<PAGE>
As filed with the Securities and Exchange Commission on June 10, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
NETCOM SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3825287 95-4312521
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
20550 NORDHOFF STREET
CHATSWORTH, CA 91311
(818) 700-5100
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
</TABLE>
--------------------
BARRY PHELPS
CHIEF EXECUTIVE OFFICER
20550 NORDHOFF STREET
CHATSWORTH, CA 91311
(818) 700-5100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN E. BOCHNER DONALD M. KELLER, JR.
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CALIFORNIA 94304 MENLO PARK, CALIFORNIA 94025
(650) 493-9300 (650) 854-4488
</TABLE>
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value................. 14,260,000 shares(1) $13.00 $185,380,000 $54,688
</TABLE>
(1) Includes Shares that the Underwriters have the option to purchase solely to
cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
12,400,000 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
------------------
Of the 12,400,000 shares of Common Stock offered, 9,920,000 shares are being
offered hereby in the United States and 2,480,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and aggregate underwriting discount per share will be identical
for both offerings (the "Offerings"). See "Underwriting".
Of the 12,400,000 shares of Common Stock offered hereby, 10,000,000 shares
are being sold by the Company and 2,400,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $11.00 and $13.00 per share. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "NTCM".
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(3)............................ $ $ $ $
</TABLE>
- ------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company and certain Selling Stockholders have granted to the U.S.
Underwriters an option for 30 days to purchase up to an additional 1,488,000
shares of Common Stock at the initial public offering price per share, less
the underwriting discount, solely to cover over-allotments. Additionally,
the Company and certain Selling Stockholders have granted the International
Underwriters a similar option with respect to an additional 372,000 shares
as part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount, proceeds to Company and proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting".
--------------------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the shares
will be ready for delivery in New York, New York on or about , 1998,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX( BROWN
-------------
The date of this Prospectus is , 1998.
<PAGE>
EDGAR COLORWORK DESCRIPTION:
INSIDE FRONT COVER OF PROSPECTUS:
Graphic depicts a series of arrows arranged point-to-tail in a circle
traveling clockwise. The arrows are labeled as follows: "Network Equipment
Manufacturers", "Service Providers and Corporate End-Users", "New Product
Design", "Production", "Sales", "Proof of Product", and "Proof of Service". The
arrows emerge from and terminate at the corporate logo of Netcom Systems, which
is situated at the base of the circle created by the arrows. Above the arrows is
the heading, in large type, "The first link in the network". Below the logo is
the caption, "Netcom Systems' SmartBits products verify network performance to
create the first link in a new network. Netcom Systems reduces the risks and
costs associated with network failures. SmartBits proactively measures the
limits of network devices and complex network configurations before they 'go
live.' From initial product design to first end-user deployment, Netcom Systems
helps new technology take its place in today's evolving network world".
INSIDE GATEFOLD:
Graphic depicts a series of arrows arranged point-to-tail emerging from a
picture of SmartBits at the base of the graphic, traveling clockwise in a
circle, and terminating back at the picture of SmartBits. The arrows are labeled
"Network Equipment Manufacturers", "Service Providers and Corporate End-Users",
"New Product Design", "Production", "Sales", "Proof of Product", and "Proof of
Service".
Above the circle that is created by the arrows is the corporate logo of
NetCom Systems followed by "Network Performance Analysis".
Emerging from the picture of the products and filling the space in the
center of the circle is a diagram detailing SmartBits interconnected with
network equipment.
Under the lower left area of the circle are two pictures of computer screens
showing the graphical user interface of SmartBits. There are three similar
pictures under the lower right area of the circle.
At the bottom of the graphic is the following caption: "SmartBits recreates
and generates the traffic of thousands of network connected computers, then
analyzes the results to accurately measure the performance of network equipment.
SmartBits' product family breadth addresses both existing and new networking
technologies: 10/100 Mpbs and Gigabit Ethernet, Token Ring, ATM and Frame Relay,
xDSL, Cable Modem, Multi-Layer applications and Quality of Service measurement.
Corporate end-users, carriers and service providers use SmartBits to validate
the implementation and service levels of their networks. Network equipment
manufacturers use SmartBits to develop new technologies, accelerate time to
market and prove that products work for their customers. Netcom Systems works
with network experts and standards bodies to create independent testing for the
network industry. SmartBits has been used to determine the viability of new
technology by leading network laboratories and trade publications."
INSIDE BACK COVER OF PROSPECTUS:
Graphic depicts a rectangle rotated clockwise approximately 20 degrees
bearing the words "Tested with SmartBits". Also inside the rectangle, in smaller
type at the bottom, is "Netcom Systems". The rectangle is superimposed over a
list of companies. The companies listed are: 3Com Corporation - 3M
Corporation - Abbott Laboratories - Accton Technology Corporation - Allied
Telesis - Ascend Communications, Inc. - AT&T - Bay Networks, Inc. - Bell
Atlantic Network Integration - BellSouth Business Systems - Cabletron
Systems, Inc. - Cigna Systems - Cisco Systems, Inc. - Delta Electronics,
Inc. - D-Link Corporation - FORE Systems, Inc. - Fujitsu Group - GTE
Laboratories, Inc. - Hewlett-Packard Company - Hitachi Computer Products,
Inc. - John Hancock Life Insurance Company - Lucent Technologies,
Inc. - Matsushita - MCI Telecommunications
Corporation - MFS/Worldcom - Microsoft Corporation - NationsBanc
Corporation - Naval Command Control and Ocean Surveillance Center RDT&E
Division - NEC Corporation - Newbridge Networks Corporation - Northern
Telecom Canada Limited - Pacific Bell Networks Integration - PaineWebber,
Inc. - PSINet, Inc. - Raytheon Service Company - Southwestern Bell
Technology Resources - Sprint Corporation - The Boeing Company - Xylan
Corporation.
--------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
------------------
"SMARTBITS-TM-" IS A TRADEMARK OF THE COMPANY. ALL RIGHTS RESERVED. ALL
OTHER TRADE NAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY
OF THEIR RESPECTIVE HOLDERS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS". THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF VARIOUS ACRONYMS AND TECHNICAL TERMS
USED IN THIS PROSPECTUS.
THE COMPANY
Netcom Systems is a leading provider of network performance measurement
systems. The Company's flagship platform, SmartBits, evaluates performance,
reliability, quality of service and proof of service of networking equipment,
such as routers and switches, before deployment on the network. SmartBits also
allows users to measure network performance criteria by emulating complex,
multi-protocol networks through generation of accurate, customizable, high speed
flows of network traffic. By offering a robust, scalable, and modular network
performance solution, the Company has established relationships with several
prominent industry experts and multiple technology publications in the field of
network performance. The Company's customer base of over 600 accounts includes
leading Network Equipment Manufacturers ("NEMs"), such as Ascend Communications,
Bay Networks, Cisco Systems, Cabletron, Lucent Technologies, Nortel and 3Com,
telecommunications carriers and internet service providers ("Service
Providers"), such as AT&T, Bell Atlantic, GTE, MCI, Sprint and WorldCom and
Fortune 1000 companies, financial institutions, and systems integrators and
government entities ("End Users"), such as 3M, Boeing, Fujitsu, John Hancock,
Microsoft, NEC and U.S. Naval Command Control. Netcom Systems has been
profitable in each of its last three fiscal years and for the Company's last
thirteen fiscal quarters, revenues have increased over the prior quarter's
results.
In recent years, businesses have migrated from mainframe-based computing
environments to distributed, client/server computing networks capable of sharing
bandwidth intensive applications. The widespread adoption of this computing
paradigm has resulted in an increasing need for network equipment capable of
transmitting bandwidth intensive, mission critical traffic at extremely fast
speeds across progressively larger and heterogeneous networks. Growth in network
size, proliferation of multi-protocol networks and increasing levels of
multimedia traffic across networks have exacerbated network equipment
complexity. These trends have driven NEMs, End Users and Service Providers to
require robust performance measurement equipment to evaluate network equipment
performance, reliability and interoperability. For NEMs, performance measurement
solutions have become mission critical for the successful and timely
introduction of new products that are fully interoperable in multi-vendor and
multi-protocol environments. For End Users and Service Providers that rely on
critical network traffic for their business, performance measurement equipment
evaluates the reliability, accuracy, availability and performance of network
equipment before deployment on the network.
Utilizing SmartBits, NEMs ensure proper network equipment performance while
efficiently allocating their scarce engineering resources to product
development. In addition, End Users and Service Providers use SmartBits to make
better cost/performance purchasing decisions on new equipment, reduce the risk
of network "meltdowns", and ensure that critical applications perform correctly.
The SmartBits platform enables customers to analyze parameters such as
reliability, packet loss, throughput, latency, jitter, traffic flow performance
and bandwidth per connection.
The modular SmartBits platform enables users to easily add or substitute
protocol specific interface cards or SmartCards within a common SmartBits
chassis, thus allowing performance measurement over a wide variety of networking
protocols and interfaces simultaneously. SmartBits is also scalable, allowing
for the addition of multiple SmartCards within a single chassis and linkage of
multiple SmartBits
3
<PAGE>
chassis for performance measurement of network equipment replicating the demands
of up to 640 simultaneous connections. The Company's SmartBits chassis and
SmartCards are used in conjunction with a versatile suite of software
applications that address the performance measurement requirements of End Users
and Service Providers and the more complex measurement needs of NEMs.This robust
solution establishes offers a common platform and language that enables NEMs,
End Users, Service Providers, and industry test labs to measure network
performance in a common language.
The Company's strategy is to strengthen and expand its market leadership in
developing, manufacturing and marketing network performance measurement systems.
Key elements of this strategy include: (i) capitalizing on rapid technological
change by creating network performance measurement systems for new network
technologies as they emerge; (ii) leveraging its key relationships with industry
test labs, networking publications, and NEM customers to be first to market with
new industry standard performance measurement solutions; (iii) further
penetrating its existing NEM customer base by increasing sales to multiple
functional departments within its installed base and (iv) further expanding its
customer base into the End User and Service Provider markets, as well as into
new international markets by increasing the Company's promotional and marketing
efforts.
The Company's offices are located at 20550 Nordhoff Street, Chatsworth,
California 91311, and its telephone number is (818) 700-5100. The Company was
incorporated in California on August 7, 1989 and reincorporated in Delaware in
June 1998. Unless the context otherwise requires the terms "Netcom" and the
"Company" refer to Netcom Systems, Inc. and its wholly-owned subsidiaries,
Netcom Systems Europe S.A.R.L. ("Netcom Systems Europe") and Netcom (Barbados)
Limited. Information contained on the Company's Web site does not constitute
part of this prospectus.
EXCEPT AS SET FORTH IN THE FINANCIAL STATEMENTS AND THE NOTES THERETO OR AS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) A
TWO-FOR-ONE FORWARD STOCK SPLIT OF THE COMPANY'S COMMON STOCK TO BE EFFECTED
PRIOR TO THE CLOSING OF THE OFFERINGS, INCLUDING SHARE AND PER SHARE
INFORMATION, (II) THE FILING AND EFFECTIVENESS UPON CLOSING THE OFFERINGS OF THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AUTHORIZING A CLASS OF
UNDESIGNATED PREFERRED STOCK, (III) THE AUTOMATIC CONVERSION OF ALL OUTSTANDING
SHARES OF THE COMPANY'S CLASS B CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK
UPON THE CLOSING OF THE OFFERINGS, (IV) THE REDEMPTION OF ALL OUTSTANDING SHARES
OF THE COMPANY'S CLASS A REDEEMABLE PREFERRED STOCK UPON THE CLOSING OF, AND
WITH THE PROCEEDS OF, THE OFFERINGS, AND (V) NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTIONS. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING".
4
<PAGE>
THE OFFERINGS
The offering of 9,920,000 shares initially being offered in the United
States (the "U.S. Offering") and the concurrent offering of 2,480,000 shares of
Common Stock initially being offered outside the United States (the
"International Offering") are collectively referred to herein as the
"Offerings". The closing of the International Offering is conditioned upon the
closing of the U.S. Offering and vice versa. See "Underwriting".
<TABLE>
<S> <C>
Common Stock offered by the Company
U.S. Offering.................................... 8,000,000
International Offering........................... 2,000,000
Common Stock offered by the Selling Stockholders
U.S. Offering.................................... 1,920,000
International Offering........................... 480,000
Common Stock to be outstanding after the 60,929,218 shares(1)
Offerings........................................
Use of Proceeds.................................... For repayment of senior debt, redemption of redeemable
preferred stock and working capital and other general
corporate purposes, including sales and marketing,
manufacturing and capital expenditures. See "Use of
Proceeds".
Proposed Nasdaq National Market symbol............. "NTCM"
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 663 $ 2,080 $ 9,053 $ 27,454 $ 56,273 $ 10,115
Gross profit............................................... 361 1,744 7,787 24,198 49,025 8,952
Operating expenses:
Research and development................................. 151 446 833 1,681 3,527 748
Sales and marketing...................................... 65 193 844 1,466 3,713 540
General and administrative............................... 143 365 1,262 1,342 3,452 753
Income from operations..................................... 5 740 4,848 19,709 38,333 6,911
Net income................................................. $ 3 $ 483 $ 2,958 $ 11,811 $ 22,796 $ 4,296
----- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- ---------
Pro forma basic net income per common share(2)............. $ 0.72
---------
---------
Pro forma weighted average number of common shares
outstanding(2)........................................... 31,837
---------
---------
Pro forma diluted net income per common share(2)........... $ 0.68
---------
---------
Pro forma weighted average number of common shares and
common equivalent shares outstanding(2).................. 33,657
---------
---------
<CAPTION>
1998
---------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 18,011
Gross profit............................................... 14,963
Operating expenses:
Research and development................................. 1,662
Sales and marketing...................................... 2,271
General and administrative............................... 776
Income from operations..................................... 10,254
Net income................................................. $ 5,648
---------
---------
Pro forma basic net income per common share(2)............. $ 0.11
---------
---------
Pro forma weighted average number of common shares
outstanding(2)........................................... 50,925
---------
---------
Pro forma diluted net income per common share(2)........... $ 0.10
---------
---------
Pro forma weighted average number of common shares and
common equivalent shares outstanding(2).................. 58,772
---------
---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
--------------------------
ACTUAL AS ADJUSTED(3)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 24,390 $ 33,840
Working capital........................................................................ 28,836 40,786
Total assets........................................................................... 42,805 52,255
Long-term debt, net of current portion................................................. 47,500 --
Redeemable preferred stock............................................................. 50,255 --
Stockholders' equity (deficit)......................................................... (66,111) 44,639
</TABLE>
- ----------------------
(1) Based on the number of shares outstanding as of March 31, 1998. Excludes
16,329,462 shares of Common Stock reserved for issuance under the Company's
1993 Stock Plan, 1997 Stock Plan and 1998 Stock Plan, and an additional
1,600,000 shares of Common Stock reserved for issuance under options granted
outside of the Company's stock plans. As of March 31, 1998, options to
purchase 12,069,462 shares at a weighted average exercise price of $0.78
were outstanding. See "Management-Stock Plans" and Note 12 of Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
(2) See Note 14 of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus for an explanation of the determination of the number of
shares used in computing per share data. The pro forma data is unaudited.
(3) As adjusted reflects the conversion of all outstanding shares of Class B
Preferred Stock to Common Stock and the redemption of all outstanding shares
of Class A Redeemable Preferred Stock upon the closing of the Offerings, the
sale of Common Stock offered by the Company hereby and the application of
the estimated net proceeds therefrom.
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF TERMS" FOR
DEFINITIONS OF VARIOUS ACRONYMS AND TECHNICAL TERMS USED IN THIS PROSPECTUS.
DEPENDENCE ON SALES TO NETWORK EQUIPMENT MANUFACTURERS
To date, the Company has sold a substantial majority of its products to a
limited number of NEMs and has derived the majority of its sales from repeat NEM
customers. For 1997, 89.7% of the Company's domestic revenues were from sales to
NEMs. In each of 1995, 1996 and 1997, the Company's four largest customers were
Bay Networks, Cisco, 3Com and Cabletron, although the relative ordering of these
four customers has varied from year to year. For 1995, 1996 and 1997, these four
customers collectively accounted for 56.6%, 48.9% and 42.7%, respectively, of
the Company's revenues. The Company believes that sales to a limited number of
NEMs, such as Bay Networks, Cisco, 3Com and Cabletron, will continue to
represent a significant portion of its future revenues. There are only a small
number of NEMs, and the number of these manufacturers may decrease due to
industry consolidation. Accordingly, the loss of any significant NEM customer,
or the reduction, delay or cancellation of orders or a delay in shipment of the
Company's products to any such customer would have a material adverse effect on
the Company's business, results of operations or financial condition.
The Company's dependence on substantial orders from a limited number of NEMs
makes the relationship between the Company and each such manufacturer critical
to the Company's business. As relationships evolve over time, adjustments to
product specifications, forecasts and delivery timetables may be required in
response to customer demands and expectations. The inability of the Company to
satisfy customer requirements or manage its customer relationships successfully
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business-- Sales and
Marketing".
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent competitive product
introductions and short product life cycles. The Company's success will depend
to a substantial degree upon its ability to enhance its existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
features that meet changing customer requirements and emerging industry
standards. The Company budgets for research and development expenditures based
on planned product introductions and enhancements; however, due to the factors
described above, actual expenditures may significantly differ from budgeted
expenditures. Inherent in the product development process are a number of risks.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technology and market trends. The failure of the Company to
develop, in a timely and cost-effective manner, new products or product
enhancements which are responsive to new technologies would result in loss of
revenue or a substantial increase in research and development expense. As a
result, any such failure could have a material adverse effect on the Company's
business, results of operations and financial condition. See "--Fluctuations in
Quarterly Operating Results", "--Risks Associated with New Product
Introductions", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Research and Development".
6
<PAGE>
RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS
The Company's introduction of new or enhanced products requires it to
effectively manage the transition from older products to newer generation
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. In the past, the
Company has experienced problems with product transitions. For example, the
Company experienced a decrease in revenues from its layer 2 Fast Ethernet
SmartCards in the three month period ended March 31, 1998, primarily as a result
of the pre-announcement of the Company's new Multi-layer 10/100 Mbps SmartCard.
The Company believes that the pre-announcement of new products is an advisable
practice to preserve customer relationships and, accordingly, expects to
pre-announce products in the future, a practice which may adversely affect sales
of existing products. The inability of the Company to effectively manage future
new product introductions could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's new product strategy includes the development of enhanced
functionality for the SmartBits system, including the development of measurement
functionality at higher layers of the OSI protocol stack and greater port
densities. For example, in the first quarter of 1998, the Company introduced its
new ML-7710 SmartCard, as well as new asynchronous transfer mode ("ATM")
products. The Company expects that it will be increasingly dependent upon sales
of these products to sustain or grow its revenues. There can be no assurance
that these products will achieve market acceptance or that sales of these
products will be sufficient to sustain and grow the Company's revenues. The
failure of these products to achieve market acceptance would have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be successful in new
product development and introductions, that the Company will not experience
delays or unexpected costs in connection with such efforts or that any
enhancements to the SmartBits system will achieve market acceptance. Any failure
of the Company to develop such enhancements or additional new products on a
timely and cost-effective basis or any failure of any such enhancements or
additional new products to achieve market acceptance would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, such new enhancements or any new products could have
lower gross margins than existing products, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "--Risks Associated with Rapid Technological Change" and "Business--Research
and Development".
The Company's introduction of new or enhanced products may contain
undetected or unresolved software or hardware defects when they are first
introduced or as new versions are released. There can be no assurance that,
despite extensive testing by the Company, design defects will not be found in
new products or upgrades after commencement of commercial shipments, resulting
in additional costs to the Company, reduced acceptance of the Company's products
or damage to the Company's reputation and relationships with its customers and
industry experts. Future delays in the introduction or shipment of new or
enhanced products, the inability of such products to gain market acceptance or
problems associated with new product transitions or introductions could have a
material adverse effect on the Company's business, results of operations and
financial condition.
DEPENDENCE ON SMARTBITS PLATFORM AND NETWORKING INDUSTRY
The Company's SmartBits platform presently provides virtually all of the
Company's revenues. The Company does not presently intend to develop any
products other than network performance measurement equipment and software or to
take any other action to reduce the risks associated with any softening or
slowdown in the demand for network performance measurement. Accordingly, a
softening or slowdown in demand for performance measurement tools and, in
particular, the Company's SmartBits system, by NEMs, End Users and Service
Providers would have a material adverse effect on the Company's business,
results of operations and financial condition.
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The network performance measurement market is heavily influenced by
fluctuations in the networking market. The market for network equipment is
evolving rapidly and is subject to rapid technology and market fluctuations.
There can be no assurance that the increased competition among and escalating
demand for new networking technologies and services will continue in a manner
favorable to the Company or its business strategies. Any increase in competition
in the networking market could result in increased pressure on the Company to
reduce prices and could result in a reduction in the Company's revenues or a
decrease in the Company's margins, each of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Due to the emerging and evolving nature of the markets for the Company's
products and the likelihood of increased competition, there can be no assurance
that growth of the Company's revenues will continue or that the Company will
sustain its gross margin or profitability in the future. As a result of changes
in computer networking technology, the Company believes that sales of its
existing products and, in particular, its layer 2 Ethernet and Token Ring
performance measurement products, will decline in future periods. To the extent
that a decline in revenues of these products is not offset by sales of newer and
future products, the Company's business, operating results and financial
condition would be materially and adversely affected. The Company's quarterly
operating results could also be adversely affected by a wide variety of factors
including the following: (i) changes in the demand for the Company's products;
(ii) the timing, composition and size of orders from the Company's customers,
including the possibility that significant bookings will occur in the last month
of each quarter; (iii) spending patterns and budgetary resources of the
Company's customers; (iv) the success or failure of the Company's efforts to
create new customers; (v) introductions or enhancements of products, or delays
in the introductions or enhancements of products, by the Company, its
competitors or NEMs; (vi) price competition; (vii) the ability of the Company to
provide product features required by NEMs and other customers; (viii) product
flaws that cannot be detected or remedied in a timely manner; (ix) shortages of
critical components; (x) the growth or decline of network usage; (xi) the
ability of the Company to hire and retain additional sales and marketing
personnel and technical employees such as development and support engineers;
(xii) consolidation in the computer networking industry; (xiii) the mix of
distribution channels employed by the Company; (xiv) seasonality and general
economic conditions; (xv) the publication of opinions about the Company and its
products, or its competitors and their products, by industry analysts or others
and (xvi) pricing pressure from NEMs due to competition and pricing pressure
from NEM customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DIFFICULTY FORECASTING SALES
The Company typically operates with little or no backlog. In addition, the
sales cycle for the Company's products is generally not longer than sixty days
and can be only a few days. Furthermore, customers may cancel orders or change
delivery schedules without significant penalties. As a result, quarterly sales
and operating results generally depend on the volume and timing of, and ability
to fulfill, orders received within the quarter, which are difficult to forecast.
A significant portion of the Company's spending, including rent, headcount and
capital lease expenditures, is relatively fixed in advance based on the
Company's forecasts of future sales. If sales are below expectations in any
given quarter, the adverse impact of the shortfall on the Company's quarterly
operating results may be magnified by the Company's inability to adjust spending
to compensate for the shortfall. The Company anticipates that its operating
expenses will substantially increase. In the absence of a corresponding increase
in sales of the Company's products, this increase would have an adverse effect
on the Company's quarterly operating results. Accordingly, there can be no
assurance that the Company will be able to sustain profitability in the future,
particularly on a quarter-to-quarter basis or that the Company will not
experience material fluctuations in quarterly operating results. As a result, it
is possible that the Company's
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future quarterly operating results may fall below the expectations of analysts
and investors which, in turn, would likely have a material adverse effect on the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
RISKS ASSOCIATED WITH ENTRY INTO NEW AND UNFAMILIAR CUSTOMER MARKETS
The Company's future growth is dependent upon sales to End Users and Service
Providers from which the Company derived 10.3% of its domestic revenues in 1997.
To enter into and compete in the performance measurement markets for End Users
and Service Providers, the Company will be required to develop new products and
enhancements to existing products and to expand its sales, marketing and
customer support capabilities, each of which will result in substantial
increases in operating expenses. Many of the Company's potential competitors
have substantially greater resources, name recognition and experience than the
Company, as well as established relationships with many of the Company's
potential End User and Service Provider customers. Failure of the Company to
increase sales in these new markets would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"--Competition".
COMPETITION
The Company's principal and potential competitors include NEMs that develop
in-house products; test equipment manufacturers such as The Hewlett-Packard
Company ("Hewlett-Packard"), Fluke Corporation and Tekelec; new start-up
enterprises focused on network performance measurement such as IXIA
Communications; companies specializing in ATM (LAN and/or WAN) performance
testing such as Adtech, Inc. and RADCOM Ltd.; software based network traffic
simulators such as Ganymede Software Inc. and Optimal Networks Corporation; and
other companies that sell networking products with functionality complementary
to SmartBits, such as Network Associates, Inc. Competitive factors in the
network performance testing and measurement market include the breadth of
product features, conformity to industry-standard protocols, pricing, product
quality, reliability and functionality, marketing and sales resources, customer
service and support and reputation. Many of the Company's competitors and
potential competitors have greater resources, name recognition and sales
capabilities than the Company. Increased competition could result in price
reductions, reductions in gross margins, the inability of the Company to
increase market share, or a loss of market share by the Company, any of which
would adversely affect the Company's business, results of operations and
financial condition. There can be no assurance that the Company's current and
future competitors will not develop or market technologies and products that
offer higher performance and are more cost-effective than the Company's current
or future products, thereby rendering the Company's technologies and products
obsolete.
DEPENDENCE ON RELATIONSHIPS WITH INDUSTRY EXPERTS
The Company has established relationships with several industry experts in
the field of network performance. These experts have established standard
testing methodologies that evaluate new network equipment products and
technologies. Accordingly, the Company believes that these relationships are
critical for maintaining its industry credibility and developing new products
reflecting new technologies and testing methodologies in a timely fashion. There
can be no assurance that the Company will be able to maintain these
relationships or that the Company's competitors, including new entrants, will
not seek and obtain relationships with these or other industry experts, any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
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RISKS ASSOCIATED WITH RELIANCE ON DISTRIBUTORS
For the year ended December 31, 1997 and for the three months ended March
31, 1998, sales through international distributors generated approximately 20.4%
and 17.6%, respectively, of the Company's revenues. Accordingly, the Company is
dependent upon the continued viability and financial stability of its
distributors. While the Company maintains contractual relationships with most of
its distributors, these contracts generally do not require a distributor to
purchase the Company's products and, in some cases, may be terminated by a
distributor at any time without penalty. There can be no assurance that any of
the Company's distributors will continue to market the Company's products. In
addition, the Company may, from time to time, terminate some of its
relationships with distributors and any such termination could have a negative
impact on the Company's business and result in threatened or actual litigation.
There can be no assurance that any future termination of a distributor would not
have a negative impact on the Company's business, that such termination would
not result in a lawsuit or that the Company would be successful in defending
itself in such a lawsuit. Certain of the Company's distributors manufacture
products with functionality complementary in some respects to SmartBits, and, as
such, are potential competitors of the Company's. These distributors may, in the
future, enhance such products or develop new products to compete directly with
the Company. In such event, these distributors would likely cease to distribute
the Company's products. In addition, these distributors possess confidential
information concerning the Company's products, product release schedules, and
sales, marketing and distribution operations. Although the Company's contracts
with its distributors contain confidentiality provisions, there can be no
assurance that any such distributor would not use such information in
competition with the Company or otherwise. Any failure of the Company's
distributors to successfully market and sell the Company's products for these or
any other reasons would have a material adverse effect on the Company's
business, financial condition and results of operation. See "-- Risks Associated
with International Sales" and "Business--Sales and Marketing".
DEPENDENCE ON CONTRACT MANUFACTURERS AND SINGLE-SOURCE SUPPLIERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, quality control, final assembly and testing of its
products. The Company designs all of the hardware subassemblies for its products
and uses the services of contract manufacturers to build these subassemblies and
certain products to the Company's specifications. The Company also is dependent
upon single or limited source suppliers for a number of components and parts
used in the Company's products, including certain key microprocessors and
integrated circuits. There can be no assurance that these contract manufacturers
and suppliers will be able to meet the Company's future requirements for
manufactured products, components and subassemblies. The Company generally
purchases single or limited source components pursuant to purchase orders and
has no guaranteed supply arrangements with these suppliers. The availability of
many of these components is dependent in part on the Company's ability to
provide its suppliers with accurate forecasts of its future requirements. The
Company's ability to make accurate forecasts is complicated by the typically
short product life cycles and customer lead times for its products. The Company
purchases certain components from foreign suppliers, the supply of which could
be adversely affected by changing tariff and regulatory structures, particularly
those affecting the import and export of electronics and technology. Any
interruption in the supply of any of the key components currently obtained from
a single or limited source could disrupt the Company's operations and have a
material adverse effect on the Company's business, results of operations and
financial condition in any given period. In addition, any increases in component
costs could also have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Manufacturing".
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RISKS ASSOCIATED WITH THE MANAGEMENT OF EXPANDING OPERATIONS
The Company has recently experienced rapid growth and a significant
expansion in the number of its employees and the scope and complexity of its
operating and financial systems. Netcom Systems increased the number of its
employees from 48 to 140 individuals during the 12 months ended April 30, 1998.
Such growth has placed and, if sustained, will continue to place, a significant
strain upon the Company's management, operations, financial systems and
resources. The Company believes that it must expand its manufacturing, research
and development, marketing, sales and customer support capabilities in order to
effectively serve the evolving needs of its present and future customers. In
particular, the Company needs to hire additional sales and technical personnel.
The failure by the Company to hire additional qualified personnel in a timely
manner and on reasonable terms could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
if the Company is to achieve its business objectives in the future, it must both
successfully train and retain the members of its existing sales force, research
and development staff and customer support staff, as well as recruit additional
such personnel. Competition for such persons is intense and there can be no
assurance that the Company will be able to either retain and adequately train
its current staff or attract qualified personnel in the future. See
"--Dependence on Key Personnel".
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 26.1% and 26.3% of the
Company's revenues in 1997 and the three month period ended March 31, 1998,
respectively. The Company expects that international sales will continue to
account for a significant portion of its revenues in future periods. Although
the Company sells products directly in certain European countries, the Company
is substantially dependent on distributors for its international sales. The loss
of certain distributors could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, sales in
many foreign markets are adversely affected by local holidays and customary
vacation times, such as during the third quarter in Europe, which cause
customers in such markets to reduce their business activities. The Company
intends to enter into additional international markets and to continue to expand
its operations outside of the United States by adding resellers and
international sales and support personnel and pursuing additional strategic
relationships which will require significant management attention and
expenditure of significant financial resources. To the extent that the Company
is unable to make additional international sales in a timely manner, the
Company's growth, if any, in international sales will be limited, and the
Company's business, financial condition and results of operations would be
materially and adversely affected. Sales to international customers are subject
to additional risks including longer receivables collection periods, increased
exposure to bad debt write-offs, political and economic instability,
nationalization, trade restrictions, the impact of possible recessionary
environments in economies outside the United States, reduced protection for
intellectual property rights in some countries, currency fluctuations and tariff
regulations and requirements for export licenses. To the extent the export or
import of the Company's products is prohibited by the domestic laws of the
United States or any foreign country in which the Company does business, or
uncertainty relating to such laws limit the Company's ability to market its
products internationally, the Company could lose a substantial portion of its
international sales. There can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property
rights. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. These international factors
could have a material adverse effect on future sales of the Company's products
to international customers and, consequently, the Company's business, results of
operations and financial condition. See "--Dependence on Proprietary
Technology".
Portions of the Company's international sales are currently denominated in
French francs. Accordingly, fluctuations in currency exchange rates could cause
the Company's products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
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country. The Company does not engage in any hedging activities to reduce its
currency exposure. These factors could have a material adverse effect on the
Company's business, results of operations and financial condition. See "--Risks
Associated with Reliance on Distributors", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Marketing and
Sales".
DEPENDENCE ON KEY PERSONNEL
The Company's success depends on the continuing contributions of its key
personnel, all of whom would be difficult to replace. The Company's future
success will depend, in part, upon its ability to attract and retain highly
qualified personnel. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. Loss of, or the inability
to hire, key personnel or consultants could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"--Risks Associated with the Management of Expanding Operations" and
"Management".
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success and ability to compete is dependent in part
upon its proprietary technology. The Company relies on a combination of
contractual rights, trade secrets and copyright laws to establish and protect
its proprietary technology. The Company generally enters into confidentiality
agreements with its employees, consultants, resellers, customers and potential
customers, strictly limits access to and distribution of its source code, and
further limits the disclosure and use of other proprietary information. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. There can
be no assurance that third parties will not assert infringement claims in the
future with respect to the Company's current or future products. Any such
assertion, regardless of its merit, could require the Company to pay damages or
settlement amounts and could require the Company to develop non-infringing
technology or acquire licenses to the technology that is the subject of asserted
infringement, resulting in product delays, increased costs or both. In addition,
the cost of any such litigation and the resulting distraction of the Company's
management resources could have a material adverse effect on the Company's
business, results of operations or financial condition. No assurance can be
given that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. The failure of the
Company to adequately obtain such licenses, or to protect its own proprietary
technology through contractual rights, trade secrets, patent and copyrights
laws, could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Proprietary Rights".
CONTROL BY EXISTING STOCKHOLDERS
Following the Offerings, certain holders of the Company's outstanding
capital stock associated with the Company's recapitalization in the third
quarter of 1997 will beneficially own approximately 79.6% of the Company's
Common Stock (approximately 76.6% if the Underwriters' over-allotment options
are exercised in full). In addition, these holders, who include certain members
of the Company's senior management team, have entered into a Shareholder's
Agreement pursuant to which they have agreed to vote their shares together to
elect certain representatives to the Company's Board of Directors and to
maintain the number of the Company's authorized directors at six. Accordingly,
these stockholders will be able to elect all of the Company's directors, will
retain the voting power to approve all matters requiring stockholder approval
and will continue to have significant influence over the affairs of the
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Company. This concentration of ownership could have the effect of delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders" and "Certain Transactions".
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems or
software used by many companies may need to be upgraded to become compliant with
such "Year 2000" requirements. The Company generally warrants and has
represented to its customers that its products are free from Year 2000 defects.
There can be no assurance that the Company's products or third party computer
products used by the Company are Year 2000 compliant. Any failure of the
Company's products to be Year 2000 compliant could result in the loss of or
delay in market acceptance of the Company's products and services, increased
service and warranty costs to the Company or payment by the Company of
compensatory or other damages. In addition, any failure of third party computer
products used by the Company, including the Company's key accounting, inventory
and payroll systems, to be Year 2000 compliant could interrupt and disrupt the
Company's business. To fix such systems could require the Company to invest
substantially in its operating systems and to hire additional personnel. Any
failure of the Company's products or internal systems to address the issues
associated with the Year 2000 could have a material adverse effect on the
Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
As a part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, complementary companies, products or
technologies, although no such acquisitions or investments are currently
pending. Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology and
rights into the Company's products and services, additional expense associated
with amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of any integration of new management
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with any
such acquisitions. In addition, the Company cannot presently account for any
acquisition as a pooling of interests. As a result, should the Company complete
any acquisition it would likely be required to amortize goodwill related to such
acquisition which could adversely affect the Company's results of operations. In
addition, the fact that the Company cannot be a party to an acquisition
transaction accounted for as a pooling of interests could discourage a third
party from attempting to acquire control of the Company. See "--Certain Anti-
Takeover Provisions" and "Use of Proceeds".
PROCEEDS TO BE USED TO REDEEM PREFERRED STOCK AND REPAY INDEBTEDNESS
The net proceeds to the Company from the sale of the 10,000,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $110.8 million ($111.7 million if the Underwriters' over-allotment
options are exercised in full), assuming the shares offered hereby are sold at a
public offering price of $12.00 per share and after deduction of the estimated
underwriting discount and estimated offering expenses. The Company will not
receive any of the proceeds from the sale of the shares of Common Stock offered
by the Selling Stockholders. The Company intends to use approximately $50.0
million of the proceeds of the initial public offering to repay indebtedness
under the
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Company's term credit facility and intends to use an additional approximately
$51.3 million of such proceeds to redeem all outstanding shares of the Company's
Class A Redeemable Preferred Stock. The Company will use any remaining proceeds
from the Offerings for general corporate purposes, including working capital and
as a result, the Company's management will have broad discretion to allocate
this portion of the proceeds of the Offerings and to determine the timing of
expenditures. See "Use of Proceeds".
NO DIVIDENDS
Although the Company has paid dividends on its Common Stock in the past, it
does not anticipate paying any dividends upon its Common Stock in the
foreseeable future. See "Dividend Policy".
NO PRIOR PUBLIC TRADING MARKET
Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if one does develop, that it will be maintained. The initial public offering
price, which will be established by negotiations between the Company and the
Underwriters, may not be indicative of the market price of the shares of Common
Stock after the Offerings. See "Underwriting".
POSSIBLE VOLATILITY OF STOCK PRICE
The equity markets, particularly the market for technology corporations,
recently have experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may adversely affect the market price of the Common Stock.
