<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION NO. 333-09457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
DIGITAL LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3663 95-4313013
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
601 CLEVELAND STREET, FIFTH FLOOR
CLEARWATER, FLORIDA 34615
(813) 442-6677
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
BETH A. MORRIS
VICE PRESIDENT, FINANCE
DIGITAL LIGHTWAVE, INC.
601 CLEVELAND STREET, FIFTH FLOOR
CLEARWATER, FLORIDA 34615
(813)442-6677
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. HENTRICH, ESQ. JEFFREY M. STEIN, ESQ.
BAKER & MCKENZIE KING & SPALDING
101 WEST BROADWAY 191 PEACHTREE STREET, N.E.
SAN DIEGO, CALIFORNIA 92101-3890 ATLANTA, GEORGIA 30303-1763
(619) 235-7776 (404) 572-4600
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS PROMPTLY AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
----------------
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, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 30, 1997
[LOGO]
4,000,000 SHARES
COMMON STOCK
($.0001 PAR VALUE)
--------------
Of the shares of Common Stock ("Common Stock") offered hereby (the "Offering"),
3,161,601 shares are being sold by Digital Lightwave, Inc. ("Digital Lightwave"
or the "Company") and 838,399 shares are being sold by the Selling Stockholders
named herein under "Principal and Selling Stockholders" (the "Selling
Stockholders"). The Company will not receive any of the proceeds of shares sold
by the Selling Stockholders. Prior to the Offering, there has been no public
market for the Common Stock. It is anticipated that the initial public offering
price will be between $10.00 and $12.00 per share. For information relating to
the factors to be considered in determining the initial offering price to the
public, see "Underwriting." The Common Stock has been approved for listing on
the Nasdaq National Market under the symbol "DIGL."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 7 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS COMPANY(1) STOCKHOLDERS
---------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(2)............................ $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company, estimated at $700,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 600,000
additional shares of Common Stock to cover over-allotments of shares. If the
option is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ , and Proceeds to
Company will be $ .
The shares of Common Stock are offered by the several Underwriters when, as and
if delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1997, against payment
in immediately available funds.
CREDIT SUISSE FIRST BOSTON FURMAN SELZ
Prospectus dated , 1997.
<PAGE>
[Graphic depicting transmission assets of the class of service providers
described in the Prospectus and the points along the network at which the
Company's existing products and a planned product could be utilized by network
operators. At the far left side of the graphic there appears the Company's
trademark "Technology to reach inside the light." At the far right side of the
graphic there appears the Company's logo. On the reverse side of the inside
front gatefold there is a photograph of the ASA 312 together with a description
of certain features and functions offered by the product.]
"Digital Lightwave," "Lightwave Management," "Technology to reach inside the
light," "Network Information Computer," "Remote Access Agent," "Network Digital
Assistant" and the rectangular design logo are trademarks of the Company for
which registration has been applied. "ASA 312" is a trademark of the Company.
All other trademarks or trade names referred to in this Prospectus are the
property of their respective owners.
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNT OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS
FROM RULES 10B-6 AND 10B-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND
THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. CERTAIN TERMS CONTAINED HEREIN HAVE THE RESPECTIVE MEANINGS SET
FORTH IN THE GLOSSARY AT PAGE G-1. UNLESS OTHERWISE INDICATED, ALL INFORMATION
CONTAINED IN THIS PROSPECTUS: (I) GIVES EFFECT TO A TWO FOR THREE REVERSE SPLIT
OF THE COMMON STOCK EFFECTED ON OCTOBER 31, 1996; AND (II) ASSUMES THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING."
THE COMPANY
Digital Lightwave develops, manufactures and sells advanced computer systems
that provide information concerning the performance of lightwave
telecommunications networks and transmission equipment. The Company believes
that there is a growing need on the part of its customers, which include
telecommunications service providers and network equipment manufacturers, to
manage lightwave transmission of voice, data, image and video and to plan and
implement fiber optic network expansion more effectively. The Company's product,
the ASA 312, is a portable software-based Network Information Computer that is
designed to outperform conventional hardware-based network test instruments. The
ASA 312 is "user friendly," lightweight, compact and easily operated through a
touch sensor over a full color display. The Company believes that the ASA 312 is
the only integrated product that enables users to understand and process
information, simultaneously and without interruption, from telecommunications
networks utilizing: (i) the legacy T-Carrier protocol at rates DS-0, DS-1 and
DS-3; (ii) the lightwave SONET protocol at rates OC-1, OC-3 and OC-12; and (iii)
the lightwave ATM protocol.
The Company has developed prototypes for a series of Remote Access Agents
which are modular hardware/software platforms that are designed to provide
network operators with real-time information concerning performance of the
network segments where Remote Access Agents have been installed. The Remote
Access Agents incorporate technology developed by the Company which includes
advanced hardware technology that accesses bits in lightwave and legacy
telecommunications transmissions, a non-blocking switch matrix that maps signals
into different transmission speeds and protocols, and object-oriented software
that controls user selectable features accessible through Windows OS, web
browsers or other user environments.
The Company began shipping the ASA 312 in February 1996. Through December
31, 1996, the Company had shipped more than 170 ASA 312 units to more than 25
customers, including: (i) InterExchange Carriers ("IXCs"), such as MCI
Telecommunications Corp. ("MCI"); (ii) Regional Bell Operating Companies
("RBOCs"), such as Ameritech Corporation ("Ameritech"); (iii) Competitive Access
Providers ("CAPs"), such as Brooks Fiber Properties, Inc. ("Brooks"); (iv)
independent telephone companies, such as GTE Corp. ("GTE"); (v) network
equipment manufacturers, such as Tellabs Operations, Inc. ("Tellabs"); (vi)
equipment leasing companies, such as AT&T Capital Services Corp. ("AT&T
Capital"); and (vii) private network operators, such as Bear Stearns & Co., Inc.
STRATEGY
The Company has developed a growth strategy which is designed to increase
its market share and expand distribution across a wide range of customers, the
key elements of which are:
-INCREASE DOMESTIC SALES. The Company intends to increase sales of the ASA
312 by recruiting additional direct and internal sales staff to broaden its
customer base and obtain repeat orders. In addition, the Company plans to
introduce its Remote Access Agents into the existing domestic market for
legacy network monitoring products and to obtain an early market position
as a supplier of lightwave network monitoring products. Further, the
Company intends to supplement its direct sales network with strategic OEM
relationships with network equipment manufacturers.
3
<PAGE>
-COMMENCE INTERNATIONAL SALES. The Company believes that significant demand
exists outside the United States for products such as the Company's Network
Information Computers and Remote Access Agents and intends to design and
develop versions of these products for international markets.
-PROVIDE COMPREHENSIVE LIGHTWAVE MANAGEMENT SOLUTIONS. The Company believes
that its Network Information Computers offer superior performance over
competing products. The Company intends to build upon the core technology
found in this product to develop a family of virtual switching products
that the Company believes will position it as a leader in providing
lightwave management solutions.
RECENT RESULTS
For the three months ended December 31, 1996, the Company achieved sales of
$3.0 million (unaudited), derived from shipments of 85 ASA 312 units and had a
net income of $212,000 (unaudited). At year end, the Company had an order
backlog, primarily for its ASA 312 product, of approximately $1.0 million and
had increased its staff to 89 full-time employees. Newly-hired employees include
a Vice President, Engineering and an additional eight direct sales managers with
substantial prior experience in the sale of telecommunications products. In
January 1997, the Company produced prototypes of its Remote Access Agents which
were placed in field trials with a private network operator.
--------------
The Company was incorporated in California on October 12, 1990 under the
name Digital Lightwave, Inc., and reincorporated in Delaware on March 18, 1996
through its merger into a newly formed Delaware corporation. Unless the context
otherwise requires, as used in this Prospectus the "Company" and "Digital
Lightwave" refer to the Company and its predecessor entity. The Company's
principal executive offices are located at 601 Cleveland Street, Fifth Floor,
Clearwater, Florida 34615; its telephone and facsimile numbers are 813.442.6677
and 813.442.5660; its eMail address is [email protected]; and its URL is
http://www.lightwave.com.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company.......................... 3,161,601 shares
The Selling Stockholders............. 838,399 shares
Total.............................. 4,000,000 shares
Common Stock to be outstanding after
the Offering.......................... 25,680,518 shares (1)
Use of Proceeds........................ Working capital, retirement of short-term
obligations and other general corporate purposes,
including new product development, expansion of
domestic and international distribution channels
and possible funding of the acquisition of
complementary businesses, products or technologies.
The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholders.
Nasdaq National Market Symbol.......... DIGL
</TABLE>
- --------------
(1) Excludes 1,250,037 shares of Common Stock issuable upon the exercise of
outstanding employee stock options and 3,749,963 shares of Common Stock
reserved for issuance pursuant to employee stock options which may be
granted in the future. See "Management--Option Plan."
5
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Sales.................................... $ -- $ -- $ -- $ -- $ 3,037
Gross profit............................. -- -- -- -- 1,885
Operating income (loss).................. (545) (1,568) (2,725) (1,894) (1,713)
Net interest income (expense)............ (41) (114) (613) (367) (414)
Net income (loss)........................ $ (587) $ (1,683) $ (3,334) $ (2,261) $ (2,320)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) per share.............. $ (.01) $ (.04) $ (.08) $ (.06) $ (.11)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common shares
outstanding (1)......................... 40,867,030 40,867,030 39,265,723 40,867,030 21,651,344
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital...................................................................... $ 2,263 $ 33,906
Total assets......................................................................... 6,055 36,948
Total debt........................................................................... 750 --
Total stockholders' equity........................................................... 3,237 34,880
</TABLE>
- --------------
(1) On November 30, 1995, 19,215,686 shares of Common Stock were purchased by
the Company from a former stockholder pursuant to an option granted to the
Company by the former stockholder in February 1995. See "Certain
Transactions -- Transactions with Former Stockholder." Pursuant to the
requirements of the Securities and Exchange Commission, Common Stock and
stock options and warrants to purchase shares of Common Stock issued by the
Company during the 12 months prior to the initial public offering date have
been included in the calculation of the weighted average shares outstanding
for all periods presented using the treasury stock method based upon an
assumed initial public offering price of $11.00 per share.
(2) Adjusted to reflect the sale of 3,161,601 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $11.00 per
share (after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company).
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THE ACCURACY OF WHICH IS SUBJECT TO MANY RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISK FACTORS.
LIMITED OPERATING HISTORY; CUMULATIVE LOSSES
The Company was incorporated in October 1990 and commenced shipment of the
ASA 312 in February 1996. Since its inception, the Company has incurred
substantial costs to develop and enhance its technology, to create, introduce
and enhance its product offerings, to establish marketing and distribution
relationships, to recruit and train a sales and marketing group, and to build an
administrative organization. As a consequence, the Company has incurred
operating losses in each fiscal quarter through September 30, 1996. As of
September 30, 1996, the Company has incurred cumulative losses of $8.5 million.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new, unproven and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks. The limited operating history of the Company makes the
prediction of future results of operations difficult or impossible, and there
can be no assurance that the Company will sustain growth or achieve
profitability.
DEPENDENCE ON SINGLE PRODUCT; UNCERTAIN MARKET ACCEPTANCE OF PLANNED PRODUCTS
The Company has to date derived all of its sales from its initial product,
the ASA 312. The Company expects that sales of the ASA 312 will continue to
account for a substantial portion of the Company's sales for the foreseeable
future. The market for lightwave management products is in an early stage of
development and there is uncertainty regarding the size and scope of the market.
The Company's future performance will depend on increased sales of the ASA 312
and the successful development, introduction and market acceptance of new and
enhanced products. In January 1997, prototypes of the Company's initial Remote
Access Agents were placed in field trials by a private network operator,
however, the Company has not yet had sales of this product. The occurrence of
undetected software or hardware errors which frequently occur when new products
are first introduced could result in the delay or loss of market acceptance of
the Company's products and the loss of credibility with its customers, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Industry Development," "--
Technology," "-- Products," "-- Product Development" and "-- Competition."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The market for the Company's products is characterized by frequent new
product introductions, rapidly changing technology and continued emergence of
new industry standards, any of which could adversely affect sales of the
Company's products or render the Company's existing products obsolete. The
Company's success will depend upon its ability to develop, manufacture and sell,
in a timely fashion, new products and enhancements to its existing products that
meet changing customer requirements, gain market acceptance and satisfy emerging
industry standards. There can be no assurance that the Company will be able to
meet these objectives, and any failure to do so could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Business -- Technology," "-- Products," and "-- Product
Development."
COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid technological change, frequent product introductions with improved
performance-to-price ratios and continued emergence of new industry standards.
In addition to its current competitors, the Company anticipates that it will
face competition from other companies as the market for its products grows and
as it releases additional and enhanced products. Furthermore, many of the
Company's large competitors offer customers a broader product line than the
Company currently offers or can be expected to offer. Many of the Company's
current and potential competitors have longer operating histories and
substantially greater financial, technical, sales,
7
<PAGE>
marketing and other resources, as well as greater name recognition and larger
installed bases, than the Company. Such companies may have a competitive
advantage over the Company when selling similar products or alternative
lightwave management solutions. Increased competition could result in
significant price competition, reduced profit margins or loss of market share,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors. See "Business -- Competition."
SUBSTANTIAL INCREASE IN MANUFACTURING OPERATIONS; DEPENDENCE ON CONTRACT
MANUFACTURING AND LIMITED SOURCE SUPPLIERS
The Company is in the process of substantially increasing its flow of
materials, contract manufacturing capacity and internal test and quality
functions to respond to anticipated customer demand for the ASA 312 and to
reduce its order lead times. Any inability to increase product flow would limit
the Company's revenue, could adversely affect the Company's competitive position
and could result in cancellations of orders. The Company's operational strategy
relies on outsourcing of manufacturing. The Company currently subcontracts
component procurement and kitting and printed circuit board assembly to a single
company (Q-1 Technologies) that specializes in those services. The Company is
seeking to secure additional sources of supply, including additional contract
manufacturers. Certain key components used in the manufacture of the Company's
products are currently purchased only from single or limited sources. At
present, the Company's only single-sourced component is a SONET overhead
terminator. Limited-source components utilized in the ASA 312 include a single
board computer, a power supply, a touch sensor and controller, plastic housing
units and other discrete components.
The Company has experienced, and may in the future experience, problems with
its various component suppliers, such as inferior quality, insufficient
quantities and late delivery. There can be no assurance that such problems will
not generate material liabilities for the Company or adversely impact the
Company's relations with its customers. In addition, the Company may in the
future experience pricing pressure from its contract manufacturers. There can be
no assurance that the Company will manage its contract manufacturers effectively
or that these manufacturers will meet the Company's future requirements for
timely delivery of products of sufficient quality and quantity. The Company
intends to introduce certain new products and product enhancements in 1997,
which may require that the Company rapidly achieve volume production by
coordinating its efforts with those of its suppliers and contract manufacturers.
The inability of the Company's contract manufacturers to provide adequate
supplies of high-quality products or the loss of any of the Company's contract
manufacturers could cause a delay in the Company's ability to fulfill orders
while the Company identifies a replacement manufacturer and could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Production."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, finance and
manufacturing personnel, certain of whom would be difficult to replace. In
particular, the Company believes that its future success is highly dependent on
Dr. Bryan J. Zwan, its Chairman, Chief Executive Officer and President. The
Company does not intend to maintain key man life insurance covering its key
personnel. Until 1996, the Company was in the development stage. Most of the
Company's executive officers joined the Company during the past year and,
therefore, have been involved only with the most recent operating activity of
the Company. The Company's success will depend to a significant extent on the
retention of these executive officers, their successful performance and the
ability of these executive officers to integrate themselves into the Company's
daily operations and for all personnel to work effectively together as a team.
See "Business -- Employees" and "Management -- Executive Officers and
Directors."
MANAGEMENT OF GROWTH
The Company has significantly expanded its operations over the past year and
the success of the Company is dependent upon its continued expansion,
particularly in hiring additional technical and customer support personnel,
developing its sales and marketing network and expanding its manufacturing
8
<PAGE>
capacity. The Company may in the future undertake acquisitions that could
present challenges to the Company's management, such as integrating and
incorporating new operations, product lines, technologies and personnel. There
can be no assurance that the Company's systems, procedures and controls will be
adequate to support the Company's future operations. Failure to manage the
Company's growth properly could have a material adverse effect on the Company's
business, financial condition and results of operations.
ANTICIPATED FLUCTUATIONS IN OPERATING RESULTS
It is anticipated that as the Company matures, the Company's sales and
operating results may fluctuate from quarter to quarter and from year to year
due to a combination of factors, certain of which are outside the control of the
Company, including, among others (i) the timing and amount of significant orders
from the Company's customers, (ii) the ability to obtain sufficient supplies of
sole or limited source components for the Company's products, (iii) the ability
to attain and maintain production volumes and quality levels for its products,
(iv) the mix of distribution channels and products, (v) new product
introductions by the Company's competitors, (vi) the Company's success in
developing, introducing and shipping product enhancements and new products,
(vii) pricing actions by the Company or its competitors, (viii) changes in
material costs and (ix) general economic conditions. Any unfavorable changes in
these or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
anticipate that its backlog at the beginning of each quarter will be sufficient
to achieve expected revenue for that quarter. To achieve its revenue objectives,
the Company expects that it will have to obtain orders during a quarter for
shipment in that quarter. As a result of all of the foregoing, there can be no
assurance that the Company will be able to sustain profitability on a quarterly
or annual basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success and its ability to compete are dependent in part upon
its proprietary technology. Although the Company has applied for several patents
on elements of its core technology, the Company currently does not hold any
patents and relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary rights in its products.
There can be no assurance that the patents for which the Company has applied
will be issued, that steps taken by the Company to protect its technology will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, financial condition and
results of operations could be materially and adversely affected. In addition,
the Company's growth strategy includes a plan to enter international markets,
and the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States.
The Company is subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights of others. Given that patent
applications in the United States are not publicly disclosed until the patent
issues, applications may have been filed which, if issued as patents, could
relate to the Company's products. The Company's industry is characterized by a
large number of patents, some of which have broad claims which, if valid and
enforceable, would pose a risk of infringement. Although the Company is not
aware that its technology infringes on the proprietary rights of others and has
not received any notice of claimed infringements, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could obtain an award of substantial damages any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event of a successful claim of infringement, the Company, its
customers and end-users may be required to obtain one or more licenses from
third parties. There can be no assurance that the Company or its customers could
obtain necessary licenses from third parties at a reasonable cost or at all. See
"Business -- Intellectual Property."
9
<PAGE>
CUSTOMER CONCENTRATION
For the year ended December 31, 1996, sales to MCI, Ameritech and PacTel
accounted for 25%, 19% and 15% of total sales, respectively. The Company does
not anticipate that its sales to these customers will continue to be as
significant in future periods as a percentage of total sales. The success of the
Company is dependent upon broadening its customer base to increase its level of
sales. Any reduction or delay in sales of its products to its principal
customers or the loss of one or more of the Company's principal customers could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Customers."
PRODUCT CERTIFICATIONS
The Company's products must meet industry standards and receive
certification for connection to certain public telecommunications networks prior
to their sale. In the United States, the Company's products must comply with
various regulations promulgated by the Federal Communications Commission ("FCC")
and Underwriters Laboratories. Internationally, the Company's products will be
required to comply with standards established by telecommunications authorities
in various countries as well as with recommendations of the Consultative
Committee on International Telegraph and Telephony. In addition, certain planned
products, such as the virtual switching products, must be certified by Bell
Communications Research, Inc. ("Bellcore") to be commercially viable. Although
the Company's products have not been denied any regulatory approvals or
certifications to date, any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, financial condition and results of operations.
CONTROL BY PRINCIPAL STOCKHOLDER
Following the Offering, the Company's Chairman, Chief Executive Officer and
President, together with entities affiliated with him, will beneficially own
approximately 78% of the Company's outstanding Common Stock (approximately 76%
if the Underwriters' over-allotment option is exercised in full). Accordingly,
he will be able to elect the Company's directors, will retain the voting power
to approve all matters requiring stockholder approval and will continue to have
significant influence over the affairs of the Company, including the power to
delay or prevent a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."
FACTORS INHIBITING TAKEOVER
Certain provisions of the Company's charter documents, including provisions
limiting the ability of stockholders to take action by written consent and
limiting the ability of stockholders to raise matters at a meeting of
stockholders without giving advance notice, and provisions establishing
supermajority affirmative voting requirements as a prerequisite to certain
extraordinary corporate transactions, may have the effect of delaying or
preventing changes in control or management of the Company, which could have an
adverse effect on the market price of the Company's Common Stock. The Board of
Directors has authority to issue up to 20,000,000 shares of Preferred Stock and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of these shares without any further vote or action by the stockholders.
The rights of the holders of the Company's Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights, senior to the Common Stock, and, as a result, the issuance of such
Preferred Stock could have a material adverse effect on the market value of the
Common Stock. In addition, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with any "interested stockholder" as
defined by such statute. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Company's
Common Stock. On the date of this Prospectus,
10
<PAGE>
no shares other than the 4,000,000 shares offered hereby will be eligible for
sale in the public market. All directors and officers of the Company and each of
the Selling Stockholders have agreed with the Underwriters not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Credit Suisse
First Boston Corporation ("CSFBC"). Beginning 180 days after the date of this
Prospectus, assuming that CSFBC does not consent to any sales prior to such
time, an additional 20,000,000 shares subject to such agreements will become
eligible for sale in the public market, subject to compliance with the
provisions of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Such 20,000,000 shares are held by Dr. Zwan, the Company's
Chairman of the Board, Chief Executive Officer and President, who is an
"affiliate" of the Company, and may, therefore, only be sold by Dr. Zwan in the
public market in compliance with the volume limitations of Rule 144. At various
times thereafter, an additional 1,680,518 shares will become eligible for sale
in the public market. See "Shares Eligible for Future Sale" and "Underwriting."
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
The Common Stock purchased by the existing stockholders for an aggregate of
$14.2 million prior to the date of this Prospectus would have a market value of
$247.7 million based upon an assumed initial public offering price of $11.00 per
share. Existing stockholders will be selling 21% of the shares of Common Stock
offered hereby (approximately 18% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Stockholders."
BROAD DISCRETION REGARDING USE OF PROCEEDS
A substantial portion of the proceeds of the Offering have not been
allocated to a particular purpose. Accordingly, management will have broad
discretion concerning the use of a majority of the proceeds of the Offering. See
"Use of Proceeds."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The principal reasons for making the Offering at the present
time are to obtain additional working capital and for general corporate
purposes, to create a public market for the Common Stock of the Company and to
facilitate future access to the public market. However, there can be no
assurance that an active public market for the Common Stock will develop or be
sustained after the Offering. The initial public offering price will be
determined by negotiations between the Company and the Underwriters based on
several factors and may not be indicative of the market price of the Common
Stock after the Offering. The market price of the shares of Common Stock is
likely to be highly volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's results of operations and
other factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of technology companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. See "Underwriting."
