-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G4P1OWLqA9jrnc9Kifh82JAbGChQV8rLS/fLNWxmAoC42CsAUFBZ1Znc/u/nqAMJ lbXg9BQRLlp2hBP8dsiZKw== 0001019687-04-002894.txt : 20041223 0001019687-04-002894.hdr.sgml : 20041223 20041223132710 ACCESSION NUMBER: 0001019687-04-002894 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20041223 DATE AS OF CHANGE: 20041223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Comtech Group Inc CENTRAL INDEX KEY: 0000028367 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 520466460 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-121586 FILM NUMBER: 041223477 BUSINESS ADDRESS: STREET 1: RM. 10001, TOWER C, SKYWORTH BUILDING STREET 2: HIGH-TECH INDUSTRIAL PARK, NANSHAN CITY: SHENZHEN STATE: F4 ZIP: 5180 BUSINESS PHONE: 011.755.267.4327 MAIL ADDRESS: STREET 1: RM. 10001, TOWER C, SKYWORTH BUILDING STREET 2: HIGH-TECH INDUSTRIAL PARK, NANSHAN CITY: SHENZHEN STATE: F4 ZIP: 5180 FORMER COMPANY: FORMER CONFORMED NAME: TRIDENT ROWAN GROUP INC DATE OF NAME CHANGE: 19960920 FORMER COMPANY: FORMER CONFORMED NAME: DETOMASO INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ROWAN INDUSTRIES INC DATE OF NAME CHANGE: 19731118 S-1 1 comtech_s1-122104.txt As filed with the Securities and Exchange Commission on December 23, 2004 Registration No. 333- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- COMTECH GROUP, INC. (Exact name of registrant as specified in its charter) 3669 (Primary standard industrial classification code number) MARYLAND 52-0466460 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) ROOM 10001, TOWER C, SKYWORTH BUILDING HIGH-TECH INDUSTRIAL PARK NANSHAN, SHENZHEN 5180, PRC 011-86-755-267-43210 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------------------- JEFFREY KANG CHIEF EXECUTIVE OFFICER ROOM 10001, TOWER C, SKYWORTH BUILDING HIGH-TECH INDUSTRIAL PARK NANSHAN, SHENZHEN 5180, PRC 011-86-755-267-43210 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------------- COPIES TO: MITCHELL S. NUSSBAUM FRAN STOLLER LOEB & LOEB LLP 345 PARK AVENUE NEW YORK, NEW YORK 10154 (212) 407-4000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. |X| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_| ----------------------------- CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE (2) - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value per share 12,080,834 $2.50 $30,202,085 $3,554.79 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457(c) solely for the purpose of determining the registration fee. The price shown is the average of the high and low bid price of the common stock on December 20, 2004 as reported by the Over the Counter Bulletin Board. (2) The registration fee has been calculated in accordance with Rule 457(o) under the Securities Act of 1933. ----------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 23, 2004 12,080,834 SHARES COMTECH GROUP, INC. COMMON STOCK ---------------------- This prospectus relates to the resale of up to 12,080,834 shares of our Common Stock being offered by the selling stockholders. Of the shares covered by this prospectus, 10,000,000 shares have been issued, 1,850,834 shares are issuable upon the exercise of outstanding warrants and 230,000 shares are issuable upon the exercise of outstanding stock options. We will not receive any proceeds from the sale of the shares of Common Stock by the selling stockholders. Assuming that all of the warrants held by selling stockholders are exercised for cash, we will realize proceeds of approximately $2,556,000. Assuming that all of the stock options held by selling stockholders are exercised for cash, we will realize proceeds of approximately $345,000. ---------------------- Our Common Stock is quoted on the Electronic Bulletin Board of the Over-The-Counter Market (OTCBB) under the symbol "COGO." We have applied to list our Common Stock on The Nasdaq National Market under the same symbol. ---------------------- THE SELLING STOCKHOLDERS, AND INTERMEDIARIES THROUGH WHOM SUCH SECURITIES ARE SOLD, MAY BE DEEMED UNDERWRITERS WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WITH RESPECT TO THE SECURITIES OFFERED, AND ANY PROFITS REALIZED OR COMMISSIONS RECEIVED MAY BE DEEMED UNDERWRITING COMPENSATION. WE HAVE AGREED TO INDEMNIFY CERTAIN OF THE SELLING STOCKHOLDERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- The date of this prospectus is _________, 2005 3 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR TO REPRESENT ANYTHING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, YOU SHOULD NOT RELY UPON SUCH INFORMATION OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. INFORMATION CONTAINED ON OUR WEBSITE DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. ---------------------- TABLE OF CONTENTS Page SUMMARY......................................................................5 RISK FACTORS.................................................................9 FORWARD-LOOKING STATEMENTS...................................................15 USE OF PROCEEDS..............................................................17 DIVIDEND POLICY..............................................................17 CAPITALIZATION...............................................................17 PRICE RANGE OF COMMON STOCK..................................................18 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA...........................19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................21 BUSINESS.....................................................................32 MANAGEMENT...................................................................40 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47 PRINCIPAL STOCKHOLDERS.......................................................48 DESCRIPTION OF SECURITIES....................................................50 SHARES ELIGIBLE FOR FUTURE SALE..............................................50 WHERE YOU CAN FIND MORE INFORMATION..........................................55 LEGAL MATTERS................................................................55 EXPERTS......................................................................55 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1 INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS...........................Q-1 ---------------------- 4 SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. REFERENCES IN THIS PROSPECTUS TO "COMTECH," "THE COMPANY," "WE," "US" AND "OUR" REFER TO COMTECH GROUP, INC. AND ITS SUBSIDIARIES. OUR BUSINESS OVERVIEW Comtech is a leading module design solutions provider in China focused on the mobile handset and telecom equipment industries. Our team of engineers works with leading manufacturers of mobile handset and telecom equipment to design solutions that meet their need to provide state of the art products to their customers. Our design solutions for mobile device products include LCD modules, camera modules, persistent storage modules, input/output modules, sound system and power supply modules. In the telecom equipment industry we currently target optical solutions, data communication solutions, PSTN switching and wireless base stations. Since we began operations in 1995, we have evolved from a distribution company to a customized design solution provider. Our client base has grown to serve over 200 companies representing most of the large manufacturers in the mobile handset and telecom equipment industries in China. Our largest customer in the mobile handset market is TCL Mobile Communication (HK) Company Ltd., or TCL, one of China's largest domestic mobile handset manufacturers. Our top two revenue producing customers from the telecom equipment industry have been Zhongxing International (Hong Kong) Trading Co. Ltd. (ZTE) and Huawei Technology Investment Co. Ltd., or Huawei, which are China's two largest telecom equipment vendors. We currently offer our clients over 500 design solutions and product lines integrating components from many leading suppliers. Our engineers work with our customers' product development team to understand their needs for each specific function module. Based on a customer's specific requirements, our engineers provide a proposed customized module design solution. A module design solution incorporates several components. If the customer accepts our design, the customer agrees to purchase from us key specific components outlined in our module design. We purchase the specific components from our suppliers. We do not charge our customers an independent design fee. Instead, we generate revenue through the sale of the specific components that are incorporated in our module design. The price mark-up between the purchase price and the selling price of such components compensate our design, technical support and distribution services. Our business model has proven to be profitable and sustainable during our nine year operating history. We have had significant growth in both net revenues and profits since 1995. In 2003, we had over $43 million in net revenues and $3.4 million in net income, which amounts to an increase of approximately 72% and 209%, respectively, from $25 million in net revenue and $1.1 million in profit in 2002. For the nine month period ended September 30, 2004, our net revenues and net income were $56.2 million and $5.3 million, respectively, compared to the nine month period ended September, 2003, during which our net revenues and net income were $29.8 million and $2.8 million, respectively. 5 SHARE EXCHANGE On July 22, 2004, we acquired all of the outstanding capital stock of Comtech Group, a Cayman Islands company ("Comtech Cayman"), in exchange for the issuance of 40,502,150 shares of our Common Stock to the shareholders of Comtech Cayman. We then changed our name from Trident Rowan Group, Inc. ("Trident") to Comtech Group, Inc. The share exchange was accounted for as a reverse acquisition, whereby Comtech was deemed to be the accounting acquirer and Trident the legal acquirer. Accordingly, (i) the historical financial statements of Trident for periods prior to the date of the transaction are no longer presented; (ii) the historical financial statements presented herein for periods prior to the share exchange date are those of Comtech Cayman, as the accounting acquirer; and (iii) the number of shares has been restated retrospectively to reflect the share exchange ratio as at the date of the transaction in a manner similar to a stock split. As of September 30, 2004, the ownership structure of the Company as a result of the share exchange transaction is as follows: Comtech Group Inc. (formerly known as Trident OAM S.P.A. Rowan Group Inc.) - - - - - - - - - - (a) (established in Italy) (established in Maryland) (non operating subsidiary) | | | Comtech Group (established on April 26, 2002 in the Cayman Islands) | | - - - - - - - - - - - - - - | - - - - - - - - - - - - - - - - - | | Comtech (China) Holding Limited Comtech (Hong Kong) Holding Limited ("Comtech China") ("Comtech Holding") (established on May 27, 2002 (established on May 27, 2002 in the BVI) in the British Virgin Islands ("BVI")) | | | | | - - - - - - - -|- - - - - - - - - - - - - - - - - - - - | | | | | Shenzhen Comtech Comtech Communication Comtech Software Comtech Interrnational International Limited Technology (Shenzhen) Technology (Shenzhen) (Hong Kong) Limited ("Shenzhen Comtech") Company Limited Co. Ltd. ("Comtech Hong Kong") ("Comtech ("Comtech Software") Communication") (established on (established on (established on (established on July 4, 1996 in the PRC) July 23, 2002 in the PRC) 18 March 2004 in the PRC) July 14, 2000 | in Hong Kong) | | Shanghai E & T System Co. Ltd. ("Shanghai E & T") (a) (established on January 18, 2004 in the PRC) (a) The Company owns 98.6% of the shares in OAM S.P.A. and 60% of the shares in Shanghai E & T.
6 CORPORATE INFORMATION Trident was incorporated in 1917 as a Maryland corporation. Our principal executive offices are located at Room 1001, Tower C, Skyworth Building, High-Tech Industrial Park, Nanshan, Shenzhen, PRC. Our telephone number at that location is 86-755-26743210. We have numerous branch offices located throughout China, including Beijing, Shanghai, Qingdao, Wuhan and Hong Kong. Our website is WWW.COMTECH.COM.CN. Please note that in this prospectus, all references to "Renminbi" and "RMB" are to the legal currency of China and all references to "dollars," "USD," "$" and "US$" are to the legal currency of the United States. The consolidated financial statements are reported in Renminbi, the Company's functional currency, because all of the Company's material operating entities are based in and operated entirely within the People's Republic of China. The translation of RMB amounts into U.S. dollar amounts contained in this prospectus is included solely for the convenience of the readers of the financial statements and has been calculated at the rate of US$1 to RMB 8.2773, the approximate exchange rate at September 30, 2004. Such translations should not be construed as representations that the RMB amounts could be converted into US$ at that rate or any other rate. SUMMARY CONSOLIDATED FINANCIAL DATA The following table shows summary consolidated financial information and other data for our business. You should read this information in conjunction with: o the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," o our consolidated financial statements and related notes beginning on page F-1 of this prospectus, and o our unaudited condensed consolidation financial statements and related notes beginning on page Q-1 of this prospectus. The consolidated statement of operations data for the years ended December 31, 2003, 2002 and 2001 and the consolidated balance sheet data presented below as of December 31, 2003, 2002 and 2001, are derived from our audited consolidated financial statements and related notes thereto which have been included elsewhere in this prospectus. These audited consolidated financial statements and the related notes thereto have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm. The consolidated statement of operations data for the nine months ended September 30, 2004 and 2003, and the consolidated balance sheet as of September 30, 2004, are derived from our unaudited condensed consolidated financial statements and related notes thereto which have been included elsewhere in this prospectus. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements, and have included in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period. 7 CONSOLIDATED STATEMENT OF OPERATIONS DATA: (In thousands, except share and per share amounts) Nine months ended September 30, Year ended December 31, ---------------------------------------- ------------------------------------------------------ 2004 2004 2003 2003 2003 2002 2001 ---- ---- ---- ---- ---- ---- ---- USD RMB RMB USD RMB RMB RMB --- --- --- --- --- --- --- Net revenue 56,174 464,970 246,324 43,227 357,805 207,607 171,721 Cost of revenue (47,742) (395,171) (210,290) (37,082) (306,939) (190,265) (159,244) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Gross profit 8,432 69,799 36,034 6,145 50,866 17,342 12,477 Selling, R&D, general and administrative expenses (2,402) (19,886) (11,836) (2,457) (20,341) (7,461) (7,911) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income from operations 6,030 49,913 24,198 3,688 30,525 9,881 4,566 Interest expenses (202) (1,669) (500) (97) (801) -- (9) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Interest income 19 159 34 6 54 157 175 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income before income tax 5,847 48,403 23,732 3,597 29,778 10,038 4,732 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income tax (217) (1,799) (964) (156) (1,295) (820) (825) Net income before minority interest 5,630 46,604 22,768 3,441 28,483 9,218 3,907 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Minority interest (369) (3,055) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income 5,261 43,549 22,768 3,441 28,483 9,218 3,907 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted earnings per share 0.13 1.05 0.56 0.08 0.70 0.23 0.10 ============ ============ ============ ============ ============ ============ ============ Dividends declared per share -- -- -- 0.12 1.02 -- -- ============ ============ ============ ============ ============ ============ ============ Weighted average number of shares outstanding Basic 41,507,253 41,507,253 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150 ============ ============ ============ ============ ============ ============ ============ Diluted 41,666,436 41,666,436 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150 ============ ============ ============ ============ ============ ============ ============
8 CONSOLIDATED BALANCE SHEET DATA: As of September 30, As of December 31, ------------------- ------------------ 2004 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- ---- USD RMB USD RMB RMB RMB --- --- --- --- --- --- Cash 2,142 17,727 3,707 30,683 12,194 30,066 Accounts receivable, net of allowance for doubtful accounts 18,248 151,043 11,146 92,259 67,597 45,048 Property, plant and equipment 384 3,180 358 2,961 2,371 2,446 Total assets 28,851 238,809 19,354 160,200 97,072 80,724 Total current liabilities 17,846 147,719 17,222 142,546 66,514 59,467 Total liabilities 18,465 152,845 17,222 142,546 66,514 59,467 Total shareholders' equity 10,386 85,964 2,132 17,654 30,558 21,257
RISK FACTORS An investment in our Common Stock involves a high degree of risk. You should carefully read and consider the risks described below before deciding to invest in our Common Stock. If any of the following risks actually occur, our business, financial condition, results of operation or cash flows could be materially harmed. In any such case, the trading price of our Common Stock could decline, and you could lose all or part of your investment. When determining whether to buy our Common Stock, you should also refer to the other information in this prospectus, including our consolidated financial statements and the related notes. 9 RISKS RELATED TO OUR BUSINESS OUR REVENUES MAY VARY FROM QUARTER TO QUARTER DUE TO FLUCTUATING DEMAND FOR OUR PRODUCTS. We derive revenues through the sale of products to our customers. Fluctuating demand for our products by our customers may result from a variety of factors, including, but not limited to, the cancellation of large orders, price concessions on high volume orders, competitive pressures, technical synchronization between us and our clients, time required for research and development and changing design requirements resulting from rapid technology shifts. If customer demand for our products is not consistent, our revenues would be adversely affected. WE MAY NOT HAVE SUFFICIENT WORKING CAPITAL TO PAY OUR ACCOUNTS PAYABLE WHEN DUE. We experience a lag between the time we incur operating expenses in connection with a project and the collection of accounts receivable from customers in connection with that project. For this reason, among others, we may experience periods during which our working capital is not sufficient to fund our operations. If we do not have sufficient working capital to timely pay our suppliers, they may reduce the quantity of product they supply or no longer sell products to us, which would have a material adverse effect on our operations and net revenues. IF OUR CUSTOMERS DO NOT ACCEPT OUR PROPOSED DESIGNS, OUR REVENUE WILL BE ADVERSELY AFFECTED. We dedicate personnel, management and financial resources to research and development and technical support in developing new design solutions or establishing a new market channel for our customers. In the telecom equipment industry, the time frame for most research and development projects ranges from several months to as long as one to two years. Approximately 50% of our proposed design solutions are accepted by our customers. If our customers do not accept our proposed design solutions, we will fail to capitalize on the invested resources, time and effort that we expended on a project and our revenue would be adversely affected. WE DO NOT HAVE EXCLUSIVE AGREEMENTS WITH OUR CLIENTS AND IF THEY CHOOSE NOT TO ENGAGE OUR SERVICES ON A CONSISTENT BASIS, OR AT ALL, OUR REVENUES WOULD BE ADVERSELY AFFECTED. Customer loyalty, trust and established relationships are key factors in doing business in our industry. Although it is industry practice that upon acceptance of our module design our clients will purchase from us the specific components incorporated in the module design, we do not have agreements with our customers requiring them to purchase from us. If a client chooses our design solution proposal for a new project, the client is only obligated to purchase our products for that project. We cannot guarantee that clients will not contract with our competitors to purchase products that we have previously custom designed for them. Furthermore, we can not assure you that clients will not begin to purchase components directly from our suppliers instead of through us. The loss of consistent business from our clients and the transition away from us in favor of direct purchases from our suppliers, would have a negative impact on our ability to sell our design solution services and would result in a substantial loss of revenues for us. LOSS OF CERTAIN KEY CLIENTS MAY ADVERSELY IMPACT OUR REVENUES. We generate the majority of our revenues from certain key clients. In 2003, our top ten clients represented 64% of revenues and our top four clients represented nearly 48% percent of total revenues. During the nine months ended September 30, 2004, our top ten clients generated 62% of our revenues. Should we lose or receive reduced orders from any of our large customers, we would have a substantial loss in revenues. 10 RELIANCE ON OUR SUPPLIERS FOR PRODUCT MAKES US VULNERABLE TO THE LOSS OF ONE OR MORE KEY SUPPLIERS. If our suppliers do not continue to sell products to us, clients who have engaged us because of the brand-name associated with our product may no longer seek our services. Furthermore, if our suppliers do not expand their product line to keep up with new technologies, they may be surpassed by new suppliers entering the market. In either event, we would have to seek alternative suppliers. There is no guarantee that alternative suppliers will sell their products to us or that our clients will want to purchase those products. If we lose our supplier base, we would be unable to continue to operate our business. In addition, we rely on our suppliers to maintain sufficient inventory of the components we need for our module designs. If our suppliers have a shortage of components needed for a customer's project, we may not meet our customer's scheduled shipment deadline. If we fail to timely deliver our products our business relationships with our customers may be harmed and they may no longer seek our services. THE UNAUTHORIZED USE OF OUR PROPRIETARY DESIGN SOLUTIONS COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR REVENUES. Although we have in-house design engineering teams to design our component solutions, we provide our suppliers with our custom specifications to manufacture the components. Our design solutions are proprietary, however, we do not have patent protection for our solutions and we do not have non-disclosure or confidentiality agreements with suppliers to keep our design specifications confidential. Although we have good relationships with our suppliers, we face the risk that they will use our specifications in components to be sold to competitors, or that they will attempt to circumvent us and sell these components directly to our clients. The unauthorized use by our suppliers of our design specifications would result in a substantial loss of revenues for us. AN INABILITY TO RESPOND QUICKLY AND EFFECTIVELY TO NEW TRENDS WOULD ADVERSELY IMPACT OUR COMPETITIVE POSITION. Our failure to maintain the superiority of our technological capabilities or to respond effectively to technological changes could adversely affect our ability to retain existing clients and secure new clients. We will need to constantly seek out new products and develop new solutions to maintain in our portfolio. If we are unable to keep current with new trends, our competitors' technologies or products may render us noncompetitive and our products obsolete. THE INDUSTRIES IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE AND FRAGMENTED. We expect competition to persist and intensify in the future. For each project, we partner with our supplier to compete with other key enabling component suppliers. For example, we partner with JDS Uniphase to compete against Intel for optical module designs. Currently many of our customers and suppliers do not focus on module level design. If our customers or suppliers decide to devote time and resources to in-house component design, the demand for our products may decline. In addition, our customers may change their procurement strategy or decide to rely on us primarily for component delivery, and not for integration or design work. The loss of clients for our design solutions services would have a material adverse effect on our business, financial condition and results of operations. Also, some traditional distributors have been enhancing their designing capabilities. Competitive pressures from current or future competitors could cause our services and products to lose market acceptance or require us to significantly reduce the price of our services to keep and attract clients. 11 OUR SUCCESS IS HIGHLY DEPENDENT UPON THE CONTINUING SERVICE OF OUR OFFICERS, MANAGEMENT TEAM AND OTHER PERSONNEL. Competition in our industry for executive-level personnel is strong, and recruiting, training, and keeping qualified key personnel with both technical and market expertise are important factors in our ongoing success and survival. Should key employees leave, we may lose both an important internal asset and revenues from customer projects tied to those employees. OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED ADDITIONAL FINANCING. We currently have an available bank line, and we also have cash available in our bank account from our predecessor company, Trident Rowan Group, Inc. However, in the future, we may need to raise additional funds through public or private financing, which may include the sale of equity securities. The issuance of these equity securities could result in dilution to our stockholders. If we are unable to raise capital when needed, our business strategy will be affected, which could severely limit our ability to generate revenue. Moreover, failure to obtain such additional funds on a timely basis could result in lost business opportunities. IF OUR ITALIAN SUBSIDIARY, OAM S.P.A., IS NOT SUCCESSFUL IN ITS PENDING LITIGATION IN ITALY, WE MAY SUFFER LOSSES. As a result of its former operations, our Italian subsidiary, OAM S.p.A, is currently a party to ongoing legal proceedings in Italy. In connection with claims for tax rebates made by OAM in 1984, the Italian tax authorities counterclaimed assessing additional taxes and penalties. OAM has been successful in two lower courts in its defense of such counterclaims and awaits the results of a final appeal in the highest Italian tax court. In 1999, OAM sold real estate to a third party that subsequently leased such real estate to CSD Srl. CSD has brought a claim against OAM in the Rome Civil Court alleging that the commercial designation of the property was not properly disclosed and consequently CSD's lease payments were excessive. CSD is seeking reimbursement from OAM of such alleged excessive lease payments. On March 25, 2004,the Court requested that the parties present their conclusions in order for it to render a final verdict. If OAM is not successful in its defense, there may be a material adverse effect on our business, financial condition and results of operations. RISKS ASSOCIATED WITH DOING BUSINESS IN GREATER CHINA There are substantial risks associated with doing business in greater China, as set forth in the following risk factors. THE ESTABLISHMENT AND EXPANSION OF INTERNATIONAL OPERATIONS REQUIRES SIGNIFICANT MANAGEMENT ATTENTION. All of our current, as well as any anticipated future revenues, are or are expected to be derived from Asia. Our international operations are subject to risks, including the following, which, if not planned and managed properly, could materially adversely affect our business, financial condition and operating results: 12 o legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers; o longer customer payment cycles and greater difficulties in collecting accounts receivable; o uncertainties of laws and enforcement relating to the protection of intellectual property; and o potentially uncertain or adverse tax consequences. FLUCTUATIONS IN THE VALUE OF THE RMB RELATIVE TO FOREIGN CURRENCIES COULD AFFECT OUR OPERATING RESULTS. We have historically conducted transactions with customers, paid payroll and other costs of operations in Chinese Renminbi. To the extent future revenue is denominated in foreign currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on our financial condition and operating results. To date, we have not engaged in any hedging transactions in connection with our international operations. OUR OPERATIONS AND ASSETS IN GREATER CHINA ARE SUBJECT TO SIGNIFICANT POLITICAL AND ECONOMIC UNCERTAINTIES. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice. WE MAY HAVE LIMITED LEGAL RECOURSE UNDER CHINESE LAW IF DISPUTES ARISE UNDER CONTRACTS WITH THIRD PARTIES. The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. COMPLIANCE WITH THE FOREIGN CORRUPT PRACTICES ACT COULD ADVERSELY IMPACT OUR COMPETITIVE POSITION; FAILURE TO COMPLY COULD SUBJECT US TO PENALTIES AND OTHER ADVERSE CONSEQUENCES. We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. We have attempted to implement safeguards to prevent and discourage such practices by our employees and agents. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. 13 RISKS RELATED TO AN OFFERING OF OUR COMMON STOCK OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER CONTROLS A MAJORITY OF OUR COMMON STOCK. Jeffrey Kang, our President and Chief Executive Officer, through entities he controls, beneficially owns 73.46% of our outstanding Common Stock. As a result, Mr. Kang has the ability to control the outcome of all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change of control would benefit our other shareholders. EFFORTS TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND REGULATIONS WILL INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES AND WE STILL MAY FAIL TO COMPLY. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company's financial statements must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2005. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of December 31, 2005 and future year ends as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. We have only recently begun a formal process to evaluate our internal controls over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. THERE HAS NOT BEEN SIGNIFICANT TRADING IN OUR COMMON STOCK. Our Common Stock is quoted on the Over the Counter Bulletin Board and has a limited trading market. There is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control: o variations in our quarterly operating results; o announcements that our revenue or income are below analysts' expectations; o general economic slowdowns; o changes in market valuations of similar companies; o sales of large blocks of our Common Stock; o announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; o fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of internationally-based companies. 14 PROSPECTIVE INVESTORS MAY SUFFER DILUTION UPON THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS. As of November 30, 2004, we had stock options outstanding to purchase 3,935,000 shares of Common Stock and warrants to purchase 1,850,834 shares of Common Stock. The holders of 230,000 of the options and the holders of the warrants have registration rights with respect to the securities. To the extent that the options and warrants are exercised, they may be exercised at prices below the price of our shares of Common Stock on the public market, resulting in a significant number of shares entering the public market and the dilution of our Common Stock. In addition, in the event that any future financing should be in the form of securities convertible into, or exchangeable for, equity securities, investors may experience additional dilution upon the conversion or exchange of such securities. FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "will," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," "continue," or similar terms, variations of those terms, or the negative of these terms. You should carefully consider the risk factors in this prospectus and not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this prospectus under the heading "Risk Factors", include, but are not limited to: o unfavorable results of our product development and design efforts; o failure to achieve market acceptance of our products; o the outcome of plans for manufacturing, sales and marketing; o the introduction of competitive products; o impairment of proprietary rights; o the impact of present and future collaborative agreements; failure to implement our strategy; and o deteriorating financial performance. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure that such plans, intentions or expectations will be achieved in whole or in part. You should carefully review the risk factors described herein and any other cautionary statements contained in this prospectus. All forward-looking 15 statements attributable to the Company or persons acting on its behalf are expressly qualified by the risk factors and other cautionary statements in this prospectus. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. The safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995 protects companies from liability for their forward looking statements if they comply with the requirements of the Act. The Act does not provide this protection for initial public offerings. EXCHANGE RATE INFORMATION Our business is primarily conducted in China and denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at a specific rate solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. The following table sets forth information concerning exchange rates between Renminbi and U.S. dollars for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York. - ------------------------------------------------------------------------------------------------------------ NOON BUYING RATE --------------------------------------------------------------- PERIOD PERIOD END AVERAGE (1) LOW HIGH - ------------------------------------------------------------------------------------------------------------ (RMB PER USD1.00) 1998 ................................ RMB8.2789 RMB8.3006 RMB8.3180 RMB8.2774 1999 ................................ 8.2795 8.2783 8.2800 8.2770 2000 ................................ 8.2774 8.2784 8.2799 8.2768 2001 ................................ 8.2766 8.2770 8.2786 8.2676 2002 ................................ 8.2800 8.2770 8.2800 8.2669 2003 ................................ 8.2767 8.2771 8.2765 8.2880 2004 ................................ January ................ 8.2768 8.2769 8.2767 8.2772 February ................ 8.2769 8.2771 8.2768 8.2773 March ................ 8.2770 8.2771 8.2767 8.2774 April ................ 8.2771 8.2769 8.2768 8.2772 May ................ 8.2769 8.2771 8.2768 8.2773 June ................ 8.2766 8.2767 8.2766 8.2768 July ................ 8.2769 8.2767 8.2766 8.2769 August ................ 8.2766 8.2768 8.2766 8.2770 September ................ 8.2766 8.2767 8.2766 8.2768 October ................ 8.2766 8.2765 8.2768 8.2765 November ................ 8.2765 8.2765 8.2765 8.2764 December(2) ................ 8.2765 8.2765 8.2767 8.2765 - ------------------------------------------------------------------------------------------------------------
(1) Annual and monthly averages are calculated using the average of the daily rates during the relevant period. (2) For the period to and including December 17, 2004. 16 USE OF PROCEEDS We will not receive any proceeds from the sale of the shares of Common Stock by the selling stockholders. Assuming that all of the warrants held by selling shareholders are exercised for cash, we will realize proceeds of approximately $2,556,000. Assuming that all of the options held by selling stockholders are exercised for cash, we will realize proceeds of approximately $345,000. DIVIDEND POLICY Since the share exchange, we have not declared any cash dividends on our Common Stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant. CAPITALIZATION The following table sets forth our capitalization as of September 30, 2004 on a historical basis and on a pro forma basis giving retroactive effect to the sale of 6,300,000 shares in a private placement completed in October 2004 and November 2004: Actual Actual Pro Forma Pro Forma ---------- ---------- ---------- ---------- USD'000 RMB'000 USD'000 RMB'000 ---------- ---------- ---------- ---------- Common stock, $.01 par value; 50,000,000 shares authorized at September 30, 2004 and 200,000,000 shares authorized on a pro forma basis; 44,422,050 shares issued and outstanding at September 30, 2004 and 50,722,050 on a pro forma basis, respectively 444 3,676 507 4,198 ---------- ---------- ---------- ---------- Additional paid-in capital 4,249 35,168 14,499 120,010 ---------- ---------- ---------- ---------- Retained earnings 5,693 47,120 5,693 47,120 ---------- ---------- ---------- ---------- Total stockholders' equity 10,386 85,964 20,699 171,328 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity 28,851 238,809 39,164 324,173 ---------- ---------- ---------- ----------
