<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-07428
CALIFORNIA MICROWAVE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1668412
- -------- ----------
(State or other jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
1143 BORREGAS AVENUE, SUNNYVALE, CALIFORNIA 94089
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 732-4000
--------------
</TABLE>
- --------------------------------------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Classes Outstanding at January 31, 1999
- --------------------------- -------------------------------
Common Stock $.10 Par Value 14,780,685
</TABLE>
-1-
<PAGE> 2
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 43,174 $ 45,955 $ 77,905 $ 85,213
Costs of revenue 26,949 26,948 50,035 50,808
-------- -------- -------- --------
Gross margin 16,225 19,007 27,870 34,405
Expenses:
Research and development 5,961 4,550 11,395 8,744
Sales, marketing and administration 10,846 11,753 21,571 20,058
Amortization of intangible assets 473 344 868 688
Purchased in-process research and development 3,565 -- 11,775 --
-------- -------- -------- --------
Total expenses 20,845 16,647 45,609 29,490
-------- -------- -------- --------
Operating income (loss) (4,620) 2,360 (17,739) 4,915
Interest expense, net (1,107) (893) (1,979) (2,006)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (5,727) 1,467 (19,718) 2,909
Provision for (benefit from) income taxes (1,203) 529 (4,268) 1,048
-------- -------- -------- --------
Income (loss) from continuing operations (4,524) 938 (15,450) 1,861
Income from discontinued operations, net
of income taxes 888 934 1,963 2,323
-------- -------- -------- --------
Net income (loss) $ (3,636) $ 1,872 $(13,487) $ 4,184
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.30) $ 0.06 $ (1.03) $ 0.11
Income from discontinued operations 0.06 0.06 0.13 0.14
-------- -------- -------- --------
Net income (loss) $ (0.24) $ 0.11 $ (0.90) $ 0.25
======== ======== ======== ========
Weighted average common shares 14,968 16,526 15,041 16,511
======== ======== ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.30) 0.06 $ (1.03) $ 0.11
Income from discontinued operations 0.06 0.06 0.13 0.14
-------- -------- -------- --------
Net income (loss) $ (0.24) $ 0.11 $ (0.90) $ 0.25
======== ======== ======== ========
Weighted average common shares and dilutive
common share equivalents 14,968 16,825 15,041 16,739
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-2-
<PAGE> 3
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,303 $ 24,630
Short-term investments 2,791 2,636
Accounts receivable 36,998 35,918
Inventories 28,196 25,710
Deferred income taxes 32,607 15,714
Prepaid expenses 2,914 512
Net current assets of discontinued operations 13,617 11,971
--------- ---------
Total current assets 118,426 117,091
--------- ---------
Property, plant and equipment, net 19,915 19,065
Deferred income taxes 3,005 16,448
Intangible assets 33,171 27,887
Other assets 5,029 3,698
Net long-term assets of discontinued operations 5,710 6,323
--------- ---------
$ 185,256 $ 190,512
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 15,944 $ 13,142
Accrued liabilities 24,106 30,217
Current portion of long-term debt 1,967 352
Note payable 20,542 --
--------- ---------
Total current liabilities 62,559 43,711
--------- ---------
Long-term liabilities:
Long-term debt 1,058 2,748
Convertible subordinated notes 57,500 57,500
Other long-term liabilities 2,010 2,000
--------- ---------
Total long-term liabilities 60,568 62,248
--------- ---------
Shareholders' equity:
Common stock 1,663 1,663
Capital in excess of par value 95,673 95,673
Treasury stock (36,223) (27,831)
Retained earnings 1,016 15,048
--------- ---------
Total shareholders' equity 62,129 84,553
--------- ---------
$ 185,256 $ 190,512
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Income (loss) from continuing operations $(15,450) $ 1,861
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Purchased in-process research and development 11,775 --
Depreciation and amortization 3,320 3302
Amortization of intangible assets 868 688
Deferred taxes (4,268) 1,048
Debt issuance costs 80 146
Other -- 37
Net effect of changes in:
Accounts receivable (746) (8,620)
Refundable income taxes -- 10,085
Inventories (2,179) 2,247
Prepaid expenses (868) (737)
Accounts payable 2,585 (1,400)
Other accrued liabilities (8,536) 3,682
-------- --------
Net cash provided by (used in) continuing operations (13,419) 12,339
-------- --------
Investing activities:
Capital expenditures (2,368) (3,958)
Acquisitions and investments in businesses (18,761) --
Other (1,565) (512)
-------- --------
Net cash used in continuing operations
investing activities (22,694) (4,470)
Net cash provided by (used in) discontinued
operations activities 2,033 (5,872)
-------- --------
Net cash used in investing activities (20,661) (10,342)
-------- --------
Financing activities:
Payments on long-term debt (75) (71)
Proceeds from issuance of common stock 1,168 1,163
Proceeds from (payments on) bank credit facilities 20,542 (3,630)
Purchase of treasury stock (10,391) --
Other (491) --
-------- --------
Net cash provided by (used in) financing activities 10,753 (2,538)
-------- --------
Net decrease in cash and cash equivalents (23,327) (541)
Cash and cash equivalents at beginning of year 24,630 5,705
-------- --------
Cash and cash equivalents at end of period $ 1,303 $ 5,164
======== ========
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 1,793 $ 2,239
Income taxes -- (300)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements include
the accounts of California Microwave, Inc. and its subsidiaries (the
Company) and have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. All
significant intercompany balances and transactions have been
eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation. These unaudited condensed
consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to fairly state the financial
position, results of operation and cash flows for the periods
presented. Interim results are not necessarily indicative of results
for a full year. The condensed consolidated interim financial
statements should be read in conjunction with the audited
consolidated financial statements for the year ended June 30, 1998,
included in the California Microwave, Inc. 1998 Annual Report to
Shareholders.
The Company has adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income," and for the
six months ended December 31, 1998 and December 31, 1997, the
Company's comprehensive loss was the same as its net loss.
Note 2 - Segment Information
-------------------
California Microwave, Inc.'s two continuing segments are business
units that develop, manufacture, and distribute products and
solutions for distinct markets.
1. The Satellite Communications Division (Satellite) includes EF
Data and Crown Satellite. EF Data provides satellite modems and
transceiver products and services principally to
telecommunications carriers and Internet service providers. Crown
Satellite develops and supplies products and software for the
network delivery of Internet Protocol (IP) data and multimedia
services. These products and services enable customers to provide
voice, video, and data services via satellite.
2. The Terrestrial Wireless Division (Terrestrial) represents the
combination of Microwave Radio Communications (MRC), Microwave
Data Systems (MDS) and Adaptive Broadband Limited (ABL). MRC and
MDS provide products and services, based upon microwave radio
technology, primarily to the television broadcast, oil, gas and
utility, and transaction processing industries. ABL is developing
high-speed, dynamic bandwith management, wireless Internet
connectivity technology, and is a newly acquired development
stage business.
-5-
<PAGE> 6
Notes 2 - Segment Information (Continued)
<TABLE>
<CAPTION>
(Dollars in millions)
Three months ended December 31, 1998 Six months ended December 31, 1998
- ------------------------------------ ----------------------------------
Satellite Terrestrial Total Satellite Terrestrial Total
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Bookings:
Domestic $ 9.5 $ 12.3 $ 21.8 $ 16.3 $ 26.6 $ 42.9
International 11.2 5.5 16.7 22.4 10.3 32.7
------- ------- ------- ------- ------- -------
$ 20.7 $ 17.8 $ 38.5 $ 38.7 $ 36.9 $ 75.6
Revenue:
Domestic $ 10.6 $ 13.5 $ 24.1 $ 16.6 $ 26.6 $ 43.2
International 12.5 6.6 19.1 22.7 12.0 34.7
------- ------- ------- ------- ------- -------
$ 23.1 $ 20.1 $ 43.2 $ 39.3 $ 38.6 $ 77.9
Operating income (loss) $ 0.6 $ 1.5 $ 2.1 $ (2.0) $ 2.7 $ 0.7
Three months ended December 31, 1997 Six months ended December 31, 1997
- ------------------------------------ ----------------------------------
Satellite Terrestrial Total Satellite Terrestrial Total
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Bookings:
Domestic $ 9.0 $ 14.5 $ 23.5 $ 19.2 $ 27.4 $ 46.6
International 15.8 9.4 25.2 28.3 15.6 43.9
------- ------- ------- ------- ------- -------
$ 24.8 $ 23.9 $ 48.7 $ 47.5 $ 43.0 $ 90.5
Revenue:
Domestic $ 10.0 $ 13.2 $ 23.2 $ 17.9 $ 24.7 $ 42.6
International 13.7 9.1 22.8 26.5 16.1 42.6
------- ------- ------- ------- ------- -------
$ 23.7 $ 22.3 $ 46.0 $ 44.4 $ 40.8 $ 85.2
Operating income $ 3.1 $ 3.7 $ 6.8 $ 5.4 $ 6.0 $ 11.4
</TABLE>
Reconciliation to Income (Loss) from Continuing Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating income from reportable segments $ 2.1 $ 6.8 $ 0.7 $ 11.4
Corporate expenses (2.6) (4.1) (5.7) (5.8)
Amortization of intangible assets (0.5) (0.3) (0.9) (0.7)
Purchased in-process research and development (3.6) - (11.8) -
Interest expense, net (1.1) (0.9) (2.0) (2.0)
------ ------ ------ ------
Income (loss) from continuing operations before
income taxes $ (5.7) $ 1.5 $(19.7) $ 2.9
====== ====== ====== ======
Reconciliation of operating assets to Total Assets
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Satellite assets $ 52.8 $ 52.3
Terrestrial assets 33.1 32.4
------- -------
Operating assets from reportable segments 85.9 84.7
Corporate assets 11.3 27.4
Deferred income taxes 35.6 32.2
Net intangible assets from businesses acquired 33.2 27.9
Net assets of discontinued operations 19.3 18.3
------- -------
Total assets $ 185.3 $ 190.5
======= =======
</TABLE>
-6-
<PAGE> 7
Note 3 - Discontinued Operations
-----------------------
In October 1998, the Company's Board of Directors adopted a
formal plan to sell its Government Division, which consists of
the Government Electronics Division (GED), and Airborne Systems
Division (ASID). Historically, the Government Division included
the Company's Services Division (SD), which was sold in the
fourth quarter of fiscal year 1998 to Telscape International,
Inc. (Telscape) for $8.2 million in cash with a pre-tax gain of
$6.3 million. These operations contract principally with the
United States Department of Defense and provide products and
services principally in the areas of communication,
reconnaissance, and surveillance systems. The operating results
and financial position of the Government Division have been
classified as discontinued operations in the Company's financial
statements for all periods presented. Revenue from the Government
Division discontinued operations was $20.0 million and $20.6
million for the three months ended December 31, 1998 and 1997,
and $39.8 million and $45.7 million for the six months ended
December 31, 1998 and 1997. Income from discontinued operations
(net of income taxes) for the Government Division was $0.9
million for three months ended December 31, 1998 and 1997, and
$2.0 million and $2.3 million for the six months ended December
31, 1998 and 1997.
In June 1997, the Company's Board of Directors adopted a formal
plan to sell its Microwave Networks (MN) and Satellite
Transmission Systems (STS) divisions, and provided $8.4 million
(net of income taxes) for anticipated operating losses prior to
disposal and for expected losses on their eventual sale.
In February 1998, STS was sold to L-3 Communications Corporation
(L-3) for $27 million in cash, and in April 1998, MN was sold to
Tadiran Ltd. (Tadiran) for $31.5 million in cash. During the
second half of fiscal year 1998, the Company recorded additional
provisions of $15.1 million (net of income taxes) for additional
losses on disposal of these divisions. These provisions were
primarily for adjustments to the combined losses on sale and for
higher than anticipated operating losses prior to disposal of
both divisions. The operating results, loss on disposal, and
financial position of these divisions have been classified as
discontinued operations in the Company's financial statements for
all periods presented. Revenue from the MN and STS discontinued
operations was $33.1 million and $62.5 million for the three
month and six month periods ended December 31, 1997. The loss
from discontinued operations (net of income taxes) for MN and STS
for the three month and six month periods ended December 31,
1997, was $2.6 million and $4.8 million, and was accrued at June
30, 1997 as part of the net loss on disposal.
