee. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such an early disposition, the Grantee agrees to satisfy the amount of such withholding in a manner that the Administrator prescribes. 7. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this agreement shall inure to the benefit of the successors and assigns of the Company. This Exercise Notice shall be binding upon the Grantee and his or her heirs, executors, administrators, successors and assigns. 8. Headings. The captions used in this Exercise Notice are inserted for convenience and shall not be deemed a part of this agreement for construction or interpretation. 9. Dispute Resolution. The provisions of Section 15 of the Option Agreement shall be the exclusive means of resolving disputes arising out of or relating to this Exercise Notice. 10. Governing Law; Severability. This Exercise Notice is to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice) with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 13. Entire Agreement. The Notice, the Plan, and the Option Agreement are incorporated herein by reference, and together with this Exercise Notice constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan, the 8 Option Agreement and this Exercise Notice (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. Submitted by: Accepted by: GRANTEE: STRATEX NETWORKS, INC. By: _________________________________ ____________________________________ Title: ______________________________ (Signature) Address: Address: ____________________________________ 170 Rose Orchard Way ____________________________________ San Jose, California 95134 9 STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN NOTICE OF STOCK OPTION AWARD [DOUBLE TRIGGER ACCELERATION FOR OFFICERS - REMOVE THIS] Grantee's Name and Address: __________________________________________ __________________________________________ __________________________________________ You have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the "Notice"), the Stratex Networks, Inc. 2002 Stock Incentive Plan, as amended from time to time (the "Plan") and the Stock Option Award Agreement (the "Option Agreement") attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice. Award Number ___________________________________ Date of Award ___________________________________ Vesting Commencement Date ___________________________________ Exercise Price per Share $__________________________________ Total Number of Shares subject to the Option ___________________________________ Total Exercise Price $__________________________________ Type of Option: _________ Incentive Stock Option _________ Non-Qualified Stock Option Expiration Date: ___________________________________ Post-Termination Exercise Period: Three (3) Months Vesting Schedule: Subject to Grantee's Continuous Service and other limitations set forth in this Notice, the Plan and the Option Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and an additional 25% of the Shares subject to the Option shall vest on each yearly anniversary of the Vesting Commencement Date thereafter. During any authorized leave of absence, the vesting of the Option as provided in this schedule shall be suspended after the leave of absence exceeds a period of ninety (90) days. Vesting of the Option shall resume upon the Grantee's termination of the leave of absence and return to service to the Company or a Related Entity. The Vesting Schedule of the Option shall be extended by the length of the suspension. 10 In the event of the Grantee's change in status from Employee to Consultant or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Option shall continue only to the extent determined by the Administrator as of such change in status. In the event of termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Option shall terminate concurrently with the termination of the Grantee's Continuous Service. IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Option Agreement. Stratex Networks, Inc., a Delaware corporation By: _______________________________________________ Title: ____________________________________________ THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE'S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF GRANTEE'S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE'S RIGHT OR THE RIGHT OF THE GRANTEE'S EMPLOYER TO TERMINATE GRANTEE'S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, GRANTEE'S STATUS IS AT WILL. The Grantee acknowledges receipt of a copy of the Plan and the Option Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Grantee hereby agrees that all disputes arising out of or relating to this Notice, the Plan and the Option Agreement shall be resolved in accordance with Section 16 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice. Dated: ______________________ Signed: ________________________________ Grantee 11 AWARD NUMBER: ___________ STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN STOCK OPTION AWARD AGREEMENT 1. Grant of Option. Stratex Networks, Inc., a Delaware corporation (the "Company"), hereby grants to the Grantee (the "Grantee") named in the Notice of Stock Option Award (the "Notice"), an option (the "Option") to purchase the Total Number of Shares of Common Stock subject to the Option (the "Shares") set forth in the Notice, at the Exercise Price per Share set forth in the Notice (the "Exercise Price") subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the "Option Agreement") and the Company's 2002 Stock Incentive Plan, as amended from time to time (the "Plan"), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded. 2. Exercise of Option. (a) Right to Exercise. The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of Section 3 relating to the exercisability or termination of the Option in the event of a Corporate Transaction or Change in Control. No partial exercise of the Option may be for less than the lesser of five percent (5%) of the total number of Shares subject to the Option or the remaining number of Shares subject to the Option. The Grantee shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Administrator. In no event shall the Company issue fractional Shares. (b) Method of Exercise. The Option shall be exercisable only by delivery of an exercise notice (a form of which is attached as Exhibit A) or by other such procedure as specified from time to time by the Administrator which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The exercise notice shall be signed by the Grantee and shall be delivered in person, by certified mail, or by such other 1 method (including electronic transmission) as determined from time to time by the Administrator to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 4(d), below. (c) Taxes. No Shares will be delivered to the Grantee or other person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income and employment tax withholding obligations, including, without limitation, such other tax obligations of the Grantee incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of the Option, the Company or the Grantee's employer may offset or withhold (from any amount owed by the Company or the Grantee's employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer's withholding obligations. 3. Corporate Transactions/Changes in Control. (a) Termination of Option to Extent Not Assumed Upon a Corporate Transaction. Effective upon the consummation of a Corporate Transaction, this Option shall terminate. However, this Option shall not terminate to the extent it is Assumed in connection with the Corporate Transaction. (b) Acceleration of Option Upon Corporate Transaction/Change in Control. (i) Corporate Transaction. In the event of a Corporate Transaction and: (A) for the portion of this Option that is Assumed or Replaced, the Option (if Assumed), the replacement Option (if Replaced), or the cash incentive program (if Replaced) automatically shall become fully vested, exercisable and payable for all of the Shares at the time represented by such Assumed or Replaced portion of this Option, immediately upon termination of the Grantee's Continuous Service (substituting the successor employer corporation, if any, for "Company or Related Entity" for the definition of "Continuous Service") if such Continuous Service is terminated by the successor company or the Company without Cause or voluntarily by the Grantee with Good Reason within eighteen (18) months of the Corporate Transaction; and (B) for the portion of this Option that is neither Assumed nor Replaced, such portion of the Option shall automatically become fully vested and exercisable for all of the Shares at the time represented by such portion of the Option, immediately prior to the specified effective date of the Corporate Transaction. (ii) Change in Control. Following a Change in Control (other than a Change in Control which also is a Corporate Transaction) and upon the termination of the Continuous Service of a Grantee if such Continuous Service is terminated by the Company or Related Entity without Cause or voluntarily by the Grantee with Good Reason within eighteen (18)months of a Change in Control, the outstanding Option shall automatically become fully 2 vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at fair market value), immediately upon the termination of such Continuous Service. (c) Disclaimer of Accelerated Vesting. In the event that vesting is to occur earlier than provided in the Vesting Schedule as a result of the application of this Section 3 (the "Accelerated Vesting"), the Grantee may, prior to the date on which the Accelerated Vesting is to occur, disclaim some or all of the Accelerated Vesting to the extent that the Accelerated Vesting would result in any payment or benefit (within the meaning of Section 280G(b)(2) of the Code) to the Grantee that would be subject to the excise tax imposed by Section 4999 of the Code. To disclaim such Accelerated Vesting, the Grantee must provide notice of the disclaimer to the Company in a form that is acceptable to the Administrator. (d) The portion of the Option, if an Incentive Stock Option, accelerated under this Section 3 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the extent such dollar limitation is exceeded, the accelerated excess portion of the Option shall be exercisable as a Non-Qualified Stock Option. 4. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (a) cash; (b) check; (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price); or (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. 5. Restrictions on Exercise. The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable 3 Laws. In addition, the Option, if an Incentive Stock Option, may not be exercised until such time as the Plan has been approved by the stockholders of the Company. 6. Termination or Change of Continuous Service. In the event the Grantee's Continuous Service terminates, other than for Cause, the Grantee may, but only during the Post-Termination Exercise Period, exercise the portion of the Option that was vested at the date of such termination (the "Termination Date"). In the event of termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Option shall, except as otherwise determined by the Administrator, terminate concurrently with the termination of the Grantee's Continuous Service (also the "Termination Date"). In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Grantee's change in status from Employee, Director or Consultant to any other status of Employee, Director or Consultant, the Option shall remain in effect and, except to the extent otherwise determined by the Administrator, continue to vest; provided, however, with respect to any Incentive Stock Option that shall remain in effect after a change in status from Employee to Director or Consultant, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change in status. Except as provided in Sections 7 and 8 below, to the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate. 7. Disability of Grantee. In the event the Grantee's Continuous Service terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the portion of the Option that was vested on the Termination Date; provided, however, that if such Disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. 8. Death of Grantee. In the event of the termination of the Grantee's Continuous Service as a result of his or her death, or in the event of the Grantee's death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee's termination of Continuous Service as a result of his or her Disability, the Grantee's estate, or a person who acquired the right to exercise the Option by bequest or inheritance, may exercise the portion of the Option that was vested at the date of termination, within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate. 9. Transferability of Option. The Option, if an Incentive Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Grantee only by the Grantee. The Option, if a Non-Qualified Stock Option, may not be transferred in any manner other than by will or by the laws 4 of descent and distribution, provided, however, that a Non-Qualified Stock Option may be transferred to members of the Grantee's Immediate Family to the extent and in the manner authorized by the Administrator. The terms of the Option shall be binding upon the executors, administrators, heirs and successors of the Grantee. 10. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Option Agreement, the Notice or the Plan, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 11. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Option Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 12. Term of Option. The Option may be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. 13. Tax Consequences. Set forth below is a brief summary as of the date of this Option Agreement of some of the federal tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Incentive Stock Option. If the Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as income for purposes of the alternative minimum tax for federal tax purposes and may subject the Grantee to the alternative minimum tax in the year of exercise. However, the Internal Revenue Service issued proposed regulations which would subject the Grantee to withholding at the time the Grantee exercises an Incentive Stock Option for Social Security and Medicare taxes based upon the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. These proposed regulations are subject to further modification by the Internal Revenue Service and, if adopted, would be effective only for the exercise of Incentive Stock Options on or after January 1, 2003. (b) Exercise of Incentive Stock Option Following Disability. If the Grantee's Continuous Service terminates as a result of Disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Grantee must exercise an Incentive Stock Option within three (3) months of such termination for the Incentive Stock Option to be qualified as an Incentive Stock Option. (c) Exercise of Non-Qualified Stock Option. On exercise of a Non-Qualified Stock Option, the Grantee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on 5 the date of exercise over the Exercise Price. If the Grantee is an Employee or a former Employee, the Company will be required to withhold from the Grantee's compensation or collect from the Grantee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of a Non-Qualified Stock Option, if Shares are held for more than one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes and subject to tax at a maximum rate of 20%. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for more than one year after receipt of the Shares and are disposed more than two years after the Date of Award, any gain realized on disposition of the Shares also will be treated as capital gain for federal income tax purposes and subject to the same tax rates and holding periods that apply to Shares acquired upon exercise of a Non-Qualified Stock Option. If Shares purchased under an Incentive Stock Option are disposed of prior to the expiration of such one-year or two-year periods, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. 14. Entire Agreement: Governing Law. The Notice, the Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Option Agreement are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Option Agreement be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 15. Headings. The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. 16. Dispute Resolution The provisions of this Section 16 shall be the exclusive means of resolving disputes arising out of or relating to the Notice, the Plan and this Option Agreement. The Company, the Grantee, and the Grantee's assignees pursuant to Section 9 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Notice, the Plan and this Option Agreement by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will 6 represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in the Santa Clara County Superior Court) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 16 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 17. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice), with postage and fees prepaid, addressed to the other party at its address as shown beneath its signature in the Notice, or to such other address as such party may designate in writing from time to time to the other party. 7 EXHIBIT A STRATEX NETWORKS, INC. 2002 STOCK INCENTIVE PLAN EXERCISE NOTICE Stratex Networks, Inc. 170 Rose Orchard Way San Jose, California 95134 Attention: Secretary 1. Exercise of Option. Effective as of today, ______________, ___ the undersigned (the "Grantee") hereby elects to exercise the Grantee's option to purchase ___________ shares of the Common Stock (the "Shares") of Stratex Networks, Inc. (the "Company") under and pursuant to the Company's 2002 Stock Incentive Plan, as amended from time to time (the "Plan") and the [ ] Incentive [ ] Non-Qualified Stock Option Award Agreement (the "Option Agreement") and Notice of Stock Option Award (the "Notice") dated ______________, ________. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Exercise Notice. 2. Representations of the Grantee. The Grantee acknowledges that the Grantee has received, read and understood the Notice, the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. 4. Delivery of Payment. The Grantee herewith delivers to the Company the full Exercise Price for the Shares, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 4(d) of the Option Agreement. 