In addition, the market price of the shares of Common Stock is likely to be
highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or proprietary
rights, announcement of litigation by or against the Company, changes in stock
market analyst recommendations regarding the Company or its competitors, and
general market conditions may have a significant effect on the market price of
the Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions provide for a classified board of directors, eliminate
cumulative voting in the election of directors and restrict the Company's
stockholders from acting by written consent. In addition, upon completion of
this offering, the Company's Board of Directors will have the authority to issue
up to 10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing flexibility in
connection with possible financings or acquisitions or other corporate purposes,
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of preferred stock. The Company's Certificate of
Incorporation, Bylaws and indemnity agreements provide that the Company will
indemnify officers and directors against losses they may incur in legal
proceedings resulting from their service to the Company. These provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company cannot presently be a party to an acquisition
transaction accounted for as a
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pooling of interests which could discourage a third party from attempting to
acquire control of the Company. See "--Risks Associated with Possible
Acquisitions".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after the Offerings could materially
and adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or equity-
related securities in the future at a time and price that the Company deems
appropriate. Upon completion of the Offerings (based on shares outstanding at
March 31, 1998), the Company will have outstanding an aggregate of 60,929,218
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
options and no exercise of outstanding options. Of these shares, all of the
shares sold in the Offerings will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (the
"Affiliates"). The remaining 48,529,218 shares of Common Stock held by existing
stockholders and 938,666 shares subject to outstanding vested options (as of
March 31, 1998) are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act. As a
result of the contractual restrictions described below and the provisions of
Rules 144 and 701, the Restricted Shares will be available for sale in the
public market as follows: (i) no shares will be eligible for immediate sale on
the date of this Prospectus; and (ii) 52,880,198 shares will be eligible for
sale upon expiration of the lock-up agreements 180 days after the date of this
Prospectus. All officers, directors, stockholders and certain option holders of
the Company have agreed not to offer, pledge, sell, contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly (or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180 days
after the date of this Prospectus, without the prior written consent of the
Underwriters. The Company intends to file a registration statement on Form S-8
which would allow shares issuable upon exercise of options previously granted to
be freely tradeable following release of such lock-up obligations, subject to
compliance with Rule 144 in the case of affiliates of the Company. See "Shares
Eligible for Future Sale".
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of $11.27 per share in the net tangible book value of the
Common Stock from the initial public offering price of $12.00 per share. To the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution".
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 10,000,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $110.8 million assuming the shares offered hereby are sold at a
public offering price of $12.00 per share and after deduction of the estimated
underwriting discount and estimated offering expenses ($111.7 million if the
Underwriters' over-allotment options are exercised in full). The Company will
not receive any of the proceeds from the sale of the shares of Common Stock
offered by the Selling Stockholders.
The Company intends to use approximately $50.0 million of the proceeds of
the Offerings to repay indebtedness under the Company's term credit facility and
intends to use an additional approximately $51.3 million of such proceeds to
redeem all outstanding shares of the Company's Class A Redeemable Preferred
Stock. Following the proposed redemption, none of such shares will be
outstanding. The other purposes of the Offerings are to obtain additional
working capital, to create a public market for the Common Stock, to facilitate
future access by the Company to public capital markets and to enhance the
Company's ability to use its Common Stock as consideration for acquisitions and
as a means of attracting and retaining key employees. Following the repayment of
debt and redemption described above, the Company expects to use the remaining
net proceeds of the Offerings for general corporate purposes including sales and
marketing, hiring of additional consultants and staff, and working capital. The
Company may also use a portion of such net proceeds to fund capital expenditures
and acquisitions of products, technologies or businesses that are related, or
complementary to the Company's business. Although the Company has no present
agreements or commitments and is not currently engaged in any negotiations with
respect to any such transactions, the Company from time to time evaluates such
opportunities. Pending use of such net proceeds for the foregoing purposes, the
Company intends to invest such net proceeds in investment grade interest bearing
marketable securities. See "Risk Factors--Risks Associated with Possible
Acquisitions" and "--Proceeds to be Used to Redeem Preferred Stock and Repay
Indebtedness".
DIVIDEND POLICY
Although the Company declared a $2.7 million dividend on its Common Stock in
1996 and repurchased shares of its Common Stock in connection with its
recapitalization in the third quarter of 1997, in the future, the Company
intends to retain earnings, if any, and will not pay cash dividends for the
foreseeable future. See "Certain Transactions". In addition, the Company's
credit facility limits the ability of the Company to declare and pay dividends.
Any future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements, general business conditions and
such other factors as the Board of Directors may deem relevant. See "Risk
Factors--No Dividends" and "Certain Transactions".
16
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998, (i) on an actual basis
and (ii) as adjusted to reflect the conversion of all outstanding shares of
Class B Convertible Preferred Stock into 45,806,872 shares of Common Stock, the
redemption of all outstanding shares of Class A Redeemable Preferred Stock upon
the closing of the Offerings and the sale of 10,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion................................................ $ 47,500 $ --
Class A redeemable preferred stock, $0.001 par value:
Authorized--485,184 shares; Issued and outstanding--485,184 (actual); no shares (as
adjusted)......................................................................... 50,255 --
Stockholders' equity (deficit):.......................................................
Class B convertible preferred stock, $0.001 par value: Authorized-- 45,806,874
shares; Issued and outstanding--45,806,872 shares (actual); no shares (as
adjusted)......................................................................... 48,518 --
Common stock, $0.001 par value: Authorized--200,000,000 shares; Issued and
outstanding--5,122,346 shares (actual); 60,929,218 shares (as adjusted)(1)........ 5 61
Additional paid-in capital.......................................................... 10,092 169,304
Deferred compensation............................................................... (116) (116)
Note receivable for stock purchase.................................................. (120) (120)
Retained deficit.................................................................... (124,443) (124,443)
Cumulative translation adjustments.................................................. (47) (47)
------------ ------------
Total stockholders' equity (deficit).................................................. (66,111) 44,639
------------ ------------
Total capitalization.................................................................. $ 31,644 $ 44,639
------------ ------------
------------ ------------
</TABLE>
- ------------------
(1) Excludes 16,329,462 shares of Common Stock reserved for issuance under the
Company's 1993 Stock Plan, 1997 Stock Plan and 1998 Stock Plan, and an
additional 1,600,000 shares of Common Stock reserved for issuance under
options granted outside of the Company's stock plans. As of March 31, 1998,
options to purchase 12,069,462 shares at a weighted average exercise price
of $0.78 were outstanding. See "Management--Stock Plans" and Note 12 of
Notes to Consolidated Financial Statements included elsewhere in this
Prospectus.
17
<PAGE>
DILUTION
Pro forma net tangible book value (deficit) per share represents total
assets, less intangible assets and total liabilities, divided by the number of
shares outstanding as of March 31, 1998 (assuming the conversion into Common
Stock of all of the Company's outstanding shares of Class B Convertible
Preferred Stock and the redemption of all of the Company's outstanding shares of
Class A Redeemable Preferred Stock). The Company's pro forma net tangible book
value (deficit) at March 31, 1998 was approximately $(66.1 million) or
approximately $(1.30) per share. Without taking into account any changes in such
net tangible book value per share after March 31, 1998, other than to give
effect to the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and the receipt of the net
proceeds of such sale, the pro forma net tangible book value at March 31, 1998
would have been approximately $44.6 million or approximately $0.73 per share.
This represents an immediate increase in net tangible book value per share of
$2.03 to existing stockholders and an immediate dilution of $11.27 per share to
new investors. The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...... $ 12.00
Pro forma net tangible book value (deficit) per share
as of March 31, 1998............................... $ (1.30)
Increase per share attributable to new investors..... 2.03
---------
Pro forma net tangible book value per share after the
Offerings.......................................... 0.73
---------
Dilution per share to new investors.................. $ 11.27
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing stockholders and new investors with respect to
the total number of shares of Common Stock and Class B Convertible Preferred
Stock (all of which Class B Convertible Preferred Stock will be converted into
Common Stock upon the closing of the Offerings) purchased from the Company, the
total consideration paid and the average price per share paid (assuming the sale
of 10,000,000 shares of Common Stock at an initial public offering price of
$12.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- ----------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 50,929,218 83.6% $ 51,197,422 29.9% $ 1.01
New investors.................................. 10,000,000 16.4 120,000,000 70.1 $ 12.00
-------------- ----- ---------------- -----
Total........................................ 60,929,218 100.0% $ 171,197,422 100.0%
-------------- ----- ---------------- -----
-------------- ----- ---------------- -----
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 12,069,462 shares of Common Stock at a weighted average
exercise price of $0.78 per share outstanding on March 31, 1998. To the extent
that these options become exercisable and are exercised, there will be further
dilution to new investors. See "Risk Factors--Immediate and Substantial
Dilution", "Management--Stock Plans" and "Description of Capital
Stock--Options".
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
are derived from consolidated financial statements of the Company that have been
audited by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this Prospectus. The balance sheet data at December 31, 1995 is
derived from the audited financial statements of the Company that are not
included herein. The statements of operations data for the years ended December
31, 1993 and 1994 and the balance sheet data at December 31, 1993 and 1994 are
derived from unaudited consolidated financial statements not included herein.
The consolidated statement of operations data for the three months ended March
31, 1997 and 1998 and the consolidated balance sheet data at March 31, 1998 are
derived from unaudited consolidated financial statements included elsewhere in
this Prospectus. The historical results are not necessarily indicative of the
operating results to be expected in the future. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997
----- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 663 $ 2,080 $ 9,053 $ 27,454 $ 56,273 $ 10,115
Cost of goods sold........................................ 302 336 1,266 3,256 7,248 1,163
----- --------- --------- --------- --------- ---------
Gross profit.............................................. 361 1,744 7,787 24,198 49,025 8,952
----- --------- --------- --------- --------- ---------
Operating expenses:
Research and development................................ 151 446 833 1,681 3,527 748
Sales and marketing..................................... 65 193 844 1,466 3,713 540
General and administrative.............................. 143 365 1,262 1,342 3,452 753
----- --------- --------- --------- --------- ---------
Total operating expenses.................................. 359 1,004 2,939 4,489 10,692 2,041
----- --------- --------- --------- --------- ---------
Income from operations.................................... 2 740 4,848 19,709 38,333 6,911
Other income (expense), net............................... 3 6 65 244 (662) 189
----- --------- --------- --------- --------- ---------
Income before provision for income taxes.................. 5 746 4,913 19,953 37,671 7,100
Provision for income taxes................................ 2 263 1,955 8,142 14,875 2,804
----- --------- --------- --------- --------- ---------
Net income................................................ $ 3 $ 483 $ 2,958 $ 11,811 $ 22,796 $ 4,296
----- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- ---------
Pro forma basic net income per common share(1)............ $ 0.72
---------
---------
Pro forma weighted average number of common shares
outstanding(1).......................................... 31,837
---------
---------
Pro forma diluted net income per common share(1).......... $ 0.68
---------
---------
Pro forma weighted average number of common shares and
common equivalent shares outstanding(1)................. 33,657
---------
---------
<CAPTION>
<S> <C>
1998
---------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 18,011
Cost of goods sold........................................ 3,048
---------
Gross profit.............................................. 14,963
---------
Operating expenses:
Research and development................................ 1,662
Sales and marketing..................................... 2,271
General and administrative.............................. 776
---------
Total operating expenses.................................. 4,709
---------
Income from operations.................................... 10,254
Other income (expense), net............................... (682)
---------
Income before provision for income taxes.................. 9,572
Provision for income taxes................................ 3,924
---------
Net income................................................ $ 5,648
---------
---------
Pro forma basic net income per common share(1)............ $ 0.11
---------
---------
Pro forma weighted average number of common shares
outstanding(1).......................................... 50,925
---------
---------
Pro forma diluted net income per common share(1).......... $ 0.10
---------
---------
Pro forma weighted average number of common shares and
common equivalent shares outstanding(1)................. 58,772
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 79 $ 469 $ 2,885 $ 9,314 $ 17,708 $ 24,390
Working capital.......................................... 230 716 3,735 12,505 23,767 28,836
Total assets............................................. 370 986 5,683 18,110 34,129 42,805
Long-term debt, net of current portion................... -- -- -- -- 47,500 47,500
Redeemable preferred stock............................... -- -- -- -- 49,520 50,255
Stockholders' equity (deficit)........................... 294 777 3,854 13,014 (71,004) (66,111)
</TABLE>
- ------------------
(1) See Note 14 of Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
SEE "RISK FACTORS". SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF VARIOUS ACRONYMS
AND TECHNICAL TERMS USED IN THIS PROSPECTUS.
OVERVIEW
The Company has been profitable in each of the three years for which its
financial statements were audited. In addition, for each of the Company's 13
quarters for which its financial statements were audited, its revenues have
increased over the prior quarter's results. For the year ended December 31, 1997
and the three months ended March 31, 1998, the Company's revenues were $56.3
million and $18.0 million, respectively.
Netcom Systems is a leading provider of network performance measurement
systems. The Company's flagship platform, SmartBits, evaluates the performance,
reliability, quality of service and proof of service of networking equipment,
such as routers and switches, before deployment on the network. SmartBits allows
users to measure network performance criteria by emulating complex,
multi-protocol networks through generation of accurate, customizable, high speed
flows of network traffic.
The Company realizes revenues primarily from sales of hardware, as well as
from the licensing of related software and software maintenance contracts.
Revenues from hardware and software are generally recognized at the time of
shipment to customers or distributors, net of estimated allowances for product
returns. Maintenance contracts typically call for the Company to provide
technical support and software updates to customers. Maintenance revenues are
deferred and recognized ratably over the term of the maintenance period,
typically one year. Post-contract support obligations are insignificant and are
accrued for at the time of the sale.
The Company markets and sells its products and services through a direct
sales force in the United States, Denmark, U.K., France and Ireland and
indirectly through distributors in Canada, China, Germany, Israel, Italy, Japan,
Korea, the Netherlands, Sweden and Taiwan. Typically, distributors receive a
commission or sales discount off of the international sales price of the
Company's products. Commissions to distributors are payable only after the
Company's receipt of the revenues for such sale. For the year ended December 31,
1997 and for the three month period ended March 31, 1998, approximately 20.4%
and 17.6%, respectively, of the Company's revenues were generated through
distributors. To date, the Company has incurred no bad debt write-offs based on
sales to distributors although there can be no assurance that this will be the
case in the future. See "Risk Factors--Risks Associated with Reliance on
Distributors".
Historically, the Company has sold a substantial majority of its products to
NEMs and has derived the majority of its sales from repeat customers. In
addition, a significant amount of the Company's revenues were historically
generated by the Company's largest customers. For example, in each of 1995, 1996
and 1997, the Company's four largest customers were Bay Networks, Cisco, 3Com
and Cabletron, although the relative ordering of these four customers has varied
from year to year. For 1995, 1996 and 1997, these four customers collectively
accounted for 56.6%, 48.9% and 42.7%, respectively, of the Company's revenues.
Sales to Bay Networks and 3Com accounted for approximately 22.0% and 12.4% of
revenues, respectively, in the year ended December 31, 1995. Sales to Bay
Networks and Cisco accounted for approximately 14.4% and 10.9% of revenues,
respectively, in the year ended December 31, 1996, approximately 10.9% each of
revenues in the year ended December 31, 1997, and approximately 12.8% and 12.1%
of revenues, respectively, in the three month period ended March 31,
20
<PAGE>
1998. The Company anticipates that its results of operations in any given period
will continue to depend to a significant extent upon sales to a small number of
customers. As a result of this customer concentration, the Company's revenues
from quarter to quarter may be subject to substantial period-to-period
fluctuations which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors--Dependence on Sales to Network Equipment Manufacturers."
"--Fluctuations in Quarterly Operating Results" and "--Entry into New and
Unfamiliar Customer Markets".
The Company derives a portion of its revenues from international sales,
which represented approximately, 17.9%, 16.7% and 26.1% of the Company's
revenues in 1995, 1996 and 1997, respectively, and 26.3% during the three month
period ended March 31, 1998. A significant portion of the Company's
international sales currently are United States dollar-denominated. As a result,
an increase in the value of the United States dollar relative to foreign
currencies could make the Company's products and services less competitive in
international markets. See "Risk Factors--Risks Associated with International
Sales".
The Company generally operates with little or no backlog. In addition, the
sales cycle for the Company's products is typically not longer than sixty days
and can be only a few days. As a result, quarterly sales and operating results
generally depend on the volume and timing of, and ability to fulfill, orders
received within the quarter, which are difficult to forecast. A significant
portion of the Company's spending is relatively fixed in advance based on the
Company's forecasts of future sales. If sales are below expectations in any
given quarter, the adverse impact of the shortfall on the Company's quarterly
operating results may be magnified by the Company's inability to adjust spending
to compensate for the shortfall. See "Risk Factors--Difficulty Forecasting
Sales".
In September 1997, the Company acquired Netcom Systems Europe, formerly a
distributor of the Company's products, and the Company's consolidated financial
statements contained within the Prospectus reflects this acquisition.
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain consolidated
statement of operations data as a percentage of the Company's revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues............................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................................................... 14.0 11.9 12.9 11.5 16.9
--------- --------- --------- --------- ---------
Gross profit......................................................... 86.0 88.1 87.1 88.5 83.1
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................................. 9.2 6.1 6.3 7.4 9.3
Sales and marketing.................................................. 9.3 5.3 6.6 5.4 12.6
General and administrative........................................... 13.9 4.9 6.1 7.4 4.3
--------- --------- --------- --------- ---------
Total operating expenses........................................... 32.4 16.3 19.0 20.2 26.2
--------- --------- --------- --------- ---------
Income from operations................................................. 53.6 71.8 68.1 68.3 56.9
Other income (expense), net............................................ 0.7 0.9 (1.2) 1.9 (3.8)
--------- --------- --------- --------- ---------
Income before provision for income taxes............................... 54.3 72.7 66.9 70.2 53.1
--------- --------- --------- --------- ---------
Provision for income taxes............................................. 21.6 29.7 26.4 27.7 21.8
--------- --------- --------- --------- ---------
Net Income............................................................. 32.7% 43.0% 40.5% 42.5% 31.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
REVENUES. The Company recognized $18.0 million in revenues for the three
month period ended March 31, 1998, as compared to $10.1 million for the three
month period ended March 31, 1997, an increase of $7.9 million or 78.2%. The
increase was due primarily to market acceptance of new products, increased
international sales and further penetration of the SmartBits solutions into the
Company's existing customer base.
GROSS PROFIT. Cost of goods sold consists primarily of direct materials,
labor, customer support, warranty provisions and manufacturing overhead. Gross
profit was $15.0 million for the three month period ended March 31, 1998, as
compared to $9.0 million for the three month period ended March 31, 1997, an
increase of $6.0 million. Gross margin was 83.1% for the three month period
ended March 31, 1998, as compared to 88.5% for the three month period ended
March 31, 1997. The decrease in gross margin was due primarily to the increase
in manufacturing and customer support personnel to support expanding operations,
as well as increased volume purchase discounts given to customers. The Company
expects future gross margins to decrease over the next 12 months due to factors
including the product mix of sales, price erosion, increases in overhead and
customer support, new competition, changes in the networking industry and
related technologies and increases in component and contract manufacturing
costs.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of salaries and wages relating to research and development, consulting
fees, certain software development costs and costs of prototype materials and
supplies. The Company expenses research and development costs as incurred.
Research and development expense was $1.7 million for the three month period
ended March 31, 1998, as compared to $0.7 million for the three month period
ended March 31, 1997, an increase of $1.0 million. Research and development
expense was 9.3% of revenues for the three month period ended March 31, 1998, as
compared to 7.4% for the three month period ended March 31, 1997. The increase
in research and development expense in absolute dollars and as a percentage of
revenues was due primarily to increased staffing levels and to increased
purchases of materials used in the development of new products and product
enhancements. The Company expects that research and development expenditures
will continue to increase in absolute dollars for at least the next 12 months to
support continued development of new products and product enhancements.
SALES AND MARKETING. Sales and marketing expense consists primarily of
salaries and wages, commissions, travel and other sales expenses, trade shows
and other marketing programs. Sales and marketing expense was $2.3 million for
the three month period ended March 31, 1998, as compared to $0.5 million for the
three month period ended March 31, 1997, an increase of $1.8 million. Sales and
marketing expense was 12.6% of revenues for the three month period ended March
31, 1998, as compared to 5.4% for the three month period ended March 31, 1997.
The increase in sales and marketing expense in absolute dollars and as a
percentage of revenues was due primarily to increased staffing levels and
related compensation, travel and other sales expenses, and various marketing and
promotional programs. The Company expects that sales and marketing expenditures
will increase in absolute dollars for at least the next 12 months as additional
personnel are hired, field offices are opened and promotional expenditures are
increased as the Company attempts to increase its market penetration and to
pursue new market opportunities.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries and wages, and legal and accounting fees relating to
finance, administration and executive management activities. General and
administrative expense was $0.8 million for the three month periods ended March
31, 1998 and 1997. General and administrative expense was 4.3% of revenues for
the three month period ended March 31, 1998, as compared to 7.4% for the three
month period ended March 31, 1997. The decrease as a percentage of revenues was
due to the significant increase in revenues as compared
22
<PAGE>
to the increase in general and administrative expense. The Company expects that
general and administrative expenditures will continue to increase in absolute
dollars for at least the next 12 months as the Company's administrative staff
and internal systems grow to support expanding operations and the Company's
status as a public company.
OTHER INCOME (EXPENSE), NET. In August 1997, the Company entered into a
credit agreement with two banks under which the Company borrowed $50,000,000
through a term loan facility. Interest expense relating to the borrowings was
$0.9 million during the three month period ended March 31, 1998. There was no
interest expense for the three month period ended March 31, 1997. Interest
income was $0.2 million during the three month period ended March 31, 1998 and
during the three month period ended March 31, 1997. The Company expects interest
expense relating to its term loan facility to cease following repayment of the
term loan with the proceeds of the Offerings, although the Company intends to
maintain a credit facility and may borrow again in the future. The Company
presently has a $10 million revolving credit facility which has not yet been
utilized.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 41.0% for
the three month period ended March 31, 1998, as compared to 39.5% for the three
month period ended March 31, 1997. The increase in the effective tax rate
resulted primarily from the effect of foreign taxes combined with the decreased
benefit of research and development tax credits as a percentage of pre-tax
income due to the significant increase in pre-tax income. Also, during the
fourth quarter of 1997, the Company established a foreign sales corporation that
slightly decreased the effective tax rate during the three month period ended
March 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES. The Company recognized $56.3 million in revenues for the year
ended December 31, 1997, as compared to $27.5 million for the year ended
December 31, 1996, an increase of $28.8 million or 105%. The increase was due
primarily to the introduction of new products and further market acceptance of
existing products.
GROSS PROFIT. Gross profit was $49.0 million for the year ended December
31, 1997, as compared to $24.2 million for the year ended December 31, 1996, an
increase of $24.8 million. Gross margin was 87.1% for the year ended December
31, 1997, as compared to 88.1% for the year ended December 31, 1996. The
decrease in gross margin was due primarily to the increase of manufacturing
personnel to support expanding operations as well as increased volume discounts
to certain customers.
RESEARCH AND DEVELOPMENT. Research and development expense was $3.5 million
for the year ended December 31, 1997, as compared to $1.7 million for the year
ended December 31, 1996, an increase of $1.8 million. Research and development
expense was 6.3% of revenues for the year ended December 31, 1997, as compared
to 6.1% for the year ended December 31, 1996. The increase in research and
development expense in absolute dollars and as a percentage of revenues was due
primarily to increased staffing levels and to increased purchases of materials
used in the development of new products and product enhancements.
SALES AND MARKETING. Sales and marketing expense was $3.7 million for the
year ended December 31, 1997, as compared to $1.5 million for the year ended
December 31, 1996, an increase of $2.2 million. Sales and marketing expense was
6.6% of revenues for the year ended December 31, 1997, as compared to 5.3% for
the year ended December 31, 1996. The increase in sales and marketing expense in
absolute dollars and as a percentage of revenues was due primarily to increased
staffing levels and increased commissions.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $3.5
million for the year ended December 31, 1997, as compared to $1.3 million for
the year ended December 31, 1996, an
23
<PAGE>
increase of $2.2 million. General and administrative expense was 6.1% of
revenues for the year ended December 31, 1997, as compared to 4.9% for the year
ended December 31, 1996. The increase in general and administrative expense in
absolute dollars and as a percentage of revenues was due primarily to increased
staffing levels and the related compensation to support expanding operations.
OTHER INCOME (EXPENSE), NET. Interest expense relating to outstanding
borrowings under the Company's term loan facility was $1.2 million for the year
ended December 31, 1997. Interest income increased approximately $0.4 million
for the year ended December 31, 1997 compared to the year ended December 31,
1996, due to increased cash and cash equivalent balances.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.5% for
the year ended December 31, 1997, as compared to 40.8% for the year ended
December 31, 1996. The decrease in the effective tax rate was primarily due to
the increase in research and development tax credits utilized in 1997. This
increase in research and development tax credits and certain other tax benefits
were caused primarily by the exercise of a substantial number of employee stock
options in connection with the Company's recapitalization in the third quarter
of 1997. Accordingly, the Company does not expect these tax benefits to recur to
the same extent in future periods. See "Certain Transactions".
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES. The Company recognized $27.5 million in revenues for the year
ended December 31, 1996, as compared to $9.1 million for the year ended December
31, 1995, an increase of $18.4 million or 202%. The increase was due primarily
to the introduction of new products and further market acceptance of the
SmartBits solution.
GROSS PROFIT. Gross profit was $24.2 million for the year ended December
31, 1996, as compared to $7.8 million for the year ended December 31, 1995, an
increase of $16.4 million. Gross margin was 88.1% for the year ended December
31, 1996, as compared to 86.0% for the year ended December 31, 1995. The
increase in gross margin was primarily due to the significant increase in
revenues as compared to the increase in overhead costs.
RESEARCH AND DEVELOPMENT. Research and development expense was $1.7 million
for the year ended December 31, 1996, as compared to $0.8 million for the year
ended December 31, 1995, an increase of $0.9 million. Research and development
expense was 6.1% of revenues for the year ended December 31, 1996, as compared
to 9.2% for the year ended December 31, 1995. The increase in research and
development expense in absolute dollars was due primarily to increased staffing
levels and to increased purchases of materials used in the development of new or
enhanced products. The decrease as a percentage of revenues was due to the
significant increase in revenues as compared to the increase in research and
development expense.
SALES AND MARKETING. Sales and marketing expense was $1.5 million for the
year ended December 31, 1996, as compared to $0.8 million for the year ended
December 31, 1995, an increase of $0.7 million. Sales and marketing expense was
5.3% of revenues for the year ended December 31, 1996, as compared to 9.3% for
the year ended December 31, 1995. The increase in sales and marketing expense in
absolute dollars was due primarily to increased staffing levels and related
compensation and travel. The decrease as a percentage of revenues was due to the
significant increase in revenues as compared to the increase in sales and
marketing expense.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $1.3
million for the years ended December 31, 1996 and 1995. General and
administrative expense was 4.9% of revenues for the year ended December 31,
1996, as compared to 13.9% for the year ended December 31, 1995. The decrease as
a percentage of revenues was due to the significant increase in revenues as
compared to the increase in general and administrative expense.
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<PAGE>
OTHER INCOME (EXPENSE), NET. Interest income was $0.2 million for the year
ended December 31, 1996, as compared to $0.1 million for the year ended December
31, 1995, an increase of approximately $0.1 million. The increase was due to
increased cash and cash equivalent balances. There was no interest expense
during the years ended December 31, 1995 and 1996.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 40.8% for
the year ended December 31, 1996, as compared to 39.8% for the year ended
December 31, 1995. The increase in the effective tax rate was primarily due to
the increase in the federal tax rate from 34% in 1995 to 35% in 1996, combined
with the decreased benefit of research and development tax credits as a
percentage of pre-tax income due to the significant increase in pre-tax income.
25
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present statement of operations data in dollars and as
a percentage of the Company's revenues. This quarterly information is unaudited
but has been prepared on a basis consistent with the Company's audited financial
statements presented elsewhere herein, and in the Company's opinion, includes
all adjustments (consisting only of normal recurring adjustments), necessary for
a fair presentation of the information for the quarters presented. The results
of operations for any quarter are not necessarily indicative of results that may
be expected for any subsequent periods. See "Risk Factors--Potential
Fluctuations in Quarterly Operating Results".
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................. $ 5,141 $ 5,263 $ 7,722 $ 9,328 $ 10,115 $ 12,958 $ 15,912
Cost of goods sold....................... 623 642 896 1,095 1,163 1,575 2,017
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........................... 4,518 4,621 6,826 8,233 8,952 11,383 13,895
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development............... 327 408 432 514 748 589 805
Sales and marketing.................... 272 310 480 404 540 761 1,090
General and administrative............. 239 256 452 395 753 965 805
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............. 838 974 1,364 1,313 2,041 2,315 2,700
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations................... 3,680 3,647 5,462 6,920 6,911 9,068 11,195
Other income (expense), net.............. 28 44 59 113 189 167 (107)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes.................................. 3,708 3,691 5,521 7,033 7,100 9,235 11,088
Provision for income taxes............... 1,509 1,502 2,267 2,864 2,804 3,628 4,459
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Income............................... $ 2,199 $ 2,189 $ 3,254 $ 4,169 $ 4,296 $ 5,607 $ 6,629
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31, MAR. 31,
1997 1998
----------- -----------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................. $ 17,288 $ 18,011
Cost of goods sold....................... 2,493 3,048
----------- -----------
Gross profit........................... 14,795 14,963
----------- -----------
Operating expenses:
Research and development............... 1,385 1,662
Sales and marketing.................... 1,322 2,271
General and administrative............. 929 776
----------- -----------
Total operating expenses............. 3,636 4,709
----------- -----------
Income from operations................... 11,159 10,254
Other income (expense), net.............. (911) (682)
----------- -----------
Income before provision for income
taxes.................................. 10,248 9,572
Provision for income taxes............... 3,984 3,924
----------- -----------
Net Income............................... $ 6,264 $ 5,648
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 12.1 12.2 11.6 11.7 11.5 12.1 12.7
----- ----- ----- ----- ----- ----- -----
Gross profit........................... 87.9 87.8 88.4 88.3 88.5 87.9 87.3
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development............... 6.4 7.7 5.6 5.5 7.4 4.5 5.1
Sales and marketing.................... 5.3 5.9 6.2 4.4 5.4 5.9 6.8
General and administrative............. 4.6 4.9 5.9 4.2 7.4 7.5 5.1
----- ----- ----- ----- ----- ----- -----
Total operating expenses............. 16.3 18.5 17.7 14.1 20.2 17.9 17.0
----- ----- ----- ----- ----- ----- -----
Income from operations................... 71.6 69.3 70.7 74.2 68.3 70.0 70.3
Other income (expense), net.............. 0.5 0.8 0.7 1.2 1.9 1.3 (0.6)
----- ----- ----- ----- ----- ----- -----
Income before provision for income
taxes.................................. 72.1 70.1 71.4 75.4 70.2 71.3 69.7
Provision for income taxes............... 29.3 28.5 29.3 30.7 27.7 28.0 28.0
----- ----- ----- ----- ----- ----- -----
Net Income............................... 42.8% 41.6% 42.1% 44.7% 42.5% 43.3% 41.7%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
DEC. 31, MAR. 31,
1997 1998
----------- -----------
<S> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues................................. 100.0% 100.0%
Cost of goods sold....................... 14.4 16.9
----- -----
Gross profit........................... 85.6 83.1
----- -----
Operating expenses:
Research and development............... 8.0 9.3
Sales and marketing.................... 7.6 12.6
General and administrative............. 5.4 4.3
----- -----
Total operating expenses............. 21.0 26.2
----- -----
Income from operations................... 64.6 56.9
Other income (expense), net.............. (5.3) (3.8)
----- -----
Income before provision for income
taxes.................................. 59.3 53.1
Provision for income taxes............... 23.1 21.8
----- -----
Net Income............................... 36.2% 31.3%
----- -----
----- -----
</TABLE>
Revenues have increased in each of the quarters presented, from $5.1 million
for the three month period ended March 31, 1996 to $18.0 million for the three
month period ended March 31, 1998. Gross margins remained relatively consistent
until the three month periods ended December 31, 1997 and
26
<PAGE>
March 31, 1998, when the margin decreased primarily due to the effects of
increased manufacturing personnel and increased volume purchase discounts given
to customers. Research and development expenditures increased in each of the
quarters presented, except for the quarter ended June 30, 1997, in which the
decrease was primarily due to decreased purchases of prototype materials. Sales
and marketing expenditures increased in each of the quarters presented, except
for the quarter ended December 31, 1996, in which the decrease was primarily due
to decreased travel and other selling costs. Sales and marketing expense
increased significantly in the quarter ended March 31, 1998 due to more
pronounced increases in headcount and promotional efforts. General and
administrative expenses increased or remained relatively constant, in each of
the quarters presented, except for the quarter ended September 30, 1997, in
which the decrease was primarily due to decreased legal and other administrative
costs and for the quarter ended March 31, 1998, in which the decrease was
primarily due to changes in management that resulted in lower overall
compensation expense.
The Company's quarterly revenues and operating results may vary
significantly as a result of a number of factors, including the size and timing
of orders, product mix and shipment of products. Operating results may also
fluctuate on a quarterly basis based upon factors such as demand for the
Company's current and future product offerings, the introduction of product
enhancements by the Company or its competitors and market acceptance of new
products offered by the Company or its competitors. The Company's quarterly
operating results are also affected by the budgeting cycles of customers, the
relative percentages of products sold through the Company's direct and indirect
sales channels, product pricing and competitive conditions in the industry. 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.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations may not be meaningful and should not be relied upon as in
indication of future performance. Furthermore, there can be no assurance that
the Company will be able to sustain profitability on a quarterly or annual
basis. See "Risk Factors--Fluctuation in Quarterly Operating Results".
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through cash
provided by operating activities. At March 31, 1998, the Company's principal
source of liquidity was its cash and cash equivalents of $24.4 million. In
August 1997, the Company established an unsecured $10.0 million revolving line
of credit with two banks. At March 31, 1998, there were no borrowings
outstanding under the revolving line of credit.
In the third quarter of 1997, the Company effected a recapitalization (the
"Recapitalization"). In connection with the Recapitalization, the Company
received net proceeds of $141.0 million from the issuance and sale of preferred
stock and borrowings under a term loan facility. The Company used these
proceeds, together with $14.7 million from its existing cash balances to
repurchase 20,431,288 shares of its Common Stock for $155.7 million. See
"Certain Transactions".
Cash provided by operating activities during the years ended December 31,
1995, 1996 and 1997 was $2.5 million, $9.5 million and $24.7 million,
respectively. Cash provided by operating activities during the three month
periods ended March 31, 1997 and 1998 was $4.4 million and $7.4 million,
respectively. Cash generated from operations for all of these periods was
principally attributable to net income adjusted for certain non-cash charges
such as depreciation and amortization and provisions for doubtful accounts.
Additionally, in 1997, the Company received a $6.9 million tax benefit from the
exercise of stock options associated with the Recapitalization.
Investing activities have consisted solely of the acquisition of property
and equipment, except for the year ended December 31, 1997. In September 1997,
the Company acquired all of the outstanding common shares of Netcom Systems
Europe, a research and development, sales and distribution
27
<PAGE>
company located near Paris, France. The purchase price was $3.0 million plus
$0.1 million of acquisition related costs. Cash used for the acquisition, net of
cash acquired, was $2.4 million.
Cash used in financing activities have consisted solely of $2.7 million used
for Common Stock dividends paid from retained earnings during 1996 and the net
$14.7 million used in connection with the Recapitalization in 1997. Cash
provided by financing activities have consisted solely of the exercise of
employee stock options, providing cash of $2.2 million for the year ended
December 31, 1997 and $2,000 for the three month period ended March 31, 1998.
The Company believes that the net proceeds from the Offerings, together with
its current balances, cash provided by future operations and available
borrowings under its line of credit, will be sufficient to meet its working
capital and anticipated capital expenditure requirements for at least the next
12 months. Although operating activities may provide cash in certain periods, to
the extent the Company experiences continued growth in the future, its operating
and investing activities may require significant cash. Consequently, any such
future growth may require the Company to obtain additional equity or debt
financing. See "Risk Factors--Proceeds to be Used to Redeem Preferred Stock and
Repay Indebtedness", and "Use of Proceeds".
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to become compliant with
such "Year 2000" requirements. The Company generally warrants and has
represented to its customers that its products are free from Year 2000 defects.
There can be no assurance that the Company's products or third party computer
products used by the Company are Year 2000 compliant. Any failure of the
Company's products to be Year 2000 compliant could result in the loss of or
delay in market acceptance of the Company's products and services, increased
service and warranty costs to the Company or payment by the Company of
compensatory or other damages. In addition, any failure of third party computer
products used by the Company to be Year 2000 compliant could interrupt and
disrupt the Company's business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 applies to all companies and is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income in a set of
financial statements. Comprehensive income is defined as the change in net
assets of a business enterprise during a period from transactions generated from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Management believes that the adoption of SFAS No. 130 will not have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 applies to all public
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires that businesses segment financial information reported in
the financial statements utilizing the management approach. The management
approach is defined as the manner in which management organizes the segment
within the enterprise for making operating decisions and assessing performance.