Final accounting for the STS and MN divestitures is subject to
completion of the post-closing procedures provided for in the L-3
and Tadiran agreements. The Company believes that the completion
of these procedures will not have a material impact on the
Company's financial position, results of operations or cash
flows.
In May 1995, the Company's MN division entered into certain
agreements with Nokia Telecommunications Oy (Nokia) pursuant to
which MN was to provide to Nokia certain microwave radios and
related software and services, and was to carry out certain
development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to
meet certain contracual specifications. MN was sold to Tadiran in
April 1998 and under the terms of the sale agreement, Tadiran
assumed and indemnified the Company with respect to the Nokia
claims. Tadiran has now taken the position that the Company is
responsible for the Nokia claims, based upon allegations that the
Company failed to provide adequate disclosures and financial
reserves with respect to such claims. Also, in September 1998,
the Company received notices from Nokia that Nokia has decided to
terminate the May 1995 agreements and has begun arbitration
proceedings to recover damages, which Nokia provisionally claims
are $9.6 million. The Company believes that it has good defenses
and will vigorously defend the Nokia and Tadiran claims. No
accruals have been recorded for expenses which may be incurred to
resolve the dispute, and the Company believes final resolution of
this matter will not have a material impact on the Company's
financial position, results of operations or cash flow.
Note 4 - Inventories
-----------
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Work-in-process and finished goods $ 10,526 $ 8,766
Raw materials 17,670 16,944
-------- --------
$ 28,196 $ 25,710
======== ========
</TABLE>
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<PAGE> 8
Note 5 - Intangible Assets of Businesses Acquired
----------------------------------------
The excess purchase price over the fair value of net tangible
assets is allocated to intangible assets based on fair value. The
carrying value of the intangible assets are reviewed if the facts
and circumstances suggest that the asset may be impaired. If this
review indicates that the intangible assets are not recoverable,
the Company's carrying value is reduced appropriately. The
following table summarizes net intangible assets of businesses
acquired.
<TABLE>
<CAPTION>
(Dollars in thousands) Amortization December 31, June 30,
Period 1998 1998
------------- ------------ --------
<S> <C> <C> <C> <C>
Goodwill 20 - 30 years $ 40,246 $ 37,033
Assembled work force 3 - 4 years 865 --
Developed technology 8 years 2,074 --
-------- --------
43,185 37,033
Accumulated amortization (10,014) (9,146)
-------- --------
$ 33,171 $ 27,887
======== ========
</TABLE>
Note 6 - Borrowing Arrangements
----------------------
In November 1998, the Company terminated its asset-based bank
credit facility due to expire in June 2000 and entered into an
unsecured revolving credit facility with available credit of $30
million that expires in June 1999. The annual commitment fee on
the unused portion of the facility and the interest rate for
borrowings vary based upon the Company's ratio of funded debt to
earnings before interest, amortization and taxes, with the
maximum commitment fee set at 0.40% and the maximum borrowing
rate set at the bank's rate plus 0.25%. The maximum borrowing
rate was 8.0% at December 31, 1998. The net borrowing capacity
under the Company's credit facility was $8.1 million as of
December 31, 1998. The Company expects to increase its revolving
credit facility to provide additional working capital flexibility
in the third quarter of fiscal year 1999, and anticipates having
to secure the credit facility with the assets of the Company.
At December 31, 1998, the Company was not in compliance with
certain covenants of its bank credit facility and one of its
industrial development bond agreements. These lenders have waived
such non-compliance at December 31, 1998, and the credit facility
and industrial development bond balances are classified as
current liabilities.
Note 7 - Shareholders' Equity
--------------------
On February 5, 1998, the Company announced that its Board of
Directors authorized the repurchase of up to three million shares
of its common stock on the open market. On October 6, 1998, the
Company announced that its Board of Directors had increased the
number of shares authorized for repurchase to six million. During
the six months ended December 31, 1998, the Company acquired
705,000 shares of common stock for $10.4 million, bringing the
total shares repurchased subsequent to February 5, 1998 to
approximately 2.3 million.
The following table summarizes the changes in shareholders'
equity for the six months ended December 31, 1998.
<TABLE>
<CAPTION>
Capital Total share-
Common Stock in excess of Treasury Retained holders'
(Dollars in thousands) Shares Issued Amount par value stock earnings equity
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 16,629,031 $1,663 $95,673 $(27,831) $15,048 $84,553
------------------------------------------------------------------------------
Treasury stock purchases (10,391) (10,391)
Common stock issued from
treasury shares for
stock option and stock
purchase plans 1,999 (545) 1,454
Net loss (13,487) (13,487)
------------------------------------------------------------------------------
Balance at December 31, 1998 16,629,031 $1,663 $95,673 $(36,223) $1,016 $62,129
==============================================================================
</TABLE>
Note 8 - Shareholder Rights
------------------
In October 1989, the Board of Directors of the Company approved a
Rights Agreement which provided for the issuance to holders of
Common Stock of Rights to purchase additional Common Stock and
other securities. These Rights become exercisable in the event,
among other things, that a person or group acquires 20% or more
of the Company's Common Stock as described in the Agreement. In
light of the Company's Common Stock repurchase program (discussed
in Note 7 above), planned repurchases of Common Stock by the
Company could cause the ownership of one or more stockholders to
cross the 20% threshold, which could inadvertently trigger the
exercisability of the Rights. Accordingly, on November 6, 1998,
the rights Agreement was amended to provide that the
exercisability of the Rights will not be triggered if a person
becomes a beneficial owner of 20% or more of the Company's Common
Stock as a result of an acquisition of Common Stock by the
Company which, by reducing the number of shares outstanding,
increases the proportionate number of shares beneficially owned
by such stockholder to 20% or more. Exercisability would still,
however, be triggered if such person, following notice or
disclosure of stock repurchases, then becomes the beneficial
owner of an aggregate of 3,000,000 shares of Common Stock or
more. In addition, the Rights Agreement was also amended to
permit the Board of Directors to authorize, issue or pay, upon
exercise of Rights, cash or other property.
-8-
<PAGE> 9
The Company also effected certain other changes to the Rights
Agreement, including the change of its Rights Agent to
BankBoston, N.A.
Note 9 - Income Taxes
------------
At December 31, 1998, the Company has a cumulative net deferred
tax asset of $35.6 million that will be available to reduce
payments on future tax liabilities. The Company's management
believes it is more likely than not that the deferred tax asset
will be realized based on the Company's operating history in its
continuing operations, its projected future results, and the
anticipated gain on the sale of its Government Division.
Note 10 - Contingent Liabilities
----------------------
The Company is subject to legal proceedings and claims that arise
in the normal course of its business. The Company believes these
proceedings will not have a material adverse effect on the
financial position, results of operations or cash flows of the
Company.
Note 11 - Acquisitions
------------
On August 20, 1998, the Company acquired Adaptive Broadband
Limited a United Kingdom based company developing high-speed
wireless Internet connectivity technology. The acquisition was
accounted for under the purchase method. The initial purchase
price was approximately $10.9 million including cash payments,
direct costs, and the assumption of ABL's net liabilities. The
purchase price will include additional future payments of up to
$7 million contingent on ABL's performance exceeding certain
targets. The assets and liabilities assumed by the Company were
recorded based on their fair values at the date of acquisition.
The purchase price was allocated $8.2 million to in-process
research and development, $0.4 million to net tangible assets,
$0.4 million to identified intangible assets, and $1.9 million to
goodwill. The amount allocated to in-process research and
development was expensed at the time of acquisition. The
Company's management believes that the allocation of the majority
of the initial purchase price to purchased in-process research
and development is appropriate given the stage of development of
ABL's potential products and the considerable potential of these
products to contribute to the future operations of the Company.
The Company's results of operations for the first half of fiscal
year 1999, include ABL's results from August 20, 1998.
On November 19, 1998, the Company acquired Crown Satellite
(Crown), which is developing and supplying products and software
for the network delivery of Internet Protocol (IP) data and
multimedia services, from Crown International, Inc. The
acquisition was accounted for under the purchase method. The
initial purchase price was approximately $7.7 million including
cash payments, direct costs, and the assumption of Crown's net
liabilities. The purchase price will include additional future
payments contingent on Crown's performance. The assets and
liabilities assumed by the Company were recorded based on their
fair values at the date of acquisition. The purchase price was
allocated $3.6 million to in-process research and development,
$0.3 million to net tangible assets, $2.5 million to identified
intangible assets, and $1.3 million to goodwill. The amount
allocated to in-process research and development was expensed at
the time of acquisition. The Company's management believes that
the purchased in-process research and development is appropriate
given the stage of development of certain of Crown's data
products and the potential of these products to contribute to the
future operations of the Company. The Company's results of
operations for the second quarter of fiscal year 1999, include
Crown's results from November 19, 1998.
Note 12 - Restructuring and Other Charges
-------------------------------
During the fourth quarter of fiscal year 1998, the Company
reviewed and refocused its operations and business processes in
connection with its strategic and operational initiatives and
recorded $4.6 million for restructuring and other charges,
primarily for severance and excess facilities. The severance
charge was $2.9 million associated with workforce reductions of
approximately 160 employees. The workforce reductions were
primarily driven by the elimination of manufacturing capacity in
the Company's Satellite division and factory consolidation in the
Company's Terrestrial division, as well as the elimination of the
Company's historical holding company structure and impacted
employees in all functional areas of the Company. During the
first six months of fiscal year 1999, the Company terminated
approximately all of the 160 employees and utilized $2.1 million
of the $2.9 million reserve recorded at June 30, 1998 through
cash payments for termination benefits. During the first six
months of fiscal year 1999, there have been no adjustments to the
reserve, and the Company expects to utilize the remainder of the
severance accrual through additional cash payments for
termination benefits by March 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements made below and in the California Microwave, Inc. (the Company) 1998
Annual Report to Shareholders that are not historical facts, including any
statements about expectations for fiscal year 1999 and beyond, involve certain
risks and uncertainties. Factors that could cause the Company's actual results
to differ materially from management's projections, estimates and expectations
include, but are not limited to, delays in the receipt of orders or in the
shipment of products, delays in the disposal of discontinued operations and
other factors referred to under "Information Regarding Forward Looking
Statements" in the Company's Consolidated Financial Statements and Notes to
Financial Statements and in the Company's Form 10-K Annual Report for its fiscal
year ended June 30,
-9-
<PAGE> 10
1998. The Consolidated Financial Statements should be read in conjunction with
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
In October 1998, the Company's board of director's adopted a formal plan to sell
its Government Division. During fiscal 1998, the Company sold its Microwave
Networks (MN), Satellite Transmission Systems (STS), and Services (SD)
divisions. The operating results, loss on disposal, and financial position of
these divisions have been classified separately as discontinued operations for
all periods presented in the accompanying Condensed Consolidated Financial
Statements. See Note 3 - Discontinued Operations of Notes to Condensed
Consolidated Financial Statements for further discussion of these transactions.
RESULTS OF OPERATIONS
Overview
The Company reported a net loss from continuing operations of $4.5 million,
or $0.30 per share, for the three months ended December 31, 1998, compared to
net income from continuing operations of $0.9 million, or $0.06 per share, for
the three months ended December 31, 1997, which included a $1.2 million charge
after income taxes for a litigation settlement. Operating results from
continuing operations for the second quarter of fiscal year 1999 include a
purchased in-process research and development charge for the acquisition of
Crown Satellite (Crown) of $3.1 million after income taxes, or $0.21 per share.
Excluding the purchased in-process research and development charge, the
Company's net loss from continuing operations for the three months ended
December 31, 1998 was $1.4 million, or $0.09 per share.