DILUTION
The initial public offering price of the Common Stock offered hereby is
substantially higher than the net tangible book value per share of the Common
Stock. Therefore, purchasers of Common Stock offered hereby will incur an
immediate and substantial dilution, and may incur additional dilution upon the
exercise of outstanding stock options. See "Dilution."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated (at an
assumed initial public offering price of $11.00 per share) to be approximately
$31.6 million ($37.8 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the net proceeds of the Offering
for the retirement of its entire remaining indebtedness, consisting of $750,000
of 18% subordinated promissory notes due May 31, 1997, working capital and other
general corporate purposes, including an estimated $5.5 million for equipment
and personnel to support accelerated product development and an estimated $3.0
million to enhance the Company's domestic and international distribution
capabilities. The Company may also use a portion of the net proceeds of the
Offering to fund acquisitions of complementary businesses, products or
technologies, although there are no current agreements or negotiations with
respect to any such acquisitions. Pending use of the net proceeds, the Company
will invest the net proceeds in short-term investment grade securities. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
The principal reasons for making the Offering at the present time are to
obtain additional working capital and for general corporate purposes, to create
a market for the Common Stock of the Company and to facilitate future access to
the public market. The amounts and timing of expenditures may vary significantly
depending upon numerous factors, including the rate of progress in the Company's
current product development efforts, the magnitude of additional product
development efforts of the Company, technological advances, the status of
competitive products and the availability of alternative methods of financing.
Accordingly, management will have broad discretion in the use of the proceeds of
the Offering to the Company. The Company anticipates that its existing capital
resources, including the proceeds of the Offering, will be adequate to satisfy
its capital needs through 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has not declared or paid dividends on its Common Stock since the
inception of the Company. The Company currently intends to retain any earnings
for use in developing and growing its business and does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on an actual basis and (ii) on an as adjusted basis to
give effect to the sale by the Company of 3,161,601 shares of Common Stock
offered hereby based upon an assumed initial public offering price of $11.00 per
share and the application of the estimated net proceeds therefrom. This table
should be read in conjunction with the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................................................... $ 750 $ --
--------- ------------
Long-term obligations..................................................................... $ -- $ --
Stockholders' equity:
Preferred Stock, $.0001 par value; authorized 20,000,000 shares; 0 shares issued........ -- --
Common Stock, $.0001 par value; authorized 200,000,000 shares; issued and outstanding,
22,518,917 shares (actual) and 25,680,518 shares (as adjusted) (1)..................... 2 3
Additional paid in capital.............................................................. 14,242 45,884
Accumulated deficit..................................................................... (9,307) (9,307)
Stockholder loan........................................................................ (1,700) (1,700)
--------- ------------
Total stockholders' equity............................................................ 3,237 34,880
--------- ------------
Total capitalization................................................................ $ 3,237 $ 34,880
--------- ------------
--------- ------------
</TABLE>
- --------------
(1) Excludes 5,000,000 shares of Common Stock reserved for future issuance under
the Company's Option Plan, including 1,250,037 shares of Common Stock
issuable pursuant to outstanding employee stock options. See "Principal and
Selling Stockholders," "Management -- Option Plan" and Note 10 of Notes to
Financial Statements.
13
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
approximately $3.2 million, or $.14 per share of Common Stock. Net tangible book
value per share is equal to the Company's tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the sale of 3,161,601 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $11.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company (resulting in estimated net proceeds of
$31.6 million), the pro forma net tangible book value of the Company as of
September 30, 1996 would have been approximately $34.9 million, or $1.36 per
share. This represents an immediate increase of $1.22 per share to existing
stockholders and an immediate dilution of $9.64 per share to purchasers of
Common Stock in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 11.00
Net tangible book value per share at September 30, 1996............ $ .14
Increase attributable to the Offering.............................. 1.22
---------
Pro forma net tangible book value per share after the Offering....... 1.36
---------
Dilution per share to purchasers in the Offering (1)................. $ 9.64
---------
---------
</TABLE>
The following table summarizes on pro forma basis as of September 30, 1996
the number of shares of Common Stock acquired from the Company, the aggregate
consideration paid and the average price per share paid by existing stockholders
and to be paid by investors purchasing Common Stock from the Company in the
Offering (at an assumed initial public offering price of $11.00 per share and
before deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION (1) AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)(2)............. 22,518,917 87.7% $ 14,243,203 29.1% $ .63
New investors (2)........................ 3,161,601 12.3 34,777,611 70.9 11.00
------------ ----- ------------- -----
Total................................ 25,680,518 100.0% $ 49,020,814 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- --------------
(1) As of the date of this Prospectus, there were employee stock options
outstanding to purchase a total of 1,250,037 shares of Common Stock. If all
such options outstanding at September 30, 1996 were exercised, the dilution
per share to new investors in the Offering would be decreased by $.29 per
share to a total of $9.35 per share and the average price per share paid by
the Company's existing stockholders would be $1.00. See "Capitalization,"
"Management -- Option Plan" and Note 10 of Notes to Financial Statements.
(2) Sales by Selling Stockholders in the Offering will reduce the number of
shares held by existing stockholders to 21,680,518 shares, or approximately
84.4% of the total shares of Common Stock outstanding, and will increase the
number of shares held by new investors to 4,000,000 shares, or approximately
15.6% of the total shares of Common Stock outstanding after the Offering.
14
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected financial data for the years ended December 31, 1993,
1994 and 1995, for the nine months ended September 30, 1996, as of December 31,
1994 and 1995 and as of September 30, 1996 are derived from the Financial
Statements of the Company, which have been audited by Coopers & Lybrand L.L.P.,
independent certified accountants, and are included in this Prospectus. The
following selected financial data for the period from inception, October 12,
1990 through December 31, 1991, for the year ended December 31, 1992 and as of
December 31, 1991, 1992 and 1993 are derived from the Financial Statements of
the Company which have been audited by Coopers & Lybrand L.L.P., independent
certified accountants, and which are not included in this Prospectus. The
selected financial data for the nine months ended September 30, 1995 are derived
from unaudited financial statements prepared by the Company. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for this period. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1996. The selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------- ---------------------------
1991(1) 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- 1995 --------------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 3,037
Cost of sales................ -- -- -- -- -- -- 1,152
--------- --------- --------- --------- --------- ----------- --------------
Gross profit................. -- -- -- -- -- -- 1,885
Operating expenses:
Research and development... 124 366 439 1,241 1,508 1,169 1,653
Selling, general and
administrative............ -- 77 106 327 1,217 725 1,945
--------- --------- --------- --------- --------- ----------- --------------
Total operating expenses..... 124 443 545 1,568 2,725 1,894 3,598
Operating income (loss)...... (124) (443) (545) (1,568) (2,725) (1,894) (1,713)
Net interest income
(expense)................... (1) (16) (41) (114) (613) (367) (414)
Other income (expense)....... -- -- -- -- 4 -- (193)
--------- --------- --------- --------- --------- ----------- --------------
Income (loss) before income
taxes....................... (125) (459) (586) (1,682) (3,334) (2,261) (2,320)
Provision for income taxes... -- (1) (1) (1) -- -- --
--------- --------- --------- --------- --------- ----------- --------------
Net income (loss)............ $ (125) $ (460) $ (587) $ (1,683) $ (3,334) $ (2,261) $ (2,320)
--------- --------- --------- --------- --------- ----------- --------------
--------- --------- --------- --------- --------- ----------- --------------
Net income (loss) per
share....................... $ -- $ (.01) $ (.01) $ (.04) $ (.08) $ (.06) $ (.11)
--------- --------- --------- --------- --------- ----------- --------------
--------- --------- --------- --------- --------- ----------- --------------
Weighted average shares
outstanding (2)............. 40,867,030 40,867,030 40,867,030 40,867,030 39,265,723 40,867,030 21,651,344
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (43) $ (104) $ (725) $ (1,939) $ (8,595) $ 2,263
Total assets............................... 15 299 194 332 1,277 6,055
Short-term notes payable................... -- 257 555 1,602 7,897 750
Long-term debt............................. -- -- -- 500 -- --
Total stockholders' equity (deficit)....... (30) (58) (645) (2,328) (8,163) 3,237
</TABLE>
- ------------------
(1) Period cumulative from inception, October 12, 1990, through December 31,
1991.
(2) On November 30, 1995, 19,215,686 shares of Common Stock were purchased by
the Company from a former stockholder pursuant to an option granted to the
Company by the former stockholder in February 1995. See "Certain
Transactions -- Transactions with Former Stockholder." Pursuant to the
requirements of the Securities and Exchange Commission, Common Stock and
stock options and warrants to purchase shares of Common Stock issued by the
Company during the 12 months prior to the initial public offering date have
been included in the calculation of the weighted average shares outstanding
for all periods presented using the treasury stock method based upon an
assumed initial public offering price of $11.00 per share.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS OF
THE COMPANY AND THE NOTES THERETO, AND OTHER FINANCIAL INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS
REGARDING FUTURE TRENDS, THE ACCURACY OF WHICH IS SUBJECT TO MANY RISKS AND
UNCERTAINTIES. SUCH TRENDS, AND THEIR ANTICIPATED IMPACT UPON THE COMPANY, COULD
DIFFER MATERIALLY FROM THOSE PRESENTED IN THIS PROSPECTUS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company manufactures and sells Network Information Computers, has
developed prototypes of certain Remote Access Agents and has other products in
design and development. The Company's products are based on the Company's core
software, firmware and hardware technology which was developed over a five year
period. In February 1996, the Company commenced sales of the ASA 312. To date,
the Company has not entered into long term agreements or blanket purchase orders
for the sale of its products, but generally obtains purchase orders for
immediate shipment and other cancelable purchase commitments. The Company's
sales during a particular quarter are, therefore, highly dependent upon orders
placed by customers during the quarter. Consequently, sales may fluctuate
significantly from quarter to quarter due to the timing and amount of orders
from customers, among other factors.
The Company allocates all of its fixed production costs to the cost of goods
sold of those products shipped during a given period. Accordingly, gross profit
may fluctuate significantly from period to period as a result of the change in
overall sales volumes. Gross profit may be affected in the future by the
introduction of new products which generate differing gross margins and by the
sales mix during a given period. The Company plans to pursue OEM relationships
with respect to the sale of Remote Access Agents. The Company has not negotiated
any such arrangements but anticipates that its pricing to OEMs would be less
than with respect to direct sales resulting in lower gross margins in connection
with these arrangements. However, sales and marketing expenses are generally
lower in the case of sales to OEMs.
The Company believes that its operating expenses will continue to increase
as a result of a variety of factors including: (i) increased research and
development expenses associated with the completion of the products in
development and the continued enhancement of existing products; and (ii)
increased selling, general and administrative expenses associated with continued
expansion of sales and marketing capabilities, product advertising and
promotion. See "Business -- Company Strategy" and "-- Product Development." The
Company recognizes research and development expenses when incurred.
RECENT RESULTS
For the three months ended December 31, 1996, the Company achieved sales of
$3.0 million, derived from shipments of 85 ASA 312 units and had a net income of
$212,000 (unaudited). The Company gained seven new customers during the three
months ended December 31, 1996. During 1996, sales to MCI, Ameritech and PacTel
accounted for 25%, 19% and 15% of total sales respectively. At year end, the
Company had an order backlog primarily for the ASA 312 of approximately $1.0
million and had increased its staff to 89 full-time employees. Newly-hired
employees include a Vice President, Engineering and eight additional direct
sales managers with substantial prior experience in the sale of
telecommunications products.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
SALES. Sales of the ASA 312 increased from $0 for the nine months ended
September 30, 1995 to $3.0 million for the nine months ended September 30, 1996
reflecting the initiation of sales of the ASA 312 during the first quarter of
1996. Total sales of $185,000, $1.1 million and $1.7 million were made during
the first, second and third quarters of 1996, respectively. During the nine
months ended September 30, 1996, sales to MCI, PacTel and Tellabs accounted for
31%, 18% and 13% of total sales, respectively. The Company does
16
<PAGE>
not anticipate that the sales to these customers will continue to be as
significant in future periods as a percentage of total sales. The Company is
therefore dependent upon broadening its customer base to increase its level of
sales.
COST OF GOODS SOLD. Cost of goods sold increased from $0 for the nine
months ended September 30, 1995 to $1.1 million for the nine months ended
September 30, 1996. Gross margin on the sale of ASA 312 units during the nine
months ended September 30, 1996 was 62%. Cost of goods sold includes direct
costs of subassemblies and components, fixed costs of the Company's production
department, indirect costs, and contract services. Fixed production costs
amounted to $319,000 for the nine months ended September 30, 1996.
OPERATING EXPENSES. Operating expenses increased 90% from $1.9 million for
the nine months ended September 30, 1995 to $3.6 million for the nine months
ended September 30, 1996 as a result of increases in research and development
and selling, general and administrative expenses. Research and development
expense increased 41% from $1.1 million for the nine months ended September 30,
1995 to $1.7 million for the nine months ended September 30, 1996 primarily as a
result of adding engineering personnel to broaden the Company's technology and
to develop new products. Selling, general and administrative expenses increased
168% from $725,000 for the nine months ended September 30, 1995 to $1.9 million
for the nine months ended September 30, 1996 primarily due to facility
expansion, employment of managerial and support staff and commissions directly
related to sales.
NET INTEREST EXPENSE. Net interest expense increased 13% from $367,000 for
the nine months ended September 30, 1995 to $414,000 for the nine months ended
September 30, 1996 primarily due to servicing short-term debt, all but $750,000
of which had been repaid as of the date of this Prospectus.
NET OTHER EXPENSE. Net other expense increased from $0 for the nine months
ended September 30, 1995 to $193,000 for the nine months ended September 30,
1996 primarily due to nonrecurring extension fee payments associated with short
term indebtedness of the Company which had been repaid prior to the date of this
Prospectus.
1995 COMPARED TO 1994
OPERATING EXPENSES. Operating expenses increased 74% from $1.6 million for
1994 to $2.7 million for 1995 as a result of increases in research and
development and selling, general and administrative expenses. Research and
development expense increased 22% from $1.2 million for 1994 to $1.5 million for
1995 as a result of additional personnel costs incurred to support the
development of enhancements to new applications for and pre-production costs
related to the ASA 312. Selling, general and administrative expense increased
272% from $327,000 for 1994 to $1.2 million for 1995 due to the hiring of
additional administrative personnel and costs associated with the introduction
of the ASA 312 at trade shows.
NET INTEREST EXPENSE. Net interest expense increased 438% from $114,000 for
1994 to $613,000 for 1995 primarily as a result of the incurrence of
indebtedness to finance operations.
1994 COMPARED TO 1993
OPERATING EXPENSES. Operating expenses increased 188% from $545,000 for
1993 to $1.6 million for 1994 as a result of increases in research and
development and selling, general and administrative expenses. Research and
development expense increased 183% from $439,000 for 1993 to $1.2 million for
1994 primarily as a result of an increase in technical personnel to support
development of the Company's technology, the purchase of components to
manufacture prototype products and product design expenses associated with the
ASA 312. Selling, general and administrative expenses increased 208% from
$106,000 for 1993 to $327,000 for 1994, primarily as a result of increased
personnel and employee relocation costs.
NET INTEREST EXPENSE. Net interest expense increased 178% from $41,000 for
1993 to $114,000 for 1994 primarily as a result of reliance on external debt to
finance operations.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating expenses through December 31, 1995 were financed primarily with
borrowings. As of December 31, 1995, the Company had incurred indebtedness of
$7.9 million, all of which was short-term. During the nine months ended
September 30, 1996, the Company sold 2,518,917 shares of Common Stock in private
transactions, including the issuance of 1,283,003 shares upon the exercise of
outstanding options and warrants for an aggregate of $13.7 million, and issued
$750,000 in 18% unsecured subordinated promissory notes due May 31, 1997 (the
"Notes"). The proceeds of the sale of such Common Stock were used for working
capital and to retire all of the Company's indebtedness other than the Notes.
The Company's working capital position improved from a deficit of $8.6 million
as of December 31, 1995 to $2.3 million as of September 30, 1996 primarily due
to the issuance of Common Stock, increases in accounts receivable and decreases
in short-term obligations.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. As a result of the substantial quarterly increases in sales, trade
accounts receivable increased to $1.4 million as of September 30, 1996. The
Company's future capital requirements will depend on many factors, including the
rate of revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing products and market
acceptance of the Company's products. There can be no assurance that additional
equity or debt financing, if required, will be available on acceptable terms or
at all.
Management estimates that capital expenditures will be approximately $4.0
million in 1997, primarily for the purchase of equipment related to product
development and automation of production operations, for the purchase of tooling
for plastic injection production molds, for ASA 312 production and for
furniture, fixtures and equipment in connection with leasing additional space
for the Company's operations.
The Company believes that the net proceeds of the Offering and anticipated
cash flow from operations will be sufficient to fund the Company's working
capital and capital expenditure requirements at budgeted levels through 1997.
RECENT PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based employee compensation plans,
including stock options. SFAS No. 123 defines and encourages the use of the fair
value method of accounting for employee stock-based compensation. Continuing use
of the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25") for measurement of employee
stock-based compensation is allowed with pro forma disclosures of net income and
net income per share as if the fair value method of accounting had been applied.
SFAS No. 123 is effective for transactions entered into for fiscal years
beginning after December 15, 1995. The Company has determined that it will
continue to use the method of accounting prescribed in APB 25 for measurement of
stock-based employee compensation, and will begin providing the required pro
forma disclosures in its financial statements for the year ended December 31,
1996 as allowed by SFAS No. 123. In the opinion of management, SFAS No. 123 is
not expected to have a material impact on the Company's financial statements.
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's quarters since January 1, 1996. This information has been
prepared by the Company on a basis consistent with the Company's financial
statements and includes all adjustments, consisting only of normal recurring
accruals, in
18
<PAGE>
accordance with generally accepted accounting principles. Such quarterly results
are not necessarily indicative of future operating results. This information
should be read in conjunction with the Financial Statements of the Company and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 % OF SALES 1996 % OF SALES 1996
----------- ----------- ----------- ----------- -------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales................................................ $ 185 100% $ 1,129 100% $ 1,723
Gross profit......................................... 60 32% 732 65% 1,093
Operating expenses:
Research and development........................... 464 251% 522 46% 667
Selling, general and administrative................ 421 227% 591 52% 933
----------- --- ----------- --- ------
Total operating expenses............................. 885 478% 1,113 98% 1,600
Operating income (loss).............................. (825) (381) (507)
Net interest income (expense)........................ (309) (88) (17)
Other income (expense)............................... 2 3 (198)
----------- ----------- ------
Net income (loss).................................... $ (1,132) $ (466) $ (722)
----------- ----------- ------
----------- ----------- ------
Net income (loss) per share.......................... $ (0.06) $ (0.02) $ (0.03)
----------- ----------- ------
----------- ----------- ------
<CAPTION>
% OF SALES
-----------
<S> <C>
Sales................................................ 100%
Gross profit......................................... 63%
Operating expenses:
Research and development........................... 39%
Selling, general and administrative................ 54%
---
Total operating expenses............................. 93%
Operating income (loss)..............................
Net interest income (expense)........................
Other income (expense)...............................
Net income (loss)....................................
Net income (loss) per share..........................
</TABLE>
19
<PAGE>
BUSINESS
Digital Lightwave develops, manufactures and sells advanced computer systems
that provide information concerning the performance of lightwave
telecommunications networks and transmission equipment. The Company believes
that there is a growing need on the part of its customers, which include
telecommunications service providers and network equipment manufacturers, to
manage lightwave transmission of voice, data, image and video and to plan and
implement fiber optic network expansion more effectively. The Company's product,
the ASA 312, is a portable software-based Network Information Computer that is
designed to outperform conventional hardware-based network test instruments. The
ASA 312 is "user friendly," lightweight, compact, and easily operated through a
touch sensor over a full color display. The Company believes that the ASA 312 is
the only integrated product that enables users to understand and process
information, simultaneously and without interruption, from telecommunications
networks utilizing: (i) the legacy T-Carrier protocol at rates DS-0, DS-1 and
DS-3; (ii) the lightwave SONET protocol at rates OC-1, OC-3 and OC-12; and (iii)
the lightwave ATM protocol.
The Company has developed prototypes for a series of Remote Access Agents
which are modular hardware/software platforms that are designed to provide
network operators with real-time information concerning performance of the
network segments where Remote Access Agents have been installed. The Remote
Access Agents incorporate technology developed by the Company which includes
advanced hardware technology that accesses bits in lightwave and legacy
telecommunications transmissions, a non-blocking switch matrix that maps signals
into different transmission speeds and protocols, and object-oriented software
that controls user selectable features accessible through Windows OS, web
browsers or other user environments.
The Company began shipping the ASA 312 in February 1996. Through December
31, 1996, the Company had shipped more than 170 ASA 312 units to more than 25
customers, including: (i) IXCs, such as MCI; (ii) RBOCs, such as Ameritech;
(iii) CAPs, such as Brooks; (iv) independent telephone companies, such as GTE;
(v) network equipment manufacturers, such as Tellabs; (vi) equipment leasing
companies, such as AT&T Capital; and (vii) private network operators, such as
Bear Stearns & Co., Inc.
INDUSTRY DEVELOPMENT
Over the past several years, the telecommunications network has undergone
fundamental changes. Telecommunications service providers have increasingly
added fiber optic cable to their existing copper infrastructures and high
bandwidth lightwave transmission equipment to transport traffic efficiently
through the network. Although lightwave transmissions are mapped differently
from legacy transmissions, they often contain legacy signals, resulting in a
proliferation of signalling standards in the network. Universal protocols, such
as ATM, have been developed for the transport of voice, data, image and video on
public and private lightwave networks. However, service providers must still
transport traffic mapped in specialized protocols inherent in legacy networks.
The dedicated circuit switching architecture of the legacy portions of the
public network are now coupled to networks designed with packet or cell switched
architectures, which allow for a more seamless delivery of transmissions through
both private and public networks. In order to effectively manage and qualify the
performance of the more highly evolved portions of the network, realtime
monitoring is required at increased numbers of access points.
