<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 0-21669
DIGITAL LIGHTWAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4313013
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
15550 LIGHTWAVE DRIVE
CLEARWATER, FLORIDA 33760
(727) 442-6677
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES AND REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.0001 PAR VALUE PER SHARE
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Report or any amendment to this
Report. [ ]
The aggregate market value of Registrant's voting stock, held by
non-affiliates, computed by reference to the average of the closing bid and
asked prices of the Common Stock as reported by Nasdaq on March 26,
1999: $19,821,560.
The number of shares of Registrant's Common Stock issued and outstanding as
of March 26, 1999: 26,558,766.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<PAGE> 2
PART I
Certain statements contained in this report on Form 10-K including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 1 under the
heading "Factors That May Affect Operating Results." Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
A glossary of terms used in this Report appears at the end of this Item 1.
ITEM 1. BUSINESS
GENERAL
Digital Lightwave designs, develops, markets and supports diagnostic
products that monitor, maintain and manage fiber optic-based networks.
Telecommunications networks increasingly rely on optical fiber to provide
sufficient network bandwidth to transmit Internet, data, voice and multimedia
video traffic. The Company's products provide telecommunications service
providers and equipment manufacturers with capabilities to cost-effectively
deploy and manage fiber optic networks to address the rapidly increasing demand
for bandwidth. The Company's current customers include telecommunications
service providers, such as AT&T, MCI WorldCom, Qwest Communications and Sprint
Corporation, and telecommunications equipment manufacturers, such as Alcatel
Network Systems, Northern Telecom Limited and Tellabs.
The Company's products are used to qualify and verify service during
network installation and to provide ongoing real-time quality assurance for
deployed networks. In contrast to other existing telecommunications test
equipment, the Company's products are based on modular and scaleable hardware
and software platforms with a flexible architecture that allows customers to
readily upgrade existing systems to accommodate new technologies.
The Company's ASA 312 Network Information Computer provides engineers and
technicians with a truly portable, easy-to-use diagnostic product that offers
increased functionality for the installation and maintenance testing of
advanced, high speed networks and transmission equipment. In 1998, the Company
introduced its initial Network Access Agent, which incorporates the technology
developed for the Network Information Computer and is an unattended,
software-controlled performance monitoring and diagnostic product permanently
installed within optical-based networks for management from a central location.
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 Report the "Company" and "Digital Lightwave"
refer to Digital Lightwave, Inc., a Delaware corporation, and its predecessor
entity. The Company's principal executive offices are located at 15550 Lightwave
Drive, Clearwater, Florida, 33760, and the telephone number at that address is
(727) 442-6677.
INDUSTRY
Over the past several years, the telecommunications industry has undergone
fundamental changes. The volume of traffic carried over telecommunications
networks has increased significantly, principally as the result of the rapidly
growing amount of data traffic as well as steady growth of voice traffic. Data
traffic has increased due to a proliferation of bandwidth intensive
applications, including the Internet, online commerce and other multi-media
applications. As of January 1999, there were an estimated 150 million Internet
users worldwide, up more than 200% from 1996, according to NUA Internet Surveys,
a market research company specializing in on-line Internet demographics and
trends. Global Internet bandwidth demand is projected to increase at a
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compound annual growth rate of 109% from 1998 through 2003, according to KMI
Corporation, a market research company specializing in fiber optics.
This rising demand, together with worldwide deregulation of the
telecommunications industry, has led to an increase in the number of service
providers entering the industry. The growing number of industry participants has
heightened competition in an environment characterized by downward price
pressure and near zero tolerance of communication network failures. These
competitive pressures are causing service providers to seek solutions to improve
operational efficiency and network performance, including the deployment of
easy-to-use test equipment with self-diagnosing features and the implementation
of centralized network management with remote monitoring capabilities.
The telecommunications industry has addressed the demand for increased
network capacity by installing new optical fiber, transmission lines, increasing
transmission rates and employing new technologies such as Dense Wave Division
Multiplexing (DWDM), which increases the carrying capacity of existing fiber.
The continuing deployment of optical fiber and the implementation of new
technologies are significantly increasing the demand for optical networking
equipment, including diagnostic equipment. Optical diagnostic equipment enables
telecommunications service providers to more effectively and efficiently deploy,
maintain and manage telecommunications networks. The global high-speed fiber
optic transmission equipment market generated estimated revenues of $11.2
billion in 1997 and is expected to grow at a compound annual growth rate of 20%
to approximately $23.1 billion by the year 2001, according to KMI Corporation.
Faster transmission speeds and new technologies magnify the complexity of
telecommunications networks while continuing demands for greater bandwidth
stress their capacity, requiring sophisticated diagnostic equipment to prevent
network interruptions or failures. In addition, new fiber optic networks must be
compatible with existing legacy networks, as well as with wireless networks used
in cellular technologies. Various standards, or "protocols," have been developed
for encoding and transmitting information across these networks, including the
T-Carrier protocol, SONET and ATM. Service providers must be able to efficiently
transport signals carrying multiple protocols. To effectively manage the
performance and reduce the possibility of network downtime, real-time,
simultaneous and independent monitoring of protocols is required at multiple
access points throughout networks.
To meet the challenge of managing increasingly complex networks,
telecommunications service providers require increasingly sophisticated optical
diagnostic equipment. The lightwave diagnostic products historically available
have been primarily hardware-based and typically have worked with one
transmission speed or protocol at a time. Many of these products do not have the
technology required to permit users to simultaneously switch and multiplex
different signals to derive information concerning embedded signals. In
addition, many of these products, which are designed to be used by technicians
in the field, are large and heavy, and do not provide intuitive user interfaces.
THE DIGITAL LIGHTWAVE SOLUTION
Digital Lightwave provides the optical networking industry with products
for monitoring, maintaining and managing fiber optic-based networks. The
Company's products enable telecommunications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth.
Characterized by their ease of use, Digital Lightwave's products qualify and
verify service during optical network installation and provide ongoing quality
assurance after new equipment is deployed.
The Company believes that its Network Information Computers and Network
Access Agents offer a broad range of features and capabilities that provide
distinct competitive advantages over the optical network diagnostic equipment
offered by its competitors. The Company's Network Information Computers were
designed to provide technicians with a more compact, easy-to-use, lightweight
product with increased functionality compared to other products currently
available. The Network Information Computer: (i) is an integrated product that
is capable of independently and simultaneously testing multiple protocols; (ii)
utilizes an intuitive windows-based graphical user interface with a touch sensor
display to create an easy-to-use diagnostic tool; and (iii) is a software-based
solution which can be easily upgraded and customized.
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Utilizing the technology of the Network Information Computer, the Company
has recently introduced optical diagnostic equipment that is permanently
installed within the network. In 1998, the Company introduced the Network Access
Agent product line, which is comprised of software-controlled performance
monitoring and diagnostic equipment, permanently installed at multiple access
points within optical networks to provide real-time analysis and network
management from a centralized location.
The Company's products are based on advanced technologies, including
modular and scaleable hardware and software platforms and a flexible
architecture that allows customers to easily upgrade existing systems to
accommodate new technologies. The Company plans to utilize the core technology
of its Network Information Computer and its Network Access Agents to continue to
develop products that address the evolving needs of the optical networking
industry.
THE DIGITAL LIGHTWAVE STRATEGY
Digital Lightwave has developed a growth strategy to increase its market
share and expand distribution across a wide range of customers, the key elements
of which are:
Continue to Penetrate New and Existing Markets and Broaden Customer
Base. The Company believes that its family of products offer superior
performance over competing products. The Company intends to continue to market
its Network Information Computers and Network Access Agents to new and
established telecommunications equipment manufacturers and service providers,
including the RBOCs, IXCs, CLECs and other recent entrants to the
telecommunications industry that require lightwave management products. The
Company intends to leverage its customer relationships and its reputation for
high quality products to attract new key accounts.
Develop New Products and Enhancements by Leveraging Technology and Product
Design Expertise. Digital Lightwave believes that there is significant
opportunity for the development of a family of lightwave management products
that address the evolving and emerging markets within the telecommunications
industry. The Company plans to continue to build upon the core technologies and
architecture developed for its Network Information Computers and Network Access
Agents to offer advanced, easy-to-use products based on a flexible platform that
can be easily upgraded to include advanced features and functionality. In the
third quarter of 1998, the Company released its latest enhancement to the
Network Information Computer, adding OC-48 analysis capabilities, which enable
customers to monitor higher speed networks. Future products are expected to
include enhanced Network Access Agents and other lightwave management products.
Establish Strategic Relationships. The Company is seeking to supplement
its direct sales network by entering into strategic relationships for certain of
its lightwave management products. The Company believes such relationships will
enable it to more effectively develop and market additional lightwave management
products. The Company believes that strategic relationships will be critical to
its continued growth and to future development of new products and technologies.
Develop and Market International Products. The Company believes that
significant opportunities exist outside the United States for its lightwave
management products, and is currently developing versions of the Network
Information Computer for international markets.
PRODUCTS
The Company's current family of products is organized into two product
lines: Network Information Computers and Network Access Agents.
Network Information Computers. The Company manufactures, sells and
supports portable Network Information Computers, which enable users to verify,
qualify and monitor the performance of telecommunications networks and
transmission equipment. The Network Information Computer was designed to replace
existing network test instruments by incorporating their functions into a
software-based information processing system, adding additional functions and
improving performance with competitive pricing. With the Network Information
Computer, telecommunications service providers and equipment manufacturers are
able to plan
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for and implement fiber optic network expansion more cost-effectively and verify
and manage information concerning the transmission of voice, data, image and
video traffic. Telecommunications equipment manufacturers also use the Network
Information Computer in designing, engineering and manufacturing their products,
installing their products in the networks of their customers and providing
ongoing customer support.
The Network Information Computer generates, transmits, receives,
multiplexes and processes legacy and lightwave signals and provides network
analysis. The Network Information Computer's easy-to-use graphical user
interface is a touch sensor over a large color display which provides simple and
intuitive windowed graphics and menus. The Network Information Computer may be
accessed and operated remotely by modem or through direct connection to an
Ethernet Local Area Network ("LAN").
The Network Information Computer competes against the optical network
diagnostic instruments currently available, which are primarily hardware-based,
work with one transmission speed or protocol at a time, do not provide an
easy-to-use graphical user interface which permits users to simultaneously
switch and multiplex 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 Network Information
Computer.
The following core technologies are used in the Network Information
Computer and provide a basis for certain of the Company's products in
development: (1) a software operating environment which runs over a windows or a
MS-DOS platform; (2) programs which operate the Company's firmware and hardware;
(3) graphical user interface programs, written in object-oriented code, running
in a windowed environment; (4) "Network Protocol Translators," which logically
process discrete network information from signals at specific bandwidths and
specific protocols; and (5) "Network Protocol Processors," which process
information encoded in a specific protocol over a range of bandwidth.
To allow its customers to work simultaneously with different bandwidths and
protocols, the Company has developed a non-blocking switch matrix and
applications software that allow the Company's customers to "frame up" on a
given signal, multiplex 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.
Network Access Agents. Network Access Agents are unattended, software
controlled performance monitoring and diagnostic equipment installed within
optical networks for analysis and management of a telecommunications network
from a centralized location. The Company recently commenced sales of its Network
Access Agents which is a modular hardware/software platform designed to provide
network operators with real-time information concerning performance of the
network segments where a Network Access Agent has been installed. Installation
of Network Access Agents at multiple access points throughout networks provides
the capability for end-to-end monitoring, maintenance and management of fiber
optic networks. Network Access Agents provide performance and quality data to
the network operator through a standard operations interface to allow
centralized monitoring and administration. Network Access Agents incorporate
technology developed by the Company for the Network Information Computer, which
includes advanced hardware and software 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 selectable features accessible through
Windows operating system or other user environments.
Future Products and Enhancements. The Company plans to leverage the core
technologies of its Network Information Computer and Network Access Agents to
continue to develop a family of advanced products and enhancements that address
the evolving needs of the optical networking industry.
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CUSTOMERS
Through December 31, 1998, the Company has sold over 1,100 units of the
Network Information Computer to over 80 customers. Set forth below is a
representative list of purchasers of the Company's products:
<TABLE>
<S> <C>
INTEREXCHANGE CARRIERS EQUIPMENT MANUFACTURERS
- -------------------------------------------- --------------------------------------------
AT&T Corp. ADC Telecommunications
IXC Communications, Inc. Alcatel Network Systems, Inc.
Level 3 Communications, Inc. Ascend Communications Inc.
MCI WorldCom, Inc. Cisco Systems, Inc.
Qwest Communications FORE Systems
Sprint Corporation Fujitsu
Hitachi Telecom Technologies Co., Ltd. (USA)
Lucent Technologies, Inc.
NEC America, Inc.
Northern Telecom Limited Systems
QUALCOMM
Tellabs Operations, Inc.
CIENA
REGIONAL BELL OPERATING COMPANIES COMPETITIVE LOCAL EXCHANGE CARRIERS
- -------------------------------------------- --------------------------------------------
Ameritech Corporation GST Corporation
Bell Atlantic Communications, Inc. ICG Communications
Pacific Telesis Group MFS WorldCom
SBC Communications Inc. Electric Lightwave
US West Communications, Inc. WorldxChange Communications
AT&T Local Service (TCG)
Hyperion Communications
INDEPENDENT TELEPHONE COMPANIES WIRELESS SERVICE PROVIDERS
- -------------------------------------------- --------------------------------------------
Frontier Communications GTE Mobilnet
GTE Corp. Pacific Bell Mobile Services
Sprint Centel AT&T Wireless
EQUIPMENT LEASING COMPANIES PRIVATE NETWORK OPERATORS
- -------------------------------------------- --------------------------------------------
AT&T Capital Corporation Bear Stearns & Co., Inc.
GE Capital IBM Global Services
McGrath Rentelco Time Warner
Telogy U.S. Department of Defense
</TABLE>
The Company involves key customers in the evaluation of products in
development and continually solicits suggestions from customers regarding
additional desirable features of products that it has introduced or plans to
develop. Because the Company's products are software-based, the Company has
generally been able to satisfy requests for additional feature sets by providing
software upgrades for loading into its products in the field.
For the year ended December 31, 1998, the Company's four largest customers
accounted for approximately 57% of total revenues, with Qwest, MCI Worldcom,
Tellabs, and GTE accounting for approximately 17%, 16%, 13% and 11% of total
sales, respectively. For the year ended December 31, 1997, sales to the
Company's five largest customers comprised 69% of its total revenues, with
WorldCom, Inc. (prior to its acquisition of MCI Communications Corporation) and
its subsidiaries accounting for 42% of total sales. For the year ended December
31, 1996, the Company's five largest customers accounted for approximately 62%
of total revenues, with MCI Communications Corporation (prior to its acquisition
by WorldCom, Inc.), Ameritech Corporation and Pacific Telesis Group accounting
for 23%, 19% and 15% of total sales, respectively. No other customers accounted
for sales of 10% or more during such periods. There can be no
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assurance regarding the amount or timing of purchases by any customer in any
future period. See "Factors That May Affect Operating Results -- We are
dependent on a limited number of major customers."
SALES, MARKETING AND CUSTOMER SUPPORT
Sales. The Company sells its products to telecommunications service
providers and network equipment manufacturers through a sales organization of 29
employees, including managers, sales engineers and sales administrative staff
based at the Company's principal executive offices. The primary functions of the
Company's 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 direct sales staff
helps the Company to monitor changing customer requirements, as well as the
development of industry standards.
Marketing. In marketing the Network Information Computer, the Company
focuses on the divisions of telecommunications service providers that are
responsible for planning and installing extensions of the network, as well as
the quality assurance divisions of telecommunications equipment manufacturers.
In marketing the Network Access Agents, the Company has directed its preliminary
efforts towards the strategic planning divisions of telecommunications service
providers and private network operators in order to define customer
requirements. The Company seeks to build awareness of its products through a
variety of marketing channels and methodologies, including industry trade shows
and conferences and direct mailings to targeted potential customers.
Customer Support. The Company offers technical support to its customers 24
hours a day, seven days a week, via a toll-free hotline to reach on-site or
on-call personnel. The Company's customer support organization is comprised of
19 employees. All service, repair and technical support are performed at the
Company's facilities. 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 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.
PRODUCTION
The Company's production 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 subcontracts the manufacture of computer system boards,
plastic molds and metal chassis, and certain subassemblies and components for
the Network Information Computer and the Network Access Agent. The Company
performs final assembly and programs the products with the Company's software.
The Company has implemented strict quality control procedures throughout each
stage of the manufacturing process, and tests the boards and subassemblies at
various stages in the process, including final test and qualification of the
product. The Company is ISO 9001 certified. To further enhance quality and
efficiency, the Company is in the process of centralizing all of its production
in one location by transferring all operations to its new Clearwater
headquarters facility.
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 a sole-source or limited sources, the loss of
which could seriously disrupt the Company's operations. The Company purchases
certain laser and laser amplifier components, power supplies, touch-screen
sensors, single-board computers and SONET overhead terminators used in the
Network Information Computer and the Network Access Agent from a single or a
limited number of contractors. In addition, for the Network Access Agent, the
Company purchases a controller board and an interface board from a single or
limited number of contractors. The Company does not have long-term agreements
with any of these sole or limited sources of supply. Any
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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. The Company
is currently attempting to qualify certain additional suppliers for certain of
the sole-sourced components. However, qualifying additional suppliers is time
consuming and expensive and the likelihood of errors could be greater with new
suppliers.
In connection with its outsourcing strategy, the Company is seeking to
identify and 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.
The Company forecasts product demand on a quarterly basis, based on
anticipated product sales and orders materials and components based on these
forecasts. 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. If actual orders vary
significantly from the forecasts, the Company may have excess or inadequate
inventory of certain materials and components.
ENGINEERING AND DEVELOPMENT
The Company has organized its engineering and development efforts into
product or project teams, currently ranging in size from three to eleven
engineers. The teams are organized around the development of a particular
product, and are responsible for all aspects of the development of that product
and any enhanced features or upgrades. The Company's research and development
teams are located at the Company's corporate headquarters in Clearwater, Florida
and a facility in Wall Township, New Jersey.
As of March 26, 1999, the Company maintained an engineering and development
department of 45 individuals, 39 of whom are full time Company employees and the
remainder of whom are contractors. During fiscal years 1998, 1997 and 1996, the
amounts spent on Company sponsored engineering and development activities were
approximately $14.3 million, $5.3 million and $2.4 million, respectively.
INTELLECTUAL PROPERTY
Digital Lightwave relies on a combination of patent, 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 Company believes that its success will be largely dependent on
its reputation for technology, product innovation, affordability, marketing
ability and response to customers' needs. The Company has been issued two
patents from the United States Patent and Trademark Office relating to the
Network Information Computer and Network Access Agent. The Company intends to
apply for additional patents for its technology. There can be no assurance,
however, that any such future or pending applications will be granted.
The Company believes that the rapid rate of technological change and the
relatively long development cycle for integrated electronic assemblies are also
significant factors in the protection of the Company's intellectual property. 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. See "Factors That May Affect Operating
Results -- We are dependent on proprietary technology and subject to risks of
infringement."
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BACKLOG
The Company's backlog at December 31, 1998 was approximately $1.0 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.
SEASONALITY
The Company generally believes that its sales are seasonal in nature with
the largest portion of quarterly sales tied to telecommunications industry
purchasing patterns which usually decrease during the first calendar quarter of
the year.
COMPETITION
The market for the Company's products is intensely competitive and is
subject to rapid technological change, frequent product introductions with
improved performance, competitive pricing ratios and shifting industry
standards. The Company believes that the principal competitive factors in its
markets are product capabilities and design, price, customer service and
support, ease of operation and reliability, length of operating history,
industry experience and name recognition, and extent and maturity of sales and
distribution relationships.
The Company believes that there are six principal competitors which
currently offer products that compete with the Network Information Computer,
including Hewlett-Packard Company, Technology Techniques Corporation (TTC) (a
subsidiary of Dynatech Corporation), Anritsu Corporation, Tektronix, Inc.,
Wavetek Wandel Goltermann, Inc. and ANDO Corporation. However, the companies
that offer test instruments in competition with the Network Information Computer
do not provide an integrated comprehensive solution to performance monitoring
transmission speeds from DS-0 through OC-48 in a single, upgradeable, portable
unit. Although there are several companies that offer network monitoring and
test instruments, including Hekimian Laboratories, Inc., TTC, Applied Digital
Access, Inc. and Sage Instruments, none of these companies offer lightwave
network monitoring products in competition with the Company's Network Access
Agents. Accordingly, the Company believes that there are currently no
competitors that provide optical network monitoring capability which cover the
full range of features offered by the Network Access Agent. The Company is aware
of certain companies that are also developing equipment to monitor lightwave
transmissions. Many of the Company's competitors and certain prospective
competitors have significantly longer operating histories, larger installed
bases, greater name recognition and significantly greater 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 "Factors That May Affect Operating Results -- Our
industry is extremely competitive and such competition may negatively affect our
business."
REGULATORY MATTERS
The Company's products must meet industry standards and, 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 future 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 Bell Communications Research, Inc. ("Bellcore") in
order to be commercially viable. Any inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications that may be
required in the future 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.
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EMPLOYEES
As of March 26, 1999, the Company employed a full-time staff of 161
employees, of which 75 were engineering and production personnel, and the
remainder were sales and marketing staff and administrative personnel. The
Company believes that its relationship with its employees is good.
FACTORS THAT MAY AFFECT OPERATING RESULTS
We are uncertain about the future of our business and, in preparing this
Annual Report, have made a number of assumptions and projections. We generally
use words like "expect," "believe" and "intend" to indicate these assumptions
and projections. Our assumptions and projections could be wrong for many
reasons, including the reasons discussed below.
WE HAVE A LIMITED OPERATING HISTORY AND CUMULATIVE LOSSES AND WE EXPECT TO INCUR
ADDITIONAL LOSSES
We have a limited operating history. We shipped our first product, the ASA
312 Network Information Computer, in February 1996, and have shipped only
limited quantities of our second product, the Network Access Agent. To date, we
have incurred substantial costs, including costs to:
- Develop and enhance our technology and products;
- Establish our engineering, production and quality assurance operations;
- Recruit and train a sales and marketing group; and
- Build an administrative organization.
As a result of these costs, we have incurred operating losses in each fiscal
year through December 31, 1998. Our operating losses, combined with $11.5
million in expenses and settlement amounts recorded in connection with the
settlement of certain lawsuits and a $1.0 million reorganization charge, were
$30.5 million for the year ended December 31, 1998. We anticipate that our costs
will continue to increase in the foreseeable future as we create and introduce
new products and develop new distribution channels. We expect that any related
increases in revenues will lag behind these cost increases foreseeable future.
If we cannot achieve and sustain operating profitability or positive cash flow
from operations, we may not be able to meet our working capital requirements.
This would have a material adverse effect on our business, financial condition
and results of operations.
An investor in our Common Stock must consider the risks, challenges and
difficulties frequently encountered by early stage companies, particularly
companies in intensely competitive and rapidly evolving markets such as the
telecommunications and fiber optic equipment markets. To address these risks, we
must, among other things:
- Respond to competitive and technological developments;
- Continue to attract, retain and motivate qualified personnel;
- Establish, maintain and enhance the Digital Lightwave brand; and
- Increase the scope of our product offerings.
We may be unsuccessful in addressing these risks, which could have a
material adverse affect on our business, financial condition and results of
operations.
WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS AND OUR SALES ARE SEASONAL
Our quarterly operating results have fluctuated in the past and our future
quarterly operating results are likely to vary significantly due to a variety of
factors, many of which are outside our control. Factors that could affect our
quarterly operating results include:
- The product mix, volume, timing and number of orders we receive from our
customers;
- The long sales cycle for obtaining new orders;
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- Our ability to obtain sufficient supplies of sole or limited source
components for our products;
- Our ability to attain and maintain production volumes and quality levels
for our products;
- The timing of introduction and market acceptance of new products by us,
our competitors or our suppliers;
- Our success in developing, introducing and shipping product enhancements
and new products;
- Pricing actions by us or our competitors;
- Changes in costs of materials;
- Our ability to enter into long term agreements or blanket purchase orders
with customers; and
- General economic conditions.
Because of these factors, our operating results for any particular quarter may
not be indicative of future operating results. These factors have historically
been, and are likely to continue to be, difficult to forecast. Any unfavorable
changes in these or other factors could negatively affect our business,
financial condition and operating results.
Our revenues and operating results generally depend on the volume and
timing of the orders we receive from customers, as well as our ability to
fulfill the orders received. Most of our expenses, particularly employee
compensation and rent, are relatively fixed and cannot be reduced in response to
decreases in revenues. As a result, variations in the timing of revenues could
cause significant variations in results of operations from quarter to quarter
and could result in continuing quarterly losses. The deferral of any large order
from one quarter to another would negatively affect our results of operations
for the earlier quarter. To achieve our revenue objectives, we must obtain
orders during each quarter for shipment in that quarter. If we fail to do this,
we may be unable to achieve or sustain profitability on a quarterly or annual
basis. Quarterly fluctuations in operating results may result in volatility in
the market prices of our Common Stock.
We have experienced and expect to continue to experience seasonality in our
business. Historically, our sales have been affected by a seasonal decrease in
demand in the first quarter of each calendar year budgetary constraints. We
expect this trend to continue, which may contribute to quarterly or annual
fluctuations in our operating results, and could have a material adverse effect
on our business, financial condition and results of operations.
WE ARE DEPENDENT ON A LIMITED NUMBER OF PRODUCTS AND ARE UNCERTAIN OF THE MARKET
FOR OUR PRODUCTS AND OUR PLANNED PRODUCTS
We derive the vast majority of our sales from our initial product, the
Network Information Computer, and we expect that sales of Network Information
Computers will continue to account for a substantial portion of our sales for
the foreseeable future. In 1998, we started shipping commercial versions of our
Network Access Agent, which utilizes the same core technology as the Network
Information Computer. Because the market for our products is evolving and
subject to rapid technological change, we are uncertain about the size and scope
of the market for our current and future products. Our future performance will
depend on increased sales of the Network Information Computer, market acceptance
of the Network Access Agent and the successful development, introduction and
market acceptance of other new and enhanced products. If we are delayed in
introducing or producing new products or fail to detect software or hardware
errors in new products (which frequently occur when new products are first
introduced), market acceptance of our products and our credibility with our
customers might be diminished. This could have a material adverse affect on our
business, financial condition and results of operations.
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OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE ARE DEPENDENT ON
NEW PRODUCT INTRODUCTIONS
To remain competitive, we must develop, manufacture and sell new products
and improve our existing products. Our market is characterized by:
- Rapid technological change;
- Changes in customer requirements and preferences;
- Frequent new product introductions; and
- The emergence of new industry standards and practices.
These factors could cause our sales to decrease or render our current products
obsolete. Our success will depend, in part, upon our ability to:
- Create improvements on and enhancements to our existing products;
- Develop, manufacture and sell new products to address the increasingly
sophisticated and varied needs of our current and prospective customers;
- Respond to technological advances and emerging industry standards and
practices on a cost effective and timely basis; and
- Increase market acceptance of our products.
We cannot assure you that we will be able to meet these objectives. If we fail
to adapt to changing market conditions or customer requirements, our business,
financial condition and operating results would be materially adversely
affected.
OUR INDUSTRY IS EXTREMELY COMPETITIVE AND SUCH COMPETITION MAY NEGATIVELY AFFECT
OUR BUSINESS
The market for our products is intensely competitive and is subject to
rapid technological change, frequent product introductions with improved
performance, competitive pricing and shifting industry standards. We believe
that the principal factors on which we compete include:
- Product capabilities and design;
- Price;
- Customer service and support;
- Ease of operation and reliability of products;
- Length of operating history, industry experience and name recognition;
and
- Extent and maturity of sales and distribution relationships.
Our principal competitors are Hewlett-Packard Company, Technology Techniques
Corporation (TTC) (a subsidiary of Dynatech Corporation), Tektronix, Inc.,
Anritsu Corporation, Wavetek Wandel Goltermann, Inc., ANDO Corporation and other
companies which offer network monitoring products. We are a relative newcomer to
the telecom equipment market, and many of these competitors have significantly
longer operating histories, greater name recognition, and greater technical,
financial, manufacturing and marketing resources than we have. A number of our
competitors have long-established relationships with our current and potential
customers. Furthermore, many of our large competitors may offer customers a
broader product line than we currently offer or anticipate offering in the near
future. These companies may have a competitive advantage over us in sales of
similar products or alternative lightwave management solutions. We expect that
competition will increase in the future and that new competitors will enter the
market for most if not all of the products we will offer. Increased competition
could reduce our profit margins and cause us to lose, or prevent us from
gaining, market share. Any of these events could have a material adverse effect
on our business, financial condition and results of operation.
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WE ARE DEPENDENT ON A LIMITED NUMBER OF MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company's four largest customers
accounted for approximately 57% of total revenues, with Qwest, MCI WorldCom,
Tellabs, and GTE accounting for approximately 17%, 16%, 13% and 11% of total
sales, respectively. For the year ended December 31, 1997, sales to the
Company's five largest customers comprised 69% of its total revenues, with
WorldCom, Inc. (prior to its acquisition of MCI Communications Corporation) and
its subsidiaries accounting for 42% of total sales. For the year ended December
31, 1996, the Company's five largest customers accounted for approximately 62%
of total revenues, with MCI Communications Corporation (prior to its acquisition
by WorldCom, Inc.), Ameritech Corporation and Pacific Telesis Group accounting
for 23%, 19% and 15% of total sales, respectively. No other customers accounted
for sales of 10% or more during such periods. There can be no assurance
regarding the amount or timing of purchases by any customer in any future
period.
Our success is dependent upon our ability to broaden our customer base to
increase the level of sales. None of our customers has a written agreement with
us that obligates it to purchase additional products, and we cannot assure you
that our customers will purchase additional products. We also cannot assure you
that we will be able to retain our largest customers or to attract additional
major customers. If we lose one or more of our major customers or if we fail to
broaden our customer base, it could have a material adverse affect on our
business, financial condition and results of operations.
WE ARE DEPENDENT ON CONTRACT MANUFACTURERS AND SOLE AND LIMITED SOURCE
SUPPLIERS; WE INTEND TO RELOCATE AND INCREASE OUR PRODUCTION AND ASSEMBLY
OPERATIONS
Our operational strategy is to outsource component manufacturing. We
subcontract the manufacture of computer system boards, plastic molds and metal
chassis, and certain subassemblies and components. We do not maintain large
inventories of components for building our products. From time to time, our
suppliers have failed to meet component delivery schedules, have failed to
provide us with sufficient quantities of components and have failed to meet our
component quality standards. We expect that these or other difficulties may
occur in the future. These difficulties may be magnified as we introduce new
products and product enhancements in 1999. If demand for our products increases,
we will need to coordinate our efforts with our contract manufacturers in order
to achieve sufficient production levels. We do not know whether we will be able
to manage our contract manufacturers effectively or whether the manufacturers
will be able to supply us with the quantity and quality of products on the
delivery schedule that we require. Although we are attempting to identify
additional potential component manufacturers, we cannot assure you that we will
be able to obtain sufficient quantities of quality components. If our contract
manufacturers are unable to provide us with adequate supplies of high-quality
products or if we lose any of our contract manufacturers without qualifying
others, our ability to meet orders may be diminished. Such delays could have a
material adverse effect on our business, financial condition and results of
operations.
Several key components used in the manufacture of the Company's products
are currently purchased from a sole-source or limited sources, the loss of which
could seriously disrupt the Company's operations. The Company purchases certain
laser and laser amplifier components, power supplies, touch-screen sensors,
single-board computers and SONET overhead terminators used in the Network
Information Computer and the Network Access Agent from a single or a limited
number of contractors. In addition, for the Network Access Agent, the Company
purchases a controller board and an interface board from a single or limited
number of contractors. The Company does not have long-term agreements with any
of these sole 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. The Company is currently
attempting to qualify certain additional suppliers for certain of the
sole-sourced components. However, qualifying additional suppliers is time
consuming and expensive and the likelihood of errors could be greater with new
suppliers.
In 1998, we began consolidating our production and assembly operations from
our current facility in St. Petersburg, Florida, to our corporate headquarters
in Clearwater, Florida. We anticipate that we will complete
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this move by September 1999. The new facility will be configured to assemble all
of our product lines. We may encounter difficulty in consolidating our
production and assembly operations, and we may experience business interruptions
as we relocate our personnel and equipment. Interruptions and transition
difficulties could impair our ability to meet customer orders and lead customers
to cancel orders, which would have a material adverse affect on our business,
financial condition and results of operations.
FAILURE TO MANAGE OUR GROWTH MAY AFFECT OUR RESULTS
Successful implementation of our business plan in the rapidly evolving
fiber optic equipment market will require effective planning and management. We
are continuing to expand our product lines and introduce new products and
features and intend to extend our operations internationally. We have expanded
our operations over the past year and our success depends upon continued
expansion. Our growth has placed, and we expect future growth to continue to
place, a significant strain on our management, operational and financial
resources. To manage our growth, we will need to continue to:
- Improve our financial and managerial controls, reporting systems and
procedures;
- Increase, train and manage our work force;
- Develop our sales and marketing network; and
- Expand our manufacturing, production and assembly capacity.
Currently we are pursuing strategic relationships as part of our growth
strategy, and we cannot forecast the impact that any strategic relationships
will have upon our growth. If we experience difficulty in managing our growth,
our business, financial condition and operating results could be materially
adversely affected.
FAILURE TO ENTER INTO STRATEGIC RELATIONSHIPS MAY ADVERSELY AFFECT OUR RESULTS
An important component of our business strategy is to enter into strategic
relationships in order to expand our product lines and offer our products and
services to a larger customer base. For example, we are seeking strategic
relationships to market our products on a direct or OEM basis. We have not
negotiated any such arrangements to date. If we do enter into such arrangements,
we anticipate that our pricing to strategic partners would be less than our
pricing to direct sales, resulting in lower gross margins in connection with
these arrangements. We may not be able to successfully enter into such
arrangements or, if we do, we may become overly dependent on our strategic
partners. Either development could have a material adverse effect on our
business, operating results and financial condition.
WE ARE DEPENDENT ON KEY PERSONNEL
Our success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, finance and
product assembly personnel, some of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on Dr. Bryan
J. Zwan, our Chairman. We do not intend to maintain key man life insurance
covering our key personnel. Until 1996, we were in the development stage. Most
of our executive officers joined us during 1997 and 1998 and, therefore, have
been involved only with our most recent operating activities. For example, Mr.
Gerry Chastelet, our new President and CEO joined us on December 31, 1998. Our
success will depend on the performance of our officers, our ability to retain
our executive officers, our ability to integrate new officers into our
operations and the ability of all personnel to work together effectively as a
team.
WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY AND SUBJECT TO RISKS OF INFRINGEMENT
Our success and our ability to compete depends in part upon our proprietary
technology, which we protect through a combination of patent, copyright, trade
secret and trademark law. As of March 17, 1999, in the United States, we have
two issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. We may apply for additional patents for our Network Access Agent
technology. We cannot assure you that the patents for which
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we have applied or intend to apply will be issued, or that the steps that we
take to protect our technology will be adequate to prevent misappropriation. Our
competitors may independently develop technologies that are substantially
equivalent or superior to our technology. In addition, our growth strategy
includes a plan to enter international markets, and the laws of some foreign
countries may not protect our proprietary rights to the same extent as do the
laws of the United States. If our protective measures are not successful, our
business, financial condition and operating results could be materially and
adversely affected.
From time to time we may either license our proprietary rights to
third-parties or in-license certain technologies from third-parties for use in
our products. The telecommunications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. We have no reason to believe that our technology infringes
on the proprietary rights of others and we have not received any notice of
claimed infringements. Nonetheless, third parties may assert infringement claims
against us in the future that may or may not be successful. If we must defend
ourselves or our customers against such claims, we could incur substantial costs
regardless of the merits of the claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block our
ability to sell our products, and could obtain an award of substantial damages.
Any such claim could seriously damage our business. In the event of a successful
claim of infringement against us, we may be required to obtain one or more
licenses from third parties, including our customers. We cannot assure you that
any such licenses would be available on terms acceptable to us, if at all.
CERTAIN OF OUR PRODUCTS MUST MEET REGULATORY REQUIREMENTS BEFORE WE CAN SELL
THEM
In the United States, our products must meet industry standards and comply
with various regulations promulgated by the FCC, Underwriters Laboratories, and
Bellcore. Any product we may in the future sell internationally, must comply
with standards established by telecommunications authorities in various foreign
countries, as well as with recommendations of the Consultative Committee on
International Telegraph and Telephony. If we fail to meet industry standards or
regulatory requirements, or if in the future we have difficulty obtaining
regulatory approvals or certifications, our business, financial condition and
results of operations could be materially adversely affected.
OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY
As of March 26, 1999, Dr. Bryan J. Zwan, the Chairman of Digital Lightwave,
together with entities affiliated with him, beneficially own approximately 75%
of outstanding shares of Common Stock. Accordingly, Dr. Zwan is able to elect
our directors, has the voting power to approve all matters requiring stockholder
approval and has significant influence over our affairs, including the power to
cause, delay or prevent a change in control of Digital Lightwave.
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK
Our Board of Directors has the authority to issue up to 20,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by our stockholders. The rights
of the holders and the market value of our Common Stock may be adversely
affected by the rights of the holders of any series of preferred stock that may
be issued in the future. Some provisions of our certificate of incorporation,
our bylaws and Delaware law could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock, even if
doing so would be beneficial to our stockholders. These include provisions that
prohibit stockholders from taking action by written consent and restrict the
ability of stockholders to call special meetings.
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OUR STOCK PRICE MAY BE VOLATILE
The market price of the shares of our Common Stock has been and is likely
in the future to be highly volatile. The price may fluctuate significantly in
response to factors such as:
- Quarterly variations in our operational results;
- Announcements of technological innovations;
- New product introductions by us or our competitors;
- Changes in earnings estimates by analysts or our failure to meet such
earnings estimates;
- Announcements by us regarding significant acquisitions, strategic
relationships or capital expenditure commitments;
- Additions or departures of key personnel;
- Sales or issuances of Common Stock; and
- Changes in federal, state or foreign regulations affecting the
telecommunications industry.
In addition, the stock markets in general, and the stocks of technology
companies in particular, have experienced extreme price and volume fluctuations
recently. These fluctuations often have been unrelated or disproportionate to
the operating performance of these companies. These broad market and industry
factors may have a material adverse affect on the market price of our Common
Stock, regardless of our actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation often has been initiated against that company.
Litigation like this, if initiated, could result in substantial costs and divert
attention and resources of our management personnel.
WE ARE DEFENDING SIGNIFICANT LITIGATION
As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the federal securities laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our Common Stock. The complaints named as defendants Digital Lightwave, Bryan J.
Zwan, our Chairman, Steven H. Grant, our Executive Vice President, Finance,
Chief Financial Officer and Secretary, and other former corporate officers. The
complaints allege that Digital Lightwave and certain officers during the
relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial statements and press releases concerning our revenues,
income and earnings, which artificially inflated the price of our Common Stock.
On July 23, 1998, we entered into a memorandum of understanding for the
settlement of these class action complaints. In late October 1998, a Stipulation
of Settlement was filed with the court and on December 21, 1998, the court
preliminarily approved the settlement. On March 12, 1999, the court indicated
that it would grant final approval of the settlement. The settlement is subject
to appeal. The settlement consists of $4.25 million in cash, to be paid to
plaintiffs primarily by a claim on the Company's directors and officers
liability insurance policy, and the issuance of up to 1.8 million shares of
Common Stock. We recorded a charge of $8.5 million during 1998 as a result of
the settlement.
In addition, the Company is aware of a related informal investigation by
the Securities and Exchange Commission, which was commenced in March 1998. The
Company believes that the investigation relates to the circumstances underlying
the restatement of its financial results. The investigation is ongoing. The
Company is unable to predict the outcome of the investigation. There can be no
assurance that such investigation will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
We are from time to time involved in other lawsuits arising in the ordinary
course of business. Our management believes that we have adequate legal defenses
and/or adequate reserves for related costs for these
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lawsuits. As of the date of this Annual Report, we were not aware of any
additional lawsuits that were pending that could have a material adverse effect
on our business, financial condition and operating results.
WE MAY EXPERIENCE "YEAR 2000" PROBLEMS
Many currently installed computer systems and software products are coded
to accept only two digit entries for the year in the date code field and, as a
result, cannot distinguish 21st century dates from 20th century dates. Failure
to distinguish 21st century dates from 20th century dates could result in
systems failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
We have made a preliminary assessment of our Year 2000 readiness. We are in
the process of providing our customers with product upgrades which we believe
are Year 2000 compliant. We have identified and evaluated the actions needed to
upgrade our information technology ("IT") and non-IT embedded systems to Year
2000 compliance. We are preparing to contact certain third-party suppliers of
key components or services regarding their Year 2000 readiness. Following
completion of these items, we will be better able to make a complete evaluation
of our Year 2000 readiness, to determine what additional costs will be necessary
to be Year 2000 compliant and whether we will have to develop contingency plans.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance" for detailed information on our state of
readiness, assessment of costs, potential risks and contingency plans regarding
the Year 2000 issue.
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GLOSSARY
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.
Byte -- Abbreviation for binary term. A unit of information consisting of 8
bits. In computer processing, equivalent of a single character such as a letter
of the alphabet, a numeral or punctuation mark.
CAP (Competitive Access Provider) -- A company that provides its customers with
an alternative to the Regional Bell Operating Companies for local transport of
private line, special access and interstate transport of telecommunications
service.
Competitive Local Exchange Carriers (CLECs) -- Category of telephone service
provider (carrier) that offers local exchange services, as allowed by recent
changes in telecommunications law and regulation. A Competitive Local Exchange
Carrier may also provide other types of service such as long distance, Internet
access, and entertainment.
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 electronic cross
connect, signals are electronically switched to make circuit connections.
Demultiplex -- The process of separating two or more signals that were
previously multiplexed.
Dense Wave Division Multiplexing (DWDM) -- A technology that permits the
transmission of multiple lightwave signals over a single optical fiber.
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.
DS-0, 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-0 service has a bit rate of 64 Kbps and can transmit
one voice conversation. 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
Mbps and can transmit 672 simultaneous voice conversations.
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.
Fiber optics -- A transmission medium consisting of a core of glass or plastic
surrounded by a protective cladding of similar material, strengthening material
and an outer jacket which guides light pulses introduced into the fiber by a
light source.
Firmware -- Software that is contained semi-permanently in a hardware device or
memory and which can be rewritten.
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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 semi-conductor substrate.
Internet -- The name used to refer to the world's largest interconnected
network, consisting of thousands of networks which interchange information
through a common communications protocol.
ISO 9001 -- An international standard for quality management and assurance.
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 or other technologies which continue
to be utilized in telecommunications networks.
Lightwave -- Light as a communication signal over fiber-optic cable traveling as
discrete pulses, each representing one bit of digital information.