The Company reported a net loss from continuing operations of $15.5
million, or $1.03 per share, for the six months ended December 31, 1998,
compared to net income from continuing operations of $1.9 million, or $0.11 per
share for the six months ended December 31, 1997, which included a $1.2 million
charge after income taxes for a litigation settlement. Operating results from
continuing operations for the first half of fiscal year 1999 include purchased
research and development charges for the acquisitions of Crown and Adaptive
Broadband Limited (ABL) of $10.4 million after income taxes, or $0.69 per share.
Excluding the purchased research and development charges, the Company's net loss
from continuing operations for the six months ended December 31, 1998 was $5.1
million, or $0.34 per share.
New orders booked from continuing operations were $38.5 million and $48.7
million for the three months ended December 31, 1998 and 1997, representing a
21% decrease. New orders booked from continuing operations were $75.6 million
and $90.5 million for the six months ended December 31, 1998 and 1997,
representing a 16% decrease. Revenue from continuing operations was $43.2
million and $46.0 million for the three months ended December 31, 1998 and 1997,
representing a 6% decrease. Revenue from continuing operations was $77.9 million
and $85.2 million for the six months ended December 31, 1998 and 1997,
representing a 9% decrease. The decrease for the second quarter and first half
of fiscal year 1999 was primarily a result of weakness in the Company's
international markets, primarily in Latin America and Asia, for both satellite
and terrestrial products, and in satellite product sales to domestic integrators
who ship internationally. The revenue decrease was only partially offset by an
increase in satellite domestic business during the second quarter of fiscal year
1999 and terrestrial domestic business primarily during the first quarter of
fiscal year 1999.
During the second quarter of fiscal year 1999, the Company continued its
expense reduction actions to respond to continued softness in customer demand.
Until the Company reaches more acceptable bookings levels, the Company
eliminated certain employee bonuses, which contributed income of $0.8 million
after income taxes to the second quarter of fiscal year 1999.
-10-
<PAGE> 11
Business Segment Information
The Company's continuing operations include two divisions: the Satellite
Communications Division (Satellite) and the Terrestrial Wireless Division
(Terrestrial). The following table sets forth certain information for these
business segments for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in millions) Three months ended December 31, Six months ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bookings
Satellite:
Domestic $ 9.5 46% $ 9.0 36% $ 16.3 42% $ 19.2 40%
International 11.2 54% 15.8 64% 22.4 58% 28.3 60%
----------------- ----------------- --------------- ---------------
Total 20.7 100% 24.8 100% 38.7 100% 47.5 100%
Terrestrial:
Domestic 12.3 69% 14.5 61% 26.6 72% 27.4 64%
International 5.5 31% 9.4 39% 10.3 28% 15.6 36%
----------------- ----------------- --------------- ---------------
Total 17.8 100% 23.9 100% 36.9 100% 43.0 100%
Total Domestic 21.8 57% 23.5 48% 42.9 57% 46.6 51%
Total International 16.7 43% 25.2 52% 32.7 43% 43.9 49%
----------------- ----------------- --------------- ---------------
Total Bookings $38.5 100% $ 48.7 100% $75.6 100% $ 90.5 100%
Revenue
Satellite:
Domestic $ 10.6 46% $ 10.0 42% $ 16.6 42% $17.9 40%
International 12.5 54% 13.7 58% 22.7 58% 26.5 60%
----------------- ----------------- --------------- ---------------
Total 23.1 100% 23.7 100% 39.3 100% 44.4 100%
Terrestrial:
Domestic 13.5 67% 13.2 59% 26.6 69% 24.7 61%
International 6.6 33% 9.1 41% 12.0 31% 16.1 39%
----------------- ----------------- --------------- ---------------
Total 20.1 100% 22.3 100% 38.6 100% 40.8 100%
Total Domestic 24.1 56% 23.2 50% 43.2 55% 42.6 50%
Total International 19.1 44% 22.8 50% 34.7 45% 42.6 50%
----------------- ----------------- --------------- ---------------
Total Revenue $ 43.2 100% $ 46.0 100% $ 77.9 100% $ 85.2 100%
Gross Margin
Satellite $ 7.8 34% $ 10.0 42% $ 11.8 30% $ 18.1 41%
Terrestrial 8.4 42% 9.0 40% 16.1 42% 16.3 40%
----------------- ----------------- --------------- ---------------
Total $ 16.2 38% $ 19.0 41% $ 27.9 36% $ 34.4 40%
Operating Income (loss)
Satellite $ 0.6 3% $ 3.1 13% $ (2.0) (5)% $ 5.4 12%
Terrestrial 1.5 7% 3.7 17% 2.7 7% 6.0 15%
Corporate and other (1)(2) (6.7) (16)% (4.4) (10)% (18.4) (24)% (6.5) (8)%
----------------- ----------------- --------------- ---------------
Total $ (4.6) (11)% $ 2.4 5% $ (17.7) (23)% $ 4.9 6%
</TABLE>
(1) During the first quarter of fiscal year 1999 the Company recorded a
purchased in-process research and development charge of $8.2 million for
the ABL acquisition. During the second quarter of fiscal year 1999, the
Company recorded a purchased in-process research and development charge of
$3.6 million for the Crown acquisition.
(2) During the second quarter of fiscal year 1998 the Company recorded a $1.9
million litigation settlement charge.
-11-
<PAGE> 12
Satellite Communications
The Satellite Communications Division includes EF Data and Crown Satellite.
EF Data provides satellite modems and transceiver products and services
primarily to telecommunications carriers and Internet service providers. Crown
Satellite develops and supplies products and software for the network delivery
of Internet Protocol (IP) data and multimedia services. These products and
services enable customers to provide voice, video, and data services via
satellite.
Satellite revenue was $23.1 million and $23.7 million for the three months
ended December 31, 1998 and 1997, representing a decrease of $0.6 million or 3%.
Satellite revenue was $39.3 million and $44.4 million, for the six months ended
December 31, 1998 and 1997, representing a decrease of $5.1 million or 11%.
International revenue decreased $1.2 million or 9% for the three months ended
December 31, 1998, and for the six months ended December 31, 1998, international
revenue decreased $3.8 million or 14%. The international revenue decrease was
due to financial conditions in developing countries, a delay in the
privatization of the public telecommunications company in Brazil, and softness
in the Satellite European markets. Domestic revenue increased $0.6 million or 6%
for the three months ended December 31, 1998, and decreased $1.3 million or 7%
for the six months ended December 31, 1998. The revenue decrease for the six
months ended December 31, 1998 was due to lower demand from systems integrators
whose ultimate customers are in the international markets. Satellite
book-to-bill ratios were 90% and 105% for the three months ended December 31,
1998 and 1997, and 98% and 107% for the six months ended December 31, 1998 and
1997.
Satellite gross margin was $7.8 million and $10.0 million, or as a
percentage of revenue 34% and 42% for the three months ended December 31, 1998
and 1997. For the six months ended December 31, 1998 and 1997, Satellite gross
margin was $11.8 million and $18.1 million, or as a percentage of revenue 30%
and 41%. The decrease was due to the reduction in revenue, unfavorable
manufacturing variances driven by the revenue reduction, and a change in the
revenue mix to lower margin products.
Satellite operating income was $0.6 million and $3.1 million for the three
months ended December 31, 1998 and 1997. Satellite operating loss for the six
months ended December 31, 1998, was $2.0 million, compared to operating income
of $5.4 million for the six months ended December 31, 1997.
Terrestrial Wireless
The Terrestrial Wireless Division represents the combination of Microwave
Radio Communications (MRC), Microwave Data Systems (MDS) and ABL. MRC and MDS
provide products and services, based upon microwave radio technology, primarily
to the television broadcast, oil, gas and utility, and transaction processing
industries. ABL is developing high-speed, dynamic bandwidth management, wireless
Internet connectivity technology and is in the development stage.
Terrestrial revenue was $20.1 million and $22.3 million for the three
months ended December 31, 1998 and 1997, representing a decrease of $2.2 million
or 10%. Terrestrial revenue was $38.6 million and $40.8 million for six months
ended December 31 1998 and 1997, representing a decrease of $2.2 million or 5%.
International revenue decreased $2.5 million or 27% for the three months ended
December 31, 1998, slightly offset by an increase in domestic revenue of $0.3
million. For the six months ended December 31 1998, international revenue
decreased $4.1 million or 25%, slightly offset by an increase in domestic
revenue of $1.9 million or 8%. The decrease in international revenue was due to
financial conditions in developing countries, including declines in oil and gas
prices, in Latin America. Terrestrial book-to-bill ratios were 89% and 107% for
the three months ended December 31, 1998 and 1997, and 96% and 105% for the six
months ended December 31, 1998 and 1997.
Terrestrial gross margin was $8.4 million and $9.0 million, or as a
percentage of revenue 42% and 40% for the three months ended December 31, 1998
and 1997, and $16.1 million and $16.3 million, or as a percentage of revenue 42%
and 40% for the six months ended December 31, 1998 and 1997. The increase in
gross margin percentage is a result of the increase in volume of higher margin
products.
Terrestrial operating income was $1.5 million and $3.7 million for the
three months ended December 31, 1998 and 1997, and $2.7 million and $6.0 million
for the six months ended December 31, 1998 and 1997. The decrease in operating
income was primarily driven by research and development and sales and marketing
investments in wideband and broadband products, including ABL.
Operating Expenses
Research and development expenses for continuing operations were $6.0
million and $4.6 million, or as a percentage of revenue 14% and 10% for the
three months ended December 31, 1998 and 1997. For the six months ended December
31, 1998 and 1997, research and development expenses were $11.4 million and $8.7
million, or as a percentage of revenue 15% and 10%. The increase was primarily
due to research and development spending for ABL and other terrestrial wideband
and broadband products, as well as research and development investment in
broadband satellite products such as the Spectracast products from the Crown
acquisition and the Multimedia Integrated Digital Access System (MIDAS). The
Company believes that the continual and rapid introduction of new products and
technologies is critical to sustaining growth within its current and future
target markets.
Sales, marketing and administrative expenses for continuing operations were
$10.8 million and $11.8 million for the three months ended December 31, 1998 and
1997, or as a percentage of revenue 25% and 26%. For the six months ended
December 31, 1998 and 1997 sales, marketing and administrative expenses for
continuing operations were $21.6 million and $20.1 million, or as a percentage
of revenue 28% and 24%. Included in sales, marketing and administrative expenses
for the three and six months ended December 31, 1997 was a $1.9 million
litigation
-12-
<PAGE> 13
settlement charge. Excluding the litigation settlement charge, sales, marketing
and administrative expenses as a percentage of revenue for the three and six
month periods ended December 31, 1997 was 21%. The increase in sales, marketing
and administrative expenses were due to focused sales and marketing investments
for wideband and broadband products.
Amortization expense associated with intangible assets for the continuing
businesses was $0.5 million and $0.3 million for the three months ended December
31, 1998 and 1997, and $0.9 million and $0.7 million for the six months ended
December 31, 1998 and 1997. The increase during the second quarter and first
half of fiscal year 1999 was due to an increase in intangible assets from the
ABL and Crown acquisitions.
Purchased in-process research and development includes $3.6 million
associated with the Crown acquisition recorded during the second quarter of
fiscal year 1999, and $8.2 million associated with the ABL acquisition recorded
during the first quarter of fiscal year 1999. See Note 10 - Acquisition, of
Notes to Condensed Consolidated Financial Statements for further discussion of
the Crown and ABL acquisitions.
Interest Expense, Net
Net interest expense was $1.1 million and $0.9 million for the three months
ended December 31, 1998 and 1997, and $2.0 million for the six months ended
December 31, 1998 and 1997. The increase in net interest expense during the
second quarter of fiscal 1999, reflects an increase in average borrowings
primarily from the utilization of the Company's revolving credit facility,
partially offset by the repayment of $5.7 million of convertible subordinated
notes during the third quarter of fiscal year 1998.
Provision for Income Taxes
The Company's income tax benefit for continuing operations was $1.2 million
and $4.3 million for the three months and six months ended December 31, 1998
compared to the Company's provision for income taxes of $0.5 million and $1.0
million for the three months and six months ended December 31, 1997. Excluding
the impact of the partial valuation allowance recorded against the income tax
benefit for future deductions from the amortizaton of intangible assets acquired
in the ABL and Crown acquisitions, the effective income tax rate for the three
month and six month periods ended December 31, 1998, was 36%, consistent with
the 36% rate for the three month and six month periods ended December 31, 1997.