As the network infrastructure and architecture have evolved, there has been
increasing demand for bandwidth as LANs and WANs have proliferated, Internet and
wireless utilization has risen, and enhanced data services have become more
robust and prevalent. In addition, the domestic and certain international
telecommunications industries have been deregulated, increasing the opportunity
for competition in terms of quality, price and available bandwidth. These
competitive pressures have caused service providers to begin reducing staffing
levels and seeking more intuitive and automated management tools for their
lightwave and legacy networks.
THE DIGITAL LIGHTWAVE SOLUTION
Digital Lightwave was founded to provide technology and products to manage
network traffic over a broad range of lightwave and legacy transmission rates
and an increasing variety of protocol mappings
20
<PAGE>
commonly encountered in public and private networks. The Company's initial
products accomplish this goal by providing modular and scaleable hardware and
software platforms that provide information concerning network quality and
performance, enabling the customer to expand the network effectively and monitor
performance in real time.
Digital Lightwave has designed its product architecture to provide an open
platform for the management of the various protocols of lightwave and legacy
networks. This architecture also supports centralized management of Remote
Access Agents, which the Company is beginning to market for deployment
throughout public and private networks. By providing continuous, end to end
evaluation of the network, the Company believes that its products will enable
customers to minimize degradation or loss of service as the network evolves to a
cell or packet switched environment. The Company plans to use the switch matrix
contained in its current products as the basis to develop a virtual switching
product for the delivery of expandable bandwidth service from the public network
to private networks.
STRATEGY
The Company has developed a growth strategy which is designed to increase
its market share and expand distribution across a wide range of customers, the
key elements of which are:
INCREASE DOMESTIC SALES. The Company intends to increase sales of the ASA
312 by recruiting additional direct and internal sales staff to broaden its
customer base and obtain repeat orders. In addition, the Company plans to
introduce its Remote Access Agents into the existing domestic market for legacy
network monitoring products and to obtain an early market position as a supplier
of lightwave network monitoring products. Futher, the Company intends to
supplement its direct sales network with strategic OEM relationships with
network equipment manufacturers.
COMMENCE INTERNATIONAL SALES. The Company believes that significant demand
exists outside the United States for products such as Network Information
Computers and Remote Access Agents and intends to design and develop versions of
these products for international markets. The Company plans to augment its
technical staff with approximately eight engineers to assist in the development
of such products and to establish indirect sales channels globally.
PROVIDE COMPREHENSIVE LIGHTWAVE MANAGEMENT SOLUTIONS. The Company believes
that its Network Information Computers offer superior performance over competing
products. The Company intends to build upon the core technologies found in this
product to establish a family of virtual switching products that the Company
believes will position it as a leader in providing lightwave management
solutions.
TECHNOLOGY
The following core technologies are used in the ASA 312 and provide a basis
for certain of the Company's products in development: (i) a software operating
environment which runs over a MS-DOS platform; (ii) programs which operate the
Company's firmware and hardware; (iii) graphical user interface programs running
in a windowed environment; (iv) Network Protocol Translators ("NPTs"), which are
modular gate arrays that supply discrete network information from signals at
specific bandwidths and on specific protocols; and (v) Network Protocol
Processors ("NPPs"), which are modular hardware platforms for the processing of
various ranges of bandwidth and protocols.
The Company's software is written in object-oriented code and provides users
of the ASA 312 with an intuitive graphical user interface. The open architecture
of the Company's software establishes a platform for the development of
additional features and applications.
NPTs supply information as to each bit or specified groups of bits being
transmitted in order to identify and process information concerning the overhead
and payload carried by network transmissions. NPTs are combined with a
microprocessor, discrete integrated circuits and other firmware in NPPs. NPPs
interface, frame and process network information from a number of protocols and
transmission speeds. NPPs also can insert user-programmable payloads and
user-specified overhead into a transmission.
21
<PAGE>
The graphic presented below illustrates the hardware architecture utilized
in the Company's Network Information Computers and Remote Access Agents.
[GRAPHIC]
In order to allow its customers to work simultaneously with different
bandwidths and protocols, the Company has developed a non-blocking switch matrix
and applications software which allow the Company's customers to "frame up" on a
given signal, multiplex or demultiplex the signal into different transmission
speeds and map the signal into different protocols. These functions allow
customers to derive information concerning the performance of the network under
various existing or potential conditions.
The following reproduction of the graphical user interface used to access
and control the switch matrix depicts the manner in which customers can
simultaneously break down high speed signals into their components, route
traffic, combine lower speed signals into higher speed signals, change signals
from one protocol to another and generate signals mapped in various protocols.
[GRAPHIC]
22
<PAGE>
PRODUCTS
NETWORK INFORMATION COMPUTERS. The Company currently manufactures and sells
the ASA 312, a "user friendly," portable Network Information Computer which
enables users to access and process information concerning the performance of
telecommunications networks and transmission equipment. The ASA 312 was designed
to displace existing network test instruments by incorporating their functions
into a software-based information processing system, adding additional functions
and improving price/performance. The Company believes that the ASA 312
represents the first of a new class of products which the Company calls "Network
Information Computers." With the ASA 312, telephone companies and other
operators of large telecommunications networks, as well as manufacturers of
network transmission and cross-connect equipment, are able to (i) verify and
manage information concerning the transmission of voice, data, image and video
traffic and (ii) plan for and implement network expansion more effectively.
Telecommunications equipment manufacturers also use the ASA 312 in designing,
engineering and manufacturing their products as well as in installing their
products in the networks of their customers and providing ongoing customer
support. The ASA 312 has a suggested list price of $37,500 when equipped with
T-Carrier and SONET capabilities, and $47,500 when ATM capabilities are also
included, which prices are at or below the price of the test instruments with
which the ASA 312 is designed to compete.
The following table sets forth certain features of the ASA 312 which the
Company believes provide superior performance over the test instruments with
which the ASA 312 is designed to compete, based upon the descriptions of the
capabilities of the currently available test instruments set forth in the
catalogs and manuals for such products:
<TABLE>
<S> <C>
FEATURE CUSTOMER BENEFIT
Software-based Provides for custom features and field upgrades.
One simple menu format for all Easy to learn and set-up.
protocols
Touch sensor over full color windowed Easy to use by personnel of all levels of aptitude.
graphics Intuitive graphical user interface. Clear display of
data.
Transmitting and receiving of signals Can review multiple network elements simultaneously.
at all of the protocols Reduces overall task time.
simultaneously
Switch matrix Facilitates configuration of the product for dropping
and inserting traffic from, into and between
different protocols.
Remote operation Provides complete, direct and identical operation of
the product at a remote site.
Ethernet interface Provides operation of the product via LAN.
Laptop profile/lightweight Truly portable.
PCMCIA card for expanded memory Can display long-term history graphs. Provides
recallable setups. Can store significant amounts of
data.
Non-volatile memory Saves data when turned off.
Software calibration Allows calibration by the customer which reduces cost
and down-time.
</TABLE>
The ASA 312 competes against the test instruments currently available on the
market, which are hardware-based, work with one transmission speed or protocol
at a time, do not provide an interface which permits users to simultaneously
switch and multiplex or demultiplex different signals to derive information
concerning embedded signals, cannot store a significant amount of data and which
the Company believes are generally more difficult to use than the ASA 312.
The ASA 312 generates, transmits, receives, interleaves, deinterleaves,
multiplexes, demultiplexes, maps, demaps and processes legacy T-Carrier
electronic signals and SONET and ATM lightwave signals. It provides access to
T-Carrier SONET and ATM signals and their status and control overhead. The
Company
23
<PAGE>
believes that the ASA 312 is the only integrated product that enables users to
understand and process information, simultaneously and without interruption,
from networks utilizing the legacy T-Carrier protocols at rates DS-0, DS-1 and
DS-3 and the lightwave SONET protocol at rates OC-1, OC-3 and OC-12, as well as
from networks transporting enhanced data services utilizing the ATM protocol
integrated into a single lightweight, compact unit. The ASA 312's graphical user
interface is a touch sensor over a large color display which provides simple and
intuitive windowed graphics and menus. The ASA 312 may be accessed and operated
remotely by modem or through direct connection to an Ethernet LAN.
REMOTE ACCESS AGENTS. The Company has recently completed prototypes of
Remote Access Agents for lightwave, Ethernet and Fast Ethernet LAN networks.
Prototypes have been placed in initial field trials by a private network
operator and the Company has begun to market these products. Remote Access
Agents are designed to provide network operators with real-time information
concerning network performance for the segments where the products have been
installed. Remote Access Agents provide performance and quality data to the
operator through a standard operations interface to allow central monitoring and
administration. The Company plans to develop a family of Remote Access Agents to
provide a broad range of protocols at prices which are intended to facilitate
wide deployment of the technology. See "Risk Factors--Dependence on Single
Product; Uncertain Market Acceptance of Planned Products."
CUSTOMERS
Through December 31, 1996, the Company has sold more than 170 units of the
ASA 312 to over 25 customers, including each of the following:
IXCS
MCI Telecommunications Corp.
Sprint Corp.
WorldCom, Inc.
RBOCS
Ameritech Corporation
Bell Atlantic Communications, Inc.
Pacific Telesis Group
SBC Communications Inc.
INDEPENDENT TELEPHONE COMPANIES
GTE Corp.
Sprint Centel
EQUIPMENT LEASING COMPANIES
AT&T Capital Corp.
GE Capital TMS
McGrath Rentelco
CAPS
Brooks Fiber Properties, Inc.
Five Star Telecom Inc.
GST Telecommunications, Inc.
MRC Telecommunications Inc.
Toledo Area Telecommunications Services, Inc. U.S. South Communications, Inc.
EQUIPMENT MANUFACTURERS
Alcatel Network Systems, Inc.
Hekimian Laboratories, Inc.
Hitachi Telecom Technologies Co., Ltd.
Lucent Technologies, Inc.
NEC America, Inc.
Tellabs Operations, Inc.
PRIVATE NETWORK OPERATORS
Bear Stearns & Co., Inc.
U.S. Department of Defense
In most instances, customers designate the ASA 312 as approved operating
equipment prior to purchase. The ASA 312 has been designated as approved
operating equipment by various of the customers listed above and AT&T Corp.
("AT&T"), ICG Telecom Group, Inc. ("ICG"), Time Warner Communications, Inc.
("Time Warner") and US WEST Communications, Inc. ("US West"). While neither
AT&T, ICG, Time Warner nor US West are obligated to purchase ASA 312s, such
approvals enable employees of these companies to purchase the ASA 312, subject
to budgetary and other constraints.
On August 1, 1996 Ameritech completed a "request for qualifications"
procedure evaluating the ASA 312 and the competitive products, designated the
ASA 312 as its approved operating equipment for evaluating SONET systems and
entered into a three-year agreement (the "Ameritech Agreement") for the purchase
of the ASA 312. While the Ameritech Agreement does not obligate Ameritech to
purchase ASA 312s, such approval enables employees of Ameritech to purchase the
ASA 312, subject to budgetary and other constraints.
24
<PAGE>
The Company has pursued a policy of involving key customers in the
evaluation of products in development and continually solicits suggestions from
customers regarding additional desirable features of products which it has
introduced or plans to develop. Because the Company's products are software
based and remotely accessed, the Company has generally been able to satisfy
requests for additional feature sets by downloading software upgrades to its
products in the field.
For the twelve months ended December 31, 1996, sales to MCI, Ameritech and
PacTel accounted for 25%, 19% and 15% of total sales, respectively. There can be
no assurance regarding the amount or timing of purchases by MCI, PacTel, Tellabs
or any other customer in any future period. Broad acceptance of the ASA 312 and
future products is critical to the Company's future success and is subject to
substantial uncertainties. See "Risk Factors -- Customer Concentration."
SALES, MARKETING AND CUSTOMER SUPPORT
SALES. The Company markets its products to telecommunications service
providers and network equipment manufacturers through a direct and internal
sales force (currently consisting of 18 employees). The Company's internal sales
force includes managers and internal sales staff based at the Company's
principal executive offices and a regional direct sales staff.
The primary roles of the Company's regional direct sales force are (i) to
ensure that existing and potential customers in each territory are being
regularly contacted, (ii) to differentiate the features and capabilities of the
Company's products from competitive offerings, (iii) to assist customers with
the implementation of the Company's products and (iv) to serve as a direct link
to assure quality and timely customer support. In addition, the Company believes
that its investment in its regional direct sales staff helps the Company to
monitor changing customer requirements, as well as the development of industry
standards. The Company intends to continue to augment its sales organization to
promote the Company's products and to ensure direct contact with the Company's
current and potential customers.
MARKETING. In marketing the ASA 312, the Company focuses on the divisions
of telecommunications service providers that are responsible for planning and
installing extensions of the network. In contrast, the Company has directed its
preliminary marketing efforts relating to its Remote Access Agents towards the
strategic planning divisions of telecommunications service providers and private
network operators. The Company seeks to build awareness of its products through
a variety of marketing channels and methodologies. The Company participates in
industry trade shows and conferences and makes direct mailings to targeted
potential customers.
CUSTOMER SUPPORT. The Company is dedicated to providing comprehensive
customer support. All service, repair and technical support are performed
in-house utilizing sub-assemblies and components obtained from the Company's
regular sources of supply. The Company's technical support engineers are trained
in the hardware and software incorporated in its products, as well as the
networks and transmission equipment operated by its customers. The Company
offers technical support to its customers 24 hours a day, 7 days a week, via a
toll-free hotline and through paging systems for all support personnel. The
Company offers a three-year limited warranty on all components of its products,
other than the laser transmitter unit, which has a one-year limited warranty,
and software and firmware, which have a 90-day limited warranty.
PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
achieve technological leadership which will require ongoing enhancements of its
products and the development of new applications and products that provide a
comprehensive lightwave management solution. Accordingly, the Company intends to
continue to make substantial investments in the development of new technologies,
the commercialization of new products building on the Company's existing
technological base and the enhancement and development of additional
applications for its products. The Company plans to establish and maintain a
budget for research and development expense at a minimum of 9% of sales during
each fiscal year.
The Company has organized its product development efforts into three main
groups as follows: (i) the microelectronics group is devoted to the further
development of hardware and firmware technologies; (ii) the software development
group is devoted to developing new applications software; and (iii) the hardware
development group is devoted to reducing further the size and weight of the
Company's products, designing
25
<PAGE>
printed circuit boards for new applications and developing enhancements to
streamline production. The Company intends to increase the size of its technical
staff by adding microelectronic and software engineers, including those with
particular understanding of international transmission protocols and standards.
Described below are various planned products of the Company currently in the
preliminary stages of development, each of which utilizes the hardware, firmware
and software technology found in the ASA 312. With respect to each of these,
product definitions, including proposed features and functions, have been
established, components have been specified and pricing has preliminarily been
established to seek responses from potential customers. However, prototypes for
these products have not yet been assembled.
ENHANCEMENTS OF THE ASA 312. The Company currently plans to develop: (i) a
factory installed OC-48 option for the ASA 312; and (ii) the ASA 312E, a
modified version of the ASA 312 to serve international markets.
NOTEBOOK PLATFORM. The Company plans to develop a notebook-size Network
Information Computer which is planned to contain various customer selected NPPs.
Users will be able to configure the notebook platform with various NPP cards
that will interface with transmission speeds ranging from 64 Kbps to 2.4 Gbps
for T-Carrier, PDH, SONET, SDH and ATM protocols. The Company plans to design
the network information notebook computer to enable users to access not only the
network information provided by the NPPs, but also to write programs which use
this data. For example, the Company intends to design the notebook platform to
extract data from a particular network element, to search for a particular
condition (such as a certain level of data congestion at the network element)
and to intervene actively to alter the way in which traffic is routed. The
notebook computer platform will be designed to provide the means to transfer
data derived from the NPPs to a conventional computing environment of word
processing and spreadsheet programs for storage, processing and reporting.
NETWORK DIGITAL ASSISTANTS. The Company plans to develop a family of
Network Digital Assistants, which will generate network traffic to assist in the
analysis of network performance.
VIRTUAL SWITCHING PRODUCTS. The Company intends to utilize the switch
matrix and other elements of its technology to develop a series of virtual
switching products which would provide a means of delivering expandable
bandwidth from the public network to a customer premise.
PRODUCTION
The Company's manufacturing operations consist primarily of material
planning and procurement, final assembly, software loading, testing and quality
assurance. The Company's operational strategy relies on outsourcing of
manufacturing to reduce fixed costs and to provide flexibility in meeting market
demand. The Company currently subcontracts component procurement and kitting and
printed circuit board assembly to a company that specializes in these services.
The Company takes the printed circuit board-based modules produced by its
contract manufacturer and inserts them into product enclosures in combination
with the Company's software.
In connection with its outsourcing strategy, the Company is seeking to
secure additional sources of supply, including additional contract subassembly
and component manufacturers. The Company has experienced in the past, and may in
the future experience, problems with its contract manufacturers, in areas such
as quality, quantity and on-time delivery. In addition, the Company may in the
future experience pricing pressure from its contract manufacturers.
26
<PAGE>
The Company uses a rolling six-month forecast based on anticipated product
orders to determine its general materials and component requirements. Lead times
for materials and components ordered by the Company vary significantly, and
depend on factors such as the specific supplier, purchase terms and demand for a
component at a given time. Currently, the Company acquires materials and orders
certain standard subassemblies based on the Company's forecast. Upon receipt of
firm orders from customers, the Company assembles fully-configured systems and
subjects them to a number of tests before shipment. If orders do not match
forecasts, the Company may have excess or inadequate inventory of certain
materials and components.
Although the Company generally uses standard parts and components for its
products, several key components used in the manufacture of its products are
currently purchased only from single or limited sources. At present, the
Company's only single-sourced component is a SONET overhead terminator.
Limited-sourced components used in the ASA 312 and the Remote Access Agents
include a single board computer, a power supply, a touch sensor and controller,
plastic housing units and other discrete components. The Company generally does
not have long-term agreements with any of these single or limited sources of
supply. Any interruption in the supply of any of these components, or the
inability of the Company to procure these components from alternate sources at
acceptable prices and within a reasonable time, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. Qualifying additional suppliers is time consuming and expensive and
the likelihood of errors is greater with new suppliers. See "Risk Factors --
Substantial Increase in Manufacturing Operations; Dependence on Contract
Manufacturing and Limited Source Suppliers."
BACKLOG
The Company's backlog at December 31, 1996 was approximately $1 million.
Variations in the size and delivery schedules of purchase orders received by the
Company, as well as changes in customers' delivery requirements, may result in
substantial fluctuations in backlog from period to period. Accordingly, the
Company believes that its backlog cannot be considered a meaningful indicator of
future financial results.
COMPETITION
The market in which the Company's Network Information Computers and Remote
Access Agents is offered is intensely competitive and subject to rapid change as
a result of technological developments and other factors. The Company believes
that the principal competitive factors in its market are technical resources and
expertise relating to a wide range of bandwidth and protocols, product features,
reliability, price, timeliness of new product introductions, timely adoption of
emerging industry standards, service, support, size, name recognition and
installed base.
The Company believes that there are four current principal competitors which
offer products which compete with the ASA 312, including Hewlett Packard Co.,
Tektronix Inc., Dynatec Corp. and Wandel & Goltermann Technologies, Inc. and
less than ten other companies which offer network monitoring products, which do
not provide the capability to monitor lightwave transmissions, the principal of
which are Applied Digital Access Inc., Network General Inc. and Hekimian
Laboratories, Inc. The companies that offer test instruments in competition with
the ASA 312 do not supply network monitoring products. Accordingly, the Company
believes that there are currently no competitors that provide an integrated
comprehensive solution to performance monitoring transmission speeds from DS-0
through OC-12 and no providers of portable equipment which cover the full range
of features offered by the ASA 312. However, such competitors and certain
prospective competitors have significantly longer operating histories, larger
installed bases, greater name recognition and technical, financial,
manufacturing and marketing resources than the Company. In addition, a number of
these competitors have long established relationships with the Company's
customers and potential customers. The Company believes it is likely that
competitors will enter the market for most if not all of the products which the
Company will offer. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright and trademark
protection and non-disclosure agreements to protect its core technology.
Although the Company has pursued and intends to continue to pursue patent
protection of certain aspects of its technology that it considers important, the
27
<PAGE>
Company believes that its success will be largely dependent on its reputation
for technology, product innovation, affordability, marketing ability and
response to customers' needs. As of the date of this Prospectus, the Company had
pending two U.S. patent applications covering certain aspects of its technology.
There can be no assurance that the Company will be granted any patents or that,
if any patents are granted, they will provide the Company with significant
protection or will not be challenged.
The Company believes that the rapid rate of technological change and the
relatively long development cycle for integrated circuits are also significant
factors in the protection of the Company's intellectual property. The Company's
NPTs and NPPs incorporate unique designs that have been developed based on a
broad understanding of public and private networks, signaling protocols and
network information requirements of the Company's customer base. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements and proprietary information and inventions agreements with its
employees and suppliers, and limits access to and distribution of its
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's technology without
authorization. Accordingly, there can be no assurance that the Company will be
successful in protecting its intellectual property or that the Company's rights
will preclude competitors from developing products or technology equivalent or
superior to those of the Company.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. Although the Company is not aware of any infringement or claimed
infringement by its products or technology of the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertions will not result in
costly litigation or require the Company to obtain a license to intellectual
property rights of such parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.
Furthermore, litigation could result in substantial cost to and diversion of
efforts by the Company regardless of outcome. Any infringement claims or
litigation against the Company could materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
the Company's growth strategy includes a plan to enter international markets and
the laws of some foreign countries do not protect the Company's proprietary
rights regarding its products to the same extent as do the laws of the United
States. See "Risk Factors -- Dependence on Proprietary Technology."
FACILITIES
The Company occupies a headquarters facility of 15,824 square feet in
Clearwater, Florida, with rent payable in the amount of $266,000 per year plus a
portion of operating expenses. This facility is leased through January 31, 1998.
The Company has an option to extend the term of the lease for an additional
three-year period.
REGULATION
The Company's products must meet industry standards and receive
certification for connection to certain public telecommunications networks prior
to their sale. In the United States, the Company's products must comply with
various regulations promulgated by the FCC and Underwriters Laboratories.
Internationally, the Company's products must comply with standards established
by telecommunications authorities in various countries as well as with
recommendations of the Consultative Committee on International Telegraph and
Telephony. In addition, certain planned products of the Company may be required
to be certified by BellCore in order to be commercially viable. Although the
Company's products have not been denied any regulatory approvals or
certifications to date, any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, financial condition and results of operations.
The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state regulatory agencies, including the
FCC and the various state Public Utility Commissions ("PUCs") and Public Service
Commissions regulate most of the Company's domestic customers. In February 1996,
the Telecommunications Act of 1996 (the "Telecom Act") was passed. The Telecom
Act allows
28
<PAGE>
IXCs, RBOCs, CAPs, independent telephone companies and electric utility
companies to compete with each other to provide local and long-distance service.