The Company's management believes the adoption of SFAS No. 131 will not have a
material impact on financial statements.
28
<PAGE>
BUSINESS
THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH ABOVE UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF VARIOUS ACRONYMS AND
TECHNICAL TERMS USED IN THIS PROSPECTUS.
OVERVIEW
Netcom Systems is a leading provider of network performance measurement
systems. The Company's flagship platform, SmartBits, evaluates the performance,
reliability, quality of service and proof of service of networking equipment,
such as routers and switches, before deployment on the network. SmartBits also
allows users to measure network performance criteria by emulating complex,
multi-protocol networks through the generation of accurate, customizable, high
speed flows of network traffic. By offering a robust, scalable, and modular
network performance solution, the Company has established relationships with
several prominent industry experts and multiple technology publications in the
field of network performance measurement. The Company's customer base of over
600 accounts includes leading network equipment manufacturers ("NEMs"),
telecommunications carriers and internet service providers ("Service
Providers"), and Fortune 1000 companies, financial institutions, systems
integrators and government entities ("End Users").
INDUSTRY BACKGROUND
In recent years, businesses have migrated from mainframe-based computing
environments to distributed, client/server computing networks capable of sharing
bandwidth intensive applications. The widespread adoption of this computing
paradigm has resulted in an increasing need by End Users and Service Providers
for network equipment capable of transmitting bandwidth intensive, mission
critical traffic at extremely fast speeds across progressively larger and more
heterogeneous networks. Growth in usage of the Internet, intranets and
extranets, coupled with the escalating aggregation of voice, video and other
multimedia traffic over networks has exacerbated demands for high speed, high
performance network equipment. As the rate of technological change in networking
has grown and the performance of network equipment has improved, the need for a
robust performance measurement solution to evaluate network equipment
performance, reliability, accuracy and interoperability has become acute.
Historically, solutions have existed to troubleshoot problems after
deployment of equipment on the network. These products analyze the data
transmitted across networks, including packets of data that contain complex
network protocols. While these products are adequate for monitoring data
integrity problems of a "live" network, they were not designed to measure the
performance of network products such as switches and routers prior to network
deployment or to measure performance statistics such as throughput (i.e., the
"speed" of the network), latency (i.e., the time required to process data) and
jitter (i.e., the variation in the latency). In addition, historical solutions
were designed neither to transmit network traffic simulating multiple users
simultaneously using the network nor to capture and measure the performance of
network equipment under such "stressed" conditions.
To emulate traffic on networks, performance measurement equipment has
increased in technological complexity over time. Performance measurement
solutions must increasingly be able to measure the performance of network
equipment for multiple local area network ("LAN") and wide area network ("WAN")
protocols and connections, increasing port density, multiple layers of the OSI
protocol stack and the adoption of packet-based technologies across all
networks. New protocols, such as ATM and Gigabit Ethernet, have been developed
to transmit increasingly diverse types of traffic, such as voice, video and
graphics, faster, more reliably and more efficiently across networks. In
addition, as networks are increasingly deployed across global operations, there
is a need for end-to-end performance measurement equipment that not only
analyzes how network equipment handles traffic within a LAN at a central
location, such as a company's headquarters, but also how traffic is handled over
WANs when
29
<PAGE>
data is transmitted over distances, such as to branch offices. As a result,
effective performance measurement equipment must stress test the ability of
network equipment to perform under multi-protocol, multi-media environments over
LANs and WANs. In addition, as networks grow in size and complexity, performance
measurement equipment that emulates greater port density, corresponding to
greater numbers of network connections, is needed to effectively measure the
performance of network equipment under growing traffic conditions. Furthermore,
the performance of network equipment at higher layers of the OSI protocol stack
must be measured for quality of service or prioritization of time sensitive
network traffic, such as voice and video. While current solutions offer analysis
solely at a single layer, such as the application layer or the network layer,
network professionals are seeking to measure network equipment on multiple
layers of the OSI protocol stack concurrently. Simultaneous layer measurement
involves analyzing more than the performance of a single unit of network
equipment but analysis of the entire network. Finally, as adoption of the
Internet and the Internet Protocol ("IP") increases, performance measurement
equipment must have strong packet measurement abilities to analyze
multi-protocol traffic over IP. All of these factors complicate network
performance analysis.
For NEMs, performance measurement solutions have become mission critical for
the successful and timely introduction of new products that are fully
interoperable in multi-vendor and multi-protocol environments. Historically,
NEMs created in-house, proprietary solutions to measure the performance of their
new products. However, NEMs found their in-house performance analysis solutions
consuming scarce and expensive research and development resources that could be
better utilized creating new products. In addition, NEMs found it increasingly
difficult to develop and maintain "state of the art" in-house performance
measurement solutions as the pace of technological change and the complexity of
equipment interoperability hastened in networking, particularly as new protocols
were developed and adopted. The disadvantages of in-house solutions were
accentuated by industry consolidation among NEMs which resulted in a need by
acquiring companies to quickly evaluate and understand newly acquired technology
and its interoperability with legacy products, performance measurement that
their in-house solutions were not designed to perform. Moreover, because
in-house network performance solutions lacked independence, they were not widely
adopted by third-party industry test labs and thus were not well suited for use
by NEMs to certify the performance of new products to potential equipment
purchasers. As a result, End Users and Service Providers did not widely adopt
NEM in-house solutions and, accordingly, in-house solutions could not be widely
used as a shared means of communication among NEMs, End Users and Service
Providers after a purchase to improve customer service and troubleshoot customer
configuration problems.
For End Users and Service Providers that rely on mission critical network
traffic for their business, performance measurement equipment evaluates the
reliability, accuracy, availability and performance of network equipment before
deployment on the network. End Users and Service Providers increasingly require
credible, industry recognized performance measurement tools to independently
evaluate multiple vendors' network solutions. By measuring the performance,
reliability and compliance to industry standards of new products prior to
deployment, network managers can optimize network configuration and performance
and maximize scarce resources. End Users and Service Providers deploy these
solutions to stress test their networks and proactively identify potential
network problem areas prior to network deployment and performance degradation.
Using the results of these stress tests, End Users and Service Providers can
communicate existing and potential problems to NEM customer service centers who
use the same performance analysis equipment to emulate, understand and solve
these problems. As a result, NEMs, End Users and Service Providers require
performance analysis equipment that emulates progressively larger, more complex,
multi-protocol networks and that provides a common basis for communication among
users, manufacturers and suppliers of network equipment.
THE NETCOM SYSTEMS SOLUTION
Netcom Systems is a leading provider of network performance measurement
systems. Netcom Systems' flagship platform, SmartBits, enables NEMs, End Users
and Service Providers to measure the performance, reliability, quality of
service and proof of service of network equipment before deployment
30
<PAGE>
on the network. SmartBits also generates accurate, customizable, high speed
flows of network traffic for measuring performance criteria such as reliability,
throughput, jitter, latency and packet loss. As a result, NEMs can ensure proper
network equipment performance while better allocating their scarce engineering
resources to new product development. In addition, End Users and Service
Providers can make better cost/performance purchasing decisions on new
equipment, reduce the risk of network "meltdowns" and ensure that mission
critical applications perform correctly. To date, SmartBits has an installed
base of over 600 accounts, including leading NEMs, End Users and Service
Providers. The Netcom Systems solution incorporates the following features:
- EMULATE COMPLEX, MULTI-PROTOCOL NETWORKS. The SmartBits platform was
designed to emulate and test large, complex networks to measure network
performance under "stressed" traffic conditions. The modular SmartBits
platform enables users to easily add or substitute protocol specific
interface cards, or SmartCards, within a common SmartBits chassis. As a
result, a single SmartBits chassis can measure the performance of network
equipment over a wide variety of networking protocols and interfaces,
including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, ATM and
Frame Relay. SmartBits also measures performance across multiple protocols
simultaneously, enabling LAN-to-LAN, LAN-to-WAN, and LAN-to-ATM
performance measurement. The platform enables extremely accurate (to
within 100 nanoseconds), reliable, repeatable and customizable traffic
generation, capture and analysis at speeds that exceed the maximum
performance specifications for analyzed protocols. Additionally, the
SmartBits platform is scalable, allowing for the addition of multiple
SmartCards in a single chassis and linkage of multiple SmartBits chassis
for performance measurement of network equipment replicating the demands
of up to 640 simultaneous connections (each of which can include multiple
streams of traffic) to allow for high density, multi-protocol performance
measurement. As a result, the SmartBits platform provides a common
solution addressing the diverse needs of NEMs, End Users and Service
Providers.
[GRAPHIC]
[Graphic depicting interconnection of SmartBits with an Ethernet Switch, two
Gigabit Ethernet switches, two Frame Relay switches, two ATM switches and a
Token Ring.]
- INDEPENDENCE AND INDUSTRY RECOGNITION. The Company has established
relationships with several prominent industry experts in the field of
network performance measurement, including Robert Mandeville of European
Network Laboratories, Scott Bradner of Harvard University, The Tolly
Group, John Streck of Centennial Networking Lab and Barry Reinhold of the
University of New Hampshire. In addition, Netcom Systems has been
recognized for its independent, multi-protocol, high port density
performance measurement capabilities, by widely recognized technology
publications such as DATACOMMUNICATIONS MAGAZINE, ATM WORLD, INTERNET
WEEK, LAN TIMES, NETWORK COMPUTING and PC WEEK. These experts and
publications drive the standards setting
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<PAGE>
process and establish testing methodologies that evaluate new products and
new technologies. The Company works closely with these experts and
publications in order to develop a SmartBits solution to implement these
tests when industry standards are released. In addition, Netcom Systems
believes use of SmartBits by leading NEMs, such as Cisco, Bay Networks and
3Com, is also critical to the Company's industry recognition. The Company
believes the use of SmartBits by such independent industry standard
testing experts and leading NEMs provides the Company with recognition
among potential customers and is an important endorsement of the Company's
position in the performance measurement market.
- COMMON SOLUTION FOR NEMS, END USERS, SERVICE PROVIDERS AND INDUSTRY TEST
LABS. The SmartBits solution enables NEMs, End Users, Service Providers
and test labs to evaluate and measure the performance of networking
equipment in a common language.
NEMS. NEMs rely on SmartBits as an independent means of validating
the performance of their network equipment performance to End Users
and Service Providers. NEMs also increasingly utilize SmartBits as
a common platform for facilitating communication with End Users and
Service Providers to troubleshoot and replicate problems on their
networks before deployment.
END USERS AND SERVICE PROVIDERS. End Users and Service Providers
use SmartBits to perform industry standard tests, verify network
equipment performance and evaluate new products prior to
deployment. As SmartBits is widely accepted by leading NEMs and has
an installed base of over 600 accounts, End Users and Service
Providers increasingly utilize the common SmartBits platform to
troubleshoot network equipment problems with NEM customer service
centers.
INDUSTRY TEST LABS. Industry experts use SmartBits to evaluate
network equipment from multiple vendors and work closely with
Netcom Systems to develop standard tests for new technologies.
NEMs, End Users and Service Providers use these standardized tests
and product evaluations to measure network equipment performance
using common parameters.
32
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[GRAPHIC]
[Graphic depicts two boxes. The first is labeled "Market Need" and shows three
sub-boxes labeled "NEMs", "Industry Test Labs", and "End User and Service
Provider" interconnected with arrows. Captions read, (a) below "NEMS",
"Marketing claims unvalidated by third parties -- No means of
communicating/replicating problems -- Inability to independently evaluate NEM
products", (b) next to "Industry Test Labs", "Inability to address performance
measurement tests" and (c) above "End User and Service Providers", "Inability to
replicate standard tests". The second box depicts the three sub-boxes in the
first box radially interconnected to the Netcom Systems logo. Captions read
"Third party validation of marketing claims -- Common language to explain
performance problems -- Means of evaluating performance claims of multiple NEMs
- -- Means for NEMS, End Users and Service Providers to perform standard tests and
analysis".]
- VERSATILE PERFORMANCE MEASUREMENT SUITE. Netcom Systems' suite of software
performance measurement applications addresses the performance measurement
requirements of End Users and Service Providers and the more complex
measurement needs of NEMs. The Company's software programs run tests
across multiple protocols, providing turnkey performance analysis for
network equipment such as switches and routers. The Company also offers
more sophisticated software solutions enabling NEMs, End Users and Service
Providers to customize their test sequences. The Company's software runs
on Windows-based personal computers, as well as the HP-UX and Solaris UNIX
platforms.
NETCOM SYSTEMS' STRATEGY
Netcom Systems' strategy is to strengthen and expand its market leadership
in developing, manufacturing and marketing network performance measurement
systems to become the industry standard for network performance measurement.
Important elements of the Company's strategy are to:
- CAPITALIZE ON RAPID TECHNOLOGICAL CHANGE. The Company believes that each
new technological advance in network computing represents a new market for
its performance
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measurement equipment. Netcom Systems intends to develop performance
measurement solutions for next generation LAN and WAN products and new
chassis technology scalable to larger port counts to enable SmartBits to
emulate denser and more complex networks. The Company also intends to
leverage its extensive IP knowledge to capitalize on the increasing
deployment of IP-centric networks. In addition, the Company plans to
develop new software applications to measure performance features such as
packet sequencing and prioritization for the performance measurement of
time sensitive network traffic such as voice and video.
- LEVERAGE KEY RELATIONSHIPS. Netcom Systems intends to leverage its key
relationships with prominent industry test labs, networking publications
and industry leading NEMs to be first to market with new industry standard
tests that measure the performance of new networking technologies.
Additionally, Netcom Systems is a member of a number of standard setting
bodies, such as the Gigabit Ethernet, ATM, Frame Relay, Cable Modem and
ADSL forums. By playing an active role in aiding industry leading
companies in their efforts to determine how performance of new
technologies should be measured, Netcom Systems believes it is well
positioned to rapidly introduce new, industry endorsed and accepted
performance analysis solutions on a timely basis. The Company believes
that its role as an industry recognized provider of performance analysis
for next generation technologies is critical to its continued leadership
and success.
- FURTHER PENETRATE EXISTING NEM CUSTOMER BASE.Netcom Systems believes there
is a significant opportunity for additional sales to existing NEMs. Netcom
Systems plans to increase sales to new development and quality assurance
engineers as NEMs continue to grow their research and development
operations and introduce new products. Similarly, the Company believes
NEMs are increasingly adopting the SmartBits platform in new functional
operations, such as manufacturing, customer support and sales and
marketing. Netcom Systems believes networking industry consolidation also
represents a growth opportunity as NEMs require SmartBits to quickly
evaluate and understand newly acquired technology and its interoperability
with current networking product lines. The Company also plans to increase
sales to its NEM customer base through the introduction of performance
equipment with new functionality and features, including support of new
WAN technologies and higher density systems.
- EXPAND CUSTOMER BASE. Netcom Systems also intends to further expand into
the End User and Service Provider markets, which are increasingly
requiring solutions for analyzing and optimizing network equipment
performance before deployment on their mission critical networks. To
increase awareness of SmartBits among these potential new customers,
Netcom Systems intends to promote its performance measurement solutions
through widely recognized publications and seminars. Netcom Systems
believes it can leverage its leadership in performance measurement
equipment, relationships with leading NEMs and industry experts and its
promotional efforts to penetrate these End Users and Service Provider
markets. In addition, the Company intends to continue expanding
relationships with strategic partners and distributors in order to enter
new international territories in Europe, Asia and Latin America.
TECHNOLOGY
The Company's integrated software and hardware system provides users with a
robust performance measurement solution. Key features of the Company's
technology include:
- MODULAR AND SCALABLE. SmartBits' modular and scalable design supports high
density multi-protocol stress testing of dense networking equipment (up to
640 ports with 1000 streams per port). Each SmartBits SMB-2000 chassis can
measure the performance of new networking protocols through add-on
SmartCards and software updates.
- MULTI-PROTOCOL. The SmartBits platform supports a wide variety of
networking protocols including Ethernet, Fast Ethernet, Gigabit Ethernet,
Token Ring, ATM and Frame Relay, that enable
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<PAGE>
customers to measure packet-to-packet and packet-to-cell performance for
LAN-to-LAN, LAN-to-WAN and LAN-to-ATM connections.
- MULTI-LAYER. SmartBits' multi-layer performance measurement enables
customers to analyze layer 2 parameters such as packet loss, throughput
and packet latency and layer 3 parameters such as stream latency, jitter,
traffic flow performance and bandwidth per connection, all in a multi-
protocol environment. The SmartBits architecture allows traffic
generation, capture and measurement at speeds that exceed the maximum
performance specifications for analyzed protocols, thus stress testing
equipment and networks beyond established performance parameters.
- IP COMPETENCY. Since inception, the Company has focused on the development
of packet-based performance measurement equipment and, as a result, the
Company has an extensive understanding of IP and frame generation,
tracking and measurement. The Company's proprietary field programmable
gate array technology reflects this competency and differentiates the
SmartBits platform from other traffic generating devices because it also
tracks the frame through to the receiving device, which permits
measurements such as throughput, packet loss, latency and jitter.
SmartBits measures frame performance through multiple network interfaces
and enables performance measurement of multi-protocol traffic over IP.
- ROBUST SOFTWARE CAPABILITIES. The SmartBits platform's robust software
solutions enable the user to configure the transmission, triggers, and
monitoring of SmartCards, either individually or in groups, and to perform
tests between any port or group of ports quickly and accurately. The
Company's SmartApplications and Advanced Switch Test software enables
customers to measure the performance of networking hardware for layer 2
switches under industry standard tests (RFCs 1242, 1944 and 2285). The
Company also offers its SmartLibrary software, which allows more demanding
users to develop custom testing methodologies for controlling SmartCards
using a variety of computer platforms such as Microsoft Windows and UNIX
and multiple programming languages such as TCL, C/C++, Java, Visual Basic,
Delphi, Perl and LabView.
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<PAGE>
PRODUCTS
SMARTBITS SYSTEMS
SmartBits, the Company's flagship performance measurement system,
incorporates a set of chassis, SmartCards and software applications that enable
performance measurement for multiple LAN and WAN technologies. SmartBits
generates the traffic of thousands of PC/workstation clients and servers, thus
analyzing the impact of such traffic on the performance of network equipment.
SmartBits can help customers identify the performance boundaries of network
equipment, optimize bandwidth, manage migrations to new technologies and analyze
a network's ability to sustain current and anticipated user populations.
SmartBits enables NEMs, End Users and Service Providers to ensure that network
equipment products meet industry standards by utilizing SmartApplications and
Advanced Switch Test software applications. SmartBits systems are scalable, and
include SmartCards that provide performance measurement functionality enabled by
a family of software programs for different test requirements and skill levels.
A stand-alone SmartBits SMB-2000 chassis, which comes bundled with
SmartWindow, SmartApplications and SmartLibrary software, lists for $15,900 and
an SMB-10 expansion chassis lists for $4,995. The list price for SmartCards
ranges from $995 for a 10 Mbps layer 2 Ethernet card to $19,995 for a 622 Mbit
ATM card with an OC-12 interface, while the list price of software applications
for the platform range from $1,995 for the Advanced Switch Test to $2,995 for
SmartLibrary.
THE SMARTBITS CHASSIS
<TABLE>
<CAPTION>
CHASSIS DESCRIPTION
<S> <C>
SMB-2000 SMARTBITS SMB-2000, the Company's second generation performance measurement
MASTER CHASSIS system, is part of a performance measurement platform using
proprietary network controllers designed to analyze and monitor
inter-networking equipment, devices or networks at maximum
performance. The SMB-2000 is a 20 port performance measurement
system for developing, and analyzing routers, bridges, switches,
repeaters, transceivers, multiport devices and live networks for
Ethernet, Fast Ethernet, Gigabit Ethernet, ATM, Frame Relay and
Token Ring traffic. The SMB-2000 measures statistics such as packet
throughput, latency, jitter, traffic flow performance and bandwidth
per connection. The SMB-2000 acts as the master chassis that can
drive up to 3 SMB-10s (or 3 SMB-2000's) to form an 80 port system or
it can act as a standalone system that accommodates 20 ports. One
SmartBits system is fully scalable up to 80 ports and 8 total
systems can be linked together to analyze up to 640 ports
simultaneously. The SMB-2000 can be controlled and managed with the
SmartWindow, SmartApplications, Advanced Switch Test, VAST,
SmartSignaling, or SmartLibrary software.
SMB-10 SMARTBITS The SMB-10 is part of the SmartBits system and is a 20 slot
EXPANSION expansion chassis driven by an external SMB-2000 master chassis.
</TABLE>
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<PAGE>
SMARTCARDS
The modular SmartBits system allows mixtures of the following SmartCards to
test single technology devices or networks of inter-working technologies:
<TABLE>
<CAPTION>
CARD DESCRIPTION
<S> <C>
10MBPS AND 100 MBPS A family of Ethernet Smartcards that generates and monitors
SMARTCARDS (ST-6410, both 10 Mbps and 100 Mbps Ethernet traffic in half or full
SE-6205, SE-6305, duplex modes.
SX-7410 and SX-7210)
GIGABIT ETHERNET Provides performance measurement functions for Gigabit Ethernet
SMARTCARD(GX-1405) with data rates of 1.0 Gbps Ethernet traffic in full-duplex
mode. Complies with IEEE Gigabit Ethernet specifications for
full-duplex and flow control functions.
MULTI-LAYER SMARTCARD Measures performance and interoperability of layer 3 devices
(ML-7710) for 10/100 Mbps Ethernet traffic. Also incorporates the layer 2
functionality and performance of the 10Mbps and 100 Mbps
SmartCards. Each ML-7710 can generate, monitor and capture the
equivalent traffic of one fully loaded LAN with up to 1000 end
devices.
LAYER 3 SMARTCARD Measures performance and interoperability of layer 3 devices
(L3-6710) for 10 Mbps Ethernet traffic in half duplex mode.
ATM SMARTCARDS (AT-9015, A family of SmartCards that generate and monitor ATM network
AT-9020, AT-9025, traffic from 1.544 Mbps to 622 Mbps. Applications include
AT-9034, AT-9045, performance measurement of ATM-to-LAN inter-networking and for
AT-9155 and AT-9622) an ATM edge device's ability to accept and sustain switched
virtual circuits.
FRAME RELAY SMARTCARD Performs frame level performance measurement at up to 6 Mbps
(WN-3405) for Frame Relay assemblers/disassemblers, routers and switches
operating over V.35 WAN links.
TOKEN RING SMARTCARD Provides a single port UTP interface for generating and
(TR-8405) monitoring both 4 and 16 Mbps. Can send and receive over 40,000
frames/second (by sending multiple frames per token).
</TABLE>
36
<PAGE>
SOFTWARE APPLICATIONS
Netcom Systems also offers a suite of software products and test
applications designed to simplify the operation of SmartBits which can be
further customized using SmartLibrary. A typical SMB-2000 chassis comes bundled
with SmartWindow, SmartApplications and SmartLibrary.
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION
<S> <C>
SMARTWINDOW A Microsoft Windows-TM-graphical user interface "soft front panel"
used to control all functions of all types of SmartCards as well as
control and set up SmartBits tests.
SMARTAPPLICATIONS Performance measurement applications for Ethernet, Frame Relay and
ATM bridges, switches and routers. Based on industry standard tests
(RFCs 1242 and 1944) for measuring throughput, latency and packet
loss and back-to-back performance. The tests were developed in
cooperation with Scott Bradner of Harvard University.
SMARTLIBRARY A software package that enables the user to create custom tests. A
SmartBits system can be programmed with SmartLibrary using Visual
Basic, C/C++, Java, LabView, Delphi, Perl or TCL programming
languages. SmartLibrary also runs on Microsoft Windows-TM- and the
HP-UX and Solaris UNIX platforms.
ADVANCED SWITCH A suite of 10 tests designed to exercise particular functions as
TESTS ("AST") AND well as determine overall switch performance. The tests were
AST FOR TOKEN RING developed in cooperation with Robert Mandeville, Director of
European Network Laboratories located in Paris, France. AST fully
supports all requirements of RFC 2285.
VLAN ADVANCED SWITCH A suite of 10 tests that use the ML-7710 and L3-6710 SmartCards to
TEST ("VAST") measure the performance and capabilities of virtual LAN enabled
switch devices.
SMARTSIGNALING TESTS Pre-programmed tests that measure the capabilities of ATM switch
devices and ATM/LAN edge devices to accept and sustain switched
virtual circuit calls.
</TABLE>
SALES AND MARKETING
The Company markets and sells its products through a direct sales force in
the United States, Denmark, the U.K. and France and through distributors in
Canada, China, Germany, Israel, Italy, Japan, Korea, the Netherlands, Sweden and
Taiwan. As of April 30, 1998, the Company employed a direct sales team composed
of 16 sales professionals and 7 systems engineers worldwide. Systems engineers
are important to the sales process, since they are the primary vehicles through
which the Company looks to provide value-added services to customers such as
training and troubleshooting. Netcom Systems is dedicated to establishing new
distributor relationships and servicing the needs of current distributors.
International revenues represented 17.9%, 16.7% and 26.1% of revenues for 1995,
1996 and 1997, respectively.
The Company's marketing strategy is to target NEMs, End Users and Service
Providers. Netcom Systems' marketing team creates the product roadmap, defines
innovative products to address the business needs of the Company's markets, and
works to ensure timely delivery of products to meet and exceed customer
expectations. Creation of user awareness and demand for Netcom Systems' products
includes partnering with key trade publications and all leading industry test
laboratories. Awareness and
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<PAGE>
educational initiatives also include trade shows, seminars, white papers,
application notes, mailing pieces, trade publications and advertising. The
Company maintains knowledge of new technology innovations by participating in
technology forums and industry standard bodies such as the IEEE, the IETF and
Gigabit, ATM and Frame Relay forums. As of April 30, 1998, the marketing group
employed nine people with extensive experience in the test, measurement and
network equipment marketplace and also uses the services of outside consultants.
CUSTOMERS
Netcom Systems has a customer base of over 600 accounts. The Company
believes that most industry-leading NEMs are customers, as well as many End
Users and Service Providers. Each of the Company's target markets has different
uses for the SmartBits platform and different purchasing practices.
Currently, NEMs represent a significant amount of repeat business for the
Company. NEMs typically purchase an entire SmartBits system consisting of one or
more chassis, SmartCards and software. NEM demand for subsequent system
purchases and add-on SmartCards is driven by the need to continually develop new
network protocols and technologies, the quality assurance and manufacturing
units' requirement to analyze new, improved or acquired products lines for
interoperability and standards compliance, and the growth in the NEM
engineering, customer service and marketing divisions. The Company also offers
an upgrade program for its NEM customers. For 1997, 89.7% of the Company's
domestic revenues were from sales to NEMs. See "Risk Factors--Dependence on
Sales to Network Equipment Manufacturers".
Conversely, End Users and Service Providers purchase SmartBits to ensure
that equipment from NEMs conforms to industry standards and is fully
interoperable in multi-vendor and multi-protocol environments before network
deployment. These customers also use SmartBits to proactively identify potential
network problem areas before performance degradation occurs and to communicate
network problems to vendors for resolution. The nature of the End User or
Service Provider sale is significantly different than that of the NEMs. Usually,
an End User or Service Provider will purchase between one and four SmartBits
systems and then buy additional stand-alone SmartCards as it has the need to
measure the performance of new technologies, rather than purchasing an entirely
new system. See "Risk Factors--Risks Associated with Entry into New and
Unfamiliar Customer Markets".
A significant amount of the Company's revenues were historically generated
by the Company's largest customers. For example, in each of 1995, 1996 and 1997,
the Company's four largest customers were Bay Networks, Cisco, 3Com and
Cabletron although the relative ordering of these four customers has varied from
year to year. For 1995, 1996 and 1997, these four customers collectively
accounted for 56.6%, 48.9% and 42.7%, respectively, of the Company's revenues.
Sales to Bay Networks and 3Com accounted for approximately 22.0% and 12.4% of
revenues, respectively, in the year ended December 31, 1995. Sales to Bay
Networks and Cisco accounted for approximately 14.4% and 10.9% of revenues,
respectively, in the year ended December 31, 1996, approximately 10.9% each of
revenues in the year ended December 31, 1997, and approximately 12.8% and 12.1%
of revenues, respectively, in the three month period ended March 31, 1998. The
Company anticipates that its results of operations in any given period will
continue to depend to a significant extent upon sales to a small number of
customers. As a result of this customer concentration, the Company's revenues
may be subject to substantial period-to-period fluctuations which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Dependence on Sales to Network Equipment
Manufacturers", "--Fluctuations in Quarterly Operating Results" and "--Entry
into New and Unfamiliar Customer Markets".
38
<PAGE>
Set forth below are the Company's 10 largest NEM, End User, Service Provider
and international customers, based on 1997 revenues.
<TABLE>
<CAPTION>
NEMS END USERS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
3Com Corporation 3M Corporation
Ascend Communications, Inc. Abbott Laboratories
Bay Networks, Inc. The Boeing Company
Cabletron Systems, Inc. Cigna Systems
Cisco Systems, Inc. John Hancock Mutual Life Insurance Company
FORE Systems, Inc. Microsoft Corporation
Hewlett-Packard Company NationsBanc Corporation
Hitachi Computer Products, Inc. Naval Command Control and Ocean Surveillance Center
RDT&E Division
Lucent Technologies, Inc. PaineWebber, Inc.
Xylan Corporation Raytheon Service Company
SERVICE PROVIDERS INTERNATIONAL
- -------------------------------------------------------- --------------------------------------------------------
AT&T Corporation 3Com Corporation
Bell Atlantic Network Integration Accton Technology Corporation
BellSouth Business Systems Allied Telesis
GTE Laboratories, Inc. Delta Electronics, Inc.
MCI Telecommunications Corporation D-Link Corporation
MFS/Worldcom Fujitsu Group
Pacific Bell Networks Integration Matsushita
PSINet, Inc. NEC Corporation
Southwestern Bell Technology Resources Newbridge Networks Corporation
Sprint Corporation Northern Telecom Canada Limited
</TABLE>
CUSTOMER SUPPORT AND QUALITY ASSURANCE
Netcom Systems believes that superior technical services and support are
critical to customer satisfaction and the development of customer relationships.
The Company also believes that achieving high levels of customer satisfaction
through, among other things, the development of a robust quality assurance
infrastructure can be a key differentiator for the Company and can serve as a
barrier to entry in the performance measurement market. Netcom Systems has
divided its customer support organization into three distinct units, customer
service, support engineering and quality assurance, to better meet customer
needs. All three units of the customer service organization are responsible for
providing ongoing technical support and training for the Company's customers.
Customers receive telephone and e-mail support, and for a fee, receive new
releases of the Company's software and firmware. As of April 30, 1998, the
Company employed 14 customer support and quality assurance personnel. The
Company believes that customer feedback obtained through technical support is
critical to its research and development efforts.
The Company's customer service unit consists of a toll free customer support
line available during business hours, Monday through Friday. Support personnel
answer the technical support calls and generally provide same-day responses to
questions that cannot be resolved during the initial call. All calls are logged,
opened, tracked and closed with a focus on keeping customers informed on
progress. The Company's support engineering unit concentrates on supporting
major accounts such as the larger NEMs and supports sales engineers and sales
representatives. This unit also resolves more sophisticated customer problems
that cannot be solved over the telephone by identifying the problem,
communicating with the Company's research and development team to develop a
solution, testing the solution
39
<PAGE>
and delivering it to the customer. This group does on-site customer visits when
necessary and develops new product training programs for customer service
representatives, systems engineers and sales professionals. The Company's
quality assurance unit not only ensures products are functioning according to
specifications prior to release but also works with customer service to
determine which customer issues are product flaws that should be fixed. Quality
assurance then communicates these issues to the research and development team
and manages the process of fixing the product. The Company provides support to
its direct customers and its distributors.
RESEARCH AND DEVELOPMENT
The Company believes that research and development is critical to its
business. Netcom Systems' research and development efforts are focused on
developing new products for the network performance measurement market and
further enhancing existing products. The Company is currently developing a new
higher density platform that will also be used to measure the performance of
next generation technologies as well as new SmartCards and new software test
suites. Netcom Systems' development efforts include addressing and anticipating
the performance measurement needs of NEMs, End Users and Service Providers;
focusing on emerging high growth networking technologies; emphasizing
performance measurement for higher layers of the OSI protocol stack and
improving the ease of use of SmartBits and enhancing the scalability of
SmartBits. The Company's future success depends on its ability to continue to
enhance its existing products and to develop new products that solve the needs
of its customers. The Company closely monitors changing customer needs by
communicating directly with its customer base and distributors. Netcom Systems
also receives input from active participation in industry groups responsible for
establishing technical standards.
Netcom Systems' research and development organization is composed of three
related engineering groups: hardware, firmware and software. Hardware engineers
design, develop and debug complex logic designs using field programmable gate
arrays and hardware description language, multiple microprocessors, memories and
high speed components to create cost efficient hardware designs that enable
complete flexibility in transmitted data. Firmware engineers create
implementations of real-time sensitive network traffic and protocol generators.
These software components are the engines of the SmartBits platform. The
products developed by this group do not interact with the user, but interact at
the data layer for the many physical interfaces Netcom Systems supports.
Software engineers include application engineers and application user interface
engineers. Application engineers use compilers to produce software applications
that are used by NEMs to rapidly create tailored tests for their unique needs in
manufacturing, quality assurance, and customer support.
Development schedules for technology products are inherently difficult to
predict, and there can be no assurance that the Company will introduce any
proposed new products in a timely fashion. Also, there can be no assurance that
the Company's product development efforts will result in commercially successful
products or that the Company's products will not contain "bugs" or other
performance problems or be rendered obsolete by changing technology or new
product announcements by other companies. Additionally, if the Company is to
successfully introduce new products in the future, it must successfully recruit
additional personnel, competition for whom is intense. See "Risk Factors--Risks
Associated with Rapid Technological Changes", "--Risks Associated with New
Product Introductions".
The Company has made and will continue to make significant investment in
research and development. The Company's research and development expenditures
were $0.8 million, $1.7 million and $3.5 million in 1995, 1996 and 1997,
respectively. As of April 30, 1998, Netcom Systems' research and development
staff consisted of 39 employees.
40
<PAGE>
MANUFACTURING
Netcom Systems' manufacturing operations consist primarily of materials
planning and procurement, warehousing, distribution, quality control, logistics,
final assembly and test. The Company outsources the assembly of printed circuit
boards to third party contract electronic manufacturers. The Company presently
uses a variety of independent third party contract assembly companies to perform
printed circuit board assembly. The manufacturing process enables the Company to
satisfy specific customer demands with minimal capital and human resources. To
date, the Company has not experienced any significant product defects or product
returns. As of April 30, 1998, there were 37 employees in manufacturing.
The Company is dependent upon single or limited source suppliers for certain
key components and parts used in the Company's products, including certain
microprocessors and integrated circuits. The Company generally purchases single
or limited source components pursuant to purchase orders and has no guaranteed
supply arrangements with these suppliers. In addition, the availability of many
of these components is dependent in part on the Company's ability to provide its
suppliers with accurate forecasts of its future requirements. Any extended
interruption in the supply of any of the key components currently obtained from
a single or limited source, or in the time necessary to transition to a
replacement supplier's product or replacement component into the Company's
products, could disrupt its operations and have a material adverse effect on the
Company in any given period. The Company purchases certain components from
foreign suppliers, the supply of which could be adversely affected by changing
tariff and regulatory structures, particularly those affecting the import and
export of electronics and technology. The Company may also be subject to
increases in component costs, which could also have a material adverse effect on
the Company's business, results of operations and financial condition. See "Risk
Factors--Dependence on Contract Manufacturers and Single-Source Suppliers".
Lead times for materials and components ordered by the Company vary and
depend on factors such as the specific supplier, contract terms and demand for a
component at a given time. Currently, the Company acquires materials, completes
certain standard subassemblies and assembles fully-configured systems based on
the Company's forecasts. If orders do not match forecasts, the Company may have
excess or inadequate inventory of certain materials and components.
COMPETITION
The Company's principal and potential competitors include NEMs that develop
in-house products; test equipment manufacturers such as Hewlett-Packard, Fluke
Corporation and Tekelec; new start-up enterprises focused on network performance
measurement such as IXIA Communications; companies specializing in ATM (LAN
and/or WAN) performance testing such as Adtech, Inc. and RADCOM Ltd.; software
based network traffic simulators such as Ganymede Software Inc. and Optimal
Networks Corporation; and other companies that sell networking products with
functionality complementary to SmartBits, such as Network Associates, Inc.
Competitive factors in the network performance testing and measurement market
include the breadth of product features, conformity to industry-standard
protocols, pricing, product quality, reliability and functionality, marketing
and sales resources, customer service and support and reputation. Many of the
Company's competitors and potential competitors have greater resources, name
recognition and sales capabilities than the Company. Increased competition could
result in price reductions, reductions in gross margins, the inability of the
Company to increase market share, or a loss of market share by the Company, any
of which would adversely affect the Company's business, results of operations
and financial condition. There can be no assurance that the Company's current
and future competitors will not develop or market technologies and products that
offer higher performance and are more cost-effective than the Company's current
or future products, thereby rendering the Company's technologies and products
obsolete. See "Risk Factors--Competition".