The table above does not include: o 5,785,834 shares of Common Stock issuable upon the exercise of outstanding options and warrants to purchase our Common Stock, at a weighted average exercise price of USD1.67 per share; and o 3,705,000 shares of Common Stock reserved for issuance under our 2004 Incentive Stock Option Plan. 17 PRICE RANGE OF COMMON STOCK We changed our name from "Trident Rowan Group, Inc." to "Comtech Group, Inc." on August 2, 2004. From March 18, 1999 to August 8, 2004, our Common Stock was quoted on the Over-The-Counter Market known as the "pink sheets" under the symbol "TRGI". From August 8, 2004 to August 23, 2004, our Common Stock was quoted on the Electronic Bulletin Board of the Over-The-Counter Market (OTCBB) under the symbol "TRGI" and since August 24, 2004 under the symbol "COGO". The following table sets forth the high and low sale prices for our Common Stock for the periods indicated as reported by the respective markets. Such prices represent prices between dealers, without adjustment for retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. All periods presented prior to July 22, 2004 represent the performance of the stock of Trident, the legal acquirer. HIGH LOW ---- --- FISCAL 2002 First Quarter $1.50 $1.15 Second Quarter $1.18 $0.75 Third Quarter $0.60 $0.45 Fourth Quarter $0.47 $0.20 FISCAL 2003 First Quarter $0.42 $0.22 Second Quarter $0.42 $0.28 Third Quarter $0.80 $0.29 Fourth Quarter $0.85 $0.52 FISCAL 2004 First Quarter $0.95 $0.75 Second Quarter $1.43 $0.85 Third Quarter: July 1 - July 21 $1.15 $1.14 July 22 - September 30* $2.50 $1.80 Fourth Quarter (through Dec. 20) $2.85 $1.75 ________________ *Represents stock performance for periods after the share exchange transaction. On December 20, 2004, the closing price of our Common Stock as reported on the OTCBB was $2.50, and there were approximately 927 holders of record of our Common Stock. The number of record holders does not reflect the number of beneficial owners of our Common Stock for whom shares are held by brokerage firms and other institutions. 18 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The consolidated statement of operations data for the years ended December 31, 2003, 2002 and 2001 and the consolidated balance sheet data presented below as of December 31, 2003, 2002 and 2001, are derived from our audited consolidated financial statements and related notes thereto which have been included elsewhere in this prospectus. These audited consolidated financial statements and the related notes thereto have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm. The consolidated statement of operations data for the nine months ended September 30, 2004 and 2003, and the consolidated balance sheet as of September 30, 2004, are derived from our unaudited condensed consolidated financial statements and related notes thereto which have been included elsewhere in this prospectus. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements, and have included in our opinion, all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period. The consolidated financial statements are reported in Renminbi because all of the Company's material operating entities are based in and operated entirely within the People's Republic of China. The translation of RMB amounts into U.S. dollar amounts set forth below is included solely for the convenience of the readers of the financial statements and has been calculated at the rate of US$1 to RMB 8.2773, the approximate exchange rate at September 30, 2004. Such translations should not be construed as representations that the RMB amounts could be converted into US$ at that rate or any other rate. RMB and US$ amounts are presented in thousands. This data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. 19 CONSOLIDATED STATEMENT OF OPERATIONS DATA: (In thousands, except share and per share amounts) Nine months ended September 30, Year ended December 31, ---------------------------------------- ----------------------------------------------------- 2004 2004 2003 2003 2003 2002 2001 ---- ---- ---- ---- ---- ---- ---- USD RMB RMB USD RMB RMB RMB --- --- --- --- --- --- --- Net revenue 56,174 464,970 246,324 43,227 357,805 207,607 171,721 Cost of revenue (47,742) (395,171) (210,290) (37,082) (306,939) (190,265) (159,244) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Gross profit 8,432 69,799 36,034 6,145 50,866 17,342 12,477 Selling, R&D general and administrative expenses (2,402) (19,886) (11,836) (2,457) (20,341) (7,461) (7,911) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income from operations 6,030 49,913 24,198 3,688 30,525 9,881 4,566 Interest expenses (202) (1,669) (500) (97) (801) -- (9) Interest income 19 159 34 6 54 157 175 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income before income tax 5,847 48,403 23,732 3,597 29,778 10,038 4,732 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Income tax (217) (1,799) (964) (156) (1,295) (820) (825) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income before minority interest 5,630 46,604 22,768 3,441 28,483 9,218 3,907 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Minority interest (369) (3,055) -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income 5,261 43,549 22,768 3,441 28,483 9,218 3,907 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted earnings per share 0.13 1.05 0.56 0.08 0.70 0.23 0.10 ============ ============ ============ ============ ============ ============ ============ Dividends declared per share -- -- -- 0.12 1.02 -- -- ============ ============ ============ ============ ============ ============ ============ Weighted average number of shares outstanding Basic 41,507,253 41,507,253 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150 ============ ============ ============ ============ ============ ============ ============ Diluted 41,666,436 41,666,436 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150 ============ ============ ============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA: As of September 30, As of December 31, ------------------- ------------------ 2004 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- ---- USD RMB USD RMB RMB RMB --- --- --- --- --- --- Cash 2,142 17,727 3,707 30,683 12,194 30,066 Accounts receivable, net of allowance for doubtful amounts 18,248 151,043 11,146 92,259 67,597 45,048 Property, plant and equipment 384 3,180 358 2,961 2,371 2,446 Total assets 28,851 238,809 19,354 160,200 97,072 80,724 Total current liabilities 17,846 147,719 17,222 142,546 66,514 59,467 Total liabilities 18,465 152,845 17,222 142,546 66,514 59,467 Total shareholders' equity 10,386 85,964 2,132 17,654 30,558 21,257
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in this prospectus. This discussion and analysis contains forward-looking statements that are subject to risks, uncertainties and other factors, including, but not limited to, those discussed under "Risk Factors" and elsewhere in this prospectus, that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. See "Forward-Looking Statements." OVERVIEW We provide customized module design solutions to various manufacturers in the mobile handset and telecom equipment industries in China. Our revenues are generated through the sale of the customized components used by these manufacturers in their products. Over the last year, due to an increased demand for mobile handsets in China, we have seen a turnaround in the contribution of revenue from sales of our mobile handset components over that of our telecom equipment line. For example, in 2003 our mobile handset components line represented only 40% of our net revenues, as of September 30, 2004 sales of mobile handset components represented almost 60% of our net revenue. We are seeking to enter the consumer electronics market by providing components to Chinese consumer electronics makers. The consumer electronics market is expected to experience strong growth. The China Center of Information Industry Development estimates that China's market for DTV products and services will be RMB 500 billion (approximately USD60 billion) by the year 2015. We believe that we are well positioned to enter this market because many of our existing mobile handset customers, such as TCL, Haier, AMoi and Xoceco, also produce televisions and other consumer electronics devices. We believe that we may be able to leverage our existing relationships with these manufacturers to sell consumer electronics components to them. Currently, we are engaged in the research and development of a set-up box and we are working closely with some of our existing customers on this new project. China continues to be one of the fastest-growing and largest markets for communications services and equipment in the world. We have seen a trend toward increased government commitment to develop a powerful communications infrastructure to support the increased demand for communications services. Since 2001, we have experienced a trend of growth in our net revenues, gross margin and net operating income. We expect that we will continue to see growth in these areas as the industry continues to grow. Total net revenues for the nine months ended September 30, 2004 were RMB464,970 thousand or 88.8% higher than that of the same period of the prior year. In 2003 we generated RMB357,805 thousand in net revenues which was 72% higher than 2002. We generated total net revenues of RMB207,607 thousand in 2002 and RMB171,721 thousand in 2001, which represents a 21% increase over 2001. We believe that our increased growth in net revenues has been the result of three main factors. First, China has seen an increased demand for services and products in its telecommunications industry and a significant expansion in the mobile phone market. Also, over the last 3 years we have significantly increased our customer base and our existing customers have increased their demand for our products, which we attribute to our ability to provide more design and value-added services to our customers. . We believe that this increased demand from our customers is the result of the China domestic industry expansion and an increase in exports by these same customers. Finally, we have expanded our product line to offer our customers more modular design services and have increased the number of suppliers with whom we have established relationships. Our gross profit was 69,799 thousand for the nine months ended September 30, 2004, RMB50,866 thousand in 2003, RMB17,342 thousand in 2002, and RMB12,477 thousand in 2001. Gross profit, as a percentage of net revenues, was approximately 15% for the nine months ended September 30, 2004, 14%, 8% and 7% in 2003, 2002 and 2001, respectively. We believe that the increase in gross profit from year to year can be primarily attributed to a change in our product mix. Specifically, sales of mobile handset components, which have higher profit margins than our sales of telecom equipment, have continued to comprise a significantly greater portion of our total net revenues over the nine months ended September 30, 2004 as well as the three-year period ended December 31, 2003. 21 We generated net income of RMB43,549 thousand for the nine months ended September 30, 2004, RMB28,483 thousand in 2003, RMB9,218 thousand in 2002 and RMB3,907 thousand in 2001. As a percentage of net revenue, net income was approximately 9% for the nine months ended September 30, 2004, 8%, 4% and 2% in 2003, 2002 and 2001 respectively. Although our increase in net income is primarily attributable to the increase in net revenues and gross margins, for the reasons noted above, we have also been able to maintain our relatively low operating expenses, which has further contributed to the increase in net income from year to year. The effective tax rate was 3.7% for the nine months ended September 30, 2004 and 4.3%, 8.2% and 17.4% in 2003, 2002 and 2001, respectively. Our gradual decrease in the effective tax rate was mostly due to our mix of subsidiaries' earnings. More income was earned in the subsidiaries with tax benefits granted from local tax authorities. The major factors affecting our results of operations and financial condition include: GROWTH IN INDUSTRY AND IN END MARKETS. As the telecommunications industry, and in particular the mobile handset and telecom equipment markets grow, we expect there will be increased demand for the purchase of our services and products, which will increase our net revenue. We believe that the increasing complexity of mobile devices and the upgrade of telecom networks will stimulate an increase in the demand for new components. In the mobile handset market, new features are added to mobile handsets at an accelerating pace due to competition between mobile handset makers and the increasing use of 2.5G services. We believe that the launch of new more advanced services in 2.5G and 3G wireless networks and broadband access networks in the telecom equipment industry will increase demand for more advanced components. INCREASE IN EXPORTS. We believe that China has established itself as a strong global manufacturing center, which has caused overseas companies to continue to seek products from local vendors. Leading domestic device and equipment vendors are also increasingly looking to distribute their products in overseas markets. In addition, there has been strong government support for increased mobile handset exports. We believe that growth in the export market will likely have a positive impact on our results of operations and financial condition, as it will increase the demand for components, such as those we provide, among our mobile handset clients. DESCRIPTION OF REVENUE AND COST ITEMS We generate revenue through the sale of components. Our net revenue is net of value-added tax (VAT). Our sales of components are generally subject to a VAT of 17%. Cost of goods sold primarily consists of the purchase of components from suppliers. Our gross profit is affected by product mix, average selling prices and the cost of components. Our gross margin, as a percentage of net revenues, varies among our product range. . We expect that our overall gross margin, as a percentage of net revenues , will fluctuate from period to period as a result of shifts in product mix, changes in selling prices and costs of good sold. Our selling expenses include, expenditures to promote new product lines and gain a larger customer base, freight charges, personnel expenses and travel and entertainment costs related to sales and marketing activities. We expense all selling expenses as they are incurred. We look for ways to maintain or minimize these expenses, however, historically, as the demand for our module designs have increased and revenue has increased, our marketing costs, freight charges and other selling expenses have increased and we would expect that trend to continue. General and administrative expenses include compensation and benefits of general and administrative staff, professional fees and travel and entertainment costs related to general corporate purposes. Some of these expenses are related to regulatory compliance necessary to maintain our listing as a US public company. We expense all general and administrative expenses as they are incurred. We expect that general and administrative expenses will continue to increase for the foreseeable future as a result of our expected continued growth and the increased costs of complying with US rules and regulations necessary to maintain our listing status. 22 Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, the cost of parts for prototypes, equipment depreciation and third party development expenses. We expense research and development expenses as they are incurred. We believe that continued investment in research and development is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in future periods as we seek to expand our business by designing new solutions, offering new product lines and penetrating new industries. As of September 30, 2004, the Company has hired 25 engineers and employees who are performing research activities to develop new product lines for telecom equipment, handsets and consumer electronics. Research and development expenses are significantly higher in the nine months ended September 30, 2004 than those of the prior year. The Company expects to continue to make significant investment in R&D in the future, and accordingly, expenses associated with this activity can be expected to increase as well. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. The U.S. Securities and Exchange Commission, or SEC, has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We have summarized below our accounting policies that we believe are both important to the portrayal of our financial results and involve the need to make estimates about the effect of matters that are inherently uncertain. ALLOWANCE FOR BAD AND DOUBTFUL ACCOUNTS - The Company maintains allowances for its bad and doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers changed, changes to these allowances may be required, which would impact the Company's future operating results. LITIGATION - The Company records contingent liabilities relating to litigation or other loss contingencies when it believes that the likelihood of loss is probable and the amount of the loss can be reasonable be estimated. Changes in judgments of outcome and estimated losses are recorded, as necessary, in the period such changes are determined or become known. Any changes in estimates would impact its future operating results. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 NET REVENUES Details of revenue for the nine month period ended September 30 are as follows: 2004 2004 2003 2003 ---- ---- ---- ---- RMB'000 % of revenue RMB'000 % of revenue % change ------- ------------ ------- ------------ -------- Mobile handset components 279,473 60.1 76,100 30.9 267.2 Telecom equipment 179,327 38.6 167,188 67.9 7.3 Other 6,170 1.3 3,036 1.2 103.2 ------- -------- -------- -------- -------- Total Net Revenues 464,970 100.0 246,324 100.0 88.8
23 Total net revenues for the nine months ended September 30, 2004 were RMB218,646 thousand or 88.8% higher than that of the same period of the prior year. The increase was mainly attributed to the increase in revenues from both mobile handset components and telecom equipment sales. Sales of mobile handset components increased by RMB203,373 thousand or 267.2% and sales of telecom equipment increased by RMB12,139 or 7.3%. Sales of mobile handset components increase was because demand for mobile handsets has been growing in China and the domestic mobile handset vendors, which make up our customer base, have continued to penetrate the market and capture market share. Sales of telecom equipment increase due to the increase in demand from telecom operators which continue to expand their existing infrastructures. The contribution to total net revenues by sales of mobile handset components increased from RMB76,100 thousand or 30.9% of total net revenues to RMB279,473 thousand or 60.1% of total net revenues. Whereas the contribution of sales of telecom equipment total net revenues decreased from 67.9% to 38.6%, though total sales increased from RMB167,188 thousand to RMB179,327 thousand. GROSS PROFIT Gross profit for the nine months ended September 30, 2004 increased from RMB36,034 thousand or 14.6% in the first three quarters of 2003 to RMB69,799 thousand or 15.0% in the same period of 2004. The increase was principally due to the change in revenue mix, where revenues from mobile handset components sales had a higher margin than those from telecom equipment. The ratio of margin contribution from mobile handset components sales for the three quarters ended September 30, 2003 and 2004 were 33.8% and 66.5% respectively, representing an increase of 32.7%. In terms of margin amount, the mobile handset components sales contribution increased by approximately RMB34,264 thousand. SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES Selling, R&D, general and administrative expenses of RMB19,886 thousand were RMB8,050 thousand or 68.0% higher than incurred in the same period of the prior year. The expenses for the nine month period ended September 30 are as follows: 2004 2003 ---- ---- RMB'000 RMB'000 % change ------- ------- --------- Selling expenses 6,059 1,913 216.7 R&D expenses 5,613 638 779.8 General and administrative expenses 8,214 9,285 (11.5) ------ ------ ------ Total 19,886 11,836 68.0 The increase in the selling expenses by RMB4,146 thousand or 216.7% was mainly attributed to the increase in marketing and business development expenses of approximately RMB1.4 million for promoting new product lines and gaining larger customer base. Other indirect selling expenses such as freight charges and salesperson expenses contributed to the balance of the increase and consistent with the same period of last year, they represented about one percent of revenue. R&D expenses increased by RMB4,975 thousand or 779.8%. The increase was comprised of approximately RMB2.6 million in additional costs incurred in developing new product lines for telecom equipment, mobile handset components and consumer electronics and additional personnel cost of approximately RMB2.4 million associated with strengthening our engineering team in 2004. Our headcount in the R&D department has increased from 20 as of September 30, 2003 to 25 as of September 30, 2004. General and administrative expenses decreased by RMB1,071 thousand or 11.5%. The decrease was attributable to the bad debt provision of RMB2 million recorded in the nine months ended September 30, 2003, whereas no such provision was additionally made in the same period of 2004. However, the decrease was offset in part by additional corporate expenses of about RMB1 million in the first nine months of 2004, which were incurred as a result of expanding the Company and an increase in legal and other expenses associated with meeting our reporting and compliance obligations as a public company in the United States. 24 INTEREST EXPENSE Interest expense for the nine months ended September 30, 2004 amounted to RMB1,669 thousand as compared to RMB500 thousand in the same period of 2003. The increase of RMB1,169 thousand or 233.8% was due to new bank loans totaling RMB72,482 (USD8,757) thousand obtained in August and September of 2004. The interest rate was overnight LIBOR or 1.5% per annum above the deposit rate , whichever is the highest. No such loans were outstanding in 2003. INTEREST INCOME Interest income for the nine months ended September 30, 2004 amounted to RMB159 thousand, compared to RMB34 thousand in the same period of 2003. The increase is attributable to higher net cash inflows generated from increased net revenues and the resulting increase in our average deposit balances. INCOME TAX The effective tax rate for the nine months ended September 30, 2004 was 3.7% compared to 4.1% for the comparable period in the prior year. The decrease in the effective tax rate was mostly due to the Company having earned more income at subsidiaries with tax benefits granted from their respective local tax authorities. MINORITY INTERESTS Minority interests comprises 40% of the outstanding shares in Shanghai E&T System Co., Ltd. and 1.4% of the shares in OAM S.p.A.. NET INCOME; EARNINGS PER SHARE As a result of the above items, net income for the nine months ended September 30, 2004 was RMB43,549 thousand compared to a net income of RMB22,768 thousand in the corresponding period of 2003. The Company reported basic per share earnings of RMB1.05 for the nine months ended September 30, 2004 based on 41,507,253 outstanding weighted average shares and a diluted per share earnings of RMB1.05 based on 41,666,436 outstanding weighted average shares, compared to basic and diluted per share earnings of RMB0.56 for the nine months ended September 30, 2003, based on 40,502,150 outstanding weighted average shares. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 NET REVENUES Details of revenue for the year ended December 31 are as follows: 2003 2003 2002 2002 ---- ---- ---- ---- RMB'000 % of RMB'000 % of % change ------- ----- ------- ----- --------- revenue revenue ------- ------- Mobile handset components 143,179 40.0 62,282 30.0 129.9 Telecom equipment 207,281 57.9 143,325 69.0 44.6 Other 7,345 2.1 2,000 1.0 267.3 ------- ------- ------- ------- ------- Total net revenues 357,805 100.0 207,607 100.0 72.3
25 Net revenue was RMB357,805 thousand or 72.3% higher than the year ended 2002. The increase was mainly attributed to the increase in net revenues from both mobile handset components and telecom equipment sales. The increase in mobile handset components net revenue was due to the fact that the demand for mobile handsets has been growing in China and domestic mobile handset vendors have continued to penetrate the market and capture market share. The increase in telecom equipment revenue was attributed to growth in China's telecom equipment industry driven by an increase in investment by telecom operators. Contribution of mobile handset components net revenue to total revenue increased from RMB62,282 thousand or approximately 30.0% to RMB143,179 thousand or 40.0%. Whereas contribution of telecom equipment net revenue to total net revenue decreased from 69.0% to 57.9%, though its net revenue increased from RMB143,325 thousand to RMB207,281 thousand. GROSS MARGIN Gross margin increased from RMB17,342 thousand in 2002 to RMB50,866 thousand in 2003. The increase was principally due to increase in sales volume and a change in revenue mix, where net revenues from mobile handset components sales, which are a higher margin product, were higher than those from telecom equipment. In addition, since more design and value-added services were provided to our customers, it resulted in higher gross margin. SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES Selling, R&D, general and administrative expenses of RMB20,341 thousand were RMB12,880 thousand or 173% higher than those of the prior year. The expenses for the year ended December 31 are as follows: 2003 2002 ---- ---- RMB'000 RMB'000 % change ------- ------- --------- Selling expenses 2,649 760 248.6 R&D expenses 983 1,042 (5.7) General and administrative expenses 16,709 5,659 195.3 ------ ------ ------ Total 20,341 7,461 172.6 The increase in the selling expenses by RMB1,889 thousand or 248.6% was mainly attributed to the increase in marketing and business development expenses of approximately RMB1 million for promoting new product lines and gaining larger customer base. Other indirect selling expenses such as freight charges and salesperson expenses contributed to the balance of the increase was primarily due to increased sales transactions. R&D expenses slightly decreased by RMB59 thousand or 5.7%. The R&D costs were incurred in developing new product lines for telecom equipment, handset components and consumer electronics. General and administrative expenses increased by RMB11,050 thousand or 195.3%. The increase was mainly attributable to the of the bad debt provision of RMB4 million that was made in 2003. The remaining RMB7 million increase was due to increase in staff cost, and an increase in legal and other expenses associated with our reporting and compliance obligations as a public company. INTEREST EXPENSE Interest expense for the year ended December 31, 2003 amounted to RMB801 thousand as compared to zero in 2002. The increase in interest expense was associated with bank overdraft and bank handling charges incurred during 2003. 26 INTEREST INCOME Interest income for the year ended December 31, 2003 amounted to RMB54 thousand, compared to RMB157 thousand in 2002. The decrease was owing to increase in net cash outflow used in operating activities during 2003. INCOME TAX The effective tax rate for the year ended December 31, 2003 was 4.3% compared to 8.2% for the prior year. The decrease in the effective tax rate was mostly due to our mix of subsidiaries' earnings. More income was earned in the subsidiaries with tax benefits granted from their respective local tax authorities. NET INCOME; EARNINGS PER SHARE As a result of the above items, net income for the year ended December 31, 2003 was RMB28,483 thousand compared to a net income of RMB9,218 thousand in 2002. We reported a basic and diluted per share earnings of RMB0.70 for the year ended December 31, 2003 based on 40,502,150 outstanding weighted average shares, compared to basic and diluted per share earnings of RMB0.23 for the year ended December 31, 2002, based on 40,502,150 outstanding weighted average shares. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 NET REVENUE Details of net revenue for the year ended December 31 are as follows: 2002 2002 2001 2001 ---- ---- ---- ---- RMB'000 % of revenue RMB'000 % of revenue % change ------- ------------ ------- ------------ --------- Mobile handset components 62,282 30.0 51,516 30.0 20.9 Telecom equipment 143,325 69.0 118,117 68.8 21.3 Other 2,000 1.0 2,088 1.2 (4.2) ------- ------- ------- ------- ------- Total 207,607 100.0 171,721 100.0 20.9
Net revenue was RMB207,607 thousand or 20.9% higher than the year ended 2001. The increase was mainly attributed to an increase in our customer base in both the mobile handset components and telecom equipment markets, which resulted in an increase in new revenue from sales to customers in those markets. The increase in mobile handset components net revenue was due to the fact that the demand for mobile handsets has been growing in China and domestic mobile handset vendors have continued to penetrate the market and capture market share. The increase in telecom equipment revenue was attributed to growth in China's telecom equipment industry driven by an increase in investment by telecom operators. GROSS MARGIN Gross margin increased from RMB12,477 thousand in 2001 to RMB17,342 thousand in 2002. The increase was principally due to increase in net revenue. Gross margin percentage increased from 7% to 8% because we have started to provide value-added services to our customers since late 2002. 27 SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES Selling, R&D, general and administrative expenses of RMB7,461 thousand were RMB450 thousand or 6% lower than those of the prior year. The expenses for the year ended December 31 are as follows: 2002 2001 ---- ---- RMB'000 RMB'000 % change ------- ------- -------- Selling expenses 760 169 349.7 R&D expenses 1,042 1,928 (46.0) General and administrative expense 5,659 5,814 (2.7) ----- ----- ------ Total 7,461 7,911 (5.7) The increase in the selling expenses by RMB591 thousand or 349.7% was mainly attributed to increase in sales transactions. R&D expenses decreased by RMB886 thousand or 46.0%. The decrease was due to extra costs spent in 2001 for future development of value-added services provided to customers. General and administrative expenses were consistent and slightly decreased by RMB155 thousand or 2.7%. INTEREST EXPENSE Interest expense for the year ended December 31, 2002 amounted zero as compared to RMB9 thousand in 2001. A significant portion of the interest expense in 2001 was represented by bank handling charges. INTEREST INCOME Interest income for the year ended December 31, 2002 amounted to RMB157 thousand, compared to RMB175 thousand in 2001. The amounts in both years represented bank interest income earned from bank deposits. INCOME TAX The effective tax rate for the year ended December 31, 2002 was 8.2% compared to 17.4% for the prior year. The decrease in the effective tax rate was mostly due to our mix of subsidiaries' earnings. More income was earned in the subsidiaries with tax benefits granted from their respective local tax authorities. NET INCOME; EARNINGS PER SHARE As a result of the above items, net income for the year ended December 31, 2002 was RMB9,218 thousand compared to a net income of RMB3,907 thousand in 2001. We reported a basic and diluted per share earnings of RMB0.23 for the year ended December 31, 2002 based on 40,502,150 outstanding weighted average shares, compared to basic and diluted per share earnings of RMB0.10 for the year ended December 31, 2001, based on 40,502,150 outstanding weighted average shares. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENT The following table sets forth our contractual obligations as of September 30, 2004: 28 Payments due by Period --------------------------------------------------------- Contractual Obligations Total Less than 1-3 Years 3-5 Years More Than 5 1 year Years --------------------------------------------------------- (in thousands of RMB) Operating Lease Obligations 774 586 188 - - Purchase Obligations 75,408 75,408 - - - Total 76,182 75,994 188 - -
On July 21, 2004, Comtech International (Hong Kong) Limited ("Comtech HK"), one of our wholly-owned subsidiaries, entered into a RMB33,109,200 (USD4,000,000) revolving credit facility (the "Facility") with Bank of Communications Hong Kong branch. On September 14, 2004, the amount of the Facility was increased to RMB82,773,000, or (USD10,000,000). During August and September 2004, Comtech HK drew down approximately RMB72,482,000, or (USD8,757,000) under the Facility. The Facility is secured by funds on deposit with the bank owned by Jeffrey Kang, our Chief Executive Officer, in an amount equal to the borrowings. Borrowings bear interest at the higher of LIBOR or 1.5% over the deposit rate, payable monthly. On August 24, 2004, Comtech Communication Technology (Shenzhen) Co., Ltd.("Comtech Communication"), one of our wholly-owned subsidiaries, entered into an accounts receivable factoring agreement (the " Factoring Agreement") with Guangdong Development Bank Shenzhen branch. Pursuant to the Factoring Agreement, accounts receivable from UT Starcom with the maximum amount of RMB30 million (USD3,624,000) can be transferred to the bank with recourse. An amount equal to 30% of the accounts receivable transferred is secured by funds we have on deposit from Comtech Communication with the bank. The factoring arrangement bears interest at the PRC official loan interest rate, payable monthly. On October 20, 2004, Comtech Communication transferred accounts receivable of approximately RMB11,449 thousand (USD1,383,000) under the Agreement. As of September 30, 2004, we have outstanding purchase orders to purchase various components from suppliers in the amount of approximately RMB75,408 thousand. However, we do not have any minimum purchase obligations with these suppliers. We have no other contractual obligations and have not engaged in any off-balance sheet guarantees or arrangements or transactions. OFF-BALANCE SHEET ARRANGEMENTS We have no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through a combination of cash generated from sales, borrowings from shareholders and available credit facilities. As of September 30, 2004, we had working capital of RMB88,542 thousand as compared with working capital of RMB14,349 thousand at December 31, 2003. 29 Operating activities used cash of RMB19,681 thousand for the nine months ended September 30, 2004 compared to cash provided of RMB5,464 thousand in the corresponding period of 2003, despite the contribution of net income for the nine months ended September 30, 2004 of RMB43,549 thousand compared to a net income of RMB22,768 thousand in the corresponding period of 2003. The decrease in cash provided by operating activities as compared to the prior year is primarily due to the increase in receivables of RMB76,215 thousand and investments in inventories of RMB2,693 thousand, partially offset by the increase in trade payables and accrued liabilities of RMB11,895 and increase in minority interest of RMB3,055 thousand. Trade accounts receivable turnover approximated 89 days for the nine months ended September 30, 2004 compared to 119 days for the comparable period in the prior year. Overall collections of trade accounts receivables and credit quality of customers has improved. The impact of the increase in trade accounts payable and inventory balances was offset primarily by an increase in trade accounts payable balances associated with the increased purchases of inventories. Investing activities used RMB1,617 thousand during the first three quarters of 2004, mainly for the purchase of property and equipment, and for the acquisition of a 60% owned subsidiary, Shanghai E&T System Co. Ltd. Financing activities provided net cash inflow of RMB8,342 thousand during the first three quarters of 2004. Cash was provided by new bank loans amounting to RMB72,482 thousand and proceeds of RMB27,603 thousand obtained from Trident as a result of the share exchange. These financing cash inflows were partially off-set by repayment of amounts due to the holding company of RMB50,356 thousand and the dividend payment for the prior year amounting to RMB41,387 thousand. Our accounts payable cycle is shorter than our accounts receivable term. Accordingly, additional working capital is needed to fund this time lag. Apart from revenues from operations, our principal source of liquidity is our USD10 million revolving credit facility with the Bank of Communications, Hong Kong branch is used to fund our working capital needs. We are currently in the process of negotiating an additional credit facility with another bank to fund our working capital needs. During the nine months ended September 30, 2004, we also entered into an accounts receivable factoring agreement with Guangdong Development Bank Shenzhen branch. Pursuant to the agreement, accounts receivable from UT Starcom, up to a maximum amount of RMB30 million, can be transferred to the Bank with recourse. FUTURE LIQUIDITY NEEDS As of September 30, 2004, we had approximately RMB17,727 thousand in cash. On October 27, 2004, we completed a private placement of 5.04 million shares of Common Stock of aggregate proceeds of approximately USD8.8 million with a group primarily consisting of institutional investors. We sold an additional 1.26 million shares of Common Stock for aggregate proceeds of approximately USD2.2 million in a second closing on November 5, 2004. We regularly reviews our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private equity offerings. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, access to equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity as well as from other sources. EFFECTS OF INFLATION Our most liquid assets are cash, cash equivalents and short-term investment. Because of their liquidity, these assets are not directly affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources. 30 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE RISK Our functional currency is the RMB. Transactions in other currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings. We have experienced minimal foreign exchange gain and losses to date. We believe that our exposure to foreign currency exchange rate risk is not material and we do not currently engage in hedging activities to reduce our exposure to exchange rate fluctuations. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the China's political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. However, recently there has been increased political pressure on the Chinese government to decouple the RMB from the USD. Because many of our customers are involved in the export of goods, the appreciation of the RMB would make our customers products more expensive to purchase, which may have an adverse impact on their sales. A decrease in sales by our customers could have an adverse effect on our operating results. In addition, the Company also has USD denominated debt and therefore decoupling of RMB many affect the Company's financial performance in the future. INTEREST RATE RISK We are exposed to interest rate risk arising from having short-term variable rate obligations of RMB72,482,000 (USD8,757,000)as of September 30, 2004. Our future interest expense would fluctuate in line with any change in LIBOR. For example, if LIBOR increases by 1%, our payment obligation would increase by approximately RMB725,000 (USD88,000) per annum. We do not have any derivative financial instruments and believes our exposure to interest rate risk and other relevant market risks is not material. INFLATION AND MONETARY RISK Inflation in China has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 0.7%, -0.8% and 1.2% in 2001, 2002 and 2003, respectively. However, following the 2.8% average change in the Consumer Price Index in China in the first quarter of 2004 and a 3.8% change in the month of April 2004, the PRC government has announced measures to restrict lending and investment in China in order to reduce inflationary pressures in China's economy. The change in the Consumer Price Index in China was 4.3% in October 2004, compared to October 2003. The PRC government may introduce further measures intended to reduce the inflation rate in China. Any such measures adopted by the PRC government may not be successful in reducing or slowing the increase in China's inflation rate. 31 BUSINESS COMPANY OVERVIEW Comtech Group, Inc. is a leading module design solutions provider in China, focused on the mobile handset components and telecom equipment industries. Our team of engineers works with leading manufacturers of mobile handset components and telecom equipment to design solutions that meet their need to provide state of the art products to their customers. When we began operations in 1995, our initial business strategy was to develop a strong distribution channel for the sale of components to mobile handset and telecom equipment manufacturers and then gradually add value to our business by providing design solutions. As we accumulated market and technical experience, we used our well-established distribution channels to evolve into a design solutions provider combining custom solutions, component sales and technical support to manufacturers. We believe that this transformation has been the main factor in our increased profitability in the recent years. Our client base has grown to serve over 200 companies representing most of the large manufacturers in the mobile handset components and telecom equipment industries in China. We also have well established supplier relationships. We have approximately 30 suppliers which include many large multinational companies like Matsushida and JDS Uniphase. Currently, we offer our clients over 500 design solutions and product lines integrating components from many leading suppliers. Our engineers work with our customers' product development team to understand their needs for each specific function module. Based on a customer's specific requirements, our engineers provide a proposed customized module design solution. A module design solution incorporates several components. If the customer accepts our design, the customer agrees to and will purchase from us key specific components outlined in our module design. We purchase the specific components from our suppliers. We issue purchase orders to our suppliers immediately after we receive customer orders, which enables us to maintain a relatively low inventory risk. We do not charge our customers an independent design fee. Instead, we generate revenue through the sale of the specific components that are incorporated in our module design. The price mark-up between the purchase price and the selling price of such components compensate our design, technical support and distribution services. INDUSTRY OVERVIEW According to BDA China Limited ("BDA"), the mobile handset and the telecom equipment market have been among the most important segments supporting China's recent emergence as a technology driven society. BDA estimates that domestic mobile handset sales in China increased by approximately 88% in 2003. BDA expects continued growth in the mobile handset market in China, with the handset market size anticipated to reach 72.1 million units and total production volume to increase to 213 million units by 2006. As the demand for mobile handsets has grown in China, domestic mobile handset vendors (our target clients) have continued to penetrate the market and capture market share. In 2004, local mobile handset vendors had a combined market share of approximately 45% of the mobile handset vendors in China compared to 1999, when the domestic vendors' market share was less than 5%. In 2003, sales to mobile handset manufacturers comprised approximately 40.0% of our net revenues and sales to telecom equipment companies comprised approximately 57.9% of net revenues, and for the nine month period ended September 30, 2004, 60.1% of our net revenue was derived from sales to mobile handset manufacturers and 38.6% of our net revenue was derived from sales to telecom equipment companies. We supply less than 1% of our client's total purchase of modules for their end-products, which we believe leaves us significant room to capture market share by increasing the number of products that we can offer to our clients. China's telecom equipment industry has recently experienced increased investment by telecom operators. We believe that key segments within the telecom equipment industry are the data communications segment, consisting of asymmetric digital subscriber line (ADSL) modems, Voice over Internet Protocol (VoIP) equipment, routers and network security equipment, the optical component segment and the Public Switched Telephone Network (PSTN) switch segment. 32 o DATA COMMUNICATIONS. Digital Subscriber Line Access Multiplexer, or DSLAM, has been one of the main investment focuses for China's fixed-line operators and is expected to be one of the fastest growing markets in China in the next two to three years. VoIP has been a mainstream technology for long distance calls since 2002, and the VoIP equipment market is expected to have significant growth in the future according to the International Data Corporation Asia/Pacific. The router and network security market continues to be driven by government supported projects aimed at improving information technology and telecommunications systems. o OPTICAL COMPONENTS. Domestic vendors increased their share of the optical equipment, subsystem and component market. According to Tongxin Xinxi Bao, a telecom information newspaper, over 50% of new deployments of optical equipment in 2003 were made by Huawei and, together Fiberhome and Shenzhen Photon Technology, represent over 50% of the market share in the optical subsystem and component market. o PSTN SWITCHES. Growth in the PSTN switch market has been attributed to network upgrades of older PSTN switch equipment and the increasing volume of exports of PSTN switches. MARKET OPPORTUNITY AND GROWTH STRATEGY We believe that certain trends are developing in China's wireless communication and telecom equipment industries that will have a positive effect on our business operations. These trends include: o INCREASED EXPORT BY MANUFACTURERS BASED IN CHINA. The mobile handset, PSTN data communication, optical, and wireless equipment markets have experienced significant growth in recent years and are expected to continue to grow in the foreseeable future. We believe that China has established itself as a strong global manufacturing center, which will cause overseas companies to continue to seek products from local vendors. Leading domestic device and equipment vendors are also increasingly looking to distribute their products in overseas markets. For example, Huawei sold over $1 billion of equipment overseas and expects growth in its exports to continue. ZTE and other Chinese equipment makers and mobile handset device makers have also begun to expand overseas. In an effort to seek global partnerships, TCL, our second largest client, recently formed a joint venture with Alcatel into which Alcatel contributed its mobile handset business. There has also been strong government support for increased mobile handset exports. At the 2004 Telecom Industry Policy and Development Briefing, MII's Economic System Reform and Operation Department stated that the government's core policy for the industry would be to encourage mobile handset exports, research and development, and development of the industry supply chain. We believe that growth in the export market is positive for us as it will drive component demand among our mobile handset clients as well. o MORE STRINGENT PROCUREMENT SYSTEMS BY MANUFACTURERS. Over time, leading manufacturers have developed more stringent procurement systems to control their purchasing. The approval process to sell products to these vendors is lengthy, time consuming and costly, and often creates a barrier to entry for potential competitors. For example, Huawei's procurement process can take over a year for suppliers to become qualified. Barriers to entry are increasingly high, and the possibility of price wars and competition is reduced. Due to our long, ongoing relationships with manufacturers, we believe we are well positioned. o INCREASED RELIANCE ON OUTSOURCING. OEMs are increasingly outsourcing the development, design, prototyping, engineering, manufacturing, assembly and testing of components and systems to subsystem suppliers in order to: 33 o reduce their investments in inventory, property, plant and equipment in the face of cyclical demands for their products; o reduce design-to-delivery cycle times; o take advantage of subsystem suppliers' ability to quickly modify and reconfigure product designs; o take advantage of subsystem suppliers' inventory management capabilities and purchasing power; and o focus on their core competencies in light of increasing research and development requirements and industry-wide pricing pressure. Because handset and telecom systems are among the most technologically complex subsystems, we believe we are establishing strong partner relationships with companies that possess the engineering expertise, design capabilities, quality control, financial stability and highly flexible manufacturing operations required to satisfy the cyclical and constantly changing demands of handset and telecom manufacturers. o GROWTH IN THE END MARKETS INTO WHICH OUR COMPONENTS ARE SOLD. We believe that the increasing complexity of mobile devices and the upgrade of telecom networks will drive demand for new components. In the mobile handset market new features are added to mobile handsets at an accelerating pace due to competition between mobile handset makers and the increasing use of 2.5G services. We have developed a storage solution by using M-System's DOC, a product for which demand has developed only as high volume storage has become necessary with more advanced data services offered over mobile handset devices. We believe that the launch of new more advanced services in 2.5G and 3G wireless networks and broadband access networks in the telecom equipment industry, will drive demand for more advanced components. o INCREASED MULTI-NATIONAL CORPORATE PRESENCE IN CHINA. Recently there has been a trend toward the re-location by multi-national corporations of their research and development centers to China. Currently, all of our component sales have been to domestic Chinese companies. We believe that the increase in multi-national companies outsourcing their R&D to China will open up a new opportunity for us to expand our customer base to foreign manufacturers and begin the export of our products abroad. GROWTH STRATEGY Our objective is to be the leading module designer and component supplier for high growth industry segments including telecom handsets, equipment, and consumer electronics. We plan to use our design, development, prototyping, engineering, testing expertise and efficiency to allow us to continue to penetrate into more product lines of existing customers as well as to add new customers in our target markets. Our ultimate objective is to evolve into a chipset and application software design house and ultimately create products with our own intellectual property which is an evolutionary model that has been successfully implemented by other Chinese companies. We have a two prong growth strategy to accomplish these objectives which focus on horizontal growth to increase revenue and vertical growth to increase profit margins. We believe that our continued focus on increasing revenue and profit margin while minimizing operating costs has historically and will continue to allow us to build a strong, profitable and growing business model. 34 We intend to grow horizontally by acquiring new product lines, designing new solutions, establishing new market channels, securing new clients and penetrating new industries. This strategy will allow us to offer new products to existing customers and broaden our customer base to new customers seeking products that we do not currently provide. For example, we are seeking to enter the consumer electronics market by providing components to Chinese consumer electronics makers. The consumer electronics market is expected to experience strong growth. According to BDA, digital television, or DTV, will be one of the key drivers of this growth with China targeting 100% DTV penetration by the year 2010. There are currently 330 million TVs in China, and the China Center of Information Industry Development estimates that China's market for DTV products and services will be RMB 500 billion (approximately USD60 billion) by the year 2015. We believe that we are well positioned to enter this market because many of our existing mobile handset customers, such as TCL, Haier, AMoi and Xoceco, also produce televisions and other consumer electronics devices. We believe that we may be able to leverage our existing relationships with these manufacturers to sell consumer electronics components to them. We believe that the most effective way to accomplish our vertical growth objective is by acquiring companies, and forming joint ventures or other partnership relationships. We intend to acquire chipset companies that have existing products. Capitalizing on our broad and well established distribution channel, we believe that we can immediately generate revenue by marketing and selling such products. With acquired IP and technology know-how in addition to our deep understanding of our customers needs, we believe we are well positioned to design and produce our own proprietary components. We recently launched Comtech-branded proprietary products which contributed approximately USD0.9 million in net revenues in 2003. We anticipate that continued development and expansion of our proprietary products may contribute to our future growth. If we are successful in our vertical integration strategy, we may be able to enhance our profit margin. PRODUCTS AND TECHNOLOGY Our products enable our OEM customers to improve the efficiency and time to market while reducing the costs of their design and manufacturing processes. We purchase our products from suppliers that manufacture components needed in our target industries. Our key suppliers include, Pixelplus, Mtekvision, NAIS, Matsushida, Sambu, JDSU and M-Systems. We develop our design solutions based on their components. We believe that the core value in our business comes from our ability to provide last-mile customization for each of our many customers' specific needs. Our design solutions include: MOBILE SOLUTIONS - ---------------- o LCD Module Solutions; o Camera Module Solutions; o Persistent Storage Module Solutions; o Input/Output Module Solutions; o Sound System Solutions; o Power Supply Module Solutions; and o Peripheral Module Solutions. 35 TELECOMMUNICATION EQUIPMENT SOLUTIONS - ------------------------------------- o PSTN Switching o Line card solution OPTICAL SOLUTIONS - ----------------- o 2.5-10G DWDM optical transmission solutions including tunable transmitters, variable optical attenuators, EML modulators and transceivers; o 2.5-10G DWDM electrical signal processing solutions, including optical transmission controls, Mux/Demux, trans-impedance amplifiers and forward error correction; o Optical signal amplification solutions including EDFA and Linear optical amplifiers; and o Passive optical network solutions including a thermal AWG, optical switching and optical add/drop Mux DATA COMMUNICATION SOLUTIONS - ---------------------------- o ADSL modem solutions, including ADSL modems in PCI and Programmable DSL; o FLASH storage solutions for secure networks including Flash Disk On Chip (DOC) and DOC arrays; o Voice over packet (VOP) solutions, including VoIP and VoATM; o Core router data processing solutions, including network processors and switch fabric; o Gigabit data optical interconnect solutions; and o Ethernet transceiver solutions WIRELESS BASE STATION - --------------------- o RF module; and o Lightning protection module. SUPPLIERS We purchase our products from suppliers that manufacture components needed in our target industries. We have approximately 30 suppliers. Our key suppliers include, Pixelplus (CMOS sensors), Mtekvision (Camera ICs), NAIS (connectors, Relay), Matsushida (switches), Sambu (speakers), JDSU (opteoelectronic components) and M-Systems (DiskOnChip). We develop our design solutions based on their components. In order to maintain low inventory levels, we generally submit purchase orders to suppliers once we receive sale orders from our customers. However, we keep certain inventory when we foresee a possible shortage in such products. Our inventory, as of September 30, 2004 was RMB22.7million (USD2.7 million). 36 CUSTOMERS We have more than 200 customers in China, including many of the largest mobile device and telecom equipment manufacturers. The following table sets forth the revenue contribution from each of these sectors during 2003 and for the first nine months of 2004. Comtech Revenue Contribution ---------------------------- SECTOR 2003 2004 ------ ----- ---- Mobile handset components 40.0% 60.1% Telecom equipment 57.9% 38.6% Other 2.1% 1.3% Our largest customer in the mobile handset is TCL, one of China's largest domestic mobile handset manufacturers. Our top two revenue producing customers from the telecom equipment industry have been ZTE and Huawei, China's two largest telecom equipment vendors. Our existing customer base includes the following companies: oMOBILE HANDSET MANUFACTURERS: TCL, Konka, Amoisonic, Capitel, Xiahua, ZTE, Haier, HiSense, BIRD, Eastcom, Soutec, Kejian, UTStarcom, Legend, HiTech Wealth, 1Zen, HYT, Inventec, Mitac, Arimma, GlobalFlex, CECW, Galaxy, Hollycomm, Motorola and Cosmobics. oTELECOM SYSTEM EQUIPMENT/ORIGINAL EQUIPMENT MANUFACTURERS: Huawei, ZTE, Datang, FiberHome, SHBell, Great Dragon, JingPeng, Optel, Harbour Network, UTStarcom, Lucent, Motorola, Ericsson, Siemens, NEC, Emerson, Solectron, SCI-Sanmina, Flextronics, Celestica, Jabil Circuits, Elcoteq and Via-systems. For the nine months ended September 30, 2004, our top 10 customers in terms of net revenues were as follows: REVENUE AMOUNT PERCENTAGE OF REVENUE CUSTOMER NAME (RMB'000) (%) ------------- --------- --- Zhongxing International (Hong Kong) Trading Co. Ltd. (ZTE) 7,775 14% UT Starcom 6,936 12% Huawei Tech. Investment Co. Ltd 6,873 12% Hongdin International Trading Limited (KONKA) 3,984 7% Jabil Circuit Shanghai Ltd. 2,211 4% TCL Mobile Communication (HK) Company Ltd. 2,074 4% SOUTEC 1,731 3% Guangzhou Kyokuto Electronics Ltd. 1,351 2% CPTE 1,272 2% Xian Datang Telecom 1,080 2% TOTAL 35,287 62%
37 SALES AND SUPPORT We sell our products through our direct sales force which, as of November 30, 2004, consisted of a total of 30 sales directors, account managers and sales support staff. Our sales directors are responsible for establishing sales strategy and setting the objectives for specific customer accounts. Each account manager is dedicated to a specific customer account and is responsible for the day-to-day management of that customer. Account managers work closely with customers and in many cases provide on-site support. Account managers often attend customers' internal meetings related to production, engineering design and quality to ensure that customer expectations are interpreted and communicated properly to our operations group. Account managers also work with our customers to identify and meet their cost and design-to-delivery cycle time objectives. We have dedicated account managers responsible for new business development for handset and telecom system products and related technologies. Our new business development account managers initiate and develop long-term, multi-level relationships with customer accounts and work closely with customers on new business opportunities throughout the design-to-delivery cycle. We believe that our customer support services allow us to offer our customers high quality services. COMPETITION For each project, we partner with our supplier to compete with other key enabling component suppliers. For example, we partnered with JDS Uniphase to compete with Intel's optical module. While the largest component suppliers have substantial financial and technical resources, we believe they lack the close project-by-project and day-to-day working relationship that we provide to customers. Furthermore, these large key enabling component suppliers usually do not focus on module level design. We also compete with foreign distribution and design companies that have operations in China, such as Arrow Electronics, Avnet, Memec, EDOM, Secom, World Piece Industrial Co. and others. China's electronic components market is fragmented with over 1,500 distributors in the market. We believe that we have better design and technical capabilities compared to distributors, and we have better distribution channel and customer base compared to design companies. RESEARCH AND DEVELOPMENT We believe that continued and timely development and introduction of new and enhanced solutions are essential if we are to maintain our competitive position. We have been able to cost-effectively hire highly skilled technical employees from a large pool of qualified candidates in China. Our research and development expenditures totaled RMB983,000 in 2003, RMB1,042,000 in 2002 and RMB1,928,000 in 2001. Our research and development expenditures have increased to RMB 5,613,000 for the first nine months of 2004. We are seeking to enter the consumer electronics market by providing components to Chinese consumer electronics makers. We have commenced research and development of a set-up box and are currently working closely with some of our existing clients on this project. EMPLOYEES As of September 30, 2004, we had 70 employees, 25 of whom perform scientific and research activities. 38 FACILITIES We lease properties in seven locations in China including Shenzhen, Shanghai, Beijing, Wuhai, Qingdao, Tianjin and Hong Kong. These properties are used as our corporate headquarters, for sales and support offices, and for research and development and manufacturing purposes. We lease approximately 35,000 square feet of property in China. Approximately 8,000 square feet is for our corporate headquarters located in Shenzhen , approximately 7,000 square feet is for our research and development center, approximately 20,000 square feet is for representative offices located in the other six cities, and approximately 13,000 square feet is used for manufacturing. In 2001, we purchased an office building from Matsunichi for cash consideration of RMB1,672 thousands and the payment of technical services fees of RMB1,620 thousands. We believe our existing facilities and equipment are well maintained and in good operating condition, and we believe our facilities are sufficient to meet our needs for the foreseeable future. LEGAL PROCEEDINGS In 1999, CSD Srl ("CSD") caused a leasing company to purchase from OAM real estate in via Baronia, Rome and entered into a leasing arrangement with the leasing company. Subsequently, on October 9, 1999, CSD brought a claim against OAM in the Rome Civil Court alleging that the commercial designation of the property in 1998 was not properly disclosed and consequently its lease payments were excessive and sought reimbursement of the lease payments that it considered excessive from OAM in an aggregate amount of approximately (euro)800 thousand. The proceedings have continued intermittently over the years. On March 25, 2004, the Court requested that the parties present their conclusions in order for it to render a final verdict. It is management's opinion that the risk of a negative judgment is low and the potential liability remote. 39 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information about our directors and executive officers as of November 30, 2004: NAME AGE POSITION ---- --- -------- Jeffrey Kang 34 Chief Executive Officer, President and Director Li Zhou 38 Chief Technical Officer and Director Hope Ni 32 Chief Financial Officer and Secretary Amy Kong (1)(2)(3) 49 Director Q.Y. Ma (1)(2)(3) 47 Director Jason Kim 37 Director Mark S. Hauser (3) 46 Director Mark B. Segall (1)(2) 42 Director
(1) Member of Nominating and Governance Committee (2) Member of Compensation Committee (3) Member of Audit Committee JEFFREY KANG, CHAIRMAN OF THE BOARD, CEO, PRESIDENT AND CO-FOUNDER. Mr. Kang was a co-founder of Comtech and has served as our Chief Executive Officer and a Director since September 1999. Mr. Kang founded Shenzhen Matsunichi Electronics Co., Ltd. and Matsunichi Electronic (Hong Kong) Limited, the Company's predecessor, in 1995 when Matsunichi commenced operations as a distributor for Matsushita. In 1999, Mr. Kang formed Comtech and transferred all operations and assets of Matsunichi into the Company. Prior to forming Matsunichi, Mr. Kang worked for Matsushita (Panasonic) Electric Industrial from March 1992 to September 1995 where he was responsible for selling components to the telecom industry within China. From 1998 to 1999, Mr. Kang was vice president of Shenzhen SME (Small and Medium Enterprises) Association, a non-profit association in Shenzhen. Mr. Kang earned an undergraduate degree in Electrical Engineering from South China University of Technology in Guangzhou, China. LI ZHOU, CHIEF TECHNICAL OFFICER. Prior to joining us in November 2003, Mr. Zhou served as CTO of HTW China, the largest PDA vendor in China from October 2000 to December 2002. Previously, he worked for Microsoft in Redmond, Washington from 1991 to 1998, and in Beijing, China from 1998-2000, where he held various positions including the Group Manager of Microsoft's embedded systems. Mr. Zhou earned a masters degree in computer science from Michigan State University after completing his undergraduate degree in China. HOPE NI, CHIEF FINANCIAL OFFICER AND SECRETARY. Prior to joining us in August 2004, Ms. Ni spent six years as a practicing attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York and Hong Kong, specializing in corporate finance. Prior to that, Ms. Ni worked at Merrill Lynch, investment banking division in New York. Currently, Ms. Ni is a member of the investment committee of Time Innovation Ventures, a venture capital firm focused on funding technology start-ups and joint ventures in China. Ms. Ni also serves on the board of Qianjia Consulting Company which she founded in 2002. Ms. Ni received her Juris Doctor degree from University of Pennsylvania Law School and her Bachelor degree in Applied Economics and Business Management from Cornell University. 40 AMY KONG, DIRECTOR. Prior to joining Comtech as a director, Ms. Kong founded Primustech Ventures (HK) Limited, an investment firm focused on Greater China. Ms. Kong invested in a number of private equity projects in the areas of document management, professional training and education, medical waste management, medical device, consumer electronics and information technology consulting. From 1999 to 2000, Ms. Kong served as interim Chief Executive Officer of Cyber City International, a privately owned Shenzhen based science park company. In 1996, Ms. Kong founded GTF Asset Management for the Gajah Tunggal Group, a USD800 million global asset management company. Q.Y. MA, DIRECTOR. Dr. Ma is the Managing Partner of Time Innovation Ventures (TIV), a venture capital firm focused on funding technology start-ups and joint ventures in China. Dr. Ma has over 18 years of hands-on R&D experience in North America. Dr. Ma has been an Associate Professor at the Columbia University (1994-2000). Dr. Ma's expertise includes microelectronics, superconductivity, RF circuits, MRI, and biomedical devices, technology transfer, and hi-tech start-ups. He has served as a technology consultant to IBM, General Electric, TRW, Du Pont as well as other leading electronic companies. Dr. Ma is a co-founder and advisor of Semiconductor Manufacture International Corp. He has invested several start-ups including Comlent, AIC, CSI, Mediachip, Suntek, and UniStar. He was elected as "Top Ten Returned Chinese Entrepreneurs of the Year" in 2002 by the China Investment Magazine of the State Planning and Development Commission. Dr. Ma has served as an adviser to the Ministry of Information Industry, Beijing Government, and a Senior Advisor to Zhangjiang Hi-Tech Park in Shanghai. Dr. Ma was the president of the Chinese Association for Science & Technology-USA, and is currently the president of Chinese-American Innovation & Development Association. Dr. Ma received his Ph.D. from Columbia University, and is a graduate of Stanford Executive Program (SEP) of Stanford Business School. JASON KIM, DIRECTOR. Mr. Kim founded TG Asia Venture, a Korean venture capital firm based in Hong Kong in 2000 and currently serves as its CEO. From 1994 to 2000, Mr. Kim served as the head of the China team at the Tong Yang Group, Asia Regional Headquarters in Hong Kong, which specializes in Chinese corporate finance and direct investment activity in Asia. MARK S. HAUSER, DIRECTOR. Mr. Hauser has served as a director of the Company since May 1997. He was an attorney and a founder and Managing Director of Tamarix Capital Corporation, a New York-based merchant and investment-banking firm. Since July 2000, Mr. Hauser has been a Managing Director of FdG Associates, a middle-market private equity fund based in New York. MARK B. SEGALL, DIRECTOR. Mr. Segall has served as a director of TRGI, prior to the Share Exchange, since December 1999, and previously served as TRGI's non-executive Secretary from December 1999 until the consummation of the share exchange on July 22, 2004. Mr. Segall is the founder and CEO of Kidron Corporate Advisors LLC, an M&A and corporate advisory boutique for emerging growth companies. Prior to founding Kidron in 2003, Mr. Segall was the CEO of Investec Inc., the US investment banking operations of the South African based Investec Group. While at Investec, Mr. Segall also served as general counsel and Senior Vice President of Investec Ernst & Company, the US securities and clearing operations of Investec. Prior to joining Investec in 1999, he was a partner at Kramer Levin Naftalis & Frankel LLP, a New York law firm. BOARD COMPOSITION Our business and affairs are managed under the direction of our board of directors. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. It is our expectation that the board of directors will meet regularly on a quarterly basis and additionally as required. 41 DIRECTOR COMPENSATION Our non-employee directors receive compensation in the form of cash and stock options for serving on our board. On November 11, 2004 each of our non-employee directors were granted 10-year options to purchase 10,000 shares of common stock, exercisable at $1.87 per share and $2,000 in cash for serving on the Board since the share exchange transaction. One-half of the options granted vested on September 30, 2004, and the remainder will vest on December 31, 2004. Commencing January 2005, each non-employee director will receive annually $4,000 in cash and 10-year options to purchase 20,000 shares of our common stock. The members of our Audit Committee will receive options to purchase 10,000 shares of common stock per year, with the Chairman of the Audit Committee receiving an additional option to purchase 5,000 shares of common stock per year. The members of each of our Compensation Committee and Nominating Committees will receive options to purchase 5,000 shares of common stock per year. All of the options granted to the directors will be exercisable at the fair market value on date of grant and will vest quarterly during the one-year period following the date of grant. BOARD COMMITTEES Our board of directors has a compensation committee, an audit committee and a governance and nominating committee. Our board of directors has determined that Ms. Amy Kong, Messrs. Hauser, Ma and Segall are "independent" under the current independence standards of the SEC, and have no material relationships with us (either directly or as a partner, shareholder or officer of any entity) which could be inconsistent with a finding of their independence as members of our board of directors. COMPENSATION COMMITTEE The compensation committee makes recommendations to the board concerning salaries and incentive compensation for our officers and employees and administers our stock option plans. The audit committee oversees the Company's financial reporting process on behalf of the board of directors. Our compensation committee is responsible for the following functions: o reviewing and recommending policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives, and setting compensation of these officers based on such evaluations; o administering our benefit plans and the issuance of stock options and other awards under our stock plans; reviewing and establishing appropriate insurance coverage for our directors and executive officers; o recommending the type and amount of compensation to be paid or awarded to members of our board of directors, including consulting, retainer, meeting, committee and committee chair fees and stock option grants or awards; and o reviewing and approving the terms of any employment agreements, severance arrangements, change-of-control protections and any other compensatory arrangements for our executive officers; and 42 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our Compensation Committee is comprised of three members, Ms. Amy Kong, and Messrs. Q.Y. Ma and Mark Segall. No member of our Compensation Committee has at any time been an officer or employee of ours, or our subsidiary. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past. AUDIT COMMITTEE Our audit committee is responsible for the following functions: o approve and retain the independent auditors to conduct the annual audit of our books and records; o review the proposed scope and results of the audit; o review and pre-approve the independent auditors' audit and non-audited services rendered; o approve the audit fees to be paid; o review accounting and financial controls with the independent auditors and our financial and accounting staff; o review and approve transactions between us and our directors, officers and affiliates; o recognize and prevent prohibited non-audit services; o establish procedures for complaints received by us regarding accounting matters; and o oversee internal audit functions. Our board of directors has determined that Ms. Kong, the Chairperson of the Audit Committee, is an "audit committee financial expert" as defined by the SEC's rules. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE The governance and nominating committee is responsible for identifying potential candidates to serve on our board. EXECUTIVE COMPENSATION The following summary compensation table sets forth the aggregate compensation awarded to, earned by, or paid to the Chief Executive Officer. There are no other executive officers whose annual compensation exceeded $100,000 for the fiscal years ended December 31, 2003, 2002 and 2001: SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM ALL OTHER ----------------------------------------- COMPENSATION AWARDS COMPENSATION ------------------------------ ($USD) AWARDS PAYOUTS ------------ ------ ------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP COMPENSATION AWARD(S) OPTIONS PAYOUTS NAME AND PRINCIPAL POSITION YEAR SALARY ($USD) BONUS ($USD) ($USD) (#) (#) ($USD) Jeffrey Kang, Chairman, Chief 2003 10,590 416,984 - - - - - Executive Officer and President 2002 10,590 - - - - - - 2001 10,590 - - - - - -
OPTION GRANTS IN LAST FISCAL YEAR During the fiscal year ended December 31, 2003, no stock option grants were made to the named executive officers. No stock appreciation rights were granted to these individuals during such year. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES During the fiscal year ended December 31, 2003, no stock options were exercised by any named executive officer. 43 2004 INCENTIVE STOCK OPTION PLAN On August 3, 2004, our Board of Directors adopted the Comtech Group, Inc. 2004 Stock Incentive Plan (the "Incentive Plan") pursuant to which 5,000,000 shares of Common Stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation rights, restricted stock awards and performance shares. The purpose of the Incentive Plan is to provide additional incentive to employees, directors, advisors and consultants by facilitating their acquisition of our Common Stock. The Incentive Plan provides for a term of 10 years from the date of its adoption by the Board of Directors, after which no awards may be made, unless the Plan is earlier terminated by the Board. Options granted under the Incentive Plan are either incentive stock options (i.e. options that afford favorable tax treatment to recipients upon compliance with certain restrictions pursuant to Section 422 of the Internal Revenue Code and that do not result in tax deductions to us unless participants fail to comply with Section 422 of the Internal Revenue Code) or options that do not so qualify. We intend to seek stockholder approval of the Incentive Plan. In 1995, the Trident Board of Directors adopted, and the stockholders approved, the 1995 Stock Option Plan for Outside Directors (the "Directors' Plan"), pursuant to which 5,000 options would be granted annually to each non-employee director of Trident for each full fiscal year of service on the Board. The Directors Plan expires on December 31, 2005, however the options exercisable under the Directors Plan terminate on July 1, 2009. We do not intend to issue any additional options under this Directors Plan. The Incentive Plan and the Directors Plan are administered by the Compensation Committee of the Board of Directors. The Compensation Committee selects the employees to whom awards are to be granted, the number of shares to be subject to such awards, and the terms and conditions of such awards (provided that any discretion exercised by the Compensation Committee must be consistent with resolutions adopted by the Board of Directors and the terms of the Incentive Plan). As of November 30, 2004, options to purchase an aggregate of 3,705,000 shares had been granted under the Incentive Plan, and options to purchase an aggregate of 230,000 shares had been granted under the 1995 Directors Plan. 44 The following table sets forth aggregate information regarding our equity compensation plans in effect as of November 30, 2004: NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE FOR EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER OUTSTANDING OUTSTANDING EQUITY COMPENSATION OPTIONS/WARRANTS OPTIONS/WARRANTS PLANS PLAN CATEGORY (a) (b) (c) - ----------------------------------------------------- ---------------- ------------------ ----------------------- Equity compensation plans approved by security holders........................................... 230,000 USD1.5 44,166(1) Equity compensation plans not approved by security holders........................................... 3,705,000 USD1.83 1,295,000 ---------- --------------- ---------------- Total................................................ 3,935,000 USD1.67 1,339,166 ========== =============== ================