Discontinued Operations
The Company's results from discontinued operations includes the Government
Division operations that recorded net income of $0.9 million or $0.06 per share
for the three months ended December 31, 1998 and 1997. For the six months ended
December 31, 1998 and 1997 net income from discontinued operations was $2.0
million or $0.13 per share and $2.3 million or $0.14 per share. The operating
losses for the MN and STS business units that were sold during fiscal year 1998,
for the three month and six month periods ended December 31, 1998 were accrued
at June 30, 1997 as part of the net loss on disposal.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had net working capital of $55.9 million,
including $1.3 million of cash and cash equivalents, compared with net working
capital of $73.4 million, including cash and cash equivalents of $24.6 million,
at June 30, 1998.
Net cash used in continuing operating activities was $13.4 million for the
six months ended December 31, 1998, due primarily to a loss from operations, an
increase in inventories and payment of certain year-end accruals. Net cash
provided by continuing operating activities was $12.3 million for the six months
ended December 31, 1997, primarily from operating income and $10.1 million from
income tax refunds, which was offset by an increase in accounts receivables of
$8.6 million.
Net cash used in investing activities for the six months ended December 31,
1998 was $20.7 million including the acquisitions of ABL for $10.4 million and
Crown for $7.5 million, and capital expenditures of $2.4 million. Net cash used
in investing activities for the six months ended December 31, 1997, was $10.3
million, including capital expenditures and cash used by discontinued
operations.
On February 5, 1998, the Company announced that its Board of Directors had
authorized the repurchase of up to three million shares of its common stock on
the open market. On October 6, 1998, the Company announced that its Board of
Directors had increased the number of shares authorized for repurchase to six
million. During the first six months of fiscal year 1999, the Company acquired
705,000 shares for $10.4 million bringing the total shares repurchased
subsequent to February 5, 1998 to approximately 2.3 million.
In addition to the common stock repurchased, the Company's financing
activities for the six months ended December 31, 1998 included credit facility
borrowings of $20.5 million and the receipt of $1.2 million from the sale of the
Company's common stock under stock option and stock purchase plans.
In November 1998, the Company terminated its asset-based bank credit
facility due to expire in June 2000 and entered into an unsecured revolving
credit facility with available credit of $30 million that expires in June 1999.
The annual commitment fee on the unused portion of the facility and the interest
rate on the borrowings vary based upon the Company's ratio of funded debt to
earnings before interest, amortization, and taxes, with the maximum commitment
fee set at 0.40% and the maximum borrowing rate set at the bank's reference rate
plus 0.25%. The maximum borrowing rate was 8.0% at December 31, 1998. The net
borrowing capacity under the Company's credit facility was $8.1 million as of
December 31, 1998. The Company expects to increase its revolving credit facility
to
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<PAGE> 14
provide additional working capital flexibility in the third quarter of fiscal
year 1999, and anticipates having to secure the credit facility with the assets
of the Company.
At December 31, 1998, the Company was not in compliance with certain
covenants of its bank credit facility and one of its industrial development bond
agreements. These lenders have waived such non-compliance at December 31, 1998,
and the credit facility and industrial development bond balances are classified
as current liabilities.
The Company believes that its current cash position, funds generated from
operations, funds it believes will be available from its credit facilities and
funds generated from the sale of the Company's Government Division will be
adequate to meet the Company's requirements for working capital, capital
expenditures and debt service for the foreseeable future.
Impact of Year 2000
The Company is assessing the potential impact of the Year 2000 computer
problem on its products, information systems, embedded systems (including
computers used in the manufacturing process) and on the ability of certain third
parties to supply critical materials and services. The Company expects to
complete the assessment of its products, computer systems, embedded systems,
certain third party suppliers, and major customers by March 31, 1999, and to
take necessary remediation action by the end of calendar year 1999. Expenditures
to date have not been material and have consisted of the limited use of outside
consultants and the time of certain Company personnel. Based on the partial
assessment completed through December 31, 1998, the Company currently expects
the future costs of completing the assessment and making system modifications,
primarily consisting of the time of certain company personnel, and purchasing
replacement computer systems to be approximately $1.0 million. Based on the
partial assessment completed through December 31, 1998 the Company currently
does not expect the future costs of assessing the Year 2000 readiness of
material third party suppliers and major customers to be material. The Company
has begun to assess the impact of Year 2000 on its products. The worst case
scenario is unknown and unanticipated Year 2000 failures in the Company's
products could have a material adverse impact on the Company's results of
operations and financial condition. While the Company does not anticipate a
material business interruption to result from the Year 2000 problem, the Company
gives no assurances that its systems will be Year 2000 ready and the Company
cannot guarantee the Year 2000 readiness of key third party suppliers and
service providers and major customers. Pending the completion of the assessment
of the Company's Year 2000 readiness, the Company may make certain contingency
plans but currently such plans have not been developed. If any of the Company's
computer systems, embedded systems, key third party suppliers and, primarily
consisting of the time of certain company personnel, services providers, and
major customers are not Year 2000 ready, the Company may experience a business
interruption which would have a material adverse impact on the Company's results
of operations and financial condition.
-14-
<PAGE> 15
Part II - Other Information
Item 1. Legal Proceedings
-----------------
In May 1995, the Company's MN division entered into certain
agreements with Nokia Telecommunications Oy (Nokia) pursuant to
which MN was to provide to Nokia certain microwave radios and
related software and services, and was to carry out certain
development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet
certain contractual specifications. MN was sold to Tadiran in April
1998 and under the terms of the sale agreement, Tadiran assumed and
indemnified the Company with respect to the Nokia claims. Tadiran
has now taken the position that the Company is responsible for the
Nokia claims, based upon allegations that the Company failed to
provide adequate disclosures and financial reserves with respect to
such claims. Also, the Company, in September 1998, received notices
from Nokia that Nokia has decided to terminate the May 1995
agreements and has begun arbitration proceedings to recover damages
which Nokia provisionally claims are $9.6 million. The Company
believes that it has good defenses and will vigorously defend the
Nokia and Tadiran claims. No accruals have been recorded for
expenses which may be incurred to resolve the dispute, and the
Company believes final resolution of this matter will not have a
material impact on the Company's financial position, results of
operations or cash flow.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 10.24 - Asset purchase agreement, dated November 19,
1998, between California Microwave, Inc. and
Crown International, Inc.
Exhibit 27 - Financial Data Schedule for the period ended
December 31, 1998.
(b) Reports on Form 8-K.
December 11, 1998 reporting under Item 5 - Other events.
Announcement of filing Exhibits 99.1 and 99.2 to provide
additional supplemental information for each of its fiscal
1998 quarters and for the fiscal year ended June 30, 1998.
December 11, 1998 reporting under Item 7 - Financial
Statements and Exhibits. Exhibit 99.1 - Restated Condensed
Consolidated Financial Statements of Operations for the four
quarters of fiscal year ended June, 30 1998. Exhibit 99.2-
Restated Condensed Consolidated Financial Statement of
Operations for the fiscal year ended June, 30 1998.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CALIFORNIA MICROWAVE, INC.
February 12, 1998 BY /s/ Frederick D. Lawrence
- -------------------------- -------------------------------------
Date Frederick D. Lawrence
Chairman of the Board
President and Chief Executive Officer
February 12, 1998 BY /s/ Donna S. Birks
- -------------------------- -------------------------------------
Date Donna S. Birks
Executive Vice President
Chief Financial Officer
-16-
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.24 Asset purchase agreement, dated November 19, 1998, between
California Microwave, Inc. and Crown International, Inc.
27 Financial Data Schedule for the period ended December 31, 1998.
</TABLE>
<PAGE> 1
Exhibit 10.24
ASSET PURCHASE AGREEMENT
by and between
CALIFORNIA MICROWAVE, INC.
and
CROWN INTERNATIONAL , INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Definitions..........................................................................1
2. Purchase and Sale of Assets..........................................................1
(a) Basic Transaction.............................................................1
(b) Purchase Price................................................................2
(c) The Closing...................................................................3
(d) Additional Payments...........................................................3
(e) Assumed Liabilities...........................................................5
(f) Excluded Liabilities..........................................................6
3. Representations and Warranties Concerning the Transaction............................7
(a) Representations and Warranties of Crown.......................................7
(b) Representations and Warranties of CMI.........................................7
4. Representations and Warranties Concerning Crown and Crown Satellite..................8
(a) Qualification.................................................................8
(b) Title to Assets...............................................................9
(c) Financial Statements..........................................................9
(d) Events Subsequent to Most Recent Fiscal Month End.............................9
(e) Undisclosed Liabilities......................................................10
(f) Legal Compliance.............................................................10
(g) Real Property................................................................10
(h) Intellectual Property........................................................10
(i) Tangible Assets; Adequacy....................................................12
(j) Inventory....................................................................12
(k) Contracts....................................................................12
(l) Accounts Receivable..........................................................14
(m) Insurance....................................................................14
(n) Litigation...................................................................14
(o) Product Warranty.............................................................14
(p) Product Liability............................................................14
(q) Employee Benefits............................................................14
(r) Environment, Health, and Safety Matters......................................14
(s) Crown Satellite Products.....................................................15
(t) Year 2000 Readiness Disclosure...............................................15
(u) Disclosure...................................................................15
5. Post-Closing Covenants..............................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
(a) General......................................................................15
(b) Litigation Support...........................................................15
(c) Transition...................................................................16
(d) Confidentiality..............................................................16
(e) Covenants Not to Compete.....................................................16
(f) Use of Business Names........................................................17
(g) Employees....................................................................17
(h) Accrued Expenses.............................................................17
(i) Warranty Work................................................................17
6. Remedies for Breaches of This Agreement.............................................18
(a) Survival of Representations and Warranties...................................18
(b) Indemnification Provisions for Benefit of CMI................................18
(c) Indemnification Provisions for Benefit of Crown..............................18
(d) Matters Involving Third Parties..............................................19
(e) Notice.......................................................................20
(f) Indemnity Cap................................................................20
7. Tax Matters.........................................................................20
(a) Cooperation on Tax Matters...................................................20
(b) Certain Taxes................................................................20
(c) Allocation of Purchase Price.................................................21
(d) Research and Development Credit..............................................21
8. Termination.........................................................................21
(a) Termination of Agreement.....................................................21
(b) Effect of Termination........................................................21
9. Miscellaneous.......................................................................21
(a) Press Releases and Public Announcements......................................21
(b) No Third-Party Beneficiaries.................................................22
(c) Entire Agreement.............................................................22
(d) Succession and Assignment....................................................22
(e) Sale of Assets...............................................................22
(f) Counterparts.................................................................22
(g) Headings.....................................................................22
(h) Notices......................................................................22
(i) Governing Law................................................................23
(j) Amendments and Waivers.......................................................23
(k) Severability.................................................................24
(l) Expenses.....................................................................24
(m) Construction.................................................................24
(n) Incorporation of Exhibits, Annexes, and Schedules............................24
10. Definitions.........................................................................24
</TABLE>
ii
<PAGE> 4
EXHIBITS, ANNEXES, SCHEDULE:
Exhibit A Fixed Assets, Intellectual Property and Assumed Contracts
Exhibit B Final Statement
Exhibit C Inventory
Exhibit D Historical Financial Statements
Exhibit E Certain Employees
Annex I Exceptions to Crown's Representations and Warranties
Concerning the Transaction
Annex II Exceptions to CMI's Representations and Warranties
Concerning the Transaction
Disclosure Schedule Exceptions to Representations and Warranties
iii
<PAGE> 5
ASSET PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of November 19, 1998, by
and between CALIFORNIA MICROWAVE, INC., a Delaware corporation ("CMI"), and
CROWN INTERNATIONAL, INC., an Indiana corporation ("Crown"). CMI and Crown are
sometimes referred to individually as a "Party" and, collectively, as the
"Parties".