The Company believes that the Telecom Act will increase the demand for systems,
software and services as telecommunications service providers respond to the
changing competitive environment by constructing new networks or enhancing
existing networks.
In addition, the FCC and a majority of the states have enacted or are
considering regulations based upon alternative pricing methods. Under
traditional rate of return pricing, telecommunications service providers were
limited to a stated percentage of profit on their investment. Under the new
method of pricing, many PUCs have relaxed or eliminated the profit cap in return
for the carrier's promise to reduce or hold service prices at current levels. In
some states, the PUCs and the carriers have further agreed, in order to win
relaxation of profit limits, that the carriers would invest large sums to
upgrade the digital and lightwave capabilities of the network. The Company
believes that the new methods of price regulation could increase the demand for
its products.
Outside the United States, telecommunications networks are primarily owned
by the government or are strictly regulated by the government. Although
potential growth rates of some international markets are higher than those of
the United States, access to such markets is often difficult due to the
established relationships between the government-owned or controlled
telecommunications operating company and its traditional indigenous suppliers.
However, there has been a global trend towards privatization and deregulation of
the state-owned telecommunications operations. The Company believes that the
current trend of privatization and deregulation will continue and that such
trend could enhance the Company's international opportunities.
LITIGATION
The Company is not a party to any material litigation and is not aware of
any pending or threatened material litigation.
EMPLOYEES
The Company employs a full-time staff of 89, of which 26 are engineering
personnel, 16 are production personnel, 18 are sales staff and 29 are
administrative personnel. The Company has agreements with all employees covering
assignment of inventions and patents to the Company and confidentiality, as well
as a comprehensive security agreement. The Company believes that its
relationship with its employees is good.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --------- -----------------------------------------
<S> <C> <C>
Bryan J. Zwan............................... 49 Chairman of the Board,
Chief Executive Officer, President and
Director
Seth P. Joseph.............................. 42 Senior Executive Vice President and
Director
Beth A. Morris.............................. 43 Vice President, Finance
Eric T. Mitchell............................ 35 Vice President, National Account Sales
Gerald F. Gentile........................... 36 Vice President, Engineering
Thomas V. Williams.......................... 43 Vice President, Manufacturing
Kenneth T. Myers............................ 42 Vice President, Advanced Products
Denise Licciardi............................ 36 Vice President, Administration
Daniel Lorch................................ 44 Vice President, Customer Development
Robert Goransson............................ 36 Vice President, Qualifications
Doug C. Dohring............................. 38 Director
William F. Hamilton*........................ 57 Director Nominee
William Jefferson Marshall*................. 41 Director Nominee
</TABLE>
- --------------
*Upon consummation of the Offering, the Director Nominees set forth above are
expected to be appointed to the Company's Board of Directors.
DR. ZWAN founded the Company in February 1991 and has served as Chairman of
the Board, Chief Executive Officer and a Director since the Company's inception
and served as its President from inception until March 1996 and since October
1996. From 1987 to 1991, Dr. Zwan was Chief Executive Officer of Digital
Photonics, Inc. ("DPI"), a SONET multiplexer manufacturer which he founded in
1987. DPI was purchased in December 1990 by Digital Transmission Systems, Inc.,
a manufacturer of digital cross-connect equipment and DS1 modems. From 1985 to
1987, Dr. Zwan was Vice President, Optical Products at DSC Communications
Corporation, a global provider of telecommunication transmission, cross-connect
and network access equipment. Dr. Zwan was a member of the Research Facility
Staff at the Massachusetts Institute of Technology for two years, and holds a
Ph.D. in Space Physics from Rice University and B.S. degrees in Physics and
Chemistry from the University of Houston.
MR. JOSEPH has been Senior Executive Vice President and a Director of the
Company since September 1996. For more than the five years prior to September
1996, he was a partner in the law firm of Baker & McKenzie, during which time he
concentrated on corporate finance, merger and acquisition transactions and
providing general corporate advice.
MS. MORRIS has been Vice President, Finance of the Company since January
1996. Prior to joining the Company as Controller in January 1995, from 1989
through October 1994, Ms. Morris was the Controller of Tredegar Molded Products
Co. Technical Center, a division of Tredegar Industries, Inc., dedicated to
project management and product development, where she performed various
administrative functions in accounting, purchasing and human resources. Ms.
Morris is a Certified Public Accountant in the State of Florida.
MR. MITCHELL has been Vice President, National Account Sales of the Company
since September 1996, having served as Vice President, Sales of the Company from
April 1995 to September 1996. From October 1992 to March 1995, Mr. Mitchell was
the National Sales Manager and then President of Crown Herald, Inc., a
manufacturer of imprinted corporate products, where he was initially responsible
for various sales and marketing activities and later for all phases of
operations. Prior to that, from March 1989 to October 1992, Mr. Mitchell was
Regional Manager of Penn Corporation, a manufacturer of imprinted corporate
products.
30
<PAGE>
MR. GENTILE has been Vice President, Engineering of the Company since
January 1997. From March 1995 to January 1997 he served as Engineering and
Scientific Manager of the Microwave Logic Products Division of Tektronics, Inc.
having previously served as the Engineering Manager of Microwave Logic, Inc.
from April 1990 to March 1995. Mr. Gentile holds a B.S.E.E. from the University
of Massachusetts.
MR. WILLIAMS has been Vice President, Manufacturing of the Company since
April 1995. Prior to joining the Company, from March 1994 to April 1995, Mr.
Williams was an independent consultant to Lockheed Martin Corporation, a defense
contractor. From February 1991 to March 1994, Mr. Williams was a Program Manager
at Group Technologies Corporation, a manufacturer of computers and electronic
products.
MR. MYERS has been Vice President, Advanced Products of the Company since
June 1996, having served as Engineering and Design Manager since joining the
Company in September 1991. Prior to joining the Company, Mr. Myers was the Chief
Engineer at DPI from 1987 to 1991.
MS. LICCIARDI has been Vice President, Administration of the Company since
September 1996. Prior to joining the Company, Ms. Licciardi was Vice President,
Administration at Real World Corporation, a software supplier from April 1984
until September 1996.
MR. LORCH has been Vice President, Customer Development of the Company since
June 1996. Prior to joining the Company, from 1980 to June 1996, he served as
Chief Executive Officer and President of Digital Engineering, Inc., a nationwide
field service and computer maintenance company.
MR. GORANSSON has been Vice President, Qualifications of the Company since
August 1996, having previously served as Quality Assurance Manager of the
Company from March 1996 to August 1996. Prior to joining the Company, he served
as Project Manager at Ericsson Network Systems, a manufacturer of telephone
switching systems, from April 1981 until March 1996.
MR. DOHRING was elected as a Director of the Company in June 1996. He serves
as Chairman of the Board of The Dohring Company, Inc., a firm founded by Mr.
Dohring which provides market research and consulting services. In 1995, The
Dohring Company had 75 employees and ranked 54th on Advertising Age's list of
the top 100 market research firms in the nation. Mr Dohring served as President
of the Company from March 1996 to October 1996. From its inception in 1986 until
March 1996, he served as Chief Executive Officer of The Dohring Company, Inc.
DR. HAMILTON is the Landau Professor of Management and Technology at the
Wharton School of the University of Pennsylvania. He is also a director of
Centocor, Inc., Hunt Manufacturing Co., Marlton Technologies, Inc. and Neose
Technologies, Inc.
MR. MARSHALL is a Senior Managing Director and the Chief Technical Officer
of Bear, Stearns & Co., Inc., responsible for its telecommunications and
information technology operations. He is a co-founder of the .V Forum, an
IP/voice/video consortium which includes the Company, and the ATM Forum.
BOARD OF DIRECTORS
The Board of Directors currently consists of three members, Messrs. Zwan,
Joseph and Dohring. The Company's Bylaws provide that the Board of Directors can
fix the authorized number of directors from time to time between one and nine.
Upon consummation of the Offering, the Board of Directors will consist of five
members (at least two of whom will not be employees of, or otherwise affiliated
with, the Company). The Board of Directors will establish committees, including
compensation and audit committees, each of which will report to the Board of
Directors.
Executive officers are appointed by, and serve at, the discretion of the
Board of Directors. There are no family relationships among any of the directors
or executive officers of the Company.
COMPENSATION OF DIRECTORS
During 1996, directors did not receive compensation for serving as members
of the Board of Directors. Directors of the Company who are not officers or
employees of the Company will receive an annual fee of $10,000. Directors are
reimbursed for travel and other expenses relating to attendance at meetings of
the Board of Directors or committees.
31
<PAGE>
EXECUTIVE COMPENSATION
The following table shows, for 1996, the cash and other compensation awarded
to, earned by or paid to Dr. Zwan and each other executive officer who earned in
excess of $100,000 for all services in all capacities (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
----------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS(#) COMPENSATION(1)
- ------------------------------------------------------ ---------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Bryan J. Zwan ........................................ $ 300,000 $ -- -- $ 215,340
Chairman of the Board, President and
Chief Executive Officer
Kenneth T. Myers ..................................... 100,000 -- 100,000 81,945
Engineering and Design Manager
Eric A. Mitchell ..................................... 57,640 -- 20,000 61,845
Vice President--National Account Sales
Doug Dohring ......................................... 101,155 -- 176,667 36,282
Former President
Elizabeth W. Weigand ................................. 122,500 -- 7,000(2) 50,000
Former Executive Vice President
Al G. Zwan ........................................... 21,650 -- -- 97,520
Former Executive Vice President
</TABLE>
- --------------
(1) Includes deferred compensation of $215,340 received by Bryan J. Zwan from
the Company for 1995. Includes deferred compensation of $81,945 received by
Kenneth T. Myers from the Company for 1991. Includes sales commissions of
$61,845 received by Eric A. Mitchell from the Company for 1996. Includes
deferred compensation of $97,520 received by Al G. Zwan from the Company for
1994 and 1995. Includes deferred compensation of $50,000 received by
Elizabeth W. Weigand from the Company for 1994 and 1995.
(2) Of the 28,000 options originally granted to Ms. Weigand, 21,000 options have
expired because Ms. Weigand is no longer an employee of the Company.
OPTION PLAN
The Company's 1996 Stock Option Plan (the "Option Plan") became effective on
March 5, 1996. The purpose of the Option Plan is to attract and retain qualified
personnel, to provide additional incentives to employees, officers and
consultants of the Company and to promote the success of the Company's business.
A reserve of 5,000,000 shares of the Company's Common Stock has been established
for issuance under the Option Plan. The Option Plan is administered by the Board
of Directors who may delegate the administration of the plan to a committee of
the Board of Directors. The Board of Directors now has, and such committee would
have, complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive stock option or a non-statutory
option, the vesting schedule to be in effect for the option grant and the
maximum term for which any granted option is to remain outstanding.
Each option granted under the Option Plan has a maximum term of ten years,
subject to earlier termination following the optionee's cessation of service
with the Company. Options granted under the Option Plan may be exercised only
for fully vested shares. The exercise price of incentive stock options and
non-statutory stock options granted under the Option Plan must be at least 100%
and 85%, respectively, of the fair market value of the stock subject to the
option on the date of grant (or 110% with respect to holders of more than 10% of
the voting power of the Company's outstanding stock). The Board of Directors or,
when appointed, such committee, has the authority to determine the fair market
value of the stock. The
32
<PAGE>
purchase price is payable immediately upon the exercise of the option. Such
payment may be made in cash, in outstanding shares of Common Stock held by the
participant, through a promissory note payable in installments over a period of
years or any combination of the foregoing.
The Board of Directors may amend or modify the Option Plan at any time,
provided that no such amendment or modification may adversely affect the rights
and obligations of the participants with respect to their outstanding options or
vested shares without their consent. In addition, no amendment of the Option
Plan may, without the approval of the Company's stockholders (i) modify the
class of individuals eligible for participation, (ii) increase the number of
shares available for issuance, except in the event of certain changes to the
Company's capital structure, or (iii) extend the term of the Option Plan. The
Option Plan will terminate on March 4, 2006, unless sooner terminated by the
Board of Directors.
As of December 31, 1996, the Company had outstanding options under the
Option Plan for an aggregate of 1,250,037 shares of Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1996.
All such options were awarded under the Option Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUES AT
---------------------------------------------------- ASSUMED ANNUAL
% OF TOTAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- ----------------------------------------- ----------- ----------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan............................ -- -- -- -- -- --
Kenneth T. Myers......................... 100,000 8.0 % $ 5 3/02 $ 170,000 $ 386,000
Eric A. Mitchell......................... 20,000 1.6 % $ 5 3/02 34,000 77,200
Doug Dohring............................. 176,667 14.1 % $ 5 12/99 139,567 293,267
Elizabeth W. Weigand..................... 7,000(2) .6 % $ 5 3/02 11,900 27,020
Al G. Zwan............................... -- -- -- -- -- --
</TABLE>
- --------------
(1) Potential realizable value is based on the assumption that the Common Stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the expiration of the option term. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do
not reflect the Company's estimate of future price growth.
(2) Of the 28,000 options originally granted to Ms. Weigand, 21,000 options have
expired because Ms. Weigand is no longer an employee of the Company.
33
<PAGE>
The following table sets forth certain information regarding options to
purchase shares of Common Stock held as of December 31, 1996 by each of the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR END
--------------------------
NAME EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Bryan J. Zwan................................................. -- --
Kenneth T. Myers.............................................. -- 100,000
Eric A. Mitchell.............................................. -- 20,000
Doug Dohring.................................................. 176,667 --
Elizabeth W. Weigand.......................................... -- 7,000(1)
Al G. Zwan.................................................... -- --
</TABLE>
- --------------
(1) Of the 28,000 options originally granted to Ms. Weigand, 21,000 options have
expired because Ms. Weigand is no longer an employee of the Company.
EMPLOYMENT AGREEMENT
On September 30, 1996, the Company entered into an employment agreement with
Mr. Joseph (the "Employment Agreement"). The Employment Agreement provides for
Mr. Joseph's employment as Senior Executive Vice President of the Company at a
base salary of $250,000, with eligibility to receive an incentive bonus as
determined by the compensation committee of the Board of Directors. The
Employment Agreement provides for an initial term of five years with one
automatic five-year renewal unless terminated by either the Board of Directors
or Mr. Joseph in writing at least 180 days prior to a renewal at the end of the
initial term. The Employment Agreement contains confidentiality and noncompete
provisions by Mr. Joseph in favor of the Company. In the event of the
termination of Mr. Joseph, other than for cause, Mr. Joseph will be entitled to
severance payments in various fractions or multiples of annual compensation (in
no case exceeding three times annual compensation) depending upon whether the
termination is made following death or disability of Mr. Joseph, a change in
control of the Company or termination without cause by the Company.
34
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale of the shares offered hereby by (i) each person who
is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each named
executive officer, (iv) all directors and executive officers of the Company as a
group, and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING (1) NUMBER OF OFFERING (1)
----------------------------- SHARES -------------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------------- ---------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Bryan J. Zwan (2).................................. 20,000,000 88.8% -- 20,000,000 77.9%
Seth P. Joseph (3)................................. 249,315 1.1% -- 249,315 1.0%
Doug C. Dohring (4)................................ 176,667 * -- 176,667
Kenneth T. Myers (3)............................... 25,000 * -- 25,000 *
Eric A. Mitchell (3)............................... 5,000 * -- 5,000 *
Beth A. Morris (3)................................. 4,750 * -- 4,750 *
Robert Goransson (3)............................... 2,688 * -- 2,688 *
Thomas V. Williams (3)............................. 2,500 * -- 2,500 *
Norton S. Karno (5)................................ 900,002 4.0% 300,000 600,002 2.3%
Gerald Ellenburg (6)............................... 400,000 1.8% 225,334 174,666
Ellenburg Capital Corp. (7)........................ 200,000 * 116,420 83,580 *
Paul Hedlund....................................... 115,754(8) * 69,453 46,301 *
Michael L. Baum.................................... 111,334 * 66,801 44,533 *
George W. Murgatroyd............................... 17,001(9) * 5,760 11,241 *
Edward F. and Angela M. Guignon.................... 17,451 * 6,339 11,112 *
Stanley P. Zurn.................................... 13,334 * 8,001 5,333 *
Robert Welch....................................... 13,334 * 8,001 5,333 *
Alfred J. Cade..................................... 11,334 * 4,667 6,667 *
ASK Brown Trust.................................... 9,364 * 4,667 4,697 *
Frank & Jean Dufek................................. 5,667 * 3,134 2,533 *
Carl R. Gratz Residuary Trust...................... 5,667 * 3,134 2,533 *
Venture Tech Investors............................. 5,918 * 2,934 2,984 *
Ruth Cantley....................................... 5,667 * 2,334 3,333 *
Tony Charles Lonstein.............................. 4,667 * 2,801 1,866 *
Monte Factor TTEE under the will of Ted H.
Factor............................................ 5,667 * 1,867 3,800 *
Sean Lilly......................................... 5,667 * 1,334 4,333 *
Margaret A. Guignon................................ 10,836 * 5,418 5,418 *
All executive officers and directors as a group
(8 persons) (10).................................. 20,465,920 89.0% -- 20,465,920 78.3%
</TABLE>
- ------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. Shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days of the date of this
Prospectus are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Includes 4,666,900 shares of Common Stock held by the ZG Partners, Ltd.
(the "Zwan Partnership"). Dr. Zwan is a general partner of the Zwan
Partnership, in which he holds a 1% general partnership interest. As the
general partner, he has sole voting and investment control over the shares
of Common Stock held by the Zwan Partnership. Dr. Zwan is Chairman of the
Board, Chief Executive Officer and a director of the Company. His address
is 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615.
(3) Consists of shares of Common Stock issuable pursuant to employee stock
options that may be exercised within 60 days after the date of this
Prospectus. The address of such person is 601 Cleveland Street, Fifth
Floor, Clearwater, Florida 34615.
(4) Consists of shares of Common Stock issuable pursuant to employee stock
options that may be exercised within 60 days after the date of this
Prospectus. The address of such person is 3000 Cornwall Drive, Glendale,
California 91206.
(5) Mr. Karno is the trustee of the following three trusts, each of which owns
133,334 shares of Common Stock: Valerie Ann Karno Adult Trust #1, Stephanie
Lynn Karno Adult Trust #1 and Mitchell Perry Karno Adult Trust #1. The
shares sold by Mr. Karno are being sold for the benefit of Gerald D.
Ellenburg (150,000 shares) Barry L. Haase (50,000 shares) Robert E.C.
Wegner (50,000 shares) and Leon D. Meekcoms (50,000 shares), each of whom
agreed to purchase such shares from Mr. Karno in March 1996. Mr. Karno has
retained title, voting and dividend rights to such shares pending payment
in full of the purchase price upon completion of the Offering. Mr. Karno
has disclaimed beneficial ownership of the 300,000 shares of Common Stock
to be offered.
(6) Of the shares listed as being sold by Gerald Ellenburg, 40,000 of such
shares are being sold for the benefit of Robert E.C. Wegner and 61,436 of
such shares are being sold for the benefit of Leon D. Meekcoms. Gerald
Ellenburg disclaims beneficial ownership of such 101,436 shares.
(7) The shares sold by Ellenberg Capital Corp. are being sold for the benefit
of Barry L. Hasse (93,475 shares), Thomas Enstice (12,707 shares), John
Callaghan (2,667 shares), Douglas Neuman (2,834 shares), Dora Cline (333
shares), Nancy Wenzel (333 shares), Melvyn Glass (667 shares), Sharon Tabor
(33 shares), Leon D. Meekcoms (1,370 shares), Gayle Ege (667 shares),
Kathryn Policar (667 shares) and Anthony Woller (667 shares). Ellenburg
Capital Corp. has disclaimed beneficial ownership of such shares of Common
Stock.
(8) Includes 100,000 shares owned individually by Paul Hedlund and 15,754
shares owned jointly by Paul and Marta Hedlund.
(9) Includes 5,667 shares of Common Stock owned by George W. Murgatroyd, III, a
professional retirement trust.
(10) Includes shares of Common Stock issuable pursuant to employee stock options
held by executive officers that may be exercised within 60 days after the
date of this Prospectus.
35
<PAGE>
CERTAIN TRANSACTIONS
LOAN TO FOUNDER
On December 21, 1995, the Company loaned Dr. Zwan, the Company's Chairman of
the Board and Chief Executive Officer, $1.7 million which he advanced to LMI,
Inc. ("LMI"), a corporation wholly owned by Dr. Zwan, to enable LMI to repay a
loan extended to LMI by a former stockholder of the Company. See " --
Transactions with GAF HK." The loan to Dr. Zwan is due on December 20, 1997.
Interest only is payable monthly at the rate of 9% per annum and the original
principal amount of the loan remains outstanding as of the date of this
Prospectus.
LOANS MADE BY FOUNDER
Since 1991, Dr. Zwan from time to time has advanced personal funds to the
Company to fund working capital needs. These loans were evidenced by demand
promissory notes bearing interest at the rate of 9% per annum. All such loans
were satisfied prior to September 30, 1996.
LOANS GUARANTEED BY FOUNDER
Dr. Zwan and/or his wife personally guaranteed most of the Company's
indebtedness incurred since inception. As of the date of this Prospectus, no
indebtedness of the Company which had been guaranteed by Dr. Zwan and/or his
wife remained outstanding.
TRANSACTIONS WITH FORMER STOCKHOLDER
On June 21, 1994, Dr. Zwan sold 19,215,686 of the 39,215,686 shares of the
Common Stock then outstanding (after giving effect to subsequent splits and
conversions) to an unaffiliated third party (the "Former Stockholder") for a
purchase price of $500,000 pursuant to a Stock Purchase Agreement. In connection
with that transaction, the Former Stockholder became a member of the Company's
Board of Directors and the Former Stockholder and the Company entered into a
Shareholders' Agreement restricting both the stockholders' ability to transfer
their shares and the Company's ability to issue additional shares of Common
Stock and any other securities. Sale of the 19,215,686 shares was originally
intended to be a part of a series of transactions pursuant to which Dr. Zwan
would also acquire stock of and provide technological support to certain
companies owned by the Former Stockholder, the businesses of which are not
related to telecommunications. Subsequently, Dr. Zwan determined not to proceed
with the planned affiliation and on February 9, 1995, the Company acquired from
the Former Stockholder the option to repurchase the shares of Common Stock held
by the Former Stockholder for a price of $2.5 million (the "Option"). The Option
originally provided that the Company would be credited with a $1.6 million
partial payment of the Option purchase price upon payment of such amount to GAF
HK (hereinafter defined) by LMI with respect to the GAF HK Loan (hereinafter
defined). The Option subsequently was modified to reduce the price to $801,000
and eliminate the credit for LMI's payment of the GAF HK Loan. On November 30,
1995, the Company exercised the Option by repurchasing the 19,215,686 shares
subject to the Option for $801,000 (the "Repurchase") and the Former Stockholder
resigned from the Board of Directors.