- ------------------- (1) We do not intend to grant further options under this plan. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS On August 1, 2004, the Company entered into an employment agreement with Hope Ni to serve as its Chief Financial Officer. The employment agreement terminates on December 31, 2007, but will be automatically extended, unless either the Company or Ms. Ni gives written notice to the other party of their election not to extend. Pursuant to the terms of the agreement, Ms. Ni receives a base salary of USD117,000 per annum and was granted 10-year options to purchase up to 420,000 shares of the Company's common stock at an exercise price of USD1.50, which options vest in various installments through August 1, 2007. In the event the Company engages in an underwritten offering of shares of common stock which yields gross proceeds to the Company in excess of $30,000,000, all stock options shall accelerate and be fully vested. It the Company terminates Ms. Ni without cause or she resigns for good reason, Ms. Ni will receive termination benefits, including (i) the payment of a lump sum amount equal to three times Ms. Ni's monthly salary in effect immediately prior to her termination and (ii) payment of all premiums due for health insurance for a period of six months after termination. If a change in control occurs prior to December 31, 2007, and the Company terminates Ms. Ni without cause or she resigns for good reason prior to the date that the Company's Board of Directors certifies the audit of the Company for the first complete fiscal year after the change in control (the "Change in Control Audit Date"), Ms. Ni will be entitled to receive the standard termination benefits, and a payment equal to the greater of six times her monthly rate of compensation or 12 months salary, less compensation paid to her between the date of the change in control and the date of termination. If the change in control occurs after the Change in Control Audit Date, Ms. Ni would be entitled to the same severance payment she would have received had a change in control not occurred and the Company terminated her without cause or she resigned for good reason. Upon a change in control Ms. Ni's stock options will accelerate and all stock options will be deemed fully vested. If Ms. Ni's employment is terminated after the Change in Control Audit Date, other than as a result of her resignation, Ms. Ni shall have the right to exercise all of her stock options. If Ms. Ni resigns prior to the Change in Control Audit Date, notwithstanding the acceleration of vesting of the stock options on a change in control, Ms. Ni shall have the right to exercise a specified number of shares at a price to be determined pursuant to the terms of the agreement at the time of her resignation. For purposes of Ms. Ni's employment agreement, a change in control shall mean the consummation of a reorganization, merger of consolidation of the Company with one or more other persons. 45 INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY Our bylaws currently provide and, upon the closing of this offering our amended and restated bylaws will provide, that we shall indemnify our directors and officers to the fullest extent permitted by Maryland law, provided that, with respect to proceedings initiated by our officers and directors, we are only required to indemnify these persons if the proceeding was authorized by our board of directors. Our bylaws permit us, by action of our board of directors, to indemnify our other employees and agents to the same extent as we are required to indemnify our officers and directors. We are also empowered under our bylaws to enter into indemnification agreements with our directors, officers, employees or agents and to purchase insurance on behalf of any of our director, officer, employee or agent whether or not we are required or permitted to indemnify such persons under Maryland law. In addition, our bylaws provide that our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: o for any breach of the director's duty of loyalty to us or our stockholders; o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or o for any transaction from which the director derives an improper personal benefit. There is no pending litigation or proceeding involving any of our directors or officers for which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. 46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 2003, Comtech Global Investment Ltd. ("Comtech Global"), an entity controlled by Jeffrey Kang, our Chief Executive Officer, made working capital advances to us in the aggregate amount of RMB50,356,000 (USD6,084,000). In addition, during 2003, we deferred payment of a dividend payable to Comtech Global in the amount of RMB41,387,000 (USD5,000,000). During August and September 2004, the Company repaid the shareholder loan from, and dividends payable to, Comtech Global. In July 2004, our Hong Kong subsidiary entered into a RMB33,109,000 (USD4,000,000) credit facility with the Bank of Communications in Hong Kong which line was increased to RMB82,773,000 (USD10,000,000) on September 14, 2004. The line is secured by funds of Jeffrey Kang, our Chief Executive Officer, on deposit with the bank, which is presently in the amount of RMB72,482,000 (USD8,757,000). The Company has drawn down an aggregate of RMB72,482,000 (USD8,757,000) of the bank line. Any additional draw downs from this credit facility will require Mr. Kang or other parties to pledge additional funds on deposit with the bank as security to the credit facility. During the year ended December 31, 2003, we purchased RMB5,456,000 (USD659,000) of products from Viewtran Technology Limited (Viewtran), an entity in which Jeffrey Kang has as 6.12% interest. We sold these products on behalf of Viewtran at the same price at which we purchased those products. According to an agreement entered into between Comtech and Viewtran, we conducted these sales and purchase transactions on behalf of Viewtran and the risk and rewards as a result of these transactions remained with Viewtran. Therefore, the sales, purchases, and the corresponding receivables and payables related to the foregoing transactions are not reflected in our financial statements. As of December 31, 2003, the Company did not owe any amounts to Viewtran. In June 2004, our wholly owned subsidiary, Shenzhen Comtech International Ltd., borrowed RMB3,600,000 (USD435,000) from Viewtran and of which RMB3,000,000 (USD362,000) was repaid on June 30, 2004. The balance in the amount of RMB600,000 (USD72,000) is currently outstanding. The amount was unsecured, non-interest bearing and had no fixed repayment terms. 47 PRINCIPAL STOCKHOLDERS The following table contains information about the beneficial ownership of our Common Stock before and after the consummation of this offering for: o each person, or group of persons, who beneficially owns more than 5% of our capital stock; o each of our directors; o each executive officer named in the summary compensation table; and o all directors and executive officers as a group. Unless otherwise indicated, the address for each person or entity is High-Tech Industrial Park Nanshan, Shenzhen 5180, PRC. Number of Shares Beneficially Name of Beneficial Owner Owned (1) Percentage Ownership - ------------------------------------- ----------------------------- -------------------- Jeffrey Kang 37,345,311(2) 73.51% Hope Ni 420,000(3) * Amy Kong 10,000(4) * Q.Y. Ma 0 N/A Li Zhou 20,833(5) * Jason Kim 10,000(6) * Mark S. Hauser 687,871(7) 1.35% Mark B. Segall 190,000(8) * Comtech Global Investment, Ltd. 26,326,398 51.90% Ren Investment International, Ltd. 10,935,580 20.56% Purple Mountain Holding, Ltd. 3,240,172 6.39% All executive officers and directors as a group (8 persons) 38,684,015 74.49%
------------------------ * Represents beneficial ownership of less than one percent of our outstanding shares. 1) Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable with 60 days of the date hereof are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicate in the 48 footnotes to the following table or pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. The percentage of beneficial ownership is based on 50,722,050 shares of Common Stock outstanding as of November 30, 2004. 2) Includes (i) 83,333 shares issuable upon exercise of currently exercisable stock options, (ii) 26,326,398 shares beneficially owned by Comtech Global Investment Ltd., over which Mr. Kang and his wife, Ms. Nan Ji, share voting and investment power, and (iii) 10,935,580 shares beneficially owned by Ren Investment International Ltd., over which Mr. Kang, as sole director, has sole voting and investment power. Mr. Kang does not own any shares of Ren Investment International. 3) Represents shares issuable upon exercise of currently exercisable stock options. 4) Represents shares issuable upon exercise of currently exercisable stock options. Does not include shares held by Ren Investment International Ltd., in which Ms. Kong owns less than a 1% interest. Ms. Kong disclaims beneficial ownership of such shares. 5) Represents shares issuable upon exercise of currently exercisable stock options. Does not include shares held by Ren Investment International Ltd., in which Mr. Zhou has an approximate 3.7% interest. Mr. Zhou disclaims beneficial ownership of such shares. 6) Represents shares issuable upon exercise of currently exercisable stock options. Does not include shares held by Ren Investment International Ltd. in which Mr. Kim owns less than a 1% interest. Mr. Kim disclaims beneficial ownership of such shares. 7) Includes warrants to purchase 468,337 shares and 10,000 shares issuable upon exercise of currently exercisable stock options. 8) Includes 40,000 shares issuable upon exercise of currently exercisable stock options and warrants to purchase an aggregate of 150,000 shares issued to Kidron Corporate Advisors LLC, an affiliate of Mark B. Segall. 49 DESCRIPTION OF SECURITIES Our authorized capital stock consists of 200,000,000 shares of Common Stock, $0.01 par value per share. As of November 30, 2004, there were outstanding: o 50,722,050 shares of Common Stock, held of record by 927 stockholders; and o 5,785,834 shares of Common Stock underlying options and warrants. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted on by the stockholders. Holders of Common Stock are entitled to receive dividends declared by the board of directors out of funds legally available for dividends. In the event of our liquidation, dissolution or winding up, holders of Common Stock are entitled to share in all assets remaining after payment of liabilities. Holders of Common Stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company. SHARES ELIGIBLE FOR FUTURE SALE We currently have outstanding an aggregate of 50,722,050 shares of Common Stock. 46,802,150 of these shares are restricted securities under Rule 144. The number of these shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated), including any of our affiliates, who has beneficially owned restricted shares for at least one year (including the holding period of any prior owner, except if the prior owner was an affiliate) will be entitled to sell, within any three-month period a number of shares that does not exceed the greater of: (a) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 507,220 shares upon completion of this offering); or (b) the average weekly trading volume of our Common Stock on the Nasdaq Over-the-Counter Bulletin Board during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales of restricted securities pursuant to Rule 144 are also subject to requirements relating to manner of sale notice and the availability of current public information about us. Sales of substantial amounts of our Common Stock in the public market could adversely affect the market price of our Common Stock. We cannot estimate the number of shares of Common Stock that may be sold by third parties in the future because such sales will depend on market prices, the circumstances of sellers and other factors. 50 SELLING STOCKHOLDERS PRINCIPAL STOCKHOLDER Our Board of Directors has made a determination to allow Ren Investment International, Ltd. ("Ren"), one of our principal stockholders, to register a portion of its shares for resale. The following table sets forth as of November 30, 2004, information regarding the current beneficial ownership of our Common Stock by Ren and its beneficial ownership assuming sale of all of the shares of Common Stock offered hereby. Ren is owned by certain of our employees, however, Jeffrey Kang does not own any shares of Ren. For a description of our relationship with Ren, see "Principal Stockholders." Number of Shares Shares Maximum Number Beneficially Percentage Name of Beneficially Owned of Shares Owned Ownership After Selling Stockholder Prior to Offering to be Sold After Offering Offering ------------------- ----------------- ---------- -------------- -------- Ren Investment International, Ltd. 10,935,580 3,700,000 7,235,580 14.26%
WARRANTS AND OPTIONS Prior to the share exchange, Trident granted warrants to purchase up to 1,850,834 shares of Common Stock and options to purchase up to 230,000 shares of Common Stock. The holders of these warrants and options were granted piggyback registration rights with respect to the underlying shares of Common Stock. The following table sets forth as of November 30, 2004, information regarding the current beneficial ownership of our Common Stock by these warrant and option holders and their beneficial ownership assuming the sale of all of the underlying shares of Common Stock. No selling stockholder listed below has held any position, office, nor had any material relationship with the Company or any of its predecessors or affiliates during the past three years, except for Messrs. Hauser and Segall, who are current directors, and Messrs. Arbib, Bulgari and Chase who were previously directors and/or officers of Trident. Number of Shares, Warrants Number of Shares, Maximum Number and Options Warrants and Options of Underlying Beneficially Percentage Name of Beneficially Owned Shares Owned Ownership After Selling Stockholder Prior to Offering to be Sold After Offering Offering ------------------- ----------------- ---------- -------------- -------- Simtov LDC Mark Hauser Gianni Bulgari Kidron Corporate Advisors LLC William Spier Centro Internationale Handelsbank AG Hess Investment Fund David Tobey Phillip Kendall Jo-Jo El Investors LP SG Private Banking (Suisse) SA FAI General Insurance Company Limited Kabuki Partners, ADP, GP Emanuel Arbib Nick Speyer Mark Segall Howard Chase
51 PRIVATE PLACEMENT On each of October 27 and November 5, 2004, we completed a private placement in which we sold an aggregate of 6,300,000 shares of Common Stock. C. E. Unterberg Towbin acted as lead placement agent in connection with the offering and received a 6% placement fee. We are filing this registration statement pursuant to the terms of a securities purchase agreement between each investor and us. We also agreed to bear expenses in connection with the registration and sale of the shares. See "Plan of Distribution." The following table sets forth as of November 30, 2004, information regarding the current beneficial ownership of our Common Stock by the investors in the private placement and their beneficial ownership assuming sale of all of the shares of Common Stock offered hereby. Information as to current ownership is based upon information provided to us by the selling stockholders, which we have not independently verified. The selling stockholders are not making any representation that the shares covered by this prospectus will be offered for sale. No selling stockholder listed below has held any position, office, nor had any material relationship with the Company or any of its predecessors or affiliates during the past three years with the exception of Unterberg as described above. Number of Shares Shares Maximum Number Beneficially Percentage Name of Beneficially Owned of Shares Owned Ownership After Selling Stockholder Prior to Offering to be Sold After Offering Offering ------------------- ----------------- ---------- -------------- -------- Renaissance US Growth Investment Trust PLC 960,000 960,000 0 0 BFS US Special Opportunities Trust PLC 960,000 960,000 0 0 Renaissance Capital Growth & Income Fund III, Inc. 480,000 480,000 0 0 SF Capital Partners Ltd. 1,150,000 1,150,000 0 0 Shea Ventures, LLC 1,165,000 1,165,000 0 0 Cordillera Fund L.P. 265,000 265,000 0 0 Leaf Investment Partners, L.P. 366,250 366,250 0 0 Leaf Offshore Investment Fund, Ltd. 103,750 103,750 0 0 Basso Multi-Strategy Holding Fund Ltd. 211,750 211,750 0 0 Basso Private Opportunity Holding Fund Ltd. 63,250 63,250 0 0 C.E. Unterberg, Towbin Capital Partners I, L.P. 619,300 619,300 0 0 Peter John Lee 5,700 5,700 0 0 Lake Street Fund, L.P. 90,000 90,000 0 0 MPFV, LLC 125,000 125,000 0 0 Nite Capital L.P. 125,000 125,000 0 0 Turkel Partners, L.P. 50,000 50,000 0 0 Richard M. Chong 16,000 16,000 0 0 William Shelander 4,000 4,000 0 0 Stuart Shapiro Money Purchase Plan 20,000 20,000 0 0 Stephen R. Rizzone 25,000 25,000 0 0
52 PLAN OF DISTRIBUTION We are registering the Common Stock on behalf of the above selling stockholders. The selling stockholders are offering shares of Common Stock that they received in connection with the private placement. As used in this prospectus, the term "selling stockholders" includes pledgees, transferees or other successors-in-interest selling shares received from the selling stockholders as pledgors, assignees, borrowers or in connection with other non-sale-related transfers after the date of this prospectus. This prospectus may also be used by transferees of the selling stockholders, including broker-dealers or other transferees who borrow or purchase the shares to settle or close out short sales of shares of Common Stock. The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale or non-sale related transfer. We will not receive any of the proceeds of such sales by the selling stockholders. The selling stockholders may sell their shares of Common Stock directly to purchasers from time to time. Alternatively, they may from time to time offer the Common Stock to or through underwriters, broker/dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the selling stockholders or the purchasers of such securities for whom they may act as agents. The selling stockholders and any underwriters, broker/dealers or agents that participate in the distribution of Common Stock may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and any profit on the sale of such securities and any discounts, commissions, concessions or other compensation received by any such underwriter, broker/dealer or agent may be deemed to be underwriting discounts and commissions under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. The Common Stock may be sold by the selling stockholders from time to time in one or more transactions at or on any stock exchange, market or trading facility on which the shares are traded or in private transactions. The sales may be made at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The sale of the Common Stock may be affected by means of one or more of the following transactions (which may involve cross or block transactions): o a block trade in which the broker-dealer so engaged will attempt to sell such shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus; o transactions on any exchange or quotation service on which the shares may be listed or quoted at the time of sale in accordance with the rules of the applicable exchange; o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o privately negotiated transactions; o transactions through the settlement of short sales; o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; 53 o transactions through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; and o any other method permitted pursuant to applicable law. The selling stockholders may also sell shares under Rule 144 of the Securities Act, if available, rather than under this prospectus. To the extent required, this prospectus may be amended and supplemented from time to time to describe a specific plan of distribution. Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchase of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholders may also enter into option or other transactions with broker-dealers, or other financial institutions for the creation of one or more derivative securities, which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). In connection with the sale of the Common Stock or otherwise, the selling stockholders may enter into hedging transactions with broker/dealers of other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our Common Stock short and deliver these shares to close out such short positions, or loan or pledge Common Stock to broker/dealers that in turn may sell such securities. The selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of any of the Common Stock by the selling stockholders. The foregoing may affect the marketability of such securities. Pursuant to the registration rights agreement with the selling stockholders, all expenses of the registration of the Common Stock will be paid by us, including, without limitation, SEC filing fees; provided, however, that the selling stockholders will pay any broker or similar commissions, or, except to the extent otherwise provided for, any legal fees or other costs of the selling stockholders. The selling stockholders will be indemnified by us against certain civil liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. We will be indemnified by the selling stockholders severally against certain civil liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. To comply with the securities laws of certain jurisdictions, if applicable, the Common Stock will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. 54 WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the Common Stock offered by this prospectus. As permitted by the rules and regulations of the SEC, this prospectus, which is a part of the registration statement, omits various information, exhibits, schedules and undertakings included in the registration statement. For further information pertaining to us and the Common Stock offered under this prospectus, reference is made to the registration statement and the attached exhibits and schedules. Although required material information has been presented in this prospectus, statements contained in this prospectus as to the contents or provisions of any contract or other document referred to in this prospectus may be summary in nature, and in each instance reference is made to the copy of this contract or other document filed as an exhibit to the registration statement, and each statement is qualified in all respects by this reference. A copy of the registration statement may be inspected without charge at the public reference facilities maintained by the SEC at the Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of the registration statement may be obtained from the SEC's offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference facilities. In addition, registration statements and certain other filings made with the commission through its Electronic Data Gathering, Analysis and Retrieval system, including our registration statement and all exhibits and amendments to our registration statement, are publicly available through the SEC's website at www.sec.gov. After this offering, we will have to provide the information and reports required by the Securities Exchange Act of 1934, as amended, and we will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. LEGAL MATTERS The validity of the shares of Common Stock offered in this prospectus will be passed upon for us by Loeb & Loeb LLP, New York, New York. EXPERTS The consolidated financial statements for the years ended December 31, 2003, 2002, and 2001 included in this prospectus and the related financial statement schedules included elsewhere in the registration statement have been audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement (which report expresses an unqualified opinion and includes explanatory paragraphs relating to a series of transactions to restructure the organization of the entities owned by the Shareholders which were accounted for at historical cost and the translation of Renminbi into United States dollars for the convenience of the reader), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 55 12,080,834 SHARES COMTECH GROUP, INC. COMMON STOCK PROSPECTUS __________________________, 2005 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses payable by Comtech Group, Inc. (the "Registrant") in connection with the sale of the Common Stock being registered, other than underwriting commissions and discounts. All amounts are estimates, except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing application fee. Amount to Be Paid ----------------------- SEC registration fee $ 3,554.79 Nasdaq National Market listing application fee 5,000.00 Blue sky qualification fees and expenses * Printing and engraving expenses * Legal fees and expenses * Accounting fees and expenses * Transfer agent and registrar fees * Miscellaneous * ----------------------- Total $ * ======================= - ---------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Maryland General Corporation Law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) acts committed in bad faith or active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Company's charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. The Company's charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonably expenses in advance of final disposition of a proceeding to (1) any present or former director or officer or (2) any individual who, while a director and at the Company's request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which he or she may become subject or which he or she may incur by reason of his or her service in such capacity. The Company's bylaws obligate it, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, II-1 officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity, against any claim or liability to which he may become subject by reason of such status. The Company's charter and bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The Maryland General Corporation Law requires a corporation (unless its charter provides otherwise, which the Company's charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. The Maryland General Corporation Law permits a corporation to indemnify its directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceedings to which they may be made, or are threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceedings and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the Maryland General Corporation Law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In accordance with the Maryland General Corporation Law, the Company's bylaws require it, as a condition to advancing expenses, to obtain (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the Company as authorized by the Company's bylaws and (2) a written statement by or on his or her behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information regarding sales of the registrant's unregistered securities during the last three years: On July 22, 2004, the registrant issued 40,502,150 shares of Common Stock pursuant to a share exchange agreement with Comtech Group, a Cayman Islands company ("Comtech") and Comtech's three shareholders. On each of October 29 and November 5, 2004, we consummated a private placement of 6,300,000 shares of our Common Stock to a group of institutional and individual accredited investors at a purchase price of $1.75 per share for aggregate consideration of $11,025,000. All of the above-described issuances were exempt from registration pursuant to Section 4(2) of the Securities Act, or Regulation D or Rule 144A promulgated thereunder, as transactions not involving a public offering. With respect to each transaction listed above, no general solicitation was made by either us or any person acting on our behalf; the securities sold are subject to transfer restrictions; and the certificates for the shares contained an appropriate legend stating such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No underwriters were involved in connection with the sales of securities referred to in this Item 15. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) EXHIBITS. 3.1 Amended Articles of Restatement of the Articles of Incorporation (1) 3.1(a)+ Amendments to Articles of Incorporation 3.2+ Form of Bylaws 4.1* Specimen Stock Certificate 5.1* Opinion of Loeb & Loeb LLP 10.1+ Comtech Group, Inc. 2004 Incentive Stock Option Plan 10.2+ Employment Agreement with Hope Ni, dated as of August 1, 2004 21.1+ List of Subsidiaries of the Registrant. 23.1+ Consent of Deloitte Touche Tohmatsu, Independent Registered Public Accounting Firm. 23.2* Consent of Loeb & Loeb LLP. Reference is made to Exhibit 5.1. 24.1+ Power of Attorney. Reference is made to page II-4. - ------------- * To be filed by amendment. + Filed herewith (1) Incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April 15, 1997, (b) Financial statement schedules. All schedules are omitted because they are not required, are not applicable or the information is included in our financial statements or notes thereto. ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of Regulation S-K if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; II-3 PROVIDED, HOWEVER, That paragraphs (i) and (ii) above do not apply if the registration statement is on Form S-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purpose of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of the issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized on December 22, 2004. By: /s/ Jeffrey Kang ----------------------------------------- Jeffrey Kang, Chief Executive Officer and Chairman of the Board POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey Kang and Hope Ni, and each of them (with full power of each to act alone), severally, as his or her true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement and any subsequent registration statement filed by the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE --------- ----- ---- /s/ Jeffrey Kang Chief Executive Officer and Chairman of the December 22, 2004 - ------------------------- Board of Directors Jeffrey Kang (Principal Executive Officer) /s/ Li Zhou Chief Technical Officer and Director December 22, 2004 - ------------------------- Li Zhou /s/ Amy Kong Director December 22, 2004 - ------------------------- Amy Kong /s/ Q.Y. Ma Director December 22, 2004 - ------------------------- Q.Y. Ma Director December 22, 2004 - ------------------------- Jason Kim /s/ Mark S. Hauser Director December 22, 2004 - ------------------------- Mark S. Hauser /s/ Mark B. Segall Director December 22, 2004 - ------------------------- Mark B. Segall /s/ Hope Ni Chief Financial Officer December 22, 2004 - ------------------------- (Principal Financial Officer) Hope Ni
II-5 COMTECH GROUP - ------------- CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ----------------------------------------------------------- CONTENTS PAGE(S) - -------- ------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 1 CONSOLIDATED BALANCE SHEETS F - 2 CONSOLIDATED STATEMENTS OF OPERATIONS F - 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F - 4 CONSOLIDATED STATEMENTS OF CASH FLOWS F - 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 6 - F - 16 COMTECH GROUP REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ------------------------------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COMTECH GROUP - ----------------------------------------------------------- We have audited the accompanying consolidated balance sheets of Comtech Group and its subsidiaries (the "Company") as of December 31, 2003, 2002 and 2001 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003, 2002 and 2001, and the results of its operations and its cash flows for each of the three years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company has entered into a series of transactions to restructure the organisation of the entities owned by the Shareholders and those transactions were accounted for at historical cost. Our audit also comprehended the translation of Renminbi amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such United States dollar amounts are presented solely for the convenience of the readers in the United States of America. /s/ DELOITTE TOUCHE TOHMATSU DELOITTE TOUCHE TOHMATSU Certified Public Accountants Hong Kong August 18, 2004 except for Note 11, which is dated December 17, 2004 F-1 COMTECH GROUP CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2003, 2002 AND 2001 - ----------------------------------------------------------------------------------- (in thousands, except shares and per share amounts)
2003 2003 2002 2001 -------- -------- -------- -------- USD RMB RMB RMB ASSETS Current assets: Cash 3,707 30,683 12,194 30,066 Trade accounts receivable, net of allowance for doubtful accounts of USD501 (RMB4,145) - 2003; RMB190 - 2002; RMB58 - 2001 11,146 92,259 67,597 45,048 Bills receivable 1,607 13,306 6,142 1,000 Other trade receivables 278 2,297 1,513 873 Amount due from other related party -- -- 298 298 Inventories 2,217 18,350 6,913 949 -------- -------- -------- -------- Total current assets 18,955 156,895 94,657 78,234 Property and equipment, net 358 2,961 2,371 2,446 Other assets 41 344 44 44 -------- -------- -------- -------- 399 3,305 2,415 2,490 -------- -------- -------- -------- TOTAL ASSETS 19,354 160,200 97,072 80,724 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable 5,384 44,564 55,701 51,738 Amount due to holding company 6,084 50,356 5,144 -- Amount due to other related party 192 1,592 3,165 4,497 Dividend payable 5,000 41,387 -- -- Income tax payable 109 902 86 184 Accrued expenses and other liabilities 453 3,745 2,418 3,048 -------- -------- -------- -------- Total current liabilities 17,222 142,546 66,514 59,467 -------- -------- -------- -------- Shareholders' equity(note 11): Common stock 405 3,352 3,352 3,352 Additional paid-in capital 1,296 10,731 10,731 10,648 Retained earnings 431 3,571 16,475 7,257 -------- -------- -------- -------- Total shareholders' equity 2,132 17,654 30,558 21,257 -------- -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 19,354 160,200 97,072 80,724 ======== ======== ======== ======== - ---------------------------------------------------------------------------------- See notes to consolidated financial statements. F-2
COMTECH GROUP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 2003 2003 2002 2001 ------------ ------------ ------------ ------------ USD RMB RMB RMB Net revenues 43,227 357,805 207,607 171,721 Cost of revenue (37,082) (306,939) (190,265) (159,244) ------------ ------------ ------------ ------------ Gross profit 6,145 50,866 17,342 12,477 Selling, general and administrative expenses (2,457) (20,341) (7,461) (7,911) ------------ ------------ ------------ ------------ Income from operations 3,688 30,525 9,881 4,566 Interest expense (97) (801) -- (9) Interest income 6 54 157 175 ------------ ------------ ------------ ------------ Income before income tax 3,597 29,778 10,038 4,732 Income tax 156 1,295 820 825 ------------ ------------ ------------ ------------ Net income 3,441 28,483 9,218 3,907 ============ ============ ============ ============ Basic and diluted earnings per share 0.08 0.70 0.23 0.10 ============ ============ ============ ============ Weighted average number of ordinary shares outstanding, basic and diluted (note 11) 40,502,150 40,502,150 40,502,150 40,502,150 ============ ============ ============ ============ See notes to consolidated financial statements. F-3
COMTECH GROUP CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001 - ------------------------------------------------------------------------------------------------------- (in thousands, except shares and per share amounts)
Additional Total paid-in Retained shareholders' Common stock capital earnings equity ------------------------ ----------- ----------- ----------- Number of shares RMB RMB RMB RMB (note 11) (note 11) (note 11) Balance at January 1, 2001 (note 11) 40,502,150 3,352 10,648 3,350 17,350 Net income -- -- -- 3,907 3,907 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 40,502,150 3,352 10,648 7,257 21,257 Additional paid-in capital -- -- 83 -- 83 Net income -- -- -- 9,218 9,218 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2002 40,502,150 3,352 10,731 16,475 30,558 Dividend -- -- -- (41,387) (41,387) Net income -- -- -- 28,483 28,483 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2003 40,502,150 3,352 10,731 3,571 17,654 =========== =========== =========== =========== =========== Balance at December 31, 2003 (in thousands of USD) 405 1,296 431 2,132 =========== =========== =========== =========== See notes to consolidated financial statements. F-4
COMTECH GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------------------------------------- (in thousands)
2003 2003 2002 2001 ------------ ------------ ------------ ------------ USD RMB RMB RMB Cash flows from operating activities: Net income 3,441 28,483 9,218 3,907 Adjustment to reconcile net income to net cash (used in) provided by operating activities: Depreciation expense 51 427 455 370 Changes in operating assets and liabilities: Trade accounts receivable (2,979) (24,662) (22,549) (37,417) Bills receivable (865) (7,164) (5,142) (1,000) Inventories (1,381) (11,437) (5,964) 2,687 Other trade receivables (95) (784) (640) (549) Amount due from other related party 36 298 -- (298) Trade accounts payable (1,345) (11,137) 3,963 45,726 Accrued expenses and other liabilities 160 1,327 (630) 1,640 Amount due to other related party (190) (1,573) (1,332) 2,825 Income tax payable 98 816 (98) (943) ------------ ------------ ------------ ------------ Cash (used in) provided by operating activities (3,069) (25,406) (22,719) 16,948 ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (123) (1,017) (380) (2,258) Increase in other assets (36) (300) -- -- ------------ ------------ ------------ ------------ Cash used in investing activities (159) (1,317) (380) (2,258) ------------ ------------ ------------ ------------ Cash flows from financing activities: Capital contribution -- -- 83 -- Amount received from holding company 5,462 45,212 5,144 -- Amount due to other related party -- -- -- 1,672 ------------ ------------ ------------ ------------ Cash provided by financing activities 5,462 45,212 5,227 1,672 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 2,234 18,489 (17,872) 16,362 Cash at beginning of the year 1,473 12,194 30,066 13,704 ------------ ------------ ------------ ------------ Cash at end of the year 3,707 30,683 12,194 30,066 ============ ============ ============ ============ Supplemental disclosure of cash flows information: Cash paid for: Interest 97 801 -- 9 ============ ============ ============ ============ Income taxes 58 479 918 1,297 ============ ============ ============ ============ See notes to consolidated financial statements. F-5