41
<PAGE>
PROPRIETARY RIGHTS
Although the Company believes that its success is more dependent upon its
technical expertise than its proprietary rights, the Company's future success
and ability to compete is dependent in part upon its proprietary technology. The
Company relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary technology. The Company
generally enters into confidentiality agreements with its employees,
consultants, resellers, customers and potential customers, and strictly limits
access to, and distribution of its source code, and further limits the
disclosure and use of other proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. There can
be no assurance that third parties will not assert infringement claims in the
future with respect to the Company's current or future products. Any such
assertion, regardless of its merit, could require Netcom Systems to pay damages
or settlement amounts and could require the Company to develop non-infringing
technology or acquire licenses to the technology that is the subject of asserted
infringement, resulting in product delays or increased costs or both. In
addition, the cost of any such litigation and the distraction of the Company's
management resources in connection therewith could have a material adverse
effect on the Company. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. The failure of the Company to adequately obtain
such licenses, or to protect its own proprietary technology through contractual
rights, trade secrets, patent and copyrights laws, could have a material adverse
effect on the Company. See "Risk Factors--Dependence on Proprietary Technology".
FACILITIES
The Company's principal operations are conducted out of one leased building
located in Chatsworth, California with a total of 50,000 square feet of office
and manufacturing space. The Company also maintains 6 branch offices in the
United States. The Company's European operations are headquartered in Plaisir,
France.
The Company believes that its current Chatsworth facilities will be adequate
to meet the anticipated level of operations only through the first half of 1999.
EMPLOYEES
On April 30, 1998, Netcom Systems employed 140 individuals on a full-time
equivalent basis. Of these, 39 were involved in engineering, 46 in sales,
marketing, and customer support, 37 in manufacturing, and 18 in administration.
The Company believes that it maintains good relations with its employees and has
not experienced any interruption of operations as a result of labor
disagreements.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Barry Phelps........................... 51 President, Chief Executive Officer and Director
Gil Cabral............................. 50 Vice President, Finance, Chief Financial Officer and Secretary
James Jordan........................... 61 Vice President, Sales
Gene Zhang............................. 42 Vice President, Engineering
Mark Fishburn.......................... 51 Vice President, Marketing
Dwight Olson........................... 46 Vice President, Operations
Henry Hamon............................ 40 General Manager, Netcom Systems Europe
Stephane Johnson....................... 42 Vice President, International Sales
Walter Kortschak (1)(2)................ 39 Chairman of the Board
Marc Hamon (1)......................... 45 Director
Richard Moley (1)...................... 59 Director
Robert Sheridan III (2)................ 35 Director
Michael West (2)....................... 48 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
BARRY PHELPS has served as President and Chief Executive Officer since
November 1997 and has served as a director since January 1998. From November
1996 to November 1997, Mr. Phelps served as the Vice President, Finance and
Chief Financial Officer of the Company. Prior to joining Netcom Systems, Mr.
Phelps served as Chairman and Chief Executive Officer of MICOM Communications
Corporation ("MICOM") from February 1992 to November 1996 and Vice President,
Chief Financial Officer from August 1988 to January 1992. MICOM was acquired by
Northern Telecom, Ltd. in June 1996. Prior to serving as Vice President, Chief
Financial Officer of MICOM, he served as Controller of MICOM from July 1987 to
August 1988. From 1973 to 1987, Mr. Phelps served in various financial
management positions at Burroughs Corporation and its successor, Unisys
Corporation.
GIL CABRAL has served as Vice President, Finance, Chief Financial Officer
and Secretary since October 1997. Prior to joining Netcom Systems, Mr. Cabral
served as President and Chief Operations Officer of MICOM from August 1988 to
September 1997. From August 1985 to August 1988, he served as Vice President,
Operations and Vice President Finance and Administration for MICOM. Prior to
that, Mr. Cabral spent 13 years with GTE Corporation in various financial
management positions and served four years as General Manager and Vice
President, Operations for International Cheese Company. He sits on the Board of
Directors of Connected Systems, Inc., a privately held company in Santa Barbara,
California.
JAMES JORDAN has served as Vice President, Sales since December 1994. Prior
to joining the Company, Mr. Jordan managed the Southern California sales region
for Network General Corporation from January 1991 to October 1994. From January
1986 to December 1990, Mr. Jordan ran his own sales representation firm, Jordan
Electronics. From 1959 to 1985, Mr. Jordan held various sales and management
positions at Moxon Electronics Corporation, including President from 1973 to
1985.
GENE ZHANG has served as Vice President, Engineering since April 1996. From
January 1988 to April 1996, Mr. Zhang held various positions at Wandel &
Goltermann Technologies, Inc., including
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Director of Engineering from June 1995 to April 1996, Business Unit Manager from
May 1993 to May 1995 and Engineering Manager from January 1988 to April 1993.
From 1984 to 1987, Mr. Zhang was a senior engineer at Atlantic Research
Corporation.
MARK FISHBURN has served as Vice President, Marketing since March 1997. From
July 1993 until he joined Netcom Systems, Mr. Fishburn founded and was President
of Achieve, Inc. From October 1984 through July 1993, Mr. Fishburn held various
management positions at Retix, including UK Managing Director and Vice
President, General Manager of OSI Software Products. Mr. Fishburn also held
technical support and marketing management positions at Xerox Corporation and
Systems Engineering Labs from 1974 to 1984.
DWIGHT OLSON has served as Vice President, Operations since September 1997.
From January 1997 to August 1997, Mr. Olson was Vice President of Operations at
Whisper Communications, Inc. From July 1984 to January 1997, Mr. Olson held
various operations management positions at MICOM, including Vice President
Operations from 1988 to 1997.
HENRY HAMON has served as General Manager, Netcom Systems Europe since
February 1996. From August 1995 to September 1997, Mr. Hamon served as a
consultant to the Company. Mr. Hamon was an independent consultant in software
engineering for six years from February 1990 to February 1996. Prior to that, he
was a technical marketing manager for Quotron Systems, Inc. from 1987 to 1989.
Mr. Hamon also spent four years as a software architecture manager for Dassault
Systemes S.A. from 1983 to 1987.
STEPHANE JOHNSON has served as Vice President, International Sales since
September 1996. From January 1993 to August 1996, Mr. Johnson was with Experdata
France, a subsidiary of Philips Communication Systems B.V., serving as Directeur
General. From March 1987 to December 1993, Mr. Johnson was the President and CEO
of Experdata, Inc. Prior to Experdata, Inc., from September 1981 to February
1987, Mr. Johnson held various technical, sales and operations management
positions at TITN, Inc., a subsidiary of Alcatel N.V.
WALTER KORTSCHAK has been Chairman of the Board since August 1997. Mr.
Kortschak is a General Partner of Summit Partners, L.P., a private equity
investment firm, where he has been employed since June 1989. Summit Partners and
its affiliates manage a number of venture capital funds, including Summit
Ventures IV, L.P. and Summit Investors III, L.P., which are stockholders of the
Company. Mr. Kortschak also serves as a director of Aspec Technology, Inc., HMT
Technology Corporation, and SteriGenics International, Inc.
MARC HAMON has served as a director since January 1989. Mr. Hamon founded
Netcom Systems in 1988 and served as President and Chief Executive Officer of
the Company from 1988 through November 1997.
RICHARD MOLEY has served as a director since September 1997. Mr. Moley was
Senior Vice President, Wide Area Business Unit, of Cisco from July 1996 to July
1997. He served as President and Chief Executive Officer of StrataCom, Inc. from
June 1986 to July 1996, when Stratacom was acquired by Cisco. Mr. Moley serves
on the Board of Directors of Linear Technology, Inc., CMC Industries, Inc. and
Cidco, Inc.
ROBERT SHERIDAN III has served as a director since August 1997. Mr. Sheridan
is a Managing Director of NationsBank Capital Investors, the principal
investment group within NationsBank Corporation, and a Senior Vice President of
NationsBanc Capital Corp., NationsBanc Investment Corporation and NationsBank,
N.A. NationsBanc Capital Corp. is a stockholder of the Company. Prior to joining
NationsBank Capital Investors in January 1994, Mr. Sheridan worked in the
corporate bank division of NationsBank Corporation and its predecessor from June
1989 to January 1994. Prior to joining NationsBank Corporation, Mr. Sheridan
worked in investment banking and capital markets positions at
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<PAGE>
PaineWebber, Inc. from 1986 to 1988. Mr. Sheridan serves as a director of
Cumulus Media, Inc., a radio broadcasting company.
MICHAEL WEST has served as a director since March 1998. From September 1997
to January 1998, Mr. West served as an Executive Vice President at Lucent
Technologies. Prior to that, Mr. West was employed by Octel Communications
Corporation from September 1986 to September 1997, serving as President and
Chief Operating Officer from December 1995 to September 1997, Vice Chairman from
February 1995 to December 1995 and Executive Vice President for sales and
marketing from September 1986 to February 1995. Mr. West also served as a
director of Octel Communications Corporation from February 1995 to September
1997.
BOARD COMPOSITION
The Company currently has authorized six directors. In accordance with the
terms of the Company's Certificate of Incorporation, the terms of office of the
Board of Directors will be divided into three classes: Class I, whose term will
expire at the annual meeting of stockholders to be held in 1999, Class II, whose
term will expire at the annual meeting of stockholders to be held in 2000 and
Class III, whose term will expire at the annual meeting of stockholders to be
held in 2001. The Class I directors are Messrs. Hamon and Sheridan, the Class II
directors are Messrs. Kortschak and Moley and the Class III directors are
Messrs. Phelps and West. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management of the Company.
Directors may be removed for cause by the affirmative vote of the holders of a
majority of the Common Stock.
In connection with the recapitalization of the Company in the third quarter
of 1997, the Company and certain of the Company's directors, executive officers
and stockholders became parties to a Shareholders Agreement pursuant to which
they have agreed to vote their shares of stock to preserve the number of
authorized directors of the Company at six and to elect certain representatives
to serve as directors of the Company. Together, these persons and entities will
hold 48,513,538 shares, or 79.6% of the Company's outstanding Common Stock
following consummation of the Offerings assuming no exercise of the
Underwriters' over-allotment options and assuming no exercise of options after
March 31, 1998). Accordingly, the parties to this Shareholders Agreement will be
empowered to control the election of directors of the Company. The provisions of
the Shareholders Agreement will survive the Offerings and will remain in effect
until terminated by a vote of investors in the recapitalization owning
two-thirds of shares held by all such investors.
The Company's executive officers are appointed by the Board of Directors and
serve until their successors are elected or appointed.
Except for Marc Hamon, a director of the Company, and Henry Hamon, an
executive officer of the Company, who are brothers, there are no family
relationships among any of the Company's directors or executive officers.
BOARD COMMITTEES
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee. Since May 1998, the Board's Audit Committee has
consisted of Messrs. Sheridan, West and Kortschak. The Audit Committee reviews
the Company's annual audit and meets with the Company's independent auditors to
review the Company's internal accounting procedures and financial management
practices. Since May 1998 the Compensation Committee has consisted of Messrs.
Moley, Kortschak and Hamon.
45
<PAGE>
The Compensation Committee makes determinations concerning salaries, incentives
and other forms of compensation for directors, officers and other employees of
the Company. The Compensation Committee also administers the Company's various
stock plans. Prior to the creation of the Compensation Committee, all decisions
concerning salaries, incentives and other forms of compensation for directors,
officers and other employees of the Company were made by the whole Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
is currently or has been, at any time since the formation of the Company, an
officer or employee of the Company except that Marc Hamon served as an officer
of the Company prior to November 1997. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
Outside directors currently receive no cash compensation for services
provided in that capacity but are reimbursed for out-of-pocket expenses they
incur in connection with their attendance at meetings of the Board. Directors
are eligible to participate in the Company's stock plans and, beginning in 1998,
employee directors will also be eligible to participate in the Company's 1998
Purchase Plan. Upon closing of the Offerings, each non-employee director
("Outside Director") will be granted options to purchase Common Stock under the
1998 Stock Plan as follows: (i) each Outside Director shall automatically be
granted a nonstatutory stock option to purchase 60,000 shares of Common Stock
(the "First Option") on the date which such person first becomes an Outside
Director and (ii) each Outside Director shall automatically be granted an option
to purchase 12,000 shares (the "Subsequent Option") on the date of the Company's
annual meeting of stockholders, if on such date he or she shall have served on
the Board for at least six months. Each option shall have a term of 10 years.
The shares subject to the First Option shall vest as to 20% of the optioned
stock one year from the date of grant, and 1/48th of the remaining optioned
stock shall vest each month thereafter, provided the person continues to serve
as a director on such dates. The shares subject to the Subsequent Option shall
vest as to 100% of the optioned stock on the first anniversary of the date of
grant, provided the person continues to serve as a director on such date. The
exercise price of each First Option and each Subsequent Option shall be 100% of
the fair market value per share of the Common Stock on the date of grant. See
"--Stock Plans".
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
The Company routinely delivers written offer letters containing provisions
on salary bonuses, benefits and stock option grants to prospective members of
management and other employees. In addition, the Company has entered into
employment and change-in-control agreements as described below.
The Company entered into a written employment agreement with James Jordan,
Vice President, Sales, in December 1994. The agreement, as amended over time,
sets forth Mr. Jordan's base salary, sales commissions and bonuses as well as
certain benefits to which Mr. Jordan is entitled. The agreement has a one year
renewable term. If not renewed by November 30 of any year, the agreement will
automatically terminate on December 1 of such year. Pursuant to such agreement,
Mr. Jordan agreed not to directly or indirectly compete with the Company in the
manufacture or sale of products which are identical or similar to those of the
Company for one year following termination of his employment.
By letter agreement in September 1996, the Company entered into a written
employment agreement with Barry Phelps, the President and Chief Executive
Officer of the Company. The letter agreement, as amended over time, provided for
certain bonuses and acceleration of options, each of which has
46
<PAGE>
been paid or effected to date. In addition, the agreement with Mr. Phelps
provides that termination of
Mr. Phelps' employment for convenience by the Company requires three months'
prior notice.
The Company entered into a written employment agreement with Stephane
Johnson, Vice President, International Sales, in September 1996. The agreement
sets forth Mr. Johnson's base salary, sales commissions and bonuses as well as
certain benefits to which Mr. Johnson is entitled. The agreement has a one year
renewable term. If not renewed by August 31 of any year, the agreement will
automatically terminate on September 1 of such year. The agreement with Mr.
Johnson provides for partial acceleration of certain options upon the
dissolution, liquidation merger or consolidation of the Company before September
1998. In addition, the agreement with Mr. Johnson provides that if Mr. Johnson
is involuntarily terminated without cause at any time after September 1, 1997,
the Company shall continue to pay Mr. Johnson's salary and car allowance and
shall continue to pay the premium cost of Mr. Johnson's group insurance for
three months following the effective date of such termination. Pursuant to such
agreement, Mr. Johnson agreed not to directly or indirectly compete with the
Company in the manufacture or sale of products which are identical or similar to
those of the Company for one year following termination of Mr. Johnson's
employment.
In June 1997, the Company entered into a written employment agreement with
Netcom Systems Europe and Netcom Systems Europe's General Manager, Henry Hamon.
The agreement with Mr. Hamon sets forth his base salary, sales commissions and
bonuses. The term of employment covered by the agreement extends to February 1,
1999. After February 1, 1999, the Company may terminate the agreement for cause,
as defined under French law, subject to a three month notice period. Pursuant to
such agreement, Mr. Hamon agreed not to engage in any other employment,
occupation, consulting or other business activity directly related to the
business of the Company for a period of six months following termination.
In May 1998, the Company entered into Change-in-Control Agreements with each
of its executive officers. Such agreements provide that if the executive
officer's employment with the Company is involuntarily terminated at any time
within 24 months after a Change of Control other than for Cause (each as defined
therein), then the executive officer shall be entitled to (i) acceleration of
all options and (ii) a severance payment equal to one year of the executive
officer's base compensation for the Company's fiscal year then in effect plus
the executive officer's bonus calculated at one hundred percent of target for
the Company's fiscal year then in effect. Any severance payments are payable in
a lump sum on or prior to the termination date. In addition, for a period of 12
months following such termination, the executive officer shall continue to
participate in the Company's health and dental insurance benefit plans in
accordance with the rules established for individual participation in such
plans, as such rules may be amended from time to time.
Pursuant to such Change-in-Control Agreements, a "Change-in-Control" is
defined as (i) the acquisition by a third party of beneficial ownership of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or (ii) a
change in the composition of the Board of Directors of the Company as a result
of which fewer than a majority of the directors are incumbent directors of the
Company or who are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the incumbent directors at the time
of such election or nomination; or (iii) a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least 50% of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (iv) the approval
by the stockholders of the Company of a plan of complete liquidation of the
Company or of an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
paid by the Company during the fiscal year ended December 31, 1997 to each
person serving as Chief Executive Officer during such year and its four other
most highly compensated executive officers (the Chief Executive Officer and such
other executive officers are hereinafter referred to as the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
--------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER (1) OPTIONS
- --------------------------------------------- ------------- ---------------------- ----------- --------------
<S> <C> <C> <C> <C>
Barry Phelps................................. $ 155,782 $ 250,000 -- 860,000
President and Chief Executive Officer
Marc Hamon................................... 1,200,007 -- -- 60,000
Former President and Chief Executive
Officer
Henry Hamon.................................. 114,996 -- $ 290,000(2) 264,000
General Manager, Netcom Systems Europe
James Jordan................................. 158,493 50,000 333,895(2) --
VP, Sales
Stephane Johnson............................. 152,889 -- 163,963(2) 264,000
VP, International Sales
Gene Zhang................................... 146,869 40,000 -- 360,000
VP, Engineering
</TABLE>
- ------------------
(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or 10%
of the total of annual salary and bonus reported for the Named Executive
Officer.
(2) Represents sales commission.
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<PAGE>
STOCK OPTION INFORMATION. The following table sets forth certain
information for the fiscal year ended December 31, 1997 with respect to each
grant of stock options to the Named Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
----------------------------------------------------
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(4)
OPTIONS GRANTED IN PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1997(2) SHARE(3) DATE 5% 10%
- ----------------------------------------------------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Barry Phelps......................................... 360,000 7.26% $ 0.75 9/10/07 $ 169,802 $ 430,310
500,000 10.09 0.75 11/13/07 235,835 597,663
Marc Hamon........................................... 60,000 1.21 0.75 9/10/07 28,300 71,718
Henry Hamon.......................................... 264,000 5.33 0.75 9/10/07 124,521 315,561
James Jordan......................................... -- -- -- -- -- --
Stephane Johnson..................................... 264,000 5.33 0.75 9/10/07 124,521 315,561
Gene Zhang........................................... 360,000 7.26 0.75 9/10/07 169,802 430,310
</TABLE>
- ------------------
(1) The options granted to Messrs. Phelps, Henry Hamon, Johnson and Zhang have
vesting schedules based on time and milestones. For each such option, 50% of
the shares vest over time as follows: 20% vest on the first anniversary of
the date of grant and the remainder vest 1/48 per month thereafter. The
remaining 50% vest based on milestones as follows: 1/3 vest upon the closing
of this offering, 1/3 vested if the Company achieves certain revenue and
profit benchmarks for 1998, and 1/3 vest if the Company achieves certain
revenue and profit benchmarks for 1999; provided, that, in any event, all
shares will be fully vested on the fifth anniversary of the date of grant.
The option granted to Mr. Marc Hamon has a vesting schedule as follows: 20%
vest on the first anniversary of the date of grant and the remainder vest
1/48 per month thereafter.
(2) In 1997, the Company granted employees, consultants and directors options to
purchase an aggregate of 4,957,100 shares of Common Stock, excluding certain
options to purchase shares of Common Stock regranted upon the cancellation
of other options in connection with the repricing of options.
(3) The exercise price per share of each option was equal to the fair value of
the Common Stock on the date of grant as determined in good faith by the
Board of Directors on such date based upon such factors as the purchase
price paid by investors for shares of the Company's preferred stock, the
absence of a trading market for the Company's securities and the Company's
financial outlook and results of operations.
(4) In accordance with the rules of the SEC, shown are the gains or "option
spreads" that would exist for the respective options granted. These gains
are based on the assumed rates of annual compound stock price appreciation
of 5% and 10% from the date the option was granted over the full option
term. These assumed annual compound rates of stock price appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
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<PAGE>
AGGREGATE OPTION EXERCISE AND OPTION VALUES. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended December 31, 1997 and exercisable and
unexercisable options held as of December 31, 1997:
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS
DECEMBER 31, 1997 AT DECEMBER 31, 1997 (1)
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- --------- -------------- ------------ -------------- ------------ --------------
Barry Phelps...................... 119,998 $ 376,057(2) -- 1,340,002 -- $ 351,667
Marc Hamon........................ -- -- -- 60,000 -- 15,000
Henry Hamon....................... 213,334 1,590,938(3) -- 850,666 -- 242,667
James Jordan...................... 1,700,000 12,171,500(4) 300,000 -- $ 75,000 --
Stephane Johnson.................. 53,332 374,391(5) 13,334 797,334 5,000 216,000
Gene Zhang........................ 200,000 1,128,200(6) -- 760,000 -- 190,000
</TABLE>
- ------------------
(1) The fair market value of the Company's Common Stock at the close of business
on December 31, 1997 was estimated to be approximately $1.00 per share.
(2) Based on the exercise of options to acquire 53,332 shares, which shares were
repurchased by the Company in the Recapitalization at a price of $7.646 per
share, and the exercise of options to acquire 66,666 shares with a deemed
fair market value of $0.75 per share on October 13, 1997.
(3) Based on the exercise of options to acquire 213,334 shares, which shares
were repurchased by the Company in the Recapitalization at a price of $7.646
per share.
(4) Based on the exercise of options to acquire 1,700,000 shares, which shares
were repurchased by the Company in the Recapitalization at a price of $7.646
per share.
(5) Based on the exercise of options to acquire 53,332 shares, which shares were
repurchased by the Company in the Recapitalization at a price of $7.646 per
share.
(6) Based on the exercise of options to acquire 160,000 shares, which shares
were repurchased by the Company in the Recapitalization at a price of $7.646
per share, and the exercise of options to acquire 40,000 shares with a
deemed fair market value of $0.75 per share on October 23, 1997.
STOCK PLANS
1993 STOCK PLAN
A total of 7,844,000 shares of Common Stock have been reserved for issuance
under the Company's Amended and Restated 1993 Non-Statutory Stock Option and
Purchase Plan, as amended (the "1993 Stock Plan"). Under the 1993 Stock Plan, as
of March 31, 1998, options to purchase an aggregate of 4,645,774 shares were
outstanding, 3,198,226 shares of Common Stock had been purchased pursuant to
exercises of stock options and no shares were available for future grant.
The 1993 Stock Plan provides for the grant of nonqualified stock options
(not intended to qualify within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code")) to key employees of the Company.
The 1993 Stock Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to each
option. The Board of Directors also determines the schedule upon which options
become exercisable. The exercise price of stock options granted under the 1993
Stock Plan must be at least equal to the fair market value of the Company's
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<PAGE>
Common Stock on the date of grant. However, for any employee holding more than
10% of the voting power of all classes of the Company's stock, the exercise
price will be no less than 110% of the fair market value. The term of options
granted under the 1993 Stock Plan is 10 years (five years in the case of an
employee holding more than 10% of the voting power of all classes of the
Company's stock).
Options granted under the 1993 Stock Plan are not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1993 Stock Plan must generally
be exercised within three months after the end of optionee's status as an
employee of the Company, or within one year after such optionee's termination by
disability or death, respectively. If the optionee dies within 90-days following
termination of employment, the person to whom the optionee's rights pass by will
or the laws of descent or distribution may exercise the option for a period of
one year. In no event may the option be exercised later than the expiration of
the option's term.
The option agreements pursuant to the 1993 Stock Plan provide that in the
event of a merger of the Company with or into another corporation, or a sale of
substantially all of the Company's assets, each outstanding option shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options are not assumed or substituted for by the successor
corporation, the administrator shall provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the administrator makes an
option exercisable in full in the event of a merger or sale of assets, the
administrator shall notify the optionee that the option or stock purchase right
("SPR") shall be fully exercisable for a period of 15 days from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.
In addition, in the event of a change of control of the Company whereby the
stockholders of the Company immediately prior to the change of control event
fail to hold at least 50% of the outstanding capital stock of the Company
following the change of control event or any sale of all or substantially all of
the Company's assets, then, immediately prior to any such change of control
event, the vesting of options under this plan will accelerate by one year.
1997 STOCK PLAN
A total of 7,919,100 shares of Common Stock have been reserved for issuance
under the Company's Second Amended and Restated 1997 Stock Plan, as amended (the
"1997 Stock Plan"). Under the 1997 Stock Plan, as of March 31, 1998, options to
purchase an aggregate 5,823,688 shares were outstanding, 235,412 shares of
Common Stock had been purchased pursuant to exercises of stock options and
1,860,000 shares were available for future grant.
The 1997 Stock Plan provides for the grant of incentive stock options within
the meaning of Section 422 of the Code, nonstatutory stock options and SPRs to
employees, directors and consultants of the Company. Nonstatutory stock options
and SPRs may be granted to employees, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1997 Stock Plan is
administered by the Board of Directors, or a committee appointed by the Board of
Directors, which determines the terms of options granted, including the exercise
price and the number of shares subject to each option. The Board of Directors
also determines the schedule upon which options become exercisable. The exercise
price of incentive stock options granted under the 1997 Stock Plan must be at
least equal to the fair market value of the Company's Common Stock on the date
of grant. However, for any employee holding more than 10% of the voting power of
all classes of the Company's stock ("10% stockholder"), the exercise price may
be no less than 110% of the fair market value. The exercise price of a
nonstatutory stock option may not be less than 85% of the fair market value of
the Common Stock on the date such option is granted; provided, however, the
exercise price of a nonstatutory stock option granted to a 10% shareholder may
not be less than 110% of the fair market value of the Common Stock on the date
such option is granted. The maximum term of options granted under the Stock Plan
is 10 years.
51
<PAGE>
Options and SPRs granted under the 1997 Stock Plan are not transferable by
the optionee, and each option and SPR is exercisable during the lifetime of the
optionee only by such optionee. Options granted under the 1997 Stock Plan must
generally be exercised within three months after the end of optionee's status as
an employee, director or consultant of the Company, or within twelve months
after such optionee's termination by disability or death, respectively, to the
extent the optionee is vested on the date of termination, but in no event later
than the expiration of the option's term.
The 1997 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of substantially all of the
Company's assets, each outstanding option and SPR shall be (i) assumed, (ii)
exchanged for an equivalent option or right, or (iii) substituted by the
successor corporation or a parent or subsidiary of the successor corporation. If
the outstanding options and SPRs are not assumed or substituted for by the
successor corporation, the Administrator shall provide for the optionee to vest
and have the right to exercise the option or SPR as to an additional 20% of the
optioned stock. If the Administrator makes an option or SPR exercisable as to an
additional 20% of the unvested shares in the event of a merger or sale of
assets, the Administrator shall notify the optionee that such additional shares
shall be fully exercisable for a period of 15 days from the date of such notice,
and the option or SPR will terminate upon the expiration of such period. In the
event of a change of control of the Company whereby the stockholders of the
Company immediately prior to the change of control event fail to hold at least
50% of the outstanding capital stock of the Company following the change of
control event or any sale of all or substantially all of the Company's assets,
then, immediately prior to any such change of control event, 20% of any option
granted within one year from the date of the change of control event shall
become immediately vested and exercisable. In addition, in the event of a change
of control of the Company whereby the stockholders of the Company immediately
prior to the change of control event fail to hold at least 50% of the
outstanding capital stock of the Company following the change of control event
or any sale of all or substantially all of the Company's assets, then,
immediately prior to any such change of control event, the vesting of options
under this plan will accelerate by one year.
1998 STOCK PLAN
The Company's 1998 Stock Plan (the "1998 Plan") was adopted by the Board of
Directors in May 1998 and will be submitted for approval by the stockholders in
June 1998. A total of 4,000,000 shares of Common Stock, plus annual increases
(beginning in 2000) equal to the lesser of (i) 8,000,000 shares, (ii) 4% of the
outstanding shares, or (iii) a lesser amount determined by the Board of
Directors, are currently reserved for issuance pursuant to the 1998 Plan. Unless
terminated sooner, the 1998 Plan will terminate automatically in May 2008.
The 1998 Plan provides for the (i) discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), to employees and for the grant of nonstatutory stock
options and SPRs to employees, directors and consultants, and (ii) automatic
grant of nonstatutory stock options to non-employee directors.
The 1998 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each option
or SPR, the exercisability thereof, and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1998 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1998 Plan.
The exercise price of all incentive stock options granted under the 1998
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1998 Plan is determined by the Administrator, but with
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<PAGE>
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1998 Plan may not exceed ten years.
In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with the Company for any reason (including
death or disability). The purchase price for shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The 1998 Stock Plan provides that each non-employee director shall
automatically be granted a nonstatutory stock option to purchase 60,000 shares
of Common Stock (the "First Option") on the date which such person first becomes
a non-employee director. In addition to the First Option, each non-employee
director shall automatically be granted an option to purchase 12,000 shares (a
"Subsequent Option") on the date of the Company's annual meeting of
stockholders, if on such date he or she shall have served on the Board for at
least six months. Each First Option and Subsequent Option shall have a term of
10 years. The shares subject to the First Option shall vest as to 20% of the
optioned stock one year from the date of grant, and 1/48th of the remaining
optioned stock shall vest each month thereafter, provided the person continues
to serve as a director on such dates. The shares subject to the Subsequent
Option shall vest as to 100% of the optioned stock on the anniversary of the
date of grant thereafter, provided the person continues to serve as a director
on such date. The exercise price of each First Option and each Subsequent Option
shall be 100% of the fair market value per share of the Common Stock.
Options and SPRs granted under the 1998 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1998 Plan must
generally be exercised within 30 days after the end of optionee's status as an
employee, director or consultant of the Company, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.
The 1998 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each outstanding option and SPR shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options and
SPRs are not assumed or substituted for by the successor corporation, the
Administrator shall provide for the optionee to have the right to exercise the
option or SPR as to all of the optioned stock, including shares as to which it
would not otherwise be exercisable. If the Administrator makes an option or SPR
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option or SPR shall be fully
exercisable for a period of 15 days from the date of such notice, and the option
or SPR will terminate upon the expiration of such period. In addition, in the
event of a change of control of the Company whereby the stockholders of the
Company immediately prior to the change of control event fail to hold at least
50% of the outstanding capital stock of the Company following the change of
control event or any sale of all or substantially all of the Company's assets,
then, immediately prior to any such change of control event, the vesting of
options under this plan will accelerate by one year.
53
<PAGE>
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors in May 1998 and will be submitted for
approval by the stockholders in June 1998. A total of 300,000 shares of Common
Stock has been reserved for issuance under the 1998 Purchase Plan, plus annual
increases (beginning in 1999) equal to the lesser of (i) 2,000,000 shares, (ii)
1% of the outstanding shares or a lesser amount determined by the Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code of 1986, as amended, contains successive six month
offering periods. The offering periods generally start on the first trading day
on or after February 15 and August 15 of each year, except for the first such
offering period which commences on the first trading day on or after the
effective date of an initial public offering and ends on the last trading day on
or before February 14, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may be not be granted an option to purchase stock under the 1998
Purchase Plan. The 1998 Purchase Plan permits participants to purchase Common
Stock through payroll deductions of up to 15% of the participant's
"compensation". Compensation is defined as the participant's base straight time
gross earnings, commissions, overtime and bonuses but exclusive of any other
compensation. The maximum number of shares a participant may purchase during a
single offering period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each offering period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning or end of the offering period.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with the Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set.
The Board of Directors has the authority to amend or terminate the 1998
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1998 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the Board
determines that the termination of the 1998 Purchase Plan is in the best
interests of the Company and its stockholders. The 1998 Purchase Plan will
become effective on the consummation of the offering and will terminate in 10
years from such date, unless sooner terminated by the Board of Directors.
401(K) PLAN
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Internal Revenue Code of 1986, as amended. The 401(k) Plan
provides that each participant may contribute up to 15% of his or her pre-tax
gross compensation (up to a statutory limit, which is $10,000 in calendar year
1998). Under the 401(k)
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<PAGE>
Plan, the Company may make discretionary matching contributions. The Company's
contribution to the 401(k) Plan in 1997 was $45,000 in the aggregate for all
employees. A matching contribution made by the Company vests at 25% per year
commencing on the first anniversary of a participant's date of employment with
the Company. All amounts contributed by participants and earnings on such
contributions are fully vested at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
and executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions, or (iv) any transaction
from which the director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal or state
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.
The Company's bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law. The
Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's bylaws also permit it to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the bylaws permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's bylaws. These agreements, among other things, indemnify the Company's
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director, officer, employee, agent or
fiduciary of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
The Company believes that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
In the third quarter of 1997, the Company was recapitalized in a transaction
(the "Recapitalization") involving (a) the borrowing of a $50,000,000 term loan
pursuant to a Credit Agreement with NationsBank of Texas, N.A., as
Administrative Agent, BankBoston, N.A. as Co-Agent and other financial
institutions, (b) the issuance of 485,184 shares of Class A Redeemable Preferred
Stock at an aggregate purchase price of $48,518,400, (c) the issuance of
45,806,874 shares of Class B Convertible Preferred Stock at an aggregate
purchase price of $48,518,400 and (d) the redemption of approximately 80% of the
Company's then-outstanding Common Stock at $7.646 per share for an aggregate
purchase price of approximately $156,217,600. The purchasers of Class A
Redeemable Preferred Stock and Class B Convertible Preferred Stock, and the
holders of Common Stock redeemed in the recapitalization included, among others,
the following directors, executive officers and holders of more than 5% of the
Company's Common Stock:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
CLASS A CLASS B COMMON
PREFERRED PREFERRED STOCK
STOCK STOCK REPURCHASED
----------- ------------- -------------
<S> <C> <C> <C>
Henry Hamon........................................................... -- -- 1,013,334
Marc Hamon............................................................ -- -- 16,000,000
James Jordan.......................................................... -- -- 1,680,000
Richard Moley......................................................... 2,500 236,026 --
NationsBanc Capital Corp. (1)......................................... 80,000 7,552,908 --
Summit Ventures IV, L.P. (2).......................................... 236,856 22,361,872 --
TA Advent VIII........................................................ 65,511 6,184,996 --
</TABLE>
- ------------------
(1) Robert Sheridan, an affiliate of NationsBanc Capital Corp. as well as
NationsBank of Texas, N.A., the Administrative Agent pursuant to the Credit
Agreement, is a director of the Company. Mr. Sheridan disclaims beneficial
ownership of the shares held by this entity except to the extent of his
proportionate partnership therein.
(2) Walter Kortschak, a General Partner of Summit Ventures IV, L.P., is a
director of the Company. Mr. Kortschak disclaims beneficial ownership of the
shares held by this entity except to the extent of his proportionate
partnership therein.
The purchasers of the Company's Class B Convertible Preferred Stock,
including the persons and entities described above, together with Marc Hamon, a
director of the Company, Henry Hamon, the Company's General Manager for Netcom
Systems Europe, James Jordan, the Company's Vice President, Sales, Barry Phelps,
the Company's President, Chief Executive Officer and director, Gene Zhang, the
Company's Vice President, Engineering, Stephane Johnson, the Company's Vice
President, International Sales and Richard Bass (collectively, the
"Recapitalization Parties") are parties to a Shareholders Agreement pursuant to
which they have agreed to vote their shares of stock to preserve the number of
authorized directors of the Company at six and to elect certain representatives
to serve as directors of the Company. Together, these persons and entities will
hold 48,513,538 shares, or 79.6% of the Company's outstanding Common Stock
following consummation of the Offerings (assuming no exercise of the
Underwriters' over-allotment options and assuming no exercise of options after
March 31, 1998). Accordingly, the parties to this Shareholders Agreement will be
empowered to control the election of directors of the Company. See
"Management--Directors and Executive Officers".
NationsBanc Montgomery Securities, LLC, a co-manager of the Offerings, as
well as certain of its affiliates & employees, including NationsBanc Capital
Corp., purchased shares of Class A Redeemable Preferred Stock and Class B
Convertible Preferred Stock in the Recapitalization. See "Underwriting".
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<PAGE>
In addition, the Recapitalization Parties are entitled to certain rights of
registration pursuant to a Registration Agreement between such persons and the
Company, including certain demand and piggyback registration rights. See
"Description of Capital Stock--Registration Rights of Certain Holders".
In September 1997, the Company purchased all of the outstanding shares of
Netcom Systems Europe, a company organized under the laws of the Republic of
France. In connection with such purchase, Henry Hamon, an executive officer of
the Company, received $150,000 in consideration for the sale of his shares in
Netcom Systems Europe to the Company.
In 1997, the Company loaned $670,000 to Marc Hamon, a director of the
Company and the former Chief Executive Officer of the Company, as an advance on
Mr. Hamon's salary. The loan was repaid in full on July 29, 1997. At that time,
interest charges of approximately $6,645 were paid by Mr. Hamon.