5. Tax Consultation. The Grantee understands that the Grantee may suffer adverse tax consequences as a result of the Grantee's purchase or disposition of the Shares. The Grantee represents that the Grantee has consulted with any tax consultants the Grantee deems advisable in connection with the purchase or disposition of the Shares and that the Grantee is not relying on the Company for any tax advice 6. Taxes. The Grantee agrees to satisfy all applicable federal, state and local income and employment tax withholding obligations and herewith delivers to the Company the full amount of such obligations or has made arrangements acceptable to the Company to satisfy such obligations. In the case of an Incentive Stock Option, the Grantee also agrees, as partial consideration for the designation of the Option as an Incentive Stock Option, to notify the Company in writing within thirty (30) days of any disposition of any shares acquired by exercise of the Option if such disposition occurs within two (2) years from the Date of Award or within one (1) year from the date the Shares were transferred to the Grantee. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such an early disposition, the Grantee agrees to satisfy the amount of such withholding in a manner that the Administrator prescribes. 7. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this agreement shall inure to the benefit of the successors and assigns of the Company. This Exercise Notice shall be binding upon the Grantee and his or her heirs, executors, administrators, successors and assigns. 8. Headings. The captions used in this Exercise Notice are inserted for convenience and shall not be deemed a part of this agreement for construction or interpretation. 9. Dispute Resolution. The provisions of Section 16 of the Option Agreement shall be the exclusive means of resolving disputes arising out of or relating to this Exercise Notice. 10. Governing Law; Severability. This Exercise Notice is to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice) with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 13. Entire Agreement. The Notice, the Plan, and the Option Agreement are incorporated herein by reference, and together with this Exercise Notice constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan, the Option Agreement and this Exercise Notice (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. Submitted by: Accepted by: GRANTEE: STRATEX NETWORKS, INC. By: _________________________________ ____________________________________ Title: ______________________________ (Signature) Address: Address: ____________________________________ 170 Rose Orchard Way San Jose, California 95134 ____________________________________ EX-13.1 8 f89373exv13w1.txt EXHIBIT 13.1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussions in this Annual Report should be read in conjunction with our accompanying Financial Statements and the related notes thereto. This Annual Report on Form 10-K contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements included or incorporated by reference in this Annual Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions also identify forward looking statements. The forward looking statements in this Annual Report are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements and include, without limitation, statements regarding: - - Our expectation to adjust facilities lease loss reserves in future periods, if necessary, based upon actual events and circumstances; - - Our plan to pay out in cash the remaining restructuring accrual balance as of March 31, 2003 of $24.2 million over several years; - - Our expectation that $6.3 million of the remaining restructuring accrual balance ($1.5 million of severance and benefits, $0.2 million of legal costs and $4.6 million of vacated building lease obligations) will be paid out in fiscal 2004; - - Our anticipation that further vacated building lease obligations of $17.9 million will be paid out during fiscal 2005 through fiscal 2012; - - Our estimation that the warranty accrual is adequate; - - Our expectation that the adoption of SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" will not have a material impact on our financial position or results of operations; - - Our estimation that under certain circumstances the facilities lease losses for our facilities in Seattle, Washington, San Jose, California and Coventry, United Kingdom could increase; - - Our belief that we have the financial resources needed to meet our business requirements for at least the next 12 months; - - Our expectation that we will not experience material exchange rate gains and losses from unhedged foreign currency exposures; - - Our belief that we maintain adequate reserves to cover exposure for doubtful accounts; - - Our expectation not to utilize our revolving credit facility with a bank in fiscal 2004 based on our current business plan; - - Our expectation that net sales for fiscal 2004 will decline about 10-15% from the net sales level achieved in fiscal 2003; - - Our expectation that gross profit in fiscal 2004 will be slightly lower than fiscal 2003 due to competitive pricing pressures; - - Our plan to release our new product, Eclipse(TM), towards the end of calendar year 2003; - - Our expectation that research and development expenses will be slightly higher in fiscal 2004 as compared to fiscal 2003 due to the planned release of our new product, Eclipse(TM), towards the end of calendar year 2003; - - Our anticipation that adjustments to the facilities losses reserve will be made in future periods, if necessary, based upon the current actual events and circumstances; - - Our belief that SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized; - - Our belief it is more likely than not that we will not fully realize benefits from deferred tax assets that may expire or go unutilized. Page 1 of 49 - - Our expectation that our selling, general and administrative expenses will decrease in fiscal 2004 as a result of the fiscal 2003 cost reduction measures. All forward looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or statements. The reader should also consult the cautionary statements and risk factors listed in this Annual Report and those listed from time to time in our Reports on Forms 10-Q and 8-K, including those contained in the section, "Factors That May Affect Future Financial Results," beginning on page 16 in this Annual Report, in evaluating these forward-looking statements. OVERVIEW We design, manufacture, and market advanced wireless solutions for worldwide mobile and fixed telephone network interconnection and access. Stratex Networks, Inc. was founded in 1984. Since inception, we have shipped over 256,000 microwave radios worldwide. We have equipment installed in over 110 countries, and a significant percentage of our revenue is derived from sales outside the United States. Our revenues from sales of equipment and services outside the United States were 95% in fiscal 2003, 92% in fiscal 2002 and 69% in fiscal 2001. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases their estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUE RECOGNITION. We recognize revenue pursuant to Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. In accordance with SAB 101, revenues from product sales are generally recognized when title and risk of loss passes to the customer, except when product sales are combined with significant post-shipment installation services. Under this exception, revenue is deferred until such services have been performed. Installation service revenue, which is less than 10% of net sales for fiscal 2003, 2002 and 2001, is recognized when the related services are performed. At the time revenue is recognized, we establish an accrual for estimated warranty expenses associated with our sales, recorded as a component of cost of revenue. Our standard warranty is generally for a period of 27 months from the date of sale and our warranty accrual represents our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Warranty accrual is made based on Page 2 of 49 forecasted returns and average cost of repair. Forecasted returns are based on trend of historical returns. Effective April 1, 2003 our standard warranty will be 27 months from date of sale only if the customer uses us or our approved installers to install the products, otherwise it will be 15 months from the date of sale. While we believe that our warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. If our actual warranty costs are greater than the accrual, cost of revenues will increase in the future. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market, where cost includes material, labor, and manufacturing overhead. We regularly monitor inventory quantities on hand and record a provision for excess and obsolete inventories based primarily on our estimated forecast of future product demand and production requirements. Inventory for all product lines in excess of nine months is fully reserved, unless firm backlog exists, and we partially reserve inventory in excess of three months for certain product lines. Included in cost of sales are $0.5 million, $1.3 million and $1.9 million, respectively, for fiscal 2003, 2002 and 2001 inventory provisions. In fiscal 2003, we realized a $2.1 million benefit due to the sale of inventory that had been written off, due primarily to excess inventories not expected to be sold, in periods prior to fiscal year 2003. During fiscal 2002, we recorded additional inventory and other valuation charges of $102.7 million, which consisted of a $9.4 million charge for purchase commitments, a $1.9 million charge for loss on impairment of manufacturing equipment and charges of $91.4 million for the value of excess inventories. This reserve is reflected as a reduction to inventory in the accompanying consolidated balance sheets. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments would significantly impact the value of our inventory and our reported operating results. If actual market conditions are less favorable than our assumptions, additional reserves may be required. 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 our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of revenue at the time of such determination. If our inventory is determined to be undervalued, we may have overstated our cost of revenue in previous periods and would be required to recognize additional operating income at the time of sale. VALUATION OF LONG-LIVED ASSETS. We have adopted Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. We value assets based on the fair value of the asset. During fiscal 2003 we recorded an impairment loss on property and equipment of $4.0 million that was recorded as part of restructuring charges. In addition, in fiscal 2002, we recorded a $1.9 million impairment loss on manufacturing equipment as inventory and other valuation charges. During fiscal 2002, we also recorded an impairment loss of $2.5 million as restructuring charges, which included a $0.4 million loss on impaired goodwill and a $2.1 million impairment loss on property and equipment due to closure of our Seattle, Washington operations. RESTRUCTURING AND IMPAIRMENT CHARGES. In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The Company has adopted the provisions of SFAS 146 for Page 3 of 49 restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Prior to December 31, 2002 we have accounted for restructurings in accordance with EITF 94-3 and SAB No. 100, "Restructuring and Impairment Charges". Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. The restructuring accrual related to vacated properties was calculated net of estimated sublease income we expect to receive once we sublease the properties that have been vacated. To determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents management's estimate of time to sublease and actual sublease rates. Sublease income is estimated based on current market quotes for similar properties. If we are unable to sublease these properties on a timely basis or if we are forced to sublease them at lower rates due to changes in market conditions, we would adjust the accrual accordingly. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject us to concentrations of credit risk consist principally of temporary cash investments and trade receivables. We have cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of investments to financial institutions evaluated as highly creditworthy. Investments, under our policy, must have a rating, at the time of purchase, of A1 or P1 for short-term paper and a rating of A or better for long-term notes or bonds. Accounts receivable concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations may subject us to concentration of credit risk. Our top two customers in net sales for fiscal 2003 were MTN Nigeria Communications Ltd (11%) and Motorola (Thailand) Ltd. (10%). Our top customer in net sales for fiscal 2002 was Beijing Telecom Equipment Factory (15%). No other customer accounted for more than 10% of net sales for fiscal 2003, 2002 and 2001. Two customers accounted for approximately 16% and one customer accounted for approximately 14% of the total accounts receivable balance at March 31, 2003. No other customer accounted for more than 10% of the total accounts receivable balance at March 31, 2003. Three customers accounted for approximately 16%, 15% and 12%, respectively, of the total accounts receivable balance at the end of the fiscal 2002. We actively market and sell products in Africa, Asia, Europe, the Middle East and the Americas. We perform on-going credit evaluations of our customers' financial conditions and generally require no collateral, although sales to Asia, Africa and the Middle East are primarily paid through letters of credit. We maintain a reserve for doubtful accounts, to be used for estimated losses that could result from the inability of our customers to make the required payments. We evaluate our reserve for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. PURCHASE COMMITMENTS. We currently subcontract substantially all of our manufacturing. As of March 31, 2003, we were committed to purchase approximately $24.0 million of inventory from our suppliers over the next five months. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments for long lead-time components with our contract manufacturers. This would be recorded as additional provisions for excess inventory as a component of cost of revenue. Page 4 of 49 RESULTS OF OPERATIONS The following table sets forth the percentage relationships of certain items from our Consolidated Statements of Operations, as a percentage of net sales for the periods indicated:
Years ended March 31, -------------------------------- 2003 2002 2001 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 75.5 80.6 69.1 Inventory valuation charges (benefits) (1.1) 44.9 3.7 ------ ------ ------ Gross profit (loss) 25.6 (25.5) 27.2 Research and development 7.3 8.1 5.7 Selling, general and administrative 29.8 25.6 15.1 Restructuring charges 14.3 8.5 - Receivable valuation charges - 2.2 5.3 ------ ------ ------ Income (loss) from operations (25.8) (69.9) 1.1 Write down of investments and other assets (0.2) (3.5) (3.3) Interest income and other expenses, net (0.1) 0.2 0.8 ------ ------ ------ Loss before provision for income taxes (26.1) (73.2) (1.4) Provision for income taxes - 0.6 0.3 ------ ------ ------ Net loss (26.1)% (73.8)% (1.7)% ------ ------ ------
YEAR ENDED MARCH 31, 2003 COMPARED TO THE YEAR ENDED MARCH 31, 2002 NET SALES. Net sales for fiscal 2003 decreased to $197.7 million, compared to $228.8 million reported in fiscal 2002. This decrease was primarily due to ongoing restrictions over capital spending in the telecommunications and mobile cellular market throughout fiscal 2003. Compared to fiscal 2002, revenues of our DXR(R) and Altium(R) product lines increased while sales of our XP4(TM) and Spectrum(TM) II product lines decreased. Net sales of our DXR product line increased to $36.9 million in fiscal 2003 compared to $29.2 million in fiscal 2002, primarily due to several large projects completed during fiscal 2003. Our Altium(R) product line net sales increased to $49.5 million in fiscal 2003 compared to $46.3 million in fiscal 2002. Our XP4(TM) product line net sales decreased to $76.9 million in fiscal 2003 compared to $87.0 million in fiscal 2002. Net sales of our Spectrum(TM) II product line decreased to $2.5 million in fiscal 2003, from $37.6 million in fiscal 2002, due to the product reaching its planned end of life and being replaced by our XP4(TM) product line. Service and other revenue was $30.7 million in fiscal 2003, compared to $27.3 million in fiscal 2002. Though the product revenue in fiscal 2003 has declined compared to fiscal 2002, service and other revenue has not experienced a comparable decline. This is primarily due to an increase in service contracts and projects as a result of our increased efforts to position ourselves as a complete solutions provider in the market. The decrease in net sales for fiscal 2003 compared to fiscal 2002 occurred in China, Europe, and the North and South America regions due to a continued slowdown in the telecommunications industry and weak economic conditions. However this decline was partially offset by increases in net sales in fiscal 2003 in Thailand, Nigeria, the Middle East and Asia/Pacific regions, primarily because network deployments in those regions were not affected as significantly by the slowdown in the global economy. Net sales to China decreased Page 5 of 49 significantly to $5.9 million in fiscal 2003 compared to $36.8 million in fiscal 2002, primarily due to lower sales to customers in China who are continuing to utilize existing inventory on hand to meet the demands in that region. Net sales to Europe also decreased to $38.4 million in fiscal 2003 from $56.4 million in fiscal 2002, primarily due to ongoing restrictions of capital expenditures by customers in Europe. Net sales to U.S. customers decreased to $10.6 million in fiscal 2003 compared to $17.6 million in fiscal 2002. Net sales to Brazil also decreased to $4.1 million in fiscal 2003 from $19.6 million in fiscal 2002, due to restrictions in spending for one customer in that location. Net sales to Thailand increased to $22.6 million in fiscal 2003 compared to $8.5 million in fiscal 2002 due to several major projects in that country. Net sales to Nigeria increased to $20.7 million in fiscal 2003 from $11.1 million in fiscal 2002 due to increased sales to one customer in that location. Net sales to the Middle East region increased to $29.4 million in fiscal 2003 from $14.8 million in fiscal 2002 due to increased sales to two customers in that region. Net sales in the Other Asia/Pacific region increased to $40.6 million in fiscal 2003 from $28.1 million in fiscal 2002, primarily due to increased sales to several customers in that region. We expect net sales for fiscal 2004 to decline about 10-15% from the net sales level achieved in fiscal 2003. For the year ended March 31, 2003, two of our customers accounted for approximately 11% and 10% of our net sales for the year, respectively and two customers accounted for approximately 25% and 11% of our backlog as of March 31, 2003, respectively. For the year ended March 31, 2002, one of our customers accounted for 15% of our net sales for the year and two customers accounted for 19% and 15% of our backlog as of March 31, 2002, respectively. During fiscal 2003, we received $190.3 million in new orders compared to $258.2 million in fiscal 2002, representing a decrease of approximately 26%. The backlog at March 31, 2003 was $50.1 million compared to $94.1 million at March 31, 2002. Orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. We include in our backlog purchase orders for which a delivery schedule has been specified for product shipment within one year. We review our backlog on an ongoing basis and make adjustments to it as required. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of future sales. GROSS PROFIT (LOSS). Gross profit as a percentage of net sales increased to 25.6% in fiscal 2003 compared to a gross loss of 25.5% in fiscal 2002. The inventory valuation benefit in fiscal 2003 of 1.1% of net sales was due to the sale of inventories, which were written off in the periods prior to fiscal 2003. The inventory valuation charges of 44.9% of net sales taken in fiscal 2002 were to reserve for excess inventory. Excess inventory was calculated by comparing backlog and our order forecast to the inventory quantities on hand to determine the amount of excess inventory at that time. Inventory for all product lines in excess of nine months is fully reserved, unless firm backlog exists, and we partially reserve inventory in excess of three months for certain product lines. The increase in gross margin in fiscal 2003, compared to fiscal 2002, exclusive of inventory valuation benefits or charges mentioned above, was primarily due to lower manufacturing costs which had a positive impact on gross profit of approximately 2.9%. Product mix had a favorable impact on gross profit of approximately 2.2% for fiscal 2003 compared to fiscal 2002. There was no significant impact on gross profit due to pricing during fiscal 2003. We expect gross profit in fiscal 2004 to be slightly lower than fiscal 2003 due to competitive pricing pressures. Page 6 of 49 RESEARCH AND DEVELOPMENT. In fiscal 2003, research and development expenses decreased to $14.4 million from $18.5 million in fiscal 2002. This decrease was due to the consolidation and reduction of our Seattle, Washington research and development operations to our San Jose, California facility and lower material and outside services costs at our San Jose location. As a percentage of net sales, research and development expenses decreased to 7.3% in fiscal 2003 compared to 8.1% in fiscal 2002. We expect research and development expenses to be slightly higher in fiscal 2004 as compared to fiscal 2003 due to the planned release of our new product, Eclipse(TM), towards the end of calendar year 2003. SELLING, GENERAL AND ADMINISTRATIVE. In fiscal 2003, selling, general and administrative expenses increased slightly to $58.9 million from $58.5 million in fiscal 2002. This increase was due to charges of $7.5 million taken for preferential payments claims by trustee attorneys for our prior CLEC customers who declared bankruptcy in a prior year and $7.6 million for agent commissions related to higher sales in South East Asia where agents are used. Offsetting these increases has been a decrease in selling, general and administrative expenses of $14.7 million during fiscal 2003 compared to fiscal 2002, which was a result of reductions in workforce and other cost reduction measures taken in fiscal 2003. As a percentage of net sales, selling, general and administrative expenses increased to 29.8% in fiscal 2003, compared to 25.6% in fiscal 2002, due to the reasons described above. We expect that our selling, general and administrative expenses will decrease in fiscal 2004 as a result of the fiscal 2003 cost reduction measures. RESTRUCTURING CHARGES. In fiscal 2003, we entered into an agreement for outsourcing our San Jose, California manufacturing operations to Microelectronics Technology Inc. ("MTI"), our manufacturing partner in Taiwan. As a result of changes associated with this agreement, as well as other reductions in operating expenses and facilities, we recorded restructuring charges in fiscal 2003. Under the terms of our agreement with MTI for transfer of our manufacturing operations to them, MTI assumed assembly, integration and testing of our Altium product family, as well as assembly and testing of the Outdoor Unit portion of our XP4(TM) product. Under the terms of the agreement, MTI has acquired certain of our manufacturing assets related to the production of the Altium(R) and XP4(TM) product lines. In addition, we have consigned certain inventory associated with these products to MTI, and MTI purchases such inventory as it is utilized in manufacturing. We have retained product design and research and development functions for these products. As a result of the agreement, MTI is our primary manufacturer of Altium(R) and XP4(TM) products. During the third quarter of fiscal 2003, we reduced our workforce and consolidated additional excess facilities. During the fourth quarter of fiscal 2003, we further reduced our workforce by approximately 4% and recorded the related restructuring charges. In connection with the above noted restructuring program, we recorded, in fiscal 2003, restructuring charges of $28.2 million consisting of $3.8 million for employee severance and benefits, $19.0 million for vacated building lease obligations, $0.6 million for legal costs, $3.3 million for transition costs related to outsourcing of our manufacturing operations as mentioned above and $4.0 million as a write off of manufacturing equipment in our San Jose, California location related to the transfer of certain manufacturing operations to MTI. These restructuring costs were reduced by $2.5 million, which represented the amount reimbursable from MTI for the costs relating to the transfer of certain of our manufacturing assets to them in accordance with our joint agreement. The total value of the assets sold to MTI under our agreement was $2.2 million. The severance and benefit charges of $3.8 million taken in fiscal 2003 were for a reduction in workforce by 176 employees, with reductions affecting primarily the manufacturing operations area due to the outsourcing of our San Jose, California manufacturing operations. As of March 31, 2003 all affected employees had been notified and 163 employees were eliminated. Page 7 of 49 During fiscal 2002, the telecommunications industry was severely impacted by the global economic downturn. In response to this downturn, we announced several restructuring programs in fiscal 2002 to reduce expenses and improve operational efficiency. These restructuring programs included consolidation of our U.S. manufacturing operations by relocating our Seattle, Washington operations to our San Jose, California facility, a worldwide reduction in workforce and a consolidation of additional excess facilities. Due to this action, we recorded restructuring charges of $19.6 million during fiscal 2002. These consisted of $8.4 million for employee severance and benefits, $11.2 million for facility-related and other costs (including $8.6 million for vacated building lease obligations, $2.1 million for the loss on impairment of equipment, $0.1 million for legal costs and $0.4 million for the write off of goodwill). There were cumulative cash payments and non-cash expenses against this provision of $7.7 million and $2.5 million, respectively, resulting in an ending provision balance at March 31, 2002 of $9.4 million. The cash payments were related primarily to workforce reduction payments and the non-cash expenses were related primarily to equipment charges. The following table summarizes the balance of the restructuring accrual as of March 31, 2002 and the type and amount of restructuring costs utilized during fiscal 2002 (in millions):
Severance Facilities and Benefits and Other Total ------------- -------------- -------- Balance as of April 1, 2001 $ - $ - $ - Provision 8.4 11.2 19.6 Cash payments (6.1) (1.6) (7.7) Non-cash expenses - (2.5) (2.5) ------ ----- ------ Balance as of March 31, 2002 $ 2.3 $ 7.1 $ 9.4 ====== ===== ====== CURRENT PORTION $ 1.7 $ 1.8 $ 3.5 LONG-TERM PORTION $ 0.6 $ 5.3 $ 5.9
The vacated building lease obligations of $19.0 million and $8.6 million recorded in fiscal 2003 and in fiscal 2002, respectively, included payments required under lease contracts, less estimated sublease income after the property had been abandoned. To determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents management's estimate of time to sublease and actual sublease rates. The following table summarizes the balance of the restructuring accrual as of March 31, 2003 and the type and amount of restructuring costs utilized during fiscal 2003 (in millions):
Severance Facilities and Benefits and Other Total ------------- -------------- --------- Balance as of April 01, 2002 $ 2.3 $ 7.1 $ 9.4 Provision 3.8 24.4 28.2 Cash payments (4.6) (7.3) (11.9) Non-cash expenses - (4.0) (4.0) Reimbursable transition costs - 2.5 2.5 ----- ------ ------ Balance as of March 31, 2003 $ 1.5 $ 22.7 $ 24.2 ===== ====== ====== CURRENT PORTION $ 1.5 $ 4.8 $ 6.3 LONG-TERM PORTION $ - $ 17.9 $ 17.9
Page 8 of 49 The remaining accrual balance of $24.2 million as of March 31, 2003 is expected to be paid out in cash. We expect $6.3 million of the remaining accrual balance ($1.5 million of severance and benefits, $0.2 million of legal costs and $4.6 million of vacated building lease obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $17.9 million to be paid out during fiscal 2005 through fiscal 2012. RECEIVABLE VALUATION CHARGES. In fiscal 2003, we did not record any receivable valuation charges. In fiscal 2002, we had recorded a $5.0 million receivable valuation charge for uncollectible accounts receivable related to our customers in Argentina and Russia. This charge was in addition to recurring bad debt reserves of $1.5 million included in selling, general and administrative expenses on the statement of operations. WRITE DOWN OF INVESTMENTS AND OTHER ASSETS. Impairment losses of $0.4 million were recorded in fiscal 2003 on our equity investments in marketable securities. As of March 31, 2003 we had no equity investments recorded. There were permanent impairment losses of approximately $7.9 million during fiscal 2002 on our equity investments in certain marketable and non-marketable securities. These losses consisted of a $3.4 million loss on our equity investments in marketable securities and a $4.5 million loss on our equity investments in non-marketable securities. We determined that the recorded value for these certain investments exceeded their fair value and that these impairments were other than temporary in nature. Fair value for our publicly traded securities was estimated based upon recent and projected future valuations, taking into account the length of time the investments had previously been held at a loss. Fair value for our privately held investments was estimated using projected financial results and comparisons with other companies in similar industries. INTEREST INCOME AND OTHER EXPENSES, NET. Interest income was $1.7 million in fiscal 2003 compared to $2.5 million in fiscal 2002. The decrease was primarily due to lower interest rates in fiscal 2003 as compared to fiscal 2002. Other expenses of $2.1 million in fiscal 2003 were primarily due to the cost of hedging our foreign currency exposure risk and discounting fees on letters of credit. Other expenses of $2.0 million in fiscal 2002 were primarily due to cost of hedging our foreign currency exposure risk. PROVISION FOR INCOME TAXES. We recorded a small income tax benefit in fiscal 2003. We recorded an income tax provision in each of fiscal 2002 and 2001 primarily related to taxable income at certain of our foreign subsidiaries. YEAR ENDED MARCH 31, 2002 COMPARED TO THE YEAR ENDED MARCH 31, 2001 NET SALES. Net sales for fiscal 2002 decreased to $228.8 million, compared to $417.7 million reported in fiscal 2001. This decrease was due to continued tightening of the capital markets and slowdown in the telecommunications industry throughout fiscal 2002, as well as decreased sales to competitive local exchange carriers ("CLECs") in the United States due to the collapse of the CLEC business. Compared to fiscal 2001, revenues of all product lines have decreased. Our Altium(R) product line net sales experienced a significant decrease to $46.3 million in fiscal 2002, from $109.1 million in fiscal 2001. This decrease was primarily due to customers delaying high capacity needs, in favor of using lower cost mid-capacity products to meet near term needs. Net sales of our Spectrum(TM) II product line decreased to $37.6 million in fiscal 2002 from $104.7 million in fiscal 2001, primarily due to the product continuing towards its planned end of life. Our XP4(TM) product line net sales decreased to $87.0 million in fiscal 2002, from $131.8 million in fiscal 2001. Net sales of our DXR(R) product line decreased to $29.2 million in fiscal 2002 from $35.6 million in fiscal 2001. Service and other revenue was $27.3 million in fiscal 2002, compared to $31.5 million in fiscal 2001. Though the product revenue in fiscal 2002 declined significantly as compared to fiscal 2001, service and other revenue did not experience a comparable decline. This was primarily due to an increase in service contracts and projects as a result of our increased efforts to position ourselves as a complete solutions provider in the market. Page 9 of 49 The decrease in net sales for fiscal 2002 compared to fiscal 2001 occurred across all geographic regions. Net sales to the Americas region decreased significantly to $62.8 million in fiscal 2002 from $214.4 million in fiscal 2001. Net sales to Europe also decreased significantly to $56.4 million in fiscal 2002 from $84.3 million in fiscal 2001. Net sales to the Middle East also decreased to $14.8 million in fiscal 2002 from $17.8 million in fiscal 2001. Net sales to the Asia/Pacific region decreased to $73.4 million in fiscal 2002 from $77.2 million in fiscal 2001. Net sales to Africa in fiscal 2002 decreased to $21.4 million as compared to $24.0 million in fiscal 2001. Net sales to U.S. customers, included in the Americas region, decreased to $17.6 million in fiscal 2002, compared to $130.2 million in fiscal 2001, primarily as a result of decreased sales to CLECs. Net sales to Mexico, included in the Americas region, decreased to $12.3 million in fiscal 2002, compared to $40.5 million in fiscal 2001, primarily due to a decrease in capital expenditures by our customers in that region. Net sales to China, included in the Asia/Pacific region, experienced a slight increase to $36.8 million in fiscal 2002 from $35.4 million in fiscal 2001, primarily because the network deployment in that region was not affected significantly by the slowdown in the global economy. For the year ended March 31, 2002, one of our customers accounted for 15% of our net sales for the year and two customers accounted for 19% and 15% of our backlog as of March 31, 2002, respectively. No customers accounted for more than 10% of our net sales for the year ended March 31, 2001. During fiscal 2002, we received $258.2 million in new orders compared to $492.8 million in fiscal 2001, representing a decrease of approximately 48%. The backlog at March 31, 2002 was $94.1 million compared to $160.3 million at March 31, 2001. Orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. We include in our backlog purchase orders for which a delivery schedule has been specified for product shipment within one year. We review our backlog on an ongoing basis and make adjustments to it as required. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of future sales. GROSS PROFIT (LOSS). Gross profit as a percentage of net sales (before inventory valuation charges) decreased to 19.4% in fiscal 2002 compared to a gross profit of 30.9% in fiscal 2001, due to lower capacity utilization due to reduction in revenues and due to transition costs associated with the closure and relocation of our Seattle, Washington facility in June 2001. Our gross loss percentage was further reduced to (25.5)% of net sales due to inventory valuation charges of $102.7 million taken in fiscal 2002 for excess inventories based upon a detailed evaluation of inventory on hand and forecasted requirements. This compares to a gross profit percentage of 27.2% in 2001 including inventory valuation charges of $15.4 million for obsolete and excess inventories as a result of product transitions and the rapid decline of the U.S CLEC market in fiscal 2001. RESEARCH AND DEVELOPMENT. In fiscal 2002, research and development expenses decreased to $18.5 million from $24.0 million in fiscal 2001. This decrease was primarily due to the consolidation and reduction of our Seattle, Washington research and development operations to our San Jose, California facility. As a percentage of net sales, research and development expenses increased to 8.1% in fiscal 2002 compared to 5.7% in fiscal 2001, primarily because the rate of the decrease in net sales exceeded the rate of the decrease of research and development expenses in absolute dollars. SELLING, GENERAL AND ADMINISTRATIVE. In fiscal 2002, selling, general and administrative expenses decreased to $58.5 million from $62.7 million in fiscal 2001. This decrease was a result of a reduction in workforce and other cost reduction measures that were taken early in fiscal 2002. As a percentage of net sales, selling, general and administrative expenses increased to 25.6% in fiscal 2002, compared to 15.1% in fiscal 2001, primarily because the rate of the decrease in net sales exceeded the rate of the decrease of selling, general and administrative expenses in absolute dollars. Page 10 of 49 RESTRUCTURING CHARGES. Due to macroeconomic and capital spending issues affecting the telecommunications industry, we announced a restructuring program during fiscal 2002 to reduce expenses and improve operational efficiency. This restructuring program included consolidation of our U.S. manufacturing operations by relocating our Seattle, Washington operations to our San Jose, California facility, a worldwide reduction in workforce and a consolidation of excess facilities. In connection with the above noted restructuring programs we recorded restructuring charges during fiscal 2002 totaling to $19.6 million. These consisted of $8.4 million for employee severance and benefits and $11.2 million for facility-related and other costs (including $8.6 million for lease termination costs, $2.1 million for the loss on impairment of equipment, $0.1 million for legal costs, $0.4 million for the write off of goodwill). We reduced our headcount by approximately 405 employees in fiscal 2002, with reductions affecting all functional areas and affecting various locations. As of March 31, 2002, essentially all of these employees were terminated. The facilities consolidation expenses included payments required under a lease contract, less estimated sublease income after the property was abandoned. To determine the lease loss, certain assumptions were made related to the (1) time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. Should operating lease rental rates continue to decline in the current market or should it take longer than expected to find a suitable tenant to sublease the Seattle, Washington, San Jose, California and Coventry, United Kingdom facilities, adjustments to the facilities lease loss reserve will be made in future periods, if necessary, based upon the current actual events and circumstances. The following table summarizes the balance of the restructuring accrual as of March 31, 2002 and the type and amount of restructuring costs utilized during fiscal 2002 (in millions):