COMTECH GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------- (in thousands, except shares and per share amounts) 1. ORGANIZATION AND NATURE OF OPERATIONS Comtech Group and its subsidiaries (together, the "Company") uses advanced technology to process and sell telecommunication system equipment, handset components and produce network protection devices in the People's Republic of China ("PRC"). Ms. Ji Nan and Mr. Kang Jing Wei (together, the "Shareholders") owned 79% (of which 8% was acquired from another party on June 25, 2002) and 21%, respectively, of the outstanding ordinary shares of the Company. The Shareholders held the equity interest of the Company through a holding company, Comtech Global Investment Ltd. As of December 31, 2003, the ownership structure of the Company is as follows: ------------------------------- Comtech Group (established on April 26, 2002 in the Cayman Islands) ------------------------------- | - ------------------------------- ----------------------- Comtech (China) Holding Limited Comtech (Hong Kong) ("Comtech China") Holding Limited ("Comtech Holding") (established on May 27, 2002 in the British Virgin Islands ("BVI")) (established on May 27, 2002 in the BVI) - -------------------------------------- ----------------------- | | | | | | - ------------------- --------------- ----------------- Shenzhen Comtech Comtech Communication Comtech International Technology (Shenzhen) International Limited Company Limited (Hong Kong) ("Shenzhen ("Comtech Communication") Limited Comtech") ("Comtech (established on Hong Kong") (established on July 23, 2002 in the PRC) July 4, 1996 in (established the PRC) on July 14, 2000 in Hong Kong) - ------------------- --------------- ----------------- F-6 COMTECH GROUP 1. ORGANIZATION AND NATURE OF OPERATIONS - continued The Company, prior to the incorporation of the Comtech Group, conducted its business through Shenzhen Comtech, which then wholly owned Comtech Hong Kong. The Shareholders reorganized the Group; the reorganization consisted of the following: (i) incorporation of the Comtech Group; (ii) establishment of Comtech China and Comtech Holding as wholly owned subsidiaries of the Comtech Group; (iii) establishment of Comtech Communication as a wholly owned subsidiary of Comtech China, (iv) transfer of the ownership in Comtech Hong Kong from Shenzhen Comtech to Comtech Holding on August 28, 2002, and (v) transfer of the direct ownership in Shenzhen Comtech by the Shareholders of Shenzhen Comtech. The Shareholders, on December 30, 2003, transferred to Comtech China their direct ownership interests in Shezhen Comtech at no consideration. Pursuant to the foregoing transfer of the direct ownership in Shenzhen Comtech, the Shareholders and Comtech China entered into a Trusteeship Agreement whereby the parties acknowledge that the ownership interest in Shenzhen Comtech are being held by the Shareholders on behalf of Comtech China. The transactions described in the two preceding paragraphs represent a reorganization of companies under common control and were accounted for at historical cost. The accompanying consolidated financial statements reflect the historical result of operations and cash flows of the Company during each respective period and include the results of operations and cash flows of Shenzhen Comtech and Comtech Hong Kong from January 1, 2001. The consolidated balance sheet as of December 31, 2001 represents the consolidated assets and liabilities of Shenzhen Comtech and Comtech Hong Kong. The share capital of Shenzhen Comtech was accounted for as additional equity contribution by the Shareholders and was presented in shareholders' equity as "Additional paid-in capital". The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position, results of operations, or cash flows: changes in the overall demand for telecommunication system equipment; competitive pressures due to excess capacity or price reductions; advances and trends in new technologies and industry standards; changes in key suppliers; changes in certain strategic relationships or customer relationships; regulatory or other factors; risks associated with the ability to obtain necessary raw materials; and risks associated with the Company's ability to attract and retain employees necessary to support its growth. 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). Principle of consolidation -------------------------- The consolidated financial statements include the financial statements of Comtech Group and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. F-7 COMTECH GROUP 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued Use of Estimates ---------------- The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash ---- Cash consisted of cash in bank and the Company does not have any cash equivalents. Trade accounts receivable ------------------------- Trade accounts receivable are stated at the nominal value and are reduced by appropriate allowances for estimated irrecoverable amounts. Bills receivable ---------------- Bills receivable are unsecured, non-interest bearing and redeemable from the banks without recourse. Property and equipment ---------------------- Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of property and equipment are as follows: Office building 10 years Machinery 5 years Furniture and office equipment 5 years Motor vehicles 5 years Major improvements of property and equipment are capitalized, while expenditures for repairs, maintenance and minor renewals and betterments are expensed. Inventories ----------- Inventories, which primarily consist of telecommunication system equipment, handset components and network protection devices, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. F-8 COMTECH GROUP 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued Long-lived assets ----------------- The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable according to FAS144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by use of the assets. If the carrying amounts of long-lived assets are not recoverable, the impairment loss to be recognized is measured by the amount by which the carrying amounts of the assets exceed their fair values. No impairment loss was recorded for all periods presented. Income taxes ------------ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. Revenue recognition ------------------- Sales of telecommunication system equipment, handset components and network protection devices are recorded when the equipment is delivered, title has passed to the customers and the Company has no further obligations to provide services related to the operation of such equipment. Revenue is recorded net of value added tax incurred. Such value added taxes amounted to RMB41,693 (USD5,037), RMB21,075, and RMB20,259, for the years ended December 31, 2003, 2002 and 2001, respectively. Cost of revenue --------------- Cost of revenue includes purchase costs and shipping and handling costs for products sold, and direct costs associated with the delivery of the equipment, including salaries, employee benefits and overhead costs associated with employees providing the related services. Foreign currency translation ---------------------------- The functional currency of the Company is the Renminbi ("RMB"). Transactions in other currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in the consolidated statements of operations as a component of current period earnings and were insignificant. F-9 COMTECH GROUP 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued Translation into United States Dollars -------------------------------------- The financial statements of the Company are stated in RMB. The translation of RMB amounts at and for the year ended December 31, 2003 into United States dollars ("USD") are included solely for the convenience of readers and have been made at the rate of RMB 8.2773 to USD 1. Such translations should not be construed as representations that RMB amounts could be converted into USD at that rate or any other rate. Fair value of financial instruments ----------------------------------- The carrying amounts of cash, trade receivables, bills receivable, other receivables and accounts payable approximate their fair values due to the short-term maturity of these instruments. Foreign Currency Risk --------------------- The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of Renminbi into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The PRC subsidiaries conduct their business substantially in the PRC, and their financial performance and position are measured in terms of RMB. Any devaluation of the RMB against the United States dollar would consequently have an adverse effect on the financial performance and asset values of the Company when measured in terms of United States dollar. The PRC subsidiaries' products are primarily sold and delivered in the PRC for RMB. Thus, their revenues and profits are predominantly denominated in RMB. Should the RMB devalue against United States dollar, such devaluation could have a material adverse effect on the Company's profits and the foreign currency equivalent of such profits repatriated by the PRC entities to the Company. Concentration of credit risk ---------------------------- Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The Company places its cash and cash equivalents with financial institutions with high-credit ratings and quality. The Company conducts credit evaluations of customers and generally does not require collateral or other security from its customers. The Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers. Comprehensive income -------------------- Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. During the years presented, the Company's comprehensive income represents its net income. F-10 COMTECH GROUP 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued Research and development expenses --------------------------------- Expenditure on research activities is recognised as an expense in the period in which it is incurred. These expenditures amounted to RMB983 (USD119), RMB1,042 and RMB1,928 for the years ended December 31, 2003, 2002 and 2001, respectively. Earnings per share ------------------ Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised into ordinary shares. Ordinary share equivalents are excluded from the computation of the diluted earnings per share in periods when their effect would be anti-dilutive. There were no dilutive potential ordinary shares in issue during the years presented. Recently Issued Accounting Pronouncements ----------------------------------------- In November 2002, EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/ or rights to use assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company's results of operations or financial position. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that guarantors recognise, at the inception of the guarantee, a liability for the fair value of the guarantee. In addition, FIN 45 clarifies the disclosures required of guarantors for certain guarantees that it has issued. The recognition and measurement criteria of this Interpretation are to be applied prospectively to guarantees issued or modified after December 31, 2002. The recognition and measurement criteria of FIN 45 did not have a material impact on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". It establishes standards for how an issuer classifies and measures certain financial instruments. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. It requires that certain financial instruments that, under previous guidance, could be accounted for as equity be classified as liabilities, or assets in some circumstances. It does not apply to features embedded in a financial instrument that is not a derivative in its entirety. SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities whose shares are mandatory redeemable. The adoption of SFAS No. 150 did not have an impact on the Company's results of operations or financial position. F-11 COMTECH GROUP 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued Recently Issued Accounting Pronouncements - continued ----------------------------------------- In January 2003, the FASB issued FIN No. 46 (revised), "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin No. 51". FIN No. 46 (revised) requires the primary beneficiary to consolidate a variable interest entity if it has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN No. 46 (revised) applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which the entity obtains an interest after that date. For variable interest entities acquired before February 1, 2003, the effective date for the Company is January 1, 2004. The Company believes the adoption of FIN No. 46 (revised) did not have a material impact on its results of operations or financial position. In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including derivatives embedded in other contracts and hedging activities. SFAS No. 149 amends SFAS No. 133 for decisions made by the FASB as part of its Derivatives Implementation Group process. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified and hedging relationships designated after June 30, 2003. The provisions of SFAS No. 149 did not have a material impact on the Company's financial position, results of operations, or cash flows. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: 2003 2003 2002 2001 ------ ------ ------ ------ USD RMB RMB RMB Office building 202 1,672 1,672 1,672 Machinery 9 76 53 51 Furniture and office equipment 130 1,073 755 377 Motor vehicles 184 1,526 850 850 ------ ------ ------ ------ Total 525 4,347 3,330 2,950 Less: accumulated depreciation 167 1,386 959 504 ------ ------ ------ ------ Property and equipment, net 358 2,961 2,371 2,446 ====== ====== ====== ====== 4. INVENTORIES 2003 2003 2002 2001 ------ ------ ------ ------ USD RMB RMB RMB Raw materials 979 8,100 4,059 -- Finished goods 1,238 10,250 2,854 949 ------ ------ ------ ------ 2,217 18,350 6,913 949 ====== ====== ====== ====== F-12 COMTECH GROUP 5. INCOME TAXES The provision for income taxes consists of the following: 2003 2003 2002 2001 ------ ------ ------ ------ USD RMB RMB RMB PRC, excluding Hong Kong 143 1,187 740 808 Hong Kong 13 108 80 17 ------ ------ ------ ------ 156 1,295 820 825 ====== ====== ====== ====== The subsidiaries that are incorporated in Cayman Islands and the British Virgin Islands are not subject to income taxes under those jurisdictions. The PRC statutory tax rate is 33%. Shenzhen Comtech and Comtech Communication are located in the Shenzhen Special Economic Zone in the PRC, which is subject to a reduced tax rate of 15%. In addition, Shenzhen Comtech is subject to a PRC preferential income tax rate at 7.5% in 2002 and 2003 while the income of Comtech Communication in 2002 and 2003 was exempt from the PRC income taxes. Comtech Hong Kong is subject to Profit Taxes in Hong Kong at 16% in 2001 and 2002, and 17.5% in 2003. A reconciliation of income tax expense to the amount computed by applying the PRC statutory tax rate to the income before income tax in the consolidated statements of operations is as follows: 2003 2003 2002 2001 ------ ------ ------ ------ USD RMB RMB RMB Income before income tax 3,597 29,778 10,038 4,732 PRC statutory tax rate 33% 33% 33% 33% Income tax expense at PRC statutory tax rate 1,187 9,827 3,313 1,562 Effect of concessionary tax rate in the Shenzhen Special Economic Zone (692) (5,728) (1,712) (755) Effect of preferential income tax rate 78 646 (713) -- Effect of tax exemptions granted to a PRC subsidiary (622) (5,147) -- -- Effect of the different income tax rate in other tax jurisdictions (11) (91) (90) (92) Non-deductible (taxable) items 174 1,444 (4) (20) Tax effect of utilisation of tax losses not previously recognised -- -- -- (49) Others 42 344 26 179 ------ ------ ------ ------ 156 1,295 820 825 ====== ====== ====== ====== There was no significant deferred tax asset or liability as of December 31, 2003, 2002 and 2001. F-13 COMTECH GROUP 6. COMMITMENTS The Company has operating lease agreements principally for its office facilities. Such leases have remaining terms of one to thirty-six months. Rental expense was RMB958 (USD116), RMB418 and RMB388 for the years ended December 31, 2003, 2002 and 2001, respectively. Future minimum lease payments under non-cancellable operating lease agreements as of December 31, 2003 were as follows: 2003 2003 -------- -------- USD RMB Fiscal year 2004 114 944 2005 31 253 2006 14 116 -------- -------- Total 159 1,313 ======== ======== 7. RELATED PARTY BALANCES AND TRANSACTIONS 2003 2003 2002 2001 ------ ------ ------ ------ USD RMB RMB RMB Related Party Balances ---------------------- AMOUNT DUE FROM OTHER RELATED PARTY Viewtran Technology Limited ("Viewtran") -- -- 298 298 ====== ====== ====== ====== AMOUNT DUE TO OTHER RELATED PARTY Matsunichi Electronics (Hong Kong) Limited ("Matsunichi") 192 1,592 3,165 4,497 ====== ====== ====== ====== Mr. Kang Jing Wei has a controlling interest in Viewtran and Matsunichi. AMOUNT DUE TO HOLDING COMPANY Comtech Global Investment Ltd. 6,084 50,356 5,144 -- ====== ====== ====== ====== The amount due to other related party and amount due to holding company represent cash advances to or from them and were unsecured, non-interest bearing and had no fixed repayment terms. F-14 COMTECH GROUP 7. RELATED PARTY BALANCES AND TRANSACTIONS - continued Related party transaction ------------------------- (a) The Company, in 2003, purchased products from Viewtran totalling RMB5,456 (USD659).The Company sold these products on behalf of Viewtran at the same price at which it purchased those products. According to an agreement entered into between the Company and Viewtran, the Company conducted these sales and purchase transactions on behalf of Viewtran and the risk and rewards as a result of these transactions are belonging to Viewtran. Therefore, the sales, purchases, and the corresponding receivables and payables related to the foregoing transactions are not reflected in the accompanying financial statements. (b) The Company purchased an office building from Matsunichi at a cash consideration of RMB1,672 in 2001 and paid technical services fees of RMB1,620 to Matsunichi in 2001. 8. SHAREHOLDERS' EQUITY Ordinary shares --------------- The holders of those shares have the right to vote, receive dividends and have liquidation rights in proportion to their shareholdings. There are no contracts outstanding to issue additional ordinary shares of the Company as of December 31, 2003, 2002 or 2001, respectively. Statutory reserves ------------------ Shenzhen Comtech and Comtech Communication (being a limited company and wholly foreign owned enterprise established in the PRC) are, pursuant to PRC regulations, required to appropriate from their net profits (as reported in their PRC statutory accounts) to certain statutory reserves (namely, statutory surplus reserve and statutory public welfare reserve). These reserves can only be used for specific purposes and are not distributable as cash dividends. The balance of the statutory reserves shown in the accounts of Shenzhen Comtech and Comtech Communications amounted to RMB2,730 (USD330), RMB 2,730, and RMB 907 as of December 31, 2003, 2002 and 2001, respectively. Dividend -------- There are no restrictions on dividends and the shareholders have the right to receive dividends in proportion to their shareholding percentages. F-15 COMTECH GROUP 9. CONCENTRATIONS Major customers --------------- The Company has three customers which account for more than 10% of total revenues as follows: 2003 2002 2001 -------- -------- -------- Company A 24% 30% 38% Company B 14% -- -- Company C -- 12% -- The above three customers represents 21%, 40% and 34% of the balance of trade receivable as of 2003, 2002 and 2001, respectively. Major suppliers --------------- The Company has five suppliers which account for more than 10% of total purchases as follows: 2003 2002 2001 -------- -------- -------- Company A -- 54% 66% Company B 30% -- -- Company C 15% -- -- Company D 14% -- -- Company E 11% -- -- The Company made purchases from Company A, which accounted for approximately 54% and 66% of the total purchases for the years ended 2002 and 2001, respectively. The accounts payable from this supplier as of each balance sheet date represents 87% in 2002 and 99% in 2001 of the balance of trade accounts payable. A director of Comtech Hong Kong is a shareholder of this supplier for which he held the shares on behalf of an unrelated third party. The payables to other four suppliers with the largest trade accounts payable balances represent 77% of the balance of trade accounts payable as of December 31 2003. 10. EMPLOYEE BENEFIT PLANS Certain employees of the Company in the PRC are entitled to retirement benefits calculated with reference to their salaries upon retirement and their length of service in accordance with a PRC government-managed retirement plan. The PRC government is directly responsible for the payments of the benefits to these retired employees. The Company is required to make contributions to the government-managed retirement plan at 6.5% to 9% of the monthly basic salaries of certain employees. The expense of such arrangements to the Company for the year ended December 31, 2003, 2002 and 2001 was RMB179 (USD22), RMB87 and RMB26, respectively. The Company operates a Mandatory Provident Fund Scheme for all qualifying employees in Hong Kong. The assets of the scheme are held separately from those of the Company by trustees. The Company contributes 5% of relevant payroll costs to the scheme, which contribution is matched by employees. The contributions paid by the Company for the years ended December 31, 2003, 2002 and 2001 were RMB34 (USD4), RMB36 and RMB15, respectively. F-16 COMTECH GROUP 11. SUBSEQUENT EVENTS On January 18, 2004, the Company signed an agreement to acquire a 60% owned subsidiary, Shanghai E&T System Co., Ltd., in the PRC. The Company contributed RMB1,200 (USD145) to this new subsidiary, which represented 60% of the registered capital of this subsidiary. On March 18, 2004, the Company established a 100% owned subsidiary, Comtech Software Technology (Shenzhen) Co, Ltd., in the PRC. The Company contributed RMB4,906 (USD600) to this new subsidiary, which represented 100% of the registered capital. On July 22, 2004, the Company and Trident Rowan Group, Inc. ("Trident"), a Maryland corporation, reached an agreement pursuant to which, the Company transferred all of its equity to Trident and Trident, in turn, issued to the Company's shareholders 40,502,150 shares of Trident's stock (the "Shares"). As a result of the transaction, the Company became a wholly-owned subsidiary of Trident and, upon the issuance of the Shares, the Company's shareholders owned approximately 91.2% of Trident's issued and outstanding stock. Trident then changed its name to Comtech Group, Inc. In addition, as a part of the share exchange transaction with Trident, the Company assumed fully vested options issued by Trident to purchase 230,000 shares of the Company's common stock with an exercise price of USD 1.50 per share. Also, as part of the share exchange transaction, the Company assumed 1,850,834 fully exercisable common stock warrants. Each warrant represents the right to receive 1 share of the Company's common stock, at an exercise price of USD1.50 per share for 968,903 common stock warrants and USD1.25 per share for 881,931 common stock warrants. The options and warrants assumed from Trident both expire on July 1, 2009. The share exchange transaction was accounted for as a reverse acquisition in which the Company was deemed to be the accounting acquirer and Trident the legal acquirer. Because Trident was a non-operating public shell company, no goodwill has been recorded in connection with the transaction and the costs incurred in connection with the transaction are charged directly to equity. As a result of the share exchange transaction, the number of shares of the Company has been retroactively restated to reflect the share exchange ratio as at the date of the transaction in a manner similar to a stock split. The related common stock, additional paid-in capital, earnings per share and weighted average number of shares data in the consolidated balance sheets, consolidated statements of operations and consolidated statements of shareholders' equity for the year ended December 31, 2003, 2002 and 2001 have been restated retroactively. In June 2004, Shenzhen Comtech borrowed RMB3,600 (USD435) from Viewtran and of which RMB3,000 (USD362) was paid on June 30,2004. The amount was unsecured, non-interest bearing and had no fixed repayment terms. F-17 COMTECH GROUP 11. SUBSEQUENT EVENTS - continued On July 21, 2004, Comtech Hong Kong, a wholly-owned subsidiary of the Company, entered into a RMB33,109 (USD4,000) revolving credit facility (the "Facility") with the Bank of Communications Hong Kong branch (the "Bank of Communication"). On September 14, 2004, the amount of the Facility was increased to RMB82,773 (USD10,000). During August and September 2004, Comtech Hong Kong drew down approximately RMB72,482 (USD8,757) under the Facility. These bank borrowings were raised for general working capital purposes of the Company and RMB8,095 (USD978) of them were directly used for settlement of amount to Comtech Global Investment Ltd. The Facility is secured by funds on deposit with the Bank of Communication owned by Jeffrey Kang, the Company's principal shareholder and Chief Executive Officer, in an amount equal to the borrowings. The facility bears interest at the higher of LIBOR or 1.5% over the deposit rate, payable monthly. On August 24, 2004, Comtech Communication, a wholly-owned subsidiary of the Company, entered into a factoring agreement (the "Agreement") with Guangdong Development Bank Shenzhen branch (the "Guangdong Development Bank"). Pursuant to the Agreement, accounts receivable from UT Starcom with the maximum amount of RMB30,000 (USD3,624) can be transferred to the Guangdong Development Bank with recourse. An amount equal to 30% of the accounts receivable transferred is secured by funds on deposit from Comtech Communication with the Guangdong Development Bank. The factoring arrangement bears interest at the PRC official loan interest rate as of September 30, 2004, payable monthly. On October 20, 2004, Comtech Communication transferred accounts receivable of approximately RMB11,449 (USD1,381) under the Agreement. In addition, the Company satisfied all of its outstanding obligations in the approximate amount of RMB91,743 (USD11,084) to Comtech Global Investment Ltd. by paying approximately RMB50,356 (USD6,084) of the amount due to holding company and a RMB41,387 (USD5,000) dividend obligation subsequent to the year end date. On October 26, 2004, Comtech Group, Inc. entered into definitive purchase agreements (the "Purchase Agreements") for the sale of an aggregate of 6,300,000 shares ("Purchased Shares") of common stock to institutional and individual investors for gross proceeds of approximately RMB91,257(USD11,025), before deducting a 6% placement fee and other expenses of the offering. A closing was held on the first 5,040,000 shares on October 27, 2004 (the "First Closing Date"). A second closing on the balance of the shares occurred on November 5, 2004. Pursuant to the Purchase Agreements, Comtech Group, Inc. has agreed to prepare and file with the SEC in no event later than 60 days following the First Closing Date, a registration statement ("Registration Statement") on Form S-1, to enable the resale of the Purchase Shares and use its best efforts to cause such Registration Statement to be declared effective as promptly as possible after filing, but in any event, within 120 days following the First Closing Date or, in the event of a review of the Registration Statement by the SEC, within 180 days following the First Closing Date, and to remain continuously effective until the earlier of (1) the second anniversary of the First Closing Date or (2) the date on which all Purchased Shares have been sold thereunder. If the Company fails to comply with certain timetable as described in the Purchase Agreements, the Company will be subject to penalty provision as specified in the Purchase Agreements. Subsequent to the year end date, Comtech Group, Inc. granted 3,705,000 stock options to its directors and employees under the Comtech Group, Inc. 2004 Stock Incentive Plan at an average exercise price of USD1.83 per share. F-18 COMTECH GROUP CONTENTS PAGE(S) UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 Q - 1 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 Q - 2 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 Q - 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Q - 4- Q - 11 COMTECH GROUP UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND DECEMBER 2003 - ----------------------------------------------------------------------------------------- (IN THOUSANDS)
September 30 September 30 December 31 2004 2004 2003 ----------- ----------- ----------- USD RMB RMB ASSETS Current assets: Cash 2,142 17,727 30,683 Trade accounts receivable, net of allowance for doubtful accounts 18,248 151,043 92,259 Bills receivable 4,209 34,843 13,306 Other trade receivables 1,081 8,940 2,297 Inventories 2,746 22,732 18,350 ----------- ----------- ----------- Total current assets 28,426 235,285 156,895 Property and equipment, net 384 3,180 2,961 Other assets 41 344 344 ----------- ----------- ----------- 425 3,524 3,305 ----------- ----------- ----------- TOTAL ASSETS 28,851 238,809 160,200 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable 6,918 57,269 44,564 Amount due to holding company -- -- 50,356 Amount due to other related party 265 2,192 1,592 Bank loans 8,757 72,482 -- Dividend payable -- -- 41,387 Income tax payable 135 1,114 902 Accrued expenses and other liabilities 1,771 14,662 3,745 ----------- ----------- ----------- Total current liabilities 17,846 147,719 142,546 ----------- ----------- ----------- Minority interests 619 5,126 -- ----------- ----------- ----------- Shareholders' equity: Common stock and additional paid-in capital 4,693 38,844 14,083 Retained earnings 5,693 47,120 3,571 ----------- ----------- ----------- Total shareholders' equity 10,386 85,964 17,654 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 28,851 238,809 160,200 =========== =========== =========== Q-1
COMTECH GROUP UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 - -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) September 30 September 30 September 30 2004 2004 2003 ------------ ------------ ------------ USD RMB RMB Net revenues 56,174 464,970 246,324 Cost of revenue (47,742) (395,171) (210,290) ------------ ------------ ------------ Gross profit 8,432 69,799 36,034 Selling, general and administrative expenses (2,402) (19,886) (11,836) ------------ ------------ ------------ Income from operations 6,030 49,913 24,198 Interest expense (202) (1,669) (500) Interest income 19 159 34 ------------ ------------ ------------ Income before income tax 5,847 48,403 23,732 Income tax (217) (1,799) (964) ------------ ------------ ------------ Net income before minority interests 5,630 46,604 22,768 Minority interests (369) (3,055) -- ------------ ------------ ------------ Net income 5,261 43,549 22,768 ============ ============ ============ Earnings per share Basic 0.13 1.05 0.56 ============ ============ ============ Diluted 0.13 1.05 0.56 ============ ============ ============ Weighted average number of ordinary shares outstanding Basic 41,507,253 41,507,253 40,502,150 ============ ============ ============ Diluted 41,666,436 41,666,436 40,502,150 ============ ============ ============ Q-2 COMTECH GROUP UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 - -------------------------------------------------------------------------------------------------- (IN THOUSANDS) September 30 September 30 September 30 2004 2004 2003 ------------ ------------ ------------ USD RMB RMB Cash flows from operating activities: Net income 5,261 43,549 22,768 Adjustment to reconcile net income to net cash (used in) provided by operating activities: Depreciation expense 88 728 319 Minority interests 369 3,055 -- Changes in operating assets and liabilities: Trade accounts receivable (6,481) (53,642) (39,633) Bills receivable (2,602) (21,537) (1,917) Inventories (325) (2,693) 5,186 Other trade receivables (125) (1,036) (12,724) Amount due from other related party -- -- 298 Trade accounts payable 676 5,592 18,987 Accrued expenses and other liabilities 663 5,491 11,345 Amount due to other related party 72 600 (1,573) Income tax payable 26 212 2,408 ------------ ------------ ------------ Cash (used in) provided by operating activities (2,378) (19,681) 5,464 ------------ ------------ ------------ Cash flows from investing activities: Net cash outflow from acquisition of a subsidiary (109) (906) -- Purchases of property and equipment (86) (711) (418) Increase in other assets -- -- (300) ------------ ------------ ------------ Cash used in investing activities (195) (1,617) (718) ------------ ------------ ------------ Cash flows from financing activities: New bank loans 8,757 72,482 -- Net cash inflow from share exchange transaction (net of transaction cost) 3,335 27,603 -- Repayment of amount due to holding company (6,084) (50,356) -- Payment of 2003 dividend (5,000) (41,387) -- ------------ ------------ ------------ Cash provided by financing activities 1,008 8,342 -- ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,565) (12,956) 4,746 Cash at beginning of the period 3,707 30,683 12,194 ------------ ------------ ------------ Cash at end of the period 2,142 17,727 16,940 ============ ============ ============ Q-3
COMTECH GROUP 1. BASIS OF PRESENTATION (in thousands, except shares and per share amounts) The accompanying unaudited consolidated condensed financial statements of Comtech Group Inc. (formerly known as "Trident Rowan Group, Inc", the "Company") have been prepared in accordance with the Company's accounting policies as stated in the Company's Audited Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001 included in the F pages. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. For a summary of the Company's accounting principles, and other footnote information, reference is made to the Company's Audited Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001 included in the F pages. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the F pages. All adjustments necessary for the fair presentation of the results of operations for the interim periods covered by this report have been included. All such adjustments are of a normal and recurring nature. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the operating results for the full year. The consolidated financial statements are reported in Renminbi ("RMB") because all of the Company's material operating entities are based in and operated entirely within the People's Republic of China. The translation of RMB amounts into U.S. dollar amounts is included solely for the convenience of the readers of the financial statements and has been calculated at the rate of USD1 to RMB8.2773, the approximate exchange rate at September 30, 2004. Such translations should not be construed as representations that the RMB amounts could be converted into USD at that rate or any other rate. 2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP, INC. AND COMTECH GROUP On May 11, 2004, Comtech Group's original sole shareholder, Comtech Global Investment Ltd., sold part of its shares to Purple Mountain Holding Ltd. and Ren Investment Ltd., which then became the shareholders of Comtech Group. On May 25, 2004, the Company entered into a Share Exchange Agreement (the "Exchange Agreement") with Comtech Group, a privately owned Cayman Islands company ("Comtech"), and Comtech's shareholders, Comtech Global Investment Ltd., Purple Mountain Holding Ltd., and Ren Investment Ltd.(collectively, the "Shareholders"), pursuant to which the Company was to acquire all of the issued and outstanding shares of stock of Comtech in exchange for the issuance in the aggregate of 42,000,000 of the Company's shares of common stock to the Shareholders. The transaction contemplated by the Exchange Agreement was consummated on July 22, 2004. Pursuant to certain provisions in the Exchange Agreement, the number of shares issued to the Shareholders was adjusted at closing to 40,502,150 (the "Shares"). As a result of the transaction, Comtech became a wholly-owned subsidiary of the Company and, upon the issuance of the Shares, the Shareholders owned approximately 91.2% of the Company's issued and outstanding stock. The Company currently has a total of 44,422,050 shares of Common Stock issued and outstanding as of September 30, 2004. The Company then changed its name from Trident Rowan Group, Inc. ("Trident") to Comtech Group, Inc. Q-4 COMTECH GROUP 2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC. AND COMTECH GROUP- continued As of September 30, 2004, the ownership structure of the Company as a result of the share exchange transaction is as follows: -------------------------- ------------------------------ Comtech Group Inc. OAM S.P.A. (formerly known as Trident (a) Rowan Group Inc.) (established in Italy) (non operating subsidiary) (established in Maryland) -------------------------- ------------------------------ | | -------------------------- Comtech Group (established on April 26, 2002 in the Cayman Islands) -------------------------- | | -------------------------- ------------------------------ Comtech (China) Holding Limited Comtech (Hong Kong) ("Comtech China") Holding Limited ("Comtech Holding") (established on May 27, 2002 in the British Virgin Islands (established on May 27, 2002 ("BVI")) in the BVI) -------------------------- ------------------------------ | | --------|------------------------------------ | | | | | | | | | - --------------------- --------------------- -------------------- --------------------- Shenzhen Comtech Comtech Communication Comtech Software Comtech International International Limited Technology (Shenzhen) Technology (Shenzhen) (Hong Kong) Limited ("Shenzhen Comtech") Company Limited Co. Ltd. ("Comtech Hong Kong") ("Comtech ("Comtech Software") Communication") (established on (established on (established on (established on July 4, 1996 in the PRC) July 23, 2002 18 March 2004 July 14, 2000 in the PRC) in the PRC) in Hong Kong) - --------------------- --------------------- -------------------- --------------------- | | - -------------------- Shanghai E&T System Co. Ltd. ("Shanghai E&T" (a) (established on January 18, 2004 in the PRC) - --------------------- (a) The Company owns 98.6% shares in OAM S.P.A. and 60% shares in Shanghai E & T.