TRANSACTIONS WITH GAF USA
Pursuant to the Stock Purchase Agreement, in June 1994 the Former
Stockholder caused Great American Fun Corp., an Ohio corporation which was
wholly owned by the Former Stockholder ("GAF USA"), to provide the Company with
a $3 million line of credit facility secured by the Company's business assets
(the "GAF USA Loan"). The Company's maximum outstanding principal balance under
the GAF USA Loan was $2.4 million. The principal of the GAF USA Loan bore
interest at the prime rate and was secured by 9,200,000 shares of Common Stock
held of record by Dr. Zwan. The GAF USA Loan was retired on September 5, 1996.
TRANSACTIONS WITH GAF HK
On June 25, 1994, LMI borrowed $1.5 million (the "GAF HK Loan") from Great
American Fun (HK) Ltd., a Hong Kong corporation wholly owned by the Former
Stockholder ("GAF HK"). The GAF HK Loan had an original maturity date of August
31, 1995, but was extended until December 22, 1995. On December 22, 1995, the
GAF HK Loan was retired with the proceeds of a loan by the Company to Dr. Zwan,
which he advanced to LMI. See "-- Loan to Founder."
LEGAL SERVICES
Seth P. Joseph, the Senior Executive Vice President and a director of the
Company, was a partner in the law firm of Baker & McKenzie for more than five
years prior to joining the Company in September 1996. Baker & McKenzie received
legal fees from the Company in connection with professional services provided to
the Company during 1995 and 1996.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Preferred Stock, $.0001 par value, issuable in series and 200,000,000 shares of
Common Stock, $.0001 par value. The following statements are brief summaries of
certain provisions relating to the Company's capital stock contained in its
Certificate of Incorporation (the "Certificate") and Bylaws and in the laws of
Delaware.
COMMON STOCK
The Company's authorized Common Stock consists of 200,000,000 shares, $.0001
par value, of which 22,518,917 shares are issued and outstanding as of the date
of this Prospectus. The issued and outstanding shares of Common Stock are fully
paid and non-assessable. Holders of the Company's Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of the
stockholders. As of the date of this Prospectus, there are 75 holders of record
of the Company's Common Stock. Each share of the Company's Common Stock is
entitled to equal dividend rights and to equal rights in the assets of the
Company available for distribution to holders of Common Stock upon liquidation,
subject to the rights of outstanding series of Preferred Stock. The Company's
Certificate and Bylaws do not provide for preemptive rights of the holders of
its Common Stock. The Transfer Agent and Registrar for the Common Stock is
American Stock Transfer & Trust Company. Its telephone number is 212.936.5100.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time direct the issuance of Preferred Stock
in series and may, at the time of issuance, determine the rights, preferences
and limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on shares of the Common Stock. See "Dividend Policy." Also,
holders of Preferred Stock would normally be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of Common Stock. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting powers of the holders of Common Stock, including the loss of
voting control to others. No shares of Preferred Stock have been issued.
CERTAIN VOTING PROVISIONS
Stockholders' rights and related matters are governed by Delaware corporate
law, the Company's Certificate and its Bylaws. Certain provisions of the
Certificate and Bylaws which are summarized below may affect potential changes
in control of the Company, may make it more difficult to acquire and exercise
control of the Company and may make changes in management more difficult to
accomplish.
Article Eight of the Certificate contains provisions (the "Fair Price
Provisions") which require the approval (an "Unaffiliated 70% Vote") of the
holders of 70% of those shares that are not beneficially owned or controlled by
a stockholder who owns directly or indirectly 10% or more of the outstanding
voting shares of the Company (a "Related Person"), defined to exclude the sole
incorporator of the Company, Bryan J. Zwan, or his affiliates, as a condition to
specified business combinations (the "Business Combinations") with or proposed
by any Related Person, except where the transaction (i) has been approved by
two-thirds of the directors who are not affiliated with the Related Person (the
"Continuing Directors") or (ii) meets certain minimum price criteria and
procedural conditions. If the Business Combination satisfies either of these
criteria, the usual requirements of applicable law, regulations and other
provisions of the Certificate would apply.
A Business Combination includes, among others, the following: (i) a merger
or consolidation of the Company or any subsidiary of the Company with a Related
Person; (ii) the sale, lease, mortgage or other disposition by the Company or
any subsidiary of the Company of assets worth more than a specified amount to a
Related Person; (iii) the sale, lease or mortgage to the Company or any
subsidiary of the Company of all or more than a specified amount of the assets
of a Related Person or its affiliates; (iv) the issuance, pledge or transfer of
stock or other securities of the Company or any of its subsidiaries to a Related
Person in exchange
37
<PAGE>
for cash or property worth more than a specified amount, unless such person is
acting as an underwriter with respect to such securities; (v) the adoption of
any plan or proposal to liquidate or dissolve the Company that is proposed by a
Related Person; (vi) any reclassification of securities, recapitalization or
other transaction which has the direct or indirect effect of increasing the
voting power or proportionate share of the outstanding stock (or of any class or
series of stock) of the Company or any subsidiary of the Company owned by a
Related Person; (vii) any agreement, contract or other arrangement providing
directly or indirectly for any of the foregoing; or (vii) any series of
transactions that not less than two-thirds of the Continuing Directors determine
are related and, if taken together, would constitute a Business Combination.
The Fair Price Provisions require the consideration to be paid to the
Company's stockholders in a Business Combination not approved by either
two-thirds of the Continuing Directors or an Unaffiliated 70% Vote to be either
cash or the same type of consideration paid by the Related Person in acquiring
the Company's voting stock that it previously acquired. The fair market value of
any consideration other than cash or publicly traded securities would be
determined by a majority of the Continuing Directors. The Fair Price Provisions
require the Related Person to meet the minimum price criteria with respect to
each class or series of Common or Preferred Stock, whether or not the Related
Person owned shares of that class or series prior to proposing the Business
Combination.
Candidates for directors shall be nominated only by the Board of Directors
or by a stockholder who gives written notice to the Company at least 120 days
but not more than 180 days before the annual meeting. The Company may have one
to nine directors as determined from time to time by the Board of Directors. The
Board of Directors currently consists of three members. Messrs. Hamilton and
Marshall have agreed to serve as directors of the Company following the
Offering. Between stockholders' meetings, the Board of Directors may appoint new
directors to fill vacancies or newly created directorships. A director may be
removed from office only for cause and only by the affirmative vote of at least
70% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors.
The Certificate further provides that stockholder action must be taken at a
meeting of stockholders and may not be effected by any consent in writing unless
approved by a vote of two-thirds of the Continuing Directors. Special meetings
of stockholders may be called only by the President or by a majority of the
Board of Directors. If a stockholder wishes to propose an agenda item for
consideration, he must give a brief description of each item and notice to the
Company not less than 120 nor more than 180 days prior to the meeting.
Stockholders will need to present their proposals or director nominations in
advance of the time they receive notice of the meeting since the Company's
Bylaws provide that notice of a stockholders' meeting must be given not less
than ten or more than 60 days prior to the meeting date.
The Certificate generally provides further that the foregoing provisions of
the Certificate and Bylaws may be amended or repealed by the stockholders only
with the affirmative vote of at least 70% of the shares entitled to vote
generally in the election of directors voting together as a single class unless
two-thirds of the Continuing Directors approve the changes in which event a
majority vote would be sufficient. These provisions exceed the usual majority
vote requirement of Delaware law and are intended to prevent the holders of less
than 70% of the voting power from circumventing the foregoing terms by amending
the Certificate or Bylaws. These provisions, however, enable the holders of more
than 30% of the voting power to prevent amendments to the Certificate or Bylaws
even if they are approved by the holders of a majority of the voting power.
The effect of such provisions of the Company's Certificate and Bylaws may be
to make more difficult the accomplishment of a merger or other takeover or
change in control of the Company. To the extent that these provisions have this
effect, removal of the Company's incumbent Board of Directors and management may
be rendered more difficult. Furthermore, these provisions may make it more
difficult for stockholders to participate in a tender or exchange offer for
Common Stock and in so doing may diminish the market value of Common Stock. The
Company is not aware of any proposed takeover attempt or any proposed attempt to
acquire a large block of Common Stock.
38
<PAGE>
CHANGE OF CONTROL PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203") regulating corporate takeovers. Section
203 prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination" (which includes a merger or sale of
more than 10% of the corporation's assets) with any "interested stockholder" (a
stockholder who acquired 15% or more the corporation's outstanding voting stock
without the prior approval of the corporation's board of directors) for three
years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of Section 203 with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of Section 203.
PERSONAL LIABILITY OF DIRECTORS
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Certificate includes a provision
eliminating liability for monetary damages for any breach of fiduciary duty as a
director, except as provided under Delaware law. Pursuant to Delaware law,
directors of the Company are not insulated from liability for breach of their
duty of loyalty (requiring that, in making a business decision, directors act in
good faith and in the honest belief that the action was taken in the best
interest of the corporation), or for certain other claims. The foregoing
provisions of the Certificate may reduce the likelihood of success of derivative
litigation against directors for breaches of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited the Company and
its stockholders. Furthermore, the Company intends to enter into indemnity
agreements with present and future officers and directors for the
indemnification of and the advancing of expenses to such persons to the full
extent permitted by law.
REGISTRATION RIGHTS
Holders of 2,518,917 shares of Common Stock currently possess the right to
have the shares of Common Stock registered under the Securities Act whenever the
Company proposes to register Common Stock under the Securities Act for sale to
the public. Such holders may require the Company, subject to certain
limitations, to include all or any portion of their Common Stock in such
registration (a "Piggyback Registration") and to pay such stockholders'
registration expenses, but not underwriting commissions or discounts in
connection with such registrations. To the extent the managing underwriter
associated with such registration determines to include only shares offered by
the Company, the Company will not have an obligation to register any shares held
by such holders for sale. In addition, the number of shares to be included will
be reduced pro-rata with all other shares not offered by the Company. The
Company has agreed to indemnify the holders against certain liabilities,
including liabilities under the Securities Act, in connection with the
registration of their shares.
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock in the public market could adversely affect the prevailing
market price.
Upon completion of the Offering, the Company will have outstanding
25,680,518 shares of Common Stock. Of these shares, the 4,000,000 shares sold in
the Offering will be freely tradable without restriction or further registration
under the Securities Act, except that shares owned by "affiliates" of the
Company ("Affiliates"), as that term is defined in Rule 144 under the Securities
Act ("Rule 144"), may generally only be sold in compliance with applicable
provisions of Rule 144. The remaining 21,680,518 shares of Common Stock (the
"Restricted Shares") held by existing stockholders upon completion of the
Offering will be "restricted" securities within the meaning of Rule 144 and may
not be sold except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including
sales pursuant to Rule 144.
All directors and officers and each of the Selling Stockholders have agreed
with the Underwriters not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of CSFBC. See "Underwriting." Beginning 180 days after the
date of this Prospectus, 20,000,000 additional Restricted Shares subject to such
agreements will become eligible for sale in the public market pursuant to Rule
144. CSFBC may, in its sole discretion and at any time without notice, waive the
provisions of the lock-up agreements.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an Affiliate, who has beneficially owned Restricted
Shares for at least two years (including the holding period of certain prior
owners), will be entitled to sell in "restricted brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the
Company becomes subject to the reporting requirements of Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), a number of
Restricted Shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 257,000 shares immediately
after the Offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks immediately preceding such sale, subject,
generally, to the filing of a Form 144 with respect to such sales and certain
other limitations and restrictions. In addition, a person (or person whose
shares are aggregated), who is not deemed to have been an Affiliate at any time
during the 90 days immediately preceding the sale and who has beneficially owned
the Restricted Shares proposed to be sold for at least three years, is entitled
to sell such shares under Rule 144(k) without regard to the limitations
described above. Further, Rule 144A under the Securities Act permits the
immediate sale of restricted shares to certain qualified institutional buyers
without regard to the volume restrictions described above.
In general, under Rule 701 of the Securities Act ("Rule 701"), any employee,
consultant or advisor of the Company who purchased shares from the Company in
connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144 and Affiliates are entitled to sell their Rule 701 shares
without having to comply with holding-period restrictions under Rule 144, in
each case commencing 90 days after the Company becomes subject to the reporting
requirements of Section 13 of the Exchange Act. Rule 701 is available for
stockholders of the Company who own shares issued pursuant to exercise of
options granted prior to the Offering.
As of the date hereof, the Company has authorized an aggregate of up to
5,000,000 shares of Common Stock for issuance pursuant to the Option Plan. See
"Management -- Option Plan." As of December 31, 1996, options to purchase
1,250,037 shares had been granted pursuant to the Option Plan. The Company
intends to file registration statements under the Securities Act within
approximately 90 days after the date of this Prospectus to register up to
5,000,000 shares available for issuance under the Option Plan. After the
effective date of the applicable registration statement, shares of Common Stock
issued under the Option Plan will be immediately available for sale in the
public market, subject in certain cases to the lock-up restrictions described
above and subject, in the case of sales by Affiliates, to certain limitations
and restrictions under Rule 144.
40
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement") among the
Company, the Selling Stockholders and the underwriters named below (the
"Underwriters"), for whom Credit Suisse First Boston Corporation ("CSFBC") and
Furman Selz LLC are acting as representatives (the "Representatives"), the
Underwriters have severally but not jointly agreed to purchase from the Company
and the Selling Stockholders the following respective numbers of shares of
Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Furman Selz LLC..................................................................
----------
Total...................................................................... 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company has granted to the Underwriters an option exercisable by CSFBC
on behalf of the Underwriters, expiring at the close of business on the 30th day
after the date of this Prospectus, to purchase up to 600,000 additional shares
of the Common Stock at the initial public offering price less underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such option may be exercised only to cover over-allotments, if any,
in the sale of the shares of Common Stock. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Underwriters, to certain dealers
at such price less a concession of $ per share, and the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other dealers.
After the initial public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares being offered
hereby.
The Company, its officers and directors and the Selling Stockholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in the case of the Company, file with the Securities and Exchange Commission
(the "Commission") a registration statement under the Securities Act relating to
any additional shares of the Company's Common Stock or securities convertible
into or exchangeable or exercisable for any shares of the Company's Common
Stock, without the prior written consent of CSFBC for a period of 180 days after
the date of this Prospectus, except issuances pursuant to the exercise of stock
options granted under the Option Plan.
41
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock has been
negotiated between the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common Stock
were the Company's historic performance, estimates of the business potential and
earnings prospects of the Company and its industry in general, an assessment of
the Company's management, the market valuation of companies in related
businesses, the general condition of the equity securities market and other
relevant factors. There can be no assurance that the initial public offering
price of the Common Stock will correspond to the price at which the Common Stock
will trade in the public market subsequent to the Offering, or that an active
public market for the Common Stock will develop and continue after the Offering.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons and the Selling Stockholders may be located outside of Canada
and, as a result, it may not be possible to satisfy a judgment against the
issuer or such persons and the Selling Stockholders in Canada or to enforce a
judgment obtained in Canadian courts against the issuer or such persons outside
of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
42
<PAGE>
LEGAL MATTERS
The validity of Common Stock offered hereby will be passed upon for the
Company by Baker & McKenzie. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by King & Spalding.
EXPERTS
The balance sheets as of December 31, 1994 and 1995 and September 30, 1996
and the statements of operations, stockholders' equity (deficit), and cash flows
for each of the three years in the period ended December 31, 1995 and the nine
months ended September 30, 1996 appearing in this Prospectus and Registration
Statement are included in reliance on the report of Coopers & Lybrand, L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act
with respect to the shares of Common Stock offered by this Prospectus. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract, agreement or any other document referred to herein
are not necessarily complete and, where such contract, agreement or other
document is an exhibit to the Registration Statement, reference is made to such
exhibit for a complete description of the matter involved, and each such
statement is qualified in all respects by the provisions of such exhibit. Copies
of the Registration Statement, including the exhibits and schedules thereto, may
be inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at Seven World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Branch of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of fees prescribed by the
Commission. The Registration Statement may also be obtained through the
Commission's URL at "http://www.sec.gov."
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and a report thereon by its independent
public accountants and with quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity (Deficit)............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Digital Lightwave, Inc.
We have audited the accompanying balance sheets of Digital Lightwave, Inc.
(the Company) as of December 31, 1994 and 1995, and September 30, 1996, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years ended December 31, 1993, 1994 and 1995 and for the nine months
ended September 30, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Lightwave, Inc. as
of December 31, 1994 and 1995, and September 30, 1996, and the results of its
operations and its cash flows for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
October 21, 1996, except as to certain information
in Note 10 for which the date
is December 5, 1996
F-2
<PAGE>
DIGITAL LIGHTWAVE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 26 $ 72 $ 2,456
Receivables........................................................ -- 10 1,391
Notes receivable................................................... -- -- 44
Inventories........................................................ 97 622 714
Prepaid expenses and other assets.................................. 25 48 383
------------ ------------ -------------
Total current assets............................................. 148 752 4,988
Property and equipment, net.......................................... 172 515 1,048
Other assets......................................................... 12 10 19
------------ ------------ -------------
$ 332 $ 1,277 $ 6,055
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities........................... $ 449 $ 1,278 $ 1,811
Notes payable...................................................... 1,500 7,695 750
Notes payable -- related party..................................... 102 202 --
Capital lease obligation, current portion.......................... 36 172 164
------------ ------------ -------------
Total current liabilities........................................ 2,087 9,347 2,725
Notes payable........................................................ 500 -- --
Capital lease obligation............................................. 73 88 93
Other long-term liabilities.......................................... -- 5 --
------------ ------------ -------------
Total liabilities................................................ 2,660 9,440 2,818
------------ ------------ -------------
Commitments (Notes 6, 7, 8, and 10)
Stockholders' equity (deficit):
Preferred stock, $.0001 par value; authorized 20,000,000 shares; no
shares issued or outstanding...................................... -- -- --
Common stock, $.0001 par value; authorized 200,000,000 shares;
issued and outstanding 39,215,686, 20,000,000, and 22,518,917
shares, respectively.............................................. 4 2 2
Additional paid-in capital......................................... 523 522 14,242
Accumulated deficit................................................ (2,855) (6,987) (9,307)
------------ ------------ -------------
(2,328) (6,463) 4,937
Less: Note receivable from stockholder............................. -- (1,700) (1,700)
------------ ------------ -------------
Total stockholders' equity (deficit)............................. (2,328) (8,163) 3,237
------------ ------------ -------------
Total liabilities and stockholders' equity (deficit)........... $ 332 $ 1,277 $ 6,055
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1993 1994 1995 1996
------------- ------------- ------------- 1995 -------------
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.................................... $ -- $ -- $ -- $ -- $ 3,037
Cost of goods sold....................... -- -- -- -- 1,152
------------- ------------- ------------- ------------- -------------
Gross profit......................... -- -- -- -- 1,885
------------- ------------- ------------- ------------- -------------
Operating expenses:
Research and development............... 439 1,241 1,509 1,169 1,653
General and administrative............. 106 179 1,017 569 897
Sales and marketing.................... -- 67 199 156 1,048
Relocation............................. -- 81 -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses............. 545 1,568 2,725 1,894 3,598
------------- ------------- ------------- ------------- -------------
Operating income (loss).................. (545) (1,568) (2,725) (1,894) (1,713)
Interest income.......................... 2 1 8 3 143
Interest expense......................... (43) (115) (621) (370) (557)
Other income (expense), net.............. -- -- 4 -- (193)
------------- ------------- ------------- ------------- -------------
Income (loss) before
income taxes........................ (586) (1,682) (3,334) (2,261) (2,320)
Provision for income taxes............... (1) (1) -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ (587) $ (1,683) $ (3,334) $ (2,261) $ (2,320)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income (loss) per share............ $ (0.01) $ (0.04) $ (0.08) $ (0.06) $ (0.11)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common and
common equivalent
shares outstanding...................... 40,867,030 40,867,030 39,265,723 40,867,030 21,651,344
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
-------------------------- PAID-IN FROM
SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER TOTAL
------------- ----------- -------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.................... 39,215,686 4 523 (585) -- (58)
Net loss.................................... -- -- -- (587) -- (587)
------------- --- -------------- --------- ----------- -------------
Balance, December 31, 1993.................. 39,215,686 4 523 (1,172) -- (645)
Net loss.................................... -- -- -- (1,683) -- (1,683)
------------- --- -------------- --------- ----------- -------------
Balance, December 31, 1994.................. 39,215,686 4 523 (2,855) -- (2,328)
Purchase and retirement of common stock,
November................................... (19,215,686) (2) (1) (798) -- (801)
Note receivable from stockholder............ -- -- -- -- (1,700) (1,700)
Net loss.................................... -- -- -- (3,334) -- (3,334)
------------- --- -------------- --------- ----------- -------------
Balance, December 31, 1995.................. 20,000,000 2 522 (6,987) (1,700) (8,163)
Issuance of common stock in exchange for
debt....................................... 1,013,924 -- 5,321 -- -- 5,321
Sale of common stock........................ 221,992 -- 2,100 -- -- 2,100
Issuance of common stock upon exercise of
stock options.............................. 31,334 -- 39 -- -- 39
Issuance of common stock upon exercise of
warrants................................... 1,251,667 -- 6,260 -- -- 6,260
Net loss.................................... -- -- -- (2,320) -- (2,320)
------------- --- -------------- --------- ----------- -------------
Balance, September 30, 1996................. 22,518,917 $ 2 $ 14,242 $ (9,307) $ (1,700) $ 3,237
------------- --- -------------- --------- ----------- -------------
------------- --- -------------- --------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIGITAL LIGHTWAVE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (587) $ (1,683) $ (3,334) $ (2,261) $ (2,320)
Adjustments to reconcile net loss to net cash used by
operating activities:
Interest expense converted to equity................. -- -- -- -- 113
Depreciation and amortization........................ 41 59 102 69 128
Loss on disposal of property......................... -- 43 -- -- --
Changes in operating assets and liabilities:
(Increase) decrease in receivables................. -- -- (10) (2) (1,425)
(Increase) decrease in inventories................. -- (97) (526) (304) (81)
(Increase) decrease in prepaid expenses and other
assets............................................ -- (29) (21) 7 (345)
Increase (decrease) in accounts payable and accrued
liabilities....................................... 91 241 760 986 406
--------- --------- --------- ----------- -----------
Net cash used by operating activities............ (455) (1,466) (3,029) (1,505) (3,524)
--------- --------- --------- ----------- -----------
Cash flows for investing activities:
Purchases of property and equipment.................... (40) (93) (173) (145) (516)
--------- --------- --------- ----------- -----------
Net cash used by investing activities............ (40) (93) (173) (145) (516)
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Stockholder borrowings................................. -- -- (1,700) -- --
Proceeds from notes payable............................ 300 2,000 5,696 1,683 1,750
Principal payments on notes payable.................... -- (300) -- -- 2,400
Proceeds from notes payable, related party............. 146 152 100 -- --
Principal payments on notes payable, related party..... (130) (305) -- -- (202)
Principal payments, capital lease obligation........... (16) (19) (47) (58) (148)
Cash paid for common stock............................. -- -- -- -- 2,624
Purchase and retirement of common stock................ -- -- (801) -- --
--------- --------- --------- ----------- -----------
Net cash provided by financing activities........ 300 1,528 3,248 1,625 6,424
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..... (195) (31) 46 (25) 2,384
Cash and cash equivalents at beginning of period......... 252 57 26 26 72
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period............... $ 57 $ 26 $ 72 $ 1 $ 2,456
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplementary information:
Cash paid for interest................................. $ 12 $ 88 $ 154
--------- --------- ---------
--------- --------- ---------
Noncash investing and financing activities:
Capital lease obligation............................... $ 92 $ 51 $ 246 $ 246 $ 17
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Accrued interest converted to equity................... $ -- $ -- $ -- $ -- $ 92
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Fixed asset additions included in accounts payable at
period end............................................ $ -- $ -- $ 25 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL -- Digital Lightwave, Inc. (the "Company") was incorporated on
October 12, 1990. The Company commenced business on February 15, 1991 to develop
and manufacture network information systems.