In the past, the Company has granted options to its executive officers and
directors. The Company intends to grant options to its officers and directors in
the future. See "Management--Option Grants During Year Ended December 31, 1997"
and "Management--Director Compensation".
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify its officers and directors against certain liabilities that
may arise by reason of their status or service as officers or directors (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company also intends to execute such
agreements with its future directors and executive officers. See
"Management--Limitation of Liability and Indemnification Matters".
The Company entered into a written employment agreement with James Jordan,
Vice President, Sales, in December 1994. The agreement, as amended over time,
sets forth Mr. Jordan's base salary, sales commissions and bonuses as well as
certain benefits to which Mr. Jordan is entitled. The agreement has a one year
renewable term. If not renewed by November 30 of any year, the agreement will
automatically terminate on December 1 of such year. Pursuant to such agreement,
Mr. Jordan agreed not to directly or indirectly compete with the Company in the
manufacture or sale of products which are identical or similar to those of the
Company for one year following termination of his employment.
By letter agreement in September 1996, the Company entered into a written
employment agreement with Barry Phelps, the President and Chief Executive
Officer of the Company. The letter agreement, as amended over time, provided for
certain bonuses and acceleration of options, each of which has been paid or
effected to date. In addition, the agreement with Mr. Phelps provides that
termination of Mr. Phelps' employment for convenience by the Company requires
three months' prior notice.
The Company entered into a written employment agreement with Stephane
Johnson, Vice President, International Sales, in September 1996. The agreement
sets forth Mr. Johnson's base salary, sales commissions and bonuses as well as
certain benefits to which Mr. Johnson is entitled. The agreement has a one year
renewable term. If not renewed by August 31 of any year, the agreement will
automatically terminate on September 1 of such year. The agreement with Mr.
Johnson provides for partial acceleration of certain options upon the
dissolution, liquidation merger or consolidation of the Company before September
1998. In addition, the agreement with Mr. Johnson provides that if Mr. Johnson
is involuntarily terminated without cause at any time after September 1, 1997,
the Company shall continue to pay Mr. Johnson's salary and car allowance and
shall continue to pay the premium cost of Mr. Johnson's group insurance for
three months following the effective date of such termination. Pursuant to such
agreement, Mr. Johnson agreed not to directly or indirectly compete with the
Company in the manufacture or sale of products which are identical or similar to
those of the Company for one year following termination of Mr. Johnson's
employment.
In June 1997, the Company entered into a written employment agreement with
Netcom Systems Europe and Netcom Systems Europe's General Manager, Henry Hamon.
The agreement with
57
<PAGE>
Mr. Hamon sets forth his base salary, sales commissions and bonuses. The term of
employment covered by the agreement extends to February 1, 1999. After February
1, 1999, the Company may terminate the agreement for cause, as defined under
French law, subject to a three month notice period. Pursuant to such agreement,
Mr. Hamon agreed not to engage in any other employment, occupation, consulting
or other business activity directly related to the business of the Company for a
period of six months following termination.
In May 1998, the Company entered into Change-in-Control Agreements with each
of its executive officers. Such agreements provide that if the executive
officer's employment with the Company is involuntarily terminated at any time
within 24 months after a Change of Control other than for Cause (each as defined
therein), then the executive officer shall be entitled to (i) acceleration of
all options and (ii) a severance payment equal to one year of the executive
officer's base compensation for the Company's fiscal year then in effect plus
the executive officer's bonus calculated at one hundred percent of target for
the Company's fiscal year then in effect. Any severance payments are payable in
a lump sum on or prior to the termination date. In addition, for a period of 12
months following such termination, the executive officer shall continue to
participate in the Company's health and dental insurance benefit plans in
accordance with the rules established for individual participation in such
plans, as such rules may be amended from time to time.
Pursuant to such Change-in-Control Agreements, a "Change-in-Control" is
defined as (i) the acquisition by a third party of beneficial ownership of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or (ii) a
change in the composition of the Board of Directors of the Company as a result
of which fewer than a majority of the directors are incumbent directors of the
Company or who are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the incumbent directors at the time
of such election or nomination; or (iii) a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least 50% of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (iv) the approval
by the stockholders of the Company of a plan of complete liquidation of the
Company or of an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
The Company believes that all of the transactions described above were in
its best interests and on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All of the Company's securities
referenced above were purchased or sold at prices equal to the fair market value
of such securities, as determined by the Company's Board of Directors, on the
date of redemption or issuance.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of March 31, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock as to
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Executive Officers named in the Summary Compensation Table, (iv) all
directors and executive officers of the Company as a group and (v) all other
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
<S> <C> <C> <C> <C> <C>
PRIOR TO OFFERING(1)(2) AFTER OFFERING(1)(4)
-------------------------- SHARES ----------------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT(3)
- ---------------------------------------- ------------- ----------- ----------- ------------- -------------
Summit Partners (5)..................... 22,667,410 44.5% 1,664,372 21,003,038 34.5%
NationsBanc Capital Corp (6)............ 7,552,908 14.8 -- 7,552,908 12.4
TA Associates Group (7)................. 7,469,542 14.7 548,458 6,921,084 11.4
Marc Hamon (8).......................... 4,000,000 7.9 -- 4,000,000 6.6
Barry Phelps (9)........................ 66,666 * -- 168,888 *
James Jordan............................ 720,000 1.4 -- 720,000 1.2
Henry Hamon (10)........................ 288,888 * -- 376,888 *
Gene Zhang (11)......................... 106,666 * -- 226,666 *
Stephane Johnson (12)................... 13,334 * -- 101,334 *
Walter Kortschak (13)................... 22,667,410 44.5 1,664,372 21,003,038 34.5
Robert Sheridan III (14)................ 7,552,908 14.8 -- 7,552,908 12.4
Richard Moley........................... 236,026 * -- 236,026 *
Michael West............................ -- -- -- -- --
All officers and directors as a group
(13 persons) (15)..................... 35,661,498 69.8 1,664,372 34,536,014 56.0
Bain Securities, Inc. (16).............. 47,206 * 3,466 43,740 *
Chase Venture Capital Assoc., L.P.
(17).................................. 2,360,284 4.6 173,306 2,186,978 3.6
Peter Mooney, as Nominee for Broadview
Partners Group (18)................... 141,616 * 10,398 131,218 *
Delaware Charter Guarantee & Trust Co.
FBO M. Allen Chozen (19).............. 70,808 * -- 70,808 *
Spitfire Capital Partners, L.P. (20).... 1,416,170 2.8 -- 1,416,170 2.3
</TABLE>
- ------------------
* Less than 1%
(1) Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage ownership based on 50,929,218 shares of Common Stock
outstanding (assuming conversion of all shares of Class B Convertible
Preferred Stock) as of March 31, 1998, together with applicable options for
such stockholder. Beneficial ownership is determined in accordance with the
rules of the Commission, based on factors including voting and investment
power with respect to shares. Shares of Common Stock subject to options
currently exercisable, or exercisable within 60 days after March 31, 1998
are deemed not outstanding for computing the percentage ownership of any
other person.
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<PAGE>
(3) After giving effect to the issuance of 10,000,000 shares of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
options).
(4) Based on vesting that occurs if the closing of the Offerings and certain
milestones are reached in 1998.
(5) The address of record for Summit Partners is 499 Hamilton Avenue, Suite 200,
Palo Alto, CA 94301. In the event of the exercise of the over-allotment
options by the Underwriters, Summit Partners has agreed to sell up to an
additional 602,368 shares.
(6) The address of record for NationsBanc Capital Corp. is 10th Floor, 100 North
Tryon, Charlotte, NC 28255. In the event of the exercise of the
overallotment options by the Underwriters, NationsBanc Capital Corp. has
agreed to sell up to 755,291 shares.
(7) The address of record for each member of the TA Associates Group is c/o TA
Associates, Inc., High Street Tower, Suite 2,500, 125 High Street, Boston,
MA 02110. Includes 6,184,996 shares of Common Stock held by and 454,138
shares of Common Stock offered by TA/Advent VIII, L.P., 1,160,846 shares of
Common Stock held by and 85,236 shares of Common Stock offered by Advent
Atlantic and Pacific III, L.P., and 123,740 shares of Common Stock held by
and 9,084 shares of Common Stock offered by TA Venture Investors, L.P.
TA/Advent VIII, L.P., Advent Atlantic & Pacific III, L.P., and TA Venture
Investors, L.P. are part of an affiliated group of investment partnerships
referred to, collectively, as the TA Associates Group. The general partner
of TA/Advent VIII, L.P., is TA Associates VIII, LLC and the general partner
of Advent Atlantic & Pacific III, L.P. is TA Associates AAP III Partners,
L.P. TA Associates, Inc. is the managing member of TA Associates VIII, LLC
and is the general partner of TA Associates AAP III Partners, L.P.
Individually, no stockholder, director or officer of TA Associates, Inc. is
deemed to have or share voting or investment power with respect to TA
Associates, Inc. Principals and employees of TA Associates, Inc. comprise
the general partners of TA Venture Investors, L.P. In the event of the
exercise of the over-allotment options by the Underwriters, TA Associates
Group has agreed to sell up to an additional 198,497 shares.
(8) Does not include 288,888 shares beneficially owned by Henry Hamon, Mr. Marc
Hamon's adult brother.
(9) Shares beneficially owned after the Offerings include 102,222 shares
issuable pursuant to options that become exercisable assuming the completion
of the Offerings and the attainment of certain milestones in 1998.
(10) Shares beneficially owned prior to the Offerings include an aggregate of
88,888 shares issuable pursuant to options exercisable within 60 days of
March 31, 1998. Shares beneficially owned after the Offerings include an
additional 88,000 shares issuable pursuant to options that become
exercisable assuming the completion of the Offerings and the attainment of
certain milestones in 1998. Does not include 4,000,000 shares beneficially
owned by Marc Hamon, Mr. Henry Hamon's adult brother.
(11) Shares beneficially owned prior to the Offerings include an aggregate of
66,666 shares issuable pursuant to options exercisable within 60 days of
March 31, 1998. Shares benefically owned after the Offerings include an
additional 120,000 shares issuable pursuant to options that become
exercisable assuming the completion of the Offerings and the attainment of
certain milestones in 1998.
(12) Shares beneficially owned prior to the Offerings consists of an aggregate
of 13,334 shares issuable pursuant to options exercisable within 60 days of
March 31, 1998. Shares beneficially owned after the Offerings include an
additional 88,000 shares issuable pursuant to options that become
exercisable assuming the completion of the Offerings and the attainment of
certain milestones in 1998.
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<PAGE>
(13) Consists of 22,667,410 shares held by Summit Partners prior to the
Offerings and 21,003,038 shares held by Summit Partners after the Offerings.
Walter Kortschak, a General Partner of Summit Ventures IV, L.P., is a
director of the Company. Mr. Kortschak disclaims beneficial ownership of the
shares held by this entity except to the extent of his proportionate
partnership therein.
(14) Consists of 7,552,908 shares held by Nationsbanc Capital Corp. Robert
Sheridan, a Senior Vice President of NationsBanc Capital Corp., is a
director of the Company. Mr. Sheridan disclaims beneficial ownership of the
shares held by this entity except to the extent of his proportionate
partnership therein.
(15) Shares beneficially owned prior to the Offerings include an aggregate of
178,488 shares issuable pursuant to options exercisable within 60 days of
March 31, 1998. Shares benefically owned after the Offerings includes an
additional 538,888 shares issuable pursuant to options that become
exercisable assuming the completion of the Offerings and the attainment of
certain milestones in 1998. Also includes 22,667,410 shares held by Summit
Partners (see footnote 12 above) and 7,552,908 shares held by NationsBanc
Capital Corp. (see footnote 11 above).
(16) The address of record for Bain Securities, Inc. is Bain & Company, Inc.,
Two Copley Place, Boston, MA 02116. In the event of the exercise of the
over-allotment options by the Underwriters, Bain Securities, Inc. has agreed
to sell up to an additional 1,254 shares.
(17) The address of record for Chase Venture Capital Assoc., L.P. is 380 Madison
Avenue, New York, NY 10017. In the event of the exercise of the
over-allotment options by the Underwriters, Chase Venture Capital Assoc.,
L.P. has agreed to sell up to an additional 62,723 shares.
(18) The address of record for Peter Mooney, as Nominee for Broadview Partners
Group ("Broadview"), is Broadview Associates, 950 Tower Lane, 18th Floor,
Foster City, CA 94404. In the event of the exercise of the over-allotment
options by the Underwriters, Broadview has agreed to sell up to an
additional 3,763 shares.
(19) The address of record for Delaware Charter Guarantee & Trust Co. FBO M.
Allen Chozen is 600 Montgomery Street, San Francisco, CA 94111. In the event
of the exercise of the over-allotment options by the Underwriters, Mr.
Chozen has agreed to sell up to 7,081 shares.
(20) The address of record for Spitfire Capital Partners, L.P. is 600 Montgomery
Street, San Francisco, CA 94111. In the event of the exercise of the
over-allotment options by the Underwriters, Spitfire Capital Partners, L.P.
has agreed to sell up to 140,000 shares.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offerings, the total number of shares of all classes
of stock which the Company has authority to issue will be 200,000,000 shares of
Common Stock, $0.001 par value, and 10,000,000 shares of undesignated preferred
stock, $0.001 par value. As of March 31, 1998, there were 50,929,218 shares of
Common Stock outstanding (assuming conversion into Common Stock of all
outstanding shares of Class B Convertible Preferred Stock and assuming
redemption of all outstanding shares of Class A Redeemable Preferred Stock),
which were held of record by 86 stockholders, and no shares of undesignated
preferred stock outstanding. Upon completion of the Offerings and assuming no
exercise of options after March 31, 1998, the Company will have outstanding
60,929,218 shares of Common Stock, 61,018,241 shares if the Underwriters'
over-allotment options are exercised in full.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock have no preemptive or subscription rights and there are no redemption
rights with respect to such shares. The outstanding shares of Common Stock are,
and the shares of Common Stock offered hereby will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further stockholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power or dividend rights of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company.
OPTIONS
As of March 31, 1998, the Company had outstanding options to purchase a
total of 10,469,462 shares of Common Stock pursuant to the 1993 Stock Plan and
the 1997 Stock Plan and an additional 1,600,000 shares outside of the Company's
stock plans at a weighted average exercise price of $0.78 per share and had
issued no options pursuant to the 1998 Stock Plan. Recommendations for option
grants under the 1993 Stock Plan, the 1997 Stock Plan and the 1998 Stock Plan
(collectively, the "Stock Plans") or otherwise are made by the Compensation
Committee, subject to ratification by the full Board of Directors. The
Compensation Committee may issue options with varying vesting schedules, but all
options granted pursuant to the Stock Plans must be exercised within 10 years
from the date of grant.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 50,913,538 shares of Common Stock issued prior
to the Offerings (the "Registrable Securities"), of which 45,806,874 shares are
"Investor Registrable Securities", or their transferees are entitled to certain
registration rights with respect to the registration of such shares under the
Securities Act of 1933, as amended (the "Securities Act"). These rights are
provided under the terms of the Registration Agreement between the Company and
the holders of the Registrable Securities. If, following the Offerings, the
Company registers any of its Common Stock either for its own account or for the
account of other security holders, the holders of Registrable Securities are
entitled to include their
62
<PAGE>
shares of Common Stock in the registration. Certain of these shares will form a
part of the shares of Common Stock registered in the Offerings. A holder's right
to include shares in an underwritten registration statement is subject to the
ability of the underwriters to limit the number of shares included in the
offering. Beginning 180 days after the closing of this offering, the holder or
holders of at least 25% of the Investor Registrable Securities may also require
the Company to register all or a portion of the Registrable Securities on Form
S-2 or S-3 when use of such form becomes available to the Company, provided,
among other limitations, that the proposed aggregate selling price is at least
$1,000,000. In addition, beginning 180 days after the closing of this offering,
the holder or holders of at least two-thirds of the Investor Registrable
Securities may also require the Company to register all or a portion of the
Registrable Securities on Form S-1, provided, among other limitations, that the
proposed aggregate selling price is at least $3,000,000. All registration
expenses and all selling expenses relating to Registrable Securities must be
borne by the Company, except that the Company shall only be responsible for the
first four registrations on Form S-1 at the request of the holders of
Registrable Securities. If such holders, by exercising their registration
rights, cause a large number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. If the Company were to initiate a registration and
include Registrable Securities pursuant to the exercise of piggyback
registration rights, the sale of such Registrable Securities may have an adverse
effect on the Company's ability to raise capital.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
Certain provisions of the Restated Certificate of Incorporation and the
Company's bylaws may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Certain of these provisions allow the Company to issue preferred stock without
any vote or further action by the stockholders and eliminate the right of
stockholders to act by written consent without a meeting. These provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless: (1) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, or (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding of those shares owned (i) by
persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer, or (iii) on or subsequent to such time the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3 % of the outstanding voting stock which is not owned by the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
Boston EquiServe, L.P. located at 150 Royall Street, Canton, Massachusetts, and
its telephone number is (781) 575-2000.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings and assuming no exercise of options after
March 31, 1998, the Company will have outstanding 60,929,218 shares of Common
Stock, 61,018,241 shares if the Underwriters' over-allotment options are
exercised in full. Of these shares, the 12,400,000 shares sold in the Offerings
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act ("Rule 144"). The remaining 48,529,218
shares outstanding upon completion of the Offerings will be "restricted
securities" as that term is defined under Rule 144 (the "Restricted Shares").
Each of the Company officers, directors and certain other stockholders have
agreed with the Underwriters not to sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus (the
"Lock-up Period") without the written consent of Goldman, Sachs & Co. Goldman,
Sachs & Co., in its sole discretion at any time and without notice, may release
any or all shares from the lock-up agreements and permit holders of the shares
to resell all or any portion of their shares at any time prior to the expiration
of the Lock-up Period. See "Underwriting". The number of shares of Common Stock
available for sale in the public market is further limited by restrictions under
the Securities Act.
Because of the restrictions noted above, on the date of this Prospectus, no
shares other than the 12,400,000 shares (14,260,000 shares if the Underwriters'
over-allotment options are exercised in full) offered hereby will be eligible
for sale. Beginning 180 days after the date of this Prospectus (or earlier with
the prior written consent of Goldman, Sachs & Co.), 52,880,198 shares, including
4,350,980 shares issuable upon exercise of currently outstanding vested options,
will be eligible for sale in the public market subject to Rule 144 and Rule 701
of the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares are acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the Nasdaq National Market System during the four calendar weeks preceding
the filing of Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner and notice of sales and the
availability of public information concerning the Company. All shares, including
Restricted Shares, held by affiliates of the Company eligible for sale in the
public market under Rule 144 are subject to the foregoing volume limitations and
other restrictions. In addition, an individual that is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least two years the shares proposed to be
sold, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirements,
contained in Rule 144. Prior to the expiration of the Lock-up Period, the
Company intends to register on a registration statement on Form S-8, (i) a total
of 300,000 shares of Common Stock reserved for issuance under the Purchase Plan
and (ii) assuming no exercise of options after March 31, 1998, 12,069,462 shares
of Common Stock subject to outstanding options under the Stock Plans and
5,860,000 shares reserved for future issuance pursuant to such Stock Plans. Such
registration will permit the resale of shares so registered by non-affiliates in
the public market without restriction under the Securities Act.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the open
market may adversely affect the market price of the Common Stock offered hereby.
See "Risk Factors--Shares Eligible".
64
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C. ("WSG&R"). Steven E. Bochner,
Esq., a member of WSG&R, and certain other attorneys of WSG&R beneficially own
an aggregate of 23,604 shares of Class B Convertible Preferred Stock and 250
shares of Class A Redeemable Preferred Stock of the Company. In addition, WS
Investment Company 97B, an investment fund for the benefit of certain attorneys
of WSG&R, owns an aggregate of 23,602 shares Class B Convertible Preferred Stock
and 250 shares of Class A Redeemable Preferred Stock. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Venture
Law Group, A Professional Corporation.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement, of which
this Prospectus constitutes a part, under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily an
exhaustive description of such documents, and reference is made to the copy of
each such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits filed therewith, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1034,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at prescribed
rates. In addition, the Commission maintains a World Wide Web site that contains
reports, proxy and information statements that are filed electronically with the
Commission. The address of the site is http://www.sec.gov.
65
<PAGE>
GLOSSARY OF TERMS
<TABLE>
<S> <C>
ATM.......................................... Asynchronous transfer mode. A cell-based
multimedia protocol suitable for voice, video
and data traffic.
bridge....................................... Networking equipment for connecting users
within a LAN based workgroup.
Cable Modem.................................. Technology used to transmit data across
coaxial cables currently used to transmit
television.
cell......................................... A fixed sized capsule containing pieces of a
stream of data to be transmitted across a
network.
edge device.................................. A switch that allows LAN and WAN interfacing.
End User..................................... Corporate and government network end-users,
such as Fortune 1000 companies, financial
institutions, systems integrators and
government entities.
Ethernet..................................... A widely adopted network protocol operating
at 10 Mbps.
extranet..................................... A portion of an intranet that is accessible
from outside of the intranet.
Fast Ethernet................................ A 100 Mbps network protocol based on
Ethernet.
field programmable gate array................ A logic device that can be repeatedly
reprogrammed without factory intervention.
frame........................................ A variable sized packet of data used
primarily in Ethernet, Fast Ethernet, Gigabit
Ethernet and Frame Relay.
Frame Relay.................................. A frame-based protocol used primarily for
LAN-to-WAN data connections.
full duplex.................................. Feature of a device that allows an interface
card to both send and receive data.
Gbit......................................... Abbreviation for gigabit or one billion bits.
Gigabit Ethernet............................. A 1000 Mbps network protocol based on
Ethernet.
half duplex.................................. Feature of a device that allows an interface
card only to send data.
Internet Engineering Task Force.............. A networking standards setting body that
develops and specifies protocols and internet
standards.
Internet Protocol (IP)....................... A packet-based protocol used on the Internet.
intranet..................................... An enterprise's Internet based internal
network, which may extend across LANs and
WANs.
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
ISO.......................................... The International Standards Organization, a
standards body that defines networking
standards.
jitter....................................... A measurement of the variation of latency on
a network.
LAN.......................................... Local area network. Refers to a network in
which all components share physical
connections.
latency...................................... A measurement of the time required to process
data on a network.
layer........................................ Refers to a layer of the OSI Protocol Stack.
Mbit......................................... Abbreviation for megabit or one million bits.
Mbps......................................... Abbreviation for megabit or one million bits
per second.
NEM.......................................... Network equipment manufacturer.
OSI Protocol Stack........................... The Open Systems Interconnection, an
internationally accepted standard promulgated
by the ISO for communication among disparate
computer systems and networks. The OSI model
organizes the communications process into
seven separate categories or "layers" in
order of their proximity to the end user.
packet....................................... A variable sized capsule containing smaller
pieces of a stream of data to be transmitted
across a network.
packet loss.................................. A measurement of the loss or misplacement of
packets.
port......................................... An input/output connection through which data
transmissions travel. Each port enables one
connection to another piece of network gear.
protocol..................................... Technologies that govern access to the
network and communications between devices on
a network.
QoS.......................................... Quality of Service. A measurement of network
performance.
RFC.......................................... Request for comment. When finalized by the
IETF, a request for comment will define
industry standards such as network test
methodologies.
router....................................... A device that provides sophisticated data
forwarding capabilities between disparate
networks.
Service Provider............................. Service providers, such as telecommunications
carriers and internet service providers.
SmartBits.................................... Netcom Systems' flagship performance
measurement solution.
</TABLE>
67
<PAGE>
<TABLE>
<S> <C>
SmartCard.................................... A plug-in card that adds functionality to a
SmartBits chassis.
switch....................................... A network device that provides a dedicated
point-to-point connection between any two
devices on a network.
Token Ring................................... A network protocol operating at 4 and 16 Mbit
per second.
throughput................................... A measurement of the speed of a network.
VLAN......................................... Virtual LAN. Technology enabling dynamic
interconnection of disparate LANs.
WAN.......................................... Wide area network. Refers to a geographically
dispersed network. Typically uses
communication facilities operated by a
Service Provider.
wireline..................................... The speed at which data can be transmitted
across a wire.
xDSL......................................... A generic term for digital/analog converters
used for sending data across copper phone
lines. Includes ADSL.
</TABLE>
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 (audited), and as of March 31, 1998 and Pro
Forma March 31, 1998 (unaudited)......................................................................... F-3
Consolidated Statements of Income for each of the three years in the period ended December 31, 1997
(audited), and for the three months ended March 31, 1997 and 1998 (unaudited)............................ F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December
31, 1997 (audited), and for the three months ended March 31, 1998 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997
(audited), and for the three months ended March 31, 1997 and 1998 (unaudited)............................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
To Netcom Systems, Inc.:
After the reincorporation and stock split discussed in Note 7 to Netcom
Systems, Inc.'s consolidated financial statements are effected, we expect to be
in a position to render the following audit report.
Los Angeles, California
May 12, 1998
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netcom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of NETCOM
SYSTEMS, INC. (a California corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, Class A
redeemable preferred stock and shareholders' equity (deficit) and cash flows for
each of the three years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netcom Systems, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 12, 1998 (except with
respect to the matters in
Note 7 as to which the date
is June , 1998)"
F-2
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------------ MARCH 31, MARCH 31,
1996 1997 1998 1998
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(NOTE 14)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 9,314,000 $ 17,708,000 $ 24,390,000 $ 24,390,000
Accounts receivable, net of allowances of $100,000 in 1996,
$350,000 in 1997 and $400,000 in 1998....................... 6,883,000 9,508,000 10,610,000 10,610,000
Inventories................................................... 551,000 2,885,000 3,468,000 3,468,000
Prepaid expenses and other.................................... 14,000 100,000 144,000 144,000
Income taxes receivable....................................... -- 455,000 -- --
Deferred income taxes......................................... 839,000 1,224,000 1,385,000 1,385,000
------------- --------------- --------------- ---------------
Total current assets........................................ 17,601,000 31,880,000 39,997,000 39,997,000
------------- --------------- --------------- ---------------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment....................................... 463,000 1,318,000 1,751,000 1,751,000
Office equipment.............................................. 68,000 277,000 463,000 463,000
Software...................................................... 28,000 189,000 283,000 283,000
Leasehold improvements........................................ 17,000 305,000 310,000 310,000
------------- --------------- --------------- ---------------
576,000 2,089,000 2,807,000 2,807,000
Less--accumulated depreciation and amortization............. (85,000) (405,000) (550,000) (550,000)
------------- --------------- --------------- ---------------
491,000 1,684,000 2,257,000 2,257,000
------------- --------------- --------------- ---------------
OTHER ASSETS:
Deferred income taxes......................................... -- 247,000 247,000 247,000
Deferred financing costs...................................... -- 275,000 260,000 260,000
Deposits...................................................... 18,000 43,000 44,000 44,000
------------- --------------- --------------- ---------------
18,000 565,000 551,000 551,000
------------- --------------- --------------- ---------------
$ 18,110,000 $ 34,129,000 $ 42,805,000 $ 42,805,000
------------- --------------- --------------- ---------------
------------- --------------- --------------- ---------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable.............................. $ -- $ 2,500,000 $ 2,500,000 $ 2,500,000
Accounts payable.............................................. 698,000 2,916,000 1,330,000 1,330,000
Accrued expenses.............................................. 601,000 2,243,000 3,576,000 3,576,000
Deferred revenue.............................................. 205,000 454,000 426,000 426,000
Income taxes payable.......................................... 3,592,000 -- 3,329,000 3,329,000
------------- --------------- --------------- ---------------
Total current liabilities................................... 5,096,000 8,113,000 11,161,000 11,161,000
------------- --------------- --------------- ---------------
NOTES PAYABLE, net of current portion........................... -- 47,500,000 47,500,000 47,500,000
------------- --------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
CLASS A REDEEMABLE PREFERRED STOCK, $0.001 par value:
Authorized-485,000 shares;
Issued and outstanding-no shares in 1996 and 485,000 shares in
1997 and 1998............................................... -- 49,520,000 50,255,000 50,255,000
------------- --------------- --------------- ---------------
SHAREHOLDERS' EQUITY (DEFICIT):
Class B convertible preferred stock, $0.001 par value:
Authorized-45,807,000 shares;
Issued and outstanding-no shares in 1996 and pro forma 1998
and 45,807,000 shares in 1997 and 1998.................... -- 48,518,000 48,518,000 --
Common stock, $0.001 par value:
Authorized-200,000,000 shares;
Issued and outstanding--21,920,000 shares in 1996, 5,056,000
in 1997, 5,122,000 in 1998 and 50,929,000 in pro forma
1998...................................................... 22,000 5,000 5,000 51,000
Additional paid-in capital.................................... 259,000 9,974,000 10,092,000 58,564,000
Deferred compensation......................................... -- -- (116,000) (116,000)
Note receivable for stock purchase............................ -- (120,000) (120,000) (120,000)
Retained earnings (deficit)................................... 12,733,000 (129,356,000) (124,443,000) (124,443,000)
Cumulative translation adjustments............................ -- (25,000) (47,000) (47,000)
------------- --------------- --------------- ---------------
13,014,000 (71,004,000) (66,111,000) (66,111,000)
------------- --------------- --------------- ---------------
$ 18,110,000 $ 34,129,000 $ 42,805,000 $ 42,805,000
------------- --------------- --------------- ---------------
------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES......................................... $ 9,053,000 $27,454,000 $56,273,000 $10,115,000 $18,011,000
COST OF GOODS SOLD............................... 1,266,000 3,256,000 7,248,000 1,163,000 3,048,000
----------- ----------- ----------- ----------- -----------
Gross profit............................... 7,787,000 24,198,000 49,025,000 8,952,000 14,963,000
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development....................... 833,000 1,681,000 3,527,000 748,000 1,662,000
Sales and marketing............................ 844,000 1,466,000 3,713,000 540,000 2,271,000
General and administrative..................... 1,262,000 1,342,000 3,452,000 753,000 776,000
----------- ----------- ----------- ----------- -----------
2,939,000 4,489,000 10,692,000 2,041,000 4,709,000
----------- ----------- ----------- ----------- -----------
Income from operations..................... 4,848,000 19,709,000 38,333,000 6,911,000 10,254,000
OTHER INCOME (EXPENSE):
Interest income................................ 65,000 244,000 640,000 189,000 232,000
Interest expense............................... -- -- (1,233,000) -- (900,000)
Other expense.................................. -- -- (69,000) -- (14,000)
----------- ----------- ----------- ----------- -----------
65,000 244,000 (662,000) 189,000 (682,000)
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes... 4,913,000 19,953,000 37,671,000 7,100,000 9,572,000
PROVISION FOR INCOME TAXES....................... 1,955,000 8,142,000 14,875,000 2,804,000 3,924,000
----------- ----------- ----------- ----------- -----------
NET INCOME....................................... $ 2,958,000 $11,811,000 $22,796,000 $ 4,296,000 $ 5,648,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME PER COMMON SHARE:
Basic Net Income per Common Share.............. $ 0.14 $ 0.54 $ 1.35 $ 0.20 $ 0.96
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted Average Number of Common Shares
Outstanding.................................. 21,255,000 21,880,000 16,149,000 21,931,000 5,119,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted Net Income per Common and Common
Equivalent Share............................. $ 0.14 $ 0.49 $ 0.68 $ 0.17 $ 0.10
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted Average Number of Common and Common
Equivalent Shares Outstanding................ 21,481,000 23,969,000 33,657,000 25,084,000 58,772,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PRO FORMA NET INCOME PER COMMON SHARE:
Basic Net Income Per Common Share.............. $ 0.72 $ 0.11
----------- -----------
----------- -----------
Weighted Average Number of Common Shares
Outstanding.................................. 31,837,000 50,925,000
----------- -----------
----------- -----------
Diluted Net Income Per Common and Common
Equivalent Share............................. $ 0.68 $ 0.10
----------- -----------
----------- -----------
Weighted Average Number of Common and Common
Equivalent Shares Outstanding................ 33,657,000 58,772,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CLASS A REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------
CLASS A CLASS B
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ --------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, December 31, 1994................. -- $ -- -- $ -- 20,341,000 $ 20,000
Issuance of common stock for services.... -- -- -- -- 1,500,000 2,000
Net income............................... -- -- -- -- -- --
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, December 31, 1995................. -- -- -- -- 21,841,000 22,000
Cash distributions to shareholders....... -- -- -- -- -- --
Issuance of common stock for services.... -- -- -- -- 79,000 --
Net income............................... -- -- -- -- -- --
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, December 31, 1996................. -- -- -- -- 21,920,000 22,000
Issuance of common stock................. -- -- -- -- 200,000 --
Exercise of employee stock options....... -- -- -- -- 2,735,000 3,000
Issuance of stock options as compensation
to non-employees....................... -- -- -- -- -- --
Tax benefit from non-qualified stock
options................................ -- -- -- -- -- --
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, August 29, 1997, prior to
Recapitalization..................... -- -- -- -- 24,855,000 25,000
Recapitalization......................... 485,000 48,518,000 45,807,000 48,518,000 (20,431,000) (20,000)
Acquisition of Netcom Systems Europe..... -- -- -- -- -- --
Exercise of employee stock options....... -- -- -- -- 632,000 --
Accrued dividends on redeemable preferred
stock.................................. -- 1,002,000 -- -- -- --
Cumulative translation adjustments....... -- -- -- -- -- --
Net income............................... -- -- -- -- -- --
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, December 31, 1997................. 485,000 49,520,000 45,807,000 48,518,000 5,056,000 5,000
Exercise of employee stock options
(unaudited)............................ -- -- -- -- 66,000 --
Accrued dividends on redeemable preferred
stock (unaudited)...................... -- 735,000 -- -- -- --
Deferred compensation relating to grants
of stock options (unaudited)........... -- -- -- -- -- --
Cumulative translation adjustments
(unaudited)............................ -- -- -- -- -- --
Net income (unaudited)................... -- -- -- -- -- --
--------- ------------- ------------ ------------- ------------- -----------
BALANCE, March 31, 1998 (unaudited)........ 485,000 $ 50,255,000 45,807,000 $ 48,518,000 5,122,000 $ 5,000
--------- ------------- ------------ ------------- ------------- -----------
--------- ------------- ------------ ------------- ------------- -----------
The accompanying notes are an integral part of these consolidated statements.