Lightwave management -- The intelligent termination, integration and switching
of lightwave communications.
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 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 Network Access Agent has been
installed. This product can be centrally monitored and administered.
Network element -- A functional entity in a network, such as a multiplexer, a
switch interface or a digital cross-connect.
Network Information Computer -- A portable product of the Company designed to
allow users to access and process real time information concerning the
performance of telecommunications networks and transmission equipment.
Network Protocol Processors (NPPs) -- Modular electronic assemblies containing
hardware, firmware and software for the processing of information encoded in a
specific protocol over a range of bandwidth.
Network Protocol Translators (NPTs) -- Modular gate arrays or field programmable
gate arrays which logically process discrete network information from signals at
specific bandwidths and 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.
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OC-1, OC-3, OC-12, OC-48, OC-192 -- 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).
OEM (Original Equipment Manufacturer) -- The maker of equipment marketed by
another vendor, usually under the name of the reseller.
Overhead -- Information carried in network transmissions, other than payload,
including routing information, error-checking characters and status and
operational information.
Packet -- A bundle of data organized for transmission which includes control
information, the data to be transmitted, and error detection bits.
Payload -- User transmitted data, including voice, data and/or video content,
which may include network management and accounting information.
PDH (Plesiochronous Digital Hierarchy) -- 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. The primary memory in a computer which can be
overwritten with new information. Any bit in memory can be located in the same
amount of time, hence random access.
Regional Bell Operating Companies (RBOCs) -- The seven original local telephone
companies (formerly part of AT&T) established by court decree in 1982.
SDH (Synchronous Digital Hierarchy) -- An electronics and network architecture
and protocol utilized on most continents other than North America for variable
optical bandwidth products which enables transmission of voice, video and data
(multimedia) at very high speeds.
SONET (Synchronous Optical Network Technology) -- An electronics and network
architecture and protocol utilized primarily in North America for variable
optical 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 or switches 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 indicates the state or condition of a signal,
such as on a fiber or metallic cable, primarily measuring level, frequencies and
faults and other conformal signal information.
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.
Wide Area Network (WAN) -- A network typically extending a LAN outside the
building over common carrier telephone lines connecting other LANs possibly in
different cities.
19
<PAGE> 21
ITEM 2. PROPERTIES
In November 1998, the Company relocated its operations, other than its
production operations, into its corporate headquarters facility of 92,225 square
feet in Clearwater, Florida. The Company also leases space for its software
development operations in Wall Township, New Jersey. Currently, the Company
leases a manufacturing facility in St. Petersburg, Florida, but anticipates that
it will consolidate its manufacturing activities to its corporate headquarters
in Clearwater, Florida by September 1999.
The lease for the Company's Clearwater, Florida headquarters expires in
November 2008; the Wall Township, New Jersey lease expires in December 2002; and
the St. Petersburg, Florida lease expires in July 2000.
ITEM 3. LEGAL PROCEEDINGS
As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the Federal Securities Laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our Common Stock. The complaints named as defendants the Company, Bryan J. Zwan,
the Company's Chairman, Steven H. Grant, the Company's Executive Vice President,
Finance, Chief Financial Officer and Secretary, and other former corporate
officers. The complaints allege that the Company and certain officers during the
relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial statements and press releases concerning the Company's
revenues, income and earnings, which artificially inflated the price of our
Common Stock.
On July 23, 1998, we entered into a memorandum of understanding for the
settlement of these class action complaints. In late October 1998, a Stipulation
of Settlement was filed with the court and on December 21, 1998, the court
preliminarily approved the settlement. On March 12, 1999, the court indicated
that it would grant final approval of the settlement. The settlement is subject
to appeal. The settlement consists of $4.25 million in cash, to be paid to
plaintiffs primarily by a claim on the Company's directors and officers
liability insurance policy, and the issuance of up to 1.8 million shares of
Common Stock. We recorded a charge of $8.5 million during 1998 as a result of
the settlement.
In addition, the Company is aware of a related informal investigation by
the Securities and Exchange Commission, which was commenced in March 1998. The
Company believes that the investigation relates to the circumstances underlying
the restatement of its financial results. The investigation is ongoing. The
Company is unable to predict the outcome of the investigation. There can be no
assurance that such investigation will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
On November 5, 1997, Hugh Brian Haney ("Plaintiff") commenced an action in
the United States District Court for the Southern District of Ohio against Bryan
J. Zwan, the Company's Chairman of the Board and then Chief Executive Officer,
and the Company ("Defendants"). An amended complaint filed December 15, 1997
alleged violations of Section 10 (b) of the Securities Exchange Act, violations
of state corporation statutes, and various common law violations by Defendants
in connection with Plaintiff's sale to the Company's predecessor in November
1995, pursuant to a previously granted option exercisable by Dr. Zwan and/or the
Company's predecessor, of 4,900 shares of stock in the Company's predecessor, an
amount equivalent to 19,215,686 shares of the Company's common stock. The
amended complaint sought, among other things, (1) rescission of the sale of the
shares transferred by Plaintiff and (2) damages of $235 million, together with
interest. On October 20, 1998, the Company and Dr. Zwan entered into an
agreement with Plaintiff to settle the action. The settlement agreement
provides, among other things, for dismissal of the action with prejudice, for a
$500,000 payment by the Company to Plaintiff for his attorneys' fees and grants
Plaintiff an option, for 10 years, to purchase for $1 per share 2 million shares
of Dr. Zwan's stock in the Company. Pursuant to that agreement, the action was
dismissed with prejudice on November 13, 1998. The Company recorded a $3.0
million charge to earnings consisting of the cash payment and the valuation of
the options upon settlement.
20
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
stockholders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of Common Stock have traded on the Nasdaq National
Market System under the symbol "DIGL" since February 7, 1997. The prices set
forth below represent quotes between dealers and do not include commissions,
mark-ups or mark-downs, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
HIGH LOW
------- ------
<S> <C> <C>
1997
1st Quarter (from February 7, 1997)....................... $12.875 $7.125
2nd Quarter............................................... 9.250 3.250
3rd Quarter............................................... 17.750 7.875
4th Quarter............................................... 23.750 12.000
1998
1st Quarter............................................... $16.813 $2.000
2nd Quarter............................................... 6.469 3.000
3rd Quarter............................................... 4.500 1.281
4th Quarter............................................... 4.375 1.156
</TABLE>
On March 26, 1999, the closing bid and ask prices of the Company's Common Stock
were $3.000 and $3.063, respectively. As of March 31, 1999, there were
approximately 200 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
contemplate payment of dividends in the foreseeable future. The Company
anticipates that any earnings in the near future will be retained from the
development and expansion of its business. Certain of the Company's credit
facilities require consent from the banks prior to payments of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1998, there were no sales of
unregistered securities.
21
<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated financial data are derived from the
Consolidated Financial Statements of the Company. The selected consolidated
financial data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and Notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations:
Sales............................ $ 24,191 $ 9,081 $ 6,044 $ -- $ --
Cost of goods sold............... 9,219 3,124 2,079 -- --
----------- ----------- ----------- ----------- -----------
Gross Profit................... 14,972 5,957 3,965 -- --
Operating expenses:
Engineering and development.... 14,335 5,342 2,403 1,509 1,241
Selling and marketing.......... 11,363 5,260 1,706 199 67
General and administrative..... 7,223 3,812 1,380 1,017 260
Reorganization charges(1)...... 1,018 -- -- -- --
Litigation settlements(2)...... 11,500 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 45,439 14,414 5,489 2,725 1,568
----------- ----------- ----------- ----------- -----------
Loss from operations............. (30,467) (8,457) (1,524) (2,725) (1,568)
Other income (expense)........... 642 1,767 (584) (609) (114)
----------- ----------- ----------- ----------- -----------
Net loss......................... (29,825) (6,690) (2,108) (3,334) (1,682)
=========== =========== =========== =========== ===========
Loss per share................... (1.13) (.25) (.10) (.08) (.04)
=========== =========== =========== =========== ===========
Weighted average shares(3)....... 26,475,749 26,084,208 21,829,235 39,443,614 41,044,921
Consolidated Balance Sheet Data:
Working capital (deficit)...... 2,267 32,495 2,349 (8,595) (1,939)
Total assets................... 27,558 44,361 6,374 1,277 332
Total long-term debt........... 281 25 983 7,985 2,102
Stockholders' equity
(deficit)................... 12,320 39,419 3,449 (8,163) (2,328)
</TABLE>
- ---------------
(1) Includes a one-time expense of $1.0 million for reorganization charges as
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and Note 14 of the Consolidated
Financial Statements -- Reorganization Charges.
(2) Includes a charge of $8.5 million made in connection with the settlement of
a class action legal proceeding and a one-time charge of $3.0 million made
in connection with the settlement of the Haney litigation as described under
Note 15 of the Consolidated Financial Statements -- Legal Proceedings.
(3) On November 30, 1995, the Company purchased 19,215,686 shares of Common
Stock from a former stockholder pursuant to an option granted to the Company
by the former stockholder in February 1995. See "Factors That May Affect
Operating Results -- We are defending significant litigation," "Item 3 --
Legal Proceedings" and Notes 9 and 15 of the Consolidated Financial
Statements -- Related Party Transactions and Legal Proceedings.
22
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
and current investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements as well as the future prospects of the Company generally, such
investors should specifically consider various factors identified in this Report
on Form 10-K, including the matters set forth therein under the caption "Factors
That May Affect Operating Results," which could cause actual results to differ
materially from those indicated by such forward-looking statements. Factors that
may affect the Company's results of operations include but are not limited to
the Company's limited operating history and cumulative losses, dependence on
limited products, uncertain market acceptance of planned products, rapid
technological change, dependence on new product introductions, competition,
expansion of manufacturing operations, dependence on contract manufacturing and
sole or limited source suppliers, dependence on key personnel, management of
growth, anticipated fluctuations in operating results, dependence on proprietary
technology, customer concentration, product certifications, control by principal
stockholder, factors inhibiting takeover, shares eligible for future sale,
possible volatility of stock price, success in defending significant litigation,
liquidity risks and future capital needs, potential year 2000 problems and
government regulations. The Company participates in a highly concentrated
industry, and has limited visibility with regard to customer orders and the
timing of such orders. The Company may also encounter difficulty obtaining
sufficient supplies to staff and meet production schedules. As a result,
quarter-to-quarter and year-to-year financial performance is highly dependent
upon the timely receipt of orders from its customers during fiscal periods.
OVERVIEW
Digital Lightwave designs, develops, markets and supports diagnostic
products that monitor, maintain and manage fiber optic-based networks. The
Company's products provide telecommunications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth.
From inception in 1990 through 1996, the Company focused its primary
activities on developing the necessary technology and infrastructure required to
launch its first product, the Network Information Computer. The Company had no
sales until February 1996, when it began shipping the Network Information
Computer. As of December 31, 1998, the Company had sold 1,100 Network
Information Computers to approximately 80 customers such as MCI WorldCom,
Ameritech Corporation, Tellabs, Qwest, GTE and AT&T Corporation. In 1998, the
Company commenced limited sales of the Network Access Agent. Net sales for the
Company were $24,191,000, $9,081,000 and $6,044,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
The Company's net sales are generated from sales of its products, less an
estimate for customer returns. Net sales are recognized when products are
shipped to a customer. The average sales price ("ASP") of the Network
Information Computer was approximately $33,459, $33,022 and $35,345 for the
years ended December 31, 1998, 1997, and 1996, respectively. The Company expects
that the ASP of its Network Information Computers will fluctuate based on a
variety of factors, including product configuration, potential volume discounts
to customers, the timing of new product introductions and enhancements and the
introduction of competitive products. Because the cost of goods sold tends to
remain relatively stable for any given product, fluctuations in the ASP may have
a material adverse effect on the Company's results of operations.
The Company sells its products through a direct sales force to
telecommunications service providers and equipment manufacturers. The sales
cycle for new customers tends to be long. In addition, the telecommunications
industry historically has had a limited number of competitors. Given long sales
cycles and few industry participants, sales of the Company's products have
tended to be concentrated, and the Company expects that sales will continue to
be concentrated in the future. For the year ended December 31, 1998, the
Company's four largest customers accounted for approximately 57% of total
revenues, with Qwest, MCI Worldcom, Tellabs, and GTE accounting for
approximately 17%, 16%, 13% and 11% of total sales, respectively. For the
23
<PAGE> 25
year ended December 31, 1997, sales to the Company's five largest customers
comprised 69% of its total revenues, with WorldCom, Inc. (prior to its
acquisition of MCI Communications Corporation) and its subsidiaries accounting
for 42% of total sales. For the year ended December 31, 1996, the Company's five
largest customers accounted for approximately 62% of total revenues, with MCI
Communications Corporation (prior to its acquisition by WorldCom, Inc.),
Ameritech Corporation and Pacific Telesis Group accounting for 23%, 19% and 15%
of total sales, respectively. No other customers accounted for sales of 10% or
more during such periods. There can be no assurance regarding the amount or
timing of purchases by any customer in any future period. See "Factors That May
Affect Operating Results -- We are dependent on a limited number of major
customers."
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. As a
result, the Company does not expect to carry substantial quarterly backlog from
quarter to quarter in the future. 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 and year-to-year due to the timing and amount of orders from
customers, among other factors. Because most of our expenses, particularly
employee compensation and rent, are relatively fixed and cannot be reduced in
response to decreased revenues, quarterly fluctuations in sales have a
significant effect on net income.
Since inception the Company has incurred substantial net operating losses
as a result of significant investment in research and development, sales and
marketing and administrative expenses. As of December 31, 1998, the Company had
an accumulated deficit of approximately $46 million and net operating loss
carryforwards of approximately $39.0 million for tax purposes. The Company
intends to continue to build its organization in anticipation of growth and
believes that its operating expenses will continue to increase accordingly due
to a variety of factors including: (1) increased research and development
expenses associated with the completion of the products in development and the
continued enhancement of existing products; and (2) increased selling, general
and administrative expenses associated with continued expansion of sales and
marketing capabilities, product advertising and promotion. There can be no
assurance that the Company will achieve profitability, or that if profitability
is achieved that it will be sustained.
In January 1998, the Company restated its revenues from the second and
third quarters of fiscal 1997. The Company's decision to restate the 1997
results of operations resulted from the discovery of certain errors in the
timing of revenue recognition and a review of related accounting policies and
procedures. A committee consisting of the outside members of the Company's board
of directors was established to review the policies, procedures and
circumstances which may have been factors in the restatement of revenue and made
recommendations regarding the adoption of appropriate revenue recognition
policies and procedures. In April 1998, 23 class action lawsuits (which were
subsequently consolidated into a single action) were filed against the Company
arising out of such restatement and alleged violations of the federal securities
laws. The Company has a proposed settlement pending in connection with the class
action and recorded a charge of $8.5 million in the second quarter of 1998 as a
result of the proposed settlement. Pursuant to the terms of the settlement, the
Company will pay $4.25 million in cash, which payment will be primarily funded
by the Company's directors' and officers' liability insurance policy, and issue
1.8 million shares of Common Stock of the Company, all of which may be freely
tradable. In late October 1998, a Stipulation of Settlement was filed with the
court and on December 21, 1998, the court preliminarily approved the settlement.
On March 12, 1999, the court indicated that it would grant final approval of the
settlement. The settlement is subject to appeal. See "Factors That May Affect
Operating Results -- We are defending significant litigation," Note 15 and 16 of
the Consolidated Financial Statements, and "Item 3 -- Legal Proceedings."
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 $2.5 million. The purchase price was subsequently reduced to
$800,522. On November 30, 1995, the Company exercised the Option and retired the
shares of treasury stock acquired. In November 1997, the former stockholder
commenced an action in the United States District Court alleging violations of
Section 10(b) of the Securities Exchange Act, violations of state corporation
24
<PAGE> 26
statutes, and various common law violations in connection with the exercise of
the Option. On October 20, 1998, the Company and Dr. Zwan entered into an
agreement with Plaintiff to settle the action. The settlement agreement
provides, among other things, for dismissal of the action with prejudice, for a
$500,000 payment by the Company to plaintiff for his attorneys' fees and grants
Plaintiff an option, for 10 years, to purchase for $1 per share 2 million shares
of Dr. Zwan's stock in the Company. Pursuant to that agreement, the action was
dismissed with prejudice on November 13, 1998. The Company recorded a $3.0
million charge to earnings consisting of the cash payment and the valuation of
the options upon settlement. See "Factors That May Affect Operating
Results -- We are defending significant litigation" and Note 15 of the
Consolidated Financial Statements and "Item 3 -- Legal Proceedings."
In order to decrease costs and improve operating efficiencies, the Company
began streamlining its management and operating structure in February 1998 and
eliminated 20 full time positions resulting in a one-time charge of $1.0 million
in connection with this restructuring. Additionally, the Company eliminated
approximately 55 full time positions in August 1998 which did not result in a
significant charge to earnings. During 1998, the Company also significantly
enhanced its management team by hiring new executives, including a new President
and Chief Executive Officer hired at the end of the year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales...................................... 100% 100% 100%
Cost of goods sold............................. 38 34 34
---- --- ---
Gross profit................................... 62 66 66
Operating expenses:
Engineering and development expenses........... 59 58 40
Sales and marketing expenses................... 47 58 28
General and administrative expenses............ 30 42 23
Reorganization and litigation charges.......... 52 -- --
---- --- ---
Total operating expenses.................. 188 158 91
---- --- ---
Operating loss................................. (126) (92) (25)
Other income (expense), net.................... 3 19 (8)
---- --- ---
Net loss....................................... (123)% (73)% (33)%
==== === ===
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net Sales
Net sales include total revenues from customer purchases of Network
Information Computers and, to a limited extent, Network Access Agents, net of
accrual for product returns. Net sales for the year ended December 31, 1998
increased by $15.1 million, or 166%, to $24.2 million from $9.1 million in
fiscal 1997. Sales to existing customers for the year represented 77% of sales,
or $18.6 million as compared to 55% of sales, or $5.0 million for fiscal 1997.
During fiscal 1998, the Company shipped 723 units of the Network Information
Computer in varying configurations at an ASP of $33,459 compared with 275 units
at an ASP of $33,022 for fiscal 1997.
Sales to existing customers continue to represent a large portion of the
Company's net sales. The Company believes repeat sales to an existing customer
are an important measure of growing product acceptance in the highly
concentrated telecommunications industry. While this longer-term trend may not
continue, management believes that new product offerings including upgrades of
existing products offer the
25
<PAGE> 27
Company's existing customers an opportunity to continue to extend the life of
their initial investment in the Company's products.
Cost of Goods Sold
Costs of goods sold principally includes inventory, labor and overhead,
management costs, facility rental and depreciation of equipment. Cost of goods
sold for the year ended December 31, 1998 increased by $6.1 million to $9.2
million, or 38% of net sales, from $3.1 million, or 34% of net sales in fiscal
1997. The primary reason for the increase in cost of goods sold is the increase
in the volume of units sold.
Gross Profit
Gross profit for the year ended December 31, 1998 increased by $9.0 million
to $15.0 million from $6.0 million last year. As a percentage of sales, gross
margin for the year ended December 31, 1998 decreased to 62% from 66% in 1997.
The increase in gross profit is directly related to the increase in sales
for the year ended December 31, 1998. Despite the increase in sales, gross
margin percentages have decreased for the year. The primary reason for the
decline is the relatively flat ASP burdened with a higher average cost per unit
in 1998. The higher average cost per unit was affected by the introduction of
the new OC-48 configuration which costs more to produce than the lower speed
optical configurations and the sale of units produced in previous periods
requiring additional labor and overhead costs in order to provide the customer
with the most current configuration available.
Engineering and Development
Engineering and development expenses principally include compensation
attributable to engineering and development personnel, depreciation of
production assets, outside consulting fees and other development expenses.
Engineering and development expenses for the year ended December 31, 1998
increased by $9.0 million to $14.3 million, or 59% of net sales, from $5.3
million, or 58% of net sales, last year.
The increase is primarily related to the ongoing engineering and
development efforts on products such as the Network Access Agents, and
enhancements to the Company's Network Information Computers (most significantly,
the OC-48 option). In addition, during the last two quarters of 1998, the
Company incurred a significant level of overhead costs that could not be
absorbed into inventory production due to a lower level of production activity
during the last six months. Although the Company's efforts to lower overhead
costs by reducing the number of manufacturing personnel were successful, some
fixed costs such as facility rental and depreciation of production assets could
not be reduced. Accordingly, a disproportionate share of overhead expenses could
not be capitalized as part of inventory costs.
Sales and Marketing
Sales and marketing expenses principally include salaries and commissions
paid on sales of products, travel expenses, tradeshow costs, and costs of
promotional materials and customer incentives. Sales and marketing expenses for
the year ended December 31, 1998 increased by $6.1 million to $11.4 million from
$5.3 million last year. As a percentage of net sales, sales and marketing
expenses in the year ended December 31, 1998 declined to 47%, from 58% in 1997.
The dollar increase is directly related to a larger sales force, higher
commissions resulting from the increased sales activity, and an increase in
marketing related expenses.
General and Administrative
General and administrative expenses principally include professional fees,
facility rentals, compensation, and information systems related to general
management functions. General and administrative expenses for the year ended
December 31, 1998 increased by $3.4 million to $7.2 million from $3.8 million
last year. As a percentage of net sales, general and administrative expenses
declined to 30%, from 42% in 1997. The dollar
26
<PAGE> 28
increase is primarily due to professional fees associated with outstanding
litigation and various legal matters. These fees increased approximately $3.3
million for the year ended December 31, 1998.
Reorganization Charges
During the year ended December 31, 1998, the Company has actively pursued
streamlining its management and operating structure. During the first quarter,
the Company focused on its management structure and eliminated 20 positions
which resulted in a one-time charge of approximately $1.0 million. In August
1998, the Company streamlined its operating structure by eliminating
approximately 55 full-time positions which did not result in a material charge
to earnings. The Company believes that these reductions in force did not
materially affect the Company's ability to operate.
Litigation Settlement
The Company signed a memorandum of understanding and a Stipulation of
Settlement for the settlement of class action complaints filed against it in
U.S. District Court for alleged violations of federal securities laws. The
settlement has resulted in a charge of approximately $8.5 million recorded
during the second quarter of 1998. In addition, Dr. Bryan Zwan and the Company
entered into an agreement to settle an action commenced by Hugh Brian Haney.
Pursuant to that agreement, the action was dismissed with prejudice on November
13, 1998. The Company recorded a non-cash charge to earnings of approximately
$2.5 million and a $0.5 million accrual of related legal expenses during the
fourth quarter of 1998.
Other Income (Expense)
Other income for the year ended December 31, 1998 decreased by $1.1 million
to $0.6 million from $1.7 million last year. The decrease is the result of the
utilization of cash reserves to fund the Company's operations which caused a
decrease in interest earned on invested cash balances.
Net Loss
Net loss for the year ended December 31, 1998 increased by $23.1 million to
a net loss of $29.8 million or $1.13 per share, from a net loss of $6.7 million
or $.25 per share in 1997. The increase in net loss for the year ended December
31, 1998 was adversely impacted by the charges of approximately $8.5 million to
record the settlement of outstanding securities litigation, $3.0 million to
record the settlement of the Haney litigation, $1.0 million to record the
reorganization, $1.3 million in legal expenses, and $0.3 million of other
special charges. Without these charges, the pro-forma net loss would have been
$15.7 million or a loss of $.59 per share.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net Sales
Net sales in 1997 increased $3.1 million to $9.1 million from $6.0 million
in 1996. Sales to existing customers in 1997 represented 55% of sales, or $5.0
million as compared to 48% of sales, or $2.9 million in 1996. During 1997 the
Company shipped 275 units of the Network Information Computer in varying
configurations at an ASP of $33,022 compared with 171 units of the Network
Information Computer at an ASP of $35,345 in 1996.
Cost of Goods Sold
Cost of goods sold in 1997 increased by $1.0 million to $3.1 million from
$2.1 million in 1996, and remained constant at 34% of net sales in both years.
The primary reason for the increase in cost of goods sold in 1997 relates to the
increase in volume of units produced and the increased infrastructure and
manufacturing costs incurred in supporting these efforts. While the overall cost
of goods sold has increased, the average cost of goods sold per unit has
declined as a result of absorption of fixed production costs over a larger
volume of units produced and the component cost reductions associated with the
purchase of larger lot sizes. During the
27
<PAGE> 29
quarter ended September 30, 1997, the Company moved its manufacturing operation
to a new expanded facility and the Company recorded certain non-recurring
expenses in connection with this move.
Gross Profit
Gross profit in 1997 increased by $2.1 million to $6.0 million from $3.9
million in 1996. As a percentage of sales, gross margin for the years ended
December 31, 1997 and 1996 was 65.6%. As highlighted above, the increase in
gross profit in 1997 is directly related to the increase in sales.
Engineering and Development
Engineering and development expenses in 1997 increased by $2.9 million to
$5.3 million, or 58% of net sales from $2.4 million, or 40% of net sales, in
1996. The increase is primarily related to the addition of engineering and
quality control personnel and the other expenses associated with the Company's
ongoing research and development efforts on products such as the Network Access
Agents and enhancements to the Company's Network Information Computers.
Sales and Marketing
Sales and marketing expenses in 1997 increased by $3.6 million to $5.3
million, or 58% of net sales, from $1.7 million, or 28% of net sales in 1996.
The increase is related to the addition of personnel for the Company's direct
sales force and marketing functions, an increase in trade show appearances, and
customer incentives.
General and Administrative
General and administrative expenses in 1997 increased by $2.4 million to
$3.8 million, or 42% of net sales, from $1.4 million, or 23% of net sales in
1996. The increase is due to the expansion of facilities, personnel, and
information systems to support the growth of the Company's business.
Other Income (Expense)
Other income in 1997 increased by $2.2 million to an income of $1.7 million
from an expense of $0.5 million in 1996. The increase relates to interest income
generated primarily from the investment of proceeds from the Company's initial
public offering in 1997 ("IPO").
Net Loss
Net loss in 1997 increased by $4.6 million to a net loss of $6.7 million or
$.25 per share, from a net loss of $2.1 million or $.10 per share in 1996. The
computation of weighted shares outstanding for the 1997 periods reflect a higher
number of shares outstanding as a result of the completion of the Company's IPO.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through December 31, 1998, the Company has financed its
operations primarily through private sales of its Common Stock, cash from
operations and the initial public offering of 4,600,000 shares of its Common
Stock. The Company completed its IPO in February 1997, resulting in net proceeds
to the Company of $39.6 million. During 1997, the Company used the net proceeds
to fund the repayment of notes payable for approximately $0.8 million, to
purchase computer equipment, software, test equipment and other assets for
approximately $6.0 million and to fund product research and development for
approximately $5.3 million. In addition, approximately $3.5 million was used to
fund the Company's expansion in the form of additional manufacturing and
administrative space and a significant increase in engineering, production and
financial management personnel to support the Company's growth.
Cash and cash equivalents at December 31, 1998 were approximately $3.8
million compared to approximately $24.0 million at December 31, 1997. As of
December 31, 1998, the Company's working capital was approximately $2.3 million
as compared to $32.5 million at December 31, 1997. The decrease in working
capital was primarily associated with cash used in operations as a result of
operating losses during the fiscal
28
<PAGE> 30
year ended December 31, 1998, as detailed in the Company's Consolidated
Statements of Cash Flows, and the proposed settlement of the litigation
previously discussed. For the year ended December 31, 1998, capital expenditures
were approximately $4.5 million. Future capital expenditures will depend on
several factors including timing of introductions of new products and
enhancements to existing products as well as continued product development
efforts.
The Company entered into an accounts receivable agreement dated December
28, 1998 with EAB Leasing Corp. ("EAB") providing for the sale of the Company's
accounts receivable to EAB. The aggregate maximum amount the Company can borrow
at one time under this agreement is $2.9 million through June 28, 1999 with a
maximum of $2.0 million available on a monthly basis. As of March 26, 1999,
there were no borrowings under this agreement. In connection with this
agreement, the Company has granted EAB a security interest in its accounts,
accounts receivable, contract rights, equipment, chattel paper, general
intangibles, instruments, inventory and all proceeds of the foregoing The annual
interest rate equivalent charged to the Company under this agreement is the
prime rate plus 1.5%. The agreement also provides that the Company pay a minimum
monthly service fee in the amount of $10,000.
On March 31, 1999, the Company entered into a financing agreement with
certain investors pursuant to which the Company has agreed to issue $3.0 million
of 9% Secured Bridge Notes due January 17, 2000. These notes will be
collateralized by all of the Company's assets and will be subordinated to the
accounts receivable agreement with EAB and the proposed line of credit agreement
with Emergent Business Capital described in the following paragraph. In
connection with the financing agreement, the Company agreed to issue warrants to
purchase an aggregate of 550,000 shares of the Company's common stock at an
exercise price of $2.75 per share, the market price of the stock on the date
prior to the issuance of the warrants. The warrants will have a term of five
years from the date of issuance. The Company has agreed to register the warrants
and the common stock issuable upon exercise thereof under the Securities Act of
1933.
On March 31, 1999, the Company entered into a Letter of Commitment with
Emergent Business Capital pursuant to which Emergent Business Capital would
provide the Company with a $5.0 million line of credit (the "Emergent Line of
Credit"). Under the Emergent Line of Credit, the Company would be entitled to
borrow up to $5.0 million, subject to certain borrowing limitations based on
amounts of the Company's accounts receivable and other assets. The Emergent Line
of Credit will have a term of two years. All indebtedness outstanding under the
Emergent Line of Credit Agreement will be collateralized by substantially all of
the Company's assets.
YEAR 2000 READINESS DISCLOSURE
Year 2000 Issues and State of Readiness
The Company is aware of the issues associated with existing
computer-controlled systems properly recognizing and processing information
relating to dates in and after the Year 2000. Systems that cannot adequately
process dates beyond the year 1999 could generate erroneous data or cause a
system to fail. The problem may affect internal information technology ("IT")
systems used by the Company for product development, accounting, distribution
and planning. The problem may also affect non-IT embedded systems such as
building security systems, machine controllers, and other equipment. The Company
has made a preliminary assessment of its Year 2000 readiness for its operations
relating to (1) the Company's software products, (2) the Company's internal IT
and non-IT systems and (3) third party customers, vendors and others with whom
the Company does business.
The Company believes that the current versions of its products (ASA 312
Network Information Computer software versions 3.500 and later and Network
Access Agents) are Year 2000 compliant. The Company's products use time and
dates only as a "time stamp" for data-logging events, for file dates, for
display of elapsed time, and setting the test duration. The products' internal
system calendar years are entered as a 2-digit number in the range of "95" (for
1995) through "94" (for 2094). Since there is never a reason for "back dating,"
this provides an unambiguous means of entry for the year. The date is displayed
in a 4-digit year format (e.g., 01-Jan-1998) to enhance understandability. Based
on the foregoing, it is not expected that the Company's current products will be
adversely affected by date changes in the Year 2000.
29
<PAGE> 31
Certain customers of the Company may be running earlier versions of the
Company's products that are not Year 2000 compliant. These earlier software
versions, like the compliant versions, rely on time and dates only as a "time
stamp" for data-logging events, for file dates, for display of elapsed time, and
setting the test duration and do not prohibit function of the equipment. The
Company has made its policy statement regarding its product line available on
the Internet as well as providing written copies at customer request. This
alerts customers to the noncompliance of earlier versions of the ASA 312
software. Of these earlier versions, 3.100 through prior to 3.500 partially
comply, although if allowed to run past 1999 and into January 1, 2000, the date
after power-down will be incorrectly set to 1980. Instructions regarding
correcting this are provided both on the Internet and via customer inquiry. This
leaves only versions lower than 3.100 which are truly non-compliant. The
suggested solution for these products is an upgrade to a more recent, compliant
version of the software at the cost of the Company. The Company has evaluated
the number of customers still operating with these non-compliant versions. Of
these customers, it is estimated that approximately half have already received
the desired upgrades. As of March 26, 1999, the cost to upgrade the remaining
units is estimated to total $36,000 which would not have a material adverse
impact on the Company's business, operating results or financial condition.
With respect to IT systems, the Company has inventoried its internal
software and electronic hardware devices currently in use to determine which of
these devices rely on a valid date in order to function. Of these, certain
operating, accounting, and telephony systems were identified as critical.
Resources required to make these systems Year 2000 compliant were evaluated
based on availability and cost of the related upgrade. In general, the Company
is obtaining Year 2000 compliant versions from third party software vendors and
modifying these systems, which the Company expects to complete during the second
quarter of 1999. Total costs of such remediation are estimated at $21,000.
Non-IT embedded systems, consisting primarily of security systems, the emergency
power generator, HVAC controls and elevators have also been reviewed. These
systems were found to be year 2000 compliant.
The Company also has certain key relationships with suppliers and
subcontractors. We are preparing to contact certain third-party suppliers of key
components or services regarding their Year 2000 readiness. Following completion
of contacting these vendors, the Company will be better able to make a complete
evaluation of the costs associated with identifying alternative vendors if the
need arises.
Risks Associated with Year 2000 and Contingency Plan
Based on information currently available to the Company, the Company
believes that the most reasonably likely worst case Year 2000 scenarios with
respect to the Company relate to the potential failure of third party suppliers,
subcontractors and customers to become Year 2000 compliant. The inability of
suppliers and subcontractors to complete their Year 2000 remediation processes
in a timely fashion could result in delays in introducing new products, reduced
sales of new or existing products and disruptions in any future strategic
relationships. The failure of these entities to become Year 2000 compliant could
in turn have a material and adverse effect on the Company's results of
operations and financial condition. The effect of non-compliance by suppliers,
subcontractors and customers is not reasonably quantifiable.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues. Many companies are
expending significant resources to correct or upgrade their current systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase testing products such as those offered by the Company. This could
have a material adverse effect upon the Company's business, operating results
and financial condition.
The Company anticipates that generally throughout the computer industry
substantial litigation may be brought against software vendors of non-compliant
operating environments. The Company believes that any such claims against the
Company, with or without merit, could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company currently does not have any Year 2000 contingency plan. The
most significant aspect of any such plan would involve the ability of the
Company to identify alternative vendors if the need arose. The Company believes
it has that ability.
30
<PAGE> 32
The Company is not aware of any Year 2000 compliance problems relating to
its current products or its IT or non-IT systems that would have a material
adverse effect on the Company's business, results of operations and financial
condition. However, the Company may discover Year 2000 problems in its products
that will require substantial revisions. In addition, third-party software or
hardware incorporated into the Company's products and material IT and non-IT
systems may need to be revised or replaced, all of which could be time consuming
and expensive. If material Year 2000 problems are discovered, the failure of the
Company to fix its products or fix or replace third-party software, third party
software incorporated into its products and in its IT systems could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on the
Company's business, results of operations and financial conditions.
Expenses Related to Year 2000 Compliance
The total cost of the Year 2000 preparedness effort is funded through
operating cash flows and the Company is expensing these costs. The Company has
not established any specific reserves for these costs. The Company has not
incurred significant expense in becoming Year 2000 compliant as both the
majority of our product software and the infrastructure of our internal systems
were developed after the Year 2000 risks were realized. Future costs related to
Year 2000 compliance are not expected to have a material adverse effect on the
Company's results of operations or financial condition. However, the Company may
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed predominantly of third party software and hardware
technology with embedded software, and the Company's own products.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, effective for fiscal periods beginning after
December 15, 1997. The new standard requires that comprehensive income, which
includes net income as well as certain changes in assets and liabilities
recorded in common equity, be reported in the financial statements. The Company
adopted SFAS No. 130 during the year ended December 31, 1998. For the years
ended December 31, 1998, 1997, and 1996, there were no components of
comprehensive income other than net income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". In 1998, the Company adopted SFAS No. 131, which requires a
"management" approach of disclosing segment information. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. For the years ended December
31, 1998, 1997, and 1996, there was no impact on the Company's financial
statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". In February 1998, the FASB issued SFAS No. 132 which
is effective for periods ending after December 15, 1998. The new standard
revises employers' disclosures about pensions and other postretirement benefits.
For the years ended December 31, 1998, 1997, and 1996, there was no impact on
the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities". SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not currently maintain any derivative investments nor does it
conduct any hedging activities, therefore, SFAS No. 133 is not expected to
impact the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
31
<PAGE> 33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included in this
Report as pages 33 through 51.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Stockholders' Equity (Deficit)... 36
Consolidated Statements of Cash Flows....................... 37
Notes to Consolidated Financial Statements.................. 38
</TABLE>
32
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Digital Lightwave, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Digital Lightwave, Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period then ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
January 29, 1999, except for Note 16, as to
which the date is March 31, 1999
33
<PAGE> 35
DIGITAL LIGHTWAVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,848 $ 24,031
Accounts receivable....................................... 7,152 4,780
Inventories............................................... 5,476 8,120
Prepaid expenses and other current assets................. 748 481
-------- --------
Total current assets.............................. 17,224 37,412
Property and equipment, net................................. 9,274 6,785
Other assets................................................ 1,060 164
-------- --------
Total assets...................................... $ 27,558 $ 44,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 6,468 $ 4,917
Accrued settlement charges................................ 8,489 --
-------- --------
Total current liabilities......................... 14,957 4,917
Long-term liabilities....................................... 281 25
-------- --------
Total liabilities................................. 15,238 4,942
-------- --------
Commitments and contingencies (Notes 7, 8, 10 and 15)
Stockholders' equity:
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 26,535,332 and
26,440,878 shares, respectively........................ 3 3
Additional paid-in capital................................ 57,927 55,201
Accumulated deficit....................................... (45,610) (15,785)
-------- --------
Total stockholders' equity........................ 12,320 39,419
-------- --------
Total liabilities and stockholders' equity........ $ 27,558 $ 44,361
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 36
DIGITAL LIGHTWAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales.................................................. $ 24,191 $ 9,081 $ 6,044
Cost of goods sold..................................... 9,219 3,124 2,079
---------- ---------- ----------
Gross profit........................................... 14,972 5,957 3,965
---------- ---------- ----------
Operating expenses:
Engineering and development.......................... 14,335 5,342 2,403
Sales and marketing.................................. 11,363 5,260 1,706
General and administrative........................... 7,223 3,812 1,380
Reorganization charges............................... 1,018 -- --
Litigation settlement................................ 11,500 -- --
---------- ---------- ----------
Total operating expenses..................... 45,439 14,414 5,489
---------- ---------- ----------
Operating loss......................................... (30,467) (8,457) (1,524)
---------- ---------- ----------
Other income (expense):
Interest income...................................... 649 1,826 211
Interest expense..................................... (37) (66) (595)
Other income (expense), net.......................... 30 7 (200)
---------- ---------- ----------
Total other income (expense)................. 642 1,767 (584)
---------- ---------- ----------
Loss before income taxes............................... (29,825) (6,690) (2,108)
Provision for income taxes............................. -- -- --
---------- ---------- ----------
Net loss..................................... $ (29,825) $ (6,690) $ (2,108)
========== ========== ==========
Basic and diluted loss per share of common stock....... $ (1.13) $ (0.25) $ (0.10)
========== ========== ==========
Weighted average common shares outstanding........... 26,475,749 26,084,208 21,829,235
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 37
DIGITAL LIGHTWAVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
------------------- PAID-IN ACCUMULATED FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER TOTAL
---------- ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996..... 20,000,000 $2 $ 522 $ (6,987) $(1,700) $ (8,163)
Issuance of common stock in
exchange for debt.......... 1,013,924 -- 4,820 -- -- 4,820
Sale of common stock......... 221,992 -- 2,602 -- -- 2,602
Issuance of common stock upon
exercise of stock
options.................... 31,334 -- 39 -- -- 39
Issuance of common upon
exercise of warrants....... 1,251,667 -- 6,259 -- -- 6,259
Net loss........... -- -- -- (2,108) -- (2,108)
---------- -- ------- -------- ------- --------
Balance, December 31, 1996... 22,518,917 2 14,242 (9,095) (1,700) 3,449
Issuance of common stock from
Initial Public Offering,
net........................ 3,658,860 1 39,591 -- -- 39,592
Issuance of common stock..... 263,101 -- 1,368 -- -- 1,368
Repayment of note receivable
from stockholder........... -- -- -- -- 1,700 1,700
Net loss........... -- -- -- (6,690) -- (6,690)
---------- -- ------- -------- ------- --------
Balance, December 31, 1997... 26,440,878 3 55,201 (15,785) -- 39,419
Issuance of common stock..... 94,454 -- 226 -- -- 226
Settlement of Haney
Litigation................. -- -- 2,500 -- -- 2,500
Net loss........... -- -- -- (29,825) -- (29,825)
---------- -- ------- -------- ------- --------
Balance, December 31, 1998... 26,535,332 $3 $57,927 $(45,610) $ -- $ 12,320
========== == ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 38
DIGITAL LIGHTWAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(29,825) $(6,690) $(2,108)
Adjustments to reconcile net loss to cash used by
operating activities:
Interest expense converted to equity................... -- -- 205
Depreciation and amortization.......................... 2,254 778 204
Loss on disposal of property........................... 33 -- 8
Litigation settlement.................................. 9,925 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable........................ (2,372) (2,270) (2,499)
Decrease (increase) in inventories..................... 2,645 (7,270) (228)
Increase in prepaid expenses and other assets.......... (1,163) (37) (499)
Increase in accounts payable and accrued liabilities... 1,386 2,647 479
Decrease in other long-term liabilities................ -- -- (5)
Increase in accrued settlement charges................. 1,064 -- --
-------- ------- -------
Net cash used by operating activities............. (16,053) (12,842) (4,443)
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,381) (5,994) (635)
Proceeds from sale of assets.............................. 68 -- --
-------- ------- -------
Net cash used by investing activities............. (4,313) (5,994) (635)
-------- ------- -------
Cash flows from financing activities:
Repayment of stockholder receivable....................... -- 1,700 --
Proceeds from notes payable............................... -- -- 2,350
Principal payments on notes payable....................... -- (750) (3,000)
Principal payments on notes payable, related party........ -- -- (202)
Principal payments, capital lease obligations............. (43) (208) (195)
Proceeds from sale of common stock, net of expense........ 226 40,960 --
Cash paid for common stock................................ -- -- 7,218
-------- ------- -------
Net cash provided by financing activities......... 183 41,702 6,171
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (20,183) 22,866 1,093
Cash and cash equivalents at beginning of period............ 24,031 1,165 72
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 3,848 $24,031 $ 1,165
======== ======= =======
Other supplemental disclosures:
Cash paid for interest.................................... $ 37 $ 66 $ 547
Non-cash investing and financing activities:
Capital lease obligations incurred........................ $ 382 $ -- $ 355
Fixed asset additions included in accounts payable at year
end.................................................... 82 327 --
Disposals of property and equipment....................... -- -- 18
Notes payable converted to equity......................... -- -- 6,295
Accounts receivable related to capital leases............. 847 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 39
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Digital Lightwave, Inc. (the "Company") was incorporated on October 12,
1990 in the state of California, and subsequently reincorporated in Delaware on
March 18, 1996 through a merger into a newly formed Delaware corporation. The
Company commenced business on February 15, 1991 and manufactures and sells
advanced computer systems that provide information concerning the performance of
fiberoptic (or "lightwave") telecommunications networks and transmission
equipment. The Company's major product, the ASA 312, is a portable
software-based network information computer that is lightweight, compact and
easily operated through a touch sensor over a full color display. The ASA 312
enables users to understand and process information, simultaneously and without
interruption, from telecommunications networks utilizing legacy T-Carrier
protocol, lightwave SONET protocol and lightwave ATM protocol. The Company sells
its products to InterExchange Carriers ("IXCs"), Regional Bell Operating
Companies ("RBOCs"), Competitive Access Providers ("CAPs"), independent
telephone companies, network equipment manufacturers, equipment leasing
companies and private network operators.