R E C I T A L S:
Crown owns all of the Assets of its Crown Satellite business division
("Crown Satellite").
This Agreement contemplates a transaction in which CMI will purchase
from Crown, and Crown will sell to CMI, all of the Assets in return for cash.
The Parties expect that the purchase will further certain of their business
objectives, including, without limitation, CMI's development, marketing and sale
of audio, data, data/ethernet broadcast and other products and services
throughout the world.
P R O V I S I O N S:
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. DEFINITIONS.
All capitalized terms will have the meaning ascribed to them in Section
12 of this Agreement.
2. PURCHASE AND SALE OF ASSETS.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, CMI agrees to purchase from Crown, and Crown agrees to sell to
CMI, all of the Assets for the consideration specified below in this Section 2.
The "Assets" shall include the following personal property, assets and rights,
tangible and intangible (including goodwill), whether accrued, contingent or
otherwise and whether now existing or hereafter acquired that relate primarily
to or are used in the business conducted by Crown through Crown's Satellite
business division, other than the Excluded Assets, and including without
limitation:
(i) the Fixed Assets, Intellectual Property and Assumed Contracts
listed on Exhibit A;
<PAGE> 6
(ii) all trade accounts receivable, and rights to receive
payments, and the benefit of security therefor reflected on the listing
of net assets of Crown Satellite as of November 13, 1998 (the "Final
Statement"), attached as Exhibit B;
(iii) all inventories of raw material, work in process, finished
products, goods, spare parts, replacement and component parts and office
and other supplies (whether on hand, in transit or on order) reflected
on Exhibit C (the "Inventories");
(iv) all of the other assets that are reflected in the Final
Statement, including credits, prepaid expenses, deferred charges,
advance payments, security deposits and prepaid items;
(v) all of the Books and Records;
(vi) all rights under express or implied warranties from
suppliers;
(vii) to the extent their transfer is permitted by law, all
Government Approvals, including all applications therefor;
(viii) all rights to causes of action, lawsuits, claims and
demands of any nature available to or being pursued by Crown or Crown
Satellite with respect to the Assets;
(ix) all guarantees, warranties, indemnities and similar rights;
(x) all computer hardware and software, including all rights
under licenses and other instruments or agreements relating thereto;
(xi) all of the Specific Assets set forth on Exhibit A, attached
hereto.
Notwithstanding anything in the foregoing to the contrary, Crown will retain and
not transfer, and CMI will not acquire the following (collectively, the
"Excluded Assets").
(i) Any interest in or right to acquire real property;
(ii) The corporate minutes books or stock transfer records of
Crown or any subsidiary;
(iii) Any insurance policy;
(iv) Any asset of Crown that relates primarily to the general
corporate business or the business of any division of
Crown other than Crown Satellite;
(v) The names and marks "Crown International" and "Crown
Satellite";
(vi) Any right to or interest in any tax refund;
(vii) Rights in computer software installed on Crown's computer
network that is not used exclusively by Crown Satellite
personnel.
(b) PURCHASE PRICE. CMI agrees to pay to Crown at the Closing
$7,500,000.00 (the "Purchase Price") by delivery of cash by wire transfer or
other immediately available funds.
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(c) THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of CMI in Tempe,
Arizona, immediately upon execution of this Agreement or on such other date as
CMI and Crown may mutually determine (the "Closing Date"). At the Closing, Crown
will transfer the Assets to CMI free and clear of all Security Interests, by
means of appropriate bills of sale, assignments, and other transfer documents.
CMI will pay the Purchase Price to Crown. In addition, the Parties shall execute
and deliver, each to the other, as appropriate:
(i) Management and Manufacturing Services Agreement
(ii) Lease Agreement
(iii) Employee Lease Agreement (Daniel Enns)
(iv) Bill of Sale
(v) Instrument of Assumption
(vi) Trademark Assignment in recordable form
(vii) Patent Assignment in recordable form
(viii) Officer's Certificates certifying corporate authority for
this transaction (both parties)
(ix) Incumbency Certificates (both parties)
(d) ADDITIONAL PAYMENTS.
(i) CMI shall also pay Crown, as additional consideration for the
Assets, 18% of the Gross Margin (defined in Section 2(d)(iv) below)
Earned (as defined in Section 2(d)(v) below) by CMI from the Crown
Satellite Products or Crown Satellite Technology during the period
beginning January 1, 1999 and ending December 31, 2001, less the portion
thereof, if any (not more than 1.8% of Gross Margin) actually paid (net
of tax withholding requirements) to participants in the Transition Bonus
Plan For Management Employees of the Crown Satellite Division of Crown
International, Inc. (the "Crown Satellite Bonus Plan").
(ii) "Crown Satellite Products" means the following current
products of Crown Satellite (by whatever name they may in the future be
designated), together with all optional features and configurations: (1)
DTMX1000 Data Multiplexer, (2) DTMX1000E Data Multiplexer, (3) DTAB1000
Audio Multiplexer, (4) DT5001P Gateway, (5) the software modules for
network management and control associated with (1) through (4), (6)
DR500 integrated receiver decoded ("IRD"), (7) DR1000 IRD, (8) DR1000E
IRD, (9) DR2000 IRD, (10) the software modules for network management
and control associated with (6) through (9), and direct successor
products of (1) through (10).
(iii) "Crown Satellite Technology" means any right or interest in
the patents or patent applications included in the Assets or in any
copyright respecting the software described in part (5) or (10) of the
definition of Crown Satellite Products.
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(iv) For purposes of this Section 2(d), "Gross Margin" means the
total revenue from product sales, royalties from third parties (net of
any direct costs of development of the related Crown Satellite
Technology), fees or other proceeds of sales, licensure or lease of
Crown Satellite Products or Crown Satellite Technology (including any
sale of any significant portion of the assets of the Crown Satellite
business (regardless how such business may then be designated)) less any
accounts receivable reserves specifically offsetting that revenue, less
the cost of goods sold (which includes labor, materials, warranty
reserve, inventory reserve, manufacturing variances and factory
overhead) less any costs properly accrued for commissions to outside
sales agents or representatives, all as recorded on the books and
records of CMI in accordance with GAAP, pursuant to the standard
prevailing accounting practices of CMI as determined by CMI's board of
directors and chief financial officer, and only as such is applicable to
the proper full cost accounting related to Crown Satellite Products.
(v) For purposes of this Section 2(d) Gross Margin will have been
"Earned" by CMI when recorded on the books and records of CMI as Gross
Margin. CMI shall duly record all components of Gross Margin on its
books and records in a accordance with GAAP and in a manner consistent
with CMI's standard prevailing practice.
(vi) On or before the 45th day after each calendar quarter
through 2001, CMI shall deliver to Crown the following information
certified by CMI's Chief Financial Officer: a financial statement
showing its calculation of Gross Margin for such period setting forth
all revenue itemized by product or source and applicable expenses
itemized in reasonable detail; identification of each Crown Satellite
Product then marketed or proposed to be marketed by CMI; information in
reasonable detail, including financial terms, of any license, lease or
sale of Crown Satellite Technology or other assets of the Crown
Satellite business; and the calculation of the portion of Gross Margin
otherwise payable to Crown that would (at the time of such certificate)
be payable to each participant in the Crown Satellite Bonus Plan if
payment were to be made to such participants on the date of such
Certificate.
(vii) For a period of 30 days after delivery of each certificate
and related information described in the preceding paragraph following
December 31, 1999, 2000 and 2001, CMI shall make its personnel available
to Crown's independent auditors and provide to such auditors access to
its books and records, as shall be necessary (at Crown's expense) to
verify the Gross Margin and other information provided by CMI under the
preceding paragraph.
(viii) The payments, if any, to be made by CMI under this Section
2(d) will be payable annually on the forty-fifth (45th) day following
the end of each calendar year (commencing February 14, 2000 for the
calendar year 1999) by the delivery of cash by wire transfer or other
immediately available funds.
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(ix) CMI shall assume Crown's payment obligations under the Crown
Satellite Bonus Plan. In accordance with Section 2(d)(i), the payments
due Crown shall be reduced in the amount of payments (not more than 1.8%
of Gross Margin) actually made (net of tax withholding requirements) by
CMI to participants in the Crown Satellite Bonus Plan. CMI and Crown
acknowledge that no payment shall be made under such plan to any person
who is not actively employed in the Crown Satellite business (regardless
how such business may then be designated) at the end of the period for
which payment is due. Any amount or payment otherwise payable under such
plan that is not duly paid to the participants in the Plan shall revert
and inure to Crown and shall be timely paid to Crown in accordance with
Section 2(d)(viii). Neither the Crown Satellite Bonus Plan nor any
Participation Agreement thereunder shall be amended, nor shall any
Participant be added or new Participation Agreement be entered into,
under such plan without Crown's prior written consent.
(x) On or before delivery of each payment required by subsection
(viii), above, CMI shall cause its independent auditors ("Auditors") to
review the results of operations of Crown Satellite during the preceding
calendar year, the related certificates provided by CMI under Section
2(d)(vi) above and such other information as the Auditors deem relevant
and to prepare and deliver to both Parties a certificate stating that in
the course of such review nothing has come to its attention to indicate
that Gross Margin was not accurately determined in accordance with this
Agreement or that any expenses or charges deducted from revenue were not
allocated to Crown Satellite in a manner consistent with the standard
prevailing practice of CMI and GAAP or, if applicable, noting any
exception to the foregoing statement. In the event that the Auditors
take an exception to the foregoing statement in the certificate, the
payments due Crown shall be adjusted accordingly. Crown shall pay the
Auditors' fee for their services under this subsection, unless an
Auditors' certificate notes a material exception, in which event the
fees related to obtaining such certificate shall be borne by CMI.
(e) ASSUMED LIABILITIES. CMI shall assume and agree to pay and perform
when lawfully due or required only the following debts, claims, commitments,
liabilities or obligations of Crown (collectively, "Assumed Liabilities"):
(i) The liabilities and obligations to be performed from and
after the Closing Date under the Assumed Contracts;
(ii) Liabilities and obligations to be performed after the
Closing Date in respect of any Government Approvals
included in the Assets;
(iii) Warranty obligations in respect of Crown Satellite
Products sold prior to the Closing Date to the extent of
the warranty reserve reflected on the Final Statement;
(iv) Obligations to Crown Satellite employees employed after
the Closing by CMI under the Crown Satellite Bonus Plan;
and
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(v) The following liabilities and obligations, but only to
the extent reflected on the Final Statement: trade
accounts payable, accrued payables, open purchase orders,
goods received not invoiced, payroll (including required
401(k) plan contributions) and related taxes, vacation
and sick pay, sales and use taxes, royalties, warranty
reserve.
(f) EXCLUDED LIABILITIES. Other than the Assumed Liabilities, CMI shall
not assume or in any way be responsible for the debts, claims, commitments,
liabilities or obligations of Crown of any kind whatsoever (collectively, the
"Excluded Liabilities"). Without limiting the foregoing, Excluded Liabilities
will include:
(i) the sponsorship, administration, or contribution obligation
of any entity under any Employee Benefit Plan or termination of any
Employee Benefit Plan on or prior to the Closing Date (other than the
Crown Satellite Bonus Plan, accrued payroll, 401(k) contributions and
taxes, vacation, sick pay and related taxes reflected on the Final
Statement).
(ii) the termination of employment of any employee of Crown or
Crown Satellite;
(iii) any cause of action or judicial or administrative action,
suit, proceeding or investigation relating to periods prior to the
Closing Date;
(iv) any failure or alleged failure to comply with, or any
violation of any law rule, regulation, statute, ordinance, permit,
judgment, injunction, order, decree, license or other government
approval, which failure or violation occurred or is alleged to have
occurred prior to the Closing Date;
(v) any infringement or alleged infringement of the rights of any
other person or entity arising out of the use of any Intellectual
Property prior to the Closing Date;
(vi) any liability for any Tax arising on or before the Closing
Date;
(vii) any liability arising from any violation or alleged
violation of any Environmental, Health, and Safety Requirements;
(viii) all obligations under all retention agreements, severance
agreements, change of control agreements and similar arrangements (other
than Participation Agreements under the Crown Satellite Bonus Plan); and
(ix) any claim, litigation, action or proceeding, whether or not
now pending or threatened, relating to Crown Satellite or the Assets to
the extent arising out of or based upon product liability with respect
to products shipped or sold prior to the Closing.