Severance Facilities and Benefits and Other Total ------------- -------------- --------- Balance as of April 1, 2001 $ - $ - $ - Provision 8.4 11.2 19.6 Cash payments (6.1) (1.6) (7.7) Non-cash expenses - (2.5) (2.5) ----- ------ ------ Balance as of March 31, 2002 $ 2.3 $ 7.1 $ 9.4 ===== ====== ====== CURRENT PORTION $ 1.7 $ 1.8 $ 3.5 LONG-TERM PORTION $ 0.6 $ 5.3 $ 5.9
Total cash outlay for the restructuring charges was approximately $17.1 million. The remaining $2.5 million of restructuring charges are non-cash charges related to the write-off of goodwill and the loss on impairment of equipment. Of the $17.1 million restructuring charges accrued for cash outlays, $7.7 million was paid as of March 31, 2002 RECEIVABLE VALUATION CHARGES. In fiscal 2002, we recorded a $5.0 million receivable valuation charge for uncollectible accounts receivable related to our customers in Argentina and Russia. In fiscal 2001, we had recorded a receivable valuation charge of $22.0 million for our U.S. CLEC customers. This charge was estimated based on outstanding accounts receivable as of March 31, 2001 compared with anticipated future collections based upon the customers' liquidity positions as of March 31, 2001. Several of our U.S. CLEC customers filed for bankruptcy during fiscal 2002. Page 11 of 49 WRITE DOWN OF INVESTMENTS AND OTHER ASSETS. In fiscal 2002, we recorded $7.9 million as a permanent impairment loss on investments. This loss consisted of a $4.5 million loss on our equity investments in non-marketable securities and a $3.4 million loss on our equity investments in marketable securities. We determined that the carrying value for these investments exceeded their fair value and that these impairments were other than temporary in nature. Fair value for our publicly traded securities was estimated based upon recent and projected future valuations, taking into account the length of time the investments had previously been held at a loss. Fair value for our privately held investments was estimated using projected financial results and comparisons with other companies in similar industries. In fiscal 2001, we recorded a $14.0 million impairment loss related to our equity investments in several telecommunications companies. INTEREST INCOME AND OTHER EXPENSES, NET. Interest income was $2.5 million in fiscal 2002 compared to $5.1 million in fiscal 2001. The decrease was primarily due to lower average cash balances and lower interest rates in fiscal 2002 as compared to fiscal 2001. Other expenses of $2.0 million in fiscal 2002 and $1.8 million in fiscal 2001 were primarily due to the cost of hedging our foreign currency exposure risk. PROVISION FOR INCOME TAXES. We recorded an income tax provision in each of fiscal 2002 and 2001 primarily related to taxable income at certain of our foreign subsidiaries. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities in fiscal 2003 was $4.9 million compared to net cash used in operating activities of $20.2 million in fiscal 2002 and $58.0 million in fiscal 2001. The primary sources of cash from operating activities were net losses, as adjusted to exclude non-cash charges and benefits and changes in working capital requirements, including notable decreases in inventories and accounts receivable. Accounts receivable decreased by $10.4 million during fiscal 2003 compared to a decrease by $66.1 million during fiscal 2002. The decrease in accounts receivable is due to improved collections from customers and decreased sales. Inventories decreased by $5.6 million in fiscal 2003 compared to an increase of $35.4 million in fiscal 2002. This decrease in inventory in fiscal 2003 was due to better utilization of existing inventory. Accounts payable increased by $2.8 million in fiscal 2003 compared to a decrease by $39.3 million in fiscal 2002 due to purchase commitments recorded at the end of fiscal 2003. Other accrued liabilities increased by $0.4 million in fiscal 2003 compared to a decrease of $6.4 million in fiscal 2002 due to the accrual of restructuring costs offset by payments related to the respective years and provision for a contingent liability arising due to the bankruptcy preference payment claims made against the Company by our prior CLEC customers in the course of their bankruptcy proceedings. Long term liabilities increased by $12.5 million in fiscal 2003 due to long term facilities restructuring costs accrued and deferred rent, compared to an increase of $6.7 million in fiscal 2002. Purchases of property and equipment were $1.8 million in fiscal 2003 compared to $7.7 million in fiscal 2002. The planned decrease in capital expenditures was made in response to an overall slowdown in the global economy. Cash provided by financing activities of $1.1 million in fiscal 2003 was from proceeds from the sale of our common stock from the exercise of employee stock options and the employee stock purchase plan. For fiscal 2002, cash provided by financing activities of $73.7 million was mainly from proceeds from the sale of our common stock. On August 10, 2001, we raised approximately $70.9 million from the sale of 7,927,851 shares of our common stock in an offering registered with the Securities and Exchange Commission pursuant to our "shelf" Registration Statement on Form S-3 (File No. 333-50820), which became effective on December 7, 2000. The remaining proceeds from the sale of common stock of $ 2.8 million were derived from the exercise of employee stock options and the employee stock purchase plan. Page 12 of 49 At March 31, 2003, our principal sources of liquidity consisted of $90.2 million in cash and cash equivalents and short-term investments. At March 31, 2002, our principal sources of liquidity consisted of $85.7 million in cash and cash equivalents and short-term investments. Our cash requirements for fiscal 2004 are primarily to fund operations, research and development, capital expenditures and restructuring activities. On January 21, 2003 we secured a $22.5 million revolving credit facility with a bank. The credit facility has a one-year renewable term and an interest rate of prime or LIBOR plus 2%. Based on our current business plan we do not expect to utilize the facility in fiscal 2004. Commercial commitments As of March 31, 2003, we had $1.9 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. In connection with the issuance of these letters of credit, we have restricted $0.5 million of cash, which is included in cash and cash equivalents in the accompanying consolidated balance sheet, as collateral for these specific obligations as of March 31, 2003. These letters of credit expire in fiscal 2004. Also, as of March 31, 2003, we had outstanding forward foreign exchange contracts in the aggregate amount of $13.7 million, for which restricted cash of $0.2 million was held as collateral by one of the financial institutions utilized to hedge our foreign currency risk exposure. This restricted cash of $0.2 million is included in cash and cash equivalents in the accompanying consolidated balance sheet. Contractual obligations The following table provides information related to our contractual obligations:
Payments due (in thousands): - --------------------------------------------------------------------------------------------------------------------------- Years ending March 31, - --------------------------------------------------------------------------------------------------------------------------- 2009 & Total 2004 2005 2006 2007 2008 beyond Obligations - --------------------------------------------------------------------------------------------------------------------------- Operating leases (a) $ 6,144 $5,802 $5,762 $5,781 $5,970 $19,313 $48,772 - --------------------------------------------------------------------------------------------------------------------------- Unconditional purchase obligations $23,974 - - - - - - ---------------------------------------------------------------------------------------------------------------------------
(a) Contractual cash obligations include $22,473 of lease obligations that have been accrued as restructuring charges as of March 31, 2003. Restructuring payments As of March 31, 2003, we have an accrued liability for restructuring payments of $24.2 million, which is expected to be paid out in cash. We expect $6.3 million of this balance ($1.5 million of severance and benefits, $0.2 million of legal costs and $4.6 million of vacated building lease obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $17.9 million to be paid out during fiscal 2005 through fiscal 2012. Depending on the growth of our business, we may require additional financing which may not be available to us in the required time frame on commercially reasonable terms, if at all. However, we believe that we have the financial resources needed to meet our business requirements for at least the next 12 months. Page 13 of 49 RECENT ACCOUNTING STANDARDS We have adopted Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. The adoption of SFAS 144 did not have a material impact on our financial position or results of operations. In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, " Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The Company has adopted the provisions of SFAS 146 for restructuring activities initiated after December 15, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that, at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations do not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 requires footnote disclosures beginning in interim and year-end financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Although it does not require the use of the fair value method of accounting for stock-based employee compensation, it does provide alternative methods of transition. It also amends the disclosure provisions of SFAS 123 and Accounting Principles Board (APB) No. 28, "Interim Financial Reporting" ("APB 28"), to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS 148's amendment of the transition and annual disclosure requirements is effective for fiscal years ending after December 15, 2002. The amendment of disclosure requirements of APB 28 is effective for interim periods beginning after December 15, 2002. We do not plan to adopt the fair value based method of accounting for stock-based employee compensation. As a result, adoption of SFAS 148 will only require expanded disclosure to include the effect of stock-based compensation in our interim and annual reporting. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, Page 14 of 49 including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is in the process of determining the impact of the adoption of SFAS 149 on its future financial position and results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK: Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We invest in high-credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer and country. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs. This policy minimizes the requirement to sell securities in order to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio.
Years Ended March 31 ------------------------------------------------------------------ (In thousands) 2004 2005 2006 2007 2008 ----- ---- ---- ---- ---- Cash equivalents and short-term investments (1) $ 68,417 $8,817 - - - Weighted average interest rate 1.61% 1.65% - - -
(1) Does not include non-interest bearing cash of $ 12.9 million. The primary objective of our short-term investment activities is to preserve principal while at the same time maximize yields, without significantly increasing risk. Our short-term investments are for fixed interest rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior to maturity have been immaterial. Investments are generally not held for more than one year. The average days to maturity for investments held at the end of fiscal 2003 was 98 days and had an average yield of 1.73% per annum. As of March 31, 2003, unrealized losses on investments were immaterial. The investments have been recorded at fair value on our balance sheet. EXCHANGE RATE RISK: We routinely use forward foreign exchange contracts to hedge our exposures related to the monetary assets and liabilities of our operations denominated in non-functional currencies. In addition, we enter into forward foreign exchange contracts to establish with certainty the U.S. dollar amount of anticipated transactions denominated in a foreign currency. The primary business objective of this hedging program is to minimize the gains and losses resulting from exchange rate changes. At March 31, 2003 we held forward contracts in various currencies in the aggregate amount of $13.7 million primarily in British pounds and the euro. The amount of unrealized losses on these contracts at March 31, 2003 was immaterial. Given our exposure to various transactions in foreign currencies, a change in foreign exchange rates would result in exchange gains and losses. As these exposures are generally covered by forward contracts, these exchange gains and losses would be offset by exchange gains and losses on the contracts designated as hedges Page 15 of 49 against such exposures. We do not expect material exchange rate gains and losses from unhedged foreign currency exposures. We do not enter into foreign currency transactions for trading or speculative purposes. We attempt to limit our exposure to credit risk by executing foreign contracts with high-quality financial institutions. A discussion of our accounting policies for derivative financial instruments is included in the notes to the consolidated financial statements. FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS The Stockholders' Letter and discussions in this Annual Report concerning our future products, expenses, revenues, gross margins, liquidity, and cash needs, as well as our plans and strategies, contain forward-looking statements concerning our future operations and financial results within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements, trend analyses and other information contained herein about the markets for our services and products and trends in revenue, as well as other statements identified by the use of forward-looking terminology, including "anticipate," "believe," "plan," "estimate," "expect," "goal" and "intend", or the negative of these terms or other similar expressions, constitute forward-looking statements. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Numerous factors, could cause actual results to differ materially from those described in these statements, as well as harm business in general, including the following: - Competition could harm our ability to maintain or improve our position in the market and could decrease our revenues. - If we fail to maintain our relationships with original equipment manufacturers, our distribution channels could be harmed, which could cause our revenues to decrease. - Our industry is volatile and subject to frequent changes, and we may not be able to respond effectively or in a timely manner to these changes. - Because of the severe economic downturn in the world economy, and bankruptcies and financial difficulties in the competitive local exchange carrier business, the demand for our products and services may decrease. - Consolidation within the telecommunications industry and among suppliers could decrease our revenues. - Our average sales prices are declining. - Because a significant amount of our revenues comes from a few customers, the termination of any of these customer relationships may harm our business. - Due to our significant volume of international sales, we are susceptible to a number of political, economic and geographic risks that could harm our business if they occur, including severe acute respiratory syndrome ("SARS"), and conflicts in the Middle East. Page 16 of 49 - The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver our products, could cause our products to be produced in an untimely or unsatisfactory manner. SARS could have an effect on our product suppliers and customers in Asia . - The global tightening of capital markets for the telecommunications and mobile cellular projects may result in inventory that we cannot sell or be required to sell at distressed prices. - If we fail to manage our internal development or successfully integrate acquired businesses, we may not effectively manage our growth and our business may be harmed. - The unpredictability of our quarter-to-quarter results may harm the trading price of our common stock. - Because of intense competition for highly skilled personnel, we may not be able to recruit and retain qualified personnel. - If we are unable to protect our intellectual property rights adequately, we may be deprived of legal recourse against those who misappropriate our intellectual property. - Defending against intellectual property infringement claims could be expensive and could disrupt our business. - If sufficient radio frequency spectrum is not allocated for use by our products, and we fail to obtain regulatory approval for our products, our ability to market our products may be restricted. - If we fail to develop products that meet our customers' technical specifications on a timely basis, our business may be harmed. - We may not successfully adapt to regulatory changes in our industry, which could significantly impact the operation of our business. - Our stock price may be volatile, which may lead to losses by investors. For a more detailed discussion of these risks see Item 1. "Business - Factors That May Affect Future Financial Results" of our Annual report on Form 10-K for the fiscal year ended March 31, 2003. Prospective investors and stockholders should carefully consider the factors set forth in this Annual Report on Form 10-K. Page 17 of 49 SELECTED CONSOLIDATED FINANCIAL DATA
Years ended March 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------------------------------------------------------------- (in thousands, except per share amounts) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales $197,704 $228,844 $417,661 $300,503 $236,499 Net income (loss) (51,555) (168,873) (6,995) 12,136 (96,729) Diluted earnings (loss) per share (0.62) (2.13) (0.10) 0.17 (1.57) Basic weighted average shares outstanding 82,548 79,166 73,391 71,642 61,601