On January 6, 1998, Digital Lightwave Leasing Corporation ("DLLC") was
incorporated in the State of Delaware. The Company commenced business
immediately and provides financing for the purchase of the Company's product in
the form of capital leases as well as equipment rental to the Company's
customers. DLLC is a wholly-owned subsidiary of the Company and all significant
intercompany transactions and balances are eliminated in consolidation.
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.
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 to 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.
ACCRUED WARRANTY
The Company provides the customer a warranty with each product sold and
accrues warranty expense based upon a percentage of sales. Actual warranty costs
incurred are charged against the accrual when paid.
REVENUE RECOGNITION
Revenue is recognized when a purchase order or contract has been received
from the customer, and the product has been shipped to the Company's customer
or, in the case of sales to a distributor, when the product is shipped to the
distributor's end user because distributors generally have a right of return on
any product that does not sell within time periods specified in the agreement
with the distributor. Returns from individual
38
<PAGE> 40
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers are recorded as a reduction in sales during the period in which the
return was made. To date, the Company has not experienced a significant amount
of product returns.
In addition, beginning January 1, 1998, revenue from the sale of the
Company's product is recognized in accordance with SOP 97-2, Software Revenue
Recognition. SOP 97-2 requires the total contract revenue to be allocated to the
various elements of the contract based upon objective evidence of the fair
values of such elements and allows for only the allocated revenue to be
recognized upon completion of those elements. The effect of the adoption of SOP
97-2 was not significant to the Company's results of operations for the year
ended December 31, 1998.
Revenue representing interest income on leasing transactions is recognized
over the life of the lease as the payments become due.
DEFERRED REVENUE
Deferred revenue, which represents amounts billed to customers in advance
of shipment or amounts billed to distributors prior to the distributors sale of
the goods, is recorded at the date of billing. Revenue is subsequently
recognized at the date of shipment or, in the case of distributor sales, at the
time the distributor ships the product to the end user.
RESEARCH AND DEVELOPMENT
Software and product development costs are included in engineering 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 consolidated financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the consolidated 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
Basic loss per share is based on the weighted average number of common
shares outstanding during the periods presented. For the years ended December
31, 1998 and 1997, diluted loss per share, which includes the effect of
incremental shares from common stock equivalents using the treasury stock
method, is not included in the calculation of net loss per share as the
inclusion of such equivalents would be anti-dilutive. The table
39
<PAGE> 41
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
below shows the calculation of basic weighted average common shares outstanding
and the incremental number of shares arising from common stock equivalents under
the treasury stock method:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Basic:
Weighted average common shares
outstanding...................... 26,475,749 26,084,208 21,375,584
---------- ----------- ----------
Total basic................. 26,475,749 26,084,208 21,375,584
Diluted:
Incremental shares for common stock
equivalents...................... 18,690* 976,013* 453,651
---------- ----------- ----------
Total dilutive.............. 26,494,439 27,060,221 21,829,235
========== =========== ==========
</TABLE>
* not included in loss per share calculations due to anti-dilutive
effect
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 the year ended
December 31, 1996 using the treasury stock method based on the Initial Public
Offering price. Accordingly, weighted average common shares includes 1,375,584
of common stock equivalent shares issued during the year ended December 31, 1996
shown as outstanding. Incremental shares for common stock equivalents includes
453,651 common stock equivalent shares for options issued during the year ended
December 31, 1996.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and receivables. As of December 31, 1998, 1997 and 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. During the normal course of business, the Company extends credit
to customers conducting business primarily in the telecommunications industry
both within the United States and internationally.
USE OF ESTIMATES
The preparation of consolidated 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 PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, effective for fiscal periods beginning after
December 15, 1997. The new standard requires that comprehensive income, which
includes net income as well as certain changes in assets and liabilities
recorded in common equity, be reported in the financial statements. The Company
adopted SFAS No. 130 during the year ended December 31, 1998. For the years
ended December 31, 1998, 1997, and 1996, there were no components of
comprehensive income other than net income.
40
<PAGE> 42
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". In 1998, the Company adopted SFAS No. 131, which requires a
"management" approach of disclosing segment information. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. For the years ended December
31, 1998, 1997, and 1996, there was no impact on the Company's financial
statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". In February 1998, the FASB issued SFAS No. 132 which
is effective for periods ending after December 15, 1998. The new standard
revises employers' disclosures about pensions and other postretirement benefits.
For the years ended December 31, 1998, 1997, and 1996, there was no impact on
the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities". SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not currently maintain any derivative investments nor does it
conduct any hedging activities, therefore, SFAS No. 133 is not expected to
impact the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
2. INVENTORIES
Inventories at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $2,166 $1,266
Work-in progress........................................... 1,443 1,875
Finished goods............................................. 1,867 4,979
------ ------
$5,476 $8,120
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Test equipment........................................... $ 4,418 $ 2,569
Computer equipment and software.......................... 3,555 2,895
Tooling.................................................. 487 455
Tradeshow fixtures and equipment......................... 242 59
Office furniture, fixtures and equipment................. 2,255 1,381
Leasehold improvements................................... 1,214 582
------- -------
12,171 7,941
Less accumulated depreciation............................ (2,897) (1,156)
------- -------
$ 9,274 $ 6,785
======= =======
</TABLE>
41
<PAGE> 43
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment under capital lease and related accumulated amortization,
included above at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Test equipment.............................................. $425 $ 75
Computer equipment and software............................. 117 37
---- ----
542 112
Less accumulated amortization............................... (96) (39)
---- ----
$446 $ 73
==== ====
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable........................................... $3,594 $3,541
Deferred revenue........................................... 124 765
Current portion of capital lease obligations............... 153 42
Accrued expenses and other................................. 2,597 569
------ ------
$6,468 $4,917
====== ======
</TABLE>
5. INCOME TAXES
The tax effected amounts of temporary differences at December 31, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Current:
Deferred tax asset:
Deferred compensation.............................. $ 64 $ 33
Accrued liabilities................................ 3,194 --
Other.............................................. 774 408
Valuation allowance................................ (3,869) (418)
-------- -------
Total current deferred tax asset.............. 163 23
-------- -------
Net current deferred tax asset................ $ 163 $ 23
-------- -------
Non-current:
Deferred tax asset:
Net operating loss carry forward................... $ 14,686 $ 5,628
Other.............................................. -- --
Research and experimentation credit................ 549 142
Valuation allowance................................ (14,621) (5,464)
-------- -------
Total non-current deferred tax asset.......... 614 306
-------- -------
</TABLE>
42
<PAGE> 44
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Property related...................................... $ (777) $ (329)
-------- -------
Total non-current deferred tax liability...... (777) (329)
-------- -------
Net deferred tax asset........................ $ 0 $ 0
======== =======
</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 December 31, 1998, the Company has established a valuation allowance of
approximately $18.5 million. The result is an increase in the valuation
allowance from December 31, 1997 of approximately $12.6 million.
As of December 31, 1998, the Company had net operating loss carry forwards
of approximately $39.0 million 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 $38.2 million. Loss carry forwards will expire between
the years 2008 and 2018.
As of December 31, 1998, the Company also had general business credit carry
forwards of approximately $500,000 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.
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at U.S. Federal income tax rate.... $(10,140) $(2,275) $(717)
State income tax benefit, net of Federal....... (1,083) (243) (76)
Other, net..................................... (979) (410) 6
Valuation allowance increase................... 12,609 2,928 787
Research and experimentation credit............ (407) -- --
-------- ------- -----
Provision for income taxes..................... $ 0 $ 0 $ 0
======== ======= =====
</TABLE>
6. NOTES PAYABLE
On February 28, 1997 the Company repaid all notes payable with proceeds
from the Initial Public Offering. At December 31, 1996 notes payable amounted to
$750,000. This note was unsecured, subordinated to all secured debt and any
future lines of credit up to $2 million, bore interest at 18% per annum with
interest due and payable August 30, 1996, November 30, 1996, February 29, 1997
and May 31, 1997.
43
<PAGE> 45
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
The Company is obligated under various non-cancelable leases for equipment
and office space. Future minimum lease commitments under operating and capital
leases were as follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999...................................................... $196 $ 1,891
2000...................................................... 169 2,314
2001...................................................... 110 2,291
2002...................................................... -- 2,314
2003...................................................... -- 2,314
Thereafter................................................ -- 13,006
---- -------
475 $24,130
-------
Less: Amount representing interest........................ 69
----
Present value of minimum lease payments................... 406
Less: Current portion..................................... 155
----
$251
====
</TABLE>
Total rental expense was approximately $1,162,900, $506,000 and $241,500
for the years ended December 31, 1998, 1997, and 1996, respectively.
8. COMMITMENTS
At December 31, 1998, the Company had outstanding purchase order
commitments to purchase certain inventory items totaling approximately $2.5
million.
On January 13, 1998 the Company entered into a ten year lease agreement,
which was amended on February 18, 1998, for a three story office building with
92,225 square feet of rentable space. The building was completed in November
1998 and the Company relocated certain of its operations to the building on
November 30, 1998. The Company is currently leasing 67% of the rentable space at
a cost of $13.43 per square foot per annum in base rent and $5.38 per square
foot per annum in operating expenses. At the beginning of year two, the rental
costs will increase to $14.175 and $6.00 for base rent and operating expenses,
respectively. Thereafter, the rental costs shall increase by 2.5% per lease
year.
The Company was required to pay a tenant improvement allowance of $900,000
during 1998. The allowance is held in escrow by the landlord to secure the
Company's obligations under the lease. The Company has an option to terminate
the lease at the conclusion of the seventh lease year. Such option, if
exercised, will invoke a termination fee of $1,941,749 plus six months of
estimated operating expenses. The Company also has an option to purchase the
building for approximately $14.5 million which may be exercised at any time
during the initial lease term and will require a $300,000 deposit when notice to
exercise is given.
As required by the lease agreement, the Company has put in place a standby
letter of credit to the benefit of the landlord in the amount of $2,300,000,
which is collateralized by a three month certificate of deposit with a financial
institution. The lease agreement calls for a declining letter of credit over the
life of the lease.
In accordance with the terms of the lease, the Landlord also issued a
letter of credit to the benefit of the Company in the amount of $1,000,000,
which secured the landlord's performance obligations under the lease and was
terminated upon occupancy.
44
<PAGE> 46
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an accounts receivable agreement dated December
28, 1998 with EAB Leasing Corp. ("EAB") providing for the sale of the Company's
accounts receivable to EAB. The aggregate maximum amount the Company can borrow
at one time under this agreement is $2.9 million through June 28, 1999, with a
maximum of $2.0 million available on a monthly basis. In connection with this
agreement, the Company has granted EAB a security interest in its accounts,
accounts receivables, contract rights, equipment, chattel paper, general
intangibles, instruments, inventory and all proceeds of the foregoing. The
annual interest rate equivalent charged to the Company under this agreement is
the prime rate plus 1.5%. The agreement also provides that the Company pay a
minimum monthly service fee in the amount of $10,000. As of December 31, 1998,
no sales had been made under this agreement.
9. RELATED PARTY TRANSACTIONS
During December 1995, a stockholder borrowed $1,700,000 from the Company.
This note accrued interest at 9% with interest payments due monthly. The
principal sum and accrued interest thereon was repaid by the stockholder in
September 1997. The accompanying consolidated financial statements include the
note as a decrease in stockholders' equity, as well as accrued interest of
approximately $31,300 as of December 31, 1996.
During December 1998, a stockholder borrowed $100,000 from the Company.
This note is accruing interest at 9% with the principal sum and accrued interest
thereon payable no later than December 31, 1999.
In 1998, a director received $12,750 for services performed as a consultant
to the Company.
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 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.
The Company subsequently terminated several agreements which reduced the
aggregate shares subject to such options to 470,000, at an aggregate price equal
to $39,000. The options were exercised during July, 1996.
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 consolidated
financial statements have been retroactively adjusted to reflect these events.
45
<PAGE> 47
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. Transactions related to
the Option Plan during 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES OPTION PRICE
---------- ----------------
<S> <C> <C>
Outstanding at 1/1/96........................... -- --
Granted....................................... 1,250,037 $5.17
Exercised..................................... -- --
Forfeited..................................... (80,540) 5.24
----------
Outstanding at 12/31/96......................... 1,169,497 5.16
Granted....................................... 1,221,015 8.72
Exercised..................................... (257,843) 5.03
Forfeited..................................... (81,884) 5.37
----------
Outstanding at 12/31/97......................... 2,050,785 7.29
Granted....................................... 2,362,643 3.62
Exercised..................................... -- --
Forfeited..................................... (1,723,282) 7.39
---------- -----
Outstanding at 12/31/98......................... 2,690,146 $3.98
========== =====
</TABLE>
The following table summarizes information about stock options outstanding
to employees and directors at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER NUMBER
OUTSTANDING WEIGHTED EXERCISABLE
AT AVERAGE AT
EXERCISE PRICE PER SHARE 12/31/98 REMAINING LIFE 12/31/98
- ------------------------ ----------- -------------- -----------
<S> <C> <C> <C>
$2.3130........................... 600,000 6.00 0
2.5630........................... 478,616 5.97 0
4.4375........................... 320,800 5.38 75,000
4.6875........................... 666,230 5.23 50,000
5.000........................... 117,083 3.18 69,296
5.250........................... 423,487 4.73 163,666
7.250........................... 25,000 7.10 8,333
9.000........................... 50,000 7.10 16,666
13.125........................... 8,930 4.78 2,972
</TABLE>
All options issued vest in one-third increments over a three year period,
with the exception of three option agreements which provide for various vesting
schedules throughout the same three-year vesting period. Option agreements
generally expire six years from date of issue if not exercised. Unvested options
are generally forfeited upon termination of employment with the Company. Total
shares exercisable were 385,933, 421,566 and 0 as of December 31, 1998, 1997 and
1996, respectively.
46
<PAGE> 48
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan became effective on August
25, 1997 in order to provide employees with the opportunity to purchase shares
of the Company's Common Stock. An aggregate of 300,000 shares of the Company's
Common Stock was reserved for issuance under the Plan. At December 31, 1998 a
total of 99,712 shares had been purchased by employees participating in the plan
at a weighted average price per share of $2.98.
In 1995, the Financial Accounting Standards Board issued FAS 123,
"Accounting for Stock -- Based Compensation" ("FAS 123"), effective for fiscal
years beginning after December 15, 1995. The Company continues to apply the
prior accounting rules under "APB No. 25, Accounting for Stock Issued to
Employees," in recognizing expense for stock-based compensation, and therefore,
no compensation expense has been recognized for the stock options granted under
the Option Plan. Had compensation cost for the Company's stock options granted
been determined based on the Black-Scholes option pricing model at the date of
grant, consistent with the method of FAS 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net loss:
As reported................................ $(29,825) $(6,690) $(2,108)
As adjusted (unaudited).................... (35,502) (8,769) (3,417)
Pro forma basic loss per share:
As reported................................ $ (1.13) $ (0.25) $ (0.10)
As adjusted (unaudited).................... (1.34) (0.34) (0.16)
</TABLE>
No options were granted prior to 1996.
These pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (a) a discount rate of 4.86%, 5.84%,
and 6.00% for December 31, 1998, 1997 and 1996, respectively; (b) a volatility
factor based upon the week ending price for comparable public companies for
periods matching the terms of the options granted; (c) an average expected
option life of 4.0, 4.2 and 5.0 years for December 31, 1998, 1997 and 1996,
respectively; (d) there have been no options that have expired; and (e) no
payment of dividends.
SUBSCRIPTION AGREEMENTS
During 1995, 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. During the
year ended December 31, 1996, 1,050,000 and 1,667 shares of Common Stock were
issued upon the exercise of warrants at a price of $5.00 and $9.00 per share,
respectively. The remaining 17,080 warrants expired in connection with the
initial public offering. See Note 13. 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 completed an Initial Public Offering of
its Common Stock, then the price of the shares would 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
47
<PAGE> 49
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company to the stockholder equal to the excess, if any, of $18.00 per share over
the 75% price. The Company recorded a liability of $400,000 as of December 31,
1996, based upon management's estimate of the expected payment to the
institutional investor. In February 1997 the Company completed its Initial
Public Offering at a price of $12.00 per share. Accordingly, the Company has
made payment to the institutional investor as required by the terms of the
subscription agreement.
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
Effective 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. DEFINED CONTRIBUTION PLAN
During 1997, the Company implemented a defined contribution plan which
qualifies under IRC section 401(k). All full-time employees are eligible to
participate in the plan after three months of service with the Company.
Employees may contribute up to 15% of their salary to the plan, subject to
certain Internal Revenue Service limitations. The Company matches the first 6%
of such voluntary contributions at 50% of the amount contributed by the
employee. The Company does not make unmatched contributions. For the years ended
December 31, 1998 and 1997, total Company contributions to the plan were
approximately $141,000 and $27,000, respectively.
12. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1998, the Company's four largest customers
accounted for approximately 57% of total revenues, with Qwest, MCI WorldCom,
Tellabs, and GTE accounting for approximately 17%, 16%, 13%, and 11% of total
sales, respectively. For the year ended December 31, 1997, sales to the
Company's five largest customers comprised 69% of its total revenues, with
WorldCom, Inc. (prior to its acquisition of MCI Communications Corporation) and
its subsidiaries accounting for 42% of total sales. For the year ended December
31, 1996, the Company's five largest customers accounted for approximately 62%
of total revenues, with MCI Communications Corporation (prior to its acquisition
by WorldCom, Inc.), Ameritech Corporation and Pacific Telesis Group accounting
for 23%, 19% and 15% of total sales, respectively. No other customers accounted
for sales of 10% or more during such periods.
13. INITIAL PUBLIC OFFERING
Effective February 5, 1997, the Company sold 3,658,860 shares of common
stock, $.0001 par value, in connection with an Initial Public Offering. Gross
proceeds to the Company approximated $40,800,000.
14. REORGANIZATION CHARGES
In order to reduce costs and improve operating efficiencies, the Company
began streamlining its management and operating structure in February 1998 and
eliminated 20 full-time positions resulting in a one-time charge to earnings of
$1.0 million in connection with this restructuring. Additionally, the Company
eliminated 55 full-time positions in August 1998 which did not result in a
significant charge to earnings. Notes and related interest receivable from
employees terminated in the restructurings totaling approximately $280,000 were
forgiven and are included in the $1.0 million restructuring charge.
48
<PAGE> 50
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. LEGAL PROCEEDINGS
As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the Federal Securities Laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our Common Stock. The complaints named as defendants the Company, Bryan J. Zwan,
the Company's Chairman, Steven H. Grant, the Company's Executive Vice President,
Finance, Chief Financial Officer and Secretary, and other former corporate
officers. The complaints allege that the Company and certain officers during the
relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial statements and press releases concerning the Company's
revenues, income and earnings, which artificially inflated the price of our
Common Stock.
On July 23, 1998, the Company entered into a memorandum of understanding
for the settlement of these class action complaints. In late October 1998, a
Stipulation of Settlement was filed with the court and on December 21, 1998, the
court preliminarily approved the settlement. The settlement is still subject to
final approval by the court. The preliminarily approved settlement consists of
$4.26 million in cash, to be paid to plaintiffs primarily by a claim on the
Company's directors and officers liability insurance policy, and the issuance of
up to 1.8 million shares of Common Stock. The Company recorded a one-time charge
of $8.5 million during 1998 as a result of the preliminarily approved
settlement.
On November 5, 1997, Hugh Brian Haney ("Plaintiff") commenced an action in
the United States District Court for the Southern District of Ohio against Bryan
J. Zwan, the Company's Chairman of the Board and then Chief Executive Officer,
and the Company ("Defendants"). An amended complaint filed December 15, 1997
alleged violations of Section 10(b) of the Securities Exchange Act, violations
of state corporation statutes, and various common law violations by Defendants
in connection with Plaintiff's sale to the Company's predecessor in November
1995, pursuant to a previously granted option exercisable by Zwan and/or the
Company's predecessor, of 4,900 shares of stock in the Company's predecessor, an
amount equivalent to 19,215,686 shares of the Company's common stock. The
amended complaint sought, among other things, (1) rescission of the sale of the
shares transferred by Plaintiff and (2) damages of $235 million, together with
interest. On October 20, 1998, the Company and Zwan entered into an agreement
with Plaintiff to settle the action. The settlement agreement provides, among
other things, for dismissal of the action with prejudice, for a $500,000 payment
by the Company to Plaintiff for his attorneys' fees and grants Plaintiff an
option, for 10 years, to purchase for $1 per share 2 million shares of Zwan's
stock in the Company. Pursuant to that agreement, the action was dismissed with
prejudice on November 13, 1998. The Company recorded a $3.0 million charge to
earnings consisting of the cash payment and the valuation of the options upon
settlement.
The Company from time to time is involved in lawsuits arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defenses and/or provided adequate accruals for
related costs. The Company is not aware of any additional lawsuits that were
pending that could have a material adverse effect on the Company's business,
financial condition and results of operations.
16. SUBSEQUENT EVENTS
On March 12, 1999, the United States District Court for the Middle District
of Florida indicated that it would grant final approval of the settlement of the
class action complaints discussed at Note 15 -- Legal Proceedings. The
settlement is subject to appeal.
On March 31, 1999, the Company entered into a financing agreement with
certain investors pursuant to which the Company has agreed to issue $3.0 million
of 9% Secured Bridge Notes due January 17, 2000. These notes will be
collateralized by all of the Company's assets and will be subordinated to the
accounts receivable agreement with EAB (see Note 8 -- Commitments) and the
proposed line of credit agreement with
49
<PAGE> 51
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Emergent Business Capital described in the following paragraph. In connection
with the financing agreement, the Company agreed to issue warrants to purchase
an aggregate of 550,000 shares of the Company's common stock at an exercise
price of $2.75 per share, the market price of the stock on the date prior to the
issuance of the warrants. The warrants will have a term of five years from the
date of issuance. The Company has agreed to register the warrants and the common
stock issuable upon exercise thereof under the Securities Act of 1933.
On March 31, 1999, the Company entered into a Letter of Commitment with
Emergent Business Capital pursuant to which Emergent Business Capital would
provide the Company with a $5.0 million line of credit (the "Emergent Line of
Credit"). Under the Emergent Line of Credit, the Company would be entitled to
borrow up to $5.0 million, subject to certain borrowing limitations based on
amounts of the Company's accounts receivable and other assets. The Emergent Line
of Credit will have a term of two years. All indebtedness outstanding under the
Emergent Line of Credit Agreement will be collateralized by substantially all of
the Company's assets.
17. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the last eight quarters. This information has been prepared by the Company on
a basis consistent with the Company's consolidated financial statements and
includes all adjustments, consisting only of normal recurring accruals, in
accordance with generally accepted accounting principles. Such quarterly results
are not necessarily indicative of future operating results.
On January 22, 1998, the Company issued a press release and related Form
8-K indicating that the Company would restate its financial results for quarters
ending June 30, 1997 and September 30, 1997, respectively. The table below gives
effect to such restatement:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
----------- ----------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................... $ 5,432 $ 3,517 $ 6,915 $ 8,327
Gross Profit........................ 3,329 2,183 4,295 5,165
Operating loss...................... (4,839) (14,747) (4,617) (6,264)
Net loss............................ (4,560) (14,580) (4,515) (6,169)
Loss per share(1)................... (.17) (.55) (.17) (.23)
Weighted average shares
outstanding....................... 26,441,775 26,461,151 26,484,670 26,512,397
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................... $ 1,498 $ 2,601 $ 1,240 $ 3,742
Gross Profit........................ 931 1,806 814 2,406
Operating loss...................... (1,605) (1,116) (3,126) (2,610)
Net loss............................ (1,312) (577) (2,615) (2,186)
Loss per share(1)................... (.05) (.02) (.10) (.08)
Weighted average shares
outstanding....................... 24,754,887 26,321,990 26,374,388 27,596,955
</TABLE>
- ---------------
(1) Earnings per share were calculated for each three month and twelve month
period on a stand-alone basis.
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
50
<PAGE> 52
DIGITAL LIGHTWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 "Item 1. Factors That May
Affect Operating Results -- We experience fluctuations in our operating results
and our sales are seasonal."
51
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
the date of this report are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dr. Bryan J. Zwan......................... 51 Chairman of the Board
Gerry Chastelet........................... 52 President and Chief Executive Officer and Director
Steven H. Grant........................... 39 Executive Vice President, Finance, Chief Financial
Officer and Secretary
George Matz............................... 49 Executive Vice President and General Manager,
Network Products
Ali Haider................................ 48 Senior Vice President, Engineering
Joe Fuchs................................. 47 Vice President, Quality Management
Dr. William F. Hamilton(1)(2)............. 58 Director
William Seifert(1)(2)..................... 48 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Following is a description of the background of each of the Company's executive
officers and directors:
Dr. Zwan founded the Company in October 1990 and has served as Chairman of
the Board since its inception. In addition, Dr. Zwan served as the Company's
Chief Executive Officer from the Company's inception until December 1998 and
served as its President from inception until March 1996 and from October 1996
until December 1998. 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. Chastelet currently serves as President and Chief Executive Officer and
a Director and joined the Company on December 31, 1998. Prior to joining the
Company, Mr. Chastelet served as President and Chief Executive Officer of Wandel
& Goltermann Technologies, Inc., a global supplier of communications test and
measurement equipment, from December 1995 to October 1998. From June 1993 to
November 1995, he served as Vice President Sales, Marketing and Service-Americas
and Asia Pacific for Network Systems Corporation, a supplier of channel-attached
communications solutions for large mainframe computers. From 1989 to 1993, he
was Vice President Sales, Marketing and Service for Infotron/Gandalf Systems
Corporation. Mr. Chastelet holds a degree in Electronics Engineering from Devry
Institute of Technology and is a graduate of the University of Toronto Executive
MBA Program.
52
<PAGE> 54
Mr. Grant currently serves as Executive Vice President, Finance, Chief
Financial Officer and Secretary and joined the Company in September 1997. Prior
to joining the Company, Mr. Grant served as Executive Vice President, Chief
Financial Officer, Treasurer and Corporate Secretary at Precision Systems Inc.
from July 1996 through September 1997. Mr. Grant also served as Executive Vice
President, Chief Financial/ Administrative Officer and Treasurer for Silver King
Communications Inc. from December 1992 through July 1996, and as Director of
Corporate Finance, Investor Relations and Assistant Treasurer at Home Shopping
Network from February 1989 through December 1992. Mr. Grant holds a Bachelor's
Degree in Accounting from the University of Alabama and holds an MBA in Finance
from the University of South Florida.
Mr. Matz currently serves as Executive Vice President and General Manager,
Network Products and joined the Company in May 1998. Mr. Matz joined the Company
as the Executive Vice President of Global Marketing and Sales and switched to
his current position in February, 1999. Prior to joining the Company, Mr. Matz
served as Vice President of Global Sales at Boston Technology, Inc., a supplier
of systems, software and services to telecommunications companies, from December
1995 to May 1998. From August 1994 to December 1995, Mr. Matz served as
Executive Director of Global Sales at Dale, Gesek, McWilliams and Sheridan,
Inc., an international supplier of telecommunications products and services.
From March 1990 to August 1994, Mr. Matz served as Director of North American
Sales at Summa Four, Inc. Mr. Matz holds a B.S. degree from Wilkes University.
Mr. Haider currently serves as Senior Vice President, Engineering and
joined the Company in September 1997. Prior to joining the Company, Mr. Haider
was a Director, Technical Support Center at AT&T/Paradyne Corporation from May
1996 to September 1997, Director, Engineering from May 1991 to May 1996, and
Engineering Manager from July 1984 through May 1991. Mr. Haider holds a Masters
Degree in Electrical Engineering from the University of Houston, a B.S. in
Electrical Engineering from the University of Engineering and Technology,
Lahore, Pakistan, and a B.S. in Physics and Math from Gordon College, University
of Punjab.
Mr. Fuchs currently serves as Vice President, Quality Management and joined
the Company in January 1997. Prior to joining the Company, Mr. Fuchs was a
System Test Lead and Project Manager at AT&T/Paradyne from May 1992 through
December 1996. Mr. Fuchs also worked at AT&T Bell Laboratories as a member of
technical staff in the Transmission Center and the Quality Assurances Center
from 1981 though 1992. Mr. Fuchs holds a B.S. in Electrical Engineering from the
Pratt Institute and a M.S. in Electrical Engineering from Columbia University.
Dr. Hamilton has served as a Director since 1997. He is the Landau
Professor of Management and Technology at the Wharton School of the University
of Pennsylvania and has been a professor at the University of Pennsylvania since
July 1967. He is also a director of the following public companies: Centocor,
Inc., Hunt Manufacturing Co., Marlton Technologies, Inc. and Neose Technologies,
Inc.
Mr. Seifert has served as a Director since 1997. He is currently an
entrepreneur/engineer. Prior to this he served as Chief Executive Officer of
Agile Networks, Inc., a wholly-owned subsidiary of Lucent Technologies, Inc.
from 1991 to 1997. Prior to founding Agile Networks, Inc. in 1991, Mr. Seifert
was also the founder of Wellfleet Communications, now Bay Networks.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten (10) percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than ten-percent stockholders are required by
regulations of the SEC to furnish the Company with copies of all Section 16(a)
forms that they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representation that
no other reports were required, the Company's officers, directors and greater
than ten percent stockholders complied with all applicable Section 16(a) filing
requirements, except that Dr. Bryan Zwan filed one late Form 4 for a transaction
and Messrs. Joe Fuchs and Ali Haider each filed one late Form 5 for a
transaction.
53
<PAGE> 55
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table shows, for the year ended December 31, 1998, the cash
and other compensation awarded to, earned by or paid to Dr. Zwan and each other
executive officer who earned in excess of $100,000 for all services in all
capacities (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
AWARDS
ANNUAL COMPENSATION RESTRICTED PAYOUTS
--------------------------------- ----------------- ------- ALL
OTHER ANNUAL STOCK OPTIONS/ LTIP OTHER
SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- -------- ------- ------------ ------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan(1)(2)......... 1998 $309,587 -- -- -- -- -- --
Chairman of the Board 1997 $305,779 -- -- -- -- -- --
and Former President 1996 $300,000 -- -- -- -- -- $215,340
and CEO
Gerry Chastelet(3).......... 1998 $ 1,060 -- -- -- -- -- --
President and Chief 1997 -- -- -- -- -- -- --
Executive Officer 1996 -- -- -- -- -- -- --
Steven H. Grant............. 1998 $193,333 $40,000 -- -- -- -- $ 1,800(4)
Executive Vice President, 1997 $ 40,615 -- -- -- -- -- $ 500(4)
Finance, Chief Financial 1996 -- -- -- -- -- -- --
Officer and Secretary
George Matz................. 1998 $148,415 $50,000 -- -- -- -- $ 8,000(5)
Executive Vice President 1997 -- -- -- -- -- -- $ --
and General Manager, 1996 -- -- -- -- -- -- $ --
Networks Products
Ali Haider.................. 1998 $149,443 $22,275 -- -- -- -- $ 1,963(4)
Senior Vice President, 1997 $ 34,788 $25,000 -- -- -- -- --
Engineering 1998 -- -- -- -- -- -- $ --
Joe Fuchs................... 1998 $117,878 -- -- -- -- -- --
Vice President, Quality 1997 $ 86,018 $ 1,000 -- -- -- -- --
Management 1996 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Dr. Zwan served as Chief Executive Officer until his resignation from that
position on December 31, 1998.
(2) Amounts include the payment of $9,587 and $5,779 of earned and unused
vacation from 1997 and 1996, which were paid in 1998 and 1997, respectively,
and 1995 deferred compensation of $215,340 which was paid in 1996.
(3) Mr. Chastelet commenced employment on December 31, 1998.
(4) Reflects 401(k) matching contributions.
(5) Reflects Automobile Allowance.
1996 STOCK 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,
directors and consultants of the Company and to promote the success of the
Company's business. A reserve of 5,000,000 shares of Common Stock has been
established for issuance under the Option Plan. The Option Plan is administered
by the Board who may delegate the administration of the plan to a committee of
the Board. The Board 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
54
<PAGE> 56
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 or, when appointed,
such committee, has the authority to determine the fair market value of the
stock. The 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 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.
Section 162(m) of the IRC limits the Company's deduction in any one fiscal
year for federal income tax purposes to $1 million per person with respect to
the Company's Chief Executive Officer and its four (4) other highest paid
executive officers who are employed on the last day of the fiscal year unless
the compensation was not otherwise subject to the deduction limit. Certain
performance-based compensation is not included in this $1 million limitation.
Stock options may qualify for exclusion from this limitation if the plan under
which they are granted meets certain conditions. At present, the Option Plan
does not satisfy these conditions. Accordingly, the Company will not be able to
claim a tax deduction for certain exercises of NSOs or disqualifying
dispositions of ISOs by the CEO (should it grant any in the future) and its four
(4) other highest paid executive officers to the extent that the income from
such exercises or dispositions, combined with such executive's other taxable
compensation for the year, exceeds $1 million.
As of December 31, 1998, the Company had outstanding options under the
Option Plan exercisable into an aggregate of 2,690,146 shares of Common Stock.
55
<PAGE> 57
The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during Fiscal 98. All such options were
awarded under the Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
SHARES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(1)
OPTIONS FISCAL PRICE EXPIRATION -------------------------
GRANTED YEAR ($/SH) DATE 5% 10%
---------- ------------ -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan................. -- -- -- -- -- --
Gerry Chastelet............... 600,000 25.40 2.3130 12/31/04 471,583 1,070,241
Steven H. Grant............... 200,000 8.47 4.6875 03/26/04 704,117 1,232,662
George Matz................... 300,000 12.70 4.4375 05/19/04 477,879 1,060,357
Ali Haider.................... 48,000 2.03 4.0235 12/19/04 129,244 233,089
Joe Fuchs..................... 30,000 1.27 3.9793 12/19/04 79,122 143,032
</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 SEC and do not reflect the Company's
estimate of future price growth.
The following table sets forth certain information regarding options to
purchase shares of Common Stock held as of December 31, 1998 by each of the
Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FY-END(#) FY-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan............... -- $ -- -- -- $ -- $ --
Gerry Chastelet............. -- -- -- 600,000 -- --
Steven H. Grant............. -- -- 50,000 150,000 -- --
George Matz................. -- -- 75,000 225,000 -- --
Ali Haider.................. -- -- -- 48,000 -- --
Joe Fuchs................... -- -- 4,999 25,001 -- --
</TABLE>
- ---------------
(1) Values shown in these columns reflect the difference between the closing
price of $2.313 on December 31, 1998 and the exercise price of the options
and does not include the federal and state taxes due upon exercise.
STOCK PURCHASE PLAN
On August 25, 1997, the Board approved the Stock Purchase Plan whereby
300,000 shares of Common Stock were reserved for issuance and purchase by
employees of the Company to assist them in acquiring a stock ownership interest
in the Company and to encourage them to remain employees of the Company. The
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code and permits eligible employees to purchase shares of Common Stock
at a discount through payroll deductions during specified six-month offering
periods. No employee may purchase more than $25,000 worth of stock in any
calendar year or 1,500 shares of Common Stock in any one offering period. The
Stock Purchase Plan is administered by an Administrative Committee appointed by
the Board and provides generally that the purchase price must not be less than
85% of the fair market value of the Common Stock on the first or last day of the
offering period, whichever is lower. As of March 31, 1998, 123,153 shares have
been purchased under the Stock Purchase Plan.
56
<PAGE> 58
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
The Company entered into a letter agreement dated as of December 31, 1998
(the "Chastelet Agreement"), with Gerry Chastelet, the Company's Chief Executive
Officer and President. The Chastelet Agreement provides for: (1) employment at
will; (2) an annual salary of $275,000; (3) a $150,000 signing bonus payable
over two years; and (4) a performance bonus of up to 50% of his base salary to
be paid based on 80% quantitative and 20% qualitative criteria to be established
by the Company's board of directors. In addition, the Company granted to Mr.
Chastelet stock options to purchase 600,000 shares of Common Stock at an
exercise price of $2.313 per share, of which 100,000 stock options vest after
each six months of employment. In the event of a "change in control" Mr.
Chastelet's unvested options will accelerate.
The Company entered into a letter agreement dated as of April 13, 1998 and
an addendum to the letter agreement dated February 9, 1999 (the "Matz
Agreements"), with George J. Matz, the Company's Executive Vice President,
Global Marketing and Sales. The Matz Agreements provide for: (1) employment at
will; (2) an annual salary of $225,000; (3) a $150,000 sign-on bonus payable
over three years; and (4) a performance bonus of 20% for the first year. In
addition, the Company granted to Mr. Matz stock options to purchase 300,000
shares of Common Stock at an exercise price of $4.4375 per share, of which
75,000 stock options vest on December 31, 1999, and 75,000 vest on each of the
second and third of his employment anniversary dates. In the event of a "change
in control" Mr. Matz's unvested options will accelerate.
The Company entered into an employment agreement effective as of February
27, 1998 (the "Grant Agreement"), with Steven H. Grant, the Company's Executive
Vice President, Finance, Chief Financial Officer and Secretary. The Grant
Agreement provides for: (1) an employment term of three years which
automatically renews for an additional two years unless either Mr. Grant or the
Company provides reasonable notice of non-renewal prior to expiration; (2) an
annual salary of $200,000; and (3) a $40,000 bonus (which is primarily an
acceleration of a deferred sign-on bonus) to be paid upon completion of the
Company's filings with the SEC for the year ended December 31, 1997. The Grant
Agreement also provides that the Company will provide to Mr. Grant on an annual
basis sufficient funds to purchase a term life insurance policy payable to his
heirs and a disability insurance policy to provide comparable compensation,
including benefits over the life of the agreement. In addition, the Company
granted to Mr. Grant stock options to purchase 200,000 shares of Common Stock at
an exercise price of $4.6875 per share, of which 50,000 stock options vest on
the date of grant and 50,000 stock options vest on each of the three
anniversaries following the date of grant. As a result of this new option grant,
the previously issued grant for 75,000 shares was canceled. In the event that
Mr. Grant's employment with the Company terminates, all stock options that have
not yet vested will continue to vest except in the event of a "change in
control" whereby the unvested options will accelerate. In the event of his
termination without "cause," including due to a "change in control" or a "change
in duties" (as such terms are defined in the Grant Agreement), Mr. Grant will be
entitled to severance compensation, including all benefits, for a period of 18
to 24 months. The Company is not obligated to pay compensation and benefits
under the Grant Agreement if Mr. Grant's employment is terminated for "cause."
The Company entered into a letter agreement dated as of September 8, 1997
as modified by letters dated July 27, 1998 and August 4, 1998 with Ali Haider
(the "Haider Agreements"), the Company's Senior Vice President, Engineering. The
Haider Agreements provide for: (1) an annual salary of $170,000; and (2) a
performance bonus of $22,275 for positive first and second quarter 1998
performance. In addition, the Company agreed to grant to Mr. Haider certain
stock options. In the event of the termination of Mr. Haider's employment for
any reason (other than a criminal act), Mr. Haider is entitled to severance pay
in the amount of six months base salary at the greater of Mr. Haider's base
salary as of the date of any termination of employment or as of July 27, 1998.
SECTION 401(K) PLAN
In 1997, the Company adopted a 401(k) Salary Savings Plan (the "401(k)
Plan") covering the Company's full-time employees located in the United States.
The 401(k) Plan is intended to qualify under
57
<PAGE> 59
Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k)
Plan by employees or by the Company, and the investment earnings thereon, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1998)
and to have the amount of such reduction contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching contributions to
the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan.
Currently, the Company matches the first 6% of such voluntary contributions at
50% of the amount contributed by the employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1998, the Compensation Committee of the Board consisted of Messrs.
Marshall and Seifert. No executive officer of the Company served on the
compensation committee of another entity or on any other committee of the board
of directors of another entity performing similar functions during Fiscal 98.
Additionally, no member of the Compensation Committee is currently or was
formally an officer or employee of the Company. Effective December 8, 1997, Mr.
Seifert began serving as a consultant to the Company. In 1998, Mr. Seifert
received $12,750 for services performed as a consultant to the Company.
COMPENSATION OF DIRECTORS
Directors of the Company who are not officers or employees of the Company
receive an annual fee of $10,000. Directors are also reimbursed for travel and
other expenses relating to attendance at meetings of the Board or committees. In
addition, in connection with their services on a special investigative committee
formed by the Board to investigate the class action litigation and the related
underlying restatement issues, Messrs. Hamilton and Seifert received $4,750 and
$6,250 respectively. Effective December 8, 1997, Mr. Seifert began serving as a
consultant to the Company. In 1998, Mr. Seifert received $12,750 for services
performed as a consultant to the Company. Under the Option Plan, non-employee
directors are also eligible to receive stock options in consideration for their
services. In fiscal 1998, none of the non-employee directors were granted
options.
58
<PAGE> 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of April 1, 1999 by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) all
of the executive officers including executive officers named in the Summary
Compensation Table (the "Named Executive Officers"), and (iv) all directors and
executive officers of the Company as a group. To the knowledge of the Company,
all persons listed below have sole voting and investing power with respect to
their shares of Common Stock, except to the extent authority is shared by
spouses under applicable law, and such persons may be contacted at 15550
Lightwave Drive, Clearwater, Florida 33760.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
--------------------
NAME NUMBER PERCENT
- ---- ---------- -------
<S> <C> <C>
Bryan J. Zwan(2)............................................ 20,000,000 74.56%
Hugh Brian Haney(3)......................................... 2,000,000 7.45
Gerry Chastelet............................................. -- *
Steven H. Grant(4).......................................... 107,430 *
George Matz(5).............................................. 75,000 *
Ali Haider(6)............................................... 14,304 *
Joe Fuchs(7)................................................ 21,165 *
William F. Hamilton(8)...................................... 33,332 *
William M. Seifert(8)....................................... 33,332 *
All executive officers and directors as a group (9
persons)(9)............................................... 20,284,563 75.62
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") 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 April 1,
1999 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 2,000,000 shares for which an option has been granted to Hugh Brian
Haney, pursuant to a litigation settlement and 15,000,000 shares held by
Bryan J. Zwan through his wholly owned Nevada corporation, ZG Nevada, Inc.