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3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION.
(a) REPRESENTATIONS AND WARRANTIES OF CROWN. Crown represents and
warrants to CMI that the statements contained in this Section 3(a) are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3(a)) with
respect to itself, except as set forth in Annex I attached hereto.
(i) Organization of Crown. Crown is duly organized and validly
existing under the laws of the jurisdiction of its incorporation.
(ii) Authorization of Transaction. Crown has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of Crown
enforceable in accordance with its terms and conditions. Crown need not
give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order
to consummate the transactions contemplated by this Agreement.
(iii) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which
Crown is subject or any provision of its charter or bylaws; or (B)
violate, result in a breach of, constitute a default under, result in
the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which
Crown is a party or by which it is bound or to which any of its assets
is subject.
(iv) Brokers' Fees. Crown has no liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement for which CMI could
become liable or obligated.
(b) REPRESENTATIONS AND WARRANTIES OF CMI. CMI represents and warrants
to Crown that the statements contained in this Section 3(b) are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3(b)), except
as set forth in Annex II attached hereto.
(i) Organization of CMI. CMI is a corporation duly organized,
validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
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(ii) Authorization of Transaction. CMI has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of CMI,
enforceable in accordance with its terms and conditions. CMI need not
give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order
to consummate the transactions contemplated by this Agreement.
(iii) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which
CMI is subject or any provision of its charter or bylaws or (B) violate,
result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which CMI is a party
or by which it is bound or to which any of its assets is subject.
(iv) Brokers' Fees. CMI has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Crown could become
liable or obligated.
4. REPRESENTATIONS AND WARRANTIES CONCERNING CROWN AND CROWN SATELLITE.
Crown represents and warrants to CMI that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 4), except as set forth in the disclosure schedule delivered by Crown to
CMI on the date hereof and initialed by the Parties (the "Disclosure Schedule").
Nothing in the Disclosure Schedule shall be deemed adequate to disclose an
exception to a representation or warranty made herein, however, unless the
Disclosure Schedule identifies the exception with particularity and describes
the relevant facts in detail. Without limiting the generality of the foregoing,
the mere listing (or inclusion of a copy) of any document or other item shall
not be deemed adequate to disclose an exception to a representation or warranty
made herein. The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Section
4.
(a) QUALIFICATION. Crown is duly authorized to conduct business and is
in good standing under the laws of each jurisdiction where the operation of
Crown Satellite causes such qualification to be required. Crown has full power
and authority and all licenses, permits and authorizations necessary to carry on
the business of Crown Satellite and to own the Assets.
(b) TITLE TO ASSETS. Crown has good and marketable title to, or a valid
and defensible leasehold interest or license in, the Assets.
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(c) FINANCIAL STATEMENTS. Attached hereto as Exhibit D are the following
financial statements (collectively and together with the Final Statement, the
"Financial Statements"): (i) unaudited statements of profit and loss for Crown
Satellite for the fiscal years ended December 28, 1996 and December 27,
1997,(the "Most Recent Fiscal Year End") and for the nine months ended September
26, 1998 (the "Most Recent Fiscal Month End"), and (ii) the unaudited listing of
net assets of Crown Satellite as of September 26, 1998 ("Most Recent Net Asset
Statement"). Such statements of profit and loss (including the notes thereto)
have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby and present fairly the results of
operations of Crown Satellite for such periods.
(d) EVENTS SUBSEQUENT TO MOST RECENT FISCAL MONTH END. Since the Most
Recent Fiscal Month End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of Crown Satellite taken as a whole. Without limiting the generality
of the foregoing, since that date in its operation of Crown Satellite, Crown has
not:
(i) sold, leased, transferred, or assigned any Assets, tangible
or intangible, outside the Ordinary Course of Business;
(ii) entered into any agreement, contract, lease, or license (or
series of related agreements, contracts, leases, or licenses) either
involving more than $50,000 or outside the Ordinary Course of Business;
(iii) accelerated, terminated, made modifications to, or canceled
any Contract;
(iv) imposed any Security Interest upon any of the Assets,
tangible or intangible;
(v) made any capital expenditures outside the Ordinary Course of
Business;
(vi) made any capital investment in, or any loan to, any other
Person outside the Ordinary Course of Business;
(vii) created, incurred, assumed, or guaranteed any indebtedness
for borrowed money and capitalized lease obligations;
(viii) granted any license or sublicense of any rights under or
with respect to any Intellectual Property;
(ix) experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
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(x) has not made any loan to, or entered into any other
transaction with any of the officers or employees of Crown Satellite;
(xi) entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement with any of the officers or
employees of Crown Satellite;
(xii) granted any increase in the base compensation of any of the
officers or employees of Crown Satellite outside the Ordinary Course of
Business;
(xiii) adopted, amended, modified, or terminated any bonus,
profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of the officers or employees of Crown
Satellite;
(xiv) made any other change in employment terms for any of the
officers or employees of Crown Satellite outside the Ordinary Course of
Business.
(xv) committed to any of the foregoing.
(e) UNDISCLOSED LIABILITIES. Crown has no liability (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due, including any liability for taxes) required by GAAP to be shown on a
balance sheet of Crown Satellite in accordance with Crown's past practice,
except for (i) liabilities set forth on the face of the Most Recent Net Asset
Statement or Final Statement (rather than in any notes thereto) and (ii)
liabilities which have arisen after the Most Recent Fiscal Month End in the
Ordinary Course of Business.
(f) LEGAL COMPLIANCE. In its operation of Crown Satellite, Crown has
complied with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof), and
no action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand, or notice has been filed or commenced alleging any failure so to comply.
(g) REAL PROPERTY. The Assets do not include any interest in real
property nor any options, purchase rights, or other contracts or commitments
that could permit the holder thereof to acquire title to real property.
(h) INTELLECTUAL PROPERTY.
(i) Crown owns or has the right to use pursuant to license,
sublicense, agreement, or permission all Intellectual Property necessary
or desirable for the operation of the business of Crown Satellite as
presently conducted and as presently proposed to be conducted. Each item
of Intellectual Property owned or used in the operation of Crown
Satellite immediately
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prior to the Closing will be owned or available for use by CMI on
identical terms and conditions immediately subsequent to the Closing.
(ii) In the operation of Crown Satellite, Crown has not
interfered with, infringed upon, misappropriated, or violated any
Intellectual Property rights of third parties, and none of Crown, or its
directors and officers has ever received any charge, complaint, claim,
demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that Crown must
license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of Crown, no third party has interfered
with, infringed upon, misappropriated, or violated any Intellectual
Property rights included among the Assets.
(iii) Section 4(h)(iii) of the Disclosure Schedule identifies
each patent or registration which has been issued to Crown with respect
to any of the Intellectual Property of Crown Satellite, identifies each
pending patent application or application for registration which Crown
has made with respect to any of the Intellectual Property of Crown
Satellite, and identifies each license, agreement, or other permission
(other than non-disclosure agreements entered into in connection with
the proposed sale of Crown Satellite, none of which purports to convey
any interest in the Crown Satellite Technology) which Crown has granted
to any third party with respect to any of the Intellectual Property of
Crown Satellite (together with any exceptions). Crown has delivered to
CMI correct and complete copies of all such patents, registrations,
applications, licenses, agreements, and permissions (as amended to
date). Section 4(h)(iii) of the Disclosure Schedule also identifies each
trade name or unregistered trademark used by Crown in connection with
the business of Crown Satellite. With respect to each item of
Intellectual Property required to be identified in Section 4(h)(iii) of
the Disclosure Schedule:
(A) Crown possesses all right, title, and interest in and
to the item, free and clear of any Security Interest, license, or
other restriction;
(B) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to Crown's
Knowledge, threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(D) Crown has not agreed to indemnify any Person for or
against any interference, infringement, misappropriation, or
other conflict with respect to the item.
(iv) Section 4(h)(iv) of the Disclosure Schedule identifies each
item of Intellectual Property that any third party owns and that Crown
uses in the operation of Crown Satellite
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pursuant to license, sublicense, agreement, or permission. Crown has
delivered to CMI correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With
respect to each item of Intellectual Property required to be identified
in Section 4(h)(iv) of the Disclosure Schedule:
(A) the license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and in
full force and effect;
(B) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or
default or permit termination, modification, or acceleration
thereunder;
(C) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(D) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or, to Crown's
Knowledge, threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property;
and
(E) Crown has not granted any sublicense or similar right
with respect to the license, sublicense, agreement, or
permission.
(i) TANGIBLE ASSETS; ADEQUACY. The machinery, equipment, and other
tangible assets that Crown owns and leases and uses in the operation of Crown
Satellite are free from material defects (patent and latent), have been
maintained in accordance with normal industry practice, and are in good
operating condition and repair (subject to normal wear and tear). The Assets
collectively, taken together with the facilities and services to be provided by
Crown under the documents listed in Section 2(c), comprise all the assets that
are necessary to the continued operation of Crown Satellite in the manner that
it has heretofore been operated by Crown.
(j) INVENTORY. The inventory of Crown Satellite consists of open
purchase orders, raw materials and supplies, manufactured and processed parts,
work in process, and finished goods, all of which is merchantable and fit for
the purpose for which it was procured or manufactured, and none of which is
slow-moving, obsolete, damaged, or defective, subject only to the reserve for
inventory set forth on the face of the Final Statement (rather than in any notes
thereto) as adjusted for operations and transactions through the Closing Date in
accordance with the past custom and practice of Crown and Crown Satellite.
(k) CONTRACTS. Exhibit A or Section 4(k) of the Disclosure Schedule
lists the following contracts and other agreements to which Crown is a party in
connection with the operation of Crown Satellite (the "Contracts"):
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(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments
in excess of $5,000 per annum or outside the Ordinary Course of
Business;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
the performance of which will extend over a period of more than one year
or involve consideration in excess of $50,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
it has imposed a Security Interest on any of the Assets, tangible or
intangible;
(v) any agreement concerning confidentiality or noncompetition,
except for nondisclosure agreements entered into in connection with the
proposed sale of Crown Satellite.
(vi) any agreement with Crown's Affiliates;
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of the employees of Crown Satellite;
(viii) any collective bargaining agreement covering any employee
of Crown Satellite;
(ix) any agreement for the employment of any individual in the
operation of Crown Satellite on a full-time, part-time, consulting, or
other basis;
(x) any agreement under which it has advanced or loaned any
amount to any of the employees of Crown Satellite outside the Ordinary
Course of Business;
(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of Crown Satellite; or
(xii) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $50,000.
Crown has delivered to CMI a correct and complete copy of each Assumed Contract
listed in Section 4(k) of the Disclosure Schedule (as amended to date) and a
written summary setting forth the material terms and conditions of each oral
Assumed Contract referred to in Section 4(k) of the
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Disclosure Schedule. With respect to each such Assumed Contract: (A) the
agreement is legal, valid, binding, enforceable, and in full force and effect;
(B) to Crown's Knowledge, no party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; (C) no party has repudiated any provision of the agreement; and (D)
Crown has not granted to any distributor, representative, employee or agent any
exclusive rights with respect to the marketing or sale of any products or
services which Crown Satellite offers, or proposes to offer, as of the Closing
Date.
(l) ACCOUNTS RECEIVABLE. All accounts receivable outstanding in the
operation of Crown Satellite are reflected properly on its books and records and
are valid receivables subject to no setoffs or counterclaims. The reserve for
bad debts set forth on the face of the Final Statement (rather than in any notes
thereto), as adjusted for operations and transactions through the Closing Date,
has been established in accordance with the past custom and practice of Crown
Satellite.
(m) INSURANCE. Crown maintains property, casualty, liability and
workers' compensation insurance coverage of Crown Satellite's assets and
operations in reasonable and customary amounts with reputable carriers.