Q-5 COMTECH GROUP 2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC. AND COMTECH GROUP - continued The share exchange transaction was accounted for as a reverse acquisition in which Comtech was deemed to be the accounting acquirer and Trident the legal acquirer. Because Trident was a non-operating public shell company, no goodwill has been recorded in connection with the transaction and the costs incurred in connection with the transaction have been charged directly to equity. As a result of the share exchange transaction, (i) the historical financial statements of Trident for periods prior to the date of the transaction are no longer presented; (ii) the historical financial statements of the Company for periods prior to the date of the transaction are those of Comtech, as the accounting acquirer; (iii) all references to the financial statements of the Company apply to the historical financial statements of Comtech prior to the transaction and the financial statements of the Company subsequent to the transaction; and (iv) the number of shares of the Company has been restated retroactively to reflect the share exchange ratio as at the date of the transaction in a manner similar to a stock split. Unaudited condensed consolidated statements of shareholders' equity for the nine months ended September 30, 2004 are set forth below: Additional Total paid-in Retained shareholders' Common stock capital earnings equity ----------------------- ---------- ---------- ---------- Number of RMB RMB RMB RMB shares Balance at January 1, 2004 40,502,150 3,352 10,731 3,571 17,654 Shares of stock held by Trident's shareholders 3,919,900 324 -- -- 324 Recapitalization in connection with the share exchange transaction -- -- 24,089 -- 24,089 Share compensation cost -- -- 348 -- 348 Net income -- -- -- 43,549 43,549 ---------- ---------- ---------- ---------- ---------- Balance at September 30, 2004 44,422,050 3,676 35,168 47,120 85,964 ---------- ---------- ---------- ---------- ---------- Balance at September 30, 2004 (in thousands of USD) 444 4,249 5,693 10,386 ========== ========== ========== ==========
The assets and liabilities of Trident acquired under the share exchange transaction are as follows: RMB Net assets acquired: Cash 32,367 Other trade receivables and prepaid expenses 2,853 Accrued expenses and other liabilities (5,126) Minority interests (917) ------------ 29,177 Less: Transaction costs (note) (4,764) ------------ 24,413 ============ Q-6 COMTECH GROUP 2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC,. AND COMTECH GROUP - continued Note: In connection with the share exchange transaction with Trident, the Company has paid RMB1,324 (USD160) to a financial advisor under a service agreement and such amount has been included in the transaction costs as stated above. In addition, pursuant to the service agreement, the Company is required to issue warrants to the financial advisor to purchase 1,000,000 shares of common stock of the Company at an exercise price of USD1.5 per share, subject to the fact that Trident has cash assets of at least RMB41,387 (USD5,000) However, since the cash assets of Trident is less than RMB41,387(USD5,000) prior to the share exchange transaction, the Company has not issued any warrants to the financial advisor. The financial advisor is now requesting the issue of warrants and is currently under discussion with the Company. No final resolution has yet been reached. As a part of the share exchange transaction with Trident, the Company assumed fully vested options issued by Trident to purchase 230,000 shares of the Company's common stock with an exercise price of USD 1.50 per share. Additionally, the Company assumed 1,850,834 fully exercisable common stock warrants. Each warrant represents the right to receive 1 share of the Company's common stock, at an exercise price of USD1.50 per share for 968,903 common stock warrants and USD 1.25 per share for 881,931 common stock warrants. The options and warrants assumed from Trident both expire on July 1, 2009. Q-7 COMTECH GROUP 3. FINANCING ARRANGEMENTS (a) Bank loans On July 21, 2004, Comtech International (Hong Kong) Limited ("Comtech Hong Kong"), a wholly-owned subsidiary of the Company, entered into a RMB33,109 (USD4,000) revolving credit facility (the "Facility") with the Bank of Communications Hong Kong branch (the "Bank of Communication"). On September 14, 2004, the amount of the Facility was increased to RMB82,773 (USD10,000). During August and September 2004, Comtech Hong Kong drew down approximately RMB72,482 (USD8,757) under the Facility. These bank borrowings were raised for general working capital purposes of the Company and RMB8,095(USD978) of them were directly used for settlement of amount to Comtech Global Investment Ltd. The Facility is secured by funds on deposit with the Bank of Communication owned by Jeffrey Kang, the Company's principal shareholder and Chief Executive Officer, in an amount equal to the borrowings. The facility bears interest at the higher of LIBOR or 1.5% over the deposit rate, payable monthly. (b) Factoring arrangement On August 24, 2004, Comtech Communication Technology (Shenzhen) Co., Ltd. ("Comtech Communication"), a wholly-owned subsidiary of the Company, entered into a factoring agreement (the "Agreement") with Guangdong Development Bank Shenzhen branch (the "Guangdong Development Bank"). Pursuant to the Agreement, accounts receivable from UT Starcom with the maximum amount of RMB30,000 (USD3,624) can be transferred to the Guangdong Development Bank with recourse. An amount equal to 30% of the accounts receivable transferred is secured by funds on deposit from Comtech Communication with the Guangdong Development Bank. The factoring arrangement bears interest at the PRC official loan interest rate as of September 30, 2004, payable monthly. On October 20, 2004, Comtech Communication transferred accounts receivable of approximately RMB11,449 (USD1,381)under the Agreement. 4. SETTLEMENT OF AMOUNT DUE TO COMTECH GLOBAL INVESTMENT LTD. The Company satisfied all of its outstanding obligations in the approximate amount of RMB91,743 (USD11,084)to Comtech Global Investment Ltd. by paying approximately RMB50,356 (USD6,084) of the amount due to holding company and a RMB41,387 (USD5,000) dividend obligation during the nine month period ended September 30, 2004 Q-8 COMTECH GROUP 5. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No.25, "Accounting for Stock Issued to Employees", and its related interpretations. Under this method, compensation cost for stock options, warrants and stock awards is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. At the board of directors' meeting held on August 3, 2004, the Company adopted the Comtech Group, Inc. 2004 Stock Incentive Plan providing for the grant of incentive and non-statutory stock options and the issuance of restricted stock up to 5,000,000 shares of common stock, in the aggregate. The compensation costs for the 420,000 options granted under the Company's share option plan for the period ended September 30, 2004 are insignificant as calculated under APB Opinion No. 25. The compensation costs for the 420,000 options granted under the Company's stock option plan for the period ended September 30, 2004, had they been accounted for using the fair value of awards at the grant date in accordance with the method of Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been as follows: For the nine month period ended September 30, 2004: RMB Net income, as reported 43,549 Less: Stock based compensation costs under fair (389) value based method for all awards Net income, pro forma 43,160 Earnings per share - basic As reported RMB1.05 Pro forma RMB1.04 Earnings per share - diluted As reported RMB1.05 Pro forma RMB1.04 The weighted average fair value of options granted during 2004 was USD1.17, using the Black-Scholes option-pricing model based on the following assumptions: Risk-free interest rate 4.25% Expected life 10 years Expected volatility 59% Expected dividend yield -- Q-9 COMTECH GROUP 6. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share are computed by dividing net income by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the dilutive effect of potential common stock equivalents during the period. As of September 30, 2004, the Company has (1) outstanding options granted under the Company's 2004 Stock Incentive Plan to purchase an aggregate of 420,000 shares of common stock with an exercise price of USD1.50 per share ; (2) fully vested outstanding options granted under Trident's prior option plans to purchase an aggregate of 230,000 shares of common stock with an exercise price of USD1.50 per share ; and (3) outstanding warrants issued to purchase an aggregate of 1,850,834 shares of common stock with an exercise price of USD1.50 per share for 968,903 common stock warrants and USD1.25 per share for 881,931 common stock warrants. The options issued under the 2004 plan vest in accordance with the terms of the agreements entered into by the Company and the grantee of the options. Of the 420,000 options, options for (1) 78,750 shares vesting on February 1, 2005 or vesting in equal monthly instalments over the six months from August 16, 2004 (2) the options for 236,250 shares vesting in equal monthly instalments over the period of 1.5 years from February 2, 2005 to August 1, 2006, and (3) the options for 105,000 shares vesting in equal monthly instalments over the period of 1 year from August 2, 2006 to August 1, 2007. The options and warrants assumed from Trident both expire on July 1, 2009. All outstanding options granted under Tridents' prior option plans and warrants are exercisable as of September 30, 2004. The weighted average number of shares used for the computation of diluted earnings per share is as follows: Nine month period ended September 30 2004 ------------ Weighted average number of shares outstanding - basic 41,507,253 Dilutive effect of stock options and warrants 159,183 ------------ Weighted average number of shares outstanding - diluted 41,666,436 ============ 7. COMPREHENSIVE INCOME Comprehensive income represents total non-shareholder changes in equity during a period except those resulting from investments by and distributions to shareholders. For the nine months ended September 30, 2004 and 2003, comprehensive income is the same as net income. 8. MINORITY INTERESTS Minority interests for the nine month periods ended September 30, 2004 represent the 40% interests in Shanghai E & T and 1.6% interests in OAM S.P.A. held by the minority shareholders. Q-10 COMTECH GROUP 9. SUBSEQUENT EVENTS On October 26, 2004, the Company entered into definitive purchase agreements (the "Purchase Agreements") for the sale of an aggregate of 6,300,000 shares ("Purchased Shares") of common stock to institutional and individual investors for gross proceeds of approximately RMB91,257(USD11,025), before deducting a 6% placement fee and other expenses of the offering. A closing was held on the first 5,040,000 shares on October 27, 2004 (the "First Closing Date"). A second closing on the balance of the shares occurred on November 5, 2004. Pursuant to the Purchase Agreements, Comtech Group, Inc. has agreed to prepare and file with the SEC in no event later than 60 days following the First Closing Date, a registration statement ("Registration Statement") on Form S-1, to enable the resale of the Purchased Shares and use its best efforts to cause such Registration Statement to be declared effective as promptly as possible after filing, but in any event, within 120 days following the First Closing Date or, in the event of a review of the Registration Statement by the SEC, within 180 days following the First Closing Date, and to remain continuously effective until the earlier of (1) the second anniversary of the First Closing Date or (2) the date on which all Purchased Shares have been sold thereunder. If the Company fails to comply with certain timetable as described in the Purchase Agreements, the Company will be subject to penalty provision as specified in the Purchase Agreements. Subsequent to the period end date, Comtech Group, Inc. granted 3,285,000 stock options to its directors and employees under the Comtech Group, Inc. 2004 Stock Incentive Plan at an exercise price of USD1.87 per share. Q-11 EX-3.1(A) 2 comtech_s1ex3-1.txt EXHIBIT 3.1 AMENDMENT TO RESTATED ARTICLES OF INCORPORATION OF TRIDENT ROWAN GROUP, INC. Trident Rowan Group, Inc., a Maryland corporation having its principal office in Sommerset, New Jersey (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: 1. The name of the Corporation is Trident Rowan Group, Inc. 2. The Amended and Restated Articles of Incorporation of the Corporation are hereby amended by striking out Article 5 thereof and by inserting in lieu thereof the following new Article 5: "5. (a) The number of directors of the Corporation shall be such as shall be fixed from time to time by, or in the manner provided in the By-laws; provided, however, that the number of directors of the Corporation shall number no less than eleven (11) for so long as Finprogetti S.p.A. is a beneficial owner of shares of the Corporation's Common Stock and shall not have completed the sale of 1,635,000 shares of Common Stock to Tamarix Investors, IDC ("Tamarix") pursuant to that certain Agreement to Purchase Common Stock dated March 7, 1997, unless waived by Tamarix, and thereafter shall number no less than ten (10); (b) At least three (3) directors of the Corporation shall not be employees of or affiliated with the Corporation or any of its subsidiaries, or of any shareholder or affiliate thereof; all of whom shall be persons of good character, experienced in business matters, and reasonably acceptable to Tamarix; (c) The Board of Directors of the Corporation shall be divided into three (3) classes as nearly equal its members as possible. Except as follows, such class will serve for three years until such year's annual meeting of shareholders and until their successors shall be elected and qualified. The Initial Class I directors elected at the Annual Meeting of Shareholders held in 1997 shall serve until the 1998 Annual Meeting of Shareholders, the initial Class II directors elected at the Annual Meeting of Shareholders held in 1997 shall serve until the 1999 Annual Meeting of Shareholders and the initial Class II directors elected at the Annual Meeting of Shareholders held in 1997 shall serve until the 2000 Annual Meeting of Shareholders; and (d) Tamarix may nominate, so long as it is the record owner of (i) not less than 1,000,000 shares of the Corporation's Common Stock, one member to each class of the Board of Directors, one of whom shall be elected by the Board of Directors to serve as the Chairman of the Board, (ii) at least 500,000 but fewer than 1,000,000 shares of the Corporation's Common Stock one member to Class II, which class shall initial serve for a two-year term, and who shall serve as the Chairman of the Board; and (iii) at least 300,000 but fewer than 500,000 shares of the Corporation's Common Stock, one member to Class I, which class shall initially serve for a one-year term." 3. The Amended and Restated Articles of Incorporation are hereby amended by adding a new Article 6 thereto, which shall read in full as follows: "6. Actions of the Board of Directors shall require the vote of the majority of the entire Board of Directors, including unfilled vacancies thereon. The By-laws shall, from time to time, prescribe the number of directors which shall constitute a quorum for the transaction of business, which number shall in no case be less than the minimum number needed for the Board of Directors to approve action." 4. The foregoing amendments to the Amended and Restated Articles of Incorporation have been duly adopted at a meeting of the Board of Directors. Notice setting forth the foregoing amendments and stating that an annual meeting of shareholders would be held to, among other reasons, take action thereon was given as required by law to all shareholders of the Corporation entitled to vote thereon. The foregoing amendments were approved by the affirmative vote of at least two-thirds of all outstanding shares of each class entitled to vote thereon at such annual meeting. The undersigned verifies under penalties of perjury that he is the duly elected and surviving president of the Corporation, that the foregoing statements are true and correct in all material respects, and that they are the actions taken of the Corporation. Dated: December 9, 1997 /s/ Howard E. Chase ---------------------------------------- Howard E. Chase President WITNESS: [illegible] - ----------------------------------- 2 TRIDENT ROWAN GROUP, INC. ARTICLES OF REVIVAL FIRST: The name of the corporation at the time its charter was forfeited was "Trident Rowan Group, Inc." SECOND: The name that the corporation will use after revival is "Trident Rowan Group, Inc." THIRD: The name and address of the resident agent are The Corporation Trust Incorporated at 300 East Lombard Street, Baltimore, MD 21202. FOURTH: These Articles of Revival are for the purpose of reviving the charter of the corporation. FIFTH: At or prior to the filing of these Articles of Revival, the corporation has; (a) paid all fees required by law; (b) filed all annual reports which should have been field by the corporation if its charter had not been forfeited; and (c) paid all state and local taxes, except taxes on real estate, and all interest and penalties due by the corporation or which would have become due if the charter had not been forfeited whether or not barred by limitations. SIXTH: The address of the principal office in the State of Maryland is c/o The Corporation Trust Incorporated at 300 East Lombard Street, Baltimore, MD 21202. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] I hereby consent to my designation in this document as resident agent for this corporation. SIGNED: /s/ Billie Swoboda, VP ----------------------------------- Resident Agent Billie J. Swoboda, VP The Corporation Trust Incorporated The undersigned who were respectively the last acting President and Secretary of the corporation severally acknowledge these Articles of Revival to be their act. /s/ Mark Hauser ----------------------------------- Mark Hauser President STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) Before me, the undersigned, a Notary Public of the State of New York, personally appeared Mark Hauser, having been sworn by me according to law did depose and say he was the President of Trident Rowan Group, Inc. (the "Company") and did acknowledge the execution of the foregoing Articles of Revival on behalf of the Company. WITNESS my hand and notarial seal this the 24th day of June, 2004. /s. Donald Waldauer - ------------------------------------ (Written Signature) [Notary Stamp] - ------------------------------------ (Printed Signature) /s/ Mark Hauser ----------------------------------- Mark Hauser Secretary STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) Before me, the undersigned, a Notary Public of the State of New York, personally appeared Mark Segale, having been sworn by me according to law did depose and say he was the Secretary of Trident Rowan Group, Inc. (the "Company") and did acknowledge the execution of the foregoing Articles of Revival on behalf of the Company. WITNESS my hand and notarial seal this the 1 day of July, 2004. /s/ Liliya Suris - ------------------------------------ (Written Signature) [Notary Stamp] - ------------------------------------ (Printed Signature) STATE OF NEW YORK ) ) AFFIDAVIT COUNTY OF NEW YORK ) I, Mark Hauser, Joint Chief Executive Officer of Trident Rowan Group, Inc., a Maryland corporation (the "Corporation"), hereby declare that the Corporation has paid all State and local taxes on real estate, and all interest and penalties due by the Corporation or which would have become due if the Corporation's charter had not been forfeited whether or not barred by limitations. /s/ Mark Hauser ----------------------------------- Mark Hauser STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) I hereby certify that on July 21st, 2004, before me, the subscriber, a notary public of the State of New York, personally appeared Mark Hauser and made oath under the penalties of perjury that the matters and facts set forth in this affidavit are true to the best of his knowledge, information and belief. As witness my hand and notarized seal this the 21st day of July, 2004. /s/ Rosana Plasensia - ------------------------------------ (Written Signature) [Notary Stamp] - ------------------------------------ (Printed Signature) My Commission expires December 10, 2005 4 ARTICLES OF SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP, INC. AND COMTECH GROUP, INC. Trident Rowan Group, Inc., a corporation organized and existing under the laws of the State of Maryland ("TRG"), and Comtech Group, Inc., a corporation organized and existing under the laws of the Cayman Islands ("Comtech"), do hereby certify that: FIRST: TRG agrees to acquire all of the issued and outstanding stock of Comtech and Comtech agrees to have such stock acquired by TRG, in a statutory share exchange. SECOND: The name and place of incorporation of each party to these Articles are Trident Rowan Group, Inc., a Maryland corporation, and Comtech Group, Inc., a Cayman Islands corporation. Trident Rowan is acquiring the stock of Comtech in the share exchange. THIRD: TRG (which is the successor corporation in the share exchange) has its principal office in Maryland located at The Corporation Trust Incorporated at 300 East Lombard Street, Baltimore MD 21202. Comtech was incorporated on April 26, 2002 under the Cayman Islands' Companies Law (2003 Revision), has no office in the State of Maryland and is not qualified to do business in the State of Maryland. FOURTH: The terms and conditions of the transaction set forth in these Articles were advised, authorized and approved by each party to these Articles in the manner and by the vote required, in the case of TRG, by its charter and the laws of Maryland and, in the case of Comtech, by its charter and the laws of the Cayman Islands (as required by Section 3-105(a)(4) of the Maryland General Corporation Law). The manner of approval was as follows: (a) The board of directors of TRG, at a meeting held on April 23, 2004, adopted a resolution which declared that the proposed share exchange was advisable on substantially the terms and conditions set forth or referred to in a resolution, which terms and conditions are more fully set forth in the Share Exchange Agreement, dated as of May 25, 2004 (the "Share Exchange Agreement"), between TRG and Comtech. (b) The board of directors of Comtech, at a meeting held on May 17, 2004, adopted a resolution which declared that the proposed share exchange was advisable on substantially all terms and conditions set forth or referred to in the resolution and directed that the proposed share exchange be submitted for consideration at a special meeting of the stockholders of Comtech. (c) The proposed share exchange was approved by the stockholders of Comtech at a special meeting of stockholders duly called and held on May 17, 2004, by the affirmative vote of all votes entitled to be cast on the matter. FIFTH: The total number of shares which TRG has authority to issue is 50,000,000 all of which are common stock with a par value of $.01 per share, the aggregate par value of which share is $500,000. SIXTH: The manner and basis of exchanging the stock of Comtech to be acquired for the stock to be issued by TRG, the successor, is that approximately 4.05 shares of the common stock of TRG shall be issued and delivered in exchange for each one share of Comtech common stock, a portion of which shares shall be held in an escrow account and disposed of in accordance with the terms and conditions of the Share Exchange Agreement. SEVENTH: The share exchange shall become effective upon the filing of these Articles of Share Exchange with the State Department of Assessments and Taxation of the State of Maryland. IN WITNESS WHEREOF, Trident Rowan Group, Inc. and Comtech Group, Inc. have caused these Articles of Share Exchange to be signed in their name and on their behalf by their respective presidents, each of whom hereby acknowledge in the name of and on behalf of said corporation that the foregoing Articles of Share Exchange as the act of the corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof by the corporation are true in all material respects under penalties of perjury, as of this 22 day of July, 2004. ATTEST TRIDENT, ROWAN GROUP, INC. /s/ Mark Segall By: /s/ Mark Hauser - -------------------------------- ------------------------------- Secretary Mark Hauser, President COMTECH GROUP, INC. /s/ Hope Ni By: /s/ Jeffrey Kang - -------------------------------- ------------------------------- Secretary Jeffrey Kang, President 2 ARTICLES OF MERGER OF COMTECH GROUP, INC. AND TRIDENT ROWAN GROUP, INC. FIRST: Comtech Group, Inc. ("Comtech") and Trident Rowan Group, Inc. ("Trident"), being the corporations which are the parties to these Articles of Merger, do hereby agree to effect a merger of said corporations upon the terms and conditions herein set forth. SECOND: The name of the successor corporation is Trident Rowan Group, Inc., which is a corporation incorporated in the State of Maryland under the provisions of the Maryland General Corporation Law with its principal office in the State of Maryland located in Baltimore City, Baltimore County. The corporate existence of Trident shall continue upon the effective date of the merger pursuant to the provisions of the Maryland General Corporation Law. THIRD: The name of the corporation to be merged with and into Trident, the successor corporation, is Comtech Group, Inc., which is a corporation incorporated in the State of Maryland under the provisions of the Maryland General Corporation Law with its principal office in the State of Maryland located in Baltimore City, Baltimore County. The corporate existence of Comtech will cease upon the effective date of the merger pursuant to the provisions of the Maryland General Corporation Law. Comtech owns no interest in land in the State of Maryland. All of the issued shares of stock of Comtech are owned by Trident . FOURTH: No amendments to the charter of Trident are to be effected as part of the merger, other than the change of its corporate name to "Comtech Group, Inc." FIFTH: The authorized share structure of each of the corporations which is a party to these Articles of Merger is as follows: Comtech Group, Inc. Trident Rowan Group, Inc. - ------------------------------ ------------------- ------------------------- Total number of shares 200 50,000,000 of all classes: - ------------------------------ ------------------- ------------------------- Number and par value of 0 $0.01 shares of each class: - ------------------------------ ------------------- ------------------------- Number of shares without 200 Common None par value of each class: - ------------------------------ ------------------- ------------------------- Aggregate par value of 0 $0.01 all shares with par value: - ------------------------------ ------------------- ------------------------- 3 SIXTH: The issued shares of Comtech shall not be converted or exchanged in any manner. All of the issued shares of stock of Comtech shall, upon the effective date of the merger, be surrendered and extinguished. The shares of stock of Trident shall not be converted or exchanged in any manner, but each said share which is issued as of the effective date of the merger shall continue to represent one issued share of stock of the successor corporation SEVENTH: The terms and conditions of the merger herein set forth were advised, authorized, and approved by Comtech in the manner required by its charter and the provisions of the Maryland General Corporation Law. The said merger and the aforesaid terms and conditions were approved in the manner herein-after set forth. The Board of Directors of Comtech adopted a resolution approving the proposed merger of Comtech with and into Trident on substantially the terms and conditions set forth in or referred to in said resolution. Said resolution of the Board of Directors was adopted by a written consent signed on July 30, 2004 by all of the members of the Board of Directors without a meeting. The sole shareholder of Comtech adopted a resolution approving the proposed merger of Comtech with and into Trident on substantially the terms and conditions set forth in or referred to in said resolution. Said resolution of the sole shareholder of Comtech was adopted by a written consent signed on July 30, 2004. The terms and conditions of the merger herein set forth were advised, authorized, and approved by Trident in the manner required by its charter and the provisions of the Maryland General Corporation Law. The said merger and the aforesaid terms and conditions were approved in the manner herein-after set forth. The Board of Directors of Trident adopted a resolution approving the proposed merger of Comtech with and into Trident on substantially the terms and conditions set forth in or referred to in said resolution. Said resolution of the Board of Directors was adopted by a written consent signed on July 30, 2004 by all of the members of the Board of Directors without a meeting. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, these Articles of Merger are hereby signed for and on behalf of Comtech by its President, who does hereby acknowledge that said Articles of Merger are the act of said corporation, and who does hereby state under the penalties for perjury that the matters and facts set forth therein with respect to authorization and approval of said merger are true in all material respects to the best of his knowledge, information, and belief; and these Articles of Merger are hereby signed for and on behalf of Trident by its Chief Executive Officer, who does hereby acknowledge that said Articles of Merger are the act of said corporation, and who does hereby state under the penalties for perjury that the matters and facts stated therein with respect to authorization and approval of said merger are true in all material respects to the best of his knowledge, information, and belief. COMTECH GROUP, INC. TRIDENT ROWAN GROUP, INC. By: /s/ Jingwei (Jeffrey) Kang By: /s/ Jingwei (Jeffrey) Kang ------------------------------ ------------------------------- Jingwei (Jeffrey) Kang Jingwei (Jeffrey) Kang President Chief Executive Officer Attest: Attest: /s/ Hope Ni /s/ Hope Ni - ---------------------------------- ----------------------------------- Secretary Secretary Dated: August 2, 2004 Dated: August 2, 2004 5 ARTICLES OF AMENDMENT 1. Comtech Group, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: 2. The charter of the Corporation is hereby amended in its entirety as follows: "4.1 NUMBER OF SHARES AUTHORIZED; PAR VALUE. Prior to the amendment of the Articles of Incorporation of the Corporation, the total number of shares of all classes of stock which the Corporation had authority to issue was 50,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"). After giving effect to the amendment to the Articles of Incorporation of the Corporation, the total number of shares of all classes of stock which the Corporation shall have authority to issue is 200,000,000 shares of Common Stock, par value $0.01 per share." 3. This amendment of the charter has been approved by the directors and shareholders. 