<CAPTION>
-------------------
<S> <C>
ADDITIONAL RETAINED CUMULATIVE
PAID-IN DEFERRED NOTE EARNINGS TRANSLATION
CAPITAL COMPENSATION RECEIVABLE (DEFICIT) ADJUSTMENTS
------------- ---------------- ------------- --------------- --------------
BALANCE, December 31, 1994................. $ 93,000 $ -- $ -- $ 664,000 $ --
Issuance of common stock for services.... 117,000 -- -- -- --
Net income............................... -- -- -- 2,958,000 --
------------- ---------------- ------------- --------------- --------------
BALANCE, December 31, 1995................. 210,000 -- -- 3,622,000 --
Cash distributions to shareholders....... -- -- -- (2,700,000) --
Issuance of common stock for services.... 49,000 -- -- -- --
Net income............................... -- -- -- 11,811,000 --
------------- ---------------- ------------- --------------- --------------
BALANCE, December 31, 1996................. 259,000 -- -- 12,733,000 --
Issuance of common stock................. 600,000 -- (600,000) -- --
Exercise of employee stock options....... 1,894,000 -- -- -- --
Issuance of stock options as compensation
to non-employees....................... 15,000 -- -- -- --
Tax benefit from non-qualified stock
options................................ 6,916,000 -- -- -- --
------------- ---------------- ------------- --------------- --------------
BALANCE, August 29, 1997, prior to
Recapitalization..................... 9,684,000 -- (600,000) 12,733,000 --
Recapitalization......................... -- -- 480,000 (161,896,000) --
Acquisition of Netcom Systems Europe..... -- -- -- (1,987,000) --
Exercise of employee stock options....... 290,000 -- -- -- --
Accrued dividends on redeemable preferred
stock.................................. -- -- -- (1,002,000) --
Cumulative translation adjustments....... -- -- -- -- (25,000)
Net income............................... -- -- -- 22,796,000 --
------------- ---------------- ------------- --------------- --------------
BALANCE, December 31, 1997................. 9,974,000 -- (120,000) (129,356,000) (25,000)
Exercise of employee stock options
(unaudited)............................ 2,000 -- -- -- --
Accrued dividends on redeemable preferred
stock (unaudited)...................... -- -- -- (735,000) --
Deferred compensation relating to grants
of stock options (unaudited)........... 116,000 (116,000) -- -- --
Cumulative translation adjustments
(unaudited)............................ -- -- -- -- (22,000)
Net income (unaudited)................... -- -- -- 5,648,000 --
------------- ---------------- ------------- --------------- --------------
BALANCE, March 31, 1998 (unaudited)........ $ 10,092,000 $ (116,000) $ (120,000) $ (124,443,000) $ (47,000)
------------- ---------------- ------------- --------------- --------------
------------- ---------------- ------------- --------------- --------------
The accompanying no
<CAPTION>
-------------------
TOTAL
---------------
BALANCE, December 31, 1994................. $ 777,000
Issuance of common stock for services.... 119,000
Net income............................... 2,958,000
---------------
BALANCE, December 31, 1995................. 3,854,000
Cash distributions to shareholders....... (2,700,000)
Issuance of common stock for services.... 49,000
Net income............................... 11,811,000
---------------
BALANCE, December 31, 1996................. 13,014,000
Issuance of common stock................. --
Exercise of employee stock options....... 1,897,000
Issuance of stock options as compensation
to non-employees....................... 15,000
Tax benefit from non-qualified stock
options................................ 6,916,000
---------------
BALANCE, August 29, 1997, prior to
Recapitalization..................... 21,842,000
Recapitalization......................... (112,918,000)
Acquisition of Netcom Systems Europe..... (1,987,000)
Exercise of employee stock options....... 290,000
Accrued dividends on redeemable preferred
stock.................................. (1,002,000)
Cumulative translation adjustments....... (25,000)
Net income............................... 22,796,000
---------------
BALANCE, December 31, 1997................. (71,004,000)
Exercise of employee stock options
(unaudited)............................ 2,000
Accrued dividends on redeemable preferred
stock (unaudited)...................... (735,000)
Deferred compensation relating to grants
of stock options (unaudited)........... --
Cumulative translation adjustments
(unaudited)............................ (22,000)
Net income (unaudited)................... 5,648,000
---------------
BALANCE, March 31, 1998 (unaudited)........ $ (66,111,000)
---------------
---------------
The accompanying no
</TABLE>
F-5
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $2,958,000 $11,811,000 $ 22,796,000 $ 4,296,000 $ 5,648,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 10,000 25,000 319,000 64,000 145,000
Provision for doubtful accounts............................ 50,000 50,000 250,000 50,000 50,000
Interest expense relating to deferred financing costs...... -- -- 20,000 -- 15,000
Issuance of common stock or stock options for services..... 119,000 49,000 15,000 -- --
Change in operating assets and liabilities:
Accounts receivable...................................... (1,816,000) (4,803,000) (2,096,000) 644,000 (1,152,000)
Inventories.............................................. (47,000) (410,000) (2,334,000) (50,000) (583,000)
Prepaid expenses and other............................... (238,000) 224,000 (19,000) 14,000 (44,000)
Income taxes receivable.................................. -- -- (455,000) -- 455,000
Deferred income taxes.................................... (162,000) (669,000) (632,000) -- (161,000)
Deposits................................................. -- (15,000) (25,000) -- (1,000)
Accounts payable......................................... 266,000 377,000 1,994,000 (20,000) (1,586,000)
Accrued expenses......................................... 66,000 528,000 1,266,000 46,000 1,333,000
Deferred revenue......................................... -- 205,000 249,000 -- (28,000)
Income taxes payable..................................... 1,288,000 2,157,000 3,324,000 (630,000) 3,329,000
---------- ----------- ------------- ----------- -----------
Net cash provided by operating activities.............. 2,494,000 9,529,000 24,672,000 4,414,000 7,420,000
---------- ----------- ------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (78,000) (400,000) (1,371,000) (119,000) (718,000)
Cash used in acquisition of Netcom Systems Europe, net of
cash acquired.............................................. -- -- (2,374,000) -- --
---------- ----------- ------------- ----------- -----------
Net cash used in investing activities.................. (78,000) (400,000) (3,745,000) (119,000) (718,000)
---------- ----------- ------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders................................ -- (2,700,000) -- -- --
Borrowings under notes payable, net of deferred financing
costs...................................................... -- -- 49,705,000 -- --
Net proceeds from sale of preferred stock.................... -- -- 91,322,000 -- --
Exercise of stock options.................................... -- -- 2,187,000 -- 2,000
Repurchase of common stock................................... -- -- (155,722,000) -- --
---------- ----------- ------------- ----------- -----------
Net cash provided by (used in) financing activities.... -- (2,700,000) (12,508,000) -- 2,000
---------- ----------- ------------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS... -- -- (25,000) -- (22,000)
---------- ----------- ------------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 2,416,000 6,429,000 8,394,000 4,295,000 6,682,000
CASH AND CASH EQUIVALENTS, beginning of period................. 469,000 2,885,000 9,314,000 9,314,000 17,708,000
---------- ----------- ------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period....................... $2,885,000 $ 9,314,000 $ 17,708,000 $13,609,000 $24,390,000
---------- ----------- ------------- ----------- -----------
---------- ----------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LINE OF BUSINESS
Netcom Systems, Inc. and subsidiaries (the "Company"), is a leading provider
of network performance analysis and measurement systems for network equipment
manufacturers, service providers and end-users. The Company's flagship product,
SmartBits, generates flows of network traffic for testing network equipment and
enables users to identify the performance boundaries of networks and network
devices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries Netcom Systems Europe S.A.R.L. and Netcom
(Barbados) Limited, a Foreign Sales Corporation. All significant intercompany
transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company's cash and
cash equivalents balance, of which a significant portion exceeds federally
insured limits at December 31, 1997, was on deposit with two financial
institutions. This represents a concentration of credit risk as defined under
Statement of Financial Accounting Standards No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk".
CONCENTRATION OF CREDIT RISK
During 1995, the Company had sales to two customers which represented 34
percent of sales. During 1996, the Company had sales to two customers which
represented 25 percent of sales. At December 31, 1996, one of these customers
accounted for 14 percent of accounts receivable. During 1997, the Company had
sales to the same two customers which represented 22 percent of sales. At
December 31, 1997, the two customers comprised 27 percent of accounts
receivable.
F-7
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories include costs of materials, labor and manufacturing overhead and
are stated at the lower of cost (first-in, first-out) or market. Inventories
consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Raw materials..................................................... $ 304,000 $ 708,000
Work-in-process................................................... 217,000 1,845,000
Finished goods.................................................... 30,000 332,000
----------- -------------
$ 551,000 $ 2,885,000
----------- -------------
----------- -------------
</TABLE>
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, less accumulated depreciation and
amortization, which is computed on a straight-line basis over 1.5 to 7 years.
Ordinary repairs and maintenance are charged to operations as incurred.
Expenditures which extend the useful life of property and equipment are
capitalized. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in operations.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the life of the related debt and
are presented net of accumulated amortization of $20,000 at December 31, 1997.
REVENUE RECOGNITION
The Company realizes revenues from the sale of hardware products, from the
licensing of related software and from maintenance contracts. Revenues on
product sales are recognized at the time of shipment, net of estimated
allowances for product returns. Revenues related to software licenses and
software maintenance is recognized in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 91-1, "Software
Revenue Recognition", and Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 48, "Revenue Recognition
When Right of Return Exists". Post-contract support obligations are
insignificant and are accrued for at the time of the sale. Maintenance revenues
for customer support and software updates are deferred and recognized ratably
over the term of the maintenance period (generally one year).
In October 1997, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition", which is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Statement of Position governs the
recognition of revenue by enterprises that license, sell, lease or otherwise
market software. Application of this Statement of Position in 1998 is not
expected to have a material impact on the Company's financial statements.
F-8
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the local
foreign currency. The Company translates the assets and liabilities of its
foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the
end of the year. Revenues and expenses are translated at the average rates of
exchange for the year. Translation adjustments, which are not significant, are
included in shareholders' deficit in the December 31, 1997 consolidated balance
sheet. Gains and losses resulting from foreign currency transactions denominated
in a currency other than the functional currency are included in "Other expense"
in the 1997 statement of income.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed", development costs related
to software products are expensed as incurred until the technological
feasibility of the product has been established. Technological feasibility in
the Company's circumstances occurs when a working model is completed. After
technological feasibility is established, additional costs would be capitalized.
The Company believes its process for developing software is essentially
completed concurrent with the establishment of technological feasibility, and,
accordingly, no software development costs have been capitalized to date.
WARRANTY
The Company warrants its products against defects in materials and
workmanship for a period of one year. The Company provides for estimated
warranty costs when products are shipped.
SHAREHOLDERS' DISTRIBUTIONS
During 1996, the Company paid a total of $2,700,000 in shareholders'
distributions. No distributions were declared or paid in 1995 and 1997.
STATEMENTS OF CASH FLOWS
Cash paid for income taxes was $1,155,000, $4,998,000 and $12,315,000 in
1995, 1996 and 1997, respectively. Cash paid for interest was $977,000 in 1997.
There was no cash paid for interest in 1995 and 1996.
During 1997, the Company issued 200,000 shares of common stock in exchange
for a note receivable in the amount of $600,000. In addition, $480,000 of the
note receivable was reduced upon the repurchase of 160,000 shares of the common
stock by the Company (see Note 3). Also in 1997, the Company received a
$6,916,000 tax benefit from the exercise of non-qualified stock options and also
accrued $1,002,000 of dividends relating to the Company's Class A redeemable
preferred stock. These non-cash transactions are excluded from the 1997
statement of cash flows.
STOCK BASED COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123") in 1997. As allowed by SFAS 123, the Company has elected to
continue to measure compensation
F-9
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and comply with the pro forma disclosure
requirements of the new standard (see Note 12).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 applies to all companies and is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Management believes that the
adoption of SFAS No. 130 will not have a material impact on the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 applies to all public
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires that business segment financial information be reported in
the financial statements utilizing the management approach. The management
approach is defined as the manner in which management organizes the segments
within the enterprise for making operating decisions and assessing performance.
Management believes the adoption of SFAS No. 131 will not have a material impact
on the Company's financial statements.
NET INCOME PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share " ("EPS") in 1997. The
statement requires presentation of basic EPS, which is computed by dividing
reported earnings available to common shareholders by the weighted average
shares outstanding. SFAS No. 128 also requires the calculation of diluted EPS,
which is similar to basic EPS except that the numerator is reduced by income
attributed to preferred shareholders and the denominator is increased for the
assumed conversion of common share equivalents.
F-10
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following schedule summarizes the information used to compute historical
basic and diluted net income per common and common equivalent share for the
years ended December 31,1995,1996 and 1997, and for the unaudited three month
periods ended March 31,1997 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net income $ 2,958 $ 11,811 $ 22,796 $ 4,296 $ 5,648
Less: preferred stock dividends............... -- -- (1,002) -- (735)
----------- ------------- ----------- ----------- -----------
Net income applicable to common shares........ $ 2,958 $ 11,811 $ 21,794 $ 4,296 $ 4,913
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
Weighted averqage number of common shares used
to compute basic net income per common
share....................................... 21,255 21,880 16,149 21,931 5,119
Dilutive effect of stock options.............. 226 2,089 1,820 3,153 7,846
Dilutive effect of convertible preferred
stock....................................... -- -- 15,688 -- 45,807
----------- ------------- ----------- ----------- -----------
Weighted average number of common shares used
to compute diluted net income per common and
common equivalent share..................... 21,481 23,969 33,657 25,084 58,772
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
Basic net income per common share............. $ 0.14 $ 0.54 $ 1.35 $ 0.20 $ 0.96
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
Diluted net income per common and common
equivalent share............................ $ 0.14 $ 0.49 $ 0.68 $ 0.17 $ 0.10
----------- ------------- ----------- ----------- -----------
----------- ------------- ----------- ----------- -----------
</TABLE>
3. RECAPITALIZATION
On August 29, 1997, the Company, its common shareholders (the "Sellers") and
certain investors (the "Purchasers") entered into a Recapitalization (the
"Recapitalization") pursuant to which the Company reconstituted its capital
structure through the sale of certain newly issued equity securities,
established senior debt obligations and repurchased certain of its outstanding
common shares. The Recapitalization resulted from three related transactions,
summarized as follows:
1. THE INVESTMENT. Subject to the terms and conditions of the
Recapitalization Agreement, the Purchasers invested an aggregate of
$97,037,000 in exchange for an aggregate of approximately 485,000 shares of
Class A redeemable preferred stock, $0.001 par value ("redeemable
preferred"), and an aggregate of approximately 45,807,000 shares of Class B
convertible preferred stock, $0.001 par value ("convertible preferred"). The
per share purchase prices of the redeemable preferred and convertible
preferred sold in the Recapitalization were $100.00 and $1.059,
respectively. Immediately following the closing of the Recapitalization, the
Purchasers held approximately
F-11
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECAPITALIZATION (CONTINUED)
78.9 percent of the voting equity securities of the Company on a fully
diluted basis (i.e. approximately 78.9 percent of the total number of
outstanding shares together with shares issuable upon exercise of
outstanding options). In connection with the Investment, the Company
incurred $5,715,000 of directly related costs, which have been recorded as a
charge to "Retained Deficit" in the accompanying December 31, 1997
consolidated financial statements. The total net proceeds from the sale of
the redeemable preferred and the convertible preferred were $91,322,000. See
Note 6 for details relating to the redeemable preferred and convertible
preferred.
2. THE SENIOR CREDIT FACILITY. Subject to the terms and conditions of
the Recapitalization Agreement, the Company entered into a credit agreement
with two banks pursuant to which the Company borrowed $50,000,000 through a
term loan facility and obtained a commitment for a $10,000,000 revolving
line of credit. See Note 5 for details relating to the credit facility.
3. THE REDEMPTION. Subject to the terms and conditions of the
Recapitalization Agreement, the Company purchased 80 percent of the
outstanding shares of common stock held by each shareholder of the Company
(including shares issued upon exercise of vested stock options) at the
approximate price of $7.65 per share. Immediately prior to the
Recapitalization, the Company had 22,120,000 shares of common stock
outstanding and approximately 3,419,000 shares relating to vested stock
options outstanding. The total aggregate number of common shares repurchased
by the Company (after the exercise of stock options) was approximately
20,431,000 and the total aggregate cash paid by the Company to the
shareholders was $155,722,000. As part of the redemption, the Company also
reduced the outstanding amount of a $600,000 note receivable due from a
shareholder by $480,000.
Following the closing of the Recapitalization, the Company's common
stock (through an independent appraisal approved by the Company's Board of
Directors) was valued at $0.75 per share.
4. ACQUISITION OF NETCOM SYSTEMS EUROPE S.A.R.L.
Effective September 15, 1997, the Company acquired all of the outstanding
common shares of Netcom Systems Europe S.A.R.L. ("NSE"), a research and
development, sales and distribution company located near Paris, France. On the
date of acquisition, NSE was owned by two brothers of the Company's founder,
majority shareholder and then president. The purchase price was $3,000,000, plus
$142,000 of directly related costs. The Company has accounted for the
acquisition using the purchase method, and the results of operations of the
acquired business are included in the Company's operations since acquisition.
Because the acquired company was a related entity, the Company has recorded the
premium paid in the transaction ($1,987,000) as an increase to retained deficit
in the accompanying 1997 financial statements.
F-12
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF NETCOM SYSTEMS EUROPE S.A.R.L. (CONTINUED)
The following is a summary of the purchase price allocation:
<TABLE>
<S> <C>
Current assets and other tangible assets....................... $1,755,000
Current liabilities assumed.................................... (600,000)
----------
Net assets acquired............................................ 1,155,000
Purchase price................................................. 3,142,000
----------
Charge to retained deficit..................................... $1,987,000
----------
----------
</TABLE>
5. CREDIT FACILITY
In August 1997, in connection with the Recapitalization, the Company entered
into a credit agreement with two banks pursuant to which the Company borrowed
$50,000,000 under a term loan facility and also received a commitment for a
$10,000,000 revolving line of credit. Both the term loan and the line of credit
are unsecured and mature in August 2002. The line of credit facility also
contains a $2,000,000 letter of credit subfacility.
Borrowings under both the term loan and the line of credit bear interest, at
the Company's election, at the "Base Rate" or the "LIBOR Rate". Interest is
payable quarterly. The Base Rate is the higher of (a) the prime rate or (b) the
federal funds overnight rate plus 0.5 percent per year. The LIBOR Rate is a per
annum rate of 30, 60, 90 or 180 days LIBOR, plus a margin based on the Company's
leverage ratio, ranging from 0.875 percent to 1.5 percent per year. Through
December 31, 1997, the Company selected the LIBOR Rate, and at December 31, 1997
the interest rate in effect was 7.185 percent.
The term loan is due and payable in quarterly installments beginning on
October 31, 1998. The amount of the installments will initially be $2,500,000
per quarter, rising to $5,000,000 per quarter on April 30, 2002. The credit
agreement contains certain financial and negative covenants, all of which the
Company was in compliance with at December 31, 1997.
At December 31, 1997, $50,000,000 was outstanding on the term loan and no
amounts were outstanding on the line of credit.
Future principal maturities under the term loan facility at December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 2,500,000
1999.......................................................... 10,000,000
2000.......................................................... 10,000,000
2001.......................................................... 10,000,000
2002.......................................................... 17,500,000
-----------
$50,000,000
-----------
-----------
</TABLE>
F-13
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK
CLASS A REDEEMABLE PREFERRED STOCK
In August 1997, in connection with the Recapitalization, the Company sold
approximately 485,000 shares of redeemable preferred stock at the price of $100
per share. The redeemable preferred accrues a preferential dividend at the rate
of 6 percent per annum of the original purchase price and has a liquidation
value of $100 per share, plus all accrued but unpaid dividends. The Company is
required to redeem the stock in three equal, annual installments beginning
September 2002 at the liquidation value. In addition, all shares of redeemable
preferred will be redeemed by the Company in the event that a change in control
or certain events related to the Company's solvency occur. Further, the Company
must apply the cash proceeds of any public offering of the Company's securities
to the redemption of the redeemable preferred. The Company may voluntarily
redeem shares of the redeemable preferred at any time. The per share price for
any redemption of shares of redeemable preferred will be equal to the original
per share purchase price plus an amount equal to all accrued but unpaid
dividends thereon. Except for certain protective provisions and as otherwise
required by law, the shares of redeemable preferred will have no voting rights.
If the Company issues securities in a public offering registered with the
Securities and Exchange Commission and does not redeem all shares of redeemable
preferred with the proceeds thereof, the dividend rate on the redeemable
preferred will increase by an increment of 1.5 percent thirty days following
such issuance and will increase by an additional 1.5 percent at the end of each
successive 90 day period (up to a maximum of 12 percent) until the redeemable
preferred is redeemed in full. Although the redeemable preferred dividends will
accrue if not paid, the dividends of the redeemable preferred will be paid only
when and as declared by the Company's Board of Directors. No dividend on any
other class or series of stock may be paid until all accrued dividends on the
redeemable preferred have been paid.
As of December 31, 1997, $1,002,000 of dividends had been accrued on the
redeemable preferred, none of which have been declared by the Company's Board of
Directors.
CLASS B CONVERTIBLE PREFERRED STOCK
Also in August 1997 and in connection with the Recapitalization, the Company
sold approximately 45,807,000 shares of convertible preferred stock at the
approximate price of $1.06 per share.
Holders of convertible preferred will be entitled to dividends when and as
declared by the Company's Board of Directors. In addition, in the event the
Company declares a dividend on its common stock, holders of convertible
preferred will be entitled to a simultaneous dividend in an amount equal to the
dividend they would have received had they converted their convertible preferred
to common stock immediately prior to the record date for the dividend. Upon any
liquidation, dissolution or winding up of the Company, each holder of
convertible preferred will be entitled to be paid, before any payment is made on
any other class or series of capital stock (other than redeemable preferred), an
amount equal to the greater of (a) the original purchase price of the
convertible preferred plus all declared but unpaid dividends thereon or (b) the
amount which such holder would have received had all shares of convertible
preferred been converted to common stock immediately prior to such liquidation,
dissolution or winding up.
At the option of the holders of at least 66.7 percent of the outstanding
shares of convertible preferred following the occurrence of a change in control
of the Company or certain events related to the
F-14
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK (CONTINUED)
Company's solvency, the Company must redeem all shares of convertible preferred.
The per share price for any redemption of shares of convertible preferred will
be equal to the original per share purchase price plus an amount equal to all
declared but unpaid dividends thereon.
The convertible preferred may be converted into common stock at any time by
the holders thereof. In addition, each share of convertible preferred will
automatically be converted into common stock upon the election of the holders of
at least 66.7 percent of the outstanding shares of convertible preferred or upon
the closing of a firm commitment underwritten public offering of common stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), in which (a) the aggregate price paid
by the public is at least $75,000,000, (b) the price per share paid by the
public for such shares is at least 300 percent of the original purchase price of
the convertible preferred (as adjusted for certain dilutive issuances,
subdivision or combination of the common stock, recapitalizations and the like)
and (c) all of the shares of the redeemable preferred are redeemed with the
proceeds of such offering. Each share of convertible preferred will initially be
convertible into one share of common stock, subject to adjustment for certain
dilutive issuances, subdivision or combination of the common stock,
recapitalizations and the like.
7. COMMON STOCK
In January 1997, the Company increased the authorized number of its common
shares to 60,000,000 and effected a two-for-one stock split of its common stock.
In September 1997, the Company amended its Articles of Incorporation to increase
the number of authorized shares of its common stock to 100,000,000. In May 1998,
the Company's Board of Directors approved an additional two-for-one stock split
of its common stock. All shares and per share prices of common stock and common
stock options included in these financial statements have been restated to give
retroactive effect to the stock splits for all periods presented. Also in May
1998, the Company's Board of Directors approved the Company's reincorporation in
the State of Delaware, and the subsequent amendment to the certificate of
incorporation, the effects of which have been reflected in these financial
statements, including the increase of authorized shares to 200,000,000.
In March 1997, the Company sold 200,000 shares of its common stock at a
price of $3.00 per share in exchange for a note receivable. The note is due June
1, 1998 and bears interest at an annual rate of eight percent. In connection
with the Recapitalization, $480,000 of the note receivable was reduced upon the
repurchase of 160,000 shares of the common stock by the Company. At December 31,
1997, $120,000 was outstanding on the note.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109.
Under SFAS 109, deferred income tax assets or liabilities are computed based on
the temporary difference between the financial statement and income tax bases of
assets and liabilities using the current enacted marginal income tax rate.
Deferred income tax expenses or credits are based on the changes in the deferred
income tax assets or liabilities from period to period.
F-15
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 1,699,000 $ 6,956,000 $ 12,175,000
State............................................................ 418,000 1,855,000 3,332,000
------------- ------------- --------------
2,117,000 8,811,000 15,507,000
------------- ------------- --------------
Deferred........................................................... (162,000) (669,000) (632,000)
------------- ------------- --------------
Provision for income taxes......................................... $ 1,955,000 $ 8,142,000 $ 14,875,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1995, 1996
and 1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory federal rate......................... $ 1,670 34.0% $ 6,984 35.0% $ 13,185 35.0%
State income taxes, net of federal benefit................... 270 5.4 1,175 5.9 2,145 5.7
Research and development tax credits......................... (30) (0.6) (50) (0.3) (480) (1.3)
Other items, net............................................. 45 1.0 33 0.2 25 0.1
--------- --- --------- --- --------- ---
$ 1,955 39.8% $ 8,142 40.8% $ 14,875 39.5%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
During the year ended December 31, 1997, the Company recorded pretax income
from U.S. operations in the amount of $37,866,000 and a pretax loss from foreign
operations in the amount of $80,000. Consequently, there was no income tax
liability relating to foreign operations as of December 31, 1997.
The Company does not provide federal income taxes on the undistributed
earnings of its foreign operations. The Company's policy is to leave the income
permanently invested in the country of origin. Such amounts will only be
distributed to the United States to the extent any federal income tax can be
fully offset by foreign tax credits.
F-16
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A detail of the Company's net deferred tax asset as of December 31, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Accrued vacation.................................................. $ 38,000 $ 119,000
State taxes....................................................... 649,000 595,000
Depreciation...................................................... (16,000) (21,000)
Allowance for doubtful accounts................................... 41,000 144,000
Inventory reserve................................................. 33,000 139,000
Accrued warranty.................................................. 10,000 41,000
Deferred revenue.................................................. 84,000 186,000
Other............................................................. -- 21,000
----------- -------------
Total current deferred asset.................................. 839,000 1,224,000
Net operating loss carryforward................................... -- 247,000
----------- -------------
$ 839,000 $ 1,471,000
----------- -------------
----------- -------------
</TABLE>
At December 31, 1997, the Company had a federal net operating loss
carryforward (NOL) of approximately $700,000, which was primarily due to the
timing of the Company's changing of its year-end from July 31 to December 31
(which was effective in December 1997) and the significant tax benefit of
$6,916,000 it received from the exercise of stock options during the period from
July 31, 1997 to December 31, 1997. Due to the income tax laws relating to the
changing of year-ends, the Company can only realize the NOL over a six year
period.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods and for
loss carryforwards. A valuation allowance is recognized if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. The Company has not recorded a
valuation allowance as of December 31, 1996 or 1997.
9. GEOGRAPHIC INFORMATION
The Company markets and sells its products from its operations in the United
States and France. Direct sales in Europe are primarily to customers in France
and the United Kingdom. Information regarding operations in different geographic
regions for the three month period ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
United States................................................... $ 7,436,000 $ 22,863,000 $ 41,596,000
Europe.......................................................... 750,000 953,000 3,998,000
Pacific Rim..................................................... 505,000 2,045,000 6,744,000
Middle East..................................................... 180,000 1,383,000 1,605,000
Canada.......................................................... 182,000 210,000 2,330,000
------------- -------------- --------------
Total......................................................... $ 9,053,000 $ 27,454,000 $ 56,273,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
F-17
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Income from operations:
United States................................................... $ 3,961,000 $ 16,408,000 $ 28,338,000
Europe.......................................................... 412,000 685,000 2,722,000
Pacific Rim..................................................... 277,000 1,470,000 4,593,000
Middle East..................................................... 98,000 995,000 1,093,000
Canada.......................................................... 100,000 151,000 1,587,000
------------- -------------- --------------
Total......................................................... $ 4,848,000 $ 19,709,000 $ 38,333,000
------------- -------------- --------------
------------- -------------- --------------
Identifiable assets:
United States................................................... $ 5,683,000 $ 18,110,000 $ 32,287,000
Europe.......................................................... -- -- 1,842,000
------------- -------------- --------------
Total......................................................... $ 5,683,000 $ 18,110,000 $ 34,129,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its primary facility and sales and distribution offices
under noncancellable leases accounted for as operating leases expiring at
various dates through August 2002. The Company leases its primary facility from
a shareholder of its common stock (see Note 11). Total rental expense under all
operating leases was $41,000, $155,000 and $405,000 in 1995, 1996 and 1997,
respectively.
Minimum commitments under existing operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1998........................................................................... $ 484,000
1999........................................................................... 481,000
2000........................................................................... 487,000
2001........................................................................... 486,000
2002........................................................................... 324,000
-------------
$ 2,262,000
-------------
-------------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with four of its employees. One of the
agreements provides for a three year term which expires in 1999, while the other
three agreements are on a year-to-year basis. Each agreement provides for a base
salary, a bonus and/or commission and the granting of non-qualified stock
options. All option grant commitments under the employment agreements were
fulfilled as of January 8, 1998.
F-18
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CHANGE-IN-CONTROL AGREEMENTS
In May 1998, the Company entered into Change-in-Control Agreements with each
of its executive officers. Such agreements provide that if the executive
officer's employment with the Company is involuntarily terminated at any time
within 24 months after a change in control other than for cause (each as defined
therein), then the executive officer shall be entitled to receive a severance
payment equal to one year of the executive officer's base compensation for the
Company's fiscal year then in effect plus the executive officer's bonus
calculated at 100 percent of target for the Company's fiscal year then in
effect.
11. RELATED PARTY TRANSACTIONS
During 1996 and 1997 (through the acquisition date of NSE), the Company had
sales of $953,000 and $3,109,000 to NSE. At December 31, 1996, accounts
receivable from NSE totaled $425,000. There were no sales to NSE in 1995.
On March 27, 1997, the Company sold shares of its common stock to the lessor
of its primary facility. In August 1997, the Company entered into a new five
year lease agreement with the lessor. The initial monthly base rent under the
agreement is $37,440, with provisions for increasing monthly payments at various
stages during the lease term. Rent under the lease agreements from March 27,
1997 through December 31, 1997 was approximately $342,000.
F-19
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS
STOCK OPTION PLANS
The Company has three stock option plans (the 1993 Stock Plan, the amended
and restated 1997 Stock Plan and the 1998 Stock Plan) under which the Company is
authorized to issue incentive and non-qualified stock options and stock purchase
rights to its directors, officers, employees and consultants totaling up to
approximately 19,763,000 shares of common stock. Options are generally granted
at exercise prices not less than the fair market value ("FMV") on the date of
grant and expire ten years after the date of grant. Options granted under these
plans generally vest over a five year period.
Following the Recapitalization, all options with exercise prices above $0.75
per share (options representing 4,470,000 shares) were cancelled and regranted
at the exercise price of $0.75 per share (the newly established FMV of the
Company's common stock).
The following summarizes option activity for 1995, 1996 and 1997 (in
thousands, except exercise price data):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ---------
<S> <C> <C> <C> <C> <C>
WTD. AVG. WTD. AVG.
FIXED OPTIONS SHARES EX. PRICE SHARES EX. PRICE SHARES
- ------------------------------------------------------------ ----------- ----------- ----------- ----------- ---------
Outstanding at beginning of year............................ -- $ -- 4,200 $ 0.76 7,844
Granted..................................................... 4,200 0.76 3,644 1.44 9,406
Exercised................................................... -- -- -- -- (3,367)
Cancelled................................................... -- -- -- -- (4,495)
----- ----- ----- ----- ---------
Outstanding at end of year.................................. 4,200 $ 0.76 7,844 $ 1.08 9,388
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
Options exercisable at end of year.......................... -- $ -- 820 $ 0.19 206
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
Weighted average fair value of options granted during the
year...................................................... $ 0.01 $ 0.08
----- -----
----- -----
<CAPTION>
<S> <C>
WTD. AVG.
FIXED OPTIONS EX. PRICE
- ------------------------------------------------------------ -----------
Outstanding at beginning of year............................ $ 1.08
Granted..................................................... 1.02
Exercised................................................... 0.64
Cancelled................................................... 1.95
-----
Outstanding at end of year.................................. $ 0.71
-----
-----
Options exercisable at end of year.......................... $ 0.71
-----
-----
Weighted average fair value of options granted during the
year...................................................... $ 0.28
-----
-----
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE NUMBER OF SHARES
RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE DECEMBER 31, 1997
- --------------- ------------------ --------------------------- ------------------
<S> <C> <C> <C>
$ 0.03-0.05 200,000 7.3 --
0.19-0.25 174,000 7.3 --
0.63 958,000 8.2 76,000
0.75 8,056,000 9.7 130,000
---------- --------
9,388,000 206,000
---------- --------
---------- --------
</TABLE>
As permitted by SFAS 123, the Company continues to apply the accounting
rules of APB 25 governing the recognition of compensation expense from its Stock
Option Plans. Such accounting rules measure compensation expense on the first
date at which both the number of shares and the exercise price are known. Under
the Company's plans, this would typically be the grant date. To the extent that
the exercise price equals or exceeds the market value of the stock on the grant
date, no
F-19
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS (CONTINUED)
expense is recognized. As options are generally granted at exercise prices not
less than the fair market value on the date of grant, no compensation expense is
recognized under this accounting treatment in the accompanying statements of
income. However, under the provisions of SFAS 123, options (and other equity
instruments) granted to non-employees are excluded from the pro forma disclosure
requirements and must be recorded as compensation expense at fair value in the
accompanying statements of income. During the year ended December 31, 1997, the
fair value of options granted to non-employees, which was charged to
compensation expense in the accompanying statements of income, was $15,000. Had
the Company applied the fair value based method of accounting, which is not
required, to all grants of options, under SFAS 123, the Company's net income
would have been decreased by the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Net income--as reported........................................... $ 3,077,000 $ 11,860,000 $ 22,796,000
Net income--pro forma............................................. 3,066,000 11,786,000 22,139,000
</TABLE>
These pro forma amounts were determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model.
Assumptions of 5.8 percent to 6.6 percent for risk free interest rate, five
years for expected life and no expected dividends or volatility were applied to
all grants for each year presented.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was approved by the Board of Directors in May 1998. A total of 300,000 shares of
common stock has been reserved for issuance under the 1998 Purchase Plan, plus
annual increases (beginning in 1999) equal to the lessor of (i) 1,000,000 shares
(ii) 1 percent of the outstanding shares or a lesser amount determined by the
Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code of 1986, as amended, contains successive six-month
offering periods. The offering periods generally start on the first trading day
on or after February 15 and August 15 of each year, except for the first such
offering period which commences on the first trading day on or after the
effective date of an offering and ends on the last trading day on or before
February 14, 1999.
13. EMPLOYEE SAVINGS PLAN
In 1997, the Company established an employee 401(k) savings plan covering
all eligible employees. The Company's contributions to the plan for 1997 were
$45,000.
14. UNAUDITED INFORMATION
INTERIM FINANCIAL STATEMENTS
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
These unaudited financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring
F-20
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. These
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes, thereto, appearing elsewhere herein. The
results for the interim periods presented are not necessarily indicative of
results to be expected for a full year.
PRO FORMA BALANCE SHEET PRESENTATION
Under the terms of the Company's agreements with the holders of the Class B
convertible preferred stock (see Note 6), all of such preferred stock will be
converted automatically into shares of common stock upon the closing of an
initial public offering of the Company's common stock, meeting specified
requirements. The unaudited pro forma information at March 31, 1998 reflects the
conversion of the Class B convertible preferred stock into approximately
45,807,000 shares of common stock as if the conversion occurred on March 31,
1998.
PRO FORMA NET INCOME PER COMMON SHARE
Unaudited pro forma net income per common and common equivalent share for
the year ended December 31, 1997 and for the three month period ended March 31,
1998, was based on the weighted average number of common and common equivalent
shares outstanding during the period. The unaudited pro forma weighted average
number of common shares used to compute basic net income per common share
assumes that all of the Class B convertible preferred stock had been converted
to common stock as of the original issuance date (August 29, 1997). The
unaudited pro forma weighted average number of common shares used to compute
diluted net income per common share also includes shares issuable upon the
assumed exercise of stock options, computed in accordance with the treasury
stock method.
The following schedule summarizes the information used to compute pro forma
basic and diluted net income per common and common equivalent share for the year
ended December 31, 1997 and the three month period ended March 31, 1998:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Net income applicable to common shares....................... $ 22,796,000 $ 5,648,000
-------------- --------------
-------------- --------------
Pro forma weighted average number of common shares used to
compute basic net income per common share.................. 31,837,000 50,925,000
Dilutive effect of stock options............................. 1,820,000 7,847,000
-------------- --------------
Pro forma weighted average number of common shares used to
compute diluted net income per common share................ 33,657,000 58,772,000
-------------- --------------
-------------- --------------
Basic net income per common share............................ $ 0.72 $ 0.11
-------------- --------------
-------------- --------------
Diluted net income per common share.......................... $ 0.68 $ 0.10
-------------- --------------
-------------- --------------
</TABLE>
F-21
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
STOCK BASED COMPENSATION PLANS
The following summarizes option activity for the three month period ended
March 31, 1998:
<TABLE>
<CAPTION>
WTD. AVG.
FIXED OPTIONS SHARES EX. PRICE
- ------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Outstanding at beginning of period................................. 9,388,000 $ 0.71
Granted.......................................................... 2,778,000 1.13
Exercised........................................................ (67,000) 0.03
Canceled......................................................... (30,000) 1.00
------------- -----
Outstanding at end of period....................................... 12,069,000 $ 0.78
------------- -----
------------- -----
Options exercisable at end of period............................... 206,000 $ 0.71
------------- -----
------------- -----
Weighted average fair value of options granted during the period... $ 0.31
-----
-----
</TABLE>
During the three month period ended March 31, 1998, the Company continued to
apply the accounting rules of APB 25. Had the Company applied the fair value
based method of accounting to all grants of option, under SFAS 123, the
Company's net income would have been decreased by the following pro forma
amount:
<TABLE>
<S> <C>
Net income--as reported........................................ $5,648,000
Net income--pro forma.......................................... 5,474,000
</TABLE>
The pro forma amount was determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model.
Assumptions of 6.5 percent for risk free interest rate, five years for expected
life and no expected dividends or volatility were applied to all grants for the
period presented.
DEFERRED COMPENSATION
During the three month period ended March 31, 1998, the Company recorded
deferred compensation in the amount of $116,000, which related to the granting
of employee stock options below fair market value. The deferred compensation
will be amortized over five years (the vesting period of the options).
COMPREHENSIVE INCOME
During the three month period ended March 31, 1998, "Other Comprehensive
Income" related solely to foreign currency translation adjustments. During the
period, translation losses, net of tax, were $22,000. Comprehensive income was
$5,626,000 during the period. "Accumulated Other Comprehensive Loss" as of March
31, 1998 was $47,000.
F-22
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
INVENTORIES
Inventories at March 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Raw materials.................................................. $1,541,000
Work-in-process................................................ 1,705,000
Finished goods................................................. 222,000
----------
$3,468,000
----------
----------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
There was no cash paid for income taxes during the three month period ended
March 31, 1998. Cash paid for income taxes was $3,877,000 during the three month
period ended March 31, 1997. Cash paid for interest during the three month
period ended March 31, 1998 was $773,000. There was no cash paid for interest
during the three month period ended March 31, 1997.
In March 1997, the Company issued 200,000 shares of common stock in exchange
for a note receivable in the amount of $600,000. This non-cash transaction is
excluded from the March 31, 1997 statement of cash flows.
INCOME TAXES
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the three month periods ended March 31,
1997 and 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Income tax at statutory federal rate........................................ $ 2,485 35.0% $ 3,350 35.0%
State income taxes, net of federal benefit.................................. 405 5.7 584 6.1
Foreign Sales Corporation tax benefit....................................... -- -- (130) (1.4)
Research and development tax credits........................................ (92) (1.3) (55) (0.5)
Foreign taxes............................................................... -- -- 98 1.0
Other items, net............................................................ 6 0.1 77 0.8
--------- --- --------- ---
$ 2,804 39.5% $ 3,924 41.0%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
F-23
<PAGE>
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
GEOGRAPHIC INFORMATION
Information regarding operations in different geographic regions for the
three month period ended March 31, 1998 is as follows:
<TABLE>
<S> <C>
Revenues:
United States............................................... $13,280,000
Europe...................................................... 1,785,000
Pacific Rim................................................. 2,373,000
Middle East................................................. 282,000
Canada...................................................... 291,000
-----------
Total..................................................... $18,011,000
-----------
-----------
Income from operations:
United States............................................... $ 7,560,000
Europe...................................................... 1,016,000
Pacific Rim................................................. 1,351,000
Middle East................................................. 161,000
Canada...................................................... 166,000
-----------
Total..................................................... $10,254,000
-----------
-----------
Identifiable assets:
United States............................................... $40,224,000
Europe...................................................... 2,581,000
-----------
Total..................................................... $42,805,000
-----------
-----------
</TABLE>
F-24
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below (the "Underwriters"), and each U.S. Underwriter for
whom Goldman, Sachs & Co., NationsBanc Montgomery Securities LLC and BT Alex.
Brown Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company and the Selling Stockholders, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- ------------------------------------------------------------------------------- -------------
<S> <C>
Goldman, Sachs & Co............................................................
NationsBanc Montgomery Securities LLC..........................................
BT Alex. Brown Incorporated....................................................
-------------
Total........................................................................ 12,400,000
-------------
-------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
prices less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the international offering
(the "International Underwriters") providing for the concurrent offer and sale
of 2,480,000 shares of Common Stock in the International Offering outside the
United States. The initial offering price and aggregate underwriting discounts
and commissions per share for the Offerings will be identical. The closing of
the U.S. Offering made hereby is a condition to the closing of the International
Offering, and vice versa. The representatives of the International Underwriters
are Goldman Sachs International, NationsBanc Montgomery LLC and BT Alex. Brown
International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the U.S.
Underwriters named herein has agreed that, as a part of the distribution of the
shares offered hereby and subject to certain exceptions, it will offer, sell or
deliver the shares of Common Stock, directly or indirectly, only in the United
States of America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction (the
"United States") and to U.S. persons, which term shall mean, for purposes of
this paragraph: (a) any individual who is a resident of the United States or (b)
any corporation, partnership or other entity organized in or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
part of the distribution of the shares offered as a part of the International
Offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the United
States or to any U.S. persons or (b) to any person whom it believes intends to
reoffer, resell or deliver the shares in the United States or to any U.S.
persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The
U-1
<PAGE>
price of any shares so sold shall be the initial public offering price, less an
amount not greater than the selling concession.
The Company and the Selling Stockholders have granted the U.S. Underwriters
an option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 71,218 and 1,416,782 additional shares of Common Stock,
respectively, to cover over-allotments, if any. If the U.S. Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them, as shown in
the foregoing table, bears to the total number of shares of Common Stock offered
in the U.S. Offering. The Company and certain Selling Stockholders have granted
the International Underwriters a similar option to purchase up to an aggregate
of 372,000 additional shares of Common Stock.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which they exercise discretionary authority
to exceed five percent of the total number of shares of Common Stock offered by
them.
The Company and the Selling Stockholders have agreed that, during the period
from the date of this Prospectus and continuing to and including the date 180
days after the date of this Prospectus, they will not offer, sell, contract to
sell or otherwise dispose of any securities of the Company (other than pursuant
to employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Common Stock or
which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of the representatives, except for the shares of Common Stock offered in
connection with the Offerings.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
In the Recapitalization, NationsBanc Capital Corp., Spitfire Capital
Partners L.P. and certain other persons related to or affiliated with Montgomery
Securities acquired an aggregate of 12,839,022 shares of the Company's Class B
Convertible Preferred Stock at a purchase price per share of $1.0592 and an
aggregate of 135,975 shares of Class A Redeemable Preferred Stock at a purchase
price of $100 per share. The shares owned by the foregoing entities represent
25.2% of the outstanding capital stock of the Company before the Offerings. All
of such shares were acquired from the Company as part of the Recapitalization on
the same terms pursuant to which all other participants in the Recapitalization
purchased their shares. See "Certain Transactions" and "Principal and Selling
Stockholders".
In connection with the Offerings, the Underwriters may purchase and sell
shares of the Company's Common Stock in the open market. These transactions may
include over-allotment and stabilizing transactions, and purchases to cover
syndicate short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Stockholders in the offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market in the
over-the-counter market or otherwise.
U-2
<PAGE>
Prior to the Offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the Selling
Stockholders and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Under Rule 2720 of the National Association of Securities Dealers, Inc. (the
"NASD"), the Company may be deemed to be an affiliate of NationsBanc Montgomery
Securities. For a description of certain relationships between NationsBanc
Montgomery Securities and its affiliates and the Company, see "Certain
Transactions" and "Principal and Selling Stockholders". The offering is being
conducted in accordance with Rule 2720, which provides that, among other things,
when an NASD member participates in the underwriting of an affiliate's equity
securities, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
In accordance with this requirement, Goldman, Sachs & Co. will serve in such
role and will recommend a price in compliance with the requirements of Rule
2720. Goldman, Sachs & Co. will receive compensation from the Company in the
amount of $10,000 for serving in such role. In connection with the offering,
Goldman, Sachs & Co. in its role as qualified independent underwriter has
performed due diligence investigations and reviewed and participated in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. In addition, the Underwriters may not confirm sales to
any discretionary account without the prior approval of the customer.
U-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 6
Use of Proceeds.................................... 16
Dividend Policy.................................... 16
Capitalization..................................... 17
Dilution........................................... 18
Selected Consolidated Financial Data............... 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 20
Business........................................... 29
Management......................................... 43
Certain Transactions............................... 56
Principal and Selling Stockholders................. 59
Description of Capital Stock....................... 62
Shares Eligible for Future Sale.................... 64
Legal Matters...................................... 65
Experts............................................ 65
Available Information.............................. 65
Glossary of Terms.................................. 66
Financial Statements............................... F-1
Underwriting....................................... U-1
</TABLE>
------------------
UNTIL , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
12,400,000 SHARES
NETCOM SYSTEMS, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
BT ALEX( BROWN
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-----------
<S> <C>
Registration Fee................................................................. $ 54,688
NASD Filing Fee.................................................................. 19,038
The Nasdaq National Market System Listing Fee.................................... 90,000
Printing......................................................................... 125,000
Legal Fees and Expenses.......................................................... 250,000
Accounting Fees and Expenses..................................................... 150,000
Registrar and Transfer Agent Fees................................................ 10,000
Miscellaneous.................................................................... 151,274
-----------
Total.................................................................... $ 850,000
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VII of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VII of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) From August 7, 1989 through March 31, 1998, the Registrant has issued
and sold the following unregistered securities:
(1) On April 16, 1993, the Registrant sold 20,240,000 shares of Common
Stock to three investors in consideration of services rendered.
(2) On May 31, 1994, the Registrant sold 101,000 shares of Common Stock
to one investor in consideration of services rendered.
(3) On March 15, 1995, the Registrant sold 1,000,000 shares of Common
Stock to one investor in consideration of services rendered.
II-1
<PAGE>
(4) On October 7, 1995, the Registrant sold 500,000 shares of Common
Stock to two investors in consideration of services rendered.
(5) On July 10, 1996, the Registrant sold 79,000 shares of Common Stock
to one investor in consideration of services rendered.
(6) On January 16, 1997, the Registrant effected a 2-for-1 stock split
of its Common Stock for no consideration.
(7) On March 26, 1997, the Registrant sold 200,000 shares of Common
Stock to one investor at a per share purchase price of $3.00.
(8) On August 27, 1997, the Registrant sold 2,735,292 shares upon the
exercise of options at prices ranging from $0.025 per share to $0.75 per
share.
(9) On August 29, 1997, the Registrant sold 482,684 shares of Class A
Redeemable Preferred Stock, which will be redeemed upon the closing of this
offering, to 12 investors at a price of $100.00 per share, payable in cash.
(10) On August 29, 1997, the Registrant sold 45,570,848 shares of Class
B Convertible Preferred Stock, which will automatically convert to Common
Stock upon the closing of this offering, to 12 investors at an as-converted
price of $1.0592 per share, payable in cash.
(11) On September 10, 1997, the Registrant sold 2,500 shares of Class A
Redeemable Preferred Stock, which will be redeemed upon the closing of this
offering, to one investor at a price of $100.00 per share, payable in cash.
(12) On September 10, 1997, the Registrant sold 236,026 shares of Class
B Convertible Preferred Stock, which will automatically convert to Common
Stock upon the closing of this offering, to one investors at an as-converted
price of $1.0592 per share, payable in cash.
(13) On October 13, 1997, the Registrant sold 66,666 shares upon the
exercise of options at prices ranging from $0.625 to $0.75 per share.
(14) On October 16, 1997, the Registrant sold 1,068 shares upon the
exercise of options at a price of $0.625 per share.
(15) On October 17, 1997, the Registrant sold 42,134 shares upon the
exercise of options at prices ranging from $0.025 to $0.75 per share.
(16) On October 20, 1997, the Registrant sold 69,570 shares upon the
exercise of options at prices ranging from $0.05 to $0.75 per share.
(17) On October 21, 1997, the Registrant sold 48,694 shares upon the
exercise of options at prices ranging from $0.025 to $0.75.
(18) On October 22, 1997, the Registrant sold 1,600 shares upon the
exercise of options at a price of $0.75 per share.
(19) On October 23, 1997, the Registrant sold 40,000 shares upon the
exercise of options at a price of $0.625 per share.
(20) On October 27, 1997, the Registrant sold 343,280 shares upon the
exercise of options at a price of $0.75 per share.
(21) On October 28, 1997, the Registrant sold 12,000 shares upon the
exercise of options at a price of $0.25 per share.
(22) On November 17, 1997, the Registrant sold 4,000 shares upon the
exercise of options at a price of $0.75 per share.
(23) On November 20, 1997, the Registrant sold 2,668 shares upon the
exercise of options at a price of $0.625 per share.
II-2
<PAGE>
(24) On January 7, 1998, the Registrant sold 66,666 shares upon the
exercise of options at a price of $0.1875 per share.
(25) On May 5, 1998, the Registrant sold 300,000 shares upon the
exercise of options at a price of $0.75 per share.
(26) On May 11, 1998, the Registrant sold 133,332 shares upon the
exercise of options at a price of $0.1875 per share.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder, or Rule
701 promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments representing such securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(A) EXHIBITS
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant, as currently in effect.
3.2 Form of Certificate of Amendment of Certificate of Incorporation of
Registrant, to be filed immediately following the closing of the offering
made under this Registration Statement.
3.3 Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Amended and Restated 1993 Non-Statutory Stock Option Plan, as amended, and
form of Stock Option Agreement thereunder.
10.2 Second Amended and Restated 1997 Stock Plan, as amended, and form of Stock
Option Agreement thereunder.
10.3 1998 Stock Plan and form of Stock Option Agreement thereunder.
10.4 1998 Employee Stock Purchase Plan.
10.5 Recapitalization Agreement, dated August 29, 1997, between Registrant and
certain shareholders.
10.6 Credit Agreement, dated August 29, 1997, between Registrant, the lenders
named therein, BankBoston, N.A., as co-agent, and NationsBank of Texas, N.A.,
as administrative agent.
10.7 Registration Agreement, dated August 29, 1997, as amended, between Registrant
and certain shareholders.
10.8 Shareholders Agreement, dated August 29, 1997, as amended, between Registrant
and certain shareholders.
10.9 Standard Industrial/Commercial Single-Tenant-Lease-Net, dated March 28, 1996,
as amended, between Registrant and Nordhoff Industrial Complex.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.10 Form of Indemnification Agreement between Registrant and each director and
executive officer.
10.11 Form of Change-in-Control Agreement between Registrant and certain executive
officers.
10.12* 401(k) Plan.
11.1 Calculation of earnings per share (contained in Notes 2 and 14 of the Notes
to Financial Statements).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (Fiscal 1997)
27.2 Financial Data Schedule (First Quarter 1998)
</TABLE>
- ------------------
+ Confidential treatment requested for portions of these agreements.
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on the 10th day of June, 1998.
NETCOM SYSTEMS, INC.
By: /s/ BARRY PHELPS
------------------------------------------
Barry Phelps
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Barry Phelps and
Gil Cabral, each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her any and all capacities, to
sign any and all amendments (including, without limitation, post-effective
Amendments and any amendments or abbreviated registration statements increasing
the amount of securities for which registration is being sought) to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, with the Securities and Exchange Commission or
any regulatory authority, granting unto such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in order to effectuate the same as
fully to all intents and purposes as he or she might or could do if personally
present, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BARRY PHELPS President, Chief Executive
- ------------------------------ Officer and Director June 10, 1998
Barry Phelps
/s/ GIL CABRAL Vice President, Finance,
- ------------------------------ Chief Financial Officer June 10, 1998
Gil Cabral and Secretary
/s/ MARC HAMON Director
- ------------------------------ June 10, 1998
Marc Hamon
/s/ WALTER G. KORTSCHAK Director
- ------------------------------ June 10, 1998
Walter G. Kortschak
/s/ RICHARD MOLEY Director
- ------------------------------ June 10, 1998
Richard Moley
/s/ ROBERT H. SHERIDAN III Director
- ------------------------------ June 10, 1998
Robert H. Sheridan III
/s/ MICHAEL WEST Director
- ------------------------------ June 10, 1998
Michael West
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant, as currently in effect.
3.2 Form of Certificate of Amendment of Certificate of Incorporation of Registrant, to be filed
immediately following the closing of the offering made under this Registration Statement.
3.3 Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Amended and Restated 1993 Non-Statutory Stock Option Plan, as amended, and form of Stock Option
Agreement thereunder.
10.2 Second Amended and Restated 1997 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.3 1998 Stock Plan and form of Stock Option Agreement thereunder.
10.4 1998 Employee Stock Purchase Plan.
10.5 Recapitalization Agreement, dated August 29, 1997, between Registrant and certain shareholders.
10.6 Credit Agreement, dated August 29, 1997, between Registrant, the lenders named therein,
BankBoston, N.A., as co-agent, and NationsBank of Texas, N.A., as administrative agent.
10.7 Registration Agreement, dated August 29, 1997, as amended, between Registrant and certain
shareholders.
10.8 Shareholders Agreement, dated August 29, 1997, as amended, between Registrant and certain
shareholders.
10.9 Standard Industrial/Commercial Single-Tenant-Lease-Net, dated March 28, 1996, as amended, between
Registrant and Nordhoff Industrial Complex.
10.10 Form of Indemnification Agreement between Registrant and each director and executive officer.
10.11 Form of Change-in-Control Agreement between Registrant and certain executive officers.
10.12* 401(k) Plan.
11.1 Calculation of earnings per share (contained in Notes 2 and 14 of the Notes to Financial
Statements).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (Fiscal 1997)
27.2 Financial Data Schedule (First Quarter 1998)
</TABLE>
- ------------------
+ Confidential treatment requested for portions of these agreements.
* To be filed by amendment.
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation)
ARTICLE I
The name of the Corporation is Netcom Systems, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE IV
A. AUTHORIZED SHARES
The total number of shares of capital stock which the Corporation has
authority to issue is 146,292,058 shares, consisting of:
(1) 485,184 shares of Class A Redeemable Preferred Stock, $0.001 par
value per share (the "CLASS A PREFERRED");
(2) 45,806,874 shares of Class B Convertible Preferred Stock, $0.001
par value per share (the "CLASS B PREFERRED"); and
(3) 100,000,000 shares of Common Stock, $0.001 par value per share
(the "COMMON STOCK").
The Class A Preferred and the Class B Preferred are hereafter
collectively referred to as the "PREFERRED STOCK."
<PAGE>
B. CLASS A REDEEMABLE PREFERRED STOCK
Section 1. DIVIDENDS.
1A. GENERAL OBLIGATION. When and as declared by the Corporation's
Board of Directors and to the extent permitted under the Delaware General
Corporation Law, the Corporation shall pay preferential dividends in cash to the
holders of the Class A Preferred as provided in this Section 1. Except as
otherwise provided herein, dividends on each share of the Class A Preferred (a
"SHARE") shall accrue on a daily basis at the rate of 6.0% per annum of the sum
of the Liquidation Value thereof plus all accumulated and unpaid dividends
thereon from and including the date of issuance of such Share to and including
the first to occur of (i) the date on which the Liquidation Value of such Share
(plus all accrued and unpaid dividends thereon) is paid to the holder thereof in
connection with the liquidation of the Corporation or the redemption of such
Share by the Corporation or (ii) the date on which such Share is otherwise
acquired by the Corporation. Such dividends shall accrue whether or not they
have been declared and whether or not there are profits, surplus or other funds
of the Corporation legally available for the payment of dividends, and such
dividends shall be cumulative such that (except as expressly permitted by
Section 3 below) all accrued and unpaid dividends shall be fully paid or
declared with funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with respect to any
Junior Securities. The date on which the Corporation initially issues any Share
(or, if earlier, any security which is subsequently converted into a Share
pursuant to a merger of the Corporation with another corporation) shall be
deemed to be the "DATE OF ISSUANCE" of such Share regardless of the number of
times transfer of such Share is made on the stock records maintained by or for
the Corporation and regardless of the number of certificates which may be issued
to evidence such Share.
1B. DIVIDEND REFERENCE DATES. To the extent not paid on March 31,
June 30, September 30 and December 31 of each year, beginning December 31, 1997
(the "DIVIDEND REFERENCE DATES"), all dividends which have accrued on each Share
outstanding during the three-month period (or other period in the case of the
initial Dividend Reference Date) ending upon each such Dividend Reference Date
shall be accumulated and shall remain accumulated dividends with respect to such
Share until paid to the holder thereof.
1C. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time the
Corporation pays less than the total amount of dividends then accrued with
respect to the Class A Preferred, such payment shall be distributed pro rata
among the holders thereof based upon the aggregate accrued but unpaid dividends
on the Shares held by each such holder.
Section 2. LIQUIDATION. Upon any liquidation, dissolution or winding
up of the Corporation (whether voluntary or involuntary), each holder of Class A
Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the aggregate
Liquidation Value of all Shares held by such holder (plus all accrued and unpaid
dividends thereon), and the holders of Class A Preferred shall not be entitled
to any further payment. If upon any liquidation, dissolution or winding up of
the Corporation the Corporation's assets to be distributed among the holders of
the Class A Preferred are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid under this Section 2, then
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<PAGE>
the entire assets available to be distributed to the Corporation's stockholders
shall be distributed pro rata among such holders of Class A Preferred based upon
the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the
Class A Preferred held by each such holder. Not less than 30 days prior to the
payment date stated therein, the Corporation shall mail written notice of any
such liquidation, dissolution or winding up to each record holder of Class A
Preferred, setting forth in reasonable detail the amount of proceeds to be paid
with respect to each Share in connection with such liquidation, dissolution or
winding up. Neither the consolidation or merger of the Corporation into or with
any other entity or entities (whether or not the Corporation is the surviving
entity), nor the sale or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation nor any other
form of recapitalization or reorganization affecting the Corporation shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 2.
Section 3. PRIORITY OF CLASS A PREFERRED ON DIVIDENDS AND
REDEMPTIONS. So long as any Class A Preferred remains outstanding, without the
prior written consent of the holders of at least 66 2/3% of the outstanding
shares of Class A Preferred, the Corporation shall not, nor shall it permit any
Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any
Junior Securities (other than (i) repurchases of Common Stock from present or
former employees or consultants of the Corporation or any of its Subsidiaries
upon termination of employment or consultancy in accordance with arrangements
approved by the Corporation's Board of Directors so long as no Event of
Noncompliance is in existence immediately prior to or is otherwise caused by any
such repurchase and (ii) repurchases of Common Stock and options to purchase
Common Stock in accordance with the terms and conditions of the Recapitalization
Agreement and the Stock Purchase Agreements), nor shall the Corporation directly
or indirectly pay or declare any dividend or make any distribution upon any
Junior Securities (other than dividends payable in shares of Common Stock issued
upon the outstanding shares of Common Stock).
Section 4. REDEMPTIONS.
4A. SCHEDULED REDEMPTIONS. The Corporation shall redeem the
corresponding percentage specified below of the outstanding Shares of Class A
Preferred on September 1 of each year, commencing in 2002 and ending in 2004
(the "SCHEDULED REDEMPTION DATES"), at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon):
<TABLE>
<CAPTION>
Scheduled Redemption Date Specified Percentage
------------------------- --------------------
<S> <C>
September 1, 2002 33 1/3%
September 1, 2003 50%
September 1, 2004 100%
</TABLE>
4B. SPECIAL REDEMPTIONS. In the event of a Change in Ownership or a
Fundamental Change, the Corporation shall, immediately prior to or
contemporaneously with the consummation of such Change in Ownership or
Fundamental Change (and, in the case of a Fundamental Change, before any
distribution or payment is made upon any Junior Securities),
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<PAGE>
redeem all of the outstanding Class A Preferred at a price per Share equal to
the Liquidation Value thereof (plus all accrued and unpaid dividends thereon).
4C. REDEMPTION WITH PROCEEDS OF PUBLIC OFFERING. The Corporation
shall apply the net cash proceeds from any Public Offering remaining after
deduction of all discounts, underwriters' commissions and other reasonable
expenses to redeem Shares of Class A Preferred at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The
Corporation shall send written notice of any redemption of Class A Preferred
pursuant to this paragraph 4C by reputable overnight courier service (charges
prepaid) to each record holder of Class A Preferred not less than three business
days prior to the Corporation's expected receipt of such proceeds. Such
redemption shall take place on a date fixed by the Corporation, which date shall
not be more than three days after the Corporation's receipt of such proceeds.
Except as to the Shares so redeemed, redemptions of Shares pursuant to this
paragraph 4C shall not relieve the Corporation of its obligation to redeem
Shares on the Scheduled Redemption Dates or pursuant to paragraph 4B above.
4D. OPTIONAL REDEMPTIONS. The Corporation may, at any time and from
time to time, redeem all or any portion of the Shares of Class A Preferred then
outstanding. Upon any such redemption, the Corporation shall pay a price per
Share equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon). Redemptions of Shares pursuant to this paragraph 4D shall
not relieve the Corporation of its obligation to redeem Shares on the Scheduled
Redemption Dates or pursuant to paragraphs 4B or 4C above.
4E. REDEMPTION PAYMENTS. For each Share which is to be redeemed
hereunder, the Corporation shall be obligated on the Redemption Date to pay to
the holder thereof (upon surrender by such holder at the Corporation's principal
office of the certificate representing such Share) an amount in immediately
available funds equal to the Liquidation Value of such Share (plus all accrued
and unpaid dividends thereon). If the funds of the Corporation legally
available for redemption of Shares on any Redemption Date are insufficient to
redeem the total number of Shares to be redeemed on such date, those funds which
are legally available shall be used to redeem the maximum possible number of
Shares pro rata among the holders of the Shares to be redeemed based upon the
aggregate number of Shares held by each such holder. At any time thereafter
when additional funds of the Corporation are legally available for the
redemption of Shares, such funds shall immediately be used to redeem the balance
of the Shares which the Corporation has become obligated to redeem on any
Redemption Date but which it has not redeemed.
4F. NOTICE OF REDEMPTION. Except as otherwise provided in paragraph
4C, the Corporation shall mail written notice of each redemption of any Class A
Preferred to each record holder thereof not more than 30 nor less than ten days
prior to the date on which such redemption is to be made. In case fewer than
the total number of Shares represented by any certificate are redeemed, a new
certificate representing the number of unredeemed Shares shall be issued to the
holder thereof without cost to such holder within three business days after
surrender of the certificate representing the redeemed Shares.
4G. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of Shares of Class A Preferred to be redeemed from each
holder thereof in redemptions hereunder shall be the number of Shares determined
by multiplying the total number of Shares to
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<PAGE>
be redeemed times a fraction, the numerator of which shall be the total number
of Shares then held by such holder and the denominator of which shall be the
total number of Shares then outstanding.
4H. DIVIDENDS AFTER REDEMPTION DATE. No Share shall be entitled to
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid to the holder of
such Share. On such date, all rights of the holder of such Share shall cease,
and such Share shall no longer be deemed to be issued and outstanding.
4I. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which are
redeemed or otherwise acquired by the Corporation shall be canceled and retired
and shall not be reissued, sold or transferred.
4J. OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall not,
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Class A Preferred, except as expressly authorized herein.
Section 5. VOTING RIGHTS.
5A. GENERAL. Except as otherwise provided in paragraph 5B below and
as otherwise provided by applicable law, the Class A Preferred shall have no
voting rights. Notwithstanding the foregoing, each holder of Class A Preferred
shall be entitled to notice of all stockholders meetings at the same time and in
the same manner as notice is given to all stockholders entitled to vote at such
meetings.
5B. PROTECTIVE PROVISIONS. So long as any Class A Preferred remains
outstanding, the Corporation shall not, without the vote or written consent of
the holders of at least 66 2/3% of the Class A Preferred then outstanding:
(i) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, (a) any notes or debt securities
containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other equity
securities or containing profit participation features), (b) any capital stock
or other equity securities (or any securities convertible into or exchangeable
for any capital stock or other equity securities) which are senior to or on a
parity with the Class A Preferred with respect to the payment of dividends,
redemptions or distributions upon liquidation or otherwise or (c) any additional
shares of Class A Preferred;
(ii) sell or transfer or permit any Subsidiary to sell or
transfer more than 25% of the assets of the Corporation and its Subsidiaries on
a consolidated basis (computed on the basis of the greater of (i) book value in
accordance with generally accepted accounting principles consistently applied or
(ii) fair market value determined in the reasonable good faith judgment of the
Corporation's Board of Directors) in any transaction or series of transactions
(including any sale or other disposition of capital stock of any of the
Corporation's Subsidiaries (whether by merger, consolidation or otherwise), but
excluding sales of inventory in the ordinary course of business);
(iii) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a merger or
consolidation between or among
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<PAGE>
Wholly-Owned Subsidiaries or a merger which is effected solely to change the
state of incorporation of the Corporation from California to Delaware);
(iv) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes, but excluding any stock split, stock dividend, stock combination or
like event);
(v) increase the number of authorized shares of Class A
Preferred or alter, change or otherwise impair or adversely affect the rights,
preferences or powers or the relative preferences and priorities of the holders
of the Class A Preferred; or
(vi) make any amendment to the Corporation's Certificate of
Incorporation or Bylaws.
Section 6. EVENTS OF NONCOMPLIANCE.
6A. DEFINITION. An Event of Noncompliance shall have occurred if:
(i) the Corporation fails to redeem all of the outstanding
Class A Preferred with the net cash proceeds from the Corporation's initial
Public Offering of Common Stock, whether or not such payment is legally
permissible or is prohibited by any agreement to which the Corporation is
subject;
(ii) the Corporation fails to make any other redemption payment
with respect to the Class A Preferred which it is required to make hereunder,
whether or not such payment is legally permissible or is prohibited by any
agreement to which the Corporation is subject;
(iii) the Corporation or any material Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree is
entered adjudicating the Corporation or any material Subsidiary bankrupt or
insolvent; or any order for relief with respect to the Corporation or any
material Subsidiary is entered under the Federal Bankruptcy Code; or the
Corporation or any material Subsidiary petitions or applies to any tribunal for
the appointment of a custodian, trustee, receiver or liquidator of the
Corporation or any material Subsidiary or of any substantial part of the assets
of the Corporation or any material Subsidiary, or commences any proceeding
(other than a proceeding for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Corporation or any material Subsidiary under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced, against the
Corporation or any material Subsidiary and either (a) the Corporation or any
such material Subsidiary by any act indicates its approval thereof, consent
thereto or acquiescence therein or (b) such petition, application or proceeding
is not dismissed within 60 days; or
(iv) the Corporation or any Subsidiary defaults in the
performance of any obligation or agreement or there shall otherwise occur an
event of default under any agreement to
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<PAGE>
which the Corporation or any Subsidiary is a party if the effect of such default
or event of default is to cause an amount exceeding $2,000,000 to become due
prior to its stated maturity.
6B. CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
(i) If an Event of Noncompliance of the type described in
subparagraph 6A(i) has occurred and continues for a period of 30 days, the
dividend rate on the Class A Preferred shall increase immediately by an
increment of one and one-half percentage points (1 1/2%). Thereafter, until
such time as no such Event of Noncompliance exists, the dividend rate shall
increase automatically at the end of each succeeding 90-day period by an
additional increment of one and one-half percentage points (1 1/2%) (but in
no event shall the dividend rate exceed 12%). Any increase of the dividend
rate resulting from the operation of this subparagraph shall terminate as of
the close of business on the date on which no such Event of Noncompliance
exists.
(ii) If an Event of Noncompliance has occurred (other than an
Event of Noncompliance of the type described in subparagraph 6A(i) or
subparagraph 6A(iii)), the holder or holders of at least 66 2/3% of the Class A
Preferred then outstanding may demand (by written notice delivered to the
Corporation) immediate redemption of all or any portion of the Class A Preferred
owned by such holder or holders at a price per Share equal to the Liquidation
Value thereof (plus all accrued and unpaid dividends thereon). The Corporation
shall give prompt written notice of such election to the other holders of Class
A Preferred (but in any event within five days after receipt of the initial
demand for redemption from the holder or holders of at least 66 2/3% of the
Class A Preferred then outstanding), and each such other holder may demand
immediate redemption of all or any portion of such holder's Class A Preferred by
giving written notice thereof to the Corporation within seven days after receipt
of the Corporation's notice. The Corporation shall redeem all Class A Preferred
as to which rights under this paragraph 6B have been exercised within 30 days
after receipt of the initial demand for redemption from the holder or holders of
at least 66 2/3% of the Class A Preferred then outstanding.
(iii) If an Event of Noncompliance of the type described in
subparagraph 6A(iii) has occurred, all of the Class A Preferred then outstanding
shall be subject to immediate redemption by the Corporation (without any action
on the part of the holders of the Class A Preferred) at a price per Share equal
to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon). The Corporation shall immediately redeem all Class A Preferred upon
the occurrence of such Event of Noncompliance.
(iv) If any Event of Noncompliance exists, each holder of Class
A Preferred shall also have any other rights which such holder is entitled to
under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 7. REGISTRATION OF TRANSFER. The Corporation shall keep at
its principal office a register for the registration of Class A Preferred. Upon
the surrender of any certificate representing Class A Preferred at such place,
the Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall
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<PAGE>
represent such number of Shares as is requested by the holder of the surrendered
certificate and shall be substantially identical in form to the surrendered
certificate, and dividends shall accrue on the Class A Preferred represented by
such new certificate from the date to which dividends have been fully paid on
such Class A Preferred represented by the surrendered certificate.
Section 8. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing Shares of Class A Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation or, in the case of any such mutilation upon
surrender of such certificate, the Corporation shall (at its expense) execute
and deliver in lieu of such certificate a new certificate of like kind
representing the number of Shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate, and dividends shall accrue on the
Class A Preferred represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
Section 9. DEFINITIONS.
"CHANGE IN OWNERSHIP" means any sale, transfer or issuance or series
of sales, transfers and/or issuances of shares (or agreement to sell, transfer
or issue shares) of the Corporation's capital stock by the Corporation or any
holders thereof which results in any Person or group of Persons (as the term
"group" is used under the Securities Exchange Act of 1934, as amended), other
than the holders of Common Stock and Class B Preferred as of the date of the
Recapitalization Agreement, owning capital stock of the Corporation possessing
the voting power (under ordinary circumstances and without regard to cumulative
voting rights) to elect a majority of the Corporation's Board of Directors. A
Change in Ownership shall be deemed to have occurred under the circumstances
described in this Section 9 notwithstanding that all or certain holders of
Class B Preferred exercise their rights under paragraph 4A of Subdivision C of
this Article IV in connection therewith.
"COMMON STOCK" means the Corporation's Common Stock and any other
capital stock of any class of the Corporation hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Corporation.
"FUNDAMENTAL CHANGE" means (a) any sale or transfer of (or any
agreement to sell or transfer) more than 50% of the assets of the Corporation
and its Subsidiaries on a consolidated basis (computed on the basis of the
greater of (i) book value in accordance with generally accepted accounting
principles consistently applied or (ii) fair market value determined in the
reasonable good faith judgment of the Corporation's Board of Directors) in any
transaction or series of related transactions (other than sales of inventory in
the ordinary course of business) and (b) any merger or consolidation (or any
agreement to merge or consolidate) to which the Corporation is a party, except
for (x) a merger which is effected solely to change the state of incorporation
of the Corporation or (y) a merger in which the Corporation is the surviving
corporation, the terms of the Class A Preferred are not changed or altered in
any respect, the Class A Preferred is not exchanged for cash,
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<PAGE>
securities or other property, and after giving effect to such merger, the
holders of Common Stock and Class B Preferred as of the date of the
Recapitalization Agreement shall continue to own the Corporation's outstanding
capital stock possessing the voting power (under ordinary circumstances and
without regard to cumulative voting rights) to elect a majority of the
Corporation's Board of Directors. A Fundamental Change shall be deemed to have
occurred under the circumstances described in this Section 9 notwithstanding
that all or certain holders of Class B Preferred exercise their rights under
paragraph 4A of Subdivision C of this Article IV in connection therewith.
"JUNIOR SECURITIES" means any capital stock or other equity securities
of the Corporation, except for the Class A Preferred.
"LIQUIDATION VALUE" of any Share as of any particular date shall be
equal to $100.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PUBLIC OFFERING" means any offering by the Corporation of its equity
or debt securities to the public pursuant to an effective registration statement
under the Securities Act of 1933, as then in effect, or any comparable statement
under any similar federal statute then in force.
"RECAPITALIZATION AGREEMENT" means the Recapitalization Agreement,
dated on or about August 28, 1997, by and among the Netcom Systems, Inc., a
California corporation, the Purchasers referred to therein and the Sellers
referred to therein (as the same may be amended from time to time in accordance
with its terms).
"REDEMPTION DATE" as to any Share means the applicable date specified
herein with respect to any redemption; PROVIDED THAT no such date shall be a
Redemption Date unless the Liquidation Value of such Share (plus all declared
and unpaid dividends thereon) is actually paid in full on such date, and if not
so paid in full, the Redemption Date shall be the date on which such amount is
fully paid.
"STOCK PURCHASE AGREEMENTS" has the meaning given to such term in the
Recapitalization Agreement.
"SHAREHOLDERS AGREEMENT" has the meaning given to such term in the
Recapitalization Agreement (as such Shareholders Agreement may be amended from
time to time in accordance with its terms).
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity
of which (i) if a corporation, a majority of the total voting power of shares
of stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by that Person or one or
more of the other Subsidiaries of that Person or a combination thereof, or
(ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at
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<PAGE>
the time owned or controlled, directly or indirectly, by that Person or one
or more Subsidiaries of that Person or a combination thereof. For purposes
hereof, a Person or Persons shall be deemed to have a majority ownership
interest in a limited liability company, partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
the limited liability company, partnership, association or other business
entity gains or losses or shall be or control the managing general partner of
such limited liability company, partnership, association or other business
entity.
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, a
Subsidiary of which all of the issued and outstanding capital stock or other
ownership interests are owned by such Person or another Wholly-Owned Subsidiary
of such Person.
Section 10. AMENDMENT. No amendment or modification shall be binding
or effective with respect to any provision of Sections 1 to 11 of this
Subdivision B without the prior written consent of the holders of at least 66
2/3% of the Class A Preferred outstanding at the time such action is taken;
PROVIDED THAT no change in the terms hereof may be accomplished by merger or
consolidation of the Corporation with another Person unless the Corporation has
obtained the prior written consent of the holders of at least 66 2/3% of the
Class A Preferred then outstanding.
Section 11. NOTICES. All notices, demands or other communications to
be given or delivered hereunder shall be in writing and shall be deemed to have
been given when delivered personally to the recipient or one (1) business day
after being sent to the recipient by reputable overnight courier service
(charges prepaid) or five (5) business days after being mailed to the recipient
by certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent (i) to the
Corporation, at its principal executive offices and (ii) to any stockholder, at
such holder's address as it appears in the stock records of the Corporation
(unless otherwise indicated by any such holder).
C. CLASS B CONVERTIBLE PREFERRED STOCK
Section 1. DIVIDENDS.
1A. GENERAL. When and as declared by the Corporation's Board of
Directors and to the extent permitted under the Delaware General Corporation Law
(and subject to the terms of the Class A Preferred), the Corporation shall pay
preferential dividends to the holders of the Class B Preferred pro rata among
the holders thereof based upon the number of shares of Class B Preferred (the
"SHARES") held by each such holder.