(3) Represents 2,000,000 shares for which an option has been granted by Bryan J.
Zwan, pursuant to a litigation settlement. Mr. Haney's address is c/o Law
Office of Eric L. Brown Co., L.P.A., Suite 550, 172 East State Street,
Clearwater, Florida 33755.
(4) Consists of 7,430 shares of Common Stock and 100,000 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.
(5) Consists of 75,000 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 1, 1999.
(6) Consists of 3,304 shares of Common Stock and 11,000 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.
(7) Consists of 9,500 shares of Common Stock and 11,665 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.
(8) Consists of 33,332 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 1, 1999.
(9) Consists of 20,020,234 shares of Common Stock and 264,329 shares issuable
upon exercise of options that are currently exercisable or exercisable
within 60 days of April 1, 1999.
59
<PAGE> 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 15, 1998, the Company loaned $100,000 to Dr. Zwan, the
Company's Chairman of the Board. The loan has a simple interest rate of 9% per
annum, is evidenced by an unsecured promissory note and is due December 14,
1999. As of March 15, 1999, $100,000 was the balance outstanding on such loan
plus accrued and unpaid interest thereon. In accordance with the Company's
policy on related party transactions, the loan was approved by the independent
members of the Audit Committee of the Board of Directors.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a)(1)Index to Consolidated Financial Statements.
Index to consolidated financial statements appears on 32.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of the period covered by this Report.
(c) Exhibits.
<TABLE>
<C> <C> <S>
3.01(1) -- Certificate of Incorporation of the Company
3.02(1) -- Amendment to Certificate of Incorporation of the Company
dated January 8, 1997
3.03(1) -- Amended and Restated By-laws of the Company
4.01(1) -- Specimen Certificate for the Common Stock
10.01(1) -- Executive Employment Agreement dated September 30, 1996,
between the Company and Seth P. Joseph
10.02(1) -- Lease Agreement dated October 7, 1994, between the Company
and Atrium at Clearwater, Limited
10.03(1) -- First Lease Agreement Amendment dated February 16, 1996,
between the Company and Atrium at Clearwater, Limited
10.04(1) -- Form of Indemnification Agreement between the Company and
officers and directors of the Company
10.05(1) -- Digital Lightwave, Inc. 1996 Stock Option Plan
10.06(3) -- Digital Lightwave, Inc. Employee Stock Purchase Plan
10.07(2) -- Second Lease Amendment, dated September 10, 1997, between
the Company and Atrium At Clearwater, Limited
10.08(2) -- Lease Agreement, dated June 30, 1997, between the Company
and Pinellas Business Center, Inc.
10.09(2) -- Lease Agreement, dated September 26, 1997, between the
Company and Monmouth/Atlantic Realty Associates
10.10(3) -- L.P. Lease Agreement, dated January 9, 1998, between the
Company and Orix Hogan-Burt Pinellas Venture.
10.11(3) -- First Lease Amendment, dated February 18, 1998, between the
Company and Orix Hogan-Burt Pinellas Venture.
10.12(3) -- First Lease Amendment, dated September 25, 1997, between the
Company and Monmouth/ Atlantic Realty Associates L.P.
10.13(3) -- Second Lease Amendment, dated February 23, 1998, between the
Company and Monmouth/ Atlantic Realty Associates L.P.
10.14(3) -- Executive Employment Agreement, dated February 27, 1998,
between the Company and Steven H. Grant.
10.15 -- Accounts Receivable Agreement dated December 28, 1998
between the Company and Bankers Capital.
</TABLE>
60
<PAGE> 62
<TABLE>
<C> <C> <S>
10.16 -- Stock Option Agreement dated November 13, 1998 among the
Company, Dr. Brian J. Zwan and Hugh Brian Haney.
10.17 -- Mutual General Release dated November 13, 1998, by and among
Hugh Brian Haney, Great American Fun Corp., Great American
Fun (HK) Ltd., Dr. Bryan J. Zwan, the Company and Logical
Magic, Inc.
10.18 -- Settlement Agreement dated November 13, 1998 by and among
Hugh Brian Haney, Dr. Bryan J. Zwan and the Company.
10.19 -- Letter Agreement dated as of December 31, 1998 between the
Company and Gerry Chastelet.
10.20 -- Letter Agreement dated April 13, 1998 and addendum thereto
dated February 9, 1999 between the Company and George J.
Matz.
10.21 -- Form of Stock Purchase Agreement, dated March 31, 1999,
between the Company and certain Purchasers, with exhibits
thereto.
10.22 -- Letter of Commitment between the Company and Emergent Asset
Based Lending, L.L.C. d/b/a Emergent Business Capital, dated
March 31, 1999.
10.23 -- Letter Agreement dated as of September 8, 1997 between the
Company and Ali Haider as amended and supplemented by the
Letter Agreements dated July 27, 1998 and August 4, 1998.
21.01 -- Subsidiaries of the Registrant
23.01 -- Consent of PricewaterhouseCoopers LLP
24.01 -- Power of Attorney (included on the signature page to this
Report)
27.01 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Registration Statement on Form S-1, File
No. 333-09457, declared effective by the Securities and Exchange Commission
on February 5, 1997.
(2) Incorporated by reference to the exhibit filed in connection with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997.
(3) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
61
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGITAL LIGHTWAVE, INC.
By: /s/ GERRY CHASTELET
------------------------------------
President and Chief Executive
Officer
Date: April 5, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gerry Chastelet and Steven H. Grant, jointly and
severally, as his or her attorney-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ BRYAN J. ZWAN Chairman of the Board April 5, 1999
- ---------------------------------------------------
Bryan J. Zwan
/s/ GERRY CHASTELET President, Chief Executive Officer April 5, 1999
- --------------------------------------------------- and Director
Gerry Chastelet
/s/ STEVEN H. GRANT Executive Vice President, Finance April 5, 1999
- --------------------------------------------------- Chief Financial Officer and
Steven H. Grant Secretary
/s/ WILLIAM F. HAMILTON Director April 5, 1999
- ---------------------------------------------------
Dr. William F. Hamilton
/s/ WILLIAM SEIFERT Director April 5, 1999
- ---------------------------------------------------
William Seifert
</TABLE>
62
<PAGE> 1
EXHIBIT 10.15
ACCOUNTS RECEIVABLE AGREEMENT
THIS ACCOUNTS RECEIVABLE AGREEMENT ("Agreement") made between Digital
Lightwave, Inc. a corporation, having its principal place of business at 15550
Lightwave Drive, City of Clearwater, County of Pinellas, State of Florida,
33760 organized under the laws of the State of Delaware and any division, trade
style, successor or successors in interest, hereinafter referred to as SELLER,
and Bankers Capital a division of EAB Leasing Corp. having its principal
place of business at 4201 Lake Cook Road, Northbrook, County of Cook, State
of Illinois, hereinafter referred to as PURCHASER.
1. PURCHASE OF ACCOUNTS. SELLER for and in consideration of the sums set
forth in the annexed Schedule "A" (such Schedule "A" as the same may be
supplemented or added to from time to time being hereinafter called Schedule
"A"), and in accordance with the terms set forth in Schedule "B", and other
good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, does hereby sell, assign and transfer to the PURCHASER,
its successors and assigns, all of SELLER'S right, title and interest in and
to SELLER'S accounts receivables set forth in Schedule "A" which is made a part
hereof and all monies due or which may become due upon such accounts
receivables. SELLER authorizes PURCHASER to insert in Schedule "A" required
accounts receivables information whenever accounts receivables are subsequently
purchased. "Accounts" shall be deemed to include, without limitation, all
references herein to account(s), account(s) receivable(s) and receivable(s).
2. POWER OF ATTORNEY. SELLER does hereby irrevocably appoint the PURCHASER, its
successors and assigns, its true and lawful attorney, for SELLER, and in
SELLER'S name and stead, but for PURCHASER'S benefit, (a) to sell, assign,
transfer, set over, pledge, compromise, or discharge the whole, or any part, of
such accounts receivables; (b) to do all acts and things necessary or proper in
furtherance of any such purposes; (c) to ask, collect, receive and sue, in its
own name, for the monies due or which may become due, upon such accounts
receivables; and (d) to substitute one person, or more, with like powers,
hereby ratifying and confirming all that the PURCHASER, or its substitute or
substitutes, shall lawfully do by virtue of this sale, assignment and transfer.
SELLER authorizes and directs PURCHASER to make, at SELLER'S expense, without
the need for SELLER'S signature thereon, whatever financing statements or
security agreement filings PURCHASER deems necessary in order to protect its
security interest.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS. To induce PURCHASER to purchase
the accounts receivables and to render the services available to SELLER, and
with full knowledge that the truth and accuracy of the following are being
relied upon by the PURCHASER in the purchase and remittance for the accounts
receivables acceptable to PURCHASER, the SELLER represents, warrants, covenants
and agrees that:
(a) SELLER, if a corporation, is presently in good standing in its state of
incorporation;
(b) SELLER is the sole and absolute owner of each account receivable set forth
in Schedule "A" and has full legal right to make said sale, assignment and
transfer thereof;
(c) The correct amount of each account receivable is as set forth in Schedule
"A" and is not in dispute;
(d) The payment of each account receivable is not contingent upon the
fulfillment of any obligations or contract, past or future, and any and all
obligations required of the SELLER have been fulfilled as of the date of
this Agreement;
(e) Each account receivable set forth in Schedule "A" is based on an actual sale
and delivery of goods and/or services actually rendered by SELLER, is
presently due and owing to SELLER, is not past due or in default, has not
been previously sold, assigned, transferred, or pledged, and is free of any
encumbrance or lien;
(f) There are no defenses, offsets, or counterclaims against any of the accounts
receivables, and no agreement has been made under which SELLER'S customer
(hereinafter referred to as "Account Debtor") may claim any deduction or
discount, except as otherwise stated in any of the accounts receivables set
forth in Schedule "A";
(g) Each account receivable set forth in Schedule "A" shall be the property of
the PURCHASER and shall be collected by PURCHASER, but if for any reason it
should be paid to SELLER, SELLER shall promptly notify PURCHASER of such
payment, shall hold any checks, drafts, or monies so received in trust for
the benefit of PURCHASER, and shall promptly endorse, transfer and deliver
the same to PURCHASER in the exact form as received by SELLER;
(h) PURCHASER shall have he right of endorsement and also the right to require
endorsement by SELLER on all payments received in connection with each
account receivable set forth in Schedule "A";
(i) SELLER, and to SELLER'S best knowledge, warrants that each Account Debtor
set forth in Schedule "A" is not insolvent as that term is defined pursuant
to the Federal Bankruptcy Act and the Uniform Commercial Code;
(j) Each Account Debtor named in Schedule "A" will not object to the payment
for, or the quality, or the quantity of, the subject matter of the account
receivable and is liable for the amount referred to above in Paragraph 3(c)
subject to the provisions in Paragraph 4;
(k) Each Account Debtor set forth in Schedule "A" shall be promptly notified by
SELLER after acceptance by PURCHASER that the account receivable has been
transferred to and is payable to PURCHASER;
(l) SELLER'S place of business and the place where the records concerning all
accounts receivables herein referred to are kept is the one set forth at the
beginning of this Agreement. SELLER will promptly advise PURCHASER in
writing if such place of business or record keeping is changed or a new
place of business or record keeping is added;
(m) All accounts receivables forwarded to PURCHASER and deemed acceptable to
PURCHASER after the date hereof, and thereby forming part of Schedule "A",
shall comply with each and every one of the foregoing representations,
warranties, covenants and agreements referred to above in this Paragraph 3
as supplemented pursuant to Paragraph
- --------------------------- ---------------------------
SELLER'S PURCHASER'S
Initials Initials
1 of 2
<PAGE> 2
1 hereof.
4. ADJUSTMENTS. In the event of a breach and/or dispute of any of the
representations, warranties, covenants and agreements contained in this
Agreement, including, but not limited to, a dispute between the SELLER and any
Account Debtor set forth in Schedule "A", SELLER shall promptly advise PURCHASER
and shall, subject to the PURCHASER'S prior approval, adjust such disputes and
advise of any such adjustment, and PURCHASER shall have the right at any time to
chargeback to SELLER'S account the amount of any allowance, return of an account
receivable, full payment of which is delayed or refused by an asserted
counterclaim, defense, or offset by the Account Debtor, plus any expenses
incurred by PURCHASER, together with interest from the date of purchase of the
account in dispute. Unless reassigned to SELLER, PURCHASER shall remain the
absolute owner of such account receivable and any rejected, returned, or
recovered personal property, and shall have the right to take possession thereof
at anytime, but if such possession is not taken, SELLER is to resell it for
PURCHASER'S account with the proceeds made payable to PURCHASER.
- --------------------- -------------------------
SELLER'S PURCHASER'S
Initials Initials
1 of 2
<PAGE> 3
5. SECURITY INTEREST. SELLER hereby grants to PURCHASER a present security
interest in all presently owned or hereafter acquired (a) accounts, (b) accounts
receivables, (c) contract rights, (d) equipment, (e) chattel paper, (f) general
intangibles, (g) instruments, (h) inventory, and all proceeds of all of the
foregoing. The security interest and assignment include SELLER's rights to any
returned personal property. As such owners and in addition to PURCHASER'S rights
under the Uniform Commercial Code, PURCHASER shall have all the rights of an
unpaid SELLER, including the rights of replevin, between the parties hereto, as
returned personal property. This security interest is granted to secure the
performance of the foregoing representations, warranties, covenants and
agreements of SELLER contained in this Agreement with respect to all accounts
set forth in the annexed Schedule "A" as the same may be supplemented from time
to time as provided by Paragraph 1 hereof as well as all other obligations of
SELLER under this Agreement. With respect to an account set forth in Schedule
"A" as supplemented pursuant to Paragraph 1 hereof, upon a breach of any of the
Paragraph 3 representations, warranties, agreements and covenants, and to the
extent such accounts remain unpaid, PURCHASER may exercise, at its sole option,
any and all rights with respect to the collateral, of a secured creditor under
the provisions of Article 9 of the Uniform Commercial Code, including the right
to realize upon said collateral as PURCHASER may determine. SELLER will
indemnify, hold harmless and protect PURCHASER against liability, loss or
expense caused by or arising out of the rejection of personal property or
services by any Account Debtor named in Schedule "A" or alleged counterclaims,
defenses or offsets of every kind. SELLER agrees to sign any such financing
statement(s) in a form satisfactory to PURCHASER, which PURCHASER may at any
time desire to file in order to protect PURCHASER's security interest. SELLER
further agrees to pay to PURCHASER any and all costs, plus reasonable attorneys'
fees in enforcing the terms of this Agreement in the event of a breach, as well
as fees and costs incurred in connection with a bankruptcy proceeding including,
but not limited to, any objections or disputes, or if it is necessary for
PURCHASER to retain the services of a lawyer to protect its rights and
interests.
6. PAYMENT. Upon acceptance of this Agreement by PURCHASER, PURCHASER further
agrees upon collection in full of each account set forth in Schedule "A" to
promptly pay over the sum corresponding to each invoice set forth in Schedule
"A" less any amount previously paid by PURCHASER to SELLER for said account,
less (a) any deduction or discount provided for in Paragraph 3 (f); and (b) any
chargebacks provided for by Paragraph 4; and (c) any indemnification provided
for by Paragraph 5 and less (d) the amount as set forth in accordance with
Paragraphs 3, 7, 8, 9, 10, 11, 12, and 13 in the annexed Schedule "B". SELLER
shall be estopped to deny the accuracy of any and all written statements of
account sent SELLER by PURCHASER unless SELLER notifies PURCHASER of any
discrepancies within thirty (30) days of receipt of said statements of account
in writing. Said notices must set forth any differences between said statement
and SELLER'S records.
7. ACCOUNT COLLECTION SERVICES. Since certain Account Debtors require or
prefer that all of SELLER'S accounts receivables be paid to the same address
and/or party. PURCHASER and SELLER agree that PURCHASER shall collect all such
accounts receivables whether owned by SELLER or PURCHASER, and PURCHASER agrees
to remit the amount of the accounts receivables it receives and does not own,
subject to PURCHASER'S rights as a secured party, to SELLER after deducting a
handling fee of N/A% of such amounts received. It is understood and agreed by
SELLER that this Paragraph does not impose any affirmative duty on PURCHASER to
do any act other than to turn over such amounts.
8. SELLER agrees, upon request by PURCHASER, to furnish PURCHASER with all
financial information of SELLER, including, but not limited to, Tax Return
Forms 940 and 941, and evidence of payment of the taxes, as well as any other
information and documents as PURCHASER may reasonably request from time to time.
9. This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of Illinois.
The parties consent to the exclusive personal jurisdiction and venue of any
federal or state court located in Cook County, Illinois and waive trial by jury.
10. NOTICES. All notices, declarations, requests, consents and other
communications given hereunder or in connection herewith, or with the
obligations secured hereby, shall be in writing and shall be deemed to have
been given when deposited or delivered in the United States mail, registered or
certified, postage prepaid, addressed to the SELLER or PURCHASER at its
address stated above, or at such other address as any such party may
hereinafter specify by written notice to the other.
11. SEVERABILITY. Any provision(s) of this Agreement which is prohibited or
unenforceable in any jurisdiction shall be, as to such jurisdiction,
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision(s) in any other jurisdiction.
12. SUCCESSORS AND ASSIGNS. SELLER shall not alienate, assign, pledge,
hypothecate or otherwise encumber, sell or transfer any of its right, title or
interest in, to or under any of the accounts receivables, as defined in
Paragraph 1 and further described in Schedule "A", as amended from time to time
and the Collateral described in Paragraph 5, without the prior written consent
of PURCHASER, which consent may be denied or granted in PURCHASER'S sole
discretion, and subject to such terms and conditions as the PURCHASER may then
specify. PURCHASER may, at its option, assign this Agreement and all or part of
the monies due it to a third party. SELLER, upon receiving notice of any such
assignment, agrees to abide thereby and make payments or direct SELLER'S
customers and Account Debtors to make payment as may therein be directed. In
the event of any such full or partial assignment by PURCHASER, SELLER shall
have no recourse against PURCHASER'S Assignee. SELLER agrees that any claim
which may arise by SELLER shall be made against PURCHASER only and waives any
rights it may have against PURCHASER'S Assignee.
13. Schedules "A", "B", "C", "D" and "E" are attached hereto and made a part
hereof.
IN WITNESS WHEREOF, SELLER and PURCHASER have as of the _____day of
December, 1998 caused these presents to be duly signed by their respective
authorized representatives, attested to, and do hereby appoint their
respective authorized representatives their true and lawful attorneys-in-fact
to acknowledge and deliver these presents.
DIGITAL LIGHTWAVE, INC.
A DELAWARE CORPORATION BY:
-------------------------------
<PAGE> 4
BANKERS CAPITAL a division of
EAB Leasing Corp.
NAME:BRYAN J. ZWAN A Pennsylvania Corporation
-------------
TITLE:Chairman of the Board, President BY:________________________
--------------------------------
and Chief Executive Officer
- ---------------------------
ATTEST: NAME:______________________
(Assistant) Secretary TITLE:_____________________
ATTEST:
(Assistant) Secretary
<PAGE> 5
SCHEDULE "B"
1. This Agreement will be based on a six (6) month renewable contract for
$2,000,000.00 per month effective as of the date hereof, and unless
PURCHASER/SELLER receives written notice from SELLER/PURCHASER at least thirty
(30) days prior to the end of the contract period, this Agreement will
automatically and continuously renew for a like period under the same terms and
conditions as provided herein. The rights and obligations of both SELLER and
PURCHASER with respect to all accounts purchased hereunder shall survive any
termination or non-renewal of this Agreement.
2. The amounts advanced periodically by PURCHASER to SELLER will be based on
the value of the accounts receivables from SELLER'S customers and Account
Debtors or contracts approved by PURCHASER and purchased periodically from
SELLER and will not exceed 80% of such receivables, or a total advance
outstanding of $2,900,000.00. PURCHASER reserves the right to reject any
accounts receivables at any time for credit and/or account debtor concentration
reasons.
3. PURCHASER shall be entitled to collect an interest rate equivalent amount
on funds advanced to SELLER based upon the prime rate of interest as published
from time to time in the Wall Street Journal, plus 1.5%, on a 360-day basis.
4. This Agreement is subject to receipt of the following documents:
(a) Any other document which PURCHASER may from time to time reasonably
request.
5. This Agreement may not be assigned by SELLER without the PURCHASER'S
express written consent, which consent may be withheld at PURCHASER'S sole
discretion.
6. This Agreement may not be changed orally; all changes must be in writing
and signed by both parties.
7. SELLER agrees to pay a wire transfer charge of $20.00 per wire.
8. The following Fee Schedule will apply to the face value of accounts
receivables purchased hereunder.
<TABLE>
<CAPTION>
If Collected Within Net Fee due PURCHASER
------------------- ---------------------
<S> <C>
1 to 45 days 1.25%
46 to 60 days 1.75%
61 to 75 days 2.25%
76 to 90 days 2.75%
</TABLE>
9. All accounts receivables which are unpaid after ninety (90) days from the
date of purchase are subject to chargeback at PURCHASER'S sole discretion.
10. For any account receivable which is unpaid and ninety (90) days past the
date of purchase, the net fee shall increase by 1.0% for each ten (10) days or
fraction thereof it remains unpaid.
11. All invoices under $N/A will have an additional fee of N/A%
12. In the event the amount advanced to SELLER by PURCHASER exceeds the
percentage as stated in Paragraph 2 above, for whatever reason, PURCHASER shall
have the right to:
(a) Chargeback the amount exceeding said percentage to SELLER; or
(b) Deduct the amount exceeding said percentage from any funds received
by PURCHASER; or
(c) Deduct the amount exceeding said percentage from any future advance;
or
(d) Avail itself of any other remedy provided for in this Agreement or as
provided by law.
13. Notwithstanding anything to the contrary contained herein SELLER
acknowledges and agrees that it will pay to PURCHASER a guaranteed minimum
monthly fee in the amount of $10,000.00 for and during each and every month of
the contract period and monthly thereafter until SELLER's obligations to
PURCHASER with respect to all accounts receivables purchased hereunder have
been fully satisfied.
- ------------------------------- -------------------------------
SELLER'S PURCHASER'S
Initials Initials
1 of 2
<PAGE> 6
14. Notwithstanding anything to the contrary contained herein each Schedule A
may be settled in bulk by applying all sums received by PURCHASER for a specific
Schedule A to any amount outstanding on said specific Schedule A, after which
any remaining sum shall be paid over to SELLER as provided for herein.
Furthermore, in the event SELLER discontinues selling to PURCHASER accounts
receivables hereunder or terminates this Agreement as provided for herein,
PURCHASER has the right to settle in bulk all Schedule A's collectively and
simultaneously in the aforementioned manner.
- ---------------- ---------------------
SELLER'S PURCHASER'S
Initials Initials
1 of 2
<PAGE> 7
IN WITNESS WHEREOF, SELLER and PURCHASER have as of ___ day of ____, 19__
caused these presents to be duly signed by their respective authorized
representatives, attested to, and do hereby appoint their respective authorized
representatives their true and lawful attorneys-in-fact to acknowledge and
deliver these presents.
Digital Lightwave, Inc. BANKERS CAPITAL a division of
EAB Leasing Corp.
A Delaware Corporation A Pennsylvania Corporation
BY: BY:
________________________________________ _________________________
NAME: Bryan J. Zwan NAME:
_____________________________________ _______________________
TITLE: Chairman of the Board, President and TITLE:
_____________________________________ _______________________
Chief Executive Officer
_____________________________________
ATTEST: ATTEST:
(Assistant) Secretary _____________________ (Assistant) Secretary _______
2 of 2
<PAGE> 1
EXHIBIT 10.16
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT (the "Agreement") is made as of November
13, 1998, by and among Mr. Hugh Brian Haney ("Holder"), Dr. Bryan J. Zwan ("Dr.
Zwan") and Digital Lightwave, Inc. (the "Company").
WHEREAS Holder and Dr. Zwan have entered into a Settlement Agreement
with respect to certain litigations that Holder has brought against Dr. Zwan and
the Company and others, and a Mutual General Release; and
WHEREAS Dr. Zwan has agreed as part of the Settlement Agreement to
grant Holder the option set forth in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements set
forth in this Agreement, the Settlement Agreement and the Mutual General
Release, Holder, Dr. Zwan and the Company agree as follows.
1. Grant of Option. Dr. Zwan grants to Holder as of the Grant Date (as
defined in the second paragraph of this Section 1), subject to the terms and
provisions set forth hereinafter, the right and option to purchase two million
(2,000,000) shares of the common stock of the Company (the "Common Stock"),
which Common Stock has a par value of $.0001 and is the only class of common
stock outstanding as of the date of execution of this Agreement,
<PAGE> 2
2
at the purchase price of One Dollar ($1.00) per share (the option hereby granted
being hereinafter referred to as the "Option" and the shares of Common Stock
purchased upon exercise of the Option being referred to herein as the "Option
Shares"). The Option shall be a non-qualified option and shall not be an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
The Option shall not be considered granted or become exercisable unless
and until Holder delivers to Dr. Zwan and the Company a fully executed
counterpart hereof. Thereafter, the Option shall be exercisable in accordance
with Sections 2 and 3 hereof. The date on which Holder delivers a fully executed
counterpart of this Agreement to Dr. Zwan is referred to herein as the "Grant
Date".
2. Exercise of Option. Holder may exercise the Option, at any time and
from time to time, on or before October 20, 2008, in whole or in part. Except as
otherwise provided in the notice provisions of Sections 7 and 8 of this
Agreement, in the event that Holder wishes to exercise the Option in whole or in
part, Holder shall send a written notice to Dr. Zwan specifying a date not less
than thirty (30) days nor more than one hundred twenty (120) days from the date
such notice is mailed for the closing of such
<PAGE> 3
3
purchase; provided, however, that Dr. Zwan shall not be obligated to close such
purchase during any Blackout Period previously established by the Company or any
time during the months of November and December in any year.
3. Payment and Delivery of Certificate. At any closing pursuant to
this Agreement, Holder shall make payment to Dr. Zwan of the aggregate price for
the Option Shares that he is purchasing by certified or bank check payable to
Dr. Zwan or by wire transfer of immediately-available federal funds to a bank
and account designated by Dr. Zwan, and Dr. Zwan shall deliver to Holder a
duly-executed certificate representing the Option Shares that Holder has
purchased containing no restrictive legend other than as contemplated by Section
5(h) of this Agreement.
4. Representations and Warranties of Dr. Zwan and the Company.
(a) Dr. Zwan represents and warrants to Holder that as of the date
of this Agreement and again as of the date of any closing pursuant to this
Agreement:
(i) Dr. Zwan has power and authority to enter into and perform all of
his obligations under this Agreement, and this Agreement constitutes a legal,
valid and binding obligation of Dr. Zwan enforceable against him in accordance
with its terms;
(ii) The execution, delivery and performance of this Agreement by Dr.
Zwan in his individual capacity will
<PAGE> 4
4
not require the consent of any other person or constitute a violation of,
conflict with or result in a default under any (A) agreement to which Dr. Zwan
is a party or by which Dr. Zwan is bound; or (B) judgment, decree, order,
statute, rule or governmental regulation applicable to Dr. Zwan;
(iii) The Option Shares are owned beneficially and of record by Dr.
Zwan, are fully paid and non-assessable and are free and clear of all adverse
claims, liens, encumbrances and security interests (except for the transfer
restrictions set forth in this Agreement or as set forth on the legend on the
certificate representing such shares of Common Stock to which Section 5(h) of
this Agreement refers);
(iv) Upon purchase of the Option Shares, such Option Shares will be
fully-paid and non-assessable and Holder will receive good and marketable title
to the Option Shares, free of all adverse claims, liens, encumbrances and
security interests, other than such of the foregoing as may have been created by
or through Holder or as set forth on the legend on the certificate representing
the Option Shares as permitted by Section 5(h) of this Agreement.
(b) The Company represents and warrants to Holder that as of the date
of this Agreement and again as of the date of any closing pursuant to this
Agreement:
<PAGE> 5
5
(i) The Company has power and authority to enter into and perform all
of its obligations under this Agreement and this Agreement constitutes a legal,
valid and binding obligation of the Company enforceable against it in accordance
with its terms;
(ii) The execution, delivery and performance of this Agreement by the
Company will not require the consent of any other person or constitute a
violation of, conflict with or result in a default under any (A) agreement to
which the Company is a party or by which the Company is bound; or (B) judgment,
decree, order, statute, rule or governmental regulation applicable to the
Company.
5. Representations and Warranties of Holder. Holder represents and
warrants to Dr. Zwan and the Company that as of the date of this Agreement and
again as of the date of any closing pursuant to this Agreement:
(a) Holder has power and authority to enter into and perform all of
his obligations under this Agreement and this Agreement constitutes a legal,
valid and binding obligation of Holder enforceable against him in accordance
with its terms;
(b) The execution, delivery and performance of this Agreement by
Holder will not require the consent of any other person or constitute a
violation of, conflict with or result in a default under any (i) agreement to
which Holder
<PAGE> 6
6
is a party or by which Holder is bound; or (ii) judgment, decree, order,
statute, rule or governmental regulation applicable to Holder;
(c) Holder will not offer to sell or otherwise dispose of any Option
Shares in violation of the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "1933 Act") or any other applicable federal or state
securities laws;
(d) Holder understands that (i) the Option and the Option Shares have
not been, and, except as provided for in this Agreement, will not be, registered
under the 1933 Act on the ground that the grant and the sale provided for in
this Agreement are exempt under the 1933 Act and regulations issued thereunder;
(ii) the reliance of Dr. Zwan on such exemption is predicated on the
representations of Holder set forth in this Agreement; and (iii) the Option
Shares may not be sold, transferred or otherwise disposed of without
registration under the 1933 Act or an exemption therefrom;
(e) Holder has such knowledge and experience in financial and business
matters and with respect to investments in securities as to be capable of
evaluating the merits and risks of ownership of the Common Stock and he is able
to bear the risk of such investment for an indefinite period and to afford a
complete loss thereof;
<PAGE> 7
7
(f) Holder is familiar with the business of the Company and, in
formulating a decision to enter into this Agreement, Holder has relied solely
upon an independent investigation of the Company's business and upon
consultations with his legal and financial advisers with respect to this
Agreement and the nature of his investment, and in entering into this Agreement
no reliance was placed upon any representations or warranties other than those
contained herein;
(g) Upon exercise of the Option, Holder will purchase the Option Shares
for investment only and not with a view to distribution in violation of
applicable securities laws;
(h) Holder acknowledges that the certificate evidencing the Option
Shares purchased by him will bear the following legend: THE SHARES OF COMMON
STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM;
(i) Holder is aware that the Option and the Option Shares have not been
approved or disapproved by the Securities and Exchange Commission or any state
securities agency; and
<PAGE> 8
8
(j) Holder is an "accredited investor" as such term is defined under
Rule 501 of Regulation D under the 1933 Act.
6. Adjustment upon Changes in Capitalization. In the event of any
change in the number or classification of shares of outstanding Common Stock,
the kind and number of securities subject to the Option shall be adjusted in the
same manner as that for all other shareholders and the purchase price per share
shall be adjusted correspondingly. The existence of the Option granted hereunder
shall not affect in any way the right or power of the Board or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities having any priority or preference with respect to or affecting
Common Stock or the rights thereof, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding, without
prejudice to the right of Holder set forth above in this Section 6.
7. Registration Rights. (a) If the Company at any time proposes to
sell any shares of Common Stock pursuant to an offering of securities registered
under the
<PAGE> 9
9
1933 Act (other than a registration on (i) Form S-4 or S-8 under the 1933 Act or
(ii) any successor form) and such registered offering would include Common Stock
to be sold by Dr. Zwan, the Company shall give reasonable written notice thereof
(the "Public Offering Notice") to Holder. If a Public Offering Notice is given,
then, no later than ten (10) days after the receipt of the Public Offering
Notice, Holder may exercise the Option (the closing of which shall take place as
soon as practicable) and present a request (the "Request") to the Company
specifying the number of Option Shares intended to be sold or disposed of by
Holder and describing the method of disposition thereof (if the offering
described in the Public Offering Notice is to be underwritten, the Holder shall
be required to make his offering through the same underwriters and to sign the
underwriting agreement). The Company will, at its expense (excluding commissions
and a pro rata share of expenses payable to underwriters and the fees of any
counsel or other advisors engaged by Holder), use its best efforts to cause the
registration under the 1933 Act of the shares stated in Holder's Request or, if
less, the Share for Share Number of Holder's Option Shares, for disposition in
accordance with the intended method of disposition as stated in Holder's Request
(except as provided above), and to cause such registration to become effective
under the 1933 Act and such
<PAGE> 10
10
disposition to be qualified or exempt from qualification under "blue sky" laws
of such states as Holder may reasonably request. However, the Company (i) may at
any time delay, abandon or withdraw any such registration or registration
statement (in which case it shall not be required to register any of Holder's
shares otherwise required to be included in such registration) and (ii) shall
not be required to register Holder's Option Shares pursuant to this Section 7 in
connection with any proposed registration to the extent that, in the opinion of
the managing underwriter, the inclusion of such Holder's Option Shares would
adversely affect the offering. As used in this Section 7, the term "Share for
Share" shall mean the number of shares of Common Stock being offered by Dr. Zwan
that are to be registered. Notwithstanding any of the foregoing, if Holder has
Option Shares available for registration and has presented a Request, Dr. Zwan
shall not register more shares of Common Stock than the number of shares of
Common Stock for which Holder has the opportunity to register.
(b) If any registration of Common Stock shall be in connection with an
underwritten public offering, and if Holder is participating in such offering,
Holder agrees not to effect any public sale or distribution, including any sale
pursuant to Rule 144, or any successor provision, under the 1933 Act, of any
shares of Common Stock and not to effect any such public sale or distribution of
any other
<PAGE> 11
11
equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company (in each
case, other than as part of such underwritten public offering) during the seven
days prior to, and during the 180-day period (or such lesser period agreed to by
the Company, Dr. Zwan and Holder with any underwriters for such registration of
Common Stock) which begins on, the effective date of such registration statement
(except as part of such registration).
(c) Holder agrees that, upon receipt of any notice from the Company of
the happening of any event that causes the Company to supplement, amend or
withdraw the prospectus included in any registration statement relating to an
offering of Common Stock in which Holder is participating, Holder shall
discontinue disposition of Common Stock pursuant to the registration statement
covering such Common Stock until Holder's receipt of copies of a supplemented or
amended prospectus from the Company, and, if so directed by the Company, Holder
shall deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in Holder's possession, of the unsupplemented,
unamended or withdrawn prospectus.
8. Acquisition or Sale of the Company. In the event that any person or
entity (including without limitation a "group" as contemplated by Section
13(d)(3) of
<PAGE> 12
12
the Securities Exchange Act of 1934, as amended (the "1934 Act") but excluding
the Company, its affiliates, any employee benefit plan maintained by the
Company, or an underwriter temporarily holding securities pursuant to an
offering of such securities), other than Dr. Zwan, proposes to obtain beneficial
ownership (as determined pursuant to Regulation 13d-3 under the 1934 Act) of
ninety percent (90%) or more (based on voting power) of the Company's
outstanding capital stock (such transaction a "Proposed Sale"), the Company
shall give notice thereof (the "Sale Notice") to Holder describing the terms of
the proposed sale in reasonable detail, including the identity of the proposed
purchasers and the number of shares to be sold. Holder shall then have the right
to exercise the Option and the closing shall take place within ten (10) days
following the receipt of the Sale Notice. If Holder elects not to exercise the
Option, the Option shall expire and be of no further force or effect upon
consummation of the Proposed Sale identified in the Sale Notice. If Holder
exercises the Option in accordance with the provisions above, Holder shall sell
all the Option Shares held by Holder and such Option Shares shall be purchased,
simultaneously with, and conditioned upon, the closing of the Proposed Sale, at
the price (whether in cash or other consideration) per share of Common Stock and
on the other terms of the Proposed Sale.
<PAGE> 13
13
9. Miscellaneous.
(a) Non-Assignability. The rights and obligations of the Holder under
this Agreement shall not be transferable or assignable, other than by will or
the laws of descent and distribution, and the Option shall be exercisable,
during Holder's lifetime, only by him or, during periods of legal disability, by
his legal representative. The Option shall not be subject to execution,
attachment or similar process. Notwithstanding the foregoing, the Option shall
not be assigned by Holder without the written consent of Zwan, other than to HBH
Assets, Ltd., an Ohio limited liability company controlled by Holder. In the
event that Holder shall cease to own at least seventy-five percent (75%) of HBH
Assets, Ltd., the Option automatically shall revert to Holder. If Holder assigns
the Option, the Option shall remain subject to the terms and conditions of this
Agreement. This Agreement shall be binding upon and shall inure to the benefit
of the legal representatives, heirs, successors and assigns of the Holder.
(b) Amendments. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written instrument
executed by each of Holder, Dr. Zwan and the Company.
<PAGE> 14
14
(c) Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by delivery, by
facsimile or by mail (registered or certified mail, postage pre-paid, return
receipt requested) to the respective parties as follows:
If to Dr. Zwan: c/o Digital Lightwave, Inc., Attention Bryan J. Zwan,
Fifth Floor, 601 Cleveland Street, Clearwater, Florida 33755, Facsimile: (813)
467-0702;
If to Holder: H. Brian Haney, c/o Law Office of Eric L. Brown Co.,
L.P.A., Suite 550, 172 East State Street, Columbus, Ohio 43215. If to the
Company: c/o Digital Lightwave, Inc., Attention Bryan J. Zwan, Fifth Floor, 601
Cleveland Street, Clearwater, Florida 33755, Facsimile: (813) 467-0702; or to
such other address as a party may have furnished to the others in writing in
accordance with this Agreement, except that notices of change of address shall
be effective only upon receipt.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive law of the State of Ohio without giving effect
to the principles of conflict of laws of the State of Ohio.
<PAGE> 15
15
(e) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
(f) Effect of Headings. The section headings in this Agreement are for
convenience only and shall not affect the construction of the language of this
Agreement.
(g) Rights of Holder in Stock. Neither Holder, nor his successor in
interest, shall have any of the rights of a shareholder of the Company with
respect to the shares for which the Option is exercised until after any closing
pursuant to the Agreement.
(h) Contra Proferentem Inapplicable. The general rule that ambiguities
are to be construed against the drafter shall not apply to this Agreement. In
the event that any language in this Agreement is found or claimed to be
ambiguous, each party shall have the same opportunity to present evidence as to
the actual intent of the parties with respect to any such ambiguous language
without any inference or presumption being drawn against the drafter.
(i) Successors of the Company. This Agreement shall be binding upon and
shall inure to the benefit of any successor of the Company.
(j) Zwan shall, for the term of this Agreement, at all times own,
control and keep available for exercise of
<PAGE> 16
16
the option contemplated by this Agreement, at least 2,000,000 shares of Common
Stock, free and clear of all encumbrances.
IN WITNESS OF this Agreement, Holder, Dr. Zwan and, after having been
duly authorized, the Company have signed this Agreement on the lines below.
/s/Hugh Brian Haney
-----------------------------
HUGH BRIAN HANEY
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
/s/ BRYAN J. ZWAN
-----------------------------
BRYAN J. ZWAN
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
<PAGE> 17
17
DIGITAL LIGHTWAVE, Inc.
By /s/ Bryan J. Zwan
---------------------------
Its Chief Executive Officer
--------------------------
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
<PAGE> 1
EXHIBIT 10.17
MUTUAL GENERAL RELEASE
MUTUAL GENERAL RELEASE, dated as of November 13, 1998, by and among
Hugh Brian Haney ("Haney"), Great American Fun Corp. ("GAF") and Great American
Fun (HK) Ltd. ("GAF-HK"), on the one hand, and Bryan J. Zwan ("Zwan"), Digital
Lightwave, Inc. ("Digital") and Logical Magic, Inc. ("LMI") on the other.
The parties hereto have agreed as follows:
1. Haney, GAF and GAF-HK hereby release and discharge Zwan, Digital,
LMI and, as applicable, each of their past and present directors, officers,
shareholders, partners, employees, attorneys and agents, both in their
respective capacities as such and personally, and the heirs, executors,
administrators, successors and assigns of each of them, from all actions, causes
of action, suits, debts, dues, sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever, in law, admiralty, equity, arbitration or otherwise,
including, specifically and without limitation, any claim for fraud or
misrepresentation (including any claim for fraud or misrepresentation with
respect to their
<PAGE> 2
2
grant of this release), whether known or unknown, accrued or
not accrued, foreseen or unforeseen, matured or not matured, that Haney, GAF
and/or GAF-HK ever had, now have or hereafter can, shall or may have, as of the
date of this Mutual General Release; provided, however, that this Mutual General
Release does not release or discharge any rights of Haney or obligations of Zwan
and/or Digital provided for in the Settlement Agreement between them dated as of
November 13, 1998.
2. Zwan, Digital and LMI hereby release and discharge Haney, GAF,
GAF-HK and, as applicable, each of their past and present directors, officers,
shareholders, partners, employees, attorneys and agents, both in their
respective capacities as such and personally, and the heirs, executors,
administrators, successors and assigns of each of them, from all actions, causes
of action, suits, debts, dues, sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever, in law, admiralty, equity, arbitration or otherwise,
including, specifically and without limitation, any claim for fraud or
misrepresentation (including any claim for fraud or misrepresentation with
respect to their grant of this release), whether known or unknown, accrued or
<PAGE> 3
3
not accrued, foreseen or unforeseen, matured or not matured, that Zwan, Digital
and/or LMI ever had, now have or hereafter can, shall or may have, as of the
date of this Mutual General Release; provided, however, that this Mutual General
Release does not release or discharge any rights of Zwan and/or Digital or
obligations of Haney provided for in the Settlement Agreement between them dated
as of November 13, 1998.
3. Each party represents and warrants that the signatory hereto has
full authority to enter into this Mutual General Release on behalf of that party
and the authority and capacity to bind that party thereto.
4. In witness of this Mutual General Release, the parties, after having
been duly authorized, have executed this Mutual General Release as of the date
specified above.
/s/ Hugh Brian Haney
----------------------------
HUGH BRIAN HANEY
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
GREAT AMERICAN FUN CORP.
By /s/ Hugh Brian Hanley
--------------------------
Its COB
--------------------------
<PAGE> 4
4
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
GREAT AMERICAN FUN (HK) Ltd.
By /s/ Hugh Brian Hanley
---------------------------
Its COB
---------------------------
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
------------------------------
Notary Public
/s/ Bryan J. Zwan
------------------------------
BRYAN J. ZWAN
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-------------------------------
Notary Public
DIGITAL LIGHTWAVE, Inc.
By /s/ Mark R. Abel
-----------------------------
Its Chief Executive Officer
----------------------------
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-------------------------------
Notary Public
LOGICAL MAGIC, Inc.