March 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------------------------------------------------------------- (in thousands, except number of employees) BALANCE SHEET AND OTHER DATA: Total assets $184,785 $214,117 $326,780 $337,441 $202,164 Long-term liabilities 19,145 6,675 - - 2,236 Stockholders' equity 112,800 167,457 259,863 264,392 131,213 Total employees 587 760 1,184 974 873
Page 18 of 49 STRATEX NETWORKS, INC. CONSOLIDATED BALANCE SHEETS
March 31, 2003 2002 ------------------------------------ (in thousands, except per share amounts) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 34,036 $ 35,888 Short-term investments 56,146 49,786 Accounts receivable, net of allowances of $6,395 in 2003 and $9,315 in 2002 31,072 42,953 Inventories 20,307 31,094 Deferred tax asset 1,743 - Other current assets 12,289 10,775 ------------------------------------ Total current assets 155,593 170,496 ------------------------------------ PROPERTY AND EQUIPMENT: Machinery and equipment 63,778 93,598 Land and buildings 7,550 6,914 Furniture and fixtures 7,936 8,423 Leasehold improvements 3,416 3,290 ------------------------------------ 82,680 112,225 Accumulated depreciation and amortization (53,844) (70,531) ------------------------------------ Net property and equipment 28,836 41,694 ------------------------------------ Other Assets 356 1,927 ------------------------------------ Total Assets $ 184,785 $ 214,117 ==================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 23,095 $ 20,579 Accrued liabilities 29,745 19,406 ------------------------------------ Total current liabilities 52,840 39,985 Long term liabilities 19,145 6,675 ------------------------------------ Total liabilities 71,985 46,660 COMMITMENTS AND CONTINGENCIES (NOTE 7) - - STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000 shares authorized; none outstanding - - Common stock, $.01 par value; 150,000 shares authorized 82,748 and 82,314 shares issued and outstanding at March 31, 2003 and 2002, respectively. 827 823 Additional paid-in capital 457,147 456,087 Accumulated deficit (330,711) (279,156) Accumulated other comprehensive loss (14,463) (10,297) ------------------------------------ Total stockholders' equity 112,800 167,457 ------------------------------------ Total Liabilities and Stockholders' Equity $ 184,785 $ 214,117 ====================================
The accompanying notes are an integral part of these consolidated financial statements. Page 19 of 49 STRATEX NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, --------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------- (in thousands, except per share amounts) NET SALES $ 197,704 $ 228,844 $ 417,661 Cost of sales 149,165 184,527 288,865 Inventory and other valuation charges (benefit) (2,122) 102,731 15,368 --------------------------------------------------------- Gross profit (loss) 50,661 (58,414) 113,428 --------------------------------------------------------- OPERATING EXPENSES: Research and development 14,393 18,529 24,006 Selling, general and administrative 58,922 58,493 62,715 Restructuring charges 28,240 19,589 - Receivable valuation charges - 5,000 22,000 --------------------------------------------------------- Total operating expenses 101,555 101,611 108,721 --------------------------------------------------------- Income (loss) from operations (50,894) (160,025) 4,707 OTHER INCOME (EXPENSE): Interest income 1,746 2,489 5,113 Other expenses, net (2,072) (1,996) (1,769) Write down of investments and other assets (412) (7,918) (14,003) --------------------------------------------------------- Total other expense, net (738) (7,425) (10,659) --------------------------------------------------------- Loss before provision (benefit) for income taxes (51,632) (167,450) (5,952) Provision (benefit) for income taxes (77) 1,423 1,043 --------------------------------------------------------- NET LOSS $ (51,555) $ (168,873) $ (6,995) --------------------------------------------------------- Basic and diluted net loss per share $ (0.62) $ (2.13) $ (0.10) Shares used to compute basic net loss per share 82,548 79,166 73,391
The accompanying notes are an integral part of these consolidated financial statements. Page 20 of 49 STRATEX NETWORKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 2001, 2002 and 2003 --------------------------------------------------------------------------------------- Accumulated Common Additional Other Total Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Loss Equity --------------------------------------------------------------------------------------- (in thousands) --------------------------------------------------------------------------------------- BALANCES MARCH 31, 2000 72,692 $ 727 $ 372,750 $ (103,288) $ (5,797) $ 264,392 Components of comprehensive loss: Net loss - - - (6,995) - (6,995) Change in unrealized holding loss - - - - (3,037) (3,037) Translation adjustment - - - - (4,295) (4,295) ------------- Total comprehensive loss (14,327) ------------- Stock issued for options and purchase plan 1,074 11 9,744 - - 9,755 Amortization of deferred stock compensation - - 43 - - 43 --------------------------------------------------------------------------------------- BALANCES MARCH 31, 2001 73,766 738 382,537 (110,283) (13,129) 259,863 --------------------------------------------------------------------------------------- Components of comprehensive loss: Net loss - - - (168,873) - (168,873) Change in unrealized holding gain - - - - 2,659 2,659 Translation adjustment - - - - 173 173 ------------- Total comprehensive loss (166,041) ------------- Proceeds from sale of stock, net of expense 7,928 79 70,600 - - 70,679 Stock issued for options and purchase plan 620 6 2,981 - - 2,987 Reversal of deferred stock compensation - - (31) - - (31) ----------------------------------------------------------------------------------------- BALANCES MARCH 31, 2002 82,314 823 456,087 (279,156) (10,297) 167,457 ----------------------------------------------------------------------------------------- Components of comprehensive income: Net loss - - - (51,555) - (51,555) Change in unrealized holding gain - - - - 194 194 Translation adjustment - - - - (4,360) (4,360) ------------- Total comprehensive loss (55,721) ------------- Stock issued for options and purchase plan 434 4 1,060 - - 1,064 ----------------------------------------------------------------------------------------- BALANCES MARCH 31, 2003 82,748 $ 827 $ 457,147 $ (330,711) $ (14,463) $ 112,800 -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 21 of 49 STRATEX NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, ------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (51,555) $ (168,873) $ (6,995) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 10,815 20,289 17,863 Impairment loss of investments and other assets 412 7,918 14,003 Loss on disposal of property and equipment 144 354 - Non-cash restructuring expenses 4,045 2,446 - Inventory and other valuation charges 452 103,988 14,342 Provision for uncollectible accounts 213 6,530 23,727 Provision for warranty reserves 9,668 10,429 9,213 Changes in assets and liabilities: Accounts receivable 10,449 66,088 (44,804) Inventories 5,627 (35,379) (60,377) Deferred taxes (267) 1,263 830 Other current assets (3,537) 5,219 (7,271) Other assets 2,077 (553) (4,340) Accounts payable 2,789 (39,306) 11,985 Income tax payable 710 (832) (1,516) Accrued liabilities 395 (6,433) (24,621) Long-term liabilities 12,470 6,675 - ------------------------------------------------------ Net cash provided by (used for) operating activities 4,907 (20,177) (57,961) ------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (343,229) (149,057) (49,724) Proceeds from sale of available-for-sale securities 336,869 111,426 103,432 Purchase of property and equipment (1,820) (7,673) (25,104) Purchase of equity investments - (13,045) Proceeds from the sale of other assets and property and equipment 12 395 - ------------------------------------------------------ Net cash provided by (used for) investing activities (8,168) (44,909) 15,559 ------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligations - (167) Proceeds from sale of common stock 1,064 73,666 9,755 ------------------------------------------------------ Net cash provided by financing activities 1,064 73,666 9,588 ------------------------------------------------------ Effect of exchange rate changes on cash 345 1,345 438 ------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (1,852) 9,925 (32,376) Cash and cash equivalents at beginning of year 35,888 25,963 58,339 ------------------------------------------------------ Cash and cash equivalents at end of year $ 34,036 $ 35,888 $ 25,963 ------------------------------------------------------ Non-cash investing activity: Transfer of inventory to property and equipment $ 351 $ 4,577 $ - ------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 22 of 49 SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES. Cash paid for interest and income taxes for each of the three fiscal years presented in the consolidated statements of cash flows was as follows:
Years ended March 31, ------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------ (in thousands) ~~Interest paid $ 430 $ 146 $ 64 Income taxes paid $ 1,022 $ 1,572 $ 1,602~~
Page 23 of 49 STRATEX NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS The Company designs manufactures and markets advanced wireless solutions for mobile applications and broadband access to enable the development of complex communications networks worldwide. The Company's microwave radio products deliver data and voice across a full spectrum of network frequencies and capacities. The Company's business is global in nature, supported by a worldwide sales and support organization. Stratex Networks, Inc., formerly known as DMC Stratex Networks, Inc., was founded in January 1984. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Stratex Networks, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statement, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. The Company generally considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents. Auction rate preferred securities are considered as short term investments based on historical practice of rolling over such investments at the interest rate reset dates. Cash and cash equivalents consisted of cash, money market funds, and short-term securities as of March 31, 2003 and 2002. As of March 31, 2003, the Company had $1.9 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. In connection with the issuance of these letters of credit, as of March 31, 2003, the Company has restricted $0.5 million of cash, which is included in cash and cash equivalents in the accompanying consolidated balance sheet, as collateral for these specific obligations, which expire in fiscal 2004. Also, as of March 31, 2003, the Company had outstanding forward foreign exchange contracts in the aggregate amount of $13.7 million, for which restricted cash of $0.2 million was held as collateral by one of the financial institutions utilized to hedge the Company's foreign currency risk exposure. This restricted cash of $0.2 million is included in cash and cash equivalents in the accompanying consolidated balance sheet. SHORT-TERM INVESTMENTS. The Company invests its excess cash in high-quality and easily marketable instruments to ensure cash is readily available for use in current operations. Accordingly, all marketable securities are classified as "available-for-sale" in accordance with the provisions of the Statement of Financial Accounting Standards No. 115 ("SFAS 115"). At March 31, 2003, the Company's available-for-sale securities had contractual maturities ranging from 1 month to 23 months, with a weighted average maturity of 98 days. All investments are reported at fair market value with the related unrealized holding gains and losses reported as a component of stockholders' equity. The realized gains on the sale of securities during fiscal 2003, 2002 and Page 24 of 49 2001 were insignificant. Realized gains (losses) are included in other expenses, net in the accompanying consolidated statement of operations. The following is a summary of available-for-sale short-term investments as of March 31:
2003 ----------------------------------------------------- UNREALIZED HOLDING GAIN COST FAIR VALUE (LOSS) ----------------------------------------------------- (IN THOUSANDS) Corporate notes $ 2,239 $ 2,245 $ 6 Corporate and Government bonds 20,965 20,951 (14) Auction rate preferred notes 32,950 32,950 - ----------------------------------------------------- Total $ 56,154 $ 56,146 $ (8) -----------------------------------------------------
The following is a summary of available-for-sale short-term and long-term investments as of March 31:
2003 ----------------------------------------------------- UNREALIZED HOLDING GAIN COST FAIR VALUE (LOSS) ----------------------------------------------------- (IN THOUSANDS) Corporate notes $ 4,032 4,016 $ (16) Corporate bonds 15,724 15,670 (54) Auction rate preferred notes 28,600 28,600 - Negotiable CD's 1,501 1,500 (1) Investment in Endwave, Inc.(1)(2) 491 360 (131) ----------------------------------------------------- Total $ 50,348 $ 50,146 $ (202) ----------------------------------------------------
(1) Classified as other assets. (2) The Company recorded an impairment loss of $0.4 million in fiscal 2003, $3.1 million in fiscal 2002 and $2.4 million in fiscal 2001 related to its original $6.0 million investment in Endwave Inc. The cash proceeds from the sale of its investments in Endwave Inc. were $0.1 million. See "Other Assets" footnote below. Page 25 of 49 INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market, where cost includes material, labor, and manufacturing overhead. Inventories consisted of:
March 31, ----------------------------------- 2003 2002 ----------------------------------- (in thousands) Raw materials $ 13,100 $ 19,346 Work-in-process 4,267 5,527 Finished goods 2,940 6,221 ----------------------------------- $ 20,307 $ 31,094 -----------------------------------
In fiscal 2003, the Company realized a $2.1 million benefit due to the sale of inventory that had been fully written off, due primarily to excess inventories not expected to be sold, in periods prior to fiscal year 2003. The Company recorded inventory valuation and other charges of $102.7 million during fiscal 2002. These inventory valuation and other charges consisted of $9.4 million for purchase commitments, $1.9 million for loss on impairment of manufacturing equipment and $91.4 million for excess and obsolete inventories. PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives of the assets (ranging from three to five years for equipment and furniture, and forty years for buildings) or the lease term. OTHER ASSETS. Included in other assets as of March 31, 2003 are long-term deposits for premises leased by the Company. As of March 31, 2002, other assets also included equity investments and notes receivable. The equity investments had been purchased for the promotion of business and strategic objectives, represented voting interests of less than 20% and are accordingly accounted for under the cost method. As of March 31, 2003 the Company had no equity investments. Equity investments in marketable securities are classified as "available-for-sale" in accordance with the provisions of the SFAS 115 and reported at fair value with unrealized gains and losses recorded in accumulated other comprehensive loss. Equity investments in non-marketable securities are recorded at cost. Impairment losses of $0.4 million were recorded in fiscal 2003 on the Company's equity investments in marketable securities. There were impairment losses of approximately $7.9 million during fiscal 2002 on the Company's equity investments in certain marketable and non-marketable securities. These losses consisted of a $3.4 million loss on equity investments in marketable securities and a $4.5 million loss on equity investments in non-marketable securities. The Company determined that the recorded value for these certain investments exceeded their fair value and that these impairments were other than temporary in nature. During fiscal 2002, the Company accepted long-term interest bearing notes receivable from one of its customers. Accordingly, the related receivables were classified as notes receivable in other current assets and other assets. The notes receivable were for a total of $2.3 million with annual interest rates of approximately 10.0%. As of March 31, 2002, the total balance of these notes receivable, including accrued interest, was $1.9 million, of which $0.7 million was included in other current assets and $1.2 million was included in other long-term assets. During fiscal 2003 these notes receivable were written off as the customer became insolvent. ACCUMULATED OTHER COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," (SFAS 130") establishes standards for reporting and display of comprehensive income (loss) and its components. SFAS 130 requires companies to report comprehensive income (loss), which includes unrealized holding gains and losses and other items that have previously been excluded from net income (loss) and reflected instead in stockholders' equity. The Company's comprehensive loss consists of net loss plus the effect of unrealized Page 26 of 49 holding gains or losses on investments classified as available-for-sale and foreign currency translation adjustments. The accumulated balances for each component of accumulated other comprehensive income (loss) are as follows:
March 31, -------------------------------- 2003 2002 -------------------------------- (in thousands) Unrealized holding loss on available-for-sale-securities $ (8) $ (202) Cumulative foreign exchange translation adjustment (14,455) (10,095) -------------------------------- $ (14,463) $ (10,297) ============== ==============
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's subsidiaries located in the United Kingdom and New Zealand is the U.S. dollar. Accordingly, all of the monetary assets and liabilities of these subsidiaries are remeasured into U.S. dollars at the current exchange rate as of the applicable balance sheet date, and all non-monetary assets and liabilities are remeasured at historical rates. Income and expenses are remeasured at the average exchange rate prevailing during the period. Gains and losses resulting from the remeasurement of these subsidiaries' financial statements are included in the consolidated statements of operations. The Company's other international subsidiaries use their respective local currency as their functional currency. Assets and liabilities of these subsidiaries are translated at the local current exchange rates in effect at the balance sheet date, and income and expense accounts are translated at the average exchange rates during the period. The resulting translation adjustments are included in accumulated other comprehensive loss. Determination of the functional currency is dependent upon the economic environment in which an entity operates as well as the customers and suppliers the entity conducts business with. Changes in the facts and circumstances may occur and could lead to a change in the functional currency of that entity. Gains and losses resulting from foreign exchange transactions are included in other income (expense) in the accompanying consolidated statements of operations. The net foreign exchange loss was $0.8 million in fiscal 2003, $1.2 million in fiscal 2002 and $2.0 million in fiscal 2001. DERIVATIVE FINANCIAL INSTRUMENTS. In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), all derivatives are recorded on the balance sheet at fair value. Derivatives are employed to eliminate, reduce, or transfer selected foreign currency risks that can be identified and quantified. The Company's policy is to hedge forecasted and actual foreign currency risk with forward contracts that expire within twelve months. Specifically, the Company hedges foreign currency risks relating to firmly committed backlog, open purchase orders and non-functional currency monetary assets and liabilities. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance sheet at fair value and changes in fair value are recognized currently in earnings. Additionally, the Company hedges forecasted non-U.S. dollar sales and non-U.S. dollar purchases. In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as "cash flow hedges" and are evaluated for effectiveness, excluding time value, at least quarterly. The Company records effective changes in the fair value of these cash flow hedges in accumulated other comprehensive income ("OCI") until the revenue is recognized or the related purchases are recognized in cost of sales, at which Page 27 of 49 time the changes are reclassified to revenue and cost of sales, respectively. All amounts accumulated in OCI at the end of the year will be reclassified to earnings within the next 12 months. During fiscal 2003 the amount reclassified to revenue and cost of sales from OCI was insignificant. The changes in fair value of derivative instruments for fiscal 2003 were $0.2 million. A gain of $0.1 million was recognized in other income and expense in fiscal 2003 related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur. In fiscal 2002, a loss of $0.2 million was recognized in other income and expense related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of investments to financial institutions evaluated as highly creditworthy. Investments, under the Company's policy, must have a rating, at the time of purchase, of A1 or P1 for short-term paper and a rating of A or better for long-term notes or bonds. Accounts receivable concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations may subject the Company to concentration of credit risk. Two customers accounted for approximately 11% and 10% of net sales for fiscal 2003. One customer accounted for approximately 15% of net sales for fiscal 2002. No other customer accounted for more than 10% of net sales for fiscal 2003, 2002 and 2001. Two customers each accounted for approximately 16% and one customer accounted for approximately 14% of the total accounts receivable balance at March 31, 2003. No other customer accounted for more than 10% of the total accounts receivable balance at March 31, 2003. Three customers accounted for approximately 16%, 15% and 12%, respectively, of the total accounts receivable balance at the end of the fiscal 2002. The Company actively markets and sells products in Africa, Asia, Europe, the Middle East and the Americas. The Company performs on-going credit evaluations of its customers' financial conditions and generally requires no collateral, although sales to Asia, Africa and the Middle East are primarily paid through letters of credit. REVENUE RECOGNITION. The Company recognizes revenue pursuant to Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. In accordance with SAB 101, revenues from product sales are generally recognized when title and risk of loss passes to the customer, except when product sales are combined with significant post-shipment installation services. Under this exception, revenue is deferred until such services have been performed. Installation service revenue, which is less than 10% of net sales for fiscal 2003, 2002 and 2001, is recognized when the related services are performed. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales, recorded as a component of cost of revenue. The Company's standard warranty is generally for a period of 27 months from the date of sale and its warranty accrual represents the best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Warranty accrual is made based on forecasted returns and average cost of repair. Forecasted returns are based on trend of historical returns. While the Company believes that its warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. Page 28 of 49 RESEARCH AND DEVELOPMENT. All research and development costs are expensed as incurred. STOCK-BASED COMPENSATION. The Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"). Accordingly, no compensation is recognized for employee stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the options. In accordance with the disclosure requirements of SFAS No. 123, if the Company had elected to recognize compensation cost based on the fair market value of the options granted at grant date as prescribed, income and earnings per share would have been reduced to the pro forma amounts indicated in the table below.