BASIS OF PRESENTATION -- The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
has incurred cumulative losses of approximately $8.5 million and has working
capital of approximately $2.3 million and a stockholders' equity of
approximately $3.2 million at September 30, 1996. Funding for the Company's
losses has been provided by the Company's stockholders.
INTERIM FINANCIAL INFORMATION -- The financial statements as of September
30, 1996, and for the nine months ended September 30, 1996 and 1995 (unaudited)
include, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the Company's financial
position, results of operations, and cash flows. Operating results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with
an initial maturity of three months or less to be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost (first-in,
first-out) or market. The costs of certain inventory units are charged to
expense if the Company determines that the units will be used for demonstration
purposes.
REVENUE RECOGNITION -- Revenue is recognized at the date of shipment as the
Company has no further significant obligations.
PROPERTY AND EQUIPMENT -- The Company's property and equipment, including
certain assets under capital leases, are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over estimated useful lives of 5-7 years, or over the
lesser of the term of the lease or the estimated useful life of assets under the
capital lease. Maintenance and repairs are expensed as incurred while renewals
and betterments are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in the
results of operations.
RESEARCH AND DEVELOPMENT -- Software development costs are included in
research and development and are expensed as incurred. SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs during the
period following the time that technological feasibility is established until
general release of the product to customers. The capitalized cost is then
amortized over the estimated product life. To date, the period between achieving
technological feasibility and the general release to customers has been short
and, therefore, software development costs qualifying for capitalization have
been insignificant.
INCOME TAXES -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and the tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
COMPUTATION OF NET LOSS PER SHARE -- Net loss per common and common
equivalent share for the years ended December 31, 1993, 1994 and 1995 and for
the nine months ended September 30, 1995
F-7
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(unaudited) and September 30, 1996 have been computed using the weighted average
number of common and common equivalent shares outstanding using the treasury
stock method, as adjusted for the common stock conversion described in Note 10
for all periods presented is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1996
------------ ------------ ------------ 1995 ------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common stock outstanding 40,487,330 40,487,330 38,886,023 40,487,330 21,271,644
Weighted average common stock equivalents
outstanding 379,700 379,700 379,700 379,700 379,700
------------ ------------ ------------ ------------ ------------
Shares used in net loss per share
computation 40,867,030 40,867,030 39,265,723 40,867,030 21,651,344
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Pursuant to the requirements of the Securities and Exchange Commission,
common stock, stock options, and warrants issued by the Company during the
twelve months immediately preceding the initial public offering date have been
included in the calculation of the weighted average shares outstanding for all
periods presented using the treasury stock method based on the estimated initial
public offering price. Accordingly, weighted average common stock outstanding
includes 1,271,644 common stock equivalent shares issued during the nine months
ended September 30, 1996 shown as outstanding for all periods presented.
Weighted average common stock equivalents outstanding includes 379,700 common
stock equivalent shares for options and warrants issued during the nine months
ended September 30, 1996.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents. As of December 31, 1994 and 1995 and September 30, 1996,
substantially all of the Company's cash balances, including amounts representing
outstanding checks, were deposited with what management believes to be
high-quality financial institutions.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENT -- SFAS No. 123, "Accounting for Stock-Based
Compensation" establishes financial accounting and reporting standards for
stock-based employee compensation plans, including stock options. SFAS No. 123
defines and encourages the use of the fair value method of accounting for
employee stock-based compensation. Continuing use of the intrinsic value based
method of accounting prescribed in Accounting Principles Board Opinion No. 25
("APB 25") for measurement of employee stock-based compensation is allowed with
pro forma disclosures of net income and net income per share as if the fair
value method of accounting had been applied. SFAS No. 123 is effective for
transactions entered into for years after December 15, 1995. The Company has
determined that it will continue to use the method of accounting prescribed in
APB 25 for measurement of employee stock-based compensation, and will begin
providing the required pro forma disclosures in its financial statements for the
year ended December 31, 1996 as allowed by SFAS No. 123. In the opinion of
management, SFAS No. 123 is not expected to have a material impact on the
Company's financial statements.
F-8
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS -- Certain reclassifications have been made to 1994
balance sheet amounts in order to conform with 1995 presentations. The
reclassifications had no impact on the results of operations for 1994.
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials.............................................. $ 97 $ 418 $ 343
Work-in-progress........................................... -- 204 346
Finished goods............................................. -- -- 25
------------ ------------ -------------
$ 97 $ 622 $ 714
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Test equipment............................................. $ 211 $ 211 $ 323
Computer equipment and software............................ 27 304 588
Tooling.................................................... -- 119 171
Office furniture, fixtures and equipment................... 8 56 269
------------ ------------ -------------
246 690 1,351
Less: accumulated depreciation and amortization............ (74) (175) (303)
------------ ------------ -------------
$ 172 $ 515 $ 1,048
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Equipment under capital lease and related accumulated amortization, included
above, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Test equipment............................................. $ 143 $ 143 $ 143
Computer equipment and software............................ -- 246 394
------------ ------------ -------------
143 389 537
Less: accumulated amortization............................. (61) (133) (194)
------------ ------------ -------------
$ 82 $ 256 $ 343
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-9
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts payable........................................... $ 195 $ 486 $ 744
Accrued audit/consulting fees.............................. 12 25 4
Deferred compensation...................................... 99 548 233
Accrued warranty........................................... -- -- 30
Advance from stockholder................................... -- -- 400
Payable to stockholders.................................... 14 14 179
Accrued sales commissions.................................. -- -- 142
Accrued interest........................................... 88 154 11
Accrued vacation........................................... 20 31 51
Accrued payroll taxes...................................... 16 13 4
Other...................................................... 5 7 13
------------ ------------ -------------
$ 449 $ 1,278 $ 1,811
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-10
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1993 and
1994 represents minimum California franchise taxes.
The tax effected amounts of temporary differences consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Deferred tax assets:
Deferred compensation............................................ $ 37 $ 206 $ 88
Other............................................................ 7 11 21
Valuation allowance.............................................. (44) (213) (107)
------------ ------------ -------------
Total current deferred tax asset............................... -- 4 2
------------ ------------ -------------
------------ ------------ -------------
Net current deferred tax asset............................... -- 4 2
------------ ------------ -------------
------------ ------------ -------------
Non-current:
Deferred tax assets:
Net operating loss carryforward.................................. 741 1,854 2,825
Research and experimentation credit.............................. 119 142 18
Other............................................................ -- -- 142
Valuation allowance.............................................. (856) (1,953) (2,930)
------------ ------------ -------------
Total non-current deferred tax asset........................... 4 43 55
------------ ------------ -------------
Deferred tax liability:
Property related................................................... (4) (47) (57)
------------ ------------ -------------
Total deferred tax liability..................................... (4) (47) (57)
------------ ------------ -------------
Net non-current deferred tax asset........................... -- -- --
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Management believes that it is more likely than not that the tax benefit
associated with these deferred tax assets will not be realized and therefore as
of September 30, 1996, the Company has established a valuation allowance of
approximately $3,037,000. The result is an increase in the valuation allowance
from December 31, 1995 of approximately $871,000.
As of September 30, 1996, the Company had net operating loss carryforwards
of approximately $8,215,000 for tax purposes. Due to certain change of ownership
requirements of Section 382 of the Internal Revenue Code ("IRC"), utilization of
the Company's net operating losses incurred prior to July 1, 1993 is expected to
be limited to approximately $7,500 per year. This limitation in conjunction with
the expiration period for these pre-July 1, 1993 net operating losses results in
the Company's total net operating losses available being limited to
approximately $7,507,000. Loss carryforwards will expire during the years 2005
and 2011.
As of September 30, 1996, the Company also had general business credit
carryforwards of approximately $142,000, which expire between the years 2008 and
2011. These credits are also subject to the Section 382 annual limitation.
Approximately $15,000 of these credits are subject to the Section 382 annual
limitation.
F-11
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES: (CONTINUED)
Following is a reconciliation of the applicable federal income tax as
computed at the federal statutory tax rate to the actual income taxes reflected
in the statement of operations (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
------------- ------------- ------------ SEPTEMBER 30, ---------------
1995
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at U.S. federal income tax rate.... $ (200) $ (572) $ (1,134) $ (769) $ (789)
State income tax, net of federal
benefit............................... (21) (61) (121) (82) (84)
IRC Section 382 limitation............. 86 -- -- -- --
Valuation allowance increase........... 164 695 1,266 873 870
Research and experimentation credit.... (29) (91) (22) (22) --
Other.................................. -- 29 11 -- 3
----- ----- ------------ ----- -----
Provision for income taxes........... -- -- -- -- --
----- ----- ------------ ----- -----
----- ----- ------------ ----- -----
</TABLE>
6. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable, collateralized by 46% of the outstanding shares of
common stock, and guaranteed by the Company's sole stockholder at
December 31, 1995; interest at prime, interest and principal due and
payable September 6, 1996; total credit facilities $1,500,000....... $ 1,500 $ 1,500 $ --
Note payable, collateralized by 46% of the outstanding shares of
common stock, and guaranteed by the Company's sole stockholder at
December 31, 1995; interest at prime, interest and principal due and
payable September 6, 1996; total credit facilities $1,500,000....... 500 900 --
Notes payable, guaranteed by the Company's sole stockholder at
December 31, 1995, interest at 16% and principal due and payable at
various dates in January, February, and March of 1996 (1)(2)........ -- 2,100 --
Note payable, collateralized by 51% of the entire class of common
stock; interest at 16%, interest payable monthly, principal due and
payable September 20, 1996; total credit facilities $2,500,000
(2)................................................................. -- 1,900 --
Note payable, guaranteed by the Company's sole stockholder at
December 31, 1995; interest at 53% with payments of principal due as
follows: $200,000 on January 8, 1996, $300,000 on January 31, 1996
and $200,000 on February 15, 1996 (1)(2)............................ -- 700 --
Notes payable, unsecured, interest at 9% and principal due and
payable upon demand; convertible to equity upon approval by both
parties (2)......................................................... -- 250 --
</TABLE>
F-12
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
Note payable, guaranteed by the Company's sole stockholder at
December 31, 1995, interest at 50%, interest and principal due and
payable June 21, 1996 (1)........................................... -- 100 --
<S> <C> <C> <C>
Note payable, guaranteed by the Company's sole stockholder at
December 31, 1995, interest at 50%, interest and principal due and
payable June 22, 1996 (1)........................................... -- 100 --
Note payable, unsecured, interest at 35% and principal due and
payable on January 10, 1996......................................... -- 75 --
Note payable, guaranteed by the Company's sole stockholder at
December 31, 1995, interest at 50%, interest and principal due and
payable July 11, 1996 (1)........................................... -- 70 --
Notes payable, unsecured, subordinated to all secured debt and any
future lines of credit up to $2 million, interest at 18%, interest
due and payable August 30, 1996, November 30, 1996, February 29,
1997, and May 31, 1997; principal due and payable May 31, 1997...... -- -- 750
------------ ------------ -------------
2,000 7,695 750
Less current portion................................................. 1,500 7,695 750
------------ ------------ -------------
$ 500 $ -- $ --
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
- ------------------------
(1) The notes, excluding $100,000 allowed the holder to exchange the debt prior
to April 30, 1996 for stock ownership equivalent to 5,667 shares for each
$51,000 of notes payable outstanding as of the date of conversion.
Approximately $2,631,000 of the notes, including principal and interest,
were converted into 292,865 shares of Common Stock. See Note 10.
(2) During March and April 1996, the Company entered into subscription
agreements to exchange the outstanding balance on certain notes on the date
of conversion to common stock at a range between $1.32 and $5.00 per share.
Approximately $2,868,200 of the notes, including principal and interest,
were converted into 721,030 shares of Common Stock. See Note 10.
Notes payable-related party consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
--------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable, uncollateralized; interest at 9%, interest
payable on demand, principal due on demand................... $ 102 $ 102 --
Note payable, uncollateralized; interest at 9%, interest
payable on demand, principal due on demand................... -- 100 --
--
----- -----
$ 102 $ 202 --
--
--
----- -----
----- -----
</TABLE>
The prime rate was 8.5% at December 31, 1994 and 1995 and was 8.25% at
September 30, 1996.
F-13
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASES:
The Company is obligated under various noncancelable leases for equipment
and office space. Future minimum lease commitments under operating and capital
leases were as follows as of September 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- ----------------------------------------------------------------------------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Three months ended December 31, 1996............................................... $ 58 $ 90
Year ended December 31, 1997....................................................... 155 365
Year ended December 31, 1998....................................................... 62 47
Year ended December 31, 1999....................................................... 27 7
----- -----
302 $ 509
-----
-----
Less: amount representing interest................................................. 45
-----
Present value of minimum lease payments............................................ 257
Less: current portion.............................................................. 164
-----
$ 93
-----
-----
</TABLE>
Total rental expense was approximately $37,000 $66,100 and $147,900 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $109,200
(unaudited) and $164,900 for the nine months ended September 30, 1995 and 1996,
respectively.
8. COMMITMENTS:
At September 30, 1996, the Company had contractual commitments to purchase
certain inventory items totaling approximately $1,789,500.
9. RELATED PARTY TRANSACTIONS:
During February 1995, the Company entered into a Stock Purchase Option (the
Option) with a former stockholder to repurchase the 19,215,686 shares of the
then outstanding class of common stock held by the former stockholder for a
purchase price of $2,500,000. The purchase price was subsequently reduced to
$800,522. On November 30, 1995, the Company exercised the option and immediately
retired the shares of treasury stock acquired. The exercise is reflected in the
accompanying statement of stockholder's equity (deficit) for the year ended
December 31, 1995. In addition, the $2.0 million included in notes payable-
related party as of December 31, 1994 has been reclassified to notes payable to
reflect the termination of the stockholder status in accordance with the
exercise of the option. These notes were satisfied prior to September 30, 1996.
During December 1995, the remaining stockholder borrowed $1,700,000 from the
Company. This note accrues interest at 9% with interest payments being made on a
monthly basis. The principal sum and any accrued interest thereon is due and
payable in December 1997. The note is included in the accompanying financial
statements as an increase in stockholders' deficit as of December 31, 1995. In
addition, the stockholder loaned the Company $100,000 during December 1995.
These notes, including interest, were satisfied prior to September 30, 1996.
10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS:
STOCK OPTIONS -- During 1995, the Company entered into option agreements
with certain parties to purchase an aggregate of up to $701,000 worth of shares
of common stock at the price to the public per share, in the event of an initial
public offering of common stock of the Company, at an aggregate purchase price
equal to $154,500. Subsequent to year-end, the Company terminated several
agreements which reduced the aggregate shares subject to such options to
$470,000, at an aggregate price equal to $39,000 as of April 30, 1996. The
options were exercised during July 1996.
F-14
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: (CONTINUED)
SUBORDINATED NOTE -- On January 2, 1996, the Company issued (i) its 16%
Subordinated Promissory Note due January 2, 1999 in the original principal
amount of $1 million, and (ii) warrants to purchase 200,000 shares of Common
Stock at an exercise price of $5.00 per share. The warrants terminate on the
earlier to occur of: (i) thirty (30) days following the filing of a registration
statement for an underwritten initial public offering of the Common Stock of the
Company, (ii) thirty (30) days following an announcement of a change in control
of the Company; or (iii) January 2, 1999. On August 27, 1996, the noteholder
surrendered the Subordinated Promissory Note in exercise of the warrants.
CORPORATE MERGER -- Pursuant to an Agreement and Plan of Merger (the Merger)
dated January 9, 1996, Digital Lightwave, Inc., a California corporation merged
into Digital Lightwave, Inc., a Delaware corporation, effective March 18, 1996.
The merger increased the number of shares of common stock authorized from
1,000,000, no par value, to 80,000,000, $.0001 par value. In connection with the
merger, the Company also authorized 20,000,000 shares of $.0001 par value
preferred stock. Each share of outstanding common stock of the California
corporation was converted into 3,921.5686 shares of common stock of the Delaware
corporation. All applicable share and per share amounts in the accompanying
financial statements have been retroactively adjusted to reflect these events.
Effective July 25, 1996, the Board of Directors authorized an increase in
the number of authorized shares of common stock from 80,000,000 shares to
200,000,000 shares.
ISO EMPLOYEE STOCK OPTION PLAN -- The Company's 1996 Stock Option Plan (the
Option Plan) became effective on March 5, 1996. A reserve of 5,000,000 shares of
the Company's common stock has been established for issuance under the Option
Plan. As of March 5, 1996, 410,103 options were granted at $5.00. As of December
5, 1996, an additional 839,934 options were granted at $9.00. The Option Plan
will terminate on February 28, 2006, unless sooner terminated by the Board.
SUBSCRIPTION AGREEMENTS -- The Company entered into subscription agreements
(the Agreements) with certain noteholders for the issuance of an aggregate of
782,898 shares of common stock for the surrender of the outstanding balance on
the notes (excluding certain accrued interest) of an aggregate of $4,074,000.
Pursuant to the Agreements, the Company issued warrants to purchase 1,050,000
and 18,747 shares of common stock at an exercise price of $5.00 and $9.00 per
share, respectively. The warrants expire on the earlier of (i) three years from
their respective dates of issuance; (ii) thirty (30) days following the filing
of a registration statement for an underwritten initial public offering of the
common stock of the Company, or (iii) a change of control of the Company. As of
September 30, 1996, 1,050,000 and 1,667 shares of Common Stock had been issued
upon the exercise of warrants at a price of $5.00 and $9.00 per share,
respectively.
On May 29, 1996, the Company entered into a subscription agreement with an
institutional investor for the issuance of 66,667 shares of common stock at a
price of $18.00 per share. In the event that on or before May 23, 1997 the
Company completes an initial public offering of its Common Stock, then the price
of the shares shall be adjusted by: (i) payment by the stockholder to the
Company in the amount equal to the excess, if any, over $18.00 per share of the
price to the public per share times 75% (the 75% price), or by (ii) a payment by
the Company to stockholder equal to the excess, if any, of $18.00 per share over
the 75% price. The Company has recorded a liability of $400,000 as of September
30, 1996, based upon management's estimate of the expected payment to the
institutional investor.
F-15
<PAGE>
DIGITAL LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: (CONTINUED)
PRIVATE PLACEMENT -- During the period March 13, 1996 through April 30,
1996, the Company sold 155,326 shares of common stock, par value $.0001 per
share, at a price of $9.00 per share.
REVERSE SPLIT -- On October 31, 1996, the Company effected a two for three
reverse split of its outstanding Common Stock. All share amounts included herein
have been adjusted to give historical effect to such reverse split for all
periods presented.
11. SIGNIFICANT CUSTOMERS
For the nine months ended September 30, 1996, sales to three customers
accounted for approximately 62% of total sales.
F-16
<PAGE>
GLOSSARY
ADD/DROP - Adding is including a lower transmission rate signal in a higher
transmission rate signal. For example, an OC-3 signal can be added to an OC-12
signal without altering the OC-3 signal. Dropping is removing a lower
transmission rate signal from a higher transmission rate signal.
ASYNCHRONOUS - Signals that are not generated from the same timing reference
and are therefore not identical in frequency.
ATM (ASYNCHRONOUS TRANSFER MODE) - An information transfer standard that is
one of a general class of technologies that relay traffic by way of an address
contained within the first five bytes of a standard 53-byte-long packet or cell.
The ATM format can be used by many different information systems, including the
public telecommunications network, WANs and LANs, to deliver traffic at varying
rates, permitting the efficient delivery of enhanced data services and
multimedia, which is a mix of voice, video and data.
BANDWIDTH - The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
BIT - A contraction of the term binary digit which represents a single digit
of information expressed as a 0 or 1, high or low, or yes or no.
BROADBAND - A communications system that can transmit large quantities of
voice, data and video. Examples of broadband communication systems include DS-3,
which can transmit 672 simultaneous voice conversations and higher speed fiber
optic systems or a broadcast television station signal, which can transmit high
resolution audio and video signals into the home. Broadband connectivity is also
an essential element for interactive multimedia applications.
CAP (COMPETITIVE ACCESS PROVIDER) - A company that provides its customers
with an alternative to the RBOC for local transport of private line, special
access and interstate transport of telecommunications service.
CROSS-CONNECT EQUIPMENT - Distribution system equipment used to terminate
and administer communication circuits. In a wire cross connect, jumper wires or
patch cords are used to make circuit connections. In an optical cross connect,
fiber patch cords are used.
DEMULTIPLEX - The process of separating two or more signals that were
previously multiplexed.
DIGITAL - A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission)
DS-1, DS-3 - Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-1 service has a bit rate of 1.544 Mbps and can
transmit 24 simultaneous voice conversations. DS-3 service has a bit rate of 45
megabits per second and can transmit 672 simultaneous voice conversations.
EMAIL OR ELECTRONIC MAIL - The transmission of memoranda and messages over a
network. Users can send eMail to a single recipient or broadcast it to multiple
users.
ETHERNET - A protocol commonly used on LANs.