By /s/ Bryan J. Zwan
-----------------------------
Its President
----------------------------
<PAGE> 5
5
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-----------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
<PAGE> 1
EXHIBIT 10.18
SETTLEMENT AGREEMENT
SETTLEMENT AGREEMENT made in Columbus, Ohio, dated November 13, 1998,
by and among Hugh Brian Haney ("Haney"), on the one hand, and Bryan J. Zwan
("Zwan") and Digital Lightwave, Inc. ("Digital"), on the other.
WHEREAS there is an action pending in the United States District Court
for the Southern District of Ohio, Haney v. Zwan, et al., Number C2-97-1218
("Haney I"); and
WHEREAS there is an action pending in the United States District Court
for the Southern District of Ohio, Haney v. Credit Suisse First Boston Corp., et
al., Number C2-98-555 ("Haney II");
The parties hereto have agreed as follows:
1. This SETTLEMENT AGREEMENT supersedes in all respects the handwritten
agreement between the parties dated October 20, 1998, annexed hereto as Exhibit
A, which shall have no further effect.
2. Grant of Stock Option Agreement. Immediately upon the execution of
this SETTLEMENT AGREEMENT by the parties hereto, Zwan will deliver to Haney a
fully executed Stock Option Agreement in the form annexed hereto as Exhibit B.
3. Cash Payment. Digital will pay Haney $500,000.00 for the attorneys'
fees purportedly incurred by
<PAGE> 2
2
Haney in connection with Haney I and Haney II. Such payment shall be made in two
equal installments by delivery of bank checks or other transfer of immediately
available funds on April 1, 1999, and July 1, 1999.
4. Dismissal of Haney I and Haney II with Prejudice. Immediately upon
the execution of this SETTLEMENT AGREEMENT by the parties hereto: (a) Haney and
Digital and Zwan shall cause their respective counsel to sign and exchange a
fully-executed stipulation for the dismissal of Haney I with prejudice, in the
form annexed hereto as Exhibit C; (b) Haney shall deliver to counsel for Digital
and Zwan a fully-executed stipulation for the dismissal of Haney II with
prejudice, in the form annexed hereto as Exhibit D; and (c) Haney will take all
additional necessary steps to secure the prompt dismissal of each action with
prejudice.
5. Release. Immediately upon the execution of this SETTLEMENT AGREEMENT
by the parties hereto, Haney, Great American Fun Corp. and Great American Fun
(HK) Ltd., on the one hand, and Zwan, Digital and Logical Magic, Inc., on the
other, will execute and deliver to each other a mutual general release, fully
executed in counterparts in the form annexed hereto as Exhibit E.
<PAGE> 3
3
6. This SETTLEMENT AGREEMENT shall be governed by and construed in
accordance with the laws of the State of Ohio.
7. All prior or contemporaneous agreements, contracts, promises,
representations and statements, if any, among the parties hereto and their
representatives as to the subject matter hereof are merged into this SETTLEMENT
AGREEMENT, and this SETTLEMENT AGREEMENT constitutes the entire agreement among
the parties with respect to its subject matter. This SETTLEMENT AGREEMENT may
not be modified, waived, changed, discharged or terminated, except by agreement
in writing signed by the party against whom or which such modification, waiver,
change, discharge or termination is sought to be enforced.
8. Except as specified in Paragraph 4 herein, nothing in this
SETTLEMENT AGREEMENT, whether expressed or implied, is intended to confer any
rights or remedies on any person other than the parties hereto and their
respective successors and assigns, nor is anything in this SETTLEMENT AGREEMENT
intended to relieve or discharge the obligations or liabilities of any third
parties to any party to this SETTLEMENT AGREEMENT, nor shall any provision of
this SETTLEMENT AGREEMENT give any third parties any right of subrogation or
action over or against any party to this SETTLEMENT AGREEMENT.
<PAGE> 4
4
9. The general rule that ambiguities are to be construed against the
drafter shall not apply to this SETTLEMENT AGREEMENT. In the event that any
language in this SETTLEMENT AGREEMENT is found or claimed to be ambiguous, each
party shall have the same opportunity to present evidence as to the actual
intent of the parties with respect to any such ambiguous language without any
inference or presumption being drawn against the drafter.
10. Each party represents and warrants that the signatory hereto has
full authority to enter into this SETTLEMENT AGREEMENT on behalf of that party
and the authority and capacity to bind that party thereto.
IN WITNESS HEREOF, Haney, Zwan and, after having been duly authorized,
Digital have executed this SETTLEMENT AGREEMENT as of the date specified
hereinabove.
/s/ Hugh Brian Haney
-------------------------------
HUGH BRIAN HANEY
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-------------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
<PAGE> 5
5
/s/ Bryan J. Zwan
-------------------------------
BRYAN J. ZWAN
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-------------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
DIGITAL LIGHTWAVE, INC.
By /s/ Bryan J. Zwan
----------------------------
Title: Chief Executive Officer
-------------------------
Sworn to before me and subscribed in my presence on November 13, 1998.
/s/ Mark R. Abel
-------------------------------
Notary Public
Attorney-at-Law
Lifetime Commission
<PAGE> 1
Exhibit 10.19
(DIGITAL LIGHTWAVE LETTERHEAD)
15550 Lightwave Drive
Clearwater, Florida 33760
Mr. Gerry Chastelet Telephone: 727.442.6677
P.O. Box 1430 Toll Free: 800.548.9283
Cary, North Carolina 27512 Fax: 727.442.5660
[email protected]
http://www.lightwave.com
CONFIDENTIAL
PAGE 1 OF 4
December 31, 1998
RE: Employment Terms
Dear Gerry,
This letter constitutes the employment terms for the position of President and
Chief Executive Officer of Digital Lightwave, Inc. (the "Company"). The terms
of this letter are subject to paragraphs 20, and 21 hereof.
1. Duties and responsibilities. As President and Chief Executive Officer you
will be responsible for the implementation and achievement of the basic
goals, operating plans and policies for the Corporation as developed in
conjunction with the Chairman of the Board (the "Chairman") and as
approved by the Board of Directors of the Company (the "Board"). You will
manage the Company according to its business plan to achieve desired
profit and return on invested capital. You will direct and coordinate the
activities of each unit and department within the Company to attain
business objectives and will determine management's direction for most
adequately meeting the needs of each major constituency served by the
Company, including customers, owner-shareholders, and employees. By
exerting personal leadership, you will assure that each of these key
interests is served in a manner consistent with Company policy.
It is expected that you will work with the Chairman and the Board to
develop and approve business objectives, policies and plans that improve
the Company's profit and growth objectives. You will communicate business
objectives and plans within the Company and ensure that plans and policies
are promulgated to and implemented by subordinate executives and managers.
Further, it is expected that you will set the tone for the Company's
relations with its employees, customers, and shareholders by means of
policy statements, management actions, and through written and verbal
communications.
Additional responsibilities are to direct the operations to achieve planned
performance goals and to develop management systems to effectively control
each company unit. You will assure that each operating unit provides those
functions required for achieving its business objectives and that each
operating unit is properly organized, staffed and directed to fulfill its
responsibilities.
You will be responsible for the development of organization and personnel,
products, facilities, technology, and appropriate financial resources to
secure the position of the Company and to facilitate its planned
development.
You will direct periodic reviews of the Company's strategic market
position and combine this information with corollary analyses of Company
products and services, technical capabilities, and financial resources. It
should be anticipated that you may act with the Chairman as approved by
the Board in planning and directing investigations and negotiations
concerning acquisitions and mergers.
BJZ GC
----- -----
INITIALS
<PAGE> 2
Page 2 of 4
Gerry Chastelet
December 31, 1998
2. Execution of Duties. You and the Chairman will work closely together
formulating the operating plans for each of the major divisions of the
Company. The formulation will include the major goals and objectives for
each division for the 1999 year including budgets and staffing and
statistical performance measurements. It is expected that you will manage
by statistical performance, and require such from all subordinate
executives. As part of your duties, you will meet with the Chairman on a
weekly basis to provide him with the status of the progress toward
attainment of operating plan objectives and on a monthly basis to provide
him with a written report on the corporate wide performance based on
statistical metrics for each division of the Company and an update of key
strategic initiatives. In addition, it is expected that quarterly, you will
make a presentation and provide a written report to the Board regarding
corporate wide statistical performance and status of attainment of the
strategic goals.
3. Board of Director Election. As President and Chief Executive Officer you
will be elected to the Board.
4. Exclusive Services and Permanent Residence. During your employment it is
expected that you will be a full time employee of the Company. It will be
required that your services be exclusive to the Company and that you will
devote your productive time and attention to the performance of your
duties during the term of employment. It is expected that you will reside
within 25 miles of the Company's corporate office.
5. Confidentiality and Intellectual Property Rights Agreement. During your
employment, you will occupy a position of trust and confidence and
therefore will be required to maintain the confidentiality of Company
Information. You will be required, as are all employees, to sign a
Confidentiality Agreement and an Assignment of Intellectual Property
Rights Agreement, wherein the employee acknowledges and agrees that all
intellectual property, inventions and trade secrets are and shall be the
sole property of the Company. Both agreements extend beyond cessation of
employment.
6. Non-Competition. During any period up to six months, throughout which the
Company continues your benefits and salary after cessation of employment,
you agree you will not provide services to or engage employment in a
company, business enterprise or entity which is a direct competitor of the
Company.
7. Compensation. The Company is offering you a base salary of $275,000 per
year. Your salary will be increased yearly after review by the Board each
year. The amount of increase will be at the discretion of the Board. The
Company will also provide you with an executive cash bonus plan as part of
a corporate wide executive plan (the "Bonus Plan"). Upon achievement of
100% of your goals, your earned bonus under the Bonus Plan will be 50% of
your entire salary. The achievement goals for your Bonus Plan will consist
of 80% quantitative and 20% qualitative goals and will be set by the
Chairman and approved by the Board prior to 31 January 1999. The
quantitative goals must be met at the 50% level to earn the minimum
quantitative bonus. The Bonus Plan has no guaranteed level and is not
guaranteed for the first year.
8. Sign-on Bonus. You will receive a $150,000 sign-on bonus which is payable
$50,000 on April 30, 1999 and $50,000 at each of your next two
employment anniversary dates (December 31, 1999 and December 31, 2000).
BJZ GC
--- --
Initials
<PAGE> 3
Page 3 of 4
Gerry Chastelet
December 31, 1998
9. Stock Options and Change of Control Vesting. The Board has approved the
issuance to you of 600,000 shares of Common Stock of the Company, of which
100,000 will vest after each six months of employment. For existing
employees, the exercise price of optioned shares is the closing market
price of the Company's Common Stock on the date immediately prior to the
date of award by the Compensation Committee. For new employees, if the
award date is prior to the employee's start date the exercise price at the
closing market price on the day prior to the employee's start date. In
the event that a change of control occurs, you will automatically be vested
in all of your outstanding stock options. A change of control shall mean
the merger or consolidation of the Company in which the Company is the
acquired part, or the sale of all, or substantially all of the assets of
the Company or if Bryan J. Zwan and/or his family cease to have voting
control of the common stock of the Company.
10. Stock Purchase Plan. Employees of the Company are eligible to purchase
shares of Company stock on an attractive basis under its Stock
Purchase Plan (the "Plan"). In order to be included in the Plan, you must
be an employee and elect to participate at the start date of each
quarterly Plan. Plans begin about 15 days prior to the beginning of a
business quarter.
11. 401(k) Plan. The Company has a 401(k) Plan which provides a 50% matching
contribution to employee contributions up to 6% of salary. The 401(k) Plan
vests after one year of employment. Usually, if you roll over a 401(k)
plan from a prior employment you can participate in the Company's 401(k)
Plan immediately, otherwise participation begins 90 days after an
employee's start date.
12. Automobile Allowance. You will be given automobile allowance of $1,500 per
month.
13. Expense Reimbursement. Hotel, car rentals, meals, etc. will be paid by you
at the time of purchase; you will then be reimbursed 100% by the Company.
All expenses charged to the Company require justification and approval by
the Chief Financial Officer and may be reviewed by the Chairman at his
discretion.
14. Benefits. You will be entitled to participate in the insurance and benefit
programs of the Company and will also be entitled to receive the normal
vacation/holiday allocation. The Company offers a comprehensive insurance
package, which includes medical, dental, disability and life insurance.
All employees receive 10 paid vacation days, 12 paid holidays, and 5 paid
sick days (paid only in the event of illness) per year. The Company's
insurance carrier enrolls people only on the first business day of each
calendar month, therefore, the Company will enroll you on the first such
day after your start of employment.
15. Supplemental Life Insurance. The Company will provide up to a yearly
premium of $3,000 to purchase supplemental term life insurance beyond the
Company's standard coverage of $100,000.
BJZ GC
--- --
Initials
<PAGE> 4
Page 4 of 4
Gerry Chastelet
December 31, 1998
16. Temporary Housing and Relocation. The Company will provide an allowance of
$21,000 including the applicable tax-gross up to move your household goods
by an approved carrier from your current residence to Clearwater, Florida.
The Company will also reimburse you for up to $4,000 per month for up to
three months of temporary housing expenses and travel, should it become
necessary for you to maintain two households. All temporary housing and
travel expense reimbursements are made from invoices provided to the
Company. Should you resign from the Company within the first twelve months
of your employment, you will reimburse the Company in full for any
reimbursements or allowances made by the Company on your behalf for
relocation expenses and temporary housing and travel expenses.
17. Pay Periods. The Company pays base salary twice a month, on the 15th and
final day of each month.
18. At-Will Employment. This letter is not an employment contract. During the
entire course of your employment with the Company you will be an at-will
employee. This means that you will be free to terminate your employment
with the Company at any time, with or without reason, and the Company will
have the right to terminate your employment or the employment of others at
any time, with or without reason. This employment relationship may only be
altered by written agreement signed by the Chairman as approved by the
Board.
19. Return of Company Equipment. The Company may supply you with equipment to
perform the functions of your position. All items provided to you for your
use as an employee remains the property of the Company and you
specifically agree to return all items given to you within seven (7) days
of cessation of employment with the Company. Further, you agree you will
reimburse the Company in full for any costs, including but not limited to
attorney's fees, it incurs in securing return of any property not returned
after seven days.
20. Duration of Offer. This offer is valid until the close of business
December 31, 1998 (the "Offer Period").
21. Start of Employment. The Company would like to commence your employment on
the last day of the Offer Period (December 31, 1998). On your start date
you are required to bring verification of your employment eligibility.
Some examples of acceptable forms of verification of eligibility include a
passport, or driver's license/photo ID and social security card, or
driver's license/photo ID and birth certificate. If you are not a U.S.
citizen, proof of employment eligibility in the U.S. is required. Original
documents are required--not photocopies, unless they are officially
certified copies.
Best Regards,
Digital Lightwave, Inc.
/s/ BRYAN J. ZWAN
- -------------------------------------
Dr. Bryan J. Zwan
Chairman of the Board
Acknowledgment of receipt and
acceptance of the foregoing:
/s/ Gerry Chastelet Dec. 31, 1998
--------------------------------------
Gerry Chastelet Date
<PAGE> 1
Exhibit 10.20
(DIGITAL LIGHTWAVE LETTERHEAD)
601 Cleveland Street
Fifth Floor
Clearwater, Florida 33755
Mr. George J. Matz Telephone: 813.442.6677
One Gussett Road Facsimile: 813.442.5680
Wenham, MA 01984 Email: [email protected]
URL:http:/www.lightwave.com
CONFIDENTIAL
PAGE 1 OF 3
April 13, 1998
RE: Employment Terms
Dear George,
The following letter constitutes the terms of employment associated with the
position of Executive Vice President, Global Marketing and Sales of Digital
Lightwave, Inc. (the "Company"). The terms of this letter are subject to
paragraphs 12 and 13 hereof.
1. Capacity And Responsibilities. As the Executive Vice President, Global
Marketing and Sales, you will be responsible for creating, implementing
and directing the sales and marketing strategy, policy, and operations of
the Company, as approved by the Chief Executive. You will be fully
responsible for the development and management of the sales and marketing
of the Company's products including the Company's Network Information
Computer (NIC), its Remote Access Agent (RAA), its international products
including its SDH NIC, and of its products currently in development
including its OC-48 product and its Optical Access Agent product and
others. The quarterly sales targets for 1998 are $5.3, $7.5, $10.0 and
$12.2 respectively.
You will be responsible for the day-to-day execution of the sales and
marketing organizations, the articulation of its targets and goals, and of
its effective plans in alignment with the goals and objectives of the
Company, as approved by the Chief Executive Officer. The Company expects
that you will closely coordinate your efforts with the Company's
employees, executives, and senior executives. You will also provide
support and resources regarding financial matters relating to sales and
marketing to the other executives of the Company. The executives reporting
to you will be the Vice Presidents of Marketing, North American Sales,
International Sales, and Customer Service and Support. All positions are
currently filled except for the Vice President, Marketing.
In addition to the foregoing, you will manage the building and staffing of
the Marketing Division. Your duties in this area will include, but not be
limited to, managing the Vice President, Marketing articulating the plans
and implementing the accomplishments of developing or providing, market
research, market definition and sizing, competitive product and feature
analysis, new feature proposals, extensive and detailed product
requirements, representation at industry conferences and trade shows,
customer contract and liaison, as well as providing content and approach
for the planning and execution of advertising and promotional campaigns for
the Company's products by the marketing communications group.
GJM
-----
Initials
<PAGE> 2
Page 2 of 3
George J. Matz
April 13, 1998
It is expected that the net impact of your sales and marketing management
and efforts will be to significantly increase the Company's awareness of
the market and competitive environment of the Company's products and to
result in greater market acceptance and increased demand for the Company's
products, which then results in increased sales, and then through effective
sales management, increased revenue, and profit for the Company. You will
report directly to the Chief Executive Officer. The Company manages by
statistics, therefore, you will be responsible for your statistical
performance and that of any subordinates you manage. You will manage your
subordinates in accordance with the policies and procedures of the Company
now or hereafter existing.
2. Exclusive Services. During your term of employment it is expected that you
will be a full time employee of the Company. It will be required that your
services be exclusive to the Company and that you will devote your
productive time and attention to the performance of your duties during the
term of employment. It is expected that when not travelling on Company
business you will spend the majority of your time at Company headquarters
in Florida.
3. Confidentiality and Intellectual Property Rights. During the term of your
employment, you will occupy a position of trust and confidence and
therefore will be required to maintain the confidentiality of Company
information. You will be required, as are all employees, to sign an
Assignment of Intellectual Property Rights Agreement, wherein the employee
acknowledges and agrees that all intellectual property, inventions and
trade secrets are and shall be the sole property of the Company. The
Confidentiality Agreement extends beyond cessation of employment.
4. Compensation. The Company is offering you a base salary of $225,000 per
year with a twenty percent (20%) bonus guaranteed for the first year only,
at the conclusion of your first year of employment. The Company is also
planning an executive bonus plan of which you will participate. If under
that participation, your first year bonus is higher than 20% of your base
compensation the higher bonus will take precedent. Also, under its 401(k)
plan of which you may participate, the Company provides a 50% matching
contribution to employee contributions up to 6% of salary, which vests
after one year of employment. Employees of the Company are also eligible
to purchase shares of Company stock on an attractive basis under its Stock
Purchase Plan.
5. Sign-on Bonus. You will receive a $150,000 sign-on bonus which is payable
in increments of $50,000, at the beginning of each of your first three (3)
years of employment.
6. Automobile Allowance. You will be given an automobile leasing and expense
arrangement that is acceptable to you and does not $1,000 per month.
7. Expense Reimbursement. Hotel, car rentals, meals, etc. will be paid by you
at the time of purchase; you will then be reimbursed 100% by the Company.
All expenses charged to the Company are subject to review by the
Controller and may require justification.
8. Benefits. You will be entitled to participate in the insurance and benefit
programs of the Company and will also be entitled to receive the normal
vacation/holiday allocation. The Company offers a comprehensive insurance
package, which includes medical, dental, disability and life insurance.
All employees receive 10 paid vacation days, 12 paid holidays, and 5 paid
sick days (paid only in the event of illness) per year. Please note that
should you wish to utilize the Company's insurance benefits, the insurance
carrier enrolls people only on the first business day of each calendar
month, therefore, the Company will enroll you on the first such day after
your start of employment.
GJM
---
Initials
<PAGE> 3
Page 3 of 3
George J. Matz
April 13, 1998
9. Stock Options. The Company will recommend to the Compensation Committee
the issuance to you of 300,000 shares of Common Stock of the Company,
75,000 shares will vest after six (6) months of employment and an
additional 75,000 shares will vest on your employment anniversary date
over the next three (3) years. The exercise price of the optioned shares
will be the closing market price of the Company's Common Stock on the date
immediately prior to the date of award by the Compensation Committee. In
the event that a change of control occurs, you will automatically be
vested in all of your outstanding stock options. A change of control shall
mean the merger or consolidation of the Company in which the Company is
the acquired part, or the sale of all, or substantially all of the assets
of the Company or if Bryan J. Zwan and/or his family cease to have voting
control of the common stock of the Company.
10. Pay Periods. The Company pays base salary twice a month, on the 15th and
the final day of each month.
11. At-will Employment. This letter is not an employment contract. During the
entire course of your employment with the Company you will be an at-will
employee. This means that you will be free to terminate your employment
with the Company at any time, with or without reason, and the Company will
have the right to terminate your employment or the employment of others at
any time, with or without reason. This employment relationship may only be
altered by written agreement signed by the Chief Executive Officer of the
Company.
12. Start of Employment. The Company would like to commence your employment on
or before May 6, 1998.
13. Duration of Offer. This offer is valid until the close of business April
15, 1998.
14. Due Diligence. Subsequent to the date hereof the Company intends to
continue its due diligence process. In the event that the Company
discovers that any act has occurred which could, with the passage of time
and taking of action, constitute "cause" under the Severance Payment
Agreement, the terms of employment set forth herein may be voided by the
Company.
Best Regards,
Digital Lightwave, Inc.
/s/ Steven H. Grant
- -------------------------------------
Steven H. Grant
Chief Financial Officer
Acknowledgement of receipt and
acceptance of the foregoing:
/s/ George J. Matz April 30, 1998
-------------------------------------
George J. Matz Date
<PAGE> 4
February 9, 1999
Mr. George J. Matz
One Gussett Road
Wenham, MA 01984
CONFIDENTIAL
Page 1 of 3
Re: Employment Terms/Addendum to Employment Letter dated April 13, 1998.
Dear George,
This employment letter serves as an addendum to your original employment
letter, dated April 13, 1998 and, as we agreed, effective February 9, 1999, you
will assume the new position of Executive Vice President, General Manager of
Network Products.
1. Capacity And Responsibilities As the Executive Vice President, General
Manager of Network Products you will be responsible for all sales of
the Network Access Product family. You will report directly to the
President and Chief Executive Officer of the Company. You will be
responsible for the development and management of all sales and
marketing programs for Network Products division. Your assigned 1999
sales quota for this product family is $15M. The details of your 1999
compensation incentives associated with the achievement of your
assigned targets will be outlined in your 1999 Incentive Compensation
Plan.
In this capacity, you will be responsible for the effective planning
and achievement of targets and goals of the Network Access Products
family, in alignment with the goals and objectives of the Company, as
approved by the President and Chief Executive Officer. The Company
expects that you will closely coordinate your efforts with the
Company's employees, executives, and senior executives. You will also
provide support and resources regarding financial matters relating to
sales of Network Access Products, to other executives of the Company.
2. Exclusive Services During the term of your employment, it is expected
that you will be a full time employee of the Company. As the executive
responsible for the Network Products Sales, you will continue to
reside in the Boston area. You are expected at Digital Lightwave
Headquarters in Clearwater, Florida, no less than twice monthly for
major account reviews. You will spend a significant amount of time
traveling to the Company's New Jersey facility and other areas of
identified opportunities.
3. Confidentiality and Intellectual Property Rights No change to the
employment terms stated in the letter dated April 13, 1998.
4. Compensation Your base salary remains the same as stated in the letter
dated April 13, 1998. A first year 20% bonus guarantee will be paid
upon your one year anniversary with the Company. The full amount of
this bonus will be recoverable by the Company should you choose to
terminate your employment prior to December 31, 1999. If the Company
terminates your employment before December 31, 1999, this bonus will
not be recoverable.
<PAGE> 5
-----
Initials
George J. Matz
February 9, 1999
Page 2 of 3
5. Sign on Bonus Your two remaining sign on bonuses of $50,000 each will
be paid to you on January 15, 2000 and July 15, 2000 respectively. If
the Company elects to terminate your employment on or before December
31, 1999, the $50,000 sign on bonus originally earned on your first
anniversary (in accordance with your employment letter dated April 13,
1998), will be due and payable upon termination. In the event the
Company terminates your employment on or before December 31, 1999, no
other sign on bonus, either whole or pro-rated, will be payable to
you.
In the event that you choose to terminate your employment with the
Company prior to December 31, 1999, no sign on bonuses will be paid.
6. Automobile Allowance No change to the employment terms stated in the
letter dated April 13, 1998.
7. Expense Reimbursement All expenses charged to the Company are subject
to the review of the President, Chief Executive Office and the
Controller.
8. Benefits No change to the employment terms stated in the letter dated
April 13, 1998.
9. Stock Options All stock option terms stated in your original
employment letter dated April 13, 1998 remain in force with the
following exception: The stock options that were scheduled to vest on
May 30, 1999 are now scheduled to vest on December 31, 1999. All other
stock option vesting schedules will remain as stated. In the event the
Company terminates your employment prior to December 31, 1999, your
stock option vesting schedules will revert to the original schedules
outlined in your April 13, 1998 employment letter.
In the event that you terminate your employment with the Company prior
to December 31, 1999, the vesting schedule according to this letter
will be enforced.
10. Pay Periods No change to the employment terms stated in the letter
dated April 13, 1998.
11. At-will Employment No change to the employment terms stated in the
letter dated April 13, 1998.
12. Start of Employment Your approved, unpaid personal leave of absence,
commencing on February 1, 1999 and ending on February 8, 1999 will not
result in an adjustment to your original hire date. Your original hire
date will remain May 5, 1998 and your new responsibilities will
commence on February 9, 1999.
13. Duration of Offer Not applicable.
<PAGE> 6
-----
Initials
George J. Matz
February 9, 1999
Page 3 of 3
14. Due Diligence No change to the employment terms stated in the letter
dated April 13, 1998.
Best Regards,
Digital Lightwave, Inc.
Gerry Chastelet
President and Chief Executive Officer Acknowledgement of receipt
And acceptance of the foregoing:
------------------- ---------
George J. Matz Date
<PAGE> 1
EXHIBIT 10.21
DIGITAL LIGHTWAVE, INC.
NOTE AND WARRANT PURCHASE AGREEMENT
$3,000,000
9% SECURED BRIDGE NOTES DUE JANUARY 17, 2000
AND
WARRANTS TO PURCHASE 450,000 SHARES OF COMMON STOCK
This NOTE PURCHASE AGREEMENT, dated as of March 31, 1999, (this
"AGREEMENT") is entered into by and among DIGITAL LIGHTWAVE, INC. a Delaware
corporation ("COMPANY"), with its principal executive office at 15550 Lightwave
Drive, Clearwater, FL 33760, and THE PERSONS AND ENTITIES LISTED ON THE SCHEDULE
OF PURCHASERS attached hereto as Schedule I (each a "PURCHASER", and
collectively, the "PURCHASERS").
RECITALS
On the terms and subject to the conditions set forth herein, each
Purchaser is willing to purchase from Company, and Company is willing to sell to
such Purchaser, a secured note in the principal amount set forth opposite such
Purchaser's name on Schedule 1 hereto.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, and the
representations, warranties, and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. DEFINITIONS. As used in this Agreement and the other Transaction Documents,
the following capitalized terms have the following meanings:
"AFFILIATE," with respect to any Person, means (i) any director,
officer or employee of such Person, (ii) any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person, and (iii) any Person beneficially owning or holding 5% or more of
any class of voting securities of such Person or any corporation of which such
Person beneficially owns or holds, in the aggregate, 5% or more of any class of
voting securities The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise. The term "Affiliate," when used herein without reference
to any Person, shall mean an Affiliate of Company.
<PAGE> 2
"AGREEMENT" has the meaning given in the introductory paragraph hereof.
"CHANGE OF CONTROL" shall mean either of the following circumstances
(a) if any Person (other than Dr. Bryan Zwan) or two or more Persons acting in
concert shall either acquire beneficial ownership, directly or indirectly, of,
or acquire by contract or otherwise, or enter into a contract or arrangement
which upon consummation will result in its or their acquisition of, or control
over, securities of Company (or other securities convertible into such
securities) representing 40% or more of the combined voting power of all
securities of Company entitled to vote in the election of directors; (b) if
during any period of twelve (12) consecutive months, commencing after the date
hereof, individuals who at the beginning of such twelve (12) month period were
directors of Company shall cease for any reason to constitute a majority of the
Board of Directors of Company unless the directors replacing such individuals
were nominated by the Board of Directors of Company; or (c) Dr. Bryan Zwan shall
no longer be the beneficial owner of a majority of the capital stock of the
Company.
"CLAIM" has the meaning given in Section 10.7.
"CODE" has the meaning give in Section 3.13.
"COLLATERAL AGENT" shall mean C.E. Unterberg, Towbin together with its
permitted successor and assigns under the Security Agreement.
"COMPANY" includes the corporation initially executing Agreement and
any Person which shall succeed to or assume the obligations of Company under
this Agreement and the Notes.
"DEBT OR EQUITY OFFERING" shall mean any offering by Company or any of
its subsidiaries of debt securities or Equity Securities pursuant to a
registration statement or if the securities are intended to be eligible for
trading under Rule 144A under the Securities Act of 1933.
"DEFAULT RATE" shall mean the per annum rate of interest equal to the
lower of (i) eighteen percent (18%) per annum, and (ii) the highest rate
permitted by applicable law.
"DEFAULT" shall mean any condition or event that with the giving of
notice or the passage of time would give rise to an Event of Default.
"DISCLOSURE SCHEDULE" shall mean the disclosure schedule attached
hereto as Schedule II setting forth certain disclosures related to Borrower and
the Subsidiaries. Each item set forth in the Disclosure Schedule shall set forth
the Section of this Agreement to which it relates.
"ENVIRONMENTAL LAWS" means all judgments, orders, writs, decrees,
statutes, rules or regulations relating to the protection of human health or the
environment, including, without limitation, (i) all judgments, orders, writs
decrees, statutes, rules or regulations, pertaining to reporting, licensing,
permitting, investigation, and remediation of emissions, discharges, releases,
or threatened releases of hazardous materials, chemical substances, pollutants,
contaminants, or
-2-
<PAGE> 3
hazardous or toxic substances, materials or wastes whether solid, liquid, or
gaseous in nature, into the air, surface water, groundwater, or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of chemical substances, pollutants,
contaminants, or hazardous or toxic substances, materials, or wastes, whether
solid, liquid, or gaseous in nature; and (ii) all judgments, orders, writs,
decrees, statutes, rules or regulations pertaining to the protection of the
health and safety of employees or the public.
"ERISA" has the meaning give in Section 3.13.
"ERISA AFFILIATE" has the meaning give in Section 3.13.
"EMPLOYEE BENEFIT PLAN" has the meaning give in Section 3.13.
"EQUITY SECURITIES" of any Person shall mean (a) all common stock,
preferred stock, participations, shares, partnership interests or other equity
interests in and of such Person (regardless of how designated and whether or not
voting or non-voting) and (b) all warrants, options and other rights to acquire
any of the foregoing.
"EVENT OF DEFAULT" has the meaning given in Section 8 hereof.
"FINANCIAL STATEMENTS" shall mean, with respect to any accounting
period for any Person, statements of operations, retained earnings and cash flow
of such Person for such period, and balance sheets of such Person as of the end
of such period, setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year if such period is less than a
full fiscal year or, if such period is a full fiscal year, corresponding figures
from the preceding fiscal year, all prepared in reasonable detail and in
accordance with GAAP. Unless otherwise indicated, each reference to Financial
Statements of any Person shall be deemed to refer to Financial Statements
prepared on a consolidated basis.
"GAAP" shall mean generally accepted accounting principles as in effect
in the United States of America from time to time.
"HOLDER" shall mean a holder of a Note.
"INDEBTEDNESS" shall mean and include the aggregate amount of, without
duplication (i) all obligations for borrowed money, (ii) all obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations to pay the deferred purchase price of property or services (other
than accounts payable incurred in the ordinary course of business determined in
accordance with GAAP), (iv) all obligations with respect to capital leases, (v)
all obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, (vi) all
reimbursement and other payment obligations, contingent or otherwise, in respect
of letters of credit and similar surety instruments; (vii) the purchase price of
any receivables of the Company sold or factored for working capital purposes,
outstanding at any one time; and
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(viii) all guaranty obligations with respect to the types of Indebtedness listed
in clauses (i) through (vii) above.
"INDEMNIFIED PARTY" has the meaning given in Section 10.7 hereof.
"INVESTMENT" of any Person shall mean any loan or advance of funds by
such Person to any other Person (other than advances to employees of such Person
for moving and travel expense, drawing accounts and similar expenditures in the
ordinary course of business), any purchase or other acquisition of any Equity
Securities or Indebtedness of any other Person, any capital contribution by such
Person to or any other investment by such Person in any other Person (including,
without limitation, any Indebtedness incurred by such Person of the type
described in clauses (a) and (b) of the definition of "Indebtedness" on behalf
of any other Person); provided, however, that Investments shall not include
accounts receivable or other indebtedness owed by customers of such Person which
are current assets and arose from sales or non-exclusive licensing in the
ordinary course of such Person's business.
"LIEN" shall mean, with respect to any property, any security interest,
mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such
property or the income therefrom, including, without limitation, the interest of
a vendor or lessor under a conditional sale agreement, capital lease or other
title retention agreement, or any agreement to provide any of the foregoing, and
the filing of any financing statement or similar instrument under the Uniform
Commercial Code or comparable law of any jurisdiction.
"MAJORITY IN INTEREST" shall mean more than 50% of the aggregate
outstanding principal amount of the Notes issued pursuant to this Agreement.
"MATERIAL ADVERSE CHANGE" shall mean any of the occurrence of any event
or condition that results in a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a)
the business, assets, operations or financial or other condition of Company; (b)
the ability of Company to pay or perform the Obligations in accordance with the
terms of this Agreement and the other Transaction Documents and to avoid an
Event of Default, or an event which, with the giving of notice or the passage of
time or both, would constitute an Event of Default, under any Transaction
Document; or (c) the rights and remedies of the Holders under the Notes, the
other Transaction Documents or any related document, instrument or agreement.
"NOTES" means Company's 9% Secured Bridge Notes due January 17, 2000,
in the form of Exhibit A hereto, issued hereunder.
"OBLIGATIONS" shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Company to Holders of
every kind and description (whether or not evidenced by any note or instrument
and whether or not for the payment of money), now existing or
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hereafter arising under or pursuant to the terms of this Agreement, the Notes
and the other Transaction Documents, including, all interest, fees, charges,
expenses, attorneys' fees and costs and accountants' fees and costs chargeable
to and payable by Company hereunder and thereunder, in each case, whether direct
or indirect, absolute or contingent, due or to become due, and whether or not
arising after the commencement of a proceeding under Title 11 of the United
States Code (11 U. S. C. Section 101 et seq.), as amended from time to time
(including post-petition interest) and whether or not allowed or allowable as a
claim in any such proceeding.
"PERMITTED DEBT FACILITY" shall mean either (i) the accounts receivable
agreement entered into between Company and EAB Leasing Corp., as the same may be
amended, supplemented, amended and restated, or otherwise modified, or
refinanced or replaced, from time to time provided that the aggregate amount of
Indebtedness thereunder shall not exceed 80% of the Company's gross accounts
receivable (as would appear on a balance sheet prepared in accordance with GAAP)
(the "EAB Permitted Debt Facility"), or (ii) a credit facility entered into with
Emergent Business Capital on terms and conditions substantially similar to the
terms and conditions set forth in Exhibit E hereto in an aggregate principal
amount not to exceed $7,000,000 as the same may be amended, supplemented,
amended and restated, or otherwise modified, or refinanced or replaced, from
time to time.
"PERMITTED INDEBTEDNESS" shall mean and include: (i) Indebtedness of
Company under the Notes; (ii) Indebtedness of Company secured by Liens permitted
under clause (iv) or (v) of the definition of Permitted Liens; (iii)
Indebtedness arising from the endorsement of instruments in the ordinary course
of business; (iv) Indebtedness existing on the date hereof and set forth on the
Disclosure Schedule; (v) Indebtedness under any Permitted Debt Facility; and
(vi) other Indebtedness of Borrower not exceeding Five Hundred Thousand Dollars
($500,000) at any time.
"PERMITTED INVESTMENTS" shall mean (a) Investments in the Equity
Securities of the Company's Subsidiary existing as of the date hereof; (b)
Investments in the Company's leasing subsidiary in aggregate amount outstanding
at any one time not to exceed $3,000,000; (c) Investments made in accordance
with the Company's stated investment policy attached hereto as Exhibit F; and
(d) other Investments aggregating not in excess of One Hundred Thousand Dollars
($100,000) at any time.
"PERMITTED LIENS" shall mean and include: (i) Liens for taxes or other
governmental charges not at the time delinquent or thereafter payable without
penalty or being contested in good faith, provided provision is made to the
reasonable satisfaction of the Collateral Agent for the eventual payment thereof
if subsequently found payable; (ii) Liens of carriers, warehousemen, mechanics,
materialmen, vendors, and landlords incurred in the ordinary course of business
for sums not overdue or being contested in good faith, provided provision is
made to the reasonable satisfaction of Holder for the eventual payment thereof
if subsequently found payable; (iii) deposits under workers' compensation,
unemployment insurance and social security laws or to secure the performance of
bids, tenders, contracts (other than for the repayment of borrowed money) or
leases, or to secure statutory obligations of surety or appeal bonds or to
secure indemnity, performance or other similar
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bonds in the ordinary course of business; (iv) Liens securing obligations under
a capital lease if such lease is permitted under this Agreement and such Liens
do not extend to property other than the property leased under such capital
lease; (v) Liens upon any equipment acquired or held by Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition of such equipment,
so long as such Lien extends only to the equipment financed, and any accessions,
replacements, substitutions and proceeds (including insurance proceeds) thereof
or thereto; (vi) easements, reservations, rights of way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property in a manner not materially or adversely affecting the
value or use of such property; (vii) Liens securing the Company's obligations
incurred in connection with any Permitted Debt Facility; (viii) Liens existing
on the date hereof and set forth on the Disclosure Schedule; (viii) Liens in
favor of a Collateral Agent for the benefit of Holders; and (ix) interests of
lessees of property of the Comapany or any Subsidiary.
"PERSON" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights
Agreement dated as of the date hereof among Company and the Holders in the form
of Exhibit D hereto.
"SECURITIES ACT" has the meaning given in Section 3.11 of this
Agreement.
"SECURITY AGREEMENT" has the meaning the Security Agreement dated the
date hereof by Company in favor of Collateral Agent in the form of Exhibit B
hereto.
"SOLVENT" shall mean, with respect to any Person on any date, that on
such date (a) the fair value of the property of such Person is greater than the
fair value of the liabilities (including, without limitation, contingent
liabilities) of such Person, (b) the present fair saleable value of the assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that it will,
incur debts or liabilities beyond such Person's ability to pay as such debts and
liabilities mature and (d) such Person is not engaged in business or a
transaction, and is not about in business or a transaction, for which such
Person's property would constitute an unreasonably small capital.
"SUBORDINATION AGREEMENT" shall mean a subordination agreement entered
by C.E. Unterberg, Towbin (on behalf of the Purchasers) and the holders of
Indebtedness under any Permitted Debt Facility.
"SUBSIDIARY" shall mean (a) any corporation of which more than 50% of
the issued and outstanding equity securities having ordinary voting power to
elect a majority of the Board of Directors of such corporation is at the time
directly or indirectly owned or controlled by Company,
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(b) any partnership, joint venture, or other association of which more than 50%
of the equity interest having the power to vote, direct or control the
management of such partnership, joint venture or other association is at the
time directly or indirectly owned and controlled by Company, (c) any other
entity included in the financial statements of Company on a consolidated basis.
"TRANSACTION DOCUMENTS" shall mean this Agreement, each of the Notes
issued under this Agreement, each of the Warrants issued under this Agreement,
the Registration Rights Agreement, the Security Agreement, and each other
document, instrument or certificate executed in connection with this Agreement.
"WARRANT" shall mean each of the Warrants issued to the Holders
pursuant to the terms of this Agreement in the form of Exhibit C hereto.
"WARRANT SHARES" shall mean each of the shares of capital stock of the
Company issued to the Holders upon the exercise of the Warrant.
2. THE NOTES AND WARRANTS.
2.1 ISSUANCE OF NOTES AND WARRANTS. At the Closing (as defined
below), Company agrees to issue and sell to each of the Purchasers, and, subject
to all of the terms and conditions hereof, each of the Purchasers agrees to
purchase a 9% Secured Bridge Note due January 17, 2000 in the form of Exhibit A
hereto (each, a "Note", and collectively, the "Notes") in the principal amount
set forth opposite the respective Purchaser's name on Schedule I hereto and upon
such purchase Company shall issue to each such Purchaser a Warrant to purchase
150 shares of the Company's Common Stock for each $1,000 in principal amount of
Notes purchased by such Purchaser. The obligations of the Purchasers to purchase
Notes are several and not joint.
2.2 DELIVERY. The sale and purchase of the Notes shall take place
at a closing (the "Closing") to be held at such place and time as Company and
the Purchasers may determine (the "Closing Date"). At the Closing, Company will
deliver to each of the Purchasers the respective Note and Warrant to be
purchased by such Purchaser, against receipt by Company of the corresponding
purchase price set forth on Schedule I hereto (the "Purchase Price"). Each of
the Notes and Warrants will be registered in such Purchaser's name in Company's
records.
2.3 INTEREST; MATURITY. Interest on the Notes will be payable in
cash and accrue semi-annually and at Maturity at the lower of (i) 9% per annum
and (ii) the highest rate permitted by law, and will be paid at maturity.
Interest on the Notes will be computed on the basis of a 360 day year of twelve
30 day months. The unpaid principal balance of all Notes, together with accrued
and unpaid interest thereon, shall be due and payable in cash on the stated date
of maturity of the Notes. The Notes will bear interest on overdue principal
(including any overdue mandatory or optional payment of principal) and (to the
extent legally enforceable) on any overdue installment of interest at the
Default Rate from the date such payment is due, whether by acceleration or
otherwise until paid.
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2.4 USE OF PROCEEDS. The proceeds of the sale and issuance of the
Notes shall be used for general corporate purposes.
2.5 PAYMENTS. Company will make all cash payments due under the
Notes in immediately available funds by 11:00 A.M. New York City time on the
date such payment is due in the manner and at the address for such purpose
specified below each Purchaser's name on Schedule I hereto, or at such other
address as a Purchaser or other registered Holder of a Note may from time to
time direct in writing.