4. We, the undersigned President and Secretary swear under penalties of perjury that the foregoing is a corporate act. /s/ Jeffrey Kang /s/ Hope Ni - ------------------------------ ----------------------------------- Jeffrey Kang, President Hope Ni, Secretary Comtech Group, Inc. c/o Loeb & Loeb LLP 345 Park Avenue New York, New York 10154 6 EX-3.2 3 comtech_s1ex3-2.txt EXHIBIT 3.2 ROWAN INDUSTRIES, INC. BY - LAWS ARTICLE I. SHAREHOLDERS SECTION 1. ANNUAL MEETINGS The annual meeting of the shareholders of the corporation shall be held at the principal office of the corporation, on the first Tuesday in May of each year at 11:00 A.M. o'clock (or as soon hereafter and at such other hour and/or place as may be fixed by the Board of Directors) for the election of Directors and for the transaction of general business except in any case required by law or statute. If the first Tuesday in May shall be a legal holiday, the annual meeting of the shareholders shall be held the first day following which is not a legal holiday, at the same hour. Such annual meetings shall be general meetings; i.e., open for the transaction of any business within the powers of the corporation without special notice of such business. SECTION 2. SPECIAL MEETINGS Except as may otherwise be required by law, special meetings of the shareholders of the corporation may be called only as hereinafter set forth: at any time by the President, or by the majority of the whole Board of Directors, either by vote or in writing, or upon request in writing received by the Secretary or Assistant Secretary, of the holders of a majority of all the shares outstanding and entitled to vote. Any such meeting shall be called and held at the expense of the corporation. Such request by the Directors or shareholders shall state the purpose of the meeting and notice thereof shall be given as provided in Section 3 of this Article I. No business other than that stated in the notice of the meeting shall be transacted at any special meeting of the shareholders, however called. Special meetings of the shareholders shall be held at the principal office of the corporation, whether within or outside of the State of Maryland, as named in Section 1 of this Article I, or at any other locations specified by the President. SECTION 3. NOTICE OF MEETINGS Not less than ten (10) days' and not more than ninety (90) days' written notice of every annual meeting and of every special meeting of the shareholders shall be given to each holder of stock having voting rights whose name appears as a holder of record upon the books of the corporation at the close of business on the date fixed by the Board of Directors for the determination of shareholders entitled to notice of such meeting in accordance with the provisions of these By-Laws, and, if no such date shall have been fixed by the Board for such purpose, then to the holders of record on the fifth business day prior to the date when such notice shall be given. Such notices of annual or special meetings shall state the place, day and hour of such meeting, and, in the case of special meetings, shall also state the business proposed to be transacted. Such notice shall be given to each shareholder by leaving the same with him or at his residence or usual place of business, or by mailing it postage prepaid and addressed to him at his address as it appears upon the books of the corporation. No notice of the time, place or purpose of any meeting of shareholders, whether prescribed by law, by the Charter, or by these By-Laws, need be given to any shareholder who attends in person, or by proxy, or who waives such notice in writing. No notice of any meeting, regular or special, need be given to any shareholder who is not entitled to vote thereat. SECTION 4. QUORUM At any meeting of shareholders the presence, in person or by proxy, of the holders of a majority of all shares having voting rights at such meeting shall constitute a quorum for the election of Directors or for the transaction of other business; but, in the absence of a quorum, the shareholders entitled to vote who shall be present in person or by proxy at any meeting (or adjournment thereof) may, by vote of a majority of shares so present and entitled to vote, adjourn the meeting from time to time, but not for a period of over thirty (30) days at any one time, by announcement at the meeting, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted at the meeting as originally notified. SECTION 5. PROXIES Shareholders may vote either in person or by proxy, but no proxy which is dated more than two months before the meeting at which it is offered shall be accepted unless such proxy shall on its face name a longer period for which it is to remain in force. Every proxy shall be in writing subscribed by a shareholder or by his duly authorized attorney, and shall be dated; but need not be sealed, witnessed or acknowledged. SECTION 6. VOTING At every meeting of the shareholders, every shareholder of the corporation shall be entitled to one vote for each share of voting stock registered in his name on the books of the corporation on the date for the determination of those entitled to notice of the meeting. Upon demand of shareholders holding ten percent (10%) of the shares present in person or by proxy and entitled to vote, the votes other than for Directors shall be by ballot; and except in cases in which it is by law, by the Charter, or by these By-Laws otherwise provided, a majority of the votes cast shall be sufficient to elect and pass any measure. SECTION 7. INSPECTORS Two inspectors shall be appointed by the Chief Executive Officer of the company, before any meeting. Such inspectors shall be duly sworn and shall open and close the polls, shall receive and take charge of the proxies and ballots and decide all questions as to the qualification of voters, the validity of proxies and the acceptance or rejection of votes. The polls shall remain open for a period of at least one hour. SECTION 8. LIST OF SHAREHOLDERS Prior to each meeting of the shareholders, the Secretary or an Assistant Secretary shall prepare a full, true and complete list in alphabetical order of all shareholders entitled to vote at such meeting, indicating the number of shares held by each, and shall be responsible for the production of such list at the meeting. SECTION 9. ORDER OF BUSINESS At all meetings of shareholders, the order of business shall be as far as applicable and practicable, as follows: a) Organization. b) Proof of notice of meeting or of waivers thereof. The Certificate of the Secretary of the corporation or the affidavit of any other person who mailed the notice or caused the same to be mailed or served, shall be accepted as proof of service of notice by mail or service. c) Submission of an alphabetical list of shareholders entitled to vote thereat. d) Opening polls. e) At an annual meeting, or at a meeting called for that purpose, reading of unapproved minutes of preceding meetings, and action thereon. f) Reports of the Officers. g) At an annual meeting, the election of Directors. h) Unfinished business. i) New business. j) Closing the polls. k) Adjournment. ARTICLE II BOARD OF DIRECTORS SECTION 1. ELECTION AND POWERS The business and property of the corporation, except as otherwise provided by statute or by the Charter, or by these By-Laws, shall be conducted and managed by its Board of Directors. Except as provided in Sec. 8 of this Article, the members of the Board of Directors shall be elected at the annual meeting of the shareholders by holders of stock present in person or by proxy at such meeting and entitled to vote thereat. Each Director elected at any annual meeting shall hold office until his successor shall have been elected and qualified or until he shall die or resign, or shall have been removed. The number of Directors may, by vote of a majority of the entire Board of Directors, be increased to not exceeding nineteen (19) or decreased to not less than three (3), provided that the tenure of office of no director shall be affected thereby. The Board of Directors shall keep minutes of its meetings and a full account of its transactions. SECTION 2. FIRST REGULAR MEETING After each meeting of shareholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet for the purpose of organization and the transaction of other business, at such time and place as may be designated by the President. SECTION 3. ADDITIONAL REGULAR MEETINGS Regular meetings of the Board of Directors shall be held at such times as may be fixed by general resolution of the Board, at the principal business office of the Corporation, or at such other place as shall be specified in the notice of the meeting. SECTION 4. SPECIAL MEETINGS Special meetings of the Board of Directors shall be held whenever and wherever called by the President or the majority of the Directors. SECTION 5. NOTICE OF MEETINGS Subject to the provisions of Section 2 of Article II. Notice of the place, day and hour of every regular and special meeting shall be given to each Director, either - a) By notice in writing mailed to him postage prepaid not later than the third day before the day set for the meeting and addressed to him at his last known post office address according to the records of the corporation; or b) By notice in writing delivered to him personally or left at his residence or usual place of business not later than the second day before the day fixed for the meeting; or c) By telegraph or telephone not later than the date set for the meeting. No notice of the time, place or purpose of any meeting need be given to any Director who, in writing, executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice of any adjourned meeting of the Board of Directors need be given. SECTION 6. QUORUM A majority of the Board of Directors shall be necessary and sufficient to constitute a quorum for the transaction of business at every meeting of the Board of Directors; but if at any meeting there be less than a quorum present, a majority of those present may adjourn the meeting from time to time, but not for a period of over ten (10) days at any one time, without notice other than by announcement at the meeting, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 7. REMOVAL At any meeting of the Shareholders called for the purpose, and at any meeting of the Board of Directors called for the purpose any Director may, by the vote of a majority of all the shares of stock outstanding and entitled to vote, or by a vote of the majority of the members of the Board of Directors, respectively, be removed from office, with or without cause, and another may be appointed in the place of the person so removed, to serve for the remainder of his term. SECTION 8. VACANCIES If any Director shall die or resign, or if the shareholders shall remove any Director without appointing another in his place, a majority of the remaining Directors (although such majority is less than a quorum) may elect a successor to hold office for the unexpired portion of the term of the Director whose place shall so become vacant, and until his successor shall have been duly chosen and qualified. Vacancies in the Board of Directors created by an increase in the number of Directors may be filled by the vote of a majority of the entire Board as constituted prior to such increase, and the Directors so elected by the Board to fill such vacancies shall hold office until the next succeeding annual meeting of shareholders and thereafter until their successors shall be elected and qualified. SECTION 9. COMPENSATION Directors, as such, shall not receive any stated compensation for their service, but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at any regular or special meeting thereof. Nothing in this Section shall be construed to preclude a Director from serving the corporation in any other capacity and receiving compensation therefor. SECTION 10. COMMITTEES The Board may appoint such committees, including an executive committee, with such powers and for such periods, as it shall by resolution provide. At any meeting of such committees those present, even if not a quorum, may appoint a member of the Board to act in the place of an absent member. ARTICLE III DELEGATIONS OF AUTHORITY SECTION 1. BUDGETS AND PLANS Approval of a budget or plan by the Board of Directors of the Corporation shall constitute the delegation of the necessary authority to implement or execute such Budget or Plan to the Board of Directors or managing officers of a subsidiary or division. SECTION 2. NON-RECURRING EXPENDITURES The Board of Directors of the corporation reserves to itself the power to approve any non-recurring (i.e., unbudgeted) expense in excess of $50,000, except in settlement of litigation. SECTION 3. COMPENSATION The Board of Directors of the Corporation reserves to itself the power to approve all compensations in excess of $30,000. per year, exclusive of fringe benefits. ARTICLE IV OFFICERS SECTION 1. OFFICERS The Executive Officers of the Corporation shall be elected by the Board of Directors. The Executive Officers of the Corporation shall be a President, a Secretary, a Treasurer and such Executive Vice Presidents as may, in the opinion of the Board of Directors, be necessary for the proper control and supervision of the business of the Corporation. Each elected officer of the Corporation shall hold his respective office for a period of one year, or until a Successor shall have been elected and qualified, or until he shall die, retire, or resign, or shall have been removed. The President shall be elected from the membership of the Board of Directors. Line and staff officers of the Corporation shall be appointed by the President with the approval of the Board of Directors to serve for such periods and with such parameters as shall be prescribed by the Board and such duties as are described by the President. The line officers of the Corporation shall be such Vice Presidents as may, in the opinion of the President and with the approval of the Board, be necessary for the proper direction and operation or supervision of the various divisions and subsidiaries of the Corporation. The staff officers of the Corporation shall be such Assistant Secretaries and Assistant Treasurers as may be deemed necessary from time to time by the Board. SECTION 2. PRESIDENT In general, the President shall be the Chief Executive Officer of the Corporation. He shall be responsible to the Board of Directors. Specifically, the Corporation's President shall: a) Be a member of the Board of Directors, and the Board of Directors of each subsidiary. b) Develop and direct his supporting organization and establish the duties and responsibilities for persons reporting directly to him, determining their compensation, subject to the limitations set by the By-Laws. c) Be responsible for the administration of all corporate policies defined and established by the Board of Directors and act as General Manager of the Corporation, in charge of corporate operations and coordinate operations and coordinate the activities of the various divisions and departments of the Corporation and its subsidiaries. d) Inform the Directors at each respective meeting of the progress of the Corporation in all phases of its activities and of the operations of its subsidiaries. e) Execute Stockholders' consent, attend meetings and act and vote, in person or by proxy, at any meetings of stockholders of companies in which the Corporation may own stock, subject to any directions of the Board of Directors. f) Sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts, leases and other documents and instruments. g) Preside at the meetings of stockholders or directors, prepare the agenda thereof, and direct the Secretary in scheduling meetings of the Board of Directors or Shareholders, and in recording the proceedings of such meetings. h) Be responsible for the formulation of the financial policies of the Corporation and the relationship with lending institutions. i) Be responsible for all relations with stockholders and all communications to stockholders, lending institutions, landlords, industry and the general public. SECTION 3. EXECUTIVE VICE PRESIDENT Each Executive Vice President shall perform all the duties and shall carry such responsibilities which are incident to the executive office assigned to him upon election by the Board of Directors and such other duties and responsibilities which may be assigned to him by the President. In order of seniority, the Executive Vice President shall perform the duties of President in the absence or disability of that officer. SECTION 4. OFFICERS Each line or staff officer shall perform all of the duties and carry such responsibilities which are incident to the administrative office assigned him by the President, and such other duties and responsibilities which may, from time to time, be assigned him by the Board of Directors. SECTION 5. SECRETARY The Secretary shall keep the Minutes of the meetings of the Shareholders and the Board of Directors in books provided for that purpose; he shall see that notices are duly given in accordance with the provisions of the By-Laws or as required by law; he shall be the custodian of the records and the corporate seal of the Corporation; he shall see that the corporate seal is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized and when so affixed may attest the same and, in general, he shall perform all duties ordinarily incident to the office of the Secretary of the Corporation and such other duties, from time to time, as may be assigned to him by the President. SECTION 6. TREASURER The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he shall render to the Board of Directors, and the Executive Officers, whenever requested, an account of the financial condition of the Corporation and, in general, shall perform all of the duties ordinarily incident to the office of a Treasurer of a Corporation and such other duties as may be assigned to him by the President. SECTION 7. ASSISTANT OFFICERS The Board of Directors may elect one or more Assistant Secretaries and one or more Assistant Treasurers. Each such Assistant Secretary and Assistant Treasurer shall hold office for such period and shall have such authority and perform such duties as the Board of Directors or the President may prescribe. SECTION 8. REMOVAL The Board of Directors shall have the power at any regular or special meeting, subject to the provisions of these By-Laws, to remove any officer with or without cause. SECTION 9. VACANCIES The Board of Directors at any regular or special meeting shall fill a vacancy occurring in an elected office for the unexpired portion of the term, or may authorize the President to fill such vacancy. ARTICLE V SHARES OF STOCK SECTION 1. CERTIFICATES Each shareholder of the Corporation shall be entitled to a stock certificate or certificates certifying the number and kind of shares owned by him. Said certificates shall be signed and the Corporate Seal affixed by such officer or officers as may be designated, from time to time, by resolution of the Board of Directors. The use of facsimile signatures and a facsimile seal will be permitted. SECTION 2. TRANSFER OF SHARES Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney and on surrender of the certificate or certificates duly endorsed, except as otherwise required by law. Signatures shall be guaranteed by a member firm of a national securities exchange or of any exchange on which the security is listed or by a bank or trust company. ARTICLE VI OTHER PROVISIONS SECTION 1. DIVIDENDS Subject to the applicable provisions of law and of the Charter, the Board of Directors may, in its discretion, declare what, if any, dividends shall be paid from the earnings or the retained earnings of the Corporation, upon any class of stock, the date when such dividends shall be payable, and the date for the determination of holders of record to whom such dividends shall be payable. SECTION 2. NEGOTIABLE INSTRUMENTS AND OTHER EVIDENCES OF INDEBTEDNESS All checks, drafts or orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall be signed by such officer or officers as may be designated, from time to time, by resolution of the Board of Directors. No checks shall be signed in blank. SECTION 3. FISCAL YEAR The fiscal year of the Corporation shall be the calendar year unless otherwise provided by the Board of Directors. SECTION 4. SEAL The seal of the Corporation shall be circular in form, with the name of the Corporation and "Maryland" inscribed around the outer edge, and in the center shall be inscribed the word "Incorporated" and the year of incorporation. SECTION 5. AMENDMENTS Except as hereinafter provided, these By-Laws, or any of them or any additional or amended By-Laws, may be altered or repealed and new By-Laws may be adopted at any regular meeting of the Board of Directors without notice, or at any special meeting, the notice of which shall set forth the terms of the proposed amendment, by the vote of a majority of the entire Board of Directors. This Section 5, relating to amendments, may, however, be amended only at a regular meeting of shareholders without notice, or at a special meeting of shareholders, the notice of which shall set forth the terms of the proposed amendment, in either case by the vote of a majority of the votes entitled to be cast in the aggregate by all shareholders present in person or by proxy at such meeting. SECTION 6. POWERS OF CERTAIN PERSONS IN THE EVENT OF A NATIONAL DISASTER The provisions of these By-Laws to the contrary notwithstanding, in the event of a national disaster, war or other event causing the incapacity of a majority of the Executive Officers and sufficient Directors of this Corporation to prevent a quorum, the affairs of the Corporation shall be directed and managed by the following persons in the following order: a) if any Directors remain available, said Directors may elect other Directors to fill the vacancies on the Board and the Board as so constituted may elect officers to fill existing vacancies. b) If no Directors are available, the ranking officer available is to act as the Chief Executive Officer of the Corporation and he may fill officer and director vacancies by appointment. c) If neither directors nor officers are available, the division managers or Executive Officers of subsidiaries in the order of their seniority shall act as the Officers of the Corporation and have their powers. d) If neither Directors, Corporation Officers, Officers of the Subsidiaries, are available, Product Line Managers shall act as the officers in the order of their seniority. e) In the event none of the persons above are available, foremen and other employees having seniority with the Corporation shall act as the officers in the order of their seniority. EX-10.1 4 comtech_s1ex10-1.txt Exhibit 10.1 COMTECH GROUP, INC. 2004 STOCK INCENTIVE PLAN SECTION 1. PURPOSE ------------------ The purpose of this 2004 Stock Incentive Plan (the "PLAN") is to advance the interests of Comtech Group, Inc., a Maryland corporation ("COMTECH") and its stockholders by enhancing the ability of Comtech and its Affiliates (as hereinafter defined) to attract, retain and incentivize officers, employees and independent contractors who are crucial to the future growth and success of the Company and its Affiliates. SECTION 2. DEFINITIONS ---------------------- "AFFILIATE" means any entity, whether or not incorporated, that directly or through one or more intermediaries is controlled by Comtech. "AWARD" means any Option, Stock Appreciation Right, Performance Share or Restricted Stock awarded under the Plan. "BOARD" means the board of directors of Comtech. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means a committee of not less than two members of the Board appointed by the Board to administer the Plan; provided, however, that while the Common Stock is registered under Section 12 of the Exchange Act (as hereinafter defined), each member of the Committee shall be a "nonemployee director" within the meaning of Rule 16b-3 under the Exchange Act ("RULE 16B-3"), and provided further, that if and to the extent necessary to exclude Options and SARs granted under the Plan from the calculation of the income tax deduction limit under Code Section 162(m), each member of the Committee shall be an "outside director" within the meaning of Code Section 162(m). "COMMON STOCK" or "STOCK" means the common stock, with $0.01 par value per share, of Comtech. "COMPANY" means Comtech and, except where the content requires otherwise, all of its present and future Affiliates. "DESIGNATED BENEFICIARY" means the beneficiary designated by a Participant, in a manner determined by the Board, to receive amounts due or exercise rights of the Participant in the event of the Participant's death or incapacity. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate, in the event of the Participant's death, and the Participant's legal guardian, in the event of the Participant's incapacity. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means with respect to Common Stock on any given date (i) if the Common Stock is listed for trading on one or more national securities exchanges, the mean of the high and low sales prices on the principal such exchange on the date in question, or, if the Common Stock shall not have been traded on such principal exchange on such date, the mean of the high and low sales prices on such principal exchange on the first day prior thereto on which the Common Stock was so traded; (ii) if Common Stock is not listed for trading on a national securities exchange but is traded on the over-the-counter market, the mean of the highest and lowest bid prices for the Common Stock on the date in question, or, if there are no such bid prices for the Common Stock on such date, the mean of the highest and lowest bid prices on the first day prior thereto on which such prices appear; and (iii) in all other events, such amount as may be determined by the Board in good faith by any fair and reasonable means. "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase shares of Common Stock awarded to a Participant under Section 6 which is intended to meet the requirements of Code Section 422. "NONSTATUTORY STOCK OPTION" or "NSO" means an option to purchase shares of Common Stock awarded to a Participant under Section 6 which is not intended to be an ISO. "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option. "PARTICIPANT" means a person selected by the Board to receive an Award under the Plan. "PERFORMANCE SHARES" mean shares of Common Stock which may be earned by the achievement of performance goals awarded to a Participant under Section 8. "REPORTING PERSON" means a person subject to Section 16 of the Exchange Act or any successor provision. "RESTRICTED PERIOD" means the period of time selected by the Board during which shares subject to a Restricted Stock Award may be repurchased by or forfeited to the Company. "RESTRICTED STOCK" means shares of Common Stock awarded to a Participant under Section 9. "STOCK APPRECIATION RIGHT" or "SAR" means a right to receive any excess in Fair Market Value of shares of Common Stock over the exercise price awarded to a Participant under Section 7. 2 SECTION 3. ADMINISTRATION ------------------------- The Board shall have plenary authority in its discretion, to the maximum extent permissible by law, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan. Without limiting the foregoing, the Board shall have authority to make Awards, to set administrative rules, guidelines and practices relating to the Plan as it shall deem advisable from time to time, and to interpret the provisions of the Plan. In determining the persons to whom Awards shall be made, the number of shares to be covered by each Award and the terms thereof (including the restriction, if any, which shall apply to the Common Stock subject to an Award), the Board shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Board, in its discretion, shall deem relevant in connection with accomplishing the purposes of the Plan. The Board's decisions shall be final and binding. Except as otherwise required by law, no member of the Board shall be liable for any action or determination relating to the Plan made in good faith. The Board may appoint a Committee and delegate to the Committee some or all of its authority with respect to Plan administration. In the event the Board appoints a Committee, references in the Plan to the Board shall, as appropriate, be read as references to the Committee. SECTION 4. ELIGIBILITY ---------------------- Awards may be made to employees and independent contractors of the Company. For purposes hereof, independent contractors shall include consultants, directors, advisors and other service providers of the Company. SECTION 5. STOCK AVAILABLE FOR AWARDS ------------------------------------- (a) Subject to adjustment under Section 10(h) below, Awards may be made under the Plan for up to five million (5,000,000) shares of Common Stock, subject to adjustment as provided herein. If any Award in respect of shares of Common Stock expires or is terminated unexercised or is forfeited for any reason or settled in a manner that results in fewer shares outstanding than were initially awarded, the shares subject to such Award or so surrendered, as the case may be, to the extent of such expiration, termination, forfeiture or decrease, shall again be available for award under the Plan, subject, however, in the case of Incentive Stock Options, to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Subject to adjustment under Section 10(h) below, for so long as the Company is a "publicly held corporation" within the meaning of Code Section 162(m), the maximum number of shares of Common Stock as to which Awards may be granted to a single individual in any year shall not exceed seven hundred thousand (700,000). 3 (c) The Board may grant Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who concurrently become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. The shares which may be delivered under such substitute Awards shall be in addition to the maximum number of shares provided for in Section 5(a). SECTION 6. STOCK OPTIONS ------------------------ (a) GENERAL. (i) Subject to the provisions of the Plan, the Board may award Incentive Stock Options and Nonstatutory Stock Options, and determine the number of shares to be covered by each Option, the option price therefor, the conditions and limitations applicable to the exercise of the Option and the restrictions, if any, applicable to the shares of Common Stock issuable thereunder. (ii) The Board shall establish the exercise price at the time each Option is awarded. (iii) Subject to Section 10(a), each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable Award or thereafter. The Board may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (iv) Options granted under the Plan shall provide for the payment of the exercise price by delivery of cash or check in an amount equal to the exercise price of such Options or by delivery of shares of Common Stock of the Company owned by the optionee for at least six months (valued at Fair Market Value) and, to the extent permitted by the Board at or after the award of the Option, may provide for payment by (A) delivery of other property acceptable to the Board (valued at Fair Market Value), (B) delivery of a promissory note of the optionee to the Company on terms determined by the Board, (C) delivery of an irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or delivery of irrevocable instructions to a broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price, (D) payment of such other lawful consideration as the Board may determine, or (E) any combination of the foregoing. (v) The Board may provide for the automatic award of an Option upon the delivery of shares to the Company in payment of the exercise price of an Option for up to the number of shares so delivered. (vi) The Board may at any time accelerate the time at which all or any part of an Option may be exercised. 4 (vii) Non-Transferability. (1) Except as provided in subparagraphs (2) and (3) below, Options granted under the Plan shall not be assignable or transferable other than by will or the laws of descent and distribution and Options may be exercised during the lifetime of the Participant only by the Participant or by the Participant's guardian or legal representative. (2) Notwithstanding subparagraph (1), a Nonstatutory Stock Option may (but need not) provide, that it is transferable by gift or a domestic relations order, to a Family Member (as hereinafter defined) of the Participant. If a Nonstatutory Stock Option is transferred in accordance with this subparagraph, the Option shall be exercisable solely by the transferee, but the determination of the exercisability of the Option shall be based solely on the activities and state of affairs of the Participant. For purposes hereof, a Participant's "Family Member" means the Participant's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Participant's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than 50% of the voting interests. (3) Notwithstanding subparagraph (1), a Participant may transfer a Nonstatutory Stock Option with the express, written consent of the Board, which consent may be withheld for any reason or for no reason. (b) INCENTIVE STOCK OPTIONS. Options granted under the Plan which are intended to be ISOs shall be subject to the following additional terms and conditions: (i) All ISOs granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Award. All Options designated as ISOs shall be interpreted in a manner consistent with the requirements of Code Section 422. (ii) While the Company shall take reasonable measures to assure that an Option intended to be an ISO shall be so treated for federal income tax purposes, it makes no assurances to anyone that any Option intended to be an ISO shall be taxed as an ISO. Without limiting the foregoing, Options intended to be ISOs which are exercised after the period permitted by Code Section 422 shall not be taxed as ISOs. (iii) ISOs may only be awarded to employees of Comtech or a corporation which, with respect to Comtech, is a "parent corporation" or "subsidiary corporation" within the meaning of Code Sections 424(e) and (f). Furthermore, except as otherwise provided in Code Section 422, if a Participant is no longer employed by Comtech or a parent corporation or subsidiary corporati 5 (iv) Subject to clause (v), the Option exercise price per share of Common Stock covered by an ISO shall be no less than the fair market value of a share of Common Stock on the date of grant of the Option. (v) In the case of an individual who at the time the Option is granted owns stock possessing more than 10% of the total combined voting power of all classes of the stock of Comtech or of a parent or subsidiary corporation of Comtech (a "10% HOLDER"), (1) the Option exercise price of the Common Stock covered by any ISO granted to such person shall in no event be less than 110% of the fair market value of the Common Stock on the date the ISO is granted and (2) the term of an ISO granted to such person may not exceed five years from the date of grant. (vi) The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock covered by ISOs exercisable for the first time by an employee during any calendar year (under all plans of the Company) may not exceed $100,000. (vii) To the extent that any Option which is issued under the Plan exceeds the limit set forth in subparagraph (vi) or otherwise does not comply with the requirements of Code Section 422, it shall be treated as a Nonstatutory Stock Option. SECTION 7. STOCK APPRECIATION RIGHTS ------------------------------------ (a) The Board may grant Stock Appreciation Rights entitling recipients on exercise of the SAR to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Board), determined in whole or in part by reference to appreciation in the Fair Market Value of the Stock between the date of the Award and the exercise of the Award. A Stock Appreciation Right shall entitle the Participant to receive, with respect to each share of Stock as to which the SAR is exercised, the excess of the share's Fair Market Value on the date of exercise over its Fair Market Value on the date the SAR was granted. (b) Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an Incentive Stock Option may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an Incentive Stock Option may be granted only at the time the Option is granted. (c) When Stock Appreciation Rights are granted in tandem with Options, the following provisions shall apply: (i) The Stock Appreciation Right shall be exercisable only at such time or times, and to the extent, that the related Option is exercisable and shall be exercisable in accordance with the procedure required for exercise of the related Option. 6 (ii) The Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option shall not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (iii) The Option shall terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (iv) The Stock Appreciation Right shall be transferable only with the related Option. (v) A Stock Appreciation Right granted in tandem with an Incentive Stock Option may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such Option. (d) A Stock Appreciation Right not granted in tandem with an Option shall become exercisable at such time or times, and on such conditions, as the Board may specify. (e) The Board may at any time accelerate the time at which all or any part of the SAR may be exercised. SECTION 8. PERFORMANCE SHARES ----------------------------- (a) The Board may make Performance Share Awards entitling recipients to acquire shares of Stock upon the attainment of specified performance goals. The Board may make Performance Share Awards independent of or in connection with the granting of any other Award under the Plan. The Board in its sole discretion shall determine the performance goals applicable under each such Award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded Performance Shares. (b) A Participant receiving a Performance Share Award shall have the rights of a stockholder only as to shares actually received by the Participant under the Plan and not with respect to shares subject to an Award but not actually received by the Participant. A Participant shall be entitled to receive a stock certificate evidencing the acquisition of shares of Stock under a Performance Share Award only upon satisfaction of all conditions specified in the Agreement evidencing the Performance Share Award. (c) The Board may at any time accelerate or waive any or all of the goals, restrictions or conditions imposed under any Performance Share Award. SECTION 9. RESTRICTED STOCK --------------------------- (a) The Board may grant Restricted Stock Awards entitling recipients to acquire shares of Stock, subject to the right of the Company to repurchase all or part of such shares at their purchase price (or to require forfeiture of such shares if purchased at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable Restricted Period or Restricted 7 Periods established by the Board for such Award. Conditions for repurchase (or forfeiture) may be based on continuing employment or service or achievement of pre-established performance or other goals and objectives. (b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Board during the applicable Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Board may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the Restricted Period, the Company (or such designee) shall deliver such certificates to the Participant or, if the Participant has died, to the Participants' Designated Beneficiary. (c) The purchase price for each share of Restricted Stock shall be determined by the Board and may not be less than the par value of the Common Stock. Such purchase price may be paid in cash or such other lawful consideration as is determined by the Board. (d) The Board may at any time accelerate the expiration of the Restricted Period applicable to all, or any particular, outstanding shares of Restricted Stock. SECTION 10. GENERAL PROVISIONS APPLICABLE TO AWARDS --------------------------------------------------- (a) MAXIMUM TERM. No Award shall have a term exceeding ten years, measured from the date of the Award grant. (b) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan which make an express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, or any successor provision, and then only to Reporting Persons. (c) REPORTING PERSON LIMITATIONS. Notwithstanding any other provision of the Plan, to the extent required to qualify for the exemption provided by Rule 16b-3, the selection of a Reporting Person as a Participant and the terms of his or her Award shall be determined only in accordance with the applicable provisions of Rule 16b-3. (d) DOCUMENTATION. Each Award under the Plan shall be evidenced by an instrument delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Board considers necessary or advisable. Such instruments may be in the form of agreements to be executed by both the Company and the Participant, or certificates, letters or similar documents, acceptance of which shall evidence agreement to the terms thereof and of this Plan. 8 (e) BOARD DISCRETION. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical and the Board need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Board at the time of the Award grant or at any time thereafter. (f) TERMINATION OF STATUS. The Board shall determine and specify in the Award documentation the effect on an Award of the disability, death, retirement, authorized leave of absence or other termination of employment or other status of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may exercise rights under such Award. (g) DILUTIONS AND OTHER ADJUSTMENTS. In the event of any stock dividend or split, issuance or repurchase of stock or securities convertible into or exchangeable for shares of stock, grants of options, warrants or rights to purchase stock, recapitalization, combination, exchange or similar change affecting the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, the Board in its sole discretion may equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the award, exercise or conversion price with respect to any of the foregoing, and may make any other equitable adjustments or take such other equitable action as the Board, in its discretion, shall deem appropriate, including, if considered appropriate by the Board, making provision for a cash payment with respect to an outstanding Award. Such adjustments or actions shall be conclusive and binding for all purposes. In the event of a change in the Common Stock which is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from no par value to par value (or vice versa), without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. For purposes hereof, the conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." In the event that Comtech or the division, subsidiary or other Affiliate for which a Participant performs services is sold, merged, consolidated, reorganized or liquidated, the Board may take any one or more of the following actions as to outstanding Awards: (i) provide that such Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) on such terms as the Board determines to be appropriate, (ii) upon written notice to Participants, provide that all unexercised Options or SARS shall terminate immediately prior to the consummation of such transaction unless exercised by the Participant within a specified period following the date of such notice, (iii) in the event of a sale or similar transaction under the terms of which holders of the Common Stock of the Company receive a cash payment for each share surrendered in the transaction (the "SALES PRICE"), make or provide for a cash payment to each Option and/or SAR holder equal to the amount by which (A) the Sales Price times the number of shares of Common Stock subject to Participant's outstanding, vested Options or SARs exceeds (B) the aggregate exercise price of all such outstanding, vested Options or SARs, in exchange for the termination of such Options or SARs, (iv) or make such other adjustments, if any, as the Board determines to be necessary or advisable to provide each Participant with a benefit substantially similar to that to which the Participant would have been entitled had such event not occurred. 9 (h) WITHHOLDING. The Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Board's discretion, and subject to such conditions as the Board may establish, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. (i) FOREIGN NATIONALS. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions that are different from those specified in the Plan, but which are consistent with the purpose of the Plan, as the Board considers necessary or advisable to achieve the purposes of the Plan and comply with applicable laws and/or achieve favorable tax results under foreign tax laws. (j) AMENDMENT OF AWARD. The Board may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the action, taking into account any related action, would not materially and adversely affect the Participant. (k) CONDITIONS ON DELIVERY OF STOCK. The Company shall not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan (i) until all conditions of the Award have been satisfied or removed, (ii) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (iii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (iv) until all other shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. Except to the extent as may be specified in the documentation with respect to a particular Award grant, the Company shall be under no obligation to register or qualify any shares of Common Stock subject to Awards under any federal or state securities law or on any exchange. 10 SECTION 11. MISCELLANEOUS ------------------------- (a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or service for the Company. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the record holder thereof. (c) NO RESTRICTION ON THE RIGHT OF THE COMPANY TO EFFECT CORPORATE CHANGES. The Plan and the Options granted hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the Company or the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights of holders thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (d) EXCLUSION FROM BENEFIT COMPUTATIONS. Except as expressly specified in the applicable plan or program, no amount or shares of Common Stock payable upon exercise of an Award granted under the Plan shall be considered salary, wages or compensation for purposes of determining the amount or nature of benefits that a Participant is entitled to receive under any Company benefit plan or program. (e) TRANSFERS TO AND FROM AFFILIATES. For all Plan purposes, except to the extent specifically provided otherwise in a particular Award, employment shall include all periods of employment with any Comtech Affiliate, and a transfer of an employee from Comtech to a Comtech Affiliate or visa versa, or a transfer from one Comtech Affiliate to another, will not be treated as a termination of employment. (f) EFFECTIVE DATE AND TERM. Subject to the approval of the stockholders of the Company within 12 months of such date, the Plan is effective as of __________________, 2004, the date of its adoption by the Board. Prior to such stockholder approval, Awards incorporating provisions authorized by the Plan may be made under the Plan, but shall be expressly subject to such approval. In the event that such stockholder approval is not obtained within such time period, the Plan and any Options granted under the Plan on or prior to the expiration of such 12 month period shall be void and of no further force and effect. No Award may be made under the Plan after the tenth anniversary of the Plan's effective date, but Awards granted before such date may extend beyond that date. In the event that such stockholder approval is not obtained within such time period, the Plan and any Options granted under the Plan on or prior to the expiration of such 12 month period shall be void and of no further force and effect. 11 (g) AMENDMENT OF PLAN. The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that no amendment requiring stockholder approval by law, rules or regulations, or by the rules of any stock exchange, inter-dealer quotation system, or other market in which shares of Common Stock are traded, shall be effective unless and until such stockholder approval has been obtained in compliance with such rule or law. Without limiting the foregoing, outstanding Options may be repriced downward without stockholder approval. (h) GOVERNING LAW. The provisions of the Plan shall be governed by and interpreted in accordance with the laws the United States and of the State of Maryland. 12 EX-10.2 5 comtech_s1ex10-2.txt Exhibit 10.2 - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT Among [Hope Ni] And COMTECH GROUP Dated as of August 1st, 2004 - -------------------------------------------------------------------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this __ day of August, 2004 (the "Effective Date") by and between [Hope Ni] (the "Employee") and COMTECH GROUP (THE COMPANY). BACKGROUND WHEREAS the Employee and the Company desire to enter into this Agreement for the purpose of retaining the services of the Employee, and wishes to provide the Employee with an inducement to remain with the Company; WHEREAS the Employee has been employed by the Company NOW, THEREFORE, intending to be legally bound, and in consideration of the premises and the mutual promises set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee agree as follows: DEFINITIONS "Affiliate" means with respect to any Person directly or indirectly Controlling, Controlled by, or under common Control with such Person. "Board" means Board of Directors. "Cause" (i) Employee commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Employee willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement; (iii) Employee commits a material breach of this Agreement, which breach is not cured within twenty (20) days after written notice to Employee from the Company; (iv) Employee willfully refuses to implement or follow a reasonable and lawful policy or directive of the Company, which breach is not cured within twenty (20) days after written notice to Employee from the Company; or (v) Employee engages in malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally. "Change in Control" shall be defined in Section 4.32. "Change in Control Audit Date" shall be the date upon which the Board of Directors of the Company certifies the audited accounts of the company for the first complete fiscal year, commencing on January 1st and ending on December 31st, after the Change in Control. "Change in Control Stock Option Exercise Date" shall be the earliest possible date upon which the value of one share of stock in the Company can be determined based upon any transaction resulting in a sale of a majority of shares owned by Common, or as can be otherwise determined, in good faith, by the Board of Directors of the Company. "Company" as defined in Preamble. "Control" (including the terms "Controlled by" and "under common Control with") means the possession, directly or indirectly or as a trustee or executor, of the power to direct or cause the direction of the management of a Person, whether through the ownership of stock, as a trustee or executor, by contract or credit agreement or otherwise. "Effective Date" as defined in Preamble. "Employee" as defined in Preamble. "Employment Capacity" shall be Financial Officer and Secretary of the Company. "Employment Change of Control Termination Date" shall be the later of (i) 6 months after the Change in Control Audit Date; (ii) one year from the date of a Change of Control; or (iii) the date on which either the Company or the Employee elects not to extend the Agreement further by giving written notice to the other party. "Employment Contract Termination Date" shall be the later of December 31, 2007 or the date on which either the Company or the Employee elects not to extend the Agreement further by giving written notice to the other party. "Employment Final Termination Date" shall be the date upon which the Employee's employment with the Company ceases for any reason. "Employee Stock Option" shall be the right given by the Company to the Employee on specific vesting dates during the Employment Term to purchase a specific number of Ordinary Shares of the Company, par value USD0.001, at a specific strike price, for a length of time equal to the earlier of 10 years from the Effective Date, 6 months after the Employee Final Termination Date, or the Change in Control Stock Option Exercise Date, subject to the Change in Control provisions in Section 4.3. "Employment Term" shall be as defined in Section 1.1. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Good Reason" in the context of the employee's resignation is defined as (a) a change in the employees position which materially reduces the employee's level of responsibilities, duties or stature; (b) reduction in the employee's compensation or (c) a relocation of the employee's principal place of employment by more than 50 miles. "Monthly Rate of Compensation" shall be the amount in US Dollars of the Salary divided by 13, and extra month of compensation shall be given during the Chinese New Year month. "Option Exercise Date" is the lesser of 10 years from the date first written above, or 6 months from Employment Termination. "Person" means an individual, corporation, partnership, limited liability company, limited partnership, association, trust, unincorporated organization or other entity or group (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended). 2 "Qualified Transaction" shall mean an underwritten offering of Ordinary Shares of the Company and yields gross proceeds to the Company in excess of US$30,000,000. "Salary" shall be US$117,000 per annum or such greater amount as may from time to time be approved by the Company only and for purposes of definition shall not include any other compensation including stock option awards. "Subsidiary" means, with respect to any Person, any entity which securities or other ownership interests having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Vesting Schedule" shall mean (i) options for 78,750 shares vesting on February 1, 2005 or vesting in equal monthly installments over the six months from the Effective date if the Company completes an offering yields gross proceeds at least US$10,000,000; (ii) the stock options for 236,250 shares vesting in equal monthly installments over the period of 1.5 years from February 2, 2005 to August 1, 2006, and (iii) the stock options for 105,000 shares vesting in equal monthly installments over the period of 1 year from August 2, 2006 to August 1, 2007. ARTICLE 1 EMPLOYMENT AND TERM The Company employs Employee and the Employee hereby agrees to such employment by the Company during the Employment Term to serve as the Chief Financial Officer of the Company, with the customary duties, authorities and responsibilities of such position and such other duties, authorities and responsibilities relative to the Company that may from time to time be delegated to Employee by the officers of the Company. Employee shall perform such duties and responsibilities as are normally related to such position in accordance with the standards of the industry and any additional duties now or hereafter assigned to Employee by the Company. Employee shall abide by the Company's rules, regulations, and practices as they may from time-to-time be adopted or modified. 1.1 EMPLOYMENT TERM. The Employment Term of this Agreement shall commence on the Effective Date and shall continue until the earlier of the Employment Contract Termination Date or the Employment Final Termination Date, except in the event that a Change in Control occurs prior to the Employment Contract Termination Date. 1.2 If a Change in Control occurs prior to the Employment Contract Termination Date, then the terms outlined in Section 4.3 shall apply. ARTICLE 2 COMPENSATION PACKAGE AMOUNT 2.1 COMPENSATION PACKAGE AMOUNT PLUS BENEFITS IN KIND. During the Employment Term, as compensation for services hereunder, Employee shall be paid the Compensation Amount; or such greater amount as may from time to time be approved by the Company (such salary, as increased from time to time, the "Base Salary"). Base Salary shall be payable in monthly installments of US$ or Chinese RMB. The Compensation Package a Amount plus Benefits in Kind shall include all compensation and Benefits in Kind described in any agreements signed between Employee and the Company, or its subsidiaries, should be entailed in the Compensation Package Amount and none of them should be treated as additional to the Compensation Amount specified in Page 2. 3 2.2 INDIVIDUAL INCOME TAX. The Company will pay individual income tax in respect of the Compensation Package Amount on behalf of the Employee according to Hong Kong taxation laws and the tax amount will be deducted from the Employee's monthly base salary. 2.3 BENEFITS. The Employee shall participate in the plans or programs maintained by the Company for its expatriate employees generally that provide insurance, medical benefits, retirement benefits, or similar fringe benefits subject to the terms and eligibility requirements of such plans. The Employee shall be entitled to paid vacation each calendar year of the Employment Term, in accordance with the Company's vacation policy then in effect; 2.4 EXPENSES. The Company shall pay or reimburse the Employee for reasonable business expenses actually incurred or paid by the Employee during the Employment Term, in the performance of her services hereunder. 2.5 STOCK OPTION AWARDS. 2.5.1 The Employee will be granted the following Employee Stock Options during the Employment Term: 2.5.1.1 An Employee Stock Option on 420,000 Ordinary Shares of the Company representing 0.9% of the total shares outstanding subject to the Vesting Schedule at a strike prate per option equal to US$1.50. 2.5.2 In the event of a Qualified Transaction, all stock options currently held by the employee shall be vested. 2.5.3 In the event of a Change in Control, the additional terms outlines in Section 4.3 shall apply. ARTICLE 3 TERMINATION 3.1 GENERAL. 3.1.1 COMPANY RIGHT TO TERMINATE. The Company shall have the right to terminate the employment of the Employee at any time with or without Cause but the relative rights and obligations of the parties in the event of any such termination or resignation shall be determined under this Agreement. 3.1.2 EMPLOYEE RIGHT TO TERMINATE. The Employee shall have the right to resign for any reason with 30 days notice to the Company, but the relative rights and obligations of the parties in the event of any such resignation shall be determined under this agreement ("Employee Resignation", and the date of notice by the Employee to the Company of which shall be the "Employee Resignation Date"). 4 3.2 TERMINATION UNDER CERTAIN CIRCUMSTANCES. 3.2.1 TERMINATION WITHOUT SEVERANCE BENEFITS. In the event the Employee's employment with the Company is terminated prior to the expiration of the Employment Term by reason of (i) the Employee's resignation for any or no reason, or (ii) the Employee's discharge by the Company for Cause or gross negligence, as determined by a majority of the Board of Directors and defined herein, this Agreement shall terminate including, without limitation, the Company's obligations to provide any compensation, benefits or severance to the Employee under Article 3 of this Agreement or otherwise, other than the Standard Termination Entitlements defined in section 4.1. 3.2.2 TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON. Except in the event of a Change in Control, the Company will be obligated to provide the Standard Termination Entitlements as defined in Section 4.1 and Severance Benefits as defined in Section 4.2 if either the Company terminates the employee's employment without Cause or the Employee resigns for Good Reason. 3.2.3 TERMINATION UPON A CHANGE IN CONTROL. In the event of a Change of Control, the terms outlined in Section 4.3 shall apply. 3.3 LIQUIDATED DAMAGES. The Company and Employee hereby stipulate that the damages which may be incurred by the Employee as a consequence of any such termination of employment are not capable of accurate measurement as of the date first above written and that the liquidated damages payments provided for in this Agreement constitute a reasonable estimate under the circumstances of, and are in full satisfaction of, all damages sustained as a consequence of any such termination of employment. ARTICLE 4 STANDARD TERMINATION ENTITLEMENTS; SEVERANCE BENEFITS. 4.1 STANDARD TERMINATION ENTITLEMENTS. For all purposes of this Agreement, the Employees "Standard Termination Entitlements" shall mean and include, (a) the Employee's earned but unpaid compensation (including, without limitation, salary, bonus, and all other items which constitute wages under applicable law) as of the date of her termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Employee's termination of employment; (b) the benefits, if any, due to the Employee (and the Employee's estate, surviving dependents or her designated beneficiaries) under the employee benefit plans and programs and compensation plans and programs (including stock option plans) maintained for the benefit of the employees of the Company; and (c) all of the Employee's Employee Stock Options that have been deemed to have vested prior to the Employment Final Termination Date. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. 5 4.2 SEVERANCE BENEFITS. For all purposes of this Agreement, the Employee's "Severance Benefits" shall mean and include: 4.2.1 the payment of a lump sum amount equal to 3 multiplied by the Employee's monthly rate of Compensation Package Amount in effect immediately prior to her termination of employment; and 4.2.2 for a period of six months after the Employee's termination of employment, direct payment by the Company to the carrier of the premiums due for any health insurance continuation coverage elected by the Employee under the Company group health plans. 4.3 CHANGE IN CONTROL 4.3.1 CHANGE IN CONTROL ADJUSTMENTS AND COMPENSATION. The "Change in Control Adjustments and Compensation" shall mean the following: 4.3.1.1 CHANGE IN CONTROL EMPLOYMENT TERM. If a Change in Control occurs prior to the Employment Contract Termination Date then the Employment Term shall continue until the earlier of the Employment Final Termination Date or the Employment Change of Control Termination Date. 4.3.1.2 CHANGE IN CONTROL SEVERANCE PAYMENT AMOUNT. If a Change in Control occurs prior to the Employment Contract Termination Date and the Company terminates the employee's employment without Cause or the Employee resigns for Good Reason prior to the Change in Control Audit Date, then the Employee will be entitled to a payment equal to the greater of 6 times the Monthly Rate of Compensation OR 12 months salary less any compensation paid to the employee during the period between the Change in Control and Employment Final Termination Date and the Company shall be obligated to provide the Standard Termination Entitlements as defined Section 4.1. If a Change in Control occurs prior to the Employment Contract Termination Date and the Company terminates the employee's employment without Cause or the Employee resigns for Good Reason after the Change in Control Audit Date, then the severance payment in Section 4.2.1 shall apply. 4.3.1.3 CHANGE IN CONTROL HEALTH AND LIFE INSURANCE BENEFITS. If a Change in Control occurs prior to the Employment Contract Termination Date then the Employee will be entitled to Company-paid contributions for health and life insurance premiums for the greater of six months or the number of months between the Employment Final Termination Date and the first anniversary of the Change in Control. 6 4.3.1.4 CHANGE IN CONTROL EMPLOYEE STOCK OPTION ENTITLEMENTS. If a Change in Control occurs prior to the Employment Contract Termination Date then the Employee Stock Options will be modified to include the following provisions. In the event that the following terms are in breach of the laws of the People's Republic of China or any other jurisdiction, or if the Board of Directors prior a Change of Control decides to terminate or replace the Employee Stock Options or any related plans, or on the event of a dispute, the Company and Employee agree to effect whatever transaction or agreement necessary to preserve the intent and economic value represented by the terms outlined it Section 4.3.1.4. 4.3.1.4.1 VESTING OF EMPLOYEE STOCK OPTION AWARDS. The number of Employee Stock Options listed in Section 2.6.1.1. shall be deemed to have vested in full upon a Change of Control, the aggregate number of which shall be the "Total Stock Option Award", subject to the Strike Adjustment. 4.3.1.4.2 ADJUSTMENT TO THE EXERCISE AND STRIKE PROVISIONS OF EMPLOYEE STOCK OPTIONS. If a Change in Control occurs prior to the Employment Contract Termination Date, the strike price and exercise date and ability to exercise Employee Stock Options shall be as follows: 4.3.1.4.2.1 NO EMPLOYEE RESIGNATION PRIOR TO CHANGE IN CONTROL AUDIT DATE. If the Employment Final Termination Date is after Change in Control Audit Date, and the Employee's Employment has not been terminated under the provision outlined in Section 3.1.2, then the Employee shall have the right to exercise 100% of the Employee Stock Options at a Strike Price of US$1.5 per Share Option on the Change in Control Stock Option Exercise Date. 4.3.1.4.2.2 EMPLOYEE RESIGNATION PRIOR TO CHANGE IN CONTROL AUDIT DATE. If the Employee's Employment is terminated under the provision outlined in Section 3.1.2 prior to Change in Control Audit Date, then the following shall apply, subject to the Escrow Provisions outlined in Section 4.2.1.4.3: 4.3.1.4.2.2.1 the Employee shall have the right to exercise the following number of Employee Stock Options at a Strike Price of US$1.5 per on the Change in Control Stock Option Exercise 7 Date. The Change in Control Percentage of Stock Options of the Total Stock Option Award, plus an additional number of options equal to the Change in Control Remaining Percentage of Stock Options multiplied by percentage represented by the number of days between the Change of Control Date and the Employment Resignation Date divided by the total number of days between the Change of Control Date and Change in Control Audit Date, (the number of Stock Option referred to herein as the "Number of Stock Options Entitled to at Original Strike upon Change of Control and Early Resignation"), and 4.3.1.4.3 ESCROW PROVISIONS. In the event that an Employee exercises any options after the date of a Change of Control and prior to the Change in Control Audit Date, the proceeds resulting from the exercise of such options shall be held in an escrow account at a reputable law firm appointed by the Board of Directors with the approval of the CEO of the Company for the benefit of the Employee until no earlier than Change in Control Audit Date. All related expenses derived from the Escrow Provisions shall be paid for by the Company. 4.3.2 DEFINITION. Change in Control shall mean any one of the following: 4.3.2.1 the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: 4.3.2.2 at least 49% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 100% of the outstanding equity ownership interests in the Company; and 4.3.2.3 at least 49% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 100% of the securities entitled to vote generally in the election of directors of the Company. 4.3.2.4 a complete liquidation or dissolution of the Company; or 8 4.3.2.5 the occurrence of any event if, immediately following such event, at least 49% of the members of the Board of Directors of the Company do not belong to any of the following groups: (a) individuals who were members of the Board of Directors of the Company on the date hereof; or (b) individuals who first became members of the Board of Directors of the Company after the date hereof either: (i) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (ii) upon election by the stockholders of the Company to serve as a member of such board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened contest for the election of directors or other actual or threatened solicitation of proxies or consents other than by or on behalf of the Board of Directors of the Company. 4.3.2.6 In no event, however, shall a Change in Control be deemed to have occurred as a result of any Qualified Transaction of the securities of the Company. For purposes of this section, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. ARTICLE 5 PROPRIETARY INFORMATION The Employee shall enter into a Key Employee Invention Assignment and Confidentiality Agreement attached herein as Exhibit A and a Non-Compete Agreement attached herein as Exhibit B. The Employee agrees that the provisions of this Article 5, Exhibit A and Exhibit B are necessary to protect the interests of the Company or its Subsidiaries or Affiliates and. are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that the provisions of this Article 5 or any part thereof are unenforceable because of the duration or geographical scope of such provision, such court will have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision will be enforceable. ARTICLE 6 DISPUTE RESOLUTION 6.1 DISPUTE RESOLUTION. Any dispute, controversy or claim, at any time arising out of this or relating to this Agreement, or the breach, termination or invalidity thereof, shall be referred to the Hong Kong courts for final and binding arbitration. Any arbitral award may be enforced through a judgment rendered in any court of competent jurisdiction. 9 ARTICLE 7 GENERAL PROVISIONS 7.1 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by hand delivery, telegram, telex, or telecopy, or facsimile transmission, or by mail (registered or certified mail, postage prepaid, return receipt requested) or by any courier service, providing proof of delivery. All communications hereunder shall be delivered to the respective parties at the following addresses or to such other address as the party to whom notice is given may have previously furnished to the other parties hereto in writing in the manner set forth above: If to the Employee: [ ] If to the Company: [ ] 7.2 ENTIRE AGREEMENT. This Agreement, taken together with Exhibit A and Exhibit B, shall constitute the entire agreement between the Employee and the Company with respect to the Company's employment of the Employee and supersedes any and all prior agreements and understandings, including but not limited to the Original Employment Agreements, written or oral, with respect thereto. 7.3 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only by an instrument in writing and signed by the party against whom such amendment or waiver is sought to be enforced. 7.4 SUCCESSORS AND ASSIGNS. The personal services of the Employee are the subject of this Agreement and no part of the Employee's or the Company's rights or obligations hereunder may be assigned, transferred, pledged or encumbered by the Employee or the Company. This Agreement shall inure to the benefit of, and be binding upon (a) the parties hereto, (b) the heirs, administrators, executors and personal representatives of the Employee and (c) the successors and assigns of the Company as provided herein. 7.5 GOVERNING LAW AND VENUE. This Agreement, including the validity hereof and the rights and obligations of the parties hereunder, and all amendments and supplements hereof and all waivers and consents hereunder, shall be construed in accordance with and governed by the laws of the State of New York, USA, without giving effect to any conflicts of law provisions or rule, that would cause the application of the laws of any other jurisdiction. 7.6 SEVERABILITY. If any provisions of this Agreement, as applied to any part or to any circumstance, shall be adjudged by a court to be invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of such provision in any other circumstances or the validity or enforceability of this Agreement. 10 7.7 SURVIVAL. The rights and obligations of the Company and Employee pursuant to Articles 3, 4, 5, 6, and 7 shall survive the termination of the Employee's employment with the Company and the expiration of the Employment Term. 7.8 CAPTIONS. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYEE By: /S/ HOPE NI -------------------------------------- [Hope Ni] Title: Chief Financial Officer COMPANY By: /S/ JEFFREY KANG -------------------------------------- Name: Jeffrey Kang Title: Chairman of the Board and Chief Executive Officer ATTEST By: --------------------------------------- Name: Address: 11 EX-21.1 6 comtech_s1ex21-1.txt Exhibit 21.1 SUBSIDIARIES ------------ ------------------------------------------------- ------------------- COMTECH PERCENTAGE OF SUBSIDIARY NAME OWNERSHIP ------------------------------------------------- ------------------- ------------------------------------------------- ------------------- Comtech (China) Holding, Ltd 100% ------------------------------------------------- ------------------- Comtech (HK) Holding, Ltd 100% ------------------------------------------------- ------------------- Comtech Communication Technology (Shenzhen) Co., Ltd 100% ------------------------------------------------- ------------------- Shenzhen Comtech International Ltd 100% ------------------------------------------------- ------------------- Comtech International (HongKong) Ltd 100% ------------------------------------------------- ------------------- Comtech Software Technology (Shenzhen) Co., Ltd 100% ------------------------------------------------- ------------------- Shanghai Yishite Electronics Ltd 60% ------------------------------------------------- ------------------- EX-23.1 7 comtech_s1ex23-1.txt EXHIBIT 23.1 [DELOITTE TOUCHE TOHMATSU LETTERHEAD] CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Registration Statement of Comtech Group, Inc. on Form S-1 of our report dated August 18, 2004, except for Note 11 which is dated December 17, 2004, which report expresses an unqualified opinion and includes explanatory paragraphs relating to a series of transactions to restructure the organization of the entities owned by the Shareholders which were accounted for at historical cost and the translation of Renminbi into United States dollars for the convenience of the reader, relating to the consolidated financial statements of Comtech Group, Inc., appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Consolidated Financial Data", "Selected Consolidated Financial and Operating Data" and "Experts" in such Prospectus. /s/ Deloitte Touche Tohmatsu Hong Kong December 22, 2004 -----END PRIVACY-ENHANCED MESSAGE-----