Years ended March 31, ------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------ (in thousands, except per share amounts) Net loss - as reported $ (51,555) $ (168,873) $ (6,995) Less : Stock-based compensation expense determined under fair value method for all awards, net of related tax effects (13,449) (9,093) (15,954) ------------------------------------------------------ Net loss - pro forma $ (65,004) $ (177,966) $ (22,949) ============ ============== ============= Basic and diluted loss per share - as reported (0.62) (2.13) (0.10) Basic and diluted loss per share - pro forma (0.79) (2.25) (0.31)
For purposes of pro forma disclosure under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to expense over the options' vesting period, using the multiple option method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Years ended March 31, ---------------------------------------------- 2003 2002 2001 ---------------------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Expected stock volatility 96.3% 84.3% 82.7% Risk-free interest rate 2.8 - 4.7% 2.8 - 4.3% 4.8 - 7.5% Expected life of options from vest date 1.7 YEARS 1.8 years 1.3 years Forfeiture rate ACTUAL Actual Actual
LOSS PER SHARE. Basic earnings (loss) per share are computed by dividing net income(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period. Net loss per share is computed using only the weighted average number of shares of common stock outstanding during the period, as the inclusion of potentially dilutive securities would be anti-dilutive. Page 29 of 49 As of March 31, 2003, there were 607,000 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share because they were anti-dilutive as a result of the net loss incurred in fiscal 2003. As of March 31, 2002, there were 557,000 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share because they were anti-dilutive as a result of the net loss incurred in fiscal 2002. As of March 31, 2001, there were 2,951,000 weighted-average options outstanding to purchase shares of common stock that were not included in the computation of diluted earnings per share, as a result of the net loss incurred in fiscal 2001. INCOME TAXES. The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, and operating loss and other tax credit carryforwards measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized in the future. RECENT ACCOUNTING PRONOUNCEMENTS. The Company has adopted Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, " Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The Company has adopted the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that, at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations do not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 requires footnote disclosures beginning in interim and year-end financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's financial position or results of operations. Page 30 of 49 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Although it does not require the use of the fair value method of accounting for stock-based employee compensation, it does provide alternative methods of transition. It also amends the disclosure provisions of SFAS 123 and Accounting Principles Board (APB) No. 28, "Interim Financial Reporting" ("APB 28"), to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS 148's amendment of the transition and annual disclosure requirements is effective for fiscal years ending after December 15, 2002. The amendment of disclosure requirements of APB 28 is effective for interim periods beginning after December 15, 2002. The Company does not plan to adopt the fair value based method of accounting for stock-based employee compensation. As a result, adoption of SFAS 148 will only require expanded disclosure to include the effect of stock-based compensation in the Company's interim reporting. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is in the process of determining the impact of the adoption of SFAS 149 on its future financial position and results of operations. NOTE 3. ACCRUED LIABILITIES Accrued liabilities included the following:
March 31, ----------------------------------- 2003 2002 ----------------------------------- (in thousands) Customer deposits $ 1,100 $ 1,804 Accrued payroll and benefits 1,782 2,461 Accrued commissions 1,959 2,533 Accrued warranty 4,219 4,674 Accrued restructuring 6,346 3,534 Accrual for contingent liabilities 7,500 - Other 6,839 4,400 ----------------------------------- $ 29,745 $ 19,406 -----------------------------------
In fiscal 2003, the Company received demand letters from counsel for unsecured creditors in the bankruptcy proceeding of its prior CLEC customers for $10.8 million related to certain monies which the Company received within 90 days of the customer seeking bankruptcy relief under the United States Bankruptcy Code. The Company intends to vigorously defend itself against these claims. However, because of the inherent uncertainties of litigation in general and because the Company's analysis of the issues presented by these threatened litigations is not yet complete, the Company cannot assure you that the ultimate outcomes will be in its favor. Using the guidance of SFAS 5, "Accounting for Contingencies", the Company has made an accrual of $7.5 million for these contingent liabilities. Accrued restructuring was $6.3 million as of March 31, 2003 compared to $3.5 million as of March 31, 2002. (See Note 5). Page 31 of 49 NOTE 4. BANK LINE OF CREDIT. On January 21, 2003, the Company secured a $22.5 million revolving credit facility with a bank. The credit facility has one-year renewable terms and an interest rate of either the bank's prime rate or LIBOR plus 2%. The Company, based on its current business plan does not expect to utilize the facility in fiscal 2004. NOTE 5. RESTRUCTURING CHARGES. In fiscal 2003, the Company entered into an agreement for outsourcing its San Jose, California manufacturing operations to Microelectronics Technology Inc. ("MTI"), the Company's manufacturing partner in Taiwan. As a result of changes associated with this agreement, as well as other reductions in operating expenses and facilities, the Company recorded restructuring charges in fiscal 2003. Under the terms of the Company's agreement with MTI for transfer of its manufacturing operations to them, MTI assumed assembly, integration and testing of the Company's Altium product family, as well as assembly and testing of the Outdoor Unit portion of the Company's XP4(TM) product. Under the terms of the agreement, MTI has acquired certain of the Company's manufacturing assets related to the production of the Altium(R) and XP4(TM) product lines. In addition, the Company has consigned certain inventory associated with these products to MTI, and MTI purchases such inventory as it is utilized in manufacturing. The Company has retained product design and research and development functions for these products. As a result of the agreement, MTI will be the Company's primary manufacturer of Altium(R) and XP4(TM) products. During the third quarter of fiscal 2003, the Company further reduced its workforce and consolidated additional excess facilities. During the fourth quarter of fiscal 2003, the Company further reduced its workforce by approximately 4% and recorded the related restructuring charges. In connection with the above noted restructuring program, the Company recorded, in fiscal 2003, restructuring charges of $28.2 million consisting of $3.8 million for employee severance and benefits, $19.0 million for vacated building lease obligations, $0.6 million for legal costs, $3.3 million for transition costs related to outsourcing of the Company's manufacturing operations as mentioned above and $4.0 million as a write off of manufacturing equipment in its San Jose, California location, related to the transfer of certain manufacturing operations to MTI. These restructuring costs were reduced by $2.5 million, which represented the amount reimbursable from MTI for the costs relating to the transfer of certain of the Company's manufacturing assets to them in accordance with the joint agreement with MTI. The total value of the assets sold to MTI under this agreement was $2.2 million. The severance and benefit charges of $3.8 million taken in fiscal 2003 were for a reduction in workforce by 176 employees, with reductions affecting primarily the manufacturing operations area due to the outsourcing of the Company's San Jose, California manufacturing operations. As of March 31, 2003 all affected employees had been notified and 163 employees were eliminated. During fiscal 2002, the telecommunications industry was severely impacted by the global economic downturn. In response to this downturn, the Company announced several restructuring programs in fiscal 2002 to reduce expenses and improve operational efficiency. These restructuring programs included consolidation of the Company's U.S. manufacturing operations by relocating its Seattle, Washington operations to its San Jose, California facility, a worldwide reduction in workforce and a consolidation of additional excess facilities. Due to this action, the Company recorded restructuring charges of $19.6 million during fiscal 2002. These consisted of $8.4 million for employee severance and benefits and $11.2 million for facility-related and other costs (including $8.6 million for vacated building lease obligations, $2.1 million for the loss on impairment of equipment, $0.1 million for legal costs and $0.4 million for the write off of goodwill). There were cumulative cash payments and non-cash expenses against this provision of $7.7 million and $2.5 million, respectively, Page 32 of 49 resulting in an ending provision balance at March 31, 2002 of $9.4 million. The cash payments were related primarily to workforce reduction payments and the non-cash expenses were related primarily to equipment charges. The following table summarizes the balance of the restructuring accrual as of March 31, 2002 and the type and amount of restructuring costs utilized during fiscal 2002 (in millions):
Severance Facilities and Benefits and Other Total --------------- -------------- -------------- Balance as of April 1, 2001 $ - $ - $ - Provision 8.4 11.2 19.6 Cash payments (6.1) (1.6) (7.7) Non-cash expenses - (2.5) (2.5) --------------- -------------- -------------- Balance as of March 31, 2002 $ 2.3 $ 7.1 $ 9.4 =============== ============== ============== CURRENT PORTION $ 1.7 $ 1.8 $ 3.5 LONG-TERM PORTION $ 0.6 $ 5.3 $ 5.9
The vacated building lease obligations of $19.0 million and $8.6 million recorded in fiscal 2003 and in fiscal 2002, respectively, included payments required under lease contracts, less estimated sublease income after the property has been abandoned. To determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents management's estimate of time to sublease and actual sublease rates. The following table summarizes the balance of the restructuring accrual as of March 31, 2003 and the type and amount of restructuring costs utilized during fiscal 2003 (in millions):
Severance Facilities and Benefits and Other Total --------------- -------------- -------------- Balance as of April 01, 2002 $ 2.3 $ 7.1 $ 9.4 Provision 3.8 24.4 28.2 Cash payments (4.6) (7.3) (11.9) Non-cash expenses - (4.0) (4.0) Reimbursable transition costs - 2.5 2.5 --------------- --------------- -------------- Balance as of March 31, 2003 $ 1.5 $ 22.7 $ 24.2 =============== =============== ============== CURRENT PORTION $ 1.5 $ 4.8 $ 6.3 LONG-TERM PORTION $ - $ 17.9 $ 17.9
The remaining accrual balance of $24.2 million as of March 31, 2003 is expected to be paid out in cash. The Company expects $6.3 million of the remaining accrual balance ($1.5 million of severance and benefits, $0.2 million of legal costs and $4.6 million of vacated building lease obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $17.9 million to be paid out during fiscal 2005 through fiscal 2012. NOTE 6. RECEIVABLE VALUATION CHARGES. In fiscal 2003, the Company did not record any receivable valuation charges. In fiscal 2002, the Company recorded a $5.0 million receivable valuation charge for uncollectible accounts receivable related to its Page 33 of 49 customers in Argentina and Russia. In fiscal 2001, the Company recorded a receivable valuation charge of $22.0 million for its U.S. CLEC customers. This charge was estimated based on outstanding accounts receivable as of March 31, 2001 compared with anticipated future collections based upon the liquidity positions of the Company's customers as of March 31, 2001. Several of the Company's U.S. CLEC customers filed for bankruptcy during fiscal 2002. NOTE 7. COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment, as well as its headquarters and manufacturing facilities, under non-cancelable operating leases that expire at various periods through 2018. At March 31, 2003, future minimum payment obligations under these leases were as follows:
Years ending March 31, ---------------------- (in thousands) 2004 6,144 2005 5,802 2006 5,762 2007 5,781 2008 5,970 2009 and beyond 19,313 ------------ Future minimum lease payments $ 48,772 ------------
Rent expense under operating leases was approximately $5.5 million for the year ended March 31, 2003, $6.0 million for the year ended March 31, 2002, and $4.3 million for the year ended March 31, 2001. LEGAL CONTINGENCIES. The Company is a party to various legal proceedings that arise in the normal course of business. In the opinion of management, the ultimate disposition of these proceedings will not have a material adverse effect on its consolidated financial position, liquidity, or results of operations. See Note 3. CONTINGENCIES IN MANUFACTURING AND SUPPLIERS. Purchases for materials are highly dependent upon demand forecasts from the Company's customers. Due to the uncertainty in demand from its customers, and in the telecommunications market in general, the Company may have to change, reschedule, or cancel purchases or purchase orders from its suppliers. These changes may lead to vendor cancellation charges on these purchase commitments. WARRANTY. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales, recorded as a component of cost of revenue. The Company's standard warranty is generally for a period of 27 months from the date of sale and its warranty accrual represents the best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Page 34 of 49 The changes in the warranty reserve balances during the years ended March 31, 2003, 2002 and 2001 are as follows (in $ thousands):
2003 2002 2001 ---- ---- ---- Balance at the beginning of the year $ 4,674 $ 4,788 $ 5,533 Additions related to current period sales 11,679 17,033 7,903 Warranty costs incurred in the current period (10,123) (11,878) (11,768) Adjustments to accruals related to prior period sales (2,011) (5,269) 3,120 ------------------------------------ Balance at the end of the year $ 4,219 $ 4,674 $ 4,788 ====================================
NOTE 8. INCOME TAXES The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable. The domestic and foreign components of loss before provision for income taxes were as follows:
Years ended March 31, --------------------------------------- 2003 2002 2001 --------- ----------- --------- (in thousands) Domestic $ (61,129) $(161,010) $ (8,366) Foreign 9,497 (6,440) 2,414 --------- --------- --------- $ (51,632) $(167,450) $ (5,952) --------- --------- ---------
The provision for income taxes consisted of the following:
Years ended March 31, --------------------------------------- 2003 2002 2001 --------- ----------- --------- (in thousands) Current: Federal $ (179) $ (1,776) $ _ State 16 - - Foreign 1,829 1,924 1,043 -------- --------- --------- Total current 1,666 148 1,043 Deferred- foreign (1,743) 1,275 - -------- --------- --------- $ (77) $ 1,423 $ 1,043 -------- --------- ---------
Page 35 of 49 The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate as follows:
Years ended March 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- (in thousands) Expected tax benefit $(18,071) $(58,608) $ (2,083) State taxes, net of Federal benefit (1,823) (7,393) (192) Change in valuation allowance 18,239 66,029 2,965 Foreign taxes 85 2,054 - Other 1,493 (659) 353 -------- -------- -------- $ (77) $ 1,423 $ 1,043 -------- -------- --------
Page 36 of 49 The major components of the net deferred tax asset consisted of the following:
March 31, ------------------------ 2003 2002 ------------------------ (in thousands) Inventory write offs $ 34,454 $ 39,581 Restructuring reserves 9,102 3,630 Warranty reserves 1,343 1,720 Bad debt reserves 2,300 3,509 Net operating loss carry forwards 92,679 71,019 Tax credits 12,377 11,679 Impairment of investments 8,879 8,461 Depreciation reserves 2,665 2,415 Other 6,195 7,998 --------- --------- 169,994 150,012 Less: Valuation allowance (168,251) (150,012) --------- --------- Net deferred tax asset $ 1,743 $ - ========= =========