2.6 REDEMPTION OF NOTES.
(a) Optional Redemption. Company may at any time and from
time to time redeem all or less than all of the then outstanding Notes by
payment in cash of the aggregate principal amount thereof plus all accrued and
unpaid interest on the amount so redeemed to the date of such redemption.
Company will give irrevocable written notice of any redemption of the Notes
pursuant to Section 2.1 to the Holders thereof not less than 15 days nor more
than 60 days before the date fixed for such redemption specifying (i) such date,
(ii) the aggregate principal amount of the Notes to be redeemed, and (iii)
accrued and unpaid interest, if any, payable to the redemption date. Notice of
redemption having been so given, the aggregate principal amount (or portion
thereof) specified in such notice, together with accrued and unpaid interest, if
any, shall become due and payable, on the redemption date.
(b) Mandatory Redemption. Upon the closing of a Debt or
Equity Offering, the Company shall be required to redeem all of the Notes
outstanding by payment in cash of the aggregate principal amount thereof plus
all accrued and unpaid interest thereon to the date of such redemption. As soon
as reasonably practicable, but in no event later than the date on which any
filing is made with the Securities and Exchange Commission or the date on which
any offering memorandum is circulated to prospective investors, the Company
shall give written notice to the Holders of the Notes of the expected timing of
any redemption of the Notes pursuant to this Section 2.6(b). Not less than three
(3) Business Days prior to date of redemption (which shall be the date of the
closing of the Debt or Equity Offering), Company shall give irrevocable written
notice of such redemption to each Holder of a Note specifying (i) such date,
(ii) the aggregate principal amount of the Notes to be redeemed, and (iii)
accrued and unpaid interest, if any, payable to the redemption date.
(c) Change of Control. If a Change in Control shall
occur, each Holder shall have the right to demand that Company redeem all or any
portion of the Notes then held by such Holder by giving written notice to such
effect to Company not later than sixty (60) days after the first to occur of the
following: (i) receipt by such holder from Company of written notice of the
occurrence of such Change in Control or (ii) the date on which such holder,
having otherwise obtained actual knowledge of such Change in Control notifies
Company thereof. Company shall redeem such Notes or portion thereof on a date
specified in a written notice from Company to such Holder given not less than
ten (10) days prior to the redemption date so specified (which date shall
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not be earlier than fifteen nor later than thirty (30) days after the date
demand for redemption was made by such Holder) and such redemption in respect of
each Note or portion thereof shall be by payment in cash of 101% the aggregate
principal amount thereof plus all accrued and unpaid interest thereon to the
date of such redemption.
(d) Partial Prepayment Pro Rata. The aggregate principal
amount of each partial redemption of Notes pursuant to this Section 2.6 shall be
allocated among the Holders of the Notes then outstanding in proportion, as
nearly as practicable, to the respective unpaid principal amounts of such Notes
then held thereby, with adjustments, to the extent practicable, to compensate
for any prior prepayments not made in exactly such proportion. Any partial
prepayment shall be applied first against accrued and unpaid interest and second
against principal.
(e) Restrictions on Redemption. Except as otherwise
provided in this Section 2.6, there shall be no prepayment, in whole or in part,
of the principal of all or any of the Notes.
(f) Acquisition of Notes. Company will not, and will not
permit any Subsidiary or Affiliate to, purchase, redeem or otherwise acquire any
Note except upon the payment or prepayment thereof in accordance with the terms
hereof and of such Note.
2.7 PRIORITY OF NOTES. The Notes shall be senior secured
obligations of Company senior to all Indebtedness and other obligations of
Company other than Permitted Facility Debt. The Purchasers hereby acknowledge
that the Notes shall be subject to, and subordinated on the terms and conditions
of, the Subordination Agreement.
2.8 REDEMPTION OF WARRANTS. Company may redeem all, but not less
than all, of the then outstanding Warrants by payment in cash of $.01 per share
of Common Stock underlying the Warrants; provided that the last sale price of
the Company's common stock shall have been at least equal to 200% of the then
effective exercise price of the Warrants on any 20 out of the 30 consecutive
trading days ending on the third trading day prior to the day notice of such
redemption is given; provided further that none of such 20 trading days shall be
a trading day on or before the one year anniversary date of the original
issuance of the Warrants. Company will give irrevocable written notice of any
redemption of the Warrants pursuant to Section 2.8 delivered to the holders
thereof not less than 30 days nor more than 60 days before the date fixed for
such redemption specifying (i) such date, and (ii) the aggregate amount of
Warrants to be redeemed. Notice of redemption having been duly received by the
holders of the Warrants, the Warrants shall expire on the date specified for
redemption in accordance with their terms.
3. REPRESENTATIONS AND WARRANTIES OF COMPANY. Company represents and
warrants to each Purchaser that, except as otherwise set forth in the Disclosure
Schedule:
3.1 DUE INCORPORATION, QUALIFICATION, ETC. Each of Company and its
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of its state of
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incorporation; (ii) has the power and authority to own, lease and operate its
properties and carry on its business as now conducted; and (iii) is duly
qualified, licensed to do business and in good standing as a foreign corporation
in each jurisdiction where the failure to be so qualified or licensed could
reasonably be expected to have a Material Adverse Effect.
3.2 AUTHORITY. The execution, delivery and performance by Company
of each Transaction Document to be executed by Company and the consummation of
the transactions contemplated thereby (i) are within the power of Company and
(ii) have been duly authorized by all necessary actions on the part of Company.
3.3 ENFORCEABILITY. Each Transaction Document executed, or to be
executed, by Company has been, or will be, duly executed and delivered by
Company and constitutes, or will constitute, a legal, valid and binding
obligation of Company, enforceable against Company in accordance with its terms,
except as limited by bankruptcy, insolvency or other laws of general application
relating to or affecting the enforcement of creditors' rights generally and
general principles of equity.
3.4 NON-CONTRAVENTION. The execution and delivery by Company of
the Transaction Documents executed by Company and the performance and
consummation of the transactions contemplated thereby do not and will not (i)
violate the Certificate of Incorporation or Bylaws of Company or any material
judgment, order, writ, decree, statute, rule or regulation applicable to
Company; (ii) violate any provision of, or result in the breach or the
acceleration of, or entitle any other Person to accelerate (whether after the
giving of notice or lapse of time or both), any material mortgage, indenture,
agreement, instrument or contract to which Company is a party or by which it is
bound, if such violation could reasonably be expected to have a Material Adverse
Effect; or (iii) result in the creation or imposition of any Lien upon any
property, asset or revenue of Company (other than any Lien arising under the
Transaction Documents) or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization or approval applicable
to Company, its business or operations, or any of its assets or properties.
3.5 APPROVALS. No consent, approval, order or authorization of,
or registration, declaration or filing with, any governmental authority or other
Person (including, without limitation, the shareholders of any Person) is
required in connection with the execution and delivery of the Transaction
Documents executed by Company and the performance and consummation of the
transactions contemplated thereby.
3.6 NO VIOLATION OR DEFAULT. None of Company or Company's
Subsidiaries is in violation of or in default with respect to (i) its
Certificate of Incorporation or Bylaws or any material judgment, order, writ,
decree, statute, rule or regulation applicable to such Person; (ii) any material
mortgage, indenture, agreement, instrument or contract to which such Person is a
party or by which it is bound (nor is there any waiver in effect which, if not
in effect, would result in such a violation or default), where, in each case,
such violation or default, individually, or together with all such violations or
defaults, could reasonably be expected to have a Material Adverse Effect.
Without
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limiting the generality of the foregoing, none of Company or Company's
Subsidiaries (A) has violated any Environmental Laws (as defined below), (B) has
any liability under any Environmental Laws or (C) has received notice or other
communication of an investigation or is under investigation by any governmental
authority having authority to enforce Environmental Laws, where such violation,
liability or investigation could reasonably be expected to have a Material
Adverse Effect. No Event of Default or default, which after the giving of notice
or the lapse of time or both would constitute an Event of Default, has occurred
and is continuing.
3.7 LITIGATION. Except as set forth (with estimates of the dollar
amounts involved) in the Disclosure Schedule, no actions (including, without
limitation, derivative actions), suits, proceedings or investigations are
pending or, to the knowledge of Company, threatened against Company or Company's
Subsidiaries at law or in equity in any court or before any other governmental
authority which if adversely determined (i) would (alone or in the aggregate)
have a Material Adverse Effect or (ii) seeks to enjoin, either directly or
indirectly, the execution, delivery or performance by Company of the Transaction
Documents or the transactions contemplated thereby.
3.8 TITLE. Company and Company's Subsidiaries own and have good
and marketable title in fee simple absolute to, or a valid leasehold interest
in, all then respective real properties and good title to their other respective
assets and properties as reflected in the most recent Financial Statements
delivered to Purchasers (except those assets and properties disposed of in the
ordinary course of business since the date of such Financial Statements) and all
respective assets and properties acquired by Company and Company's Subsidiaries
since such date (except those disposed of in the ordinary course of business).
Such assets and properties are subject to no Lien, except for Permitted Liens.
3.9 INTELLECTUAL PROPERTY. To the best of their knowledge, Company
and Company's Subsidiaries own or possess sufficient legal rights to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, processes and other intellectual property rights
necessary for its business as now conducted and as proposed to be conducted
without any conflict with, or infringement of the rights of, others, in the
whole or in the aggregate that could reasonably be expected to have a Material
Adverse Effect.
3.10 FINANCIAL STATEMENTS. Except as set forth in the Disclosure
Schedule, the Financial Statements of Company for the quarter ended September
30, 1998 contained in the Company's quarterly report on Form 10-Q for such
period and for the year ended December 31, 1998 contained in the Company's press
release dated February 16, 1999 (together, the "Financials") (i) are in
accordance with the books and records of Company and its Subsidiaries, which
have been maintained in accordance with good business practice; (ii) have been
prepared in conformity with GAAP (except that such Financial Statements do not
contain footnotes required by GAAP, and, in the case of the Financial Statements
for the quarter ended September 30, 1998, are subject to year end adjustments
which, in the aggregate, are not material); and (iii) fairly present the
consolidated financial position of Company as of the dates presented therein and
the results of operations, changes in financial positions or cash flows, as the
case may be, for the periods presented therein. Except as
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set forth in the Disclosure Schedule, none of Company or any of Company's
Subsidiaries has any contingent obligations, liability for taxes or other
outstanding obligations which are material in the aggregate, except as disclosed
in the Financials.
3.11 EQUITY SECURITIES. Company's total authorized and issued
capitalization is as set forth in the Disclosure Schedule. The Equity Securities
of Company have the respective rights, preferences and privileges set forth in
Company's Certificate of Incorporation in effect on the date hereof. All of the
outstanding Equity Securities of Company have been duly authorized and are
validly issued, fully paid and nonassessable. Except as expressly referenced
herein or as set forth in the Disclosure Schedule, there are as of the date of
this Agreement no options, warrants or rights to purchase Equity Securities of
Company authorized, issued or outstanding, nor is Company obligated in any other
manner to issue shares of its Equity Securities. Except as set forth in the
Disclosure Schedule, there are no restrictions on the transfer of Equity
Securities of Company, other than those imposed by Company's Certificate of
Incorporation and Bylaws as of the date hereof, or relevant state and federal
securities laws, and no holder of any Equity Security of Company is entitled to
preemptive or similar statutory or contractual rights, either arising pursuant
to any agreement or instrument to which Company is a party or that are otherwise
binding upon Company. The offer and sale of all Equity Securities of Company
issued before the Closing Date complied with or were exempt from registration or
qualification under all applicable federal and state securities laws. Except as
expressly referenced herein or as set forth in the Disclosure Schedule, no
Person has the right to demand or other rights to cause Company to file any
registration statement under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), relating to any Equity Securities of Company presently
outstanding or that may be subsequently issued, or any right to participate in
any such registration statement.
3.12 NO AGREEMENTS TO SELL ASSETS OR MERGE. None of Company or
Company's Subsidiaries has any legal obligation, absolute or contingent, to any
Person to sell the assets of Company or Company's Subsidiaries (other than sales
in the ordinary course of business, including, without limitation, accounts
receivables sold pursuant to the EAB Permitted Debt Facility), or to effect any
merger, consolidation or other reorganization of Company or to enter into any
agreement with respect thereto.
3.13 EMPLOYEE BENEFIT PLANS.
(a) Neither Company nor any Person (each, an "ERISA
AFFILIATE") which is treated as a single employer with Company under section 414
of the Internal Revenue Code of 1986, as amended (the "CODE") has an employee
benefit plan (an "EMPLOYEE BENEFIT PLAN") within the meaning of the Employee
Retirement Income Security Act of 1974 (as the same may from time to time be
amended or supplemented, and including any rules or regulations issued in
connection therewith, "ERISA") that is an "employee pension benefit plan"
(within the meaning of section 3(2) of ERISA). Neither Company nor any ERISA
Affiliate has any liability with respect to any post-retirement benefit under
any Employee Benefit Plan which is a welfare plan (as defined in section 3(1) of
ERISA), other than liability for health plan continuation coverage described in
Part 6
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of Title I(B) of ERISA, which liability for health plan continuation
coverage cannot reasonably be expected to have a Material Adverse Effect.
(b) Each Employee Benefit Plan complies, in both form and
operation, in all material respects, with its terms, ERISA and the Code, and no
condition exists or event has occurred with respect to any such Employee Benefit
Plan which would result in the incurrence by either Company or any ERISA
Affiliate of any material liability, fine or penalty. Each Employee Benefit
Plan, related trust agreement, arrangement and commitment of Company or any
ERISA Affiliate is legally valid and binding and in full force and effect. No
Employee Benefit Plan is being audited or investigated by any governmental
authority or is subject to any pending or threatened claim or suit. Neither
Company nor any ERISA Affiliate nor any fiduciary of any Employee Benefit Plan
has engaged in a prohibited transaction under sections 406 or 407 of ERISA or
section 4975 of the Code (other than transactions which are otherwise exempt
under either Section 408 of ERISA or 4975(d) of the Code).
(c) Except as set forth in the Disclosure Schedule,
neither Company nor any ERISA Affiliate (A) has incurred or expects to incur any
liability under Title IV of ERISA or Section 412 of the Code, or (B) contributes
to any multiemployer plan within the meaning of ERISA (a "MULTIEMPLOYER PLAN").
Neither Company nor any ERISA Affiliate has incurred any material liability
(including secondary liability) to any Multiemployer Plan as a result of a
complete or partial withdrawal from such Multiemployer Plan under section 4201
of ERISA or as a result of a sale of assets described in section 4204 of ERISA.
Neither Company nor any ERISA Affiliate has been notified that any Multiemployer
Plan is in reorganization or insolvent under and within the meaning of section
4241 or section 4245 of ERISA or that any Multiemployer Plan intends to
terminate or has been terminated under section 4041A of ERISA.
3.14 OTHER REGULATIONS. None of Company or its Subsidiaries is
subject to regulation under the Investment Company Act of 1940, the Public
Utility Holding Company Act of 1935 or to any federal or state statute or
regulation limiting its ability to incur Indebtedness.
3.15 GOVERNMENTAL CHARGES AND OTHER INDEBTEDNESS. Each of Company
and its Subsidiaries has filed or caused to be filed all tax returns which are
required to be filed by it. Company and Company's Subsidiaries have paid, or
made provision for the payment of, all taxes and other levies, assessments,
fees, claims or other charges imposed by any governmental authority which have
or may have become due pursuant to said returns and all other Indebtedness,
except such taxes, levies, assessments, fees, claims or other charges or
Indebtedness, if any, which are being contested in good faith and as to which
adequate reserves (determined in accordance with generally accepted accounting
principles) have been provided or which could not reasonably be expected to have
a Material Adverse Effect if unpaid.
3.16 SUBSIDIARIES, ETC. Except as set forth in the Disclosure
Schedule (setting forth the jurisdiction of incorporation, capital structure and
percentage ownership of each shareholder),
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Company has no Subsidiaries, is not a partner in any partnership or a joint
venturer in any joint venture.
3.17 SOLVENCY, ETC. Company is Solvent and, after the execution and
delivery of the Transaction Documents and the consummation of the transactions
contemplated thereby, each of Company and its Subsidiaries will be Solvent.
3.18 CATASTROPHIC EVENTS; LABOR DISPUTES. None of Company or
Company's Subsidiaries and none of their properties is or has been affected by
any fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or other casualty that could
reasonably be expected to have a Material Adverse Effect. There are no disputes
presently subject to grievance procedure, arbitration or litigation under any of
the collective bargaining agreements, employment contracts or employee welfare
or incentive plans to which Company or Company's Subsidiaries is a party, and
there are no strikes, lockouts, work stoppages or slowdowns, or, to the best
knowledge of Company, jurisdictional disputes or organizing activity occurring
or threatened which could reasonably be expected to have a Material Adverse
Effect.
3.19 NO MATERIAL ADVERSE EFFECT. No event has occurred and no
condition exists which could reasonably be expected to have a Material Adverse
Effect since September 30, 1998.
3.20 ACCURACY OF INFORMATION FURNISHED. None of Company's
registration statements, reports or other filings made with the Securities and
Exchange Commission, when taken as a whole, together with the information
contained in Company's Disclosure Schedule and any amendments, supplements,
restatements, modifications or other updates thereof, contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.21 CERTAIN AGREEMENTS OF OFFICERS, EMPLOYEES AND CONSULTANTS.
(a) No current officer, employee or consultant of Company
or Company's Subsidiaries is, or is now expected to be, in violation of any term
of any employment contract, proprietary information agreement, nondisclosure
agreement, noncompetition agreement, or any other contract or agreement or any
restrictive covenant relating to the right of any such officer, employee or
consultant to be employed by Company or Company's Subsidiaries because of the
nature of the business conducted or to be conducted by Company or Company's
Subsidiaries or relating to the use of trade secrets or proprietary information
of others, and to the best of Company's knowledge, after due inquiry, the
continued employment of Company's and Company's Subsidiaries' officers,
employees and consultants do not subject Company or its Subsidiaries to any
liability for any claim or claims arising out of or in connection with any such
contract, agreement, or covenant.
(b) To the knowledge of Company, no officers of Company,
and no employee or consultant of Company or Company's Subsidiaries whose
termination, either individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, has
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any present intention of terminating his or her employment or consulting
relationship with Company or Company's Subsidiaries.
3.22 CONTRACTS OR COMMITMENTS; INDEBTEDNESS. None of Company or
Company's Subsidiaries and none of their properties is subject to any material
judgment, order, writ, decree, statute, rule or regulation, or any material
mortgage, indenture, agreement, instrument or contract which could reasonably be
expected to have a Material Adverse Effect. Company and its Subsidiaries have no
Indebtedness other than Permitted Indebtedness.
3.23 TRANSACTIONS WITH AFFILIATES; INVESTMENTS. There are no loans,
leases, royalty agreements or other continuing transactions between Company or
its Subsidiaries and any Affiliate of Company or its Subsidiaries, except
transactions in the ordinary course of business and on terms at least as
favorable to Company or its Subsidiaries as would be the case in an arms-length
transaction with an unaffiliated Person. Company and its Subsidiaries have no
Investments other than Permitted Investments.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser, for that
Purchaser alone, represents and warrants to Company upon the acquisition of the
Note and the Warrants as follows:
4.1 BINDING OBLIGATION. Such Purchaser has full legal capacity,
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. Each of this Agreement and the Security Agreement is a
valid and binding obligation of such Purchaser, enforceable in accordance with
its terms, except as limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the enforcement of creditors' rights
generally and general principles of equity.
4.2 SECURITIES LAW COMPLIANCE. Such Purchaser has been advised
that the Notes, the Warrants and the Warrant Shares have not been registered
under the Securities Act, or any state securities laws and, therefore, cannot be
resold unless they are registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration requirements is
available. Such Purchaser is aware that Company is under no obligation to effect
any such registration with respect to the Notes or, except as set forth in the
Registration Rights Agreement, the Warrants or the Warrant Shares, or to file
for or comply with any exemption from registration. Such Purchaser has not been
formed solely for the purpose of making this investment and is purchasing the
Notes and the Warrants to be acquired by such Purchaser hereunder for its own
account for investment, not as a nominee or agent, and not with a view to, or
for resale in connection with, the distribution thereof. Such Purchaser has such
knowledge and experience in financial and business matters that such Purchaser
is capable of evaluating the merits and risks of such investment, is able to
incur a complete loss of such investment and is able to bear the economic risk
of such investment for an indefinite period of time. Such Purchaser is an
accredited investor as such term is defined in Rule 501 of Regulation D under
the Securities Act.
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4.3 ACCESS TO INFORMATION. Such Purchaser acknowledges that
Company has given such Purchaser access to the corporate records and accounts of
Company and to all information in its possession relating to Company, has made
its officers and representatives available for interview by such Purchaser, and
has furnished such Purchaser with all documents and other information required
for such Purchaser to make an informed decision with respect to the purchase of
the Notes and the Warrants.
5. CONDITIONS TO CLOSING OF THE PURCHASERS. Each Purchaser's obligations
at the Closing are subject to the fulfillment, on or prior to the Closing Date,
of all of the following conditions, any of which may be waived in whole or in
part by all of the Purchasers:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Company in Section 3 hereof shall have been true and correct
when made, and shall be true and correct on the Closing Date.
5.2 GOVERNMENTAL APPROVALS AND FILINGS. Except for any notices
required or permitted to be filed after the Closing Date with certain federal
and state securities commissions, Company shall have obtained all governmental
approvals required in connection with the lawful sale and issuance of the Notes.
5.3 LEGAL REQUIREMENTS. At the Closing, the sale and issuance by
Company, and the purchase by the Purchasers, of the Notes shall be legally
permitted by all laws and regulations to which the Purchasers or Company are
subject.
5.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers.
5.5 OPINION OF COUNSEL. There shall have been delivered to the
Purchasers a favorable written opinion of Brobeck Phleger & Harrison counsel to
Company dated as of the Closing Date.
5.6 TRANSACTION DOCUMENTS. Company shall have duly executed and
delivered to the Purchasers and/or the Collateral Agent, as the case may be, the
following documents:
(a) This Agreement together with the Disclosure Schedule;
(b) Each Note described in Section 2.1;
(c) The Security Agreement;
(d) Each Warrant described in Section 2.1;
(e) The Registration Rights Agreement; and
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(f) All UCC-1 financing statements and other documents
and instruments which the Purchaser may reasonably request to perfect its
security interest in the collateral described in the Security Agreement.
5.7 CORPORATE DOCUMENTS. Company shall have delivered to the
Collateral Agent each of the following:
(a) The Articles of Incorporation of Company, certified
as of a recent date prior to the Closing Date by the Secretary of State of
Delaware.
(b) A Certificate of Good Standing or comparable
certificate as to Company, certified as of a recent date prior to the Closing
Date by the Secretary of State of Delaware and a Certificate of Good Standing
certified as of a recent date prior to the Closing Date by the Secretary of the
State of Florida.
(c) A certificate of the Secretary of Company, dated the
Closing Date, certifying (i) that the Certificate of Incorporation of Company,
delivered to Purchasers pursuant to Section 5.7(a) hereof, is in full force and
effect and has not been amended, supplemented, revoked or repealed since the
date of such certification; (ii) that attached thereto is a true and correct
copy of the Bylaws of Company as in effect on the Closing Date; (iii) that
attached thereto are true and correct copies of resolutions duly adopted by the
Board of Directors of Company and continuing in effect, which authorize the
execution, delivery and performance by Company of this Agreement and the Notes
and the consummation of the transactions contemplated hereby and thereby; and
(iv) that there are no proceedings for the dissolution or liquidation of Company
(commenced or threatened); and
(d) A certificate of the Secretary of Company, dated the
Closing Date, certifying the incumbency, signatures and authority of the
officers of Company authorized to execute and deliver this Agreement and the
Notes on behalf of Company and perform Company's obligations thereunder on
behalf of Company.
5.8 POST-CLOSING DOCUMENTS. Company shall employ its best efforts
to have delivered to the Collateral Agent each of the following on or before
April 7, 1999:
(a) A legal opinion of special Florida counsel to Company
as to the attachment and perfection of the security interest of the Collateral
Agent granted pursuant to the terms of the Security Agreement; and
(b) a duly completed debtor profile in the form
attached as Attachment 2 to the Security Agreement.
6. CONDITIONS TO OBLIGATIONS OF COMPANY. Company's obligation to issue and
sell the Notes at the Closing is subject to the fulfillment, on or prior to the
Closing Date, of the following conditions, any of which may be waived in whole
or in part by Company:
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6.1 Representations and Warranties. The representations and
warranties made by the Purchasers in Section 4 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date.
6.2 Governmental Approvals and Filings. Except for any notices
required or permitted to be filed after the Closing Date with certain federal
and state securities commissions, Company shall have obtained all governmental
approvals required in connection with the lawful sale and issuance of the Notes.
6.3 Legal Requirements. At the Closing, the sale and issuance by
Company, and the purchase by the Purchasers, of the Notes shall be legally
permitted by all laws and regulations to which the Purchasers or Company are
subject.
6.4 Purchase Price. Each Purchaser shall have delivered to Company
the Purchase Price in respect of the Note being purchased by such Purchaser
referenced in Section 1(b) hereof.
7. CERTAIN COVENANTS. While any amounts are outstanding under the Notes:
7.1 INDEBTEDNESS. Neither Company nor any of its Subsidiaries
shall create, incur, assume or permit to exist any Indebtedness except Permitted
Indebtedness.
7.2 LIENS. Neither Company nor any of its Subsidiaries shall
create, incur, assume or permit to exist any Lien on or with respect to any of
its assets or property of any character, whether now owned or hereafter
acquired, except for Permitted Liens.
7.3 ASSET DISPOSITIONS. Neither Company nor any of its
Subsidiaries shall sell, lease, transfer, license or otherwise dispose of
(collectively, a "Transfer") any of its assets or property, whether now owned or
hereafter acquired, except (i) Transfers in the ordinary course of its business
consisting of (A) the sale of inventory or units in its demonstration pool, or
(B) sales of worn-out or obsolete equipment, and (ii) Transfers of accounts
receivables pursuant to the EAB Permitted Debt Facility.
7.4 MERGERS, ACQUISITIONS, ETC. Neither Company nor any of its
Subsidiaries shall consolidate with or merge into any other Person or permit any
other Person to merge into it, or acquire all or substantially all of the assets
or capital stock of any other Person.
7.5 INVESTMENTS. Neither Company nor any of its Subsidiaries shall
make any Investment except for Permitted Investments.
7.6 DIVIDENDS, REDEMPTIONS, ETC. Neither Company nor any of its
Subsidiaries shall (i) pay any dividends or make any distributions on its equity
securities; (ii) purchase, redeem, retire, defease or otherwise acquire for
value any of its Equity Securities; (iii) return any capital to any holder of
its Equity Securities; (iv) make any distribution of assets, Equity Securities,
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<PAGE> 19
obligations or securities to any holder of its Equity Securities; or (v) set
apart any sum for any such purpose; provided, however, that any Subsidiary may
pay cash dividends to Company.
7.7 INDEBTEDNESS PAYMENTS. Neither Company nor any of its
Subsidiaries shall (i) prepay, redeem, purchase, defease or otherwise satisfy in
any manner prior to the scheduled repayment thereof any Indebtedness (other than
amounts due under the Notes); (ii) amend, modify or otherwise change the terms
of any Indebtedness for borrowed money (other than the Obligations) or lease
obligations so as to accelerate the scheduled repayment thereof; or (iii) repay
any Indebtedness for borrowed money owed to officers, directors or shareholders.
7.8 AFFILIATE TRANSACTIONS. Except as otherwise expressly
permitted by this Agreement, neither Company nor any of its Subsidiaries shall
enter into any contractual obligation with any Affiliate or engage in any other
transaction with any Affiliate except upon terms at least as favorable to
Company or such Subsidiary as an arms-length transaction with unaffiliated
Persons.
7.9 INFORMATION RIGHTS: NOTICES. Company shall furnish to Holders
the following:
(a) Quarterly Financial Statements. Within sixty (60)
days after the last day of each fiscal quarter, a copy of the Financial
Statements of Company for such quarter and for the fiscal year to date,
certified by the chief financial officer or controller of Company to present
fairly the financial condition, results of operations and other information
presented therein and to have been prepared in accordance with GAAP consistently
applied, subject to normal year end adjustments and except that no footnotes
need be included with such Financial Statements;
(b) Annual Financial Statements. Within one hundred (100)
days after the close of each fiscal year of Company, (i) copies of the audited
Financial Statements of Company for such year, audited by nationally recognized
independent certified public accountants, and (ii) management's discussion and
analysis of financial condition and results of operation ("MD&A") of Company and
its Subsidiaries (it being understood that the MD&A included in Company's Form
10-K filed with the Securities and Exchange Commission shall suffice for
purposes of this Section 7.9(b)(ii));
(c) SEC Reports. As soon as possible and in no event
later than five (5) Business Days after they are sent, made available or filed,
copies of all registration statements and reports filed by Company with the
Securities and Exchange Commission and all reports, proxy statements and
financial statements sent or made available by Company to its shareholders
generally; and
(d) Notice of Defaults. Promptly upon the occurrence
thereof, written notice of the occurrence of any Default hereunder or any event
of default with respect to any Indebtedness of Company or its Subsidiaries.
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(e) Other Information. Copies of the management letters
delivered by the accountants in connection with the Financial Statements
delivered pursuant to subsection 7.9(b) above, and other information reasonably
requested by any Holder, provided that prior to the disclosure of any such items
to such Holder, the Company may require that such Holder execute a
confidentiality agreement requiring it to keep confidential all such
information, except to the extent disclosure is required by law.
7.10 INSPECTION RIGHTS. Any Holder of the Notes or its
representatives shall have the right, at any time during normal business hours,
upon reasonable prior notice, to visit and inspect the properties of Company and
its corporate, financial and operating records, and make abstracts therefrom,
and to discuss Company's affairs, finances and accounts with its directors,
officers and independent public accountants; provided that prior to any such
inspection, the Company may require that such Holder execute a confidentiality
agreement requiring it to keep confidential all such information, except if
disclosure is required by law.
8. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement, the Notes and the other
Transaction Documents:
8.1 FAILURE TO PAY. Company shall fail to pay (i) when due any
principal payment under any Note on the due date thereof or (ii) any interest or
other payment required under the terms of this Agreement or any other
Transaction Document on the date due and such payment shall not have been made
within ten (10) days of when due; or
8.2 BREACHES OF CERTAIN COVENANTS. Company or any of its
Subsidiaries shall fail to observe or perform any covenant, obligation,
condition or agreement set forth in Section 7 (other than Section 7.9) of this
Agreement or in the Security Agreement; or
8.3 BREACHES OF OTHER COVENANTS. Company or any of its
Subsidiaries shall fail to observe or perform any other covenant, obligation,
condition or agreement contained in this Agreement or the other Transaction
Documents (other than those specified in Sections 8.1 and 8.2 and such failure
shall continue for ten (10) days; or
8.4 REPRESENTATIONS AND WARRANTIES. Any representation, warranty,
certificate, or other statement (financial or otherwise) made or furnished by or
on behalf of Company to Holder in writing in connection with this Agreement or
any of the other Transaction Documents, or as an inducement to the Holders to
enter into this Agreement and the other Transaction Documents, shall be false,
incorrect, incomplete or misleading in any material respect when made or
furnished; or
8.5 OTHER PAYMENT OBLIGATIONS. Company or any of its Subsidiaries
shall (i) fail to make any payment when due under the terms of any bond,
debenture, note or other evidence of Indebtedness to be paid by such Person
(excluding the Notes and the other Transaction Documents but including any other
evidence of Indebtedness of Company or any of its Subsidiaries to any Holder)
and such failure shall continue beyond any period of grace provided with respect
thereto, or
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(ii) default in the observance or performance of any other agreement, term or
condition contained in any such bond, debenture, note or other evidence of
Indebtedness, and the effect of such failure or default is to cause, or permit
the holder or holders thereof to cause, Indebtedness in an aggregate amount of
Two Hundred Thousand Dollars ($200,000) or more to become due prior to its
stated date of maturity; or
8.6 VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Company or any
of its Subsidiaries shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a substantial
part of its property, (ii) be unable, or admit in writing its inability, to pay
its debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v)
become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or
8.7 INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or any of its Subsidiaries or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking liquidation,
reorganization or other relief with respect to Company or any of its
Subsidiaries or the debts thereof under any bankruptcy, insolvency or other
similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
thirty (30) days of commencement; or
8.8 JUDGMENTS. Except as set forth in the Disclosure Schedule,
final judgment or order for the payment of money in excess of One Hundred
Thousand Dollars ($100,000) (exclusive of amounts covered by insurance issued by
an insurer not an Affiliate of Company) shall be rendered against Company or any
of its Subsidiaries and the same shall remain undischarged for a period of
thirty (30) days during which execution shall not be effectively stayed, or any
judgment, writ, assessment, warrant of attachment, or execution or similar
process shall be issued or levied against a substantial part of the property of
Company or any of its Subsidiaries and such judgment, writ, or similar process
shall not be released, stayed, vacated or otherwise dismissed within thirty (30)
days after issue or levy; or
8.9 TRANSACTION DOCUMENTS. Any Transaction Document or any
material term thereof shall cease to be, or be asserted by Company not to be, a
legal, valid and binding obligation of Company enforceable in accordance with
its terms or if the Liens of Holder in any of the assets of Company or its
Subsidiaries shall cease to be or shall not be valid, perfected Liens or Company
or any Subsidiary shall assert that such Liens are not valid, perfected Liens;
or
8.10 MATERIAL ADVERSE CHANGE. A Material Adverse Change shall
occur.
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9. RIGHTS OF HOLDERS UPON DEFAULT. Upon the occurrence or
existence of any Event of Default (other than an Event of Default, referred to
in Sections 8.6 and 8.7) and at any time thereafter during the continuance of
such Event of Default, the Holders of 25% or more of the outstanding principal
amount of the Notes, by written notice to Company, may declare all outstanding
Obligations payable by Company under all of the Notes to be immediately due and
payable without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived, anything contained herein or in the
other Transaction Documents to the contrary notwithstanding. Upon the occurrence
or existence of any Event of Default described in Sections 8.6 and 8.7,
immediately and without notice, all outstanding Obligations payable by Company
under all of the Notes shall automatically become immediately due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the other
Transaction Documents to the contrary notwithstanding. In addition to the
foregoing remedies, upon the occurrence or existence of any Event of Default,
Holder may exercise any other right power or remedy granted to it by the
Transaction Documents or otherwise permitted to it by law, either by suit in
equity or by action at law, or both.
10. MISCELLANEOUS.
10.1 WAIVERS AND AMENDMENTS. Any provision of this
Agreement may be amended, waived or modified only upon the written consent of
Company and Holders of a Majority in Interest; provided that without the written
consent of the Holders of all of the Notes then outstanding, no such amendment,
waiver or modification shall be effective if it would (i) change the time of
payment of the principal of or the interest on any Note or reduce the principal
amount thereof or change the rate of interest thereon, or (ii) change the
percentage of Holders of the Notes required to consent to any such amendment,
waiver or modification of any of the provisions of this Agreement.
10.2 GOVERNING LAW. This Agreement and all actions arising
out of or in connection with this Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
conflicts of law provisions of the State of New York or of any other state.
10.3 SURVIVAL. The representations, warranties, covenants
and agreements made herein shall survive the execution and delivery of this
Agreement.
10.4 SUCCESSORS AND ASSIGNS. Subject to the restrictions
on transfer described in Sections 10.5 and 10.6 below, the rights and
obligations of Company and the Purchasers of the Notes shall be binding upon and
benefit the successors, assigns, heirs, administrators and transferees of the
parties.
10.5 REGISTRATION, TRANSFER AND REPLACEMENT OF THE NOTES.
The Notes issuable under this Agreement shall be registered notes. Company will
keep, at its principal executive office, books for the registration and
registration of transfer of the Notes. Prior to presentation of any Note
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<PAGE> 23
for registration of transfer, Company shall treat the Person in whose name such
Note is registered as the owner and Holder of such Note for all purposes
whatsoever, whether or not such Note shall be overdue, and the Company shall not
be affected by notice to the contrary. Subject to any restrictions on or
conditions to transfer set forth in any Note, the Holder of any Note, at its
option, may in person or by duly authorized attorney surrender the same for
exchange at Company's chief executive office, and promptly thereafter and at
Company's expense, except as provided below, receive in exchange therefor one or
more new Note(s), each in the principal requested by such Holder, dated the date
to which interest shall have been paid on the Note so surrendered or, if no
interest shall have yet been so paid, dated the date of the Note so surrendered
and registered in the name of such Person or Persons as shall have been
designated in writing by such Holder or its attorney for the same principal
amount as the then unpaid principal amount of the Note so surrendered. Upon
receipt by Company of evidence reasonably satisfactory to it of the ownership of
and the loss, theft, destruction or mutilation of any Note and (i) in the case
of loss, theft or destruction, of indemnity reasonably satisfactory to it; or
(ii) in the case of mutilation, upon surrender thereof, Company, at its expense,
will execute and deliver in lieu thereof a new Note executed in the same manner
as the Note being replaced, in the same principal amount as the unpaid principal
amount of such Note and dated the date to which interest shall have been paid on
such Note or, if no interest shall have yet been so paid, dated the date of such
Note.
10.6 ASSIGNMENT BY COMPANY. Neither the Notes nor any of
the rights, interests or obligations hereunder may be assigned, by operation of
law or otherwise, in whole or in part, by Company without the prior written
consent of a Majority in Interest.
10.7 INDEMNITY. Company shall indemnify, reimburse and
hold each Purchaser, each of such Purchaser's equityholders, and each of their
respective successors, assigns, agents, officers, directors, shareholders,
servants, agents and employees (each, an "INDEMNIFIED PARTY") harmless from and
against all liabilities, losses, damages, actions, suits, demands, claims of any
kind and nature, all costs and expenses whatsoever to the extent they may be
incurred or suffered by such Indemnified Party in connection therewith
(including reasonable attorneys' fees and expenses), fines, penalties (and other
charges of applicable governmental authorities), damage to or loss of use of
property (including consequential or special damages to third parties or damages
to Company's property) (each, a "CLAIM"), directly or indirectly relating to or
arising out of the use of the proceeds of the sale of the Notes or otherwise,
the falsity of any representation or warranty of Company or Company's failure to
comply with the terms of this Agreement or any other Operative Document during
the Term; provided, however, that Company shall not indemnify an Indemnified
Party for any liability incurred by such Indemnified Party as a direct and sole
result of such Indemnified Party's gross negligence or willful misconduct. Such
indemnities shall continue in full force and effect, notwithstanding the
expiration or termination of this Agreement. Upon an Indemnified Party's written
demand, Company shall assume and diligently conduct, at its sole cost and
expense, the entire defense of such Indemnified Party, using counsel reasonably
acceptable to such Indemnified Party against any indemnified Claim. Company
shall not settle or compromise any Claim against or
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<PAGE> 24
involving an Indemnified Party without first obtaining such Indemnified Party's
written consent thereto, which consent shall not be unreasonably withheld.
10.8 ENTIRE AGREEMENT. This Agreement together with the
Notes and the other Transaction Documents constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
10.9 NOTICES. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or mailed by registered or certified
mail, postage prepaid, or by recognized overnight courier or personal delivery,
addressed (i) if to a Purchaser, at such Purchaser's address set forth in the
Schedule of Purchasers attached as Schedule I, or at such other address as such
Purchaser shall have furnished Company in writing, or (ii) if to Company, at its
address set forth at the beginning of this Agreement, or at such other address
as Company shall have furnished to the Purchasers in writing.
10.10 EXPENSES. Company shall pay on demand all reasonable
fees and expenses, including reasonable attorneys fees and expenses in
connection with the preparation, execution and delivery of this Agreement and
the other Transaction Documents, in an amount not to exceed $20,000.00 in the
aggregate. Company shall pay on demand all reasonable fees and expenses,
including reasonable attorneys' fees and expenses, incurred by Lender with
respect to any amendments or waivers hereof requested by Company or in the
enforcement or attempted enforcement of any of the obligations of Company to the
Purchasers under the Transaction Documents or in preserving any of the
Purchasers' rights and remedies (including, without limitation, all such fees
and expenses incurred in connection with any "workout" or restructuring
affecting the Transaction Documents or the obligations thereunder or any
bankruptcy or similar proceeding involving Company or any of its Subsidiaries).
10.11 SEPARABILITY OF AGREEMENTS; SEVERABILITY OF THIS
AGREEMENT. Company's agreement with each of the Purchasers is a separate
agreement and the sale of the Notes to each of the Purchasers is a separate
sale. Unless otherwise expressly provided herein, the rights of each Purchaser
hereunder are several rights, not rights jointly held with any of the other
Purchasers. Any invalidity, illegality or limitation on the enforceability of
the Agreement or any part thereof, by any Purchaser whether arising by reason of
the law of the respective Purchaser's domicile or otherwise, shall in no way
affect or impair the validity, legality or enforceability of this Agreement with
respect to other Purchasers. If any provision of this Agreement shall be
judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
10.12 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall be deemed to constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-24-
<PAGE> 25
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
date and year first written above.
COMPANY:
DIGITAL LIGHTWAVE, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
[SIGNATURES CONTINUE]
-25-
<PAGE> 26
PURCHASERS:
--------------------------------------
By
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
[SIGNATURES CONTINUE]
-26-
<PAGE> 27
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. NO SALE,
TRANSFER OR OTHER DISPOSITION OF THIS NOTE
MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (II)
AN OPINION OF COUNSEL FOR THE HOLDER THAT SUCH
REGISTRATION IS NOT REQUIRED OR (III) RECEIPT
OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED.
9% SECURED BRIDGE NOTE DUE JANUARY 17, 2000
$____________ March 31, 1999
FOR VALUE RECEIVED, Digital Lightwave, Inc., a Delaware corporation
(the "Company"), hereby promises to pay to the order of
__________________________ (the "Lender"), its successors and assigns in lawful
money of the United States of America, the principal sum of
______________Dollars ($________), or such lesser principal amount as may be
outstanding from time to time, no later than January 17, 2000 (the "Maturity
Date") or as otherwise provided in the Purchase Agreement (as defined below).
This Note shall bear interest (computed on the basis of a year of 360 days
comprised of twelve 30-day months) on the unpaid principal amount hereof at a
rate of interest equal to nine percent (9.0%) per annum. All accrued and unpaid
interest on this Note shall be paid semi-annually, with the first such payment
coming due on September 30, 1999, and on the Maturity Date. Any prepayment
hereunder shall be applied first to the interest accrued and unpaid hereon and
then to the unpaid principal amount hereof.
This Note is one of the "Notes" as defined in, and is subject to the
terms and conditions of, the Note and Warrant Purchase Agreement dated as of
March 31, 1999 (the "Purchase Agreement") among the Company and the parties
thereto listed as "Purchasers." The Purchase Agreement contains optional and
mandatory redemption provisions, acceleration rights upon Events of Default (as
defined in the Purchase Agreement) and other terms and conditions applicable to
this Note.