ENHANCED DATA SERVICES - Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
FEAC (FAR END ALARM AND CONTROL) - A special sequence of bits which enable
telecommunications service providers to control the functioning of a remote
network element.
FCC - Federal Communications Commission.
G-1
<PAGE>
FIBER OPTIC - A transmission medium consisting of a core of glass or plastic
surrounded by a protective cladding, strengthening material and outer jacket
which guides light pulses introduced into the fiber by a laser.
FIRMWARE - Software that is contained permanently in a hardware device and
which can be rewritten.
GATE ARRAY - A circuit that has a number of logical circuits arranged in an
array, or regular pattern, normally customized to suit a specific application.
GIGABIT PER SECOND (GBPS) - One billion bits of information per second. The
information carrying capacity (i.e., bandwidth) of a circuit may be measured in
"gigabits per second."
GRAPHICAL USER INTERFACE - A type of display format that enables the user to
choose commands, start programs and see lists of files and other options by
pointing to pictorial representations and lists of menu items on the screen.
INTEGRATED CIRCUIT (MICROPROCESSOR) - A series of miniaturized
interconnected electronic circuits inseparably associated within a silicon or
geranium substitute.
INTERNET - The name used to refer to the world's largest internetwork,
consisting of thousands of networks joined by the Internet suite of protocols.
IXC (INTEREXCHANGE CARRIER) - A company providing long distance services or
service within local access and transport areas on an intrastate or interstate
basis.
KILOBIT PER SECOND (KBPS) - One thousand bits of information per second. The
information-carrying capacity (i.e., bandwidth) of a circuit may be measured in
"kilobits per second."
LAN (LOCAL AREA NETWORK) - A group of computers and other devices dispersed
over a relatively limited area and connected by a communications link that
enables any device to interact with any other on the network.
LEGACY - Older generations of transmission technologies which continue to be
utilized in telecommunications networks.
LIGHTWAVE - Light as a communication signal over fiber-optic cable
travelling as discrete pulses, each representing one bit of digital information.
LIGHTWAVE MANAGEMENT - Perception, evaluation, control and transmission of
lightwave communications.
MAPPING - A procedure of loading data into a group of bits of data (which
are marked off with flags to indicate the beginning and end of the group) such
that specific pieces of data can be located within the group of bits by network
equipment.
MEGABIT PER SECOND (MBPS) - One million bits of information per second. The
information-carrying capacity (i.e., bandwidth) of a circuit may be measured in
"megabits per second."
MULTIPLEX - The process of combining two or more signals for transmission
over the same circuit or channel at the same time.
NETWORK ELEMENT - A functional entity in a network, such as a multiplexer, a
switch interface or a digital cross-connect.
NETWORK PROTOCOL PROCESSORS (NPPS) - Modular hardware platforms for the
processing of various ranges of bandwidths and protocols.
NETWORK PROTOCOL TRANSLATORS (NPTS) - Modular gate arrays that supply
discrete network information from signals at specific bandwidths and on specific
protocols.
NON-BLOCKING SWITCH MATRIX - An internal switch in a system that has the
ability to switch multiple transmissions to different circuits simultaneously
without causing congestion internally in the switch.
NON-VOLATILE MEMORY - A type of memory that does not lose its content when
power is turned off or lost. It can be used as a virtual hard disk.
OC-1, OC-3, OC-3C, OC-12, OC-48 - Optical carrier signaling rates, measured
in bits transmitted per second. The basic rate for OC-1 is 51.840 Mbps. All
higher levels are direct multiples of OC-1 (e.g., OC-12 = 12 times 51.840 Mbps)
G-2
<PAGE>
OEM (ORIGINAL EQUIPMENT MANUFACTURER) - The customer of a component
manufacturer, which integrates the components into the products sold by the
customer in the ordinary course of its business.
OVERHEAD - Information carried in network transmissions, other than payload,
including routing information, error-checking characters and status and
operational information.
PAYLOAD - User transmitted data, including voice, data and/or video content,
which may include network management and accounting information.
PCMCIA (PERSONAL COMPUTER MEMORY CARD INTERNATIONAL ASSOCIATION) CARD - A
credit card sized card that plugs directly into a computer. The card can have
many different functions, such as providing additional memory, modem
capabilities, LAN connections, and interfaces.
PDH (PLESIOCHRONOUS DIGITAL HIERCHY) - Two or more signals that are not
generated from the same timing reference but are nominally at the same frequency
to a defined degree of precision.
PROTOCOL - A specific set of rules, procedures or conventions relating to
the format and timing of data transmission between two devices.
RAM - Random access memory.
RBOCS (REGIONAL BELL OPERATING COMPANIES) - The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
REMOTE ACCESS AGENT - A product of the Company designed to be distributed
throughout a network to provide network operators with real-time information
concerning the network segments where the Remote Access Agent has been
installed. This product can be centrally monitored and administered.
SDH (SYNCHRONOUS DIGITAL HIERARCHY) - An electronics and network
architecture utilized on most continents other than North America for variable
bandwidth products which enables transmission of voice, video and data
(multimedia) at very high speeds.
SOFTWARE CALIBRATION - Calibration of equipment using software functions
that measure and adjust through software controllable parameters.
SONET (SYNCHRONOUS OPTICAL NETWORK TECHNOLOGY) - An electronics and network
architecture utilized primarily in North America for variable-bandwidth products
which enables transmission of voice, video, and data (multimedia) at very high
speeds.
SWITCH - A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
SWITCH MATRIX - A series of gate arrays which provide for the routing of
signals from one circuit path to another.
T-CARRIER OR T-1 OR T-3 - Insulated copper wire cables which carry
electrically transmitted digital signals. A T-1 cable carries a DS-1 signal
(1.544 Mbps), and a T-3 cable carries a DS-3 signal (45 Mbps). Also, a generic
name for any of several digitally multiplexed carrier systems originally
designed to carry digitalized voice signals.
TEST INSTRUMENTS - Equipment that measures the conditions of a signal on a
fiber or metallic cable, which measures level, frequencies and faults in signal
information.
UTP (UNSHIELDED TWISTED PAIR) - A type of cable that is common for telephone
and data traffic to the end user.
VIRTUAL SWITCHING PRODUCT - A product the Company plans to develop which
will provide connections among end systems on demand.
WAN (WIDE AREA NETWORK) - A group of LANs dispersed over a relatively wide
area and interconnected on dedicated telecommunication lines.
WEB OR WORLD WIDE WEB OR WWW - An Internet network that links documents by
providing hypertext links from server to server. It allows a user to jump from
document to related document no matter where it is stored on the internet. World
Wide Web client programs, or Web browsers, allow users to "browse" the Web.
G-3
<PAGE>
[Graphic depicting the various screens (graphical user interfaces) which may be
displayed and accessed by an operator of the Company's products. Four screens
are shown to illustrate the products' features and functions]
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............. 3
Risk Factors................... 7
Use of Proceeds................ 12
Dividend Policy................ 12
Capitalization................. 13
Dilution....................... 14
Selected Financial Data........ 15
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 16
Business....................... 20
Management..................... 30
Principal and Selling
Stockholders.................. 35
Certain Transactions........... 36
Description of Capital Stock... 37
Shares Eligible For Future
Sale.......................... 40
Underwriting................... 41
Notice to Canadian Residents... 42
Legal Matters.................. 43
Experts........................ 43
Additional Information......... 43
Index to Financial
Statements.................... F-1
Glossary....................... G-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
[LOGO]
4,000,000 SHARES
COMMON STOCK
($.0001 par value)
P R O S P E C T U S
CREDIT SUISSE FIRST BOSTON
FURMAN SELZ
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of certain estimated
expenses incurred in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 19,034
NASD filing fee................................................... $ 6,100
Nasdaq National Market listing fee................................ $ 50,000
Blue Sky fees and expenses........................................ $ 10,000
Printing and engraving expenses................................... $ 100,000
Legal fees and expenses........................................... $ 400,000
Accounting fees and expenses...................................... $ 100,000
Registrar and Transfer Agent's fees and expenses.................. $ 5,000
Miscellaneous..................................................... $ 9,866
---------
Total........................................................... $ 700,000
---------
---------
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and Nasdaq National Market listing fee are estimated. The
Company intends to pay all expenses of registration with respect to shares being
sold by the Selling Stockholders hereunder, with the exception of underwriting
discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under the Delaware General Corporation Law to
indemnify all directors and officers to the extent provided in such statute. The
Company's Certificate of Incorporation provides that the Company shall indemnify
its directors to the fullest extent permitted by law either now or hereafter.
The Company has also entered into an agreement with each of its directors and
certain of its officers wherein it has agreed to indemnify each of them to the
fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
Pursuant to the Underwriting Agreement filed as Exhibit 1.01 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Company against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) The Registrant granted options to the persons identified below as
follows:
(a) On March 17, 1995, Digital Lightwave, Inc., a California corporation
(the "Predecessor"), granted an option, solely in the event of an initial
public offering (an "IPO") to purchase $150,000 worth of shares of Common
Stock at a price equal to 50% of the IPO effective price per share to
Michael Baum and George Murgatroyd in reliance on Sections 3(b) and 4(2) of
the Securities Act;
(b) On June 19, 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $400,000 worth of shares of
Common Stock at a price equal to 1% of the IPO effective price per share to
Stanley P. Zurn in reliance on Sections 3(b) and 4(2) of the Securities Act;
II-1
<PAGE>
(c) On June 22, 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $30,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share to
Edward F. Guignon in reliance on Sections 3(b) and 4(2) of the Securities
Act;
(d) On June 23 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $30,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share to
Paul J. Hedlund in reliance on Sections 3(b) and 4(2) of the Securities Act;
(e) On July 12 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $21,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share to
Margaret A. Guignon in reliance on Sections 3(b) and 4(2) of the Securities
Act;
(f) On August 15, 1995, the Predecessor granted an option to purchase
200,000 shares of Common Stock to Michael Baum and Paul J. Hedlund upon
conversion of a promissory note evidencing a loan made by such persons to
the Registrant in reliance on Sections 3(b) and 4(2) of the Securities Act;
and
(g) On September 7, 1995, the Predecessor granted an option, solely in
the event of an IPO of the Predecessor, to purchase $70,000 worth of shares
of Common Stock at a price equal to 50% of the IPO effective price per share
to Tony Charles Lonstein in reliance on Sections 3(b) and 4(2) of the
Securities Act.
(2) On January 2, 1996, the Registrant issued a three-year subordinated
promissory note in the original principal amount of $1 million and a warrant to
purchase 200,000 shares of Common Stock at an exercise price of $5.00 per share
to Renato Kasinsky, a citizen and resident of Brazil, in reliance on Regulation
S promulgated under the Securities Act.
(3) On March 12, 1996, the Registrant issued an aggregate of 521,030 shares
of Common Stock and warrants to purchase 1,050,002 shares of Common Stock at an
exercise price of $5.00 per share to several noteholders of the Company, other
than those described in paragraph (1) above, in consideration of the
satisfaction of indebtedness of the Registrant in an aggregate amount of
$2,605,041 in reliance on Sections 3(b) and 4(2) of the Securities Act.
(4) On March 18, 1996, the Registrant issued 20,000,000 shares of Common
Stock to the sole stockholder of the Predecessor, upon the effective date of the
merger between the Registrant and the Predecessor in reliance on Section 3(a)(9)
of the Securities Act.
(5) On March 28, 1996, the Registrant issued 200,000 shares of Common Stock
for an aggregate purchase price of $263,192 to the persons identified in
subparagraph 1(f) above pursuant to the exercise of their option to purchase
shares of Common Stock described in subparagraph 1(f) in satisfaction of the
indebtedness evidencing their loan to the Registrant in reliance on Sections
3(b) and 4(2) of the Securities Act.
(6) Between March 31, 1996 and May 15, 1996, the Registrant issued an
aggregate of 448,212 shares of Common Stock to 57 persons for an aggregate of
$4,033,710 (consisting of cash subscriptions and the surrender of $2,449,000 of
the Company's indebtedness) in reliance on Sections 3(b) and 4(2) of the
Securities Act. Holders of the options described in subparagraphs 1(a), 1(c),
1(d) and 1(e) above surrendered such options in exchange for warrants
exercisable for an aggregate of 18,748 shares of Common Stock at a price of
$9.00 per share.
(7) On May 27, 1996, the Registrant issued 66,667 shares of Common Stock to
Bulldog Capital Partners for an aggregate purchase price of $1,200,000 in
reliance on Sections 3(b) and 4(2) of the Securities Act.
(8) On May 31, 1996, the Company issued an aggregate of $750,000 of its 18%
subordinated promissory notes due May 31, 1997 to 11 persons in reliance on
Sections 3(b) and 4(2) of the Securities Act.
II-2
<PAGE>
(9) On July 29, 1996, the Registrant issued 26,668 shares of Common Stock
for an aggregate purchase price of $4,000 to the person identified in
subparagraph (1)(b) above pursuant to the exercise of his option to purchase
shares of Common Stock in reliance on Sections 3(b) and 4(2) of the Securities
Act.
(10) On July 29, 1996, the Registrant issued 4,667 shares of Common Stock for
an aggregate purchase price of $35,000 to the person identified in subparagraph
1(g) above pursuant to the exercise of his option to purchase shares of Common
Stock in reliance on Sections 3(b) and 4(2) of the Securities Act.
(11) During August and September 1996, the Registrant issued an aggregate of
1,051,669 shares of Common Stock upon the exercise of warrants described in
items (3) and (6) above in reliance on Sections 3(b) and 4(2) of the Securities
Act and issued 200,000 shares of Common Stock upon the exercise of the warrants
described in item (2) above in reliance on Regulation S of the Securities Act.
(12) During the period August 1993 to December 1996, the Registrant granted
incentive and non-statutory stock options to employees, officers, directors and
consultants under the 1996 Stock Option Plan which were exercisable into an
aggregate of 1,250,037 shares of its Common Stock, none of which have been
issued upon exercise. These options are subject to vesting provisions following
their respective dates of grant and were issued in reliance on Sections 3(b) and
4(2) of the Securities Act.
No underwriting discounts or commissions were paid in connection with any of
the foregoing transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement
3.01 -- Certificate of Incorporation of Registrant*
3.01.1 -- Amendment to Certificate of Incorporation of Registrant dated January 8, 1997
3.02 -- Amended and Restated By-laws of Registrant*
4.01 -- Specimen Certificate for the Common Stock*
5.01 -- Opinion of Baker & McKenzie*
10.01 -- Executive Employment Agreement dated September 30, 1996 between Registrant and Seth P. Joseph*
10.02 -- Lease Agreement dated October 7, 1994 between Registrant and Atrium at Clearwater, Limited*
10.03 -- First Lease Agreement Amendment dated February 16, 1996 between Registrant and Atrium at
Clearwater, Limited*
10.04 -- Form of Indemnification Agreement between Registrant and officers and directors of Registrant*
10.05 -- Digital Lightwave, Inc. 1996 Stock Option Plan*
23.01 -- Consent of Baker & McKenzie (included in Exhibit 5.01)*
23.02 -- Consent of Coopers & Lybrand L.L.P.
24.01 -- Power of Attorney (as set forth on the signature page of the Registration Statement)*
27.01 -- Financial Data Schedule*
</TABLE>
- --------------
* Previously filed.
(b) Financial Statement Schedules:
None
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 , 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 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 of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(3) The undersigned Registrant hereby undertakes:
(a) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(b) That for the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Registrant certifies that it has duly caused this
Amendment No. 3 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Clearwater, Florida, on
the 30th day of January, 1997.
DIGITAL LIGHTWAVE, INC.
By: /s/ BRYAN J. ZWAN
-----------------------------------
Bryan J. Zwan
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
Chairman of the Board, Chief
/s/ BRYAN J. ZWAN Executive Officer, President and
------------------------------------------- Director (Principal Executive January 30, 1997
Bryan J. Zwan Officer)
/s/ BETH A. MORRIS* Chief Financial Officer, Secretary
------------------------------------------- and Treasurer (Principal Financial January 30, 1997
Beth A. Morris and Accounting Officer)
/s/ DOUG C. DOHRING*
------------------------------------------- Director January 30, 1997
Doug C. Dohring
/s/ SETH P. JOSEPH
------------------------------------------- Senior Executive Vice President and January 30, 1997
Seth P. Joseph Director
*By: /s/ BRYAN J. ZWAN
---------------------------------------
Bryan J. Zwan, Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGES
- --------- ------------------------------------------------------------------------------------- -------------
<S> <C> <C> <C>
1.01 -- Form of Underwriting Agreement
23.2 -- Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE>
EXHIBIT 1.01
4,000,000 Shares
Digital Lightwave, Inc.
Common Stock,
$.0001 par value
UNDERWRITING AGREEMENT
__________, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
FURMAN SELZ,
As Representatives of the Several Underwriters
Eleven Madison Avenue
New York, N.Y. 10010
Dear Sirs:
1. Introductory. Digital Lightwave, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule A hereto (the "Underwriters") 3,152,000 shares of its Common Stock,
$.0001 par value per share (the "Securities") and the stockholders listed in
Schedule B hereto (the "Selling Stockholders") propose severally and not jointly
to sell an aggregate of 848,000 outstanding shares of the Securities (such
4,000,000 shares of Securities being hereinafter referred to as the "Firm
Securities"). The Company also proposes to sell to the Underwriters, at the
option of the Underwriters, an aggregate of not more than 600,000 additional
shares of its Securities, as set forth below (such 600,000 additional shares
being hereinafter referred to as the "Optional Securities"). The Firm Securities
and the Optional Securities are herein collectively referred to as the "Offered
Securities." This Underwriting Agreement, as amended, supplemented or modified
from time to time is referred to herein as the "Agreement." The Company and the
Selling Stockholders, severally and not jointly, hereby agree with the
Underwriters as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement on Form S-1 (No. 333-9457) relating to
the Offered Securities, including a form of prospectus, has been filed
with the Securities and Exchange Commission (the "Commission") and either
(A) has been declared effective under the Securities Act of 1933, as
amended (the "Act"), and is not proposed to be amended or (B) is proposed
to be amended by amendment or post-effective amendment. If such
registration statement (the "initial registration statement") has been
declared effective, either (A) an additional registration statement (the
"additional registration statement") relating to the Offered Securities
may have been filed with the Commission pursuant to Rule 462(b) ("Rule
462(b)") under the Act and, if so filed, has
<PAGE>
become effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (B) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing
the Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the
Act or, in the case of the additional registration statement, Rule 462(b).
For purposes of this Agreement, "Effective Time" with respect to the
initial registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement means
(A) if the Company has advised the Representatives that it does not
propose to amend such registration statement, the date and time as of
which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (B) if the Company has
advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and time
as of which such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company has
advised the Representatives that it proposes to file one, "Effective Time"
with respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "Effective Date" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as amended
at its Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all information
(if any) deemed to be a part of the additional registration statement as
of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "Additional Registration Statement". The Initial Registration
Statement and the Additional Registration Statement are hereinafter
referred to collectively as the "Registration Statements" and individually
as a "Registration Statement". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus". No document has been or will
be prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
("Rules and Regulations") and did not include any
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<PAGE>
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, (B) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed, or will
conform, in all material respects to the requirements of the Act and the
Rules and Regulations and did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery
of this Agreement, the Additional Registration Statement each conforms,
and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if
no such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations, and
none of such documents includes, or will include, any untrue statement of
a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein
(and, in the case of the Prospectus, in light of the circumstances under
which they were made) not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement,
the Initial Registration Statement and the Prospectus will conform in all
material respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement
of a material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein (and, in the
case of the Prospectus, in light of the circumstances under which such
statements were made) not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus (or any supplements thereto) based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(c).
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure, individually or in the aggregate, to be so qualified would not
have a material adverse effect upon the condition, financial or otherwise,
results of operations, business affairs or business prospects of the
Company.
(iv) The Company has no subsidiaries and owns no securities,
directly or indirectly, of any entity.
(v) The Company's authorized capitalization is as described in the
Prospectus; all outstanding shares of capital stock of the Company have
been duly authorized and are validly issued, fully paid and nonassessable
and conform to the description thereof contained in the Prospectus; the
Offered Securities have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be validly
issued, fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; the stockholders of the Company have
no preemptive rights with respect to the Securities; except as described
in the Prospectus, there are no other rights to subscribe for or purchase
any shares of capital stock issued
3
<PAGE>
by the Company; and, except as described in the Prospectus, there are no
outstanding securities or obligations of the Company convertible into,
exercisable for or exchangeable for any capital stock of the Company.
(vi) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection
with the transactions contemplated hereby.
(vii) No person or entity has any right, not effectively satisfied
or waived, to require the Company to include any securities with the
Securities registered pursuant to a Registration Statement; no person or
entity has any right to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person; and, except as described in the
Prospectus, no person or entity has any right to require the Company to
include such securities with securities to be registered pursuant to any
other registration statement filed by the Company under the Act.
(viii) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market, subject to notice of issuance.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the sale of the Offered
Securities by the Company, except such as have been obtained and made for
registration of the Offered Securities under the Act and such as may be
required by the National Association of Securities Dealers, Inc. or under
state or foreign securities laws.
(x) The execution, delivery and performance of this Agreement and
the sale of the Offered Securities by the Company will not result in a
breach or violation of any of the terms and provisions of the charter or
bylaws of the Company. The execution, delivery and performance of this
Agreement and the sale of the Offered Securities by the Company will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order of
any governmental agency or body or any court having jurisdiction over the
Company or any of its properties, or any agreement or instrument to which
the Company is a party or by which the Company is bound or to which any of
the properties of the Company is subject, which breach violation or
default would, individually or in the aggregate have a material adverse
effect on the Company.
(xi) This Agreement has been duly authorized, executed and delivered
by the Company.
(xii) Except as disclosed in the Prospectus, the Company has good
and marketable title to all real properties and all other properties and
assets owned by it, in each case free from liens, encumbrances and defects
that would materially affect the value thereof or materially interfere
with the use made or to be made thereof; and except as disclosed in the
Prospectus, the Company holds any leased real or personal property under
valid and enforceable leases with no exceptions that would materially
interfere with the use made or to be made thereof.
(xiii) The Company possesses adequate certificates, authorities or
permits issued by appropriate governmental agencies or bodies necessary to
conduct the business now operated by it
4
<PAGE>
as described in the Prospectus, except for certificates, authorities or
permits that are not material and do not interfere with the conduct of the
business of the Company; and the Company has not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company, would individually or in the aggregate have a material adverse
effect on the Company.
(xiv) No labor dispute with the employees of the Company exists or,
to the knowledge of the Company, is imminent that might have a material
adverse effect on the Company; the Company is not engaged in any unfair
labor practice; and no unfair labor practice complaint is pending or, to
its best knowledge, threatened against the Company.