The valuation allowance provides a reserve against deferred tax assets that may expire or go unutilized. In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company believes it is more likely than not that it will not fully realize these benefits and, accordingly, has continued to provide a valuation allowance for them. At March 31, 2003, the Company had U.S. Federal and State net operating loss carry forwards available to offset future taxable income, if any, of approximately $256.4 million and $40.1 million, respectively. The net operating losses expire in various years through 2023. Tax credits include approximately $6.9 million of Federal minimum tax and State research credits that carry forward indefinitely. The remaining tax credits of $5.7 million are Federal and State credits that expire in various years through 2023. The Internal Revenue Code contains provisions that may limit the net operating loss and credit carry forwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership interest. NOTE 9. COMMON STOCK STOCK OPTION PLANS. In accordance with the provisions of SFAS No. 123 ("SFAS 123"), the Company has applied Accounting Principles Board Opinion No. 25, ("APB 25"), and related interpretations in accounting for its stock option plans and has disclosed the summary of the pro forma effects on reported net loss and loss per share information for fiscal 2003, 2002, and 2001, based on the fair market value of the options granted at the grant date as prescribed by SFAS 123. The Company's 1984 Stock Option Plan (the "1984 Plan") provides for the grant of both incentive and nonqualified stock options to its key employees and certain independent contractors. Upon the adoption of its 1994 Stock Incentive Plan ("the 1994 Plan"), the Company terminated future grants under the 1984 Plan. In July 1994, the stockholders approved 2,366,660 shares of Common Stock to be reserved for issuance under the 1994 Plan over a ten-year term. In August 1996, the stockholders approved the reservation for issuance of 2,000,000 additional shares of Common Stock under the 1994 Plan. In March 1998, the stockholders approved the reservation for issuance of 2,500,000 additional shares of Common Stock under the 1994 Plan. The terms of the 1994 Plan also provide for an automatic increase on the first trading day of each calendar year for five years Page 37 of 49 after the adoption of the 1994 Plan, beginning January 1995, of an amount equal to one percent (1%) of the number of shares of Common Stock outstanding, but in no event is such annual increase to exceed 300,000 shares. As of March 31, 2003 the total number of shares of Common Stock reserved for issuance under the 1994 Plan is 7,766,660. The 1994 Plan contains: (i) a discretionary grant program for key employees and consultants whereby options generally vest over five years and expire after 10 years, (ii) an automatic grant program for non-employee Board members, whereby options vest over three years and expire after 10 years, (iii) a salary reduction grant program under which key employees may elect to have a portion of their base salary reduced each year in return for stock options, (iv) a stock fee program under which the non-employee Board members may elect to apply all or a portion of their annual retainer fee to the acquisition of shares of Common Stock, and (v) a stock issuance program under which eligible individuals may be issued shares of Common Stock as a bonus tied to their performance of services or the Company's attainment of financial milestones, or pursuant to their individual elections to receive such shares in lieu of base salary. The implementation and use of any of these equity incentive programs (other than the automatic grant program and the stock fee program) is within the sole discretion of the Company's Compensation Committee of the Board of Directors. In April 1996, the Company adopted the 1996 Non-Officer Employee Stock Option Plan (the "1996 Plan"). The 1996 Plan authorizes 1,000,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with the Company. The 1996 Plan will terminate on the date on which all shares available have been issued. In November 1997, the Company adopted the 1998 Non-Officer Employee Stock Option Plan (the "1998 Plan"), which became effective on January 2, 1998. The 1998 Plan authorizes 500,000 shares of Common Stock to be reserved for issuance to non-officer key employees as an incentive to continue to serve with the Company. The 1998 Plan will terminate on the date on which all shares available have been issued. The 1999 Stock Incentive Plan (the "1999 Incentive Plan"), approved by the Company's stockholders in August 1999, provides for the issuance of stock options covering up to 2,500,000 shares of its Common Stock. In August 2001, the stockholders approved the reservation for issuance of 4,000,000 additional shares of Common Stock under the 1999 Incentive Plan. The 1999 Incentive Plan enables the Company to grant options as needed to retain and attract talented employees. Options generally vest over four years and expire after 10 years. The 1999 Plan will terminate on the date on which all shares available have been issued. In August 2002, the shareholders approved the 2002 Stock Incentive Plan, which provides for the issuance of stock options and grants of the Company's common stock covering up to 10,000,000 shares of its common stock. The purposes of the plan are to give the Company's employees and others who perform substantial services for the Company an incentive, through ownership of its common stock. The plan permits the grant of awards to the Company's directors, officers, consultants and other employees. The awards may be granted subject to vesting schedules and restrictions on transfer. The 2002 Stock Incentive Plan also contains two separate equity incentive programs, (i) a non-employee director option program under which option grants will be made at specified intervals to non- employee directors of the Company's board of directors and (ii) a non-employee director stock program under which non-employee directors of the Company's board may elect to apply all or a portion of their annual retainer and meeting fees to the purchase of shares of the Company's common stock. The 2002 Stock Incentive Plan will terminate in August 2009, unless previously terminated by the Company's board of directors. Page 38 of 49 At March 31, 2003, the Company had reserved 9,386,161 shares for future issuance under all stock options plans for which there were options available for grant. The following table summarizes the Company's stock option activity under all of its stock option plans:
Years ended March 31, --------------------- 2003 2002 2001 WEIGHTED Weighted Weighted AVERAGE Average Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price --------------------------------------------------------------------------- (shares in thousands) Options outstanding at beginning of year 7,777 $ 13.21 7,693 $ 14.74 6,412 $ 10.72 Granted 5,383 2.04 2,130 6.27 2,931 21.43 Exercised (17) 2.40 (298) 3.90 (951) 8.12 Expired or canceled (885) 9.89 (1,748) 13.03 (699) 14.16 ------- ------- ------ Options outstanding at end of year 12,258 $ 8.57 7,777 $ 13.21 7,693 $ 14.74 ======= ======= ====== Exercisable at end of year 4,314 3,288 2,224 Weighted average fair value of options granted $ 1.40 $ 3.91 $ 13.04 ----------------------------------------------------------------------------
The following summarizes the stock options outstanding at March 31, 2003:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------ Weighted Average Remaining Weighted Weighted Actual Range of Number Contractual Life Average Number Average Exercise Prices Outstanding (years) Exercise Price Exercisable Exercise Price ------------------------------------------------------------------------------ (shares in thousands) $ 0.23 - 2.01 2,136 6.22 $ 2.00 32 $ 1.53 2.02 - 2.05 3,021 6.71 2.05 2 2.02 2.24 - 5.31 510 5.00 3.99 404 4.17 5.38 - 6.10 1,714 8.12 6.08 566 6.08 6.19 - 11.63 1,335 5.17 8.33 1,115 8.44 11.66 - 15.00 1,325 5.28 13.10 1,099 13.19 15.13 - 30.06 2,036 7.06 23.04 966 21.82 33.63 - 41.75 181 6.93 37.28 130 37.32 - --------------- ----------- ----------- $ 0.23 - 41.75 12,258 6.49 $ 8.57 4,314 $ 12.75 =========== ===========
EMPLOYEE STOCK PURCHASE PLANS. In June 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan") and reserved 900,000 shares of Common Stock for issuance under the 1999 Purchase Plan. Employees, subject to certain restrictions, may purchase Common Stock under the 1999 Purchase Plan through payroll withholding at a price per share of 85% of the fair market value at the beginning or end of the purchase period, as defined under the terms of the 1999 Purchase Plan. The Company sold 409,044 shares in fiscal 2003, 318,227 shares in fiscal 2002, 111,441 shares in fiscal 2001 and 93,189 shares in fiscal 2000 under the 1999 Purchase Plan. Page 39 of 49 NOTE 10. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about products, geographic information, and major customers. Operating segment information for fiscal 2003, 2002, and 2001 is presented in accordance with SFAS 131. The Company is organized into two operating segments: Products and Services. The Chief Executive Officer ("CEO") has been identified as the Chief Operating Decision-Maker as defined by SFAS 131. Resources are allocated to each of these groups using information on their revenues and operating profits before interest and taxes. The Products operating segment includes the XP4(TM), Altium(R), DXR(R) and Spectrum(TM) II digital microwave systems for digital transmission markets. The Company designs and develops these products in Wellington, New Zealand and San Jose, California. Prior to June 30, 2002, the Company manufactured the XP4 and Altium family of products in San Jose, California. In June 2002, the Company entered into an agreement with MTI in Taiwan for outsourcing of its XP4 and Altium products manufacturing operations. The Company manages the manufacturing of the DXR product family from Wellington, New Zealand, where most manufacturing takes place, except for a portion of the DXR product family that is outsourced. The Services operating segment includes, but is not limited to, installation, repair, spare parts, network design, path surveys, integration, and other revenues. The Company maintains regional service centers in Lanarkshire, Scotland and Clark Field, Pampanga, Philippines. The Company does not identify or allocate assets or depreciation by operating segment, nor does the CEO evaluate these groups on these criteria. Total depreciation expense of $10.8 million, $20.0 million and $17.9 million for fiscal 2003, 2002 and 2001, respectively, has been included in the product operating segment. Operating segments generally do not sell products to each other, and accordingly, there are no significant inter-segment revenues to be reported. The Company does not allocate interest and taxes to operating segments. The accounting policies for each reporting segment are the same.
Years ended March 31, ---------------------------------------- 2003 2002 2001 ---------------------------------------- (in thousands) PRODUCTS Revenues $ 167,007 $ 201,564 $ 386,165 Operating profit (loss) (57,407) (163,273) 4,106 SERVICES AND OTHER Revenues 30,697 27,280 31,496 Operating profit 6,513 3,248 601 TOTAL Revenues $ 197,704 $ 228,844 $ 417,661 Operating profit (loss) (50,894) (160,025) 4,707
For fiscal year 2003 two customers accounted for 11% and 10% of net sales. One customer accounted for 15% of net sales for fiscal 2002. No other customers accounted for more than 10% of net sales during fiscal 2003, 2002, or 2001. Page 40 of 49 Revenues by product from unaffiliated customers for fiscal 2003, 2002, and 2001 are as follows:
2003 2002 2001 ---------------------------------------- (in thousands) SPECTRUM II $ 2,478 $ 37,642 $ 104,688 XP4 76,930 86,980 131,767 DXR 36,863 29,182 35,631 Altium 49,471 46,324 109,087 Other Products 1,265 1,436 4,992 ---------------------------------------- Total Products 167,007 201,564 386,165 Total Services and other 30,697 27,280 31,496 ---------------------------------------- Total Revenue $ 197,704 $ 228,844 $ 417,661 ----------------------------------------
Revenues by geographic region from unaffiliated customers for fiscal 2003, 2002, and 2001 are as follows:
2003 2002 2001 ---------------------------------------- (in thousands) United States $ 10,563 $ 17,589 $ 130,218 Mexico 1,686 12,298 40,519 Other Americas 16,020 32,939 43,665 Europe 38,392 56,375 84,333 Middle East 29,427 14,770 17,772 Africa 32,558 21,471 23,957 China 5,857 36,805 35,391 Other Asia/Pacific 63,201 36,597 41,806 ---------------------------------------- Total revenues $ 197,704 $ 228,844 $ 417,661 ----------------------------------------
Revenue in fiscal 2003 in Nigeria was $20.7 million or 10% of total revenue and revenue in Thailand was $22.6 million or 11% of total revenue. Revenue in Nigeria and Thailand for fiscal years 2002 and 2001 was below 10% of total revenue. Long-lived assets consisted primarily of property and equipment at March 31, 2003 and 2002. Net property and equipment by country was as follows:
2003 2002 ------------------------- (in thousands) United States $ 8,822 $ 19,872 United Kingdom 13,230 15,732 Other foreign countries 6,784 6,090 ------------------------- Net property and equipment $ 28,836 $ 41,694 -------------------------
Page 41 of 49 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Stratex Networks, Inc. San Jose, California We have audited the accompanying consolidated balance sheet of Stratex Networks, Inc. and subsidiaries ("the Company") (formerly DMC Stratex Networks, Inc.) as of March 31, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 2003 financial statements based on our audit. The financial statements as of March 31, 2002, and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated April 22, 2002. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 2003 consolidated financial statements present fairly, in all material respects, the financial position of Stratex Networks, Inc. and subsidiaries as of March 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP San Jose, California April 25, 2003 Page 42 of 49 The following report of Arthur Andersen LLP ("Andersen") is a copy of the original report dated April 22, 2002, rendered on the fiscal 2002 and 2001 consolidated financial statements. The SEC has provided regulatory relief designed to allow public companies to dispense with the requirements to file a reissued report and consent of Andersen in certain circumstances. After reasonable efforts, we have not been able to obtain a reissued report or consent from Andersen. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To DMC Stratex Networks: We have audited the accompanying consolidated balance sheets of DMC Stratex Networks, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of DMC Stratex Networks, Inc. and subsidiaries as of March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ ARTHUR ANDERSEN LLP San Jose, California April 22, 2002 Page 43 of 49 QUARTERLY FINANCIAL DATA (UNAUDITED) The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for fiscal 2003 and 2002 are as follows (in thousands, except per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter FISCAL 2003 Net sales $ 49,319 $ 52,560 $ 49,265 $ 46,560 Gross profit (1) 10,550 12,734 13,854 13,523 Loss from operations (21,841) (3,905) (15,104) (10,044) Net loss (22,863) (4,415) (16,164) (8,113) Basic and diluted net loss per common share (2) (0.28) (0.05) (0.20) (0.10) - --------------------------------------------------------------------------------------------------------------- Market price range common stock (3) High $ 5.44 $ 2.89 $ 3.97 $ 3.00 Low 2.01 $ 1.17 $ 1.00 $ 2.03 Quarter-end Close 2.01 $ 1.17 $ 2.21 $ 2.07 - --------------------------------------------------------------------------------------------------------------- FISCAL 2002 Net sales $ 76,684 $ 60,898 $ 45,170 $ 46,092 Gross loss (1) (3,797) (27,596) (34,323) 7,302 Loss from operations (36,435) (55,838) (57,209) (10,543) Net loss (46,069) (56,487) (57,428) (8,889) Basic and diluted net loss per common share (2) (0.62) (0.72) (0.70) (0.11) - --------------------------------------------------------------------------------------------------------------- Market price range common stock (3) High $ 10.70 $ 10.90 $ 8.31 $ 9.05 Low 4.05 5.16 5.04 4.38 Quarter-end Close 10.00 5.11 7.78 5.44 - ---------------------------------------------------------------------------------------------------------------
(1) Gross profit is calculated by subtracting cost of sales from net sales (2) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share will not necessarily equal the total for the year. (3) The Company's common stock is traded on the Nasdaq National Market under the symbol STXN. The Company has not paid cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future in order to retain earnings for use in its business. At March 31, 2003, there were approximately 394 stockholders of record. Page 44 of 48 CORPORATE DIRECTORY OFFICERS AND SENIOR EXECUTIVES WHO REPORT TO THE CEO AND OTHER OFFICERS Charles D. Kissner Chairman of the Board and Chief Executive Officer Carl A. Thomsen Senior Vice President Chief Financial Officer and Secretary John C. Brandt Vice President and Corporate Controller Carol A. Goudey Corporate Treasurer and Assistant Secretary Paul A. Kennard Vice President of Product Development and Chief Technical Officer Edward T. Gardner Vice President, Human Resources and Administration Ryan R. Panos Vice President, Worldwide Sales And Service Robert J. Schlaefli Vice President, Global Operations DIRECTORS Richard C. Alberding Executive Vice President (Retired) Hewlett-Packard Company John W. Combs Chairman and Chief Executive Officer Littlefeet, Inc. Charles D. Kissner Chairman of the Board and Chief Executive Officer Dr. James D. Meindl, Ph.D. Director Microelectronics Research Center Joseph M. Pettit Chair Professor of Microelectronics Page 45 of 48 Georgia Institute of Technology V. Frank Mendicino Managing Director Access Venture Partners William A. Hasler Vice-Chairman and Director Aphton Corporation Edward F. Thompson Chief Financial Officer (Retired) Amdahl Corporation INDEPENDENT AUDITORS Deloitte & Touche LLP San Jose, California OUTSIDE LEGAL COUNSEL Morrison & Foerster LLP Palo Alto, California REGISTRAR AND TRANSFER AGENT Mellon Investor Services LLC San Francisco, California PRINCIPAL SUBSIDIARIES Stratex Networks (U.K.) Ltd. Lanarkshire, Scotland Stratex Networks do Brasil Ltda. Sao Paulo, Brazil DMC de Mexico, S.A. de C.V. Mexico D.F., Mexico Stratex Networks (India) Private Limited New Delhi, India Stratex Networks (Philippines), Inc. Metro Manila, Philippines Page 46 of 48 Stratex Networks (NZ) Limited Wellington, New Zealand DMC Stratex Networks (South Africa) (Proprietary) Limited Midrand, South Africa DMC Stratex Networks (Africa) (Proprietary) Limited Midrand, South Africa Stratex Networks (S) Pte. Ltd. Singapore Stratex Networks (Thailand) Ltd. Bangkok, Thailand. Stratex Networks Polska Sp z.o.o Warsaw, Poland CORPORATE HEADQUARTERS Stratex Networks, Inc. 120 Rose Orchard Way San Jose, California 95134 USA SALES AND SERVICE OFFICES North America: Amesbury, Massachusetts Gig Harbor, Washington Central and South America: Mexico City, Mexico Santa Fe de Bogota, Colombia Buenos Aires, Argentina Sao Paulo, Brazil Europe: Solihull, England Lanarkshire, Scotland Freising, Germany Athens, Greece Warsaw, Poland Aix en Provence, France Lisbon, Portugal Zagreb, Croatia Page 47 of 48 Middle East: Dubai, United Arab Emirates Africa: Midrand, South Africa Asia/Pacific: Singapore Wellington, New Zealand Beijing, China Clark Special Economic Zone, Philippines Metro Manila , Philippines New Delhi, India Victoria, Australia Bangkok, Thailand Selangor, Malaysia SEC FORM 10-K A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission is available without charge by writing to: Stratex Networks, Inc. Attn: Investor Relations 120 Rose Orchard Way San Jose, California 95134 CAUTIONARY STATEMENTS This annual Report contains forward-looking statements concerning the Company's goals, strategies, and expectations for business and financial results, which are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. For a discussion of these risks and uncertainties, please refer to the Company's Form 10-K filed May 19, 2003, with the Securities and Exchange Commission. Page 48 of 48 EX-23.1 9 f89373exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in the Registration Statements Nos. 33-16539, 33-37173, 33-43155, 33-85270, 33-94438, 333-00855, 333-11385, 333-11387, 333-11389, 333-25953, 333-48533, 333-48535, 333-46867, 333-62673, 333-45053, 333-66857, 333-73007, 333-76233, 333-80281, 333-85135, 333-88586, 333-98735 and 333-101331 of Stratex Networks, Inc. (formerly DMC Stratex Networks, Inc. and hereafter referred to as "the Company") on Form S-8 of our reports dated April 25, 2003, related to the consolidated financial statements and financial statement schedule of the Company as of and for the year ended March 31, 2003, appearing in this Annual Report on Form 10-K of Stratex Networks, Inc. for the year ended March 31, 2003. /s/ DELOITTE & TOUCHE LLP San Jose, California May 19, 2003 EX-23.2 10 f89373exv23w2.txt EXHIBIT 23.2 EXHIBIT 23.2 The following consent of Arthur Andersen LLP ("Andersen") is a copy of the original consent dated May 14, 2002, included in the Form 10-K for March 31, 2002. The SEC has provided regulatory relief designed to allow public companies to dispense with the requirements to file a reissued report and consent of Andersen in certain circumstances. After reasonable efforts, we have not been able to obtain a reissued report of consent from Andersen. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K into the company's previously filed Registration Statements (File Nos. 33-16539, 33-37173, 33-43155, 33-85270, 33-94438, 333-00855, 333-11385, 333-11387, 333-11389, 333-25953, 333-48533, 333-48535, 333-46867, 333-62673, 333-45053, 333-66857, 333-73007, 333-76233, 333-80281 and 333-85135) on Form S-8. /s/ ARTHUR ANDERSEN LLP San Jose, California May 14, 2002 EX-99.1 11 f89373exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 STRATEX NETWORKS, INC. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the annual report of Stratex Networks, Inc. (the "Company") on Form 10-K for the year ended March 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Charles D. Kissner, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. Date: May 19, 2003 /s/ Charles D. Kissner Charles D. Kissner Chief Executive Officer EX-99.2 12 f89373exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 STRATEX NETWORKS, INC. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the annual report of Stratex Networks, Inc. (the "Company") on Form 10-K for the year ended March 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Carl A. Thomsen, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. Date: May 19, 2003 /s/ Carl A. Thomsen Carl A. Thomsen Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the year ended March 31, 2003 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to .