This Note is secured by a Security Agreement dated as of March 31,
1999 among the Company, C.E. Unterberg, Towbin, as collateral agent, and each
of the parties named as a "Secured Party" therein.
If any amount payable under this Note (or any interest payment
hereunder) becomes due and payable on a day other than a business day, the
maturity thereof shall be extended to the next succeeding business day. In the
event that the Company shall fail to pay when due (whether at maturity, by
reason of acceleration or otherwise) any principal of or interest on this Note,
such overdue amounts shall bear interest at a rate per annum equal to the
lesser of (i) eighteen percent (18%) per annum , or (ii) the highest percentage
rate of interest permitted under applicable law.
<PAGE> 28
The Company hereby waives diligence, demand, presentment, protest and
notice of any kind, and all rights of set-off, and assents to extensions of the
time of payment, release, surrender or substitution of security, or forbearance
or other indulgence, without notice. This Note may not be changed, modified or
terminated except in accordance with the Purchase Agreement. This Note shall be
binding upon the heirs, executors, administrators, successors and assigns of
the Company and inure to the benefit of the Lender and its permitted
successors, endorsees and assigns.
If any term or provision of this Note shall be held invalid, illegal
or unenforceable the validity, legality and enforceability of all other terms
and provisions hereof shall in no way be affected thereby. In the event any
interest is paid on this Note which is deemed to be in excess of the then legal
maximum rate, then that portion of the interest payment representing an amount
in excess of the then legal maximum rate shall be deemed a payment of principal
and applied against the principal of this Note.
This Note shall be governed by and construed in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed and delivered by its authorized officer as of the date and year first
written above.
DIGITAL LIGHTWAVE, INC.
By
--------------------------
Name:
Title:
<PAGE> 29
EXHIBIT B
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of March __, 1999, is executed by
DIGITAL LIGHTWAVE, INC., a Delaware corporation ("Debtor"), in favor of C.E.
Unterberg, Towbin ("Collateral Agent") on behalf of the parties listed listed
as secured parties on the signature page hereof (together with their successors
and assigns, the "Secured Parties").
RECITALS
A. Debtor and the Secured Parties have entered into a Note and
Warrant Purchase Agreement dated the date hereof (the "Note Purchase Agreement")
and Debtor has executed a 9% Senior Secured Bridge Note (each a "Note" and
collectively, the "Notes") in favor of each Secured Party.
B. In order to induce each Secured Party to extend the credit
evidenced by the Note, Debtor has agreed to enter into this Security Agreement
and to grant Collateral Agent the security interest in the Collateral described
below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby agrees with Collateral Agent and the Secured
Parties as follows:
1. Definitions and Interpretation. When used in this
Security Agreement, the following terms shall have the following respective
meanings:
"Account Debtor" shall have the meaning given to that term in
Section 3 hereof.
"Collateral" shall have the meaning given to that term in
Section 2 hereof.
"Equipment" shall have the meaning given to that term in
Attachment 1 hereto.
"Inventory" shall have the meaning given to that term in
Attachment 1 hereto.
"Obligations" shall mean and include all loans, advances,
debts, liabilities and obligations, howsoever arising, owed
by Debtor to the Secured Parties of every kind and
description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), now
existing or hereafter arising under or pursuant to the terms
of the Notes, the Note Purchase Agreement and the other
Transaction Documents, including, all interest, fees,
charges, expenses, attorneys'
<PAGE> 30
fees and costs and accountants' fees and costs chargeable to
and payable by Debtor hereunder and thereunder, in each case,
whether direct or indirect, absolute or contingent, due or to
become due, and whether or not arising after the commencement
of a proceeding under Title 11 of the United States Code (11
U.S.C. Section 101 et seq.), as amended from time to time
(including post-petition interest) and whether or not allowed
or allowable as a claim in any such proceeding.
"Receivables" shall have the meaning given to that term in
Attachment 1 hereto.
"UCC" shall mean the Uniform Commercial Code as in effect in
the State of Florida from time to time.
All capitalized terms not otherwise defined herein shall have the
respective meanings given in the Note Purchase Agreement. Unless otherwise
defined herein, all terms defined in the UCC shall have the respective meanings
given to those terms in the UCC.
2. Grant of Security Interest. As security for the Obligations,
Debtor hereby pledges and assigns to Collateral Agent and grants to Collateral
Agent a security interest in all right, title and interests of Debtor in and to
the property described in Attachment 1 hereto (collectively and severally, the
"Collateral"), which Attachment 1 is incorporated herein by this reference.
3. Representations and Warranties. Debtor represents and
warrants to Collateral Agent and the Secured Parties that (a) Debtor is the
owner of the Collateral (or, in the case of after-acquired Collateral, at the
time Debtor acquires rights in the Collateral, will be the owner thereof) and
that no other Person has (or, in the case of after-acquired Collateral, at the
time Debtor acquires rights therein, will have) any right, title, claim or
interest (by way of Lien or otherwise) in, against or to the Collateral, other
than Permitted Liens; (b) Collateral Agent has (or in the case of
after-acquired Collateral, at the time Debtor acquires rights therein, will
have) a perfected security interest in the Collateral, subject to Permitted
Liens; (c) each Receivable is genuine and enforceable against the party
obligated to pay the same (an "Account Debtor"); and (d) all information set
forth in Attachment 2 whall be true and correct when completed by Debt and
delivered to Collateral Agent.
4. Covenants Relating to Collateral. Debtor hereby agrees (a)
to perform all acts that may reasonably be necessary to maintain, preserve,
protect and perfect the Collateral, the Lien granted to Collateral Agent
therein and the priority of such Lien, subject to for Permitted Liens; (b) not
to use or permit any Collateral to be used (i) in violation of any provision of
any Transaction Document, (ii) in violation of any applicable law, rule or
regulation, or (iii) in violation of any policy of insurance covering the
Collateral; (c) to pay promptly when due all taxes and other governmental
charges, all Liens and all other charges now or hereafter imposed upon or
affecting any Collateral other than Permitted Liens; (d) without 30 days'
written notice to Collateral Agent, (i) not to change Debtor's name or place of
business (or, if Debtor has more than one place of business, its chief
executive office), or the office in which Debtor's records relating to
Receivables are kept, (ii) not to keep Collateral consisting of chattel paper
at any location other than its chief executive office set forth in item 1 of
Attachment 2 hereto, and (iii) not to keep
-2-
<PAGE> 31
Collateral consisting of Equipment or Inventory at any location other than the
locations set forth in item 6 of Attachment 2 hereto, (e) to procure, execute
and deliver from time to time any endorsements, assignments, financing
statements and other writings reasonably deemed necessary or appropriate by
Collateral Agent to perfect, maintain and protect its Lien hereunder and the
priority thereof, subject to Permitted Liens, and to deliver promptly to
Collateral Agent all originals of Collateral consisting of instruments; (f) to
appear in and defend any action or proceeding which may affect its title to or
Collateral Agent's interest in the Collateral; and (g) to collect, enforce and
receive delivery of the Receivables in accordance with past practice until
otherwise notified by Collateral Agent.
5. Authorized Action by Agent. Debtor hereby irrevocably
appoints Collateral Agent as its attorney-in-fact and agrees that Collateral
Agent may perform (but Collateral Agent shall not be obligated to and shall
incur no liability to Debtor or any third party for failure so to do) any act
which Debtor is obligated by this Security Agreement to perform, and to
exercise such rights and powers as Debtor might exercise with respect to the
Collateral, including the right to (a) collect by legal proceedings or
otherwise and endorse, receive and receipt for all dividends, interest,
payments, proceeds and other sums and property now or hereafter payable on or
on account of the Collateral; (b) enter into any extension, reorganization,
deposit, merger, consolidation or other agreement pertaining to, or deposit,
surrender, accept, hold or apply other property in exchange for the Collateral;
(c) insure, process and preserve the Collateral; (d) make any compromise or
settlement, and take any action it deems advisable, with respect to the
Collateral; (e) pay any Indebtedness of Debtor relating to the Collateral; and
(f) execute UCC financing statements and other documents, instruments and
agreements required hereunder; provided, however, that Collateral Agent shall
not exercise any such powers prior to the occurrence of an Event of Default and
shall only exercise such powers during the continuance of an Event of Default.
Debtor agrees to reimburse Collateral Agent upon demand for any reasonable
costs and expenses, including attorneys' fees, Collateral Agent may incur while
acting as Debtor's attorney-in-fact hereunder, all of which costs and expenses
are included in the Obligations. It is further agreed and understood between
the parties hereto that such care as Collateral Agent gives to the safekeeping
of its own property of like kind shall constitute reasonable care of the
Collateral when in Collateral Agent's possession; provided, however, that
Collateral Agent shall not be required to make any presentment, demand or
protest, or give any notice and need not take any action to preserve any rights
against any prior party or any other person in connection with the Obligations
or with respect to the Collateral.
6. Default and Remedies. Debtor shall be deemed in default under
this Security Agreement upon the occurrence and during the continuance of an
Event of Default (as defined in the Note Purchase Agreement). Upon the
occurrence and during the continuance of any such Event of Default, Collateral
Agent shall have the rights of a secured creditor under the UCC, all rights
granted by this Security Agreement and by law, including the right to: (a)
require Debtor to assemble the Collateral and make it available to Collateral
Agent at a place to be designated by Collateral Agent; and (b) prior to the
disposition of the Collateral, store, process, repair or recondition it or
otherwise prepare it for disposition in any manner and to the extent Collateral
Agent deems appropriate and in connection with such preparation and
disposition, without charge, use any trademark, trade name, copyright, patent
or technical process used by Debtor. Debtor
-3-
<PAGE> 32
hereby agrees that ten (10) days' notice of any intended sale or disposition of
any Collateral is reasonable. In furtherance of Collateral Agent's rights
hereunder, Debtor hereby grants to Collateral Agent an irrevocable,
non-exclusive license (exercisable without royalty or other payment by
Collateral Agent, but only in connection with the exercise of remedies
hereunder) to use, license or sublicense any patent, trademark, trade name,
copyright or other intellectual property in which Debtor now or hereafter has
any right, title or interest together with the right of access to all media in
which any of the foregoing may be recorded or stored.
7. Collateral Agent.
(a) Appointment. The Secured Parties hereby appoint C.E. Unterberg,
Towbin as collateral agent for the Secured Parties under this Security
Agreement (in such capacity, the "Collateral Agent") to serve from the date
hereof until the termination of the Security Agreement.
(b) Powers and Duties of Collateral Agent, Indemnity by Secured
Parties.
(i) Each Secured Party hereby irrevocably authorizes the
Collateral Agent to take such action and to exercise such powers hereunder as
provided herein or as requested in writing by the holders of a majority of the
principal amount of the outstanding Notes in accordance with the terms hereof,
together with such powers as are reasonably incidental thereto. In addition,
Collateral Agent is hereby authorized by the Secured Parties to hold any lien
subordination agreements required by any holders of Permitted Facility Debt.
Collateral Agent may execute any of its duties hereunder by or through agents
or employees and shall be entitled to request and act in reliance upon the
advise of counsel concerning all matters pertaining to its duties hereunder and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance therewith.
(ii) Neither the Collateral Agent nor any of its
directors, officers or employees shall be liable or responsible to any Secured
Party or to Debtor for any action taken or omitted to be taken by Collateral
Agent or any other such person hereunder or under any related agreement,
instrument or document, except in the case of gross negligence or willful
misconduct on the part of the Collateral Agent, nor shall the Collateral Agent
or any of its directors, officers or employees be liable or responsible for (A)
the validity, effectiveness, sufficiency, enforceability or enforcement of the
Notes, this Security Agreement or any instrument or document delivered
hereunder or relating hereto; (B) the title of Debtor to any of the Collateral
or the freedom of any of the Collateral from any prior or other liens or
security interests; (C) the determination, verification or enforcement of
Debtor's compliance with any of the terms and conditions of this Security
Agreement; (D) the failure by Debtor to deliver any instrument or document
required to be delivered pursuant to the terms hereof; or (E) the receipt,
disbursement, waiver, extension or other handling of payments or proceeds made
or received with respect to the collateral, the servicing of the Collateral or
the enforcement or the collection of any amounts owing with respect to the
Collateral.
(iii) In the case of this Security Agreement and the
transactions contemplated hereby and any related document relating to any of
the Collateral, each of the Secured Parties agrees to pay to the Collateral
Agent, on demand, its pro rata share of all fees and
-4-
<PAGE> 33
all expenses incurred in connection with the operation and enforcement of this
Security Agreement, the Notes or any related agreement to the extent that such
fees or expenses have not been paid by Debtor. In the case of this Security
Agreement and each instrument and document relating to any of the Collateral,
each of the Secured Parties and the Debtor hereby agrees to hold the Collateral
Agent harmless, and to indemnify the Collateral Agent from and against any and
all loss, damage, expense or liability which may be incurred by the Collateral
Agent under this Security Agreement and the transactions contemplated hereby
and any related agreement or other instrument or document, as the case may be,
unless such liability shall be caused by the willful misconduct or gross
negligence of the Collateral Agent.
8. Miscellaneous.
(a) Notices. Except as otherwise provided herein, all
notices, requests, demands, consents, instructions or other communications to
or upon Debtor or Secured Party under this Security Agreement shall be by
telecopy or in writing and telecopied, mailed or delivered to each party at
telecopier number or its address set forth below (or to such other telecopy
number or address as the recipient of any notice shall have notified the other
in writing). All such notices and communications shall be effective (a) when
sent by Federal Express or other overnight service of recognized standing, on
the Business Day following the deposit with such service; (b) when mailed, by
registered or certified mail, first class postage prepaid and addressed as
aforesaid through the United States Postal Service, upon receipt; (c) when
delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of
receipt.
Collateral Agent:
Swiss Bank Tower
10 E. 50th Street, 22nd Floor
New York, NY 10022
Attn: Chief Financial Officer
Telephone No.: 212-572-8000
Telecopier No.: 212-888-8611
Debtor:
15550 Lightwave Drive
Clearwater, FL 33760
Attn: Chief Financial Officer
Telephone No.: 813-442-6677
Telecopier No.: 813-442-5660
(b) Nonwaiver. No failure or delay on Collateral Agent's
part in exercising any right hereunder shall operate as a waiver thereof or of
any other right nor shall any single or partial exercise of any such right
preclude any other further exercise thereof or of any other right.
(c) Amendments and Waivers. This Security Agreement may
not be amended or modified, nor may any of its terms be waived, except by
written instruments signed by Debtor
-5-
<PAGE> 34
and Collateral Agent. Each waiver or consent under any provision hereof shall
be effective only in the specific instances for the purpose for which given.
(d) Assignments. This Security Agreement shall be
binding upon and inure to the benefit of Collateral Agent and Debtor and their
respective successors and assigns; provided, however, that Debtor may not sell,
assign or delegate rights and obligations hereunder without the prior written
consent of Collateral Agent.
(e) Cumulative Rights, etc. The rights, powers and
remedies of Collateral Agent under this Security Agreement shall be in addition
to all rights, powers and remedies given to Collateral Agent by virtue of any
applicable law, rule or regulation of any Governmental Authority, any
Transaction Document or any other agreement, all of which rights, powers, and
remedies shall be cumulative and may be exercised successively or concurrently
without impairing Collateral Agent's rights hereunder. Debtor waives any right
to require Collateral Agent to proceed against any Person or to exhaust any
Collateral or to pursue any remedy in Collateral Agent's power.
(f) Payments Free of Taxes, Etc. All payments made by
Debtor under this Security Agreement shall be made by Debtor free and clear of
and without deduction for any and all present and future taxes, levies,
charges, deductions and withholdings. In addition, Debtor shall pay upon demand
any stamp or other taxes, levies or charges of any jurisdiction with respect to
the execution, delivery, registration, performance and enforcement of this
Security Agreement. Upon request by Secured Party Collateral Agent, Debtor
shall furnish evidence satisfactory to Collateral Agent that all requisite
authorizations and approvals by, and notices to and filings with, governmental
authorities and regulatory bodies have been obtained and made and that all
requisite taxes, levies and charges have been paid.
(g) Partial Invalidity. If at any time any provision of
this Security Agreement is or becomes illegal, invalid or unenforceable in any
respect under the law or any jurisdiction, neither the legality, validity or
enforceability of the remaining provisions of this Security Agreement nor the
legality, validity or enforceability of such provision under the law of any
other jurisdiction shall in any way be affected or impaired thereby.
(h) Expenses. Debtor shall pay on demand all reasonable
fees and expenses, including reasonable attorneys' fees and expenses, incurred
by Collateral Agent in connection with custody, preservation or sale of, or
other realization on, any of the Collateral or the enforcement or attempt to
enforce any of the Obligations which is not performed as and when required by
this Security Agreement.
(i) Headings. Headings in this Security Agreement and
each of the other Transaction Documents are for convenience of reference only
and are not part of the substance hereof or thereof.
(j) Plural Terms. All terms defined in this Security
Agreement or any other Transaction Document in the singular form shall have
comparable meanings when used in the plural form and vice versa.
-6-
<PAGE> 35
(k) Governing Law. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without reference to conflicts of law rules (except to the extent governed by
the UCC).
(l) Jury Trial. EACH OF DEBTOR AND COLLATERAL AGENT, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY
AGREEMENT.
-7-
<PAGE> 36
IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be
executed as of the day and year first above written.
DIGITAL LIGHTWAVE, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
AGREED:
C.E. UNTERBERG, TOBIN
as Collateral Agent
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-8-
<PAGE> 37
SECURED PARTIES:
AGREED:
- --------------------------
(Entity Name)
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-9-
<PAGE> 38
ATTACHMENT 1
TO SECURITY AGREEMENT
All right, title and interest of Debtor now owned or hereafter acquired in and
to the following:
All equipment and fixtures (including, without limitation, furniture, vehicles
and other machinery and office equipment), together with all additions and
accessions thereto and replacements therefor (collectively, the "Equipment");
All inventory (including, without limitation, (i) all boards, processors and
lasers other raw materials, work in process and finished goods and (ii) all
such goods which are returned to or repossessed by Debtor), together with all
additions and accessions thereto, replacements therefor, products thereof and
documents therefor (collectively, the "Inventory");
All accounts, chattel paper, contract rights and rights to the payment of money
(collectively, the "Receivables");
All general intangibles, including, without limitation, (i) customer and
supplier lists and contracts, books and records, insurance policies, tax
refunds, contracts for the purchase of real or personal property; (ii) all
patents, copyrights, trademarks, trade names, service marks and other
intellectual property rights, (iii) all licenses to use, applications for, and
other rights to, such patents, copyrights, trademarks, trade names and service
marks, and (iv) all goodwill of Debtor;
All deposit accounts, money, certificated securities (but excluding securities
of foreign Subsidiaries), uncertificated securities, instruments and
documents; and
All proceeds of the foregoing (including, without limitation, whatever is
receivable or received when Collateral or proceeds is sold, collected,
exchanged, returned, substituted or otherwise disposed of, whether such
disposition is voluntary or involuntary, including rights to payment and return
premiums and insurance proceeds under insurance with respect to any Collateral,
and all rights to payment with respect to any cause of action affecting or
relating to the Collateral); provided, however, that the foregoing shall not be
construed to include, and the Collateral shall not include, (i) (in each case
except to the extent provided in Section 9-318(4) of the UCC) any account,
right or intangible arising from any contract or agreement if such inclusion
could violate such contract or agreement, or (ii) any accounts receivable
subject to sale, assignment or transfer ___ Section 1 of the EAB Permitted Debt
Facility.
Att. 1-1
<PAGE> 39
ATTACHMENT 2
TO SECURITY AGREEMENT
DEBTOR PROFILE
1. The legal name of the Debtor is and the address of its chief executive
office is: Digital Lightwave ______________________________.
2. Debtor was incorporated on _____________, 19__ in the state of _______
____________________. Since its incorporation Debtor has had the
following legal names (other than its current legal name):
Date of the Debtor's Name
Date Debtor's Name Prior Name Date Changed
3. Debtor does business under the following trade names:
Trade Name Is This Name Registered? Number Registration Date
4. Since Debtor's incorporation the following companies have been merged
into Debtor (provide names, dates and brief description of
transactions):
5. The following assets of Debtor were acquired in a bulk sale or another
transaction not in the ordinary course of business of the seller
(provide description of collateral, date and description of
transaction, and name of seller):
Att. 2-1
<PAGE> 40
6. Debtor has the following places of business:
Brief Description
Address Owner of Location of Assets and Value
7. Debtor has assets at the following other locations that are not places
of business of Debtor:
Brief Description
Address Owner of Location of Assets and Value
The following locations listed in items 6 and 7 are public warehouses issuing
warehouse receipts:
8. Debtor had the following other locations within the past four months:
Brief Description
Address Owner of Location of Assets and Value
9. Debtor imports assets from outside the United States through the
following ports of entry (list location by state and county):
Att. 2-2
<PAGE> 41
10. The following Persons have possession of inventory of Debtor for the
purpose of processing or finishing it:
Name and Address Processing Services Description of inventory
11. Debtor is qualified to do business in the following states:
12. Does Debtor regularly receive letters of credit from customers to
secure payments of sums owed to Debtor? Yes . No .
----- -----
13. Debtor holds notes payable from the following persons:
Name of Obligor Amount
14. Does Debtor regularly have accounts receivable due from, or contracts
with, the United States government or any agency or department
thereof? Yes . No .
----- -----
If yes, indicate the percentage of Debtor's total outstanding accounts
receivable that are due from the United States government or such
agency or department: _____%
15. Does Debtor regularly receive advance deposits from customers for
goods not yet delivered to such customers? Yes . No .
----- -----
16. Debtor's federal employer identification number is: _________________.
Att. 2-3
<PAGE> 42
17. Debtor's assets are subject to the following security interest of
Persons other than the Collateral Agent:
Assets Name of Secured Party
18. The following tax assessments are currently outstanding and unpaid:
Assessing Authority Amount and Description
19. Debtor has directly or indirectly guaranteed the following obligations
of third parties:
Secured Party Amount Debtor
20. Debtor owns the following material intellectual property rights
(including patents, trademarks and copyrights, whether or not
registered):
21. The following is a list of all software or other copyrighted material
which is licensed to third parties and generates accounts receivable:
22. Debtor has the following subsidiaries (list jurisdiction and date of
incorporation, federal employer identification number, type and value
of assets):
Att. 2-4
<PAGE> 43
EXHIBIT C
NEITHER THIS WARRANT NOR THE SHARES OF STOCK
ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. NO SALE, TRANSFER OR OTHER
DISPOSITION OF THIS WARRANT OR SAID SHARES MAY
BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO, (II) AN OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH REGISTRATION
IS NOT REQUIRED OR (III) RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS
NOT REQUIRED.
Number of Shares Issuable Upon Exercise:
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
Expires: 5:00 p.m. (E.S.T.) March 31, 2004
THIS CERTIFIES THAT, for value received, _____________, a
________________, is entitled to subscribe for and purchase ________ shares (as
adjusted pursuant to the provisions hereof, the "Shares") of the Common Stock
of Digital Lightwave, Inc., a Delaware corporation (the "Company"), at a price
per share of $___ (as adjusted pursuant to the provisions hereof, the "Exercise
Price"), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, the term "Common Stock" shall mean the
Company's presently authorized Common Stock, and any stock into or for which
such Common Stock may hereafter be converted or exchanged, and the term "Grant
Date" shall mean March 31, 1999.
1. Term. This Warrant is exercisable, in whole or in part, at
any time and from time to time from and after the Grant Date and prior to March
31, 2004
2. Method of Exercise; Net Issue Exercise.
2.1 Method of Exercise; Payment; Issuance of New
Warrant. This Warrant may be exercised by the holder hereof at any time prior
to its expiration, in whole or in part and from time to time, at the election
of the holder hereof, by the surrender of this Warrant (with the Notice of
Exercise form attached hereto as Exhibit A duly executed) at the principal
office of the Company and by the payment to the Company, by cash, check or
cancellation of indebtedness, of an amount equal to the Exercise Price per
share multiplied by the number of Shares then being purchased. The person or
persons in whose name(s) any certificate(s) representing Shares shall be
issuable upon
<PAGE> 44
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes as the record holder(s) of, the
Shares represented thereby (and such Shares shall be deemed to have been
issued) immediately prior to the close of business on the date or dates upon
which this Warrant is exercised. In the event of any exercise of this Warrant,
certificates for the Shares so purchased shall be delivered to the holder
hereof as soon as possible and in any event within fifteen (15) days of receipt
of such notice and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof as soon as possible thereafter.
2.2 Automatic Exercise. To the extent this Warrant is
not previously exercised, and if the fair market value of one share of the
Company's Common Stock is greater than the Exercise Price then in effect, this
Warrant shall be deemed automatically exercised pursuant to Section 2.3 below
(even if not surrendered) immediately before its expiration. For purposes of
such automatic exercise, the fair market value of one share of the Company's
Common Stock upon such expiration shall be determined pursuant to Section 2.3
(b) below. To the extent this Warrant or any portion thereof is deemed
automatically exercised pursuant to this Section 2.2, the Company agrees to
promptly notify the holder hereof of the number of Shares, if any, the holder
hereof is to receive by reason of such automatic exercise.
2.3 Right to Convert Warrant into Stock: Net Issuance.
(a) In addition to and without limiting the
rights of the holder under the terms of this Warrant, at any time prior to its
expiration, the holder may elect to convert this Warrant or any portion thereof
(the "Conversion Right") into shares of Common Stock, the aggregate value of
which shares shall be equal to the value of this Warrant or the portion thereof
being converted. The Conversion Right may be exercised by the holder by
surrender of this Warrant at the principal office of the Company together with
notice of the holder's intention to exercise the Conversion Right, in which
event the Company shall issue to the holder a number of shares of the Company's
Common Stock computed using the following formula:
X = Y ( A - B )
A
Where: X = The number of shares of Common Stock to be issued to
the holder.
Y = The number of shares of Common Stock purchasable
under this Warrant subject to the exercise election.
A = The fair market value of one share of the Company's
Common Stock.
B = Exercise Price (as adjusted to the date of such
calculations).
(b) For purposes of this Section 2.3, the "fair
market value" per share of the Company's Common Stock shall mean:
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<PAGE> 45
(i) If the Common Stock is traded on a
national securities exchange or admitted to unlisted trading privileges on such
an exchange, or is listed on the National Market System (the "National Market
System") of the National Association of Securities Dealers Automated Quotations
System (the "NASDAQ"), the fair market value shall be the average of the last
reported sale prices of the Common Stock on such exchange or on the National
Market System on the last ten (10) trading days (or all such trading days such
Common Stock has been traded if fewer than 10 trading days) before the
effective date of exercise of the Conversion Right or if no such sale is made
on any such day, the mean of the closing bid and asked prices for such day on
such exchange or on the National Market System;
(ii) If the Common Stock is not so
listed or admitted to unlisted trading privileges, the fair market value shall
be the average of the means of the last bid and asked prices reported on the
last ten (10) trading days (or all such trading days such Common Stock has been
traded if fewer than 10 trading days) before the date of the election (1) by
the NASDAQ or (2) if reports are unavailable under clause (1) above, by the
National Quotation Bureau Incorporated; and
(iii) If the Common Stock is not so
listed or admitted to unlisted trading privileges and bid and ask prices are
not reported, the fair market value shall be determined in good faith by the
Board of Directors of the Company.
(c) Notwithstanding the foregoing, in the event that the
"fair market value" is determined pursuant to Section 2.3(b)(iii) above, then
the Company shall provide the holder of this Warrant with written notice of its
determination of "fair market value" within ten (10) days following receipt of
the notice of exercise and the holder shall have five (5) days following the
date of receipt of such written notice to withdraw its notice of exercise.
3. Stock Fully Paid; Reservation of Shares. All Shares that may
be issued upon the exercise of this Warrant shall, upon issuance, be validly
issued, fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which this
Warrant may be exercised, the Company will at all times have duly authorized
and reserved, for the purpose of issuance upon exercise of this Warrant, a
sufficient number of shares of Common Stock.
4. Adjustments to Exercise Price and Number of Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time as set
forth in Appendix I hereto upon the occurrence of certain events described
therein. The provisions of Appendix I are incorporated by reference herein with
the same effect as if set forth in full herein.
5. Notices of Record Date. In the event of any taking by the
Company of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire any
share of
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<PAGE> 46
any class or any other securities or property, or to receive any other right,
or for the purpose of determining shareholders who are entitled to vote in
connection with any proposed merger or consolidation of the Company with or
into any other corporation, or any proposed sale, lease or conveyance of all or
substantially all of the assets of the Company, or any proposed liquidation,
dissolution or winding up of the Company, then, in connection with each such
event, the Company shall mail to the holder of this Warrant at least twenty
(20) days prior written notice of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right(s) or vote of the
shareholders. Each such written notice shall specify the amount and character
of any such dividend, distribution or right(s), and shall set forth, in
reasonable detail, the matter requiring any such vote of the shareholders.
6. Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based upon the
per share fair market value of the Common Stock on the date of exercise.
7. Compliance with Securities Act; Disposition of Warrant or
Shares of Common Stock.
(a) Compliance with Securities Act. The holder of this
Warrant, by acceptance hereof, agrees that this Warrant, the Shares to be
issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant or any Shares
to be issued upon exercise hereof except under circumstances which will not
result in a violation of the Securities Act. This Warrant and all Shares issued
upon exercise of this Warrant (unless registered under the Securities Act)
shall be stamped or imprinted with a legend in substantially the following
form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
(I) AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (II) AN OPINION OF COUNSEL FOR THE
HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR
(III) RECEIPT OF A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
(b) Disposition of Warrant and Shares. With respect to
any offer, sale or other disposition of this Warrant or any Shares acquired
pursuant to the exercise of this Warrant prior to registration thereof, the
holder hereof and each subsequent holder of this Warrant agrees to give written
notice to the Company prior thereto, describing briefly the manner thereof,
together with a written opinion of such holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the
Securities Act as then in effect or any federal or state law then in effect) of
this Warrant or such
-4-
<PAGE> 47
Shares and indicating whether or not under the Securities Act certificates for
this Warrant or such Shares to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
insure compliance with the Securities Act. Each certificate representing this
Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144)
shall bear a legend as to the applicable restrictions on transferability in
order to insure compliance with the Securities Act unless, in the aforesaid
opinion of counsel for the holder, such legend is not required in order to
insure compliance with the Securities Act. Nothing herein shall restrict the
transfer of this Warrant or any portion hereof by the initial holder hereof to
any partnership affiliated with the initial holder, or to any partner of any
such partnership provided such transfer may be made in compliance with
applicable federal and state securities laws. The Company may issue stop
transfer instructions to its transfer agent in connection with the foregoing
restrictions.
8. Rights as Shareholders; Information.
8.1 Shareholder Rights. Except as set forth herein, no
holder of this Warrant, as such, shall be entitled to vote upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or be deemed the holder of Common Stock until this Warrant shall have
been exercised and the Shares purchasable upon such exercise shall have become
deliverable, as provided herein.
8.2 Financial Statements and Information. The Company
shall deliver to the registered holder hereof (i) within one hundred (100) days
after the end of the fiscal year of the Company, a consolidated balance sheet
of the Company as of the end of such year and a consolidated statement of
income, cash flows and shareholders' equity for such year, which year-end
financial reports shall be in reasonable detail and certified by independent
public accountants of nationally recognized standing selected by the Company,
and (ii) within sixty-five (65) days after the end of each fiscal quarter
(other than the last fiscal quarter), unaudited consolidated statements of
income and cash flows for such quarter and a consolidated balance sheet as of
the end of such quarter, certified by the Company's chief financial officer. In
addition, the Company shall deliver to the registered holder hereof any other
information or data provided generally to the shareholders of the Company.
9. Registration Rights The holder of this Warrant (and any
transferee pursuant to subsection 7(b) hereof) shall be entitled to
registration rights set forth in that certain Registration Rights Agreement,
dated as of March 31, 1999 (the "Registration Rights Agreement").
10. Mergers. The Company agrees to provide the holder of this
Warrant with at least thirty (30) days' prior written notice of the terms and
conditions of any proposed transaction, in which the Company would (i) sell,
lease, exchange, convey or otherwise dispose of all or substantially all of its
property or business, or (ii) merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary of the Company), or effect
any transaction (including a merger or other reorganization) or series of
related transactions, in which more than fifty percent (50%) of the voting
power of the Company is disposed of.
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<PAGE> 48
11. Representations and Warranties. This Warrant is issued and
delivered on the basis of the following:
(a) This Warrant has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding obligation of
the Company, enforceable in accordance with its terms;
(b) The Shares have been duly authorized and reserved
for issuance by the Company and, when issued in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and restrictions
granted to or imposed upon the Shares and the holders thereof are as set forth
in the Company's Certificate of Incorporation, as amended (the "Charter"), a
true and complete copy of which has been delivered to the original holder of
this Warrant; and
(d) As of the Grant Date, the capitalization of the
Company shall be as set forth in the Capitalization Schedule attached hereto as
Appendix II, which indicates the following: (i) the authorized capital stock of
the Company (including the authorized number of shares of Common Stock); (ii)
the number of shares of capital stock that have been issued; (iii) the number
of shares for which options have been granted under any employee, officer or
director stock ownership plan; and (iv) any other securities that are
convertible into or exchangeable for capital stock of the Company or options to
purchase or rights to subscribe for capital stock of the Company or such
convertible or exchangeable securities, and the number of shares of capital
stock of the Company issuable upon any conversion, exchange or exercise of such
securities, options or rights. All issued and outstanding shares of the
Company's capital stock have duly authorized and validly issued, and are fully
paid and nonassessable. Except as set forth in Appendix II, there are no
outstanding rights, options, warrants, conversion rights, preemptive rights,
rights of first refusal or similar rights for or understandings relating to the
purchase or acquisition from the Company of any securities of the Company.
(e) The execution and delivery of this Warrant, the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof and the compliance by the Company with the provisions hereof (i)
are not and will not be inconsistent with the Company's Charter or Bylaws, (ii)
do not and will not contravene any law, governmental rule or regulation,
judgment or order applicable to the Company, and (iii) do not and will not
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound or require the consent or approval of, the giving of notice
to, the registration with or the taking of any action in respect of or by, any
Federal, state or local government authority or agency or other person.
13. Modification and Waiver. This Warrant and any provision
hereof may be changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of the same is sought.
-6-
<PAGE> 49
14. Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be
delivered or sent to each such holder at its address as shown on the books of
the Company or to the Company at the address indicated therefor on the
signature page of this Warrant and shall be deemed received by the holder upon
the earlier of actual receipt or, if sent by certified mail (postage pre-paid),
five (5) days after deposit in the U.S. mail.
15. Binding Effect on Successors. This Warrant shall be binding
upon any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of the
obligations of the Company relating to the Shares shall survive the exercise
and termination of this Warrant. All of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof. The Company will, at the time of the exercise of this Warrant, in whole
or in part, upon request of the holder hereof but at the Company's expense,
acknowledge in writing its continuing obligation to the holder hereof in
respect of any rights (including, without limitation, any right to registration
of the Shares in accordance with the Registration Rights Agreement) to which
the holder hereof shall continue to be entitled after such exercise in
accordance with this Warrant; provided, that the failure of the holder hereof
to make any such request shall not affect the continuing obligation of the
Company to the holder hereof in respect of such rights.
16. Lost Warrants or Stock Certificates. The Company covenants to
the holder hereof that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant or any
stock certificate issued upon exercise thereof and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant or stock certificate, the Company
shall make and deliver a new Warrant or stock certificate, or like tenor, in
lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
17. No Impairment. The Company will not, by amendment of its
Charter or through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will at
all times in good faith assist in the carrying out of all the provisions of
this Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holder of this Warrant
against impairment.
18. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
19. Recovery of Litigation Costs. If any legal action or other
proceeding is brought for the enforcement of this Warrant, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Warrant, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
-7-
<PAGE> 50
incurred in that action or proceeding, in addition to any other relief to which
it or they may be entitled.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 51
20. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE
LAWS OF THE STATE OF NEW YORK.
Date: _________, 1999 DIGITAL LIGHTWAVE, INC.,
a Delaware corporation
By
------------------------------
Name:
Title:
--------------------------
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<PAGE> 52
EXHIBIT A
NOTICE OF EXERCISE
To: Digital Lightwave, Inc.
1. The undersigned hereby:
*elects to purchase __________ shares of Common Stock of the Company
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full; or
*elects to exercise its net issuance rights pursuant to Section 2.3 of
the attached Warrant with respect to __________ shares of Common Stock.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
(Address)
---------------
(Date)
<PAGE> 53
APPENDIX I
ADJUSTMENT PROVISIONS
1. Capitalized Terms. Capitalized terms used in this Appendix I that
are not otherwise defined herein shall have the respective meanings assigned to
them in the Warrant, dated as of March __, 1999, to which this Appendix I is
attached, if therein defined.
2. Reclassification or Merger. In case of any reclassification, change
or conversion of securities of the class issuable upon exercise of this Warrant
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), or in
case of any merger of the Company with or into another corporation or entity
(other than a merger with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company, or such successor or purchasing corporation or entity, as the case may
be, shall execute a new Warrant (in form and substance satisfactory to the
holder of this Warrant) providing that the holder of this Warrant shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of Common Stock theretofore issuable upon exercise of this Warrant,
the kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by a holder of one share
of Common Stock. Such new Warrant shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Appendix I. The provisions of this Section 3 shall similarly apply to successive
reclassifications, changes, mergers and transfers.
3. Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price and the number of Shares issuable upon
exercise hereof shall be proportionately adjusted.
4. Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend payable in shares of Common
Stock, then the Exercise Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Exercise Price in effect immediately
prior to such date of determination by a fraction (a) the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (b) the denominator of which shall
be the total number of shares of Common Stock outstanding immediately after such
dividend or distribution and the number of Shares subject to this Warrant shall
be proportionately adjusted.
5. Other Distributions. In the event the Company shall declare a
dividend or distribution payable in cash, securities of other persons, evidences
of indebtedness issued by the Company or other persons, assets or options or
rights not referred to in Sections 2, 3 or 4 of this Appendix I, then, in each
such case, provision shall be made by the Company such that the holder of this
Warrant shall
<PAGE> 54
receive upon exercise of this Warrant a proportionate share of any such dividend
or distribution as though it were the holder of the Shares as of the record date
fixed for the determination of the shareholders of the Company entitled to
receive such dividend or distribution.
6. Notice of Adjustments. Whenever the Exercise Price shall be adjusted
pursuant to the provisions hereof, the Company shall within thirty (30) days of
such adjustment deliver a certificate signed by its chief financial officer to
the registered holder(s) hereof setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Exercise Price after giving effect to such
adjustment.
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<PAGE> 55
EXHIBIT D
DIGITAL LIGHTWAVE, INC.
WARRANTS TO PURCHASE 550,000 SHARES OF COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
Dated as of March __, 1999
C.E. Unterberg, Towbin
- ----------------------
- ----------------------
c/o C.E. Unterberg, Towbin
Swiss Bank Tower
10 E. 50th Street, 22nd Floor
New York, NY
Ladies and Gentlemen:
Digital Lightwave, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the Purchasers (as defined herein) its Warrants to
Purchase Common Stock dated as of the date hereof (the "Warrants") pursuant to a
Purchase Agreement (as defined herein) as well as pursuant to a fee letter
between the Company and C.E. Unterberg, Towbin. As an inducement to the
Purchasers to enter into the Purchase Agreement and in satisfaction of a
condition to the obligations of the Purchasers thereunder, the Company agrees
with the Purchasers, for the benefit of the Holders (as defined herein) from
time to time of the Registrable Securities (as defined herein), as follows:
1. DEFINITIONS. Capitalized terms used herein without definition shall
have their respective meanings set forth in or pursuant to the Purchase
Agreement. As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Act" or "Securities Act" means the United States Securities Act of
1933, as amended.
"Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with such specified person. For purposes of this definition, control of
a person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such person whether by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Common Stock" means the Company's Common Stock, par value $0.001 per
share.
"Commission" means the United States Securities and Exchange
Commission.
"Effective Time" means the date on which the Commission declares the
Shelf Registration Statement effective or on which the Shelf Registration
Statement otherwise becomes effective.
<PAGE> 56
"Effectiveness Period" has the meaning set forth in Section 2(b)(i)
hereof.
"Exchange Act" means the United States Securities Exchange Act of 1934,
as amended.
"Holder" means any Person that holds a Warrant or shares of Common
Stock issuable upon exercise of a Warrant.
"NASD Rules" means the Rules of the National Association of Securities
Dealers, Inc., as amended from time to time.
"Notice and Questionnaire" means a Notice of Registration Statement and
Selling Securityholder Questionnaire substantially in the form of Exhibit A
hereto.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" means the prospectus included in any Shelf Registration
Statement (including, without limitation, any preliminary prospectus, any final
prospectus and any prospectus that discloses information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A under the Act), included in the Shelf Registration Statement, as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Shelf Registration Statement and by all other amendments and supplements to such
prospectus, including all material incorporated by reference in such prospectus
and all documents filed after the date of such prospectus by the Company under
the Exchange Act and incorporated by reference therein.
"Purchase Agreement" means the Note and Warrant Purchase Agreement
dated as of March __, 1999 between the Company and the Purchasers.
"Purchasers" means you, as the Purchasers named in Schedule I to the
Purchase Agreement.
"Registrable Securities" means all or any portion of the Warrants and
the Common Stock issuable upon the exercise of such Warrants by the holders
thereof; provided, however, that a security ceases to be a Registrable Security
when it is no longer a Restricted Security.
"Registration Default" has the meaning assigned thereto in Section 7
hereof.
"Restricted Security" means any Warrant or share of Common Stock
issuable upon exercise thereof except any such Warrant or such share of Common
Stock which (i) has been effectively registered under the Securities Act and
sold in a manner contemplated by the Shelf Registration Statement, or (ii) has
been transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto) or is transferable pursuant to paragraph (k) of
such Rule 144 (or any successor provision thereto).
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<PAGE> 57
"Shelf Registration" means a registration effected pursuant to Section
2 hereof.
"Shelf Registration Statement" means a shelf registration statement of
the Company pursuant to the provisions of Section 2 hereof filed with the
Commission which covers all of the Registrable Securities, as applicable, on an
appropriate form under Rule 415 under the Act, or any similar rule that may be
adopted by the Commission, amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
2. SHELF REGISTRATION.
(a) The Company shall cause a Shelf Registration Statement to be
filed under the Securities Act promptly following the issuance of the Warrants
but in no event later than 180 days after such issuance.