(xv) Except as disclosed in the Prospectus, the Company owns
trademarks, trade names and other rights to inventions, know-how, patents,
patent applications, copyrights, confidential information and other
intellectual property (collectively, "intellectual property rights")
necessary to operate its business as now conducted by it and as proposed
to be conducted, each as described in the Prospectus; to the best
knowledge of the Company, the Company has not infringed, and is not
infringing, and the Company has not received any notice of claimed
infringement with respect to, any intellectual property rights of others;
and to the best knowledge of the Company there is no infringement by
others of the intellectual property rights of the Company.
(xvi) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company or any of
its properties that, if determined adversely to the Company, would
individually or in the aggregate have a material adverse effect on the
condition (financial or otherwise), business, properties or results of
operations of the Company, or would materially and adversely affect the
ability of the Company to perform its obligations under this Agreement, or
which are otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are, to the
Company's knowledge, threatened or contemplated.
(xvii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates shown and its results of operations and cash flows
for the periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the United
States applied on a consistent basis.
(xviii) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event that may
result in a prospective material adverse change, in the condition
(financial or otherwise), business, properties or results of operations of
the Company; there have been no transactions entered into by the Company,
other than in the ordinary course of business, which are material with
respect to the Company; and, except as disclosed in or contemplated by the
Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(xix) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus, or to be filed
as an exhibit to the Registration Statement, that is not described or
filed as required.
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<PAGE>
(xx) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(xxi) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes, and the
Company agrees to comply with such Section if prior to the completion of
the distribution of the Offered Securities it commences doing such
business.
(b) Each Selling Stockholder severally and not jointly represents
and warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing Date
(defined below) will have, full right, power and authority to enter into
this Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for such Offered
Securities on such Closing Date, the several Underwriters will acquire
valid and unencumbered title to the Offered Securities to be delivered by
such Selling Stockholder on such Closing Date. Such Selling Stockholder
(other than Ellenburg Capital Corp., Norton S. Karno and Gerald Ellenburg)
has, and on the First Closing Date (defined below) will have, valid and
unencumbered title to the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery
of this Agreement, the Additional Registration Statement does not include,
or will not include, any untrue statement of a material fact or omit, or
will omit, to state any material fact required to be stated therein or
necessary to make the statements therein (and, in case of the Prospectus,
in light of the circumstances under which they were made) not misleading.
If the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date of
the Initial Registration Statement, the Initial Registration Statement and
the Prospectus will not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein (and, in the case of the Prospectus, in
light of the circumstances under which they were made) not misleading. The
two preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus (or any supplements thereto)
based upon written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being
understood and agreed that the only such information is that described as
such in Section 7(c). The representations and warranties set forth in this
subparagraph 2(b)(ii) shall apply only to statements and/or omissions from
any Registration Statement or any Prospectus made in reliance upon and in
conformity with the most recent information relating to such Selling
Stockholder in writing expressly for use therein.
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<PAGE>
(iii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by such Selling Stockholder for the consummation of the
transactions contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by such Selling
Stockholder, except such as have been obtained and made for registration
of the Offered Securities under the Act and such as may be required by the
National Association of Securities Dealers, Inc., or under any foreign or
state securities laws.
(iv) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default under, any
statute, any rule, regulation or order of any governmental agency or body
or any court having jurisdiction over such Selling Stockholder or any
their properties or any agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound or to
which any of the properties of such Selling Stockholder is subject.
(v) Each of this Agreement, the Power of Attorney and related
Custody Agreement with respect to each Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and
constitutes a valid and legally binding obligation of each such Selling
Stockholder enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights, to general equity principles and to applicable laws and
public policy considerations which may limit rights to indemnity or
contribution thereunder.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and each Selling Stockholder
agree, severally and not jointly, to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
each Selling Stockholder, at a purchase price of $ per share, the respective
number of shares of Firm Securities (rounded up or down, as determined by Credit
Suisse First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying 3,152,000 Firm Securities in the case of the
Company and the number of Firm Securities set forth opposite the name of such
Selling Stockholder in Schedule B hereto, in the case of a Selling Stockholder,
in each case, by a fraction the numerator of which is the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule A hereto
and the denominator of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with American Stock Transfer
and Trust Company, as custodian ("Custodian"). Each Selling Stockholder agrees
that the shares represented by the certificates held in custody for such Selling
Stockholder under such Custody Agreements are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling Stockholder
for such custody are to that extent irrevocable, and that the obligations of the
Selling Stockholders hereunder shall not be terminated by operation of law,
whether by the death of any individual Selling Stockholder or the occurrence of
any other event, or in the case of a trust, by the death of any trustee or
trustees or the termination of such trust. If any individual Selling Stockholder
or any such trustee or trustees should die, or if any other such event should
occur, or if any of such trusts should terminate, before the delivery of the
Offered Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not
7
<PAGE>
occurred, regardless of whether or not the Custodian shall have received notice
of such death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price at a bank acceptable to CSFBC in federal reserve funds
immediately available by wire transfer to the account of the Company payable to
the Company in the case of 3,152,000 shares of Firm Securities, and in federal
reserve funds immediately available by wire transfer to the account of the
Custodian payable to the Custodian in the case of 848,000 shares of Firm
Securities, at the office of King & Spalding, Atlanta, Georgia, at 10:00 A.M.,
New York time, on , or at such other time not later than seven full business
days thereafter as CSFBC and the Company determine, such time being herein
referred to as the "First Closing Date." The certificates for the Firm
Securities so to be delivered, will be in definitive form, in such denominations
and registered in such names as CSFBC requests upon reasonable notice and will
be made available for checking and packaging at the above office of King &
Spalding at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in federal reserve funds immediately available by
wire transfer to the account of the Company at a bank acceptable to CSFBC,
payable to the Company. The certificates for the Optional Securities being
purchased on each Optional Closing Date, will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of King & Spalding at a reasonable
time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
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5. Certain Agreements of the Company and the Selling Stockholders.
The Company agrees with the several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement. The Company will advise CSFBC promptly of any such
filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and delivery,
the Company will file the additional registration statement or, if filed,
will file a post-effective amendment thereto with the Commission pursuant
to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, on or prior to the
time the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent, which
shall not be unreasonably withheld; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and will
use its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend or supplement the Prospectus to comply with the Act, the Company
will promptly notify CSFBC of such event and will promptly prepare and
file with the Commission, at its own expense, an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance. Neither CSFBC's consent to, nor the Underwriters'
delivery of, any such amendment or supplement shall constitute a waiver of
any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the
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preceding sentence, "Availability Date" means the 45th day after the end
of the fourth fiscal quarter following the fiscal quarter that includes
such Effective Date, except that, if such fourth fiscal quarter is the
last quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required to complete the distribution of the Offered Securities, provided
that the Company shall not be required to qualify as a foreign corporation
or to consent to service of process under the laws of any such
jurisdiction (except service of process with respect to the offering and
sale of the Offered Securities).
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report or definitive proxy statement of the Company filed with the
Commission under the Securities Exchange Act of 1934, as amended, or
mailed to stockholders, and (ii) from time to time, such other information
of a public nature concerning the Company as CSFBC may reasonably request.
(h) For a period of 180 days after the date of the Prospectus, the
Company will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Commission a
registration statement under the Act relating to, any additional shares of
its Securities or securities convertible into or exchangeable or
exercisable for any shares of its Securities, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of CSFBC, except issuances of Securities
pursuant to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants or options, in each case
outstanding on the date hereof, grants of employee stock options pursuant
to the terms of a plan in effect on the date hereof and issuances of
Securities pursuant to the exercise of such options.
The Company and each Selling Stockholder, severally and not jointly, agree
with the several Underwriters that the Company will pay all expenses incident to
the performance of the obligations of the Company and such Selling Stockholder,
as the case may be (except for the underwriting discounts and commissions
payable with respect to the Selling Stockholders' shares sold in the Offering,
which each Selling Stockholder will bear in proportion to amounts sold), under
this Agreement, and will reimburse the Underwriters (if and to the extent
incurred by them) for any filing fees and other
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expenses (including fees and disbursements of counsel) incurred by them in
connection with qualification of the Offered Securities for sale under the laws
of such jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee of the National Association of Securities Dealers,
Inc. relating to the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholders of the Offered Securities to the Underwriters and for expenses
incurred in distributing preliminary prospectuses and the Prospectus (including
any amendments and supplements thereto) to the Underwriters.
Each Selling Stockholder agrees, severally and not jointly, to deliver to
CSFBC, attention: Transactions Advisory Group, on or prior to the First Closing
Date a properly completed and executed United States Treasury Department Form
W-9 (or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
Each Selling Stockholder agrees, severally and not jointly, for a period
of 180 days after the date of the Prospectus, not to offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any additional
shares of the Securities of the Company or securities convertible into or
exchangeable or exercisable for any shares of Securities, or publicly disclose
the intention to make any such offer, sale, pledge or disposition, without the
prior written consent of CSFBC.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Coopers & Lybrand
L.L.P., confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements
examined by them and included in the Registration Statements comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) on the basis of a reading of the latest
available interim financial statements of the Company, inquiries of
officials of the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
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(A) at the date of the latest available balance
sheet read by such accountants, or at a subsequent specified
date not more than five days prior to the date of this
Agreement, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of the
Company or, at the date of the latest available balance sheet
read by such accountants, there was any decrease in net
current assets or net assets, as compared with amounts shown
on the latest balance sheet included in the Prospectus; or
(B) for the period from the closing date of the
latest income statement included in the Prospectus to the
closing date of the latest available income statement read by
such accountants there were any decreases, as compared with
the corresponding period of the previous year, and with the
period of corresponding length ended the date of the latest
income statement included in the Prospectus, in net sales or
net operating income or in the total or per share amounts of
income before extraordinary items or net income;
except in all cases set forth in clauses (A) and (B) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) they have compared specified dollar amounts
(or percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements (in
each case to the extent that such dollar amounts, percentages and
other financial information are derived from the general accounting
records of the Company subject to the internal controls of the
Company's accounting system or are derived directly from such
records by analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and other
procedures specified in such letter and have found such dollar
amounts, percentages and other financial information to be in
agreement with such results, except as otherwise specified in such
letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the amendment
or post-effective amendment to be filed shortly prior to its Effective
Time, (ii) if the Effective Time of the Initial Registration Statements is
prior to the execution and delivery of this Agreement but the Effective
Time of the Additional Registration Statement is subsequent to such
execution and delivery, "Registration Statements" shall mean the Initial
Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration
Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter,
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<PAGE>
or shall have occurred at such later date as shall have been consented to
by CSFBC. If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Prospectus
shall have been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company, any Selling
Stockholder or the Representatives, shall be contemplated by the
Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or otherwise),
business, properties or results of operations of the Company which, in the
judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale
of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Act), or any public announcement that any such organization has
under surveillance or review its rating of any debt securities of the
Company (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading, of such
rating); (iii) any suspension or limitation of trading in securities
generally on the New York Stock Exchange or any setting of minimum prices
for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter
market; (iv) any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or
any other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters including
the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment
for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Baker & McKenzie, counsel for the Company, to the effect
that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in each jurisdiction in which it is known to such
counsel to own or lease property or conduct business and in which
the failure, individually or in the aggregate, to be so qualified
would have a material adverse effect on the Company.
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Securities of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in
the Prospectus; the stockholders of the Company have no preemptive
rights with respect to the Offered Securities; and, to the best
knowledge of such counsel, there are no other rights to subscribe
for or purchase any shares of capital stock issued by the Company
and (except as described in the Prospectus) no
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<PAGE>
outstanding securities or obligations of the Company convertible
into, exercisable for or exchangable for any capital stock of the
Company.
(iii) To the best knowledge of such counsel, no person or
entity has any right, not effectively satisfied or waived, to
require the Company to include any securities with the Securities
registered pursuant to a Registration Statement; no person or entity
has any right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person; and, except as
described in the Prospectus, no person or entity has any right to
require the Company to include such securities with securities to be
registered pursuant to any other registration statement filed by the
Company under the Act.
(iv) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or, to such counsel's
knowledge, any court is required to be obtained or made by the
Company in connection with the sale of the Offered Securities by the
Company other than registration of the Offered Securities Under the
Act (except such counsel will not express an opinion as to any
necessary qualification under the state securities or blue sky laws
of the various jurisdictions in which the Offered Securities are
being offered by the Underwriters or the review of the terms of the
public offering of the Offered Securities by the NASD).
(v) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will
not result in a breach or violation of any of the terms and
provisions of the charter or bylaws of the Company. The execution,
delivery and performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over
the Company or any of its properties, or any agreement or instrument
to which the Company is a party or by which the Company is bound or
to which any of the properties of the Company is subject, of which
such counsel is aware, which, breach, default or violation would
have a material adverse effect on the Company.
(vi) To the best knowledge of such counsel, there are no
pending actions, suits or proceedings against or affecting the
Company or any of its properties that, if determined adversely to
the Company, would individually or in the aggregate have a material
adverse effect on the condition (financial or otherwise), business,
properties or results of operations of the Company, or would
materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and
no such actions, suits or proceedings are threatened or, to the
Company's knowledge, contemplated.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company.
(viii) The Initial Registration Statement was declared
effective under the Act as of the date specified in such opinion,
the Additional Registration Statement (if any) was filed and became
effective under the Act as of the date specified in such opinion,
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<PAGE>
the Prospectus either was filed with the Commission pursuant to
subparagraph (1) or (4) of Rule 424(b) on the date specified therein
or was included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and, to the
best knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof has
been issued and no proceedings for that purpose have been instituted
or are pending or contemplated under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, complied
as to form in all material respects with the requirements of the Act
and the Rules and Regulations.
(ix) The statements in the Registration Statement and the
Prospectus under the captions "Business -- Regulation," "Description
of Capital Stock" and "Shares Eligible For Future Sale," insofar as
they are descriptions of laws, regulations and rules, of legal and
governmental proceedings or of contracts, agreements, leases and
other legal documents known to such counsel, or refer to statements
of law or legal conclusions, are complete and accurate in all
material respects.
In addition, such counsel shall state that it has participated
in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for
the Company and the Representatives and counsel to the Underwriters
at which the contents of the Registration Statement and Prospectus
and related matters were discussed and, although such counsel has
not undertaken to investigate or verify independently and does not
assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration Statement
and Prospectus (except as otherwise expressly set forth herein), on
the basis of the foregoing, no facts have come to such counsel's
attention that caused such counsel to believe that any part of the
Registration Statement (other than the financial statements and
notes thereto and other financial, statistical and accounting data
or schedules included therein, or omitted therefrom, as to which
such counsel need express no opinion), as amended or supplemented,
at the time such part of the Registration Statement became
effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or the
Prospectus (other than the financial statements and notes thereto
and other financial, statistical and accounting data or schedules
included therein, or omitted therefrom, as to which such counsel
expresses no opinion), as amended or supplemented, on the date of
filing thereof with the Commission and on the date hereof, contained
an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
(e) The Representatives shall have received the opinion contemplated
in the Power of Attorney executed and delivered by each Selling
Stockholder and an opinion, dated such Closing Date, of Holland & Knight,
counsel for the Selling Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title
to the Offered Securities delivered by such Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities
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<PAGE>
delivered by such Selling Stockholder on such Closing Date
hereunder; and the several Underwriters have acquired valid and
unencumbered title to the Offered Securities purchased by them from
the Selling Stockholders on such Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or, to such counsel's
knowledge, any court is required to be obtained or made by any
Selling Stockholder for the consummation of the transactions
contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the
Selling Stockholders, other than the registration of the Offered
Securities under the Act or approval of the terms of the public
offering of the Offered Security by the NASD (except such counsel
will not express an opinion as to any necessary qualification under
the state securities or blue sky laws of the various jurisdictions
in which the Offered Securities are being offered by the
Underwriters);
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the
transactions therein and herein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any agreement or instrument to which any
Selling Stockholder is a party or by which any Selling Stockholder
is bound or to which any of the properties of any Selling
Stockholder is subject, of which such counsel is aware;
(iv) The Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder has been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder
and constitute valid and legally binding obligations of each such
Selling Stockholder enforceable in accordance with their respective
terms, except (a) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and general principles of
equity, (b) as enforceability of any indemnification provisions may
be limited under federal and state securities or blue sky laws or
public policy, (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses, including without limitation concepts of
reasonableness, materiality, good faith and fair dealing and to the
discretion of the court before which any proceeding therefor may be
brought, and (d) to the extent that certain waivers of rights are
void as against public policy; and
(v) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
(f) The Representatives shall have received from King & Spalding,
counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the incorporation of the Company, the validity of
the Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the
Representatives may require, and the Selling Stockholders and the Company
shall have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
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(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice-President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied in all material respects
with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to such Closing Date; no stop
order suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of any
applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
change, in the condition (financial or otherwise), business, properties or
results of operations of the Company except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Coopers & Lybrand L.L.P. which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than five days prior to such
Closing Date for the purposes of this subsection.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided, further,
that such indemnity with respect to any untrue statement or omission of a
material fact contained in any preliminary prospectus, shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares that are subject thereof if
such person did not receive a copy of the Prospectus (or the
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Prospectus as supplemented) at or prior to the confirmation of the sale of such
shares to such person in any case where delivery is required under the Act and
such untrue statement or omission of a material fact contained in any
preliminary prospectus was corrected in the Prospectus (or the Prospectus as
supplemented).
(b) The Selling Stockholders severally, and not jointly, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
information provided in writing by such Selling Stockholder, upon any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or any related preliminary prospectus, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading (in
each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or any Underwriter
by a Selling Stockholder specifically for use therein) and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that each Selling Stockholder will not be liable in any such case to the extent
that any such loss, claim, damage or liability (i) arises out of or is based
upon an untrue statement or alleged untrue statement in or omission from any of
such documents in reliance upon and conformity with written information
furnished to the Company by an Underwriter through the Representatives
specifically for use therein, or (ii) is in excess of the net proceeds of the
Offering received by such Selling Stockholder.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and the Selling Stockholders against any losses, claims,
damages or liabilities to which the Company or the Selling Stockholders may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and any Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legend concerning over-allotments and stabilizing on the
inside front cover page and the concession and reallowance figures and statement
regarding discretionary sales appearing in the fourth and fifth paragraphs,
respectively, under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from
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any liability which it may have to any indemnified party otherwise than under
subsection (a), (b) or (c) above. In case any such action is brought against any
indemnified party and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action. An indemnifying party will not be
liable for any settlement of any action or claim effected without its written
consent.
(e) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and each Selling Stockholder on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and each Selling Stockholder on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and each Selling Stockholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and such Selling Stockholder bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, a Selling
Stockholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
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(f) The obligations of the Company and the Selling Stockholders under this
Section shall be in addition to any liability which the Company and the Selling
Stockholders may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on any Closing Date
and the aggregate number of shares of Offered Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the total number of shares of Offered Securities that the Underwriters are
obligated to purchase on such Closing Date, CSFBC may make arrangements
satisfactory to the Company and the Selling Stockholders for the purchase of
such Offered Securities by other persons, including any of the Underwriters, but
if no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Stockholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased
previously. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers, the Selling Stockholders and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
20
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10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed or delivered and confirmed to the
Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010, Attention: Investment Banking Department -
Transactions Advisory Group, with a copy to King & Spalding, 191 Peachtree
Street, N.E., Atlanta, GA 30303-1763, Attention: Jeffrey M. Stein, Esq., or, if
sent to the Company, will be mailed or delivered and confirmed to it at 601
Cleveland Street, Fifth Floor, Clearwater, FL 34615, Attention: Brian J. Zwan,
with a copy to Baker & McKenzie, The Wells Fargo Plaza, 12th Floor, 101 West
Broadway, San Diego, California 92101-9890, Attention: John J. Hentrich, Esq.,
or, if sent to the Selling Stockholders or any of them, will be mailed,
delivered or telegraphed and confirmed to the Selling Stockholders at the
addresses set forth on Schedule B below each Selling Stockholder's name, with a
copy to Holland & Knight, 400 North Ashley Drive, Suite 2300, Tampa, Florida
33602-4300, Attention: Chester E. Bacheller, Esq.; provided, however, that any
notice to an Underwriter pursuant to Section 7 will be mailed or delivered and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective personal representatives and
successors and the officers and directors and controlling persons referred to in
Section 7, and no other person will have any right or obligation hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives, jointly or by
CSFBC, will be binding upon all the Underwriters. Seth P. Joseph and Beth A.
Morris (the "Attorneys") will act for the Selling Stockholders in connection
with such transactions, and any action under or in respect of this Agreement
taken by the Attorneys will be binding upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company and each Selling Stockholder hereby submit to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
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If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company three counterparts
hereof, whereupon this Agreement will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
THE SELLING STOCKHOLDERS: By:_____________________________________
[Name]
Attorney-in-fact
THE COMPANY: DIGITAL LIGHTWAVE, INC.
By:_____________________________________
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
FURMAN SELZ
Acting on behalf of themselves and as the
Representatives of the several Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By:___________________________________
Name:
Title:
22
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SCHEDULE A
Number of
Firm Securities
Underwriter to be Purchased
----------- ---------------
Credit Suisse First Boston Corporation......
Furman Selz LLC.............................
----------
Total .................. 4,000,000
==========
<PAGE>
SCHEDULE B
Number of
Firm Securities
Selling Stockholder to be Sold
- ------------------- ----------
Norton S. Karno 300,000
Gerald Ellenburg 225,334
Ellenburg Capital Corp. 116,420
Paul Hedlund 69,453
Michael L. Baum 66,801
George W. Murgatroyd 5,760
Edward F. and Angela M. Guignon 6,339
Stanley P. Zurn 8,001
Robert Welch 8,001
Jakob Kryszek 6,334
Alfred J. Cade 4,667
ASK Brown Trust 4,667
Nicholas Brown 3,267
Frank & Jean Dufek 3,134
Carl R. Gratz Residuary Trust 3,134
Venture Tech Investors 2,934
Ruth Cantley 2,334
Tony Charles Lonstein 2,801
Monte Factor TTEE under the will of Ted H. Factor 1,867
Sean Lilly 1,334
Margaret A. Guignon 5,418
--------
Total..................................... 848,000
========
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-9457) of our report, dated October 21, 1996, except as to certain
information in Note 10 for which the date is December 5, 1996, on our audits of
the financial statements of Digital Lightwave, Inc. We also consent to the
reference to our firm under the captions "Experts" and "Selected Financial
Data."
/s/ Coopers & Lybrand L.L.P.
Tampa, FL
January 30, 1997