(n) LITIGATION. Section 4(n) of the Disclosure Schedule sets forth each
instance in which Crown, in connection with the operation of Crown Satellite (i)
is subject to any outstanding injunction, judgment, order, decree, ruling, or
charge or (ii) is a party or, to Crown's Knowledge, is or may be threatened to
be made a party to any action, suit, proceeding, hearing, or investigation of,
in, or before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator.
(o) PRODUCT WARRANTY. Substantially all of the products manufactured,
sold, leased, and delivered by Crown Satellite have conformed with all
applicable contractual commitments and all express and implied warranties.
Substantially all of the products manufactured, sold, leased, and delivered by
Crown Satellite are subject to standard terms and conditions of sale or lease.
Section 4(o) of the Disclosure Schedule includes copies of the standard terms
and conditions of sale or lease for Crown Satellite Products (containing
applicable guaranty, warranty, and indemnity provisions).
(p) PRODUCT LIABILITY. Crown has no liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) arising out of any injury to individuals or property as a result of the
ownership, possession, or use of any product manufactured, sold, leased, or
delivered by Crown Satellite.
(q) EMPLOYEE BENEFITS. Section 4(q) of the Disclosure Schedule lists
each Employee Benefit Plan that Crown maintains or to which Crown contributes or
has any obligation to contribute and in which any Crown Satellite employee
participates.
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(r) ENVIRONMENT, HEALTH, AND SAFETY MATTERS. Neither this Agreement nor
the consummation of the transaction that is the subject of this Agreement will
result in any obligations for site investigation or cleanup, or notification to
or consent of government agencies or third parties, pursuant to any of the
so-called "transaction-triggered" or "responsible property transfer"
Environmental, Health, and Safety Requirements.
(s) CROWN SATELLITE PRODUCTS. Crown has given CMI complete access to all
information related to the Crown Satellite Products (including all information
concerning design, manufacture, marketing, sale, use, and repair), and to the
best of its Knowledge has disclosed to CMI with particularity all material
aspects of those products, their design, manufacture, markets, sale, use, and
repair. To the best of its Knowledge, the Crown Satellite Products and their
underlying software code are merchantable and fit for the purpose for which they
were designed (which purpose has been disclosed to CMI).
(t) YEAR 2000 READINESS DISCLOSURE. Crown has taken such steps as are
reasonably necessary to provide for the Year 2000 Compliant status of the Crown
Satellite Products listed in parts (1) through (10) of the definition thereof.
(u) DISCLOSURE. The representations and warranties contained in this
Section 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4 not misleading.
5. POST-CLOSING COVENANTS. The Parties agree as follows with respect to the
period following the Closing.
(a) GENERAL. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as any other Party reasonably may request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Section 6 below). Crown acknowledges
and agrees that from and after the Closing CMI will be entitled to possession of
all documents, Books and Records relating primarily to Crown Satellite. Crown
shall make available to CMI for review and copying (at CMI's expense) during
normal business hours such other documents and records relating to Crown
Satellite as it may from time to time reasonably request in connection with its
continued operation of Crown Satellite.
(b) LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving Crown Satellite, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary
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in connection with the contest or defense, all at the sole cost and expense of
the contesting or defending Party (unless the contesting or defending Party is
entitled to indemnification therefor under Section 6 below).
(c) TRANSITION. Crown will take no action that is designed or intended
to have the effect of discouraging any lessor, licensor, customer, supplier, or
other business associate of Crown Satellite from maintaining the same business
relationships with Crown Satellite after the Closing as it maintained with Crown
Satellite prior to the Closing.
(d) CONFIDENTIALITY. Crown will treat and hold in confidence all of the
Confidential Information, refrain from using any of the Confidential Information
except in connection with this Agreement, and after such time as Crown no longer
requires the Confidential Information for use in connection with this Agreement,
Crown shall deliver promptly to CMI or destroy, at the request and option of
CMI, all tangible embodiments (and all copies) of the Confidential Information
which are in its possession.
(e) COVENANTS NOT TO COMPETE.
(i) For a period of four years from and after the Closing Date
and except as provided in Section 5(e)(ii), neither Crown nor any Crown
Affiliate will engage directly or indirectly, for itself or himself or
for any other person or entity, in any business that Crown Satellite
conducts, or contemplates conducting as of the Closing Date. Included
within the prohibition of the preceding sentence is the design,
development, manufacture or sale (including sale as a principal,
representative or otherwise) of the Crown Satellite Products and related
items and systems which are comparable to those which were or are
offered, or contemplated to be offered, by Crown Satellite prior to the
Closing Date.
(ii) Notwithstanding anything to the contrary in Section 5(e)(i),
no owner of less than 1% of the outstanding stock of any publicly-traded
corporation shall be deemed to engage solely by reason thereof in any of
the prohibited businesses.
(iii) If the final judgment of a court of competent jurisdiction
declares that any term or provision of this Section 5(e) is invalid or
unenforceable, the Parties agree that the court making the determination
of invalidity or unenforceability shall have the power to reduce the
scope, duration, or area of the term or provision, to delete specific
words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be enforceable
as so modified after the expiration of the time within which the
judgment may be appealed.
(iv) For a period of two years from and after the Closing Date,
neither Crown nor any Crown Affiliate will directly or indirectly
solicit, or hire, or directly or indirectly attempt
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to solicit, or hire any employees of the business of Crown Satellite,
regardless of the name under which such business is then operated by
CMI.
(f) USE OF BUSINESS NAMES. For a period of one (1) year from the Closing
Date, Crown grants to CMI, effective as of the Closing Date, on a fully-paid,
royalty-free basis, the non-exclusive license to use the "Crown Satellite" name
and logo (including marks, trade names, trademarks, service names, service marks
and symbols) in connection with the operation of the business of Crown
Satellite, however it may be named, by CMI after the Closing. CMI shall assure
that all Crown Satellite Products sold under the "Crown Satellite" trade name
are of a level of quality and reliability at least equal to CMI's ISO 9001
quality standard. CMI shall conform every use of the "Crown Satellite" trade
name to the form and usage instructions provided by Crown in writing to CMI from
time to time. Pursuant to the information review procedures set forth in Section
2(d), Crown shall have the right to assess the quality of the Crown Satellite
Products being marketed by CMI under the "Crown Satellite" trade name and CMI's
form of use of the trade name. If Crown determines that CMI has materially
failed to comply with its obligations under this section, Crown may terminate
CMI's license hereunder by delivery of written notice to that effect if CMI has
not restored compliance with the quality or use standards within 90 days
following the date of such notice. In that event, CMI shall use all reasonable
efforts to terminate its use of the "Crown Satellite" name and any name or mark
derivative thereof or confusingly similar thereto as promptly as practicable.
(g) EMPLOYEES. CMI shall offer employment to all employees of Crown
Satellite listed on Exhibit E. CMI shall honor the accrued vacation of each of
such employees and permit such employees to take paid vacation to the extent of
such amounts included in the Assumed Liabilities in accordance with its vacation
policies generally. CMI shall assure that all such employees receive the benefit
of the accrued payroll, and related taxes included in the Assumed Liabilities,
as well as payments in accordance with the Crown Satellite Bonus Plan. Crown
shall pay the employees listed on Exhibit E any accrued sick pay promptly
following the Closing. CMI acknowledges that Daniel Enns will remain an employee
of Crown for an indefinite period of time. Crown shall lease the services of Mr.
Enns to CMI pursuant to the Employee Lease Agreement of even date herewith.
(h) ACCRUED EXPENSES. CMI shall reimburse Crown for the payment of
accrued sales and use taxes, group insurance expenses, accrued payroll, 401(k)
contributions and sick pay included in the Assumed Liabilities promptly upon
receipt of written notice from Crown that such expenses have been paid.
(i) WARRANTY WORK. CMI shall perform or cause to be performed any
necessary warranty work and service on Crown Satellite Products sold prior to
the Closing Date; provided, that Crown shall reimburse CMI for the actual cost
of such work (only to the extent such costs exceed the warranty reserve
reflected on the Final Statement) promptly upon receipt of an invoice therefore
from CMI.
6. REMEDIES FOR BREACHES OF THIS AGREEMENT.
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(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties contained in this Agreement shall survive the
Closing hereunder (even if the damaged Party knew or had reason to know of any
misrepresentation or breach of warranty at the time of Closing) and continue in
full force and effect for a period of 18 months after the Closing.
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF CMI.
(i) In the event Crown breaches (or in the event any third party
alleged facts that, if true, would mean Crown has breached) any of its
representations, warranties, and covenants contained herein, and CMI
makes a written claim for indemnification against Crown prior to the end
of the applicable survival period, then Crown agrees to indemnify CMI
from and against any Adverse Consequences CMI may suffer through and
after the date of the claim for indemnification (including any Adverse
Consequences CMI may suffer after the end of any applicable survival
period) resulting from, arising out of, relating to, in the nature of,
or caused by the breach (or alleged breach);
(ii) Crown agrees to indemnify CMI from and against any Adverse
Consequences CMI may suffer resulting from, arising out of, relating to,
in the nature of, or caused by any Excluded Liability of Crown.
(iii) The foregoing notwithstanding, Crown shall not have any
obligation to indemnify CMI under this Section 6(b) from and against any
Adverse Consequences until CMI has suffered Adverse Consequences by
reason of all such breaches or other matters in excess of a $100,000
aggregate deductible (after which point Crown will be obligated only to
indemnify CMI from and against further such Adverse Consequences).
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF CROWN.
(i) In the event CMI breaches (or in the event any third party
alleged facts that, if true, would mean CMI has breached) any of its
representations, warranties, and covenants contained herein, and Crown
makes a written claim for indemnification against CMI prior to the end
of the applicable survival period, then CMI agrees to indemnify Crown
from and against any Adverse Consequences Crown may suffer through and
after the date of the claim for indemnification (including any Adverse
Consequences Crown may suffer after the end of any applicable survival
period) resulting from, arising out of, relating to, in the nature of,
or caused by the breach (or alleged breach);
(ii) CMI agrees to indemnify Crown from and against any Adverse
Consequences Crown may suffer resulting from, arising out of, relating
to, in the nature of, or caused by any Assumed Liability.
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(iii) The foregoing notwithstanding, CMI shall not have any
obligation to indemnify Crown from and against any Adverse Consequences
until Crown has suffered Adverse Consequences by reason of all such
breaches or other matters in excess of a $100,000 aggregate deductible
(after which point CMI will be obligated only to indemnify Crown from
and against further such Adverse Consequences).
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may
give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 6, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party in
notifying any Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) Any Indemnifying Party will have the right to assume the
defense of the Third Party Claim with counsel of its choice reasonably
satisfactory to the Indemnified Party at any time within 15 days after
the Indemnified Party has given notice of the Third Party Claim;
provided, however, that the Indemnifying Party must conduct the defense
of the Third Party Claim actively and diligently thereafter in order to
preserve its rights in this regard; and provided further that the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim.
(iii) So long as the Indemnifying Party has assumed and is
conducting the defense of the Third Party Claim in accordance with
Section 6(d)(ii) above, (A) the Indemnifying Party will not consent to
the entry of any judgment or enter into any settlement with respect to
the Third Party Claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably) unless the judgment
or proposed settlement involves only the payment of money damages by the
Indemnifying Party and does not impose an injunction or other equitable
relief upon the Indemnified Party and (B) the Indemnified Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnifying Party (not to be withheld unreasonably).
(iv) In the event the Indemnifying Party fails to assume and
conduct the defense of the Third Party Claim in accordance with Section
6(d)(ii) above, however, (A) the Indemnified Party may defend against,
and consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably may
deem appropriate (and the Indemnified Party need not consult with, or
obtain any consent from, any Indemnifying Party in connection therewith)
and (B) the Indemnifying Party will remain responsible for any Adverse
Consequences the Indemnified Party may suffer resulting from,
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arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 6.