(b) The Company shall use all reasonable efforts:
(i) To have the Shelf Registration Statement declared
effective by the Commission as promptly as practicable following the filing
thereof;
(ii) To keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part thereof to
be usable by holders of Registrable Securities for a period of two years from
the date it is declared effective, or such shorter period that will terminate
when there are no Registrable Securities outstanding (in either case, such
period being referred to herein as the "Effectiveness Period");
(iii) After the Effective Time of the Shelf Registration
Statement, promptly upon the request of any Holder of Registrable Securities, to
take any action reasonably necessary to enable such Holder to use the Prospectus
forming a part thereof for offers and resales of Registrable Securities,
including, without limitation, any action reasonably necessary to identify such
Holder as a selling securityholder in the Shelf Registration Statement;
provided, however, that nothing in this subparagraph shall relieve such Holder
of the obligation to return a completed and signed Notice and Questionnaire to
the Company in accordance with Sections 3(a)(1) or 3(a)(2) hereof; and
If at any time, the Warrants, pursuant to Section 4 of the Warrant, are
exercisable into securities other than shares of Common Stock, the Company
shall, or shall cause any successor to, cause such securities to be included in
the Shelf Registration Statement no later than the date on which the Warrants
may then be exerciseable into such securities.
3. REGISTRATION PROCEDURES. In connection with any Shelf Registration
Statement, the following provisions shall apply:
(a) (1) The Company shall mail the Notice and Questionnaire to
the Holders of Registrable Securities not less than 30 calendar days prior to
the time the Company intends in good
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<PAGE> 58
faith to have the Shelf Registration Statement declared effective. Subject to
Section 3(a)(2) hereof, no Holder of Registrable Securities shall be entitled to
be named as a selling securityholder in the Shelf Registration Statement as of
the Effective Time, and no Holder of Registrable Securities shall be entitled to
use the Prospectus forming a part thereof for offers and resales of Registrable
Securities at any time, unless such Holder has returned a completed and signed
Notice and Questionnaire to the Company by the deadline for response set forth
therein; provided, however, that Holders of Registrable Securities shall have at
least 30 calendar days from the date on which the Notice and Questionnaire is
first mailed to such Holders to return a completed and signed Notice and
Questionnaire to the Company.
(2) After the Effective Time of the Shelf Registration
Statement, the Company shall, upon the request of any Holder of Registrable
Securities, as promptly as reasonably practicable, send a Notice and
Questionnaire to such Holder. The Company shall not be required to take any
action to name such Holder as a selling securityholder in the Shelf Registration
Statement until such Holder has returned a completed and signed Notice and
Questionnaire to the Company. Following its receipt of such Notice and
Questionnaire, the Company will reasonably promptly include the Registrable
Securities covered thereby in the Shelf Registration Statement (if not
previously included).
(b) The Company shall, as promptly as reasonably practicable, take
all such action as may be necessary so that (i) each of the Shelf Registration
Statement and any amendment thereto and any Prospectus forming part thereof and
any amendment or supplement thereto (and each report or other document
incorporated therein by reference in each case) complies in all material
respects with the Securities Act and the Exchange Act and the respective rules
and regulations thereunder, (ii) each of the Shelf Registration Statement and
any amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(iii) each of the Prospectus forming part of the Shelf Registration Statement,
and any amendment or supplement to such Prospectus, does not include an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(c) (i) The Company shall, as promptly as reasonably practicable,
advise each Holder and shall confirm such advice in writing if so requested by
any such Holder:
(1) when a Shelf Registration Statement and any amendment
thereto has been filed with the Commission and when the Shelf Registration
Statement or any post-effective amendment thereto has become effective;
(2) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the Prospectus included
therein or for additional information;
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<PAGE> 59
(3) of the issuance by the Commission of any stop order
suspending effectiveness of the Shelf Registration Statement or the initiation
of any proceedings for that purpose; and
(4) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the securities included
in the Shelf Registration Statement for sale in any jurisdiction or the
initiation of any proceeding for such purpose.
(ii) The Company shall, as promptly as reasonably practicable,
advise the Purchasers and each Holder of the happening of any event or the
existence of any state of facts that requires the making of any changes in the
Shelf Registration Statement or the Prospectus included therein so that, as of
such date, the Shelf Registration Statement and the Prospectus do not contain an
untrue statement of a material fact and do not omit to state a material fact
required to be stated therein or necessary to make the statements therein (in
the case of the Prospectus, in light of the circumstances under which they were
made) not misleading (which advice shall be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have been made).
(d) The Company shall use all reasonable efforts to prevent the
issuance, and if issued to obtain the withdrawal, of any order suspending the
effectiveness of any Shelf Registration Statement at the earliest possible time.
(e) The Company shall furnish to each Holder, without charge, at
least one copy of such Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and, if the
Holder so requests in writing, all reports, other documents and exhibits that
are filed with or incorporated by reference in the Shelf Registration Statement.
The Company shall use all reasonable efforts to take into account and, if
appropriate, reflect in an amendment to the Shelf Registration Statement such
comments on the Shelf Registration Statement as initially filed as the Holders
and their counsel may reasonably propose.
(f) The Company shall, during the Effectiveness Period, deliver to
each Holder, without charge, as many copies of the Prospectus (including each
preliminary Prospectus) included in the Shelf Registration Statement and any
amendment or supplement thereto as such Holder may reasonably request; and the
Company consents (except during the continuance of any event described in
Section 3(c)(ii)) to the use of the Prospectus or any amendment or supplement
thereto by each of the Holders in connection with the offering and sale of the
Registrable Securities covered by the Prospectus or any amendment or supplement
thereto during the Effectiveness Period. The Company shall use all reasonable
efforts to take into account and, if appropriate, reflect in a Prospectus
supplement or amendment such comments as the Holders and their counsel may
reasonably propose.
(g) Prior to any offering of Registrable Securities pursuant to
the Shelf Registration Statement, the Company shall (i) register or qualify or
cooperate with the Holders and their respective counsel in connection with the
registration or qualification of such Registrable Securities
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<PAGE> 60
for offer and sale under the securities or blue sky laws of such jurisdictions
as any such Holders reasonably request, (ii) keep such registrations or
qualifications in effect and comply with such laws so as to permit the
continuance of offers and sales in such jurisdictions for so long as may be
necessary to enable any Holder or underwriter, if any, to complete its
distribution of Registrable Securities pursuant to the Shelf Registration
Statement and (iii) take any and all other actions necessary or advisable to
enable the disposition in such jurisdictions of such Registrable Securities;
provided, however, that in no event shall the Company be obligated to (a)
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to so qualify but for this
Section 3(g), or (b) file any general consent to service of process in any
jurisdiction where it is not as of the date hereof then so subject.
(h) Upon the occurrence of any event contemplated by paragraph
3(c)(ii) above, the Company shall as promptly as reasonably practicable prepare
a post-effective amendment or supplement to the Shelf Registration Statement or
the Prospectus, or any document incorporated therein be reference, or file any
other required document so that, as thereafter delivered to purchasers of the
Registrable Securities included therein, the Prospectus will not 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; provided, however, (1) if the Company determines
based upon the advice of counsel that it is advisable to disclose in the Shelf
Registration Statement a financing, acquisition or other corporate transaction
or other material event affecting the Company or its securities, and the Board
of Directors of the Company (or an executive officer of the Company duly
authorized for such purpose) shall have determined in good faith that such
disclosure would not be in the best interests of the Company and its
stockholders, and (2) for other periods not to exceed in the aggregate sixty
days in any twelve-month period, the Company shall not be required to prepare
and file such amendment, supplement or document for such period as the Board of
Directors of the Company shall have determined in good faith is in the best
interests of the Company and its stockholders. If the Holders are notified of
the occurrence of any event contemplated by paragraph 3(c)(ii) above, the
Holders shall suspend the use of the Prospectus until the requisite changes to
the Prospectus have been made.
(i) Not later than the Effective Time of the Shelf Registration
Statement, the Company shall provide a CUSIP number for the Registrable
Securities (other than Common Stock).
(j) The Company will use all reasonable efforts to cause the shares
of Common Stock issuable upon exercise of the Warrants to be quoted on the
Nasdaq National Market or other trading system or stock exchange on which the
Common Stock primarily trades on or prior to the Effective Time of any Shelf
Registration Statement hereunder.
(k) In the event that any broker-dealer registered under the
Exchange Act shall be an "affiliate" (as defined in Rule 2720(b)(1) of the NASD
Rules (or any successor provision thereto)) of the Company or has a "conflict of
interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor
provision thereto)) and such broker-dealer shall underwrite, participate as a
member of an underwriting syndicate or selling group or assist in the
distribution of any Registrable Securities
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<PAGE> 61
covered by the Shelf Registration Statement, whether as a Holder of such
Registrable Securities or as an underwriter, a placement or sales agent or a
broker or dealer in respect thereof, or otherwise, assist such broker or dealer
in respect thereof, or otherwise, the Company shall assist such broker-dealer in
complying with the requirements of the NASD Rules, including, without
limitation, by (A) engaging a "qualified independent underwriter" (as defined in
Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to
participate in the preparation of the Shelf Registration Statement relating to
such Registrable Securities, to exercise usual standards of due diligence in
respect thereto and to recommend the public offering price of such Registrable
Securities, (B) indemnifying any such qualified independent underwriter to the
extent of the indemnification of underwriters provided in Section 5 hereof, and
(C) providing such information to such broker-dealer as may be required in order
for such broker-dealer to comply with the requirements of the NASD Rules.
(l) The Company shall use all reasonable efforts to take all
other steps necessary to effect the registration, offering and sale of the
Registrable Securities covered by the Shelf Registration Statement contemplated
hereby.
4. REGISTRATION EXPENSES. The Company shall bear all fees and expenses
incurred in connection with the performance of its obligations under Sections 2
and 3and shall bear or reimburse the Holders for the reasonable fees and
disbursements of one firm of counsel designated by the Company and reasonably
acceptable to the Holders of a majority of the Registrable Securities covered by
the Shelf Registration Statement to act as counsel therefor in connection
therewith.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification by the Company. In connection with any Shelf
Registration Statement, the Company shall indemnify and hold harmless each
Holder and each underwriter, selling agent or other securities professional, if
any, who facilitates the disposition of Registrable Securities, and each of
their respective officers and directors and each person, if any, who controls
such Holder, underwriter, selling agent or other securities professional within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act (each such person being sometimes referred to herein as an "Indemnified
Person") against any losses, claims, damages or liabilities, joint or several,
to which such Indemnified Person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based on any untrue statement or alleged
untrue statement of a material fact contained in any Shelf Registration
Statement (or any amendment thereto) under which such Registrable Securities are
registered under the Securities Act, or any Prospectus contained therein or
furnished by the Company to any Indemnified Person, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the Prospectus, in
light of the circumstances under which they were made), and the Company hereby
agrees to reimburse such Indemnified Person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such
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<PAGE> 62
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 or omission or
alleged omission made in such Shelf Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by such Indemnified Person expressly for
use therein.
(b) Indemnification by the Holders and Any Agents and
Underwriters. Each Holder agrees, as a consequence of the inclusion of any such
holder's Registrable Securities in such Shelf Registration Statement, and each
underwriter, selling agent or other securities professional, if any, who
facilitates the disposition of Registrable Securities shall agree, as a
consequence of facilitating such disposition of Registrable Securities,
severally and not jointly, to (i) indemnify and hold harmless the Company, its
directors, officers who sign any Shelf Registration Statement and each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or such other persons may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in such Shelf Registration Statement or Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon an 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 the case of the
Prospectus, in light of the circumstances under which they were made), 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
Holder, underwriter, selling agent or other securities professional expressly
for use therein and (ii) reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) Notices and Claims. Promptly after receipt by an indemnified
party under subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party under this Section 5, notify such
indemnifying party in writing of the commencement thereof; but the omission to
so notify the indemnifying party shall not relieve it from any liability which
it may have to the indemnified party otherwise than under this Section 5. In
case any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, such indemnifying
party shall be entitled to participate therein and, to the extent that it shall
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
of its election so to assume the defense thereof, such indemnifying party shall
not be liable to such indemnified party under this Section 5 for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall,
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<PAGE> 63
without the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is an
actual party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act, by
or on behalf of any indemnified party.
(d) Contribution. If the indemnification provided for in this
Section 5 is unavailable to or insufficient to hold harmless an indemnified
party under subsection (a) or (b) of this Section 5 in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and the indemnified
party in connection with the statements or omissions which resulted in such
losses, claims, damages and liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party 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 such indemnifying party or by such indemnified party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties hereto
agree that it would not be just and equitable if contribution pursuant to this
Section 5(d) were determined by pro rata allocation (even if the Holders or any
underwriters, selling agents or other securities professionals or all of them
were treated as one entity for such purpose) or by any other method of
allocation that does not take into account the equitable considerations referred
to in this Section 5(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The obligations of the Holders and
any underwriters, selling agents or other securities professionals in this
Section 5(d) to contribute shall be several in proportion to the percentage of
principal amount of Registrable Securities registered or underwritten, as the
case may be, by them and not joint.
(e) Notwithstanding any other provision of this Section 5, in no
event shall any Holder be required to undertake liability to any person under
this Section 5 for any amounts in excess of the dollar amount of the proceeds
received by such Holder from the sale of such Holder's Registrable Securities
(after deducting any fees, discounts and commissions applicable thereto)
pursuant to any Shelf Registration Statement under which such Registrable
Securities are registered under the Securities Act.
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<PAGE> 64
(f) The obligations of the Company under this Section 5 shall be
in addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Holder, underwriter, selling agent
or other securities professional under this Section 5 shall be in addition to
any liability which any such Holder, underwriter, selling agent or other
securities professional shall otherwise have to the Company. The remedies
provided in this Section 5 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to an indemnified party at law or in
equity.
6. MISCELLANEOUS.
(a) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this Section 6(a), may be amended, and waivers or
consents to departures from the provisions hereof may be given, only by a
written instrument duly executed by the Company and the Holders of a majority in
aggregate principal amount of Registrable Securities then outstanding. Each
Holder of Registrable Securities outstanding at the time of any such amendment,
waiver or consent or thereafter shall be bound by any amendment, waiver or
consent effected pursuant to this Section 7(a), whether or not any notice,
writing or marking indicating such amendment, waiver or consent appears on the
Registrable Securities or is delivered to such Holder.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by
such Holder to the Company in accordance with the provisions of this Section
6(b);
(2) if to the Purchasers, initially at the address set
forth in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth
in the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given when received.
The Purchasers, the Holders or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
and the Holders, including, without the need for an express assignment or any
consent by the Company thereto, subsequent Holders of Registrable Securities.
The Company hereby agrees to extend the benefits of this Agreement to any Holder
of Registrable Securities and any such Holder may specifically enforce the
provisions of this Agreement as if an original party hereto.
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<PAGE> 65
(d) Counterparts. This agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
(g) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
(h) Survival. The respective indemnities, agreements,
representations, warranties and other provisions set forth in this Agreement or
made pursuant hereto shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Holder, any director, officer or partner of such Holder, any agent or
underwriter, any director, officer or partner of such agent or underwriter, or
any controlling person of any of the foregoing, and shall survive the transfer
and registration of the Registrable Securities of such Holder.
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<PAGE> 66
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
DIGITAL LIGHTWAVE, INC.
By:
----------------------------------
Name:
Title:
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
C.E. UNTERBERG, TOWBIN
-------------------------------------
-------------------------------------
By:
----------------------------------
(C.E. Unterberg, Towbin)
On behalf of each of the Purchasers
[Signature Page to Registration Rights Agreement]
12
<PAGE> 67
Exhibit A
DIGITAL LIGHTWAVE, INC.
NOTICE OF REGISTRATION STATEMENT AND SELLING SECURITY HOLDER
QUESTIONNAIRE
(DATE)
Digital Lightwave, Inc. (the "Company") has filed or intends shortly to
file with the United States Securities and Exchange Commission (the
"Commission") a registration statement on form S-1 (the "Shelf Registration
Statement") for the registration and resale under the United States Securities
Act of 1933, as amended (the "Securities Act"), of the Company's Warrants to
Purchase Common Stock dated March __, 1999 (CUSIP No. 0________) (the
"Warrants"), and Common Stock, par value $0.01 per share, of the Company
issuable upon exercise thereof, in accordance with the terms of the Registration
Rights Agreement dated as of March __, 1999 (the "Registration Rights
Agreement") between the Company and the purchasers named therein (the
"Purchasers"). All capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Registration Rights Agreement.
In order to have Registrable Securities included in the Shelf
Registration Statement (or a supplement or amendment thereto), this Notice of
Registration Statement and Selling Securityholder Questionnaire ("Notice and
Questionnaire") must be completed, executed and delivered to the Company at the
address set forth herein for receipt ON OR BEFORE [insert date that is 30 days
from the Notice Date] (the "Questionnaire Deadline").
The term "Registrable Securities" is defined in the Registration Rights
Agreement to mean all or any portion of the Warrants and the Common Stock
issuable upon exercise thereof; provided, however, that a security ceases to be
a Registrable Security when it is no longer a Restricted Security.
The term "Restricted Security" is defined in the Registration Rights
Agreement to mean any Note or share of Common Stock issuable upon exercise
thereof except any such Note or share of Common Stock which (i) has been
effectively registered under the Securities Act and sold in a manner
contemplated by the Shelf Registration Statement, or (ii) has been transferred
in compliance with Rule 144 under the Securities Act (or any successor provision
thereto) or is transferable pursuant to paragraph (k) of such Rule 144 (or any
successor provision thereto).
<PAGE> 68
ELECTION
The undersigned holder (the "Selling Securityholder") of Registrable
Securities hereby elects to include in the Shelf Registration Statement the
Registrable Securities held by it and listed below in Item (3) (unless otherwise
specified under Item (3). The undersigned, by signing and returning this Notice
and Questionnaire, agrees to be bound with respect to such Registrable
Securities by the terms and conditions of this Notice and Questionnaire and the
Registration Rights Agreement, including, without limitation, Section 5 of the
Registration Rights Agreement, as if the undersigned Selling Securityholder were
an original party thereto.
Upon any sale of Registrable Securities pursuant to the Shelf
Registration Statement, the undersigned Selling Securityholder will be required
to deliver to the Company the Notice of Transfer completed and signed set forth
in Appendix I to the Notice and Questionnaire.
The undersigned Selling Securityholder hereby provides the following
information to the Company and represents and warrants that such information is
accurate and complete:
<PAGE> 69
QUESTIONNAIRE
(1) (a) Full Legal Name of Selling Securityholder:
-------------------------------------------------------------
(b) Full Legal Name of Registered Holder (if not the same as in
(a) above) of Registrable Securities Listed in (3) Below:
-------------------------------------------------------------
(2) Address for Notices to Selling Securityholder:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
Telephone:
-------------------------------------------------------------
Fax:
------------------------------------------------------------------
Contact:
-------------------------------------------------------------
(3) Registrable Securities:
Except as set forth below, the undersigned Selling Securityholder does
not hold any Warrants or Common Stock previously issued upon exercise
of any Warrant.
Warrants held (expressed as the number of shares of Common Stock
underlying such Warrant):
---------------------------------------------
Number of shares of Common Stock held and issued to date upon exercise
of any Warrant (if any):
----------------------------------------------
Amount of Warrants which the undersigned wishes to be included in the
Shelf Registration Statement:
-----------------------------------------
Number of shares of Common Stock (if any) issued upon exercise of
Warrants which are to be included in the Shelf Registration Statement:
----------------------------------------------------------------------
(4) Other shares of Common Stock or other Notes of the Company Owned by the
Selling Securityholder:
-----------------------------------------------
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<PAGE> 70
Except as set forth below, and under Item (3) above, the undersigned
Selling Securityholder is not the holder any shares of Common Stock or
any other securities of the Company.
State any exceptions here:
(5) Relationships with the Company:
Except as set forth below, neither the Selling Securityholder nor any
of its affiliates, officers, directors or principal equity holders (5%
or more) has held any position or office or has had any other material
relationship with the Company (or its predecessors or affiliates)
during the past three years.
State any exceptions here:
(6) Plan of Distribution:
Except as set forth below, the undersigned Selling Securityholder
intends to distribute the Registrable Securities listed above in Item
(3) only as follows (if at all): Such Registrable Securities may be
sold from time to time directly by the undersigned Selling
Securityholder or, alternatively, through underwriters, broker-dealer
or agents. Such Registrable Securities may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time
of sale, at varying prices determined at the time of sale, or at
negotiated prices. Such sales may be effected in transactions (which
may involve crosses or block transactions) (i) on any national
securities exchanges or U.S. inter-dealer quotation system of a
registered national securities association on which the Registrable
Securities may be listed or quoted at the time of sale, (ii) in the
over-the-counter market, (iii) in transactions otherwise than on such
exchanges or services or in the over-the-counter market, or (iv)
through the writing of options. In connection with sales of the
Registrable Securities or otherwise, the Selling Securityholder may
enter into hedging transactions with broker-dealers, which may in turn
engage in short sales of the Registrable Securities in the course of
hedging the positions they assume. The Selling Securityholder may also
sell Registrable Securities short and deliver Registrable Securities to
close out such short position, or loan or pledge Registrable Securities
to broker-dealers that in turn may sell such securities.
State any exceptions here:
Note: In no event may such method(s) of distribution take the form of
an underwritten offering of the Registrable Securities without the
prior agreement of the Company.
By signing below, the Selling Securityholder acknowledges that it
understands its obligation to comply, and agrees that it will comply,
with the prospectus delivery and other provisions of the Securities Act
and Exchange Act and the respective rules thereunder, particularly
Regulation M.
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<PAGE> 71
In the event that the Selling Securityholder transfers all or any
portion of the Registrable Securities listed in Item (3) above after
the date on which such information is provided to the Company, the
Selling Securityholder agrees to notify the transferee(s) at the time
of the transfer of its rights and obligations under this Notice and
Questionnaire and the Registration Rights Agreement.
By signing below, the Selling Securityholder consents to the disclosure
of the information contained herein in its answers to Items (1) through
(6) above and the inclusion of such information in the Shelf
Registration Statement and related Prospectus. The Selling
Securityholder understands that such information will be relied upon by
the Company in connection with the preparation of the Shelf
Registration Statement and related Prospectus.
In accordance with the Selling Securityholder's obligation under the
Registration Rights Agreement to provide such information as may be
required by law for inclusion in the Self Registration Statement, the
Selling Securityholder agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein which may
occur subsequent to the date hereof at any time while the Self
Registration Statement remains in effect. All notices hereunder and
pursuant to the Registration Rights Agreement shall be made in writing
by hand delivery, first-class mail, or air courier guaranteeing
overnight delivery as follows:
To the Company:
Digital Lightwave, Inc.
15550 Lightwave Drive
Clearwater, FL 33760
Attn: CFO
Once this Notice and Questionnaire is executed by the Selling
Securityholder and received by the Company, the terms of this Notice
and Questionnaire, and the representations and warranties contained
herein, shall be binding on, shall inure to the benefit of and shall be
enforceable by the respective successors, heirs, personal
representatives and assigns of the Company and the Selling
Securityholder with respect to the Registrable Securities held by such
Selling Securityholder and listed in Item (3) above. This Agreement
shall be governed in all respects by the laws of the State of New York.
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<PAGE> 72
IN WITNESS WHEREOF, the undersigned, by authority duly given, has
caused this Notice and Questionnaire to be executed and delivered either in
person or by its duly authorized agent.
Dated:
-----------------------------
- -----------------------------------
Selling Securityholder
(Print/type full legal name of holder of Registrable Securities)
By:
--------------------------------
Name:
Title:
PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE FOR
RECEIPT ON OR BEFORE (DEADLINE FOR RESPONSE) TO THE COMPANY AT:
To the Company:
Digital Lightwave, Inc.
15550 Lightwave Drive
Clearwater, FL 33760
Attn: CFO
-5-
<PAGE> 73
APPENDIX I
NOTICE TO TRANSFER PURSUANT TO REGISTRATION STATEMENT
Digital Lightwave, Inc.
15550 Lightwave Drive
Clearwater, FL 33760
Attn: CFO
Re Digital Lightwave Warrants dated March __, 1999 (the "Warrants")
Dear Sirs:
Please be advised that _________________________________ has
transferred Warrants representing ________ shares of Common Stock or ______
shares of the Company's Common Stock, issued upon exercise of Warrants, pursuant
to the Registration Statement Form S-1 (File No. 333-_________) filed by the
Company.
We hereby certify that the prospectus delivery requirements, if any, of
the Securities Act of 1933, as amended, have been satisfied with respect to the
transfer described above and that the above-named holder of the Warrants of
Common Stock is named as a selling security holder in the Prospectus dated
____________ or in amendments or supplements thereto, and that the aggregate
amount of Warrants or number of Common Stock transferred are [a portion of] the
Warrants or Common Stock listed in such Prospectus as amended or supplemented
opposite such owner's name.
Dated:
------------------------
Very truly yours,
--------------------------------
(Name)
By:
-----------------------------
(Authorized Signature)
<PAGE> 1
EXHIBIT 10.22
March 31, 1999
Mr. Gerry Chastelet, President
Mr. Steve Grant, CFO
Digital Lightwave, Inc.
15550 Lightwave Drive
Clearwater, FL 33760
Gentlemen:
This Letter of Commitment shall set forth the terms and conditions under which
Emergent Asset Based Lending, LLC. d/b/a Emergent Business Capital (the
"Lender") will extend a line of credit (the "Line of Credit") to Borrower (as
defined below). The terms and conditions are as follows:
1. Borrower: Digital Lightwave, Inc.
2. Line of Credit: No more than Five Million Dollars
($5,000,000), hereinafter the Line of Credit. Subject to
obtaining a suitable participant in this transaction, the line
amount may be increased to $7,000,000. The suitability of the
participant shall be determined by the Lender in its sole
discretion.
3. Type of Line and Purpose: To be used for working capital.
4. Term: Two-Year Contract which will automatically
renew unless terminated by 60-days notice prior to the
expiration date.
5. Interest Rate: One and one-half percentage points (1.50%)
above the Prime Rate as determined by Summit Bank, based on
the daily unpaid principal balance of advances.
<PAGE> 2
Page 2 of 5
6. Collateral: A first lien on all of Borrower's personal
property including, but not limited to accounts receivable,
inventory, equipment, fixtures, instruments, documents and
chattel paper, general intangibles, patents and trademarks,
and books and records relating thereto.
7. *Commitment Fee and Line Fee: The Borrower agrees to pay to
Lender a fee equal to a half one percent (.50%) of the total
line which shall constitute a Commitment Fee in the amount of
Twenty Five Thousand Dollars ($25,000) which is deemed earned
and nonrefundable upon acceptance of this Commitment Letter by
Borrower. A Line Fee of Twenty Five Thousand Dollars ($25,000)
shall be due and payable at closing and each year at the
anniversary date of the facility provided. The aforesaid Line
Fee shall be due and payable whether or not the Loan
contemplated herein closes unless the failure to close is due
solely to Lender's gross negligence or willful misconduct.
This section and the obligations described herein are
independent of all other obligations set forth herein and
shall survive the expiration or termination of this Commitment
Letter and shall be payable in accord with this section.
8. Prepayment Fee: The Borrower may prepay the line of credit
by providing Emergent with 30-day written notice and payment
of a prepayment fee of 1% of the commitment amount if
terminated within the first twelve months of the contract and
.50% of the commitment amount if terminated within the second
twelve months of the contract.
9. Other Fees: Monthly service fee (for each month or
fraction thereof the Agreement is in effect) of three-quarters
of one percent (.75%) on the average daily balance of funds
employed. Audit fees of $500 per day plus out-of-pocket
expenses based on a 90-day cycle. Float days of one (1)
business day, all cash receipts will be directed to a lock-box
account for the benefit of the Borrower which will be swept
daily by Lender, and credited to the loan balance subject to
the float days indicated. Returned item fees and bank service
charges as levied by the depository banking institution. There
shall be a returned item fee of $5.00 per item above the cost
assessed to EBC. Wire fees of $10.00 per wire.
10. Closings Costs: All closing costs, legal expenses and loan
documentation charges will be borne by Borrower but shall not
exceed $5,000. If this facility has not closed and an initial
disbursement made by April 15, 1999, this Commitment Letter
will be deemed to be of no force and effect.
- - An additional .50% each for the commitment fee and the line fee will be
assessed against any increases provided in the Line of Credit facility.
<PAGE> 3
Page 3 of 5
11. Guarantee: A validity guarantee will be executed by
senior management of Borrower, including the chairman,
president and chief financial officer.
12. Insurance: Borrower shall furnish evidence, prior to
the disbursement of any loan proceeds, of the appropriate
hazard and liability insurance issued by an insurance company
satisfactory to Lender in form and content acceptable to
Lender. Said insurance shall be at all times equal to or
greater than the outstanding principal balance of the Loan.
All insurance policies required hereunder must designate
Lender as loss payee in form acceptable to Lender.
13. Loan Documents: Borrower and Guarantors shall sign and/or
furnish all documents deemed necessary by Lender and its legal
counsel. All documents shall be in form and content reasonably
acceptable to Lender and its legal counsel and shall be
governed under the laws of the State of Georgia. Borrower
understands that the terms and conditions of the transactions
contemplated by the Commitment letter are not limited to those
set forth herein. Those matters that are not covered or made
clear herein are subject to mutual agreement of the parties
(it being understood that such terms and conditions will not
be inconsistent with the terms set forth herein) and will be
set forth in the Loan Documents.
14. Financing Terms: Accounts receivable to be advanced at 80% of
eligible accounts receivable base as defined in the proposal
letter. In the event that Lender determines dilution exceeds
5% during the first 60 days of financing, Lender reserves the
right to reduce the advance rate to 75%. Inventory advance
rate of 50% against raw goods and finished products not to
exceed the lesser of $2,000,000 or 50% of the eligible
accounts receivable borrowing base. In addition to all
inventory of Borrower and proceeds thereof, all of the
outstanding indebtedness will be secured by a first priority
lien against all machinery, equipment, furniture, fixtures and
all other assets of Borrower.
15. Financial Covenants: In addition to the standard "Affirmative"
and "Negative" Loan Covenants as defined in Lender's standard
Loan and Security Agreement previously provided to Borrower,
other covenants will include:
- Cash discounts to account debtors not to
exceed 2.00%, 10 days.
- Annual Financial Statement Timing and Form -
as stated in Section 10.1(a) of the Loan and
Security Agreement and annual presentation
to the S.E.C.
<PAGE> 4
Page 4 of 5
- Monthly Interim Financial Statements Timing
and Form - As stated in Section 10.1(a) of
the Loan and Security Agreement and
quarterly presentation per the S.E.C.
- Terms of Sales - due dates no more than 30
calendar days from the date of the invoice
unless approved by Lender in writing.
- Minimum Working Capital - not to fall below
$1,000,000 after reducing liabilities for
non-cash charges.
- Minimum Tangible Net Worth - not to fall
below $3,000,000 during the term of the
Agreement or any extension thereof.
- Permitted Borrowings - None, other than
indebtedness owed to Lender and (i) the
existing indebtedness for borrowed money as
of the date of this Commitment Letter other
than Bankers Capital (EAB Leasing) for which
the proceeds of Lender's loan will repay and
(ii) the permitted purchase money security
interest in conjunction with permitted
capital expenditures and (iii) any
borrowings which would be subordinate in
payment and security interest to that of
Lender. Upon execution of this Commitment
Letter by Borrower, Lender consents to
Borrower executing and entering into a
subordinated debt transaction for
$3,000,000.
- Permitted Investments - none, except for
existing investments in marketable
securities.
- Permitted Guaranties - None
- Maximum Lease Rentals - None, other than the
existing lease rentals as of the date of
this Commitment, plus any new indebtedness
allowed in conjunction with permitted
capital expenditures as defined herein.
- Capital Expenditures - not to exceed
$2,000,000 annually directly which up to
$1,000,000 can be funded internally by
Borrower with the remaining portion funded
externally through capital leases.
Borrower by acceptance of this Commitment Letter, agrees to indemnify
and hold harmless Lender and its respective directors, officers,
employees, agents, advisors, attorneys and consultants (each an
Indemnified Party) from and against any and all losses, claims,
damages, liabilities, costs and expenses, including all reasonable fees
and disbursements of counsel which may be incurred by or asserted or
awarded against any Indemnified Party in connection with or arising out
of or by reason of the preparation of the defense of any investigation,
litigation or proceeding, whether or not any Indemnified Party is a
party thereto, related to or in connection with this proposal or any of
the transactions contemplated hereby.
<PAGE> 5
Page 5 of 5
Borrower acknowledges that this Commitment is expressly subject to the
absence of a material adverse change in the business, condition
(financial or otherwise), operations, performance, properties or
prospects of Borrower since December 31, 1998. Such adverse change
shall be determined by Lender in its reasonable judgement. Borrower and
Lender agree to use their best efforts to prepare and execute
definitive agreements covering this line of credit and to close the
transaction as soon as practical.
If the foregoing is satisfactory to you, please indicate your
acceptance thereof and your agreement to borrow the funds as set forth
herein from Lender upon the terms and conditions contained herein by
signing and returning the original Commitment Letter to Lender at the
address indicated by 5:00pm on April 1, 1999. In the event that you
fail to comply with the foregoing, this Commitment Letter will, at the
option of Lender, be of no further force and effect. The undertakings
of Lender set forth in this Commitment Letter cannot be accepted
conditionally, and any such conditional acceptance or modification of
this Commitment Letter will be deemed rejected and will terminate
absolutely the undertakings made herein. This Commitment Letter is not
assignable.
Very truly yours,
Emergent Asset Based Lending, LLC
--------------------------------------
By: John F. Fox
Its:
----------------------------------
THE FOREGOING IS ACCEPTED THIS
________DAY OF _____________,19____
Digital Lightwave, Inc.
By:
--------------------------------
Its:
-------------------------------
<PAGE> 1
Exhibit 10.23
Ali Haider
572 Hollowtree Place
Tarpon Springs, FL 34689
CONFIDENTIAL
Page 1 of 3
8 September 1997
Re: Revised Employment Offer
Dear Ali:
The following letter constitutes an offer regarding the position of Vice
President, Engineering for Digital Lightwave, Inc. (the "Company"). The duration
of this offer is as set forth in paragraph 12 herein.
1. Capacity And Responsibilities. As the Vice President of the Engineering
Division you will be fully responsible for the timely development of all Company
products, from system concept and architecture through to product release to
manufacturing, consistent with marketing requirements and to the world class
standards of the telecommunications industry. Your duties will include, but not
be limited to, collaborating and coordinating with other vice presidents and
senior Company management regarding product definitions, functions, requirements
and delivery commitments, as well as, divisional and product development
planning, divisional budgeting, staffing development, management and utilization
of multi-site engineering resources, ensuring that the engineering staff are
productive and well cared for, and that the Engineering Division meets or
exceeds product delivery and budgeting schedules and requirements. It is
expected that your efforts will result in the development of a world class
engineering organization and the continuous release of Company products to the
market which are highly regarded by the industry and which, in fact, set new
standards for product and engineering excellence. Furthermore, as an officer of
the Corporation, you will be expected to support, and actively contribute to,
the Company's overall direction and vision to the fullest extent of your
abilities. You will report directly to the Senior Vice President of Operations,
Jerry Gentile. You will manage the Engineering Division according to the
policies and procedures of the Company, now or hereafter existing. The Company
manages by statistics; therefore, you will be responsible for your statistical
performance and those of the employees you manage.
<PAGE> 2
Page 2 of 3
Ali Haider
8 September 1997
2. Confidentiality and Intellectual Property Rights. During the term of
employment, you will occupy a position of trust and confidence and therefore
will be required to maintain the confidentiality of Company information. You
will be required, as are all employees, to sign an Assignment of Intellectual
Property Rights Agreement, wherein the employee acknowledges and agrees that
all intellectual property, inventions and trade secrets are and shall be the
sole property of the Company and a Confidentiality Agreement which extends
beyond employment, termination or contract fulfillment.
3. Exclusive Services. During the term of employment it is expected that
your will be a full time employee of the Company. It will be required that your
services be exclusive to the Company and that you will devote your productive
time and attention to the performance of your duties during the term of
employment.
4. Salary. You are being offered an annual salary of $135,000 per year.
After one year you will be eligible for a review. You will participate in the
Company's 1998 Executive Bonus Plan, which is currently under formulation. It
is anticipated that, should all personal and Company achievement requirements
be met under the Executive Bonus Plan, your target cash bonus will not be less
than 33% of your base salary.
5. Pay Periods. The company pays salary twice a month, once on the 15th and
again on the final day of each month.
6. Benefits. You will be entitled to participate in the insurance and
benefit programs of the Company and will also be entitled to receive the normal
vacation/holiday allocation. The Company offers a comprehensive insurance
package, which includes medical, dental, disability and life insurance; a
Tuition Reimbursement Plan; an Employee Stock Option Plan; an Employee Stock
Purchase Plan; and a 401(k) program whereby the Company will match 50% of an
employee's regular contribution up to 6% of the employee's salary. All
employees receive 10 paid vacation days, 12 paid holidays, and 5 paid sick days
(paid only in the event of illness) per year. The Company's insurance carrier
enrolls participants only on the first business day of each calendar month,
therefore, the Company will activate your insurance coverage on the first such
day after your start of employment. As a special incentive you will, for your
first five years of employment, accrue vacation at the 15 days per year rate
rather than building this up over this five-year period, and in your first
ninety days of employment you will be allowed to use 3 days of paid vacation
for engagements planned before your employment. Each benefit has its own
eligibility requirements, and therefore, may not be immediately available.
7. At-will Employment. This letter is not an employment contract. During the
entire course of your employment with the Company you will be an at-will
employee. This means that you will be free to terminate your employment with
the Company at any time, with or without reason, and the Company will have the
right to terminate your employment or the employment of others at any time,
with or without reason. This employment relationship may only be altered by
written agreement signed by the Chief Executive Officer of the Company.
8. Stock Options. The Company plans on offering you an option to purchase
30,000 shares of Common Stock of the Company; one-third of these shares would
vest each year over a three-year period. The Compensation Committee of the
Board of Directors officially grants stock options, therefore, this offering is
subject to review and approval by the Committee at its next meeting. Should
this offer be accepted as stipulated in paragraphs 11 and 12, then the Company
will hold a special meeting of the Committee on or before 30 September 1997.
The price of any optioned shares would be the closing market price of the
Company's stock on the date immediately prior to the date of grant by the
Committee.
<PAGE> 3
Page 3 of 3
Ali Haider
8 September 1997
9. Sign-on Bonus. The Company is offering you a sign-on bonus of $25,000
(gross dollar amount), should you begin your employment as stipulated in
paragraph 11 herein, which will be payable in the first period after your start
of employment. Should you resign from the Company within the first twelve
months of your employment you will reimburse the Company in full for this
bonus. Prior to receipt of the bonus, the Treasury Division will require you
to sign an agreement reflecting the stipulations outlined herein.
10. Professional Affiliations. The Company will pay for or will reimburse you
for up to $300.00 per year in dues to professional associations to which you
belong or wish seek membership, such as the I.E.E.E. and A.C.M., so long as
they enhance skills and knowledge directly related to your position and duties
within the Company.
11. Start of Service. You will begin your employment with the Company on or
before 29 September 1997.
12. Duration of Offer. This offer is valid until the close of business 9
September 1997.
Best Regards
Digital Lightwave, Inc.
/s/ Niall Dillon
Niall Dillon
Director of Human Resources
Acknowledgement to receipt and
acceptance of the foregoing:
/s/ Ali Haider 9/9/97
--------------------------------
Ali Haider Date
<PAGE> 4
Ali Haider
572 Hollow Tree Place
Tarpon Springs, FL 34689
July 27, 1998
Dear Ali,
This letter modifies the terms of your employment as of this date pursuant
to your offer letter of September 1997.
1. Title. Your title shall be Vice President, Engineering
2. Salary. Your salary will be $150,000 per year
3. Stock Options. You will receive an additional 17,000 shares,
vesting over a three-year period. These will be
granted as soon as possible depending on the
availability of the Compensation Committee to
approve the grant.
4. Separation. In the event Digital Lightwave at any time
decides to terminate your employment for any
reason (other than a criminal act), the
Company will pay you a severance pay which will
be the greater of 6 months base salary at the
time of termination or the amount equal to
6 months your current base salary.
Best regards,
Digital Lightwave, Inc.
/s/ Bryan Zwan
- ---------------------------
Dr. Bryan Zwan
Chief Executive Officer
Acknowledgement to receipt and
acceptance of the foregoing:
/s/ Ali Haider 7/27/98
-----------------------------------
Ali Haider Date
cc: Barbara O'Grady, Dir. of Human Resources
<PAGE> 5
August 4, 1998
Ali Haider
572 Hollow Tree Place
Tarpon Springs, FL 34689
Dear Ali,
This letter modifies the terms of your employment as of this date pursuant to
your offer letter of 8 September 1997 and my letter of 27 July 1998. Further, in
acknowledgement of the way you have taken full responsibility for the
Engineering organization, and its responsibility to deliver new product, I am
pleased to provide you with the following, which is in addition to changes made
in my letter of 27 July 1998.
1. TITLE. Senior Vice President Engineering.
2. SALARY. Your salary will be $170,000 per year.
3. STOCK OPTIONS. You will receive additional stock options, vesting
over a three-year period, of 15,000 shares as soon
as is practical and 25,000 shares when the Optical
Access Agent (OAA) product successfully passes
AT+T compliance. These options will be granted as
soon as possible depending on availability of the
Compensation Committee to approve the grant.
4. BONUS. You will receive a bonus of $22,275 for positive
Q1 and Q2 1998 performance. Going forward, you
will no longer have a minimum bonus plan
percentage but will be eligible to receive a
bonus in the Company's new Executive Bonus Plan.
The Company expects to initiate this plan in Q4
98 and does not expect to pay any bonuses on this
plan for Q3 98.
5. INCENTIVE PROGRAMS. The Company expects to create an incentive program
for the engineering organization based on
performance and goals set relative to its current
and future engineering projects. Your staff will
participate in such programs which you will help
design and administer.
Best Regards,
Digital Lightwave, Inc.
/s/____________________
Dr. Bryan Zwan,
Chief Executive Officer
Acknowledgment to receipt and
acceptance of the foregoing:
/s/_________________________
Ali Haider Date
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT:
DIGITAL LIGHTWAVE LEASING CORPORATION
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Digital Lightwave, Inc. on Form S-8 (File No. 333-35375) of our report dated
January 29, 1999, except for Note 16, as to which the date is March 31, 1999, on
our audits of the financial statements of Digital Lightwave, Inc. as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996,
which report is included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
April 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL LIGHTWAVE BUILDING FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,848
<SECURITIES> 0
<RECEIVABLES> 7,152
<ALLOWANCES> 0
<INVENTORY> 5,476
<CURRENT-ASSETS> 17,224
<PP&E> 12,171
<DEPRECIATION> 2,897
<TOTAL-ASSETS> 27,558
<CURRENT-LIABILITIES> 14,957
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 12,317
<TOTAL-LIABILITY-AND-EQUITY> 27,558
<SALES> 24,191
<TOTAL-REVENUES> 24,191
<CGS> 9,219
<TOTAL-COSTS> 9,219
<OTHER-EXPENSES> 45,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (29,825)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,825)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