Delaware		77-0016028
(State of Incorporation)		(I.R.S. Employer Identification No.)

120 Rose Orchard Way San Jose, California (Address of Principal Executive Offices)		95134 (Zip Code)


	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Independent Auditor on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Management related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
EXHIBIT INDEX
EXHIBIT 4.5
EXHIBIT 10.7
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.15
EXHIBIT 13.1
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 99.1
EXHIBIT 99.2


PART I
Item 1	Business	1
Item 2	Properties	17
Item 3	Legal Proceedings	17
Item 4	Submission of Matters to a Vote of Security Holders	17
PART II
Item 5	Market for the Registrant’s Common Equity and Related Stockholder Matters	17
Item 6	Selected Financial Data	17
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8	Financial Statements and Supplementary Data	18
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18
PART III
Item 10	Directors and Executive Officers of the Registrant	18
Item 11	Executive Compensation	18
Item 12	Security Ownership of Certain Beneficial Owners and Management	18
Item 13	Certain Relationships and Related Transactions	19
Item 14	Controls and Procedures	19
PART IV
Item 15	Exhibits, Financial Statement Schedules, Certifications and Reports on Form 8-K	19


	Balance at		Charged to					Balance
(In thousands)	Beginning of		Costs and		Deductions/			at End
Description	Year		Expenses		Write-off			of Year

Year Ended March 31, 2003	$	9,315	$	213	$	(3,133	)	$	6,395
Year Ended March 31, 2002	$	26,643	$	6,530	$	(23,858	)	$	9,315
Year Ended March 31, 2001	$	4,652	$	23,608	$	(1,617	)	$	26,643

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Title of Each Class		Name of Each Exchange on Which Registered

None


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for the Registrant’s Common Equity and Related Stockholder Matters*


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


Item 9.	*Changes in and Disagreements with Independent Auditor on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Management related Stockholder Matters*


Item 13.	*Certain Relationships and Related Transactions*


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


Item 11.	*Executive Compensation*


Item 15.	*Exhibits, Financial Statement Schedule, and Reports on Form 8-K*



Signatures	Signing Capacity	Date

/s/ CHARLES D. KISSNER Charles D. Kissner	Chairman of the Board and Chief Executive Officer	May 19, 2003

/s/ CARL A. THOMSEN Carl A. Thomsen	Senior Vice President, Chief Financial Officer & Secretary (Principal Financial and Accounting Officer)	May 19, 2003

/s/ RICHARD C. ALBERDING Richard C. Alberding	Director	May 19, 2003

/s/ EDWARD F. THOMPSON Edward F. Thompson	Director	May 19, 2003


Exhibit
Number			Description

	2	.1	Certificate of Ownership and Merger merging Stratex Networks, Inc. into Digital Microwave Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2000).
	3	.1	Certificate of Amendment to the Restated Certificate of Incorporation amended as of August 9, 2000 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2000).
	3	.2	Amended and Restated Bylaws, dated as of October 17, 2001 (incorporated by reference to Exhibit 3.2 to the company’s Quarterly Report on Form 10-Q filed on November 13, 2001).
	3	.3	Certificate of Amendment to the Restated Certificate of Incorporation, amended as of September 9, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10Q filed on November 14, 2002).
	4	.1	Form of Indenture (incorporated by reference to Exhibit 4.3 to the company’s registration statement filed on Form S-3 on November 28, 2000).
	4	.2	Form of Debt Warrant Agreement, including form of Debt Warrant Certificate (incorporated by reference to Exhibit 4.4 to the company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.3	Form of Common Stock Warrant Agreement, including form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.4	Form of Senior Debenture (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement filed on Form S-3 on November 28, 2000).
	4	.5	Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank dated January 21, 2003.
	10	.1	Stratex Networks, Inc. 1984 Stock Option Plan, as amended and restated on June 11, 1991 (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1991).
	10	.2	Form of Installment Incentive Stock Option Agreement (incorporated by reference to Exhibit 28.2 to the Company’s Registration Statement on Form S-8 (File No. 33-43155)).
	10	.3	Form of Installment Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 28.3 to the Company’s Registration Statement on Form S-8 (File No. 33-43155)).
	10	.4	Form of Indemnification Agreement between the Company and its directors and certain officers (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 33-13431)).
	10	.5	Stratex Networks, Inc. 1994 Stock Incentive Plan, as amended and restated on May 1, 1996 (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on August 4, 1998).
	10	.6	Stratex Networks, Inc. 1994 Stock Incentive Plan, as amended and restated on May 1, 1996 (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on August 4, 1998).
	10	.6	Stratex Networks, Inc. 1998 Non-Officer Employee Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 333-48535)).
	10	.7	Restated Employment Agreement, dated as of May 14, 2002, by and between Stratex Networks, Inc. and Charles D. Kissner.
	10	.8	Stratex Networks, Inc. 1999 Non-Officer Employee Restricted Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the company’s Registration Statement on Form S-8 (File No. 333-76233)).
	10	.9	Stratex Networks, Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 333-80281)).