1B. PARTICIPATING DIVIDENDS. In the event that the Corporation
declares or pays any dividends upon the Common Stock (whether payable in cash,
securities or other property) other than dividends payable solely in shares of
Common Stock, the Corporation shall also declare and pay to the holders of the
Class B Preferred at the same time that it declares and pays such dividends to
the holders of the Common Stock, the dividends which would have been declared
and paid with respect to the Common Stock issuable upon conversion of the Class
B Preferred had all of the outstanding Class B Preferred been converted
immediately prior to the record date for such dividend,
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or if no record date is fixed, the date as of which the record holders of Common
Stock entitled to such dividends are to be determined.
Section 2. LIQUIDATION. Upon any liquidation, dissolution or winding
up of the Corporation (whether voluntary or involuntary), each holder of Class B
Preferred shall be entitled to be paid, after payment to the holders of the
Class A Preferred of the aggregate amounts which they are entitled to be paid
under Section 2 of Subdivision B of this Article IV but before any distribution
or payment is made upon any Junior Securities, an amount in cash equal to the
greater of (i) the aggregate Liquidation Value of all shares of Class B
Preferred held by such holder (plus an additional amount in cash equal to all
declared and unpaid dividends thereon) or (ii) the consideration which would
have been paid with respect to the Common Stock issuable upon conversion of the
Class B Preferred held by such holder upon any such liquidation, dissolution or
winding up of the Corporation (whether voluntary or involuntary) had all of the
outstanding Class B Preferred been converted into shares of Conversion Stock
immediately prior to such liquidation, dissolution or winding up of the
Corporation (plus an additional amount in cash equal to all declared and unpaid
dividends on the Class B Preferred held by such holder immediately prior to such
deemed conversion), and upon the payment of the greater of the amounts
determined pursuant to clauses (i) and (ii) above, the holders of Class B
Preferred shall not be entitled to any further payment. If upon any such
liquidation, dissolution or winding up of the Corporation the amount payable
pursuant to clause (i) above is greater than the amount payable pursuant to
clause (ii) above and the Corporation's assets to be distributed among the
holders of the Class B Preferred are insufficient to permit payment to such
holders of the aggregate amount which they are entitled to be paid pursuant to
clause (i) above, then the entire assets available to be distributed to the
Corporation's stockholders (after payment to the holders of the Class A
Preferred of the aggregate amounts which they are entitled to be paid under
Section 2 of Subdivision B of this Article IV) shall be distributed pro rata
among such holders of Class B Preferred based upon the aggregate Liquidation
Value (plus all declared and unpaid dividends thereon) of the Class B Preferred
held by each such holder. Not less than 30 days prior to the payment date
stated therein, the Corporation shall mail written notice of any such
liquidation, dissolution or winding up to each record holder of Class B
Preferred, setting forth in reasonable detail the amount of proceeds payable
under each of clause (i) and clause (ii) above with respect to each Share and
each share of Common Stock in connection with such liquidation, dissolution or
winding up. Neither the consolidation or merger of the Corporation into or with
any other entity or entities (whether or not the Corporation is the surviving
entity), nor the sale or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation nor any other
form of recapitalization or reorganization affecting the Corporation shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 2.
Section 3. PRIORITY OF CLASS B PREFERRED ON DIVIDENDS AND
REDEMPTIONS. So long as any Class B Preferred remains outstanding, without the
prior written consent of the holders of at least 66 2/3% of the outstanding
shares of Class B Preferred, the Corporation shall not, nor shall it permit any
Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any
Junior Securities (other than (i) repurchases of Common Stock from present or
former employees or consultants of the Corporation or its Subsidiaries upon
termination of employment or consultancy in accordance with arrangements
approved by the Corporation's Board of Directors so long as no Event of
Noncompliance is in existence immediately prior to or is otherwise caused by any
such
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repurchase and (ii) repurchases of Common Stock in accordance with the terms and
conditions of the Recapitalization Agreement and the Stock Purchase Agreements),
nor shall the Corporation directly or indirectly pay or declare any dividend or
make any distribution upon any Junior Securities (other than dividends payable
in shares of Common Stock issued upon the outstanding shares of Common Stock).
Section 4. REDEMPTIONS.
4A. SPECIAL REDEMPTIONS.
(i) If a Change in Ownership has occurred or the Corporation obtains
knowledge that a Change in Ownership is proposed to occur, the Corporation shall
give prompt written notice of such Change in Ownership describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Class B Preferred, but in any event such notice shall be given not later than
five days after the occurrence of such Change in Ownership, and the Corporation
shall give each holder of Class B Preferred prompt written notice of any
material change in the terms or timing of such transaction. The holder or
holders of at least 66 2/3% of the Class B Preferred then outstanding may elect
to require the Corporation to redeem all or any portion of the Class B Preferred
owned by such holder or holders at a price per Share equal to the Liquidation
Value thereof (plus all declared and unpaid dividends thereon) by giving written
notice to the Corporation of such election prior to the later of (a) 15 days
after receipt of the Corporation's notice and (b) ten days prior to the
consummation of the Change in Ownership (the "EXPIRATION DATE"). The
Corporation shall give prompt written notice of any such election to all other
holders of Class B Preferred within five days after the receipt thereof, and
each such holder shall have until the later of (a) the Expiration Date or (b)
five days after receipt of such second notice to request redemption hereunder
(by giving written notice to the Corporation) of all or any portion of the
Class B Preferred owned by such holder. Upon receipt of such election(s), the
Corporation shall be obligated to redeem (after making any distributions or
payments upon or with respect to the Class A Preferred required pursuant to
paragraph 4B of Subdivision B of this Article IV) the aggregate number of Shares
specified therein on the later of (a) the occurrence of the Change in Ownership
or (b) five days after the Corporation's receipt of such election(s). If any
proposed Change in Ownership does not occur, all requests for redemption in
connection therewith shall be automatically rescinded, or if there has been a
material change in the terms or the timing of the transaction, any holder of
Class B Preferred may rescind such holder's request for redemption by giving
written notice of such rescission to the Corporation within five days following
receipt by such holder of the Corporation's notice regarding such material
change.
(ii) If a Fundamental Change is proposed to occur, the
Corporation shall give written notice of such Fundamental Change describing in
reasonable detail the material terms and date of consummation thereof to each
holder of Class B Preferred not more than 30 days nor less than 15 days prior to
the consummation of such Fundamental Change, and the Corporation shall give each
holder of Class B Preferred prompt written notice of any material change in the
terms or timing of such transaction. The holder or holders of at least 66 2/3%
of the Class B Preferred then outstanding may elect to require the Corporation
to redeem all or any portion of the Class B Preferred owned by such holder or
holders at a price per Share equal to the Liquidation Value thereof (plus all
declared and unpaid dividends thereon) by giving written notice to the
Corporation of such
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election prior to the later of (a) ten days prior to the consummation of the
Fundamental Change or (b) ten days after receipt of notice from the Corporation.
The Corporation shall give prompt written notice of such election to all other
holders of Class B Preferred (but in any event within five days prior to the
consummation of the Fundamental Change), and each such holder shall have until
two days after the receipt of such notice to request redemption (by written
notice given to the Corporation) of all or any portion of the Class B Preferred
owned by such holder. Upon receipt of such election(s), the Corporation shall
be obligated to redeem (after making any distributions or payments upon or with
respect to the Class A Preferred required pursuant to paragraph 4B of
Subdivision B of this Article IV but prior to making any distribution or payment
upon or with respect to any Junior Securities) the aggregate number of Shares
specified therein upon the consummation of such Fundamental Change. If any
proposed Fundamental Change does not occur, all requests for redemption in
connection therewith shall be automatically rescinded, or if there has been a
material change in the terms or the timing of the transaction, any holder of
Class B Preferred may rescind such holder's request for redemption by delivering
written notice thereof to the Corporation within five days following receipt by
such holder of the Corporation's notice regarding such material change.
4B. REDEMPTION PAYMENTS. For each Share which is to be redeemed
hereunder, the Corporation shall be obligated on the Redemption Date to pay to
the holder thereof (upon surrender by such holder at the Corporation's principal
office of the certificate representing such Share) an amount in immediately
available funds equal to the Liquidation Value of such Share (plus all declared
and unpaid dividends thereon). If the funds of the Corporation legally
available for redemption of Shares pursuant to paragraph 4A above on any
Redemption Date (after making any distributions or payments upon or with respect
to the Class A Preferred required pursuant to Subdivision B of this Article IV)
are insufficient to redeem the total number of Shares to be redeemed on such
date, those funds which are legally available shall be used to redeem the
maximum possible number of Shares pro rata among the Shares to be redeemed based
upon the aggregate number of Shares held by each such holder. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of Shares, such funds shall immediately be used to redeem the
balance of the Shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed. In case fewer than the total
number of Shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed Shares shall be issued to the holder
thereof without cost to such holder within three business days after surrender
of the certificate representing the redeemed Shares.
4C. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of Shares of Class B Preferred to be redeemed from each
holder thereof in redemptions hereunder shall be the number of Shares determined
by multiplying the total number of Shares to be redeemed times a fraction, the
numerator of which shall be the total number of Shares then held by such holder
and the denominator of which shall be the total number of Shares then
outstanding.
4D. DIVIDEND AFTER REDEMPTION DATE. No Share shall be entitled to
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid to the holder of
such Share. On such date, all rights of the holder of such Share shall cease,
and such Share shall no longer be deemed issued and outstanding.
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4E. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which are
redeemed or otherwise acquired by the Corporation shall be canceled and retired
and shall not be reissued, sold or transferred.
4F. OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall not,
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Class B Preferred, except as expressly authorized herein.
Section 5. VOTING RIGHTS.
5A. ELECTION OF DIRECTORS. For so long as any Class B Preferred
remains outstanding, the holders of the Class B Preferred, voting separately as
a single class to the exclusion of all other classes of the Corporation's
capital stock and with each share of Class B Preferred entitled to one vote,
shall be entitled to elect three (3) directors to serve on the Corporation's
Board of Directors until their successors are duly elected by the holders of the
Class B Preferred or until any such director is removed from office by the
holders of a majority of the then outstanding Class B Preferred. In addition,
for so long as any Class B Preferred remains outstanding, the holders of the
outstanding Class B Preferred and the holders of the outstanding Common Stock,
voting together as a class, on an as-if-converted-to Common Stock basis with
respect to the Class B Preferred, shall have the right to elect two (2)
directors to serve on the Corporation's Board of Directors until their
successors are duly elected by the holders of Class B Preferred and Common Stock
as provided above or until any such director is removed from office by the
holders of the outstanding Class B Preferred and the holders of the outstanding
Common Stock. For so long as any Class B Preferred remains outstanding, the
Corporation shall not, without the vote or prior written consent of the holders
of at least 66 2/3% of the Class B Preferred then outstanding, make any
amendment to the Corporation's Certificate of Incorporation or Bylaws changing
the authorized number of directors on the Company's Board of Directors to a
number other than six (6). The provisions of this paragraph 5A shall
automatically terminate and be of no further force and effect at such time as
all Shares of Class B Preferred shall cease to be outstanding (whether as a
result of any redemption, conversion or otherwise).
5B. GENERAL. The holders of the Class B Preferred shall be entitled
to notice of all stockholder meetings in accordance with the Corporation's
bylaws, and, except in the election of directors of the Corporation as to which
the holders of Class B Preferred shall have the voting rights set forth in
paragraph 5A but in addition to any circumstances in which the holders of the
Class B Preferred shall be entitled to vote as a separate class under the
Delaware General Corporation Law, the holders of the Class B Preferred shall be
entitled to vote on all matters submitted to the stockholders for a vote
together with the holders of Common Stock voting together as a single class with
each share of Common Stock entitled to one vote per share and each Share of
Class B Preferred entitled to a number of votes (including fractions thereof)
equal to the number of shares of Common Stock (including fractions thereof)
issuable upon conversion of such Share as of the record date for such vote (or,
if no record date is specified, as of the date of such vote).
5C. PROTECTIVE PROVISIONS. So long as any Class B Preferred remains
outstanding, the Corporation shall not, without the vote or written consent of
the holders of at least 66 2/3% of the Class B Preferred then outstanding:
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(i) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, (a) any notes or debt securities
containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other equity
securities or containing profit participation features), (b) any capital stock
or other equity securities (or any securities convertible into or exchangeable
for any capital stock or other equity securities) which are senior to or on a
parity with the Class B Preferred with respect to the payment of dividends,
redemptions or distributions upon liquidation or otherwise or (c) any additional
shares of Class B Preferred;
(ii) sell or transfer or permit any Subsidiary to sell or
transfer more than 25% of the assets of the Corporation and its Subsidiaries on
a consolidated basis (computed on the basis of the greater of (i) book value in
accordance with generally accepted accounting principles consistently applied or
(ii) fair market value determined in the reasonable good faith judgment of the
Corporation's Board of Directors) in any transaction or series of transactions
(including any sale or other disposition of capital stock of any of the
Corporation's Subsidiaries (whether by merger, consolidation or otherwise), but
excluding sales of inventory in the ordinary course of business);
(iii) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a merger or
consolidation between or among Wholly-Owned Subsidiaries or a merger which is
effected solely to change the state of incorporation of the Corporation from
California to Delaware);
(iv) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes, but excluding any stock split, stock dividend, stock combination or
like event);
(v) increase the number of authorized shares of Class B
Preferred or alter, change or otherwise impair or adversely affect the rights,
preferences or powers or the relative preferences and priorities of the holders
of the Class B Preferred; or
(vi) make any amendment to the Corporation's Certificate of
Incorporation or Bylaws.
Section 6. CONVERSION.
6A. CONVERSION PROCEDURE.
(i) At any time and from time to time, any holder of Class B
Preferred may convert all or any portion of the Class B Preferred held by such
holder into a number of shares of Conversion Stock computed by multiplying the
number of Shares to be converted by $1.0592 and dividing the result by the
Conversion Price then in effect.
(ii) Except as otherwise provided herein, each conversion of
Class B Preferred shall be deemed to have been effected as of the close of
business on the date on which the certificate or certificates representing the
Class B Preferred to be converted have been surrendered
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for conversion at the principal office of the Corporation. At the time any such
conversion has been effected, the rights of the holder of the Shares converted
as a holder of Class B Preferred shall cease and the Person or Persons in whose
name or names any certificate or certificates for shares of Conversion Stock are
to be issued upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Conversion Stock represented thereby.
(iii) The conversion rights of any Share subject to redemption
hereunder shall terminate on the Redemption Date for such Share unless the
Corporation has failed to pay to the holder thereof the redemption price
therefor determined pursuant to paragraph 4A above or paragraph 8B below.
(iv) Notwithstanding any other provision hereof, if a
conversion of Class B Preferred is to be made in connection with a Qualified
Public Offering, a Change in Ownership, a Fundamental Change or other
transaction affecting the Corporation or any holder of Class B Preferred, the
conversion of any Shares of Class B Preferred may, at the election of the holder
thereof, be conditioned upon the consummation of such transaction, in which case
such conversion shall be deemed to be effective immediately prior to the
consummation of such transaction.
(v) Promptly (and in any event withing two business days in
the case of subparagraph (a) below) after a conversion has been effected
(including a conversion pursuant to paragraph 6H below), the Corporation shall
deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting
holder has specified;
(b) payment in an amount equal to all dividends declared with
respect to each Share converted which have not been paid prior thereto in
accordance with the provisions of subparagraph (vi) below, plus the amount
payable under subparagraph (x) below with respect to such conversion; and
(c) a certificate representing any Shares of Class B Preferred
which were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
(vi) If the Corporation is not permitted under applicable law
to pay any portion of any declared and unpaid dividends on the Class B Preferred
being converted, the Corporation shall pay such dividends to the converting
holder as soon thereafter as funds of the Corporation are legally available for
such payment. At the request of any such converting holder, the Corporation
shall provide such holder with written evidence of its obligation to such
holder. Notwithstanding the foregoing provisions of this subparagraph (vi), if
for any reason the Corporation is unable to pay any portion of the declared and
unpaid dividends on the Class A Preferred being converted, such dividends may,
at the converting holder's option, be converted into an additional number of
shares of Conversion Stock determined by dividing the amount of the unpaid
dividends to be applied for such purpose by the Conversion Price then in effect.
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(vii) The issuance of certificates for shares of Conversion
Stock upon conversion of Class B Preferred shall be made without charge to the
holders of such Class B Preferred for any issuance tax in respect thereof (so
long as such certificates are issued in the name of the record holder of such
Class B Preferred) or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Conversion Stock. Upon
conversion of each Share of Class B Preferred, the Corporation shall take all
such actions as are necessary in order to ensure that the Conversion Stock
issuable with respect to such conversion shall be validly issued, fully paid and
nonassessable, free and clear of all taxes (other than any taxes relating to any
dividends paid with respect thereto), liens, charges and encumbrances with
respect to the issuance thereof.
(viii) The Corporation shall not close its books against the
transfer of Class B Preferred or of Conversion Stock issued or issuable upon
conversion of Class B Preferred in any manner which interferes with the timely
conversion of Class B Preferred. The Corporation shall assist and cooperate
with any holder of Shares required to make any governmental filings or obtain
any governmental approval prior to or in connection with any conversion of
Shares hereunder (including, without limitation, making any filings required to
be made by the Corporation).
(ix) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Class B Preferred, such
number of shares of Conversion Stock issuable upon the conversion of all
outstanding Class B Preferred. All shares of Conversion Stock which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to ensure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance). The Corporation shall not take any action which would cause the
number of authorized but unissued shares of Conversion Stock to be less than the
number of such shares required to be reserved hereunder for issuance upon
conversion of the Class B Preferred.
(x) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph (x), be delivered upon any
conversion of the Class B Preferred, the Corporation, in lieu of delivering the
fractional share therefor, shall pay an amount to the holder thereof equal to
the Market Price of such fractional interest as of the date of conversion.
6B. CONVERSION PRICE.
(i) The initial Conversion Price shall be $1.0592. In order
to prevent dilution of the conversion rights granted under this Section 6, the
Conversion Price shall be subject to adjustment from time to time pursuant to
this paragraph 6B.
(ii) If and whenever the Corporation issues or sells, or in
accordance with paragraph 6C below is deemed to have issued or sold, any shares
of Common Stock for a
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consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then immediately upon such issue or
sale or deemed issue or sale the Conversion Price shall be reduced to the
Conversion Price determined by dividing (a) the sum of (1) the product derived
by multiplying the Conversion Price in effect immediately prior to such issue or
sale by the number of shares of Common Stock Deemed Outstanding immediately
prior to such issue or sale, PLUS (2) the consideration, if any, received by the
Corporation upon such issue or sale, by (b) the number of shares of Common Stock
Deemed Outstanding immediately after such issue or sale.
(iii) Notwithstanding the foregoing, there shall be no
adjustment to the Conversion Price hereunder with respect to the granting of
stock options to employees, officers, directors and consultants of the
Corporation and its Subsidiaries or the exercise thereof for an aggregate of
17,363,100 shares of Common Stock (as such number of shares is appropriately
adjusted for subsequent stock splits, stock combinations, stock dividends and
recapitalizations).
6C. EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Conversion Price under paragraph 6B above, the
following shall be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in
any manner grants or sells any Options and the price per share for which
Common Stock is issuable upon the exercise of such Options, or upon
conversion or exchange of any Convertible Securities issuable upon exercise
of such Options, is less than the Conversion Price in effect immediately
prior to the time of the granting or sale of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Corporation
at the time of the granting or sale of such Options for such price per share.
For purposes of this paragraph, the "PRICE PER SHARE FOR WHICH COMMON STOCK
IS ISSUABLE" shall be determined by dividing (A) the total amount, if any,
received or receivable by the Corporation as consideration for the granting
or sale of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon exercise of all such Options,
plus in the case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (B) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the
exercise of such Options or when Common Stock is actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Corporation
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon conversion or exchange thereof
is less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities shall be
deemed to be outstanding and to have been issued and sold by the Corporation
at the time of the issuance or sale of such Convertible Securities for such
price per share. For the purposes of this paragraph, the "PRICE
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PER SHARE FOR WHICH COMMON STOCK IS ISSUABLE" shall be determined by dividing
(A) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of
all such Convertible Securities. No further adjustment of the Conversion
Price shall be made when Common Stock is actually issued upon the conversion
or exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 6, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
SECURITIES. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
immediately to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Option or Convertible Security, to
the extent outstanding immediately prior to such expiration or termination,
never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common
Stock, Option or Convertible Security is issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor (net of discounts,
commissions and related expenses). If any Common Stock, Option or Convertible
Security is issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If any
Common Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the Corporation is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Option or
Convertible Security, as the case may be. The fair value of any consideration
other than cash and securities shall be determined in good faith by the
Corporation's Board of Directors.
(vi) INTEGRATED TRANSACTIONS. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the
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Option shall be deemed to have been issued for such consideration as shall be
determined in good faith by the Corporation's Board of Directors.
(vii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) RECORD DATE. If the Corporation takes a record of the
holders of Common Stock for the purpose of entitling them (a) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (b) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issuance or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or upon the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D. SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Corporation
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and if the Corporation at any
time combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
6E. ORGANIC CHANGE. Prior to the consummation of any Organic Change,
the Corporation shall make appropriate provisions (in form and substance
satisfactory to the holders of at least 66 2/3% of the Class B Preferred then
outstanding) to ensure that each of the holders of Class B Preferred shall
thereafter have the right to acquire and receive, in lieu of or in addition to
(as the case may be) the shares of Conversion Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Class B
Preferred, such shares of stock, securities or assets as such holder would have
received in connection with such Organic Change if such holder had converted its
Class B Preferred immediately prior to such Organic Change (plus all declared
and unpaid dividends on the Class B Preferred held by such holder immediately
prior to such Organic Change). In each such case, the Corporation shall also
make appropriate provisions (in form and substance satisfactory to the holders
of at least 66 2/3% of the Class B Preferred then outstanding) to ensure that
the provisions of this Section 6 and Sections 7 and 8 below shall thereafter be
applicable to the Class B Preferred (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Corporation, an immediate adjustment of the Conversion Price
to the value for the Common Stock reflected by the terms of such consolidation,
merger or sale, and a corresponding immediate adjustment in the number of shares
of Conversion Stock acquirable and receivable upon conversion of Class B
Preferred, if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor entity (if other than the Corporation)
resulting from such consolidation or merger or the entity purchasing such assets
assumes by written instrument (in form and substance satisfactory to the holders
of at least 66 2/3% of the Class B Preferred then outstanding),
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the obligation to deliver to each such holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire. Each holder of Class B Preferred shall have the right to
elect the benefits of either this paragraph 6E or, to the extent applicable,
paragraph 4A above in connection with any such Organic Change.
6F. CERTAIN EVENTS. If any event occurs of the type contemplated by
the provisions of this Section 6 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Class B
Preferred; PROVIDED THAT no such adjustment shall increase the Conversion Price
as otherwise determined pursuant to this Section 6 or decrease the number of
shares of Conversion Stock issuable upon conversion of each Share of Class B
Preferred.
6G. NOTICES.
(i) Promptly after any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Class B
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Class B Preferred at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Class B Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
6H. AUTOMATIC CONVERSION.
(i) All of the outstanding shares of Class B Preferred shall
automatically convert into Conversion Stock upon the closing of a Qualified
Public Offering. The Corporation shall deliver notice of such mandatory
conversion to all holders of Class B Preferred at least three business days
prior to such closing.
(ii) All of the outstanding Shares of Class B Preferred shall
automatically convert into Conversion Stock upon the written consent of the
holders of at least 66 2/3% of the Class B Preferred then outstanding. The
Corporation shall provide written notice of such automatic conversion to all
holders of Class B Preferred at least three business days prior to such
conversion.
Section 7. PURCHASE RIGHTS. If at any time the Corporation grants,
issues or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "PURCHASE RIGHTS"), then each holder of Class B
Preferred shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the
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number of shares of Conversion Stock acquirable upon conversion of such holder's
Class B Preferred immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
Section 8. EVENTS OF NONCOMPLIANCE.
8A. DEFINITION. An Event of Noncompliance shall have occurred if:
(i) the Corporation fails to make any redemption payment with
respect to the Class B Preferred which it is required to make hereunder, whether
or not such payment is legally permissible or is prohibited by any agreement to
which the Corporation is subject;
(ii) the Corporation or any material Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree is
entered adjudicating the Corporation or any material Subsidiary bankrupt or
insolvent; or any order for relief with respect to the Corporation or any
material Subsidiary is entered under the Federal Bankruptcy Code; or the
Corporation or any material Subsidiary petitions or applies to any tribunal for
the appointment of a custodian, trustee, receiver or liquidator of the
Corporation or any material Subsidiary or of any substantial part of the assets
of the Corporation or any material Subsidiary, or commences any proceeding
(other than a proceeding for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Corporation or any material Subsidiary under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced, against the
Corporation or any material Subsidiary and either (a) the Corporation or any
such material Subsidiary by any act indicates its approval thereof, consent
thereto or acquiescence therein or (b) such petition, application or proceeding
is not dismissed within 60 days; or
(iii) the Corporation or any Subsidiary defaults in the
performance of any obligation or agreement or there shall otherwise occur an
event of default under any agreement to which the Corporation or any Subsidiary
is a party if the effect of such default or event of default is to cause an
amount exceeding $5,000,000 to become due prior to its stated maturity.
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8B. CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
(i) If an Event of Noncompliance has occurred (other than an
Event of Noncompliance of the type described in subparagraph 8A(ii)), the holder
or holders of at least 66 2/3% of the Class B Preferred then outstanding may
demand (by written notice delivered to the Corporation) immediate redemption of
all or any portion of the Class B Preferred owned by such holder or holders at a
price per Share equal to the Liquidation Value thereof (plus all declared and
unpaid dividends thereon). The Corporation shall give prompt written notice of
such election to the other holders of Class B Preferred (but in any event within
five days after receipt of the initial demand for redemption from the holder or
holders of at least 66 2/3% of the Class B Preferred then outstanding), and each
such other holder may demand immediate redemption of all or any portion of such
holder's Class B Preferred by giving written notice thereof to the Corporation
within seven days after receipt of the Corporation's notice. The Corporation
shall redeem all Class B Preferred as to which rights under this paragraph 8B
have been exercised within 30 days after receipt of the initial demand for
redemption from the holder or holders of at least 66 2/3% of the Class B
Preferred then outstanding.
(ii) If an Event of Noncompliance of the type described in
subparagraph 8A(ii) has occurred, all of the Class B Preferred then outstanding
shall be subject to immediate redemption by the Corporation (without any action
on the part of the holders of the Class B Preferred) at a price per Share equal
to the Liquidation Value thereof (plus all declared and unpaid dividends
thereon). The Corporation shall immediately redeem all Class B Preferred upon
the occurrence of such Event of Noncompliance.
(iii) If any Event of Noncompliance exists, each holder of
Class B Preferred shall also have any other rights which such holder is entitled
to under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 9. REGISTRATION OF TRANSFER. The Corporation shall keep at
its principal office a register for the registration of Class B Preferred. Upon
the surrender of any certificate representing Class B Preferred at such place,
the Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of Shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Class B Preferred represented by such new certificate from
the date to which dividends have been fully paid on such Class B Preferred
represented by the surrendered certificate.
Section 10. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing Shares of Class B Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation or, in the case of any such mutilation upon
surrender of such certificate, the Corporation shall (at its expense) execute
and deliver in lieu of such certificate a new certificate of like kind
representing the number of Shares of such class represented by such lost,
stolen, destroyed or
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mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate, and dividends shall accrue on the Class B Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such lost, stolen, destroyed or mutilated certificate.
Section 11. DEFINITIONS.
"CHANGE IN OWNERSHIP" means any sale, transfer or issuance or series
of sales, transfers and/or issuances of shares (or agreement to sell, transfer
or issue shares) of the Corporation's capital stock by the Corporation or any
holders thereof which results in any Person or group of Persons (as the term
"group" is used under the Securities Exchange Act of 1934, as amended), other
than the holders of Common Stock and Class B Preferred as of the date of the
Recapitalization Agreement, owning capital stock of the Corporation possessing
the voting power (under ordinary circumstances and without regard to cumulative
voting rights) to elect a majority of the Corporation's Board of Directors. A
Change in Ownership shall be deemed to have occurred under the circumstances
described in this Section 11 notwithstanding that all or certain holders of
Class B Preferred exercise their rights under paragraph 4A in connection
therewith.
"COMMON STOCK" means the Corporation's Common Stock and any other
capital stock of any class of the Corporation hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Corporation.
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to subparagraphs 6C(i)
and 6C(ii) hereof whether or not the Options or Convertible Securities are
actually exercisable at such time.
"CONVERSION STOCK" means shares of Common Stock; PROVIDED THAT if
there is a change such that the securities issuable upon conversion of the
Class B Preferred are issued by an entity other than the Corporation or there is
a change in the type or class of securities so issuable, then the term
"CONVERSION STOCK" shall mean one share of the security issuable upon conversion
of the Class B Preferred if such security is issuable in shares, or shall mean
the smallest unit in which such security is issuable if such security is not
issuable in shares.
"CONVERTIBLE SECURITIES" means any stock or securities directly or
indirectly convertible into or exchangeable for Common Stock.
"FUNDAMENTAL CHANGE" means (a) any sale or transfer of (or any
agreement to sell or transfer) more than 50% of the assets of the Corporation
and its Subsidiaries on a consolidated basis (computed on the basis of the
greater of (i) book value in accordance with generally accepted accounting
principles consistently applied or (ii) fair market value determined in the
reasonable good faith judgment of the Corporation's Board of Directors) in any
transaction or series of related transactions (other than sales of inventory in
the ordinary course of business) and (b) any merger or consolidation (or any
agreement to merge or consolidate) to which the Corporation is a party, except
for (x) a merger which is effected solely to change the state of incorporation
of the Corporation or
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(y) a merger in which the Corporation is the surviving corporation, the terms of
the Class B Preferred are not changed or altered in any respect, the Class B
Preferred is not exchanged for cash, securities or other property, and after
giving effect to such merger, the holders of Common Stock and Class B Preferred
as of the date of the Recapitalization Agreement shall continue to own the
Corporation's outstanding capital stock possessing the voting power (under
ordinary circumstances and without regard to cumulative voting rights) to elect
a majority of the Corporation's Board of Directors. A Fundamental Change shall
be deemed to have occurred under the circumstances described in this Section 11
notwithstanding that all or certain holders of Class B Preferred exercise their
rights under paragraph 4A in connection therewith.
"JUNIOR SECURITIES" means any capital stock or other equity securities
of the Corporation, except for the Class A Preferred and the Class B Preferred.
"LIQUIDATION VALUE" of any Share as of any particular date shall be
equal to $1.0592.
"MARKET PRICE" of any security means the average of the closing prices
of such security's sales on the principal securities exchanges on which such
security may at the time be listed, or, if there has been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in the NASDAQ System, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day prior to the day as of which "MARKET PRICE" is being
determined and the 20 consecutive business days prior to such day. If at any
time such security is not listed on any securities exchange or quoted in the
NASDAQ System or the over-the-counter market, the "MARKET PRICE" shall be the
fair value thereof determined in good faith by the Corporation's Board of
Directors.
"OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
"ORGANIC CHANGE" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Corporation's assets or other transaction, in each case which is effected in
such a manner that the holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PUBLIC OFFERING" means any offering by the Corporation of its equity
or debt securities to the public pursuant to an effective registration statement
under the Securities Act of 1933, as then in effect, or any comparable statement
under any similar federal statute then in force.
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"QUALIFIED PUBLIC OFFERING" means a firm commitment underwritten
Public Offering of shares of the Corporation's Common Stock in which (i) the
aggregate price paid by the public for the shares shall be at least $75,000,000,
(ii) the price per share paid by the public for such shares shall be at least
300% of the Conversion Price in effect immediately prior to the closing of the
sale of such shares pursuant to the Public Offering, and (iii) all of the shares
of Class A Preferred are redeemed with the proceeds of such Public Offering
pursuant to Section 4C of Subdivision B to this Article IV.
"RECAPITALIZATION AGREEMENT" means the Recapitalization Agreement,
dated on or about August 28, 1997, by and among Netcom Systems, Inc., a
California corporation, the Purchasers referred to therein and the Sellers
referred to therein (as the same may be amended from time to time in accordance
with its terms).
"REDEMPTION DATE" as to any Share means the applicable date specified
herein with respect to any redemption; PROVIDED THAT no such date shall be a
Redemption Date unless the Liquidation Value of such Share (plus all declared
and unpaid dividends thereon) is actually paid in full on such date, and if not
so paid in full, the Redemption Date shall be the date on which such amount is
fully paid.
"SHAREHOLDERS AGREEMENT" has the meaning given to such term in the
Recapitalization Agreement (as such Shareholders Agreement may be amended from
time to time in accordance with its terms).
"STOCK PURCHASE AGREEMENTS" has the meaning given to such term in the
Recapitalization Agreement.
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of the limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, a
Subsidiary of which all of the issued and outstanding capital stock or other
ownership interests are owned by such Person or another Wholly-Owned Subsidiary
of such Person.
Section 12. AMENDMENT. No amendment, modification shall be binding
or effective with respect to any provision of Sections 1 to 13 of this
Subdivision C without the prior written
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consent of the holders of at least 66 2/3% of the Class B Preferred outstanding
at the time such action is taken; PROVIDED THAT no change in the terms hereof
may be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of at least 66 2/3% of the Class B Preferred then
outstanding.
Section 13. NOTICES. All notices, demands or other communications to
be given or delivered hereunder shall be in writing and shall be deemed to have
been given when delivered personally to the recipient or one (1) business day
after being sent to the recipient by reputable overnight courier service
(charges prepaid) or five (5) business days after being mailed to the recipient
by certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent (i) to the
Corporation, at its principal executive offices and (ii) to any stockholder, at
such holder's address as it appears in the stock records of the Corporation
(unless otherwise indicated by any such holder).
D. COMMON STOCK
Section 1. VOTING RIGHTS.
1A. ELECTION OF DIRECTORS. For so long as any Class B Preferred
remains outstanding, the holders of Common Stock, voting separately as a single
class to the exclusion of all other classes of the Corporation's capital stock
and with each share of Common Stock entitled to one vote, shall be entitled to
elect one (1) director to serve on the Corporation's Board of Directors until
such director's successor is duly elected by the holders of the Common Stock or
such director is removed from office by the holders of the Common Stock. In
addition, for so long as any Class B Preferred remains outstanding, the holders
of Common Stock and the holders of Class B Preferred shall have the right to
elect two (2) directors to serve on the Corporation's Board of Directors as
provided in paragraph 5A of Subdivision C of this Article IV. At such time as
all Shares of Class B Preferred shall cease to be outstanding, the holders of
the Common Stock, voting separately as a single class to the exclusion of all
other classes of the Corporation's capital stock and with each share of Common
Stock entitled to one vote, shall be entitled to elect all of the directors to
serve on the Corporation's Board of Directors until their successors are duly
elected by the holders of the Common Stock or until any such director is removed
from office by the holders of the Common Stock.
1B. GENERAL. The holders of the Common Stock shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's Bylaws,
and, except as required by applicable law and except in the election of
directors of the Corporation as to which the holders of the Common Stock shall
have the voting rights set forth in paragraph 1A above, the holders of the
Common Stock shall be entitled to one vote per share on all matters submitted to
the stockholders of the Corporation for a vote.
Section 2. DIVIDENDS. When and as declared by the Corporation's
Board of Directors and to the extent permitted under the Delaware General
Corporation Law, the holders of the Common Stock shall be entitled to receive
dividends on such Common Stock. The rights of the
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holders of Common Stock to receive dividends are subject to the provisions of
the Class A Preferred and Class B Preferred.
Section 3. LIQUIDATION. Subject to the provisions of the Class A
Preferred and Class B Preferred, the holders of the Common Stock shall be
entitled to participate in all distributions to the holders of capital stock of
the Corporation in any liquidation, dissolution or winding up of the
Corporation."
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ARTICLE V
The name and mailing address of the incorporator is as follows:
Todd Cleary
c/o Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
Section 1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in the Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall be
fixed in the manner designated in the Bylaws of the Corporation.
Section 2. In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
Section 3. Elections of directors need not be by written ballot unless
a stockholder demands election by written ballot at the meeting and before
voting begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VIII
Section 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 2. The Corporation may indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation or serves or served at any other enterprise as a director, officer,
employee or agent at the request of the Corporation or any predecessor to the
Corporation.
Section 3. Neither any amendment nor repeal of this Article VIII, nor
the adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article VIII, shall eliminate or reduce the effect of
this Article VIII, in respect of any matter occurring, or any
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action or proceeding accruing or arising or that, but for this Article VIII,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
Vacancies created by newly created directorships, created in accordance
with the Bylaws of this Corporation, may be filled by the vote of a majority,
although less than a quorum, of the directors then in office, or by a sole
remaining director.
ARTICLE XI
Section 1. At any time following the closing of the first sale of
Common Stock of the Corporation pursuant to a registration statement declared
effective by the Securities and Exchange Corporation under the Securities Act of
1933, as amended, stockholders of the Corporation may not take any action by
written consent in lieu of a meeting and any action contemplated by stockholders
after such