(e) NOTICE. In the event any Party breaches (or in the event any third
party alleges facts that, if true, would mean any Party has breached) any of its
covenants or any of its representations and warranties in this Agreement or in
the event that any third party shall notify any Indemnified Party with respect
to a Third Party Claim which may give rise to a claim for indemnification
against the Indemnifying Party, then the (alleged) breaching Party or
Indemnifying Party, as the case may be, shall provide detailed written notice to
the other Parties of the occurrence and nature of the relevant event.
(f) INDEMNITY CAP. No Party shall be obligated to make payments or
provide indemnity to other persons under this Section 6 in the aggregate in
excess of an amount equal to the Purchase Price.
7. TAX MATTERS.
(a) COOPERATION ON TAX MATTERS.
(i) CMI and Crown shall cooperate fully, as and to the extent
reasonably requested by the other party, in connection with the filing
of tax returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include
the retention and (upon the other party's request) the provision of
records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a
mutually convenient basis to provide additional information and
explanation of any material provided hereunder. Crown and CMI each agree
(A) to retain all books and records with respect to Tax matters
pertinent to Crown Satellite relating to any taxable period beginning
before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by CMI or Crown, any extensions
thereof) of the respective taxable periods, and to abide by all record
retention agreements entered into with any taxing authority, and (B) to
give the other party reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the other
party so requests, Crown shall allow the other party to take possession
of such books and records.
(ii) CMI and Crown further agree, upon request, to use their best
efforts to obtain any certificate or other document from any
governmental authority or any other Person as may be necessary to
mitigate, reduce or eliminate any Tax that could be imposed (including,
but not limited to, with respect to the transactions contemplated
hereby).
(b) CERTAIN TAXES. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by Crown when
due, and Crown will, at its own expense, file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales, use,
stamp, registration and other Taxes and fees, and, if required by applicable
law, CMI will, and will cause its affiliates to, join in the execution of any
such Tax Returns and other documentation.
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(c) ALLOCATION OF PURCHASE PRICE. On or before December 31, 1998, CMI
shall deliver to Crown its proposed allocation of the Purchase Price, payments
under Section 2(d) and Assumed Liabilities to the Assets and Assumed
Liabilities. Unless Crown shall object to such allocation on a reasonable basis
within 10 business days of such delivery, such proposed allocation shall be
binding. Should Crown object to such allocation, the Parties shall negotiate in
good faith for a period of 30 days to determine a mutually acceptable
allocation. The allocation that becomes final pursuant to the forgoing is
referred to as the "Allocation". The Parties acknowledge that such Allocation
shall be determined pursuant to arm's length bargaining between the Parties
regarding the fair market values of the Assets in accordance with Section 1060
of the Internal Revenue Code of 1986, as amended. The Parties shall report
(including with respect to the filing of Form 8594 to the Internal Revenue
Service) the sale and purchase of the Assets for all income tax purposes in a
manner consistent with such Allocation and shall not, in connection with the
filing of such return, make any allocation of the Purchase Price, other payments
and Assumed Liabilities which is contrary to the Allocation. The Parties agree
to consult with one another with respect to any tax audit, controversy or
litigation relating to the Allocation.
(d) RESEARCH AND DEVELOPMENT CREDIT. Crown agrees to provide CMI the
necessary information to allow CMI to adjust its base period for purposes of
computing the research and development credit in accordance with Section
41(f)(3) of the Internal Revenue Code of 1986, as amended.
8. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated as
provided below:
(i) CMI and Crown may terminate this Agreement by mutual written
consent at any time prior to the Closing;
(ii) Either Party may terminate this Agreement by giving written
notice to the other if the Closing shall not have occurred on or before
January 1, 1999.
(b) EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 8(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach).
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of CMI and Crown; provided,
however, that CMI may make any public disclosure
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it believes in good faith is required by applicable law or any listing or
trading agreement concerning its publicly-traded securities (in which case CMI
will use its reasonable best efforts to advise Crown prior to making the
disclosure).
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of CMI and Crown; provided, however, that CMI may (i) assign any or all of its
rights and interests hereunder to one or more of its Affiliates, or (ii)
designate one or more of its Affiliates to perform its obligations hereunder, or
(iii) assign all of its rights, interests and obligations hereunder to a
successor in interest to substantially all of its assets (provided, that in any
or all of which cases (i), (ii) or (iii) CMI nonetheless shall remain
responsible for the performance of all of its obligations hereunder).
(e) SALE OF ASSETS. Should CMI enter into any agreement to sell a
substantial part of the assets of the Crown Satellite business (whatever the
designation of the business at the time) prior to December 31, 2001, such that
following such sale a majority of the Gross Margin from Crown Satellite Products
and Crown Satellite Technology would no longer inure to the benefit of CMI,
then, as a condition to such sale, CMI shall either (i) require the transferee
to assume CMI's obligations under Section 2(d) of this Agreement or (ii) provide
for the continued receipt by Crown of the information necessary to calculate and
verify the Gross Margin of the acquiror, as well as the Gross Margin of CMI, in
which case, CMI's obligations under Section 2(d) of this Agreement shall
continue to apply in respect of the combined Gross Margin of the acquiror and
CMI.
(f) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified
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mail, return receipt requested, postage prepaid, or by a nationally recognized
express courier, and addressed to the intended recipient as set forth below:
If to CMI, to: California Microwave, Inc.
Satellite Communications Division
2114 W. Seventh Street
Tempe, Arizona 85281
Facsimile No.: (602) 966-0263
Attn.: President
with a copy to: California Microwave, Inc.
1143 Borregas Avenue
Sunnyvale, CA 94089
Facsimile No.: (408) 732-4244
Attn.: General Counsel
If to Crown: Crown International, Inc.
1718 W. Mishawaka Road
P.O. Box 1000
Elkhart, IN 46515-1000
Facsimile No.: (219) 294-8163
Attn.: Richard Newberry
with a copy to: Barnes & Thornburg
11 S. Meridian Street
Indianapolis, Indiana 46204
Facsimile No.: (317) 231-7433
Attn.: Eric R. Moy, Esq.
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
(i) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Illinois without giving effect
to any choice or conflict of laws provision or rule.
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(j) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by CMI
and Crown. No waiver by any Party of any default, misrepresentation, or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(k) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(m) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation."
(n) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
10. DEFINITIONS.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys' fees and
expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Allocation" has the meaning set forth in Section 7(c) above.
"Assets" has the meaning set forth in Section 2(a) above.
"Assumed Contracts" means the contracts and agreements listed or
described on Exhibit A.
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"Assumed Liabilities" has the meaning set forth in Section 2(e) above.
"Auditors" has the meaning set forth in Section 2(d)(x) above.
"Books and Records" means books and records, including manuals, price
lists, mailing lists, lists of customers, production data, sales and promotional
materials, purchasing materials, manufacturing and quality control records and
procedures, research and development files, accounting records (regardless of
the media in which they are stored) primarily relating to or used in the
business of Crown Satellite.
"Closing" has the meaning set forth in Section 2(c) above.
"Closing Date" has the meaning set forth in Section 2(c) above.
"CMI" has the meaning set forth in the preface above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" has the meaning described in the
Non-disclosure Agreement between the Parties dated as of August 25, 1998.
"Contracts" has the meaning set forth in Section 4(k) above.
"Crown" has the meaning set forth in the preface above.
"Crown Satellite" has the meaning set forth in the preface above.
"Crown Satellite Bonus Plan" has the meaning set forth in Section
2(d)(i) above.
"Crown Satellite Products" has the meaning set forth in Section 2(d)(ii)
above.
"Crown Satellite Technology" has the meaning set forth in Section
2(d)(iii) above.
"Disclosure Schedule" has the meaning set forth in Section 4 above.
"Earned" has the meaning set forth in Section 2(d)(v) above.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation
or retirement plan or arrangement, (b) qualified defined contribution retirement
plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified
defined benefit retirement plan or arrangement which is an Employee Pension
Benefit Plan (including any Multiemployer Plan), or (d) Employee Welfare Benefit
Plan or fringe benefit or other retirement, bonus, or incentive plan or program.
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"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health, and Safety Requirements" shall mean all federal,
state, local and foreign statutes, regulations, ordinances and similar
provisions having the force or effect of law, all judicial and administrative
orders and determinations, and all common law concerning public health and
safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excluded Assets" has the meaning set forth in Section 2(a) above.
"Excluded Liabilities" has the meaning set forth in Section 2(f) above.
"Final Statement" has the meaning set forth in Section 2(a)(ii) above.
"Financial Statements" has the meaning set forth in Section 4(c) above.
"Fixed Assets" means machinery, equipment, furniture, furnishings,
vehicles, tools, dies, molds and other tangible personal property, other than
Inventories, whether or not attached to real property.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Government Approval" means any consent of, with or to any government
authority.
"Gross Margin" has the meaning set forth in Section 2(d)(iv) above.
"Income Tax" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
"Indemnified Party" has the meaning set forth in Section 6(d) above.
"Indemnifying Party" has the meaning set forth in Section 6(d) above.
26
<PAGE> 31
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
"Inventories" has the meaning set forth in Section 2(a)(iii) above.
"Knowledge" means the actual knowledge of an individual or with respect
to an entity, the actual knowledge of the directors or officers of such entity
or of its management employees with direct responsibility for the matter in
question including such knowledge as such persons would normally acquire in the
performance of their respective duties.
"Most Recent Net Asset Statement" has the meaning set forth in Section
4(c) above.
"Most Recent Fiscal Month End" has the meaning set forth in Section 4(c)
above.
"Most Recent Fiscal Year End" has the meaning set forth in Section 4(c)
above.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" and "Parties" each has the meaning set forth in the preface
above.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Purchase Price" has the meaning set forth in Section 2(b) above.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
27
<PAGE> 32
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings and
disclosed to CMI in writing prior to Closing, (c) purchase money liens and liens
securing rental payments under capital lease arrangements, and (d) other liens
arising in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"Specific Assets" has the meaning set forth in Section 2(a)(xi) above.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Tax" means any federal, state, provincial, local or foreign income,
alternative, minimum, accumulated earnings, personal holding company, franchise,
capital stock, net worth, capital, profits, windfall profits, gross receipts,
value added, sales, use, goods and services, excise, customs, duties, transfer,
conveyance, mortgage, registration, stamp, documentary, recording, premium,
severance, environmental, real property, personal property, ad valorem,
intangibles, rent, occupancy, license, occupational, employment, unemployment
insurance, social security, disability, workers' compensation, payroll, health
care, withholding, estimated or other similar tax, duty or other governmental
charge or assessment or deficiencies thereof, and including any interest,
penalties or additions to tax attributable to the foregoing.
"Third Party Claim" has the meaning set forth in Section 6(d) above.
"Year 2000 Compliant" means that the information technology accurately
processes date/time data (including, but not limited to, calculating, comparing
and sequencing) from, into and between the twentieth and twenty-first centuries,
and the year 1999 and 2000 and leap year calculations, to the extent that other
information technology, used in combination with the information technology
being considered, properly exchanges date/time data with it.
*****
28
<PAGE> 33
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
CROWN INTERNATIONAL, INC. CALIFORNIA MICROWAVE, INC.
- ---------------------------------- ----------------------------------
By: Richard A. Newberry By: Donald Anderson
Title: Chief Executive Officer Title: Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,303
<SECURITIES> 2,791
<RECEIVABLES> 38,491
<ALLOWANCES> 1,493
<INVENTORY> 28,196
<CURRENT-ASSETS> 118,426
<PP&E> 50,009
<DEPRECIATION> 30,094
<TOTAL-ASSETS> 185,256
<CURRENT-LIABILITIES> 62,559
<BONDS> 58,558
0
0
<COMMON> 1,663
<OTHER-SE> 60,466
<TOTAL-LIABILITY-AND-EQUITY> 185,256
<SALES> 77,905
<TOTAL-REVENUES> 77,905
<CGS> 50,035
<TOTAL-COSTS> 50,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> 1,979
<INCOME-PRETAX> (19,718)
<INCOME-TAX> (4,268)
<INCOME-CONTINUING> (15,450)
<DISCONTINUED> 1,963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,487)
<EPS-PRIMARY> (0.90)<F1>
<EPS-DILUTED> (0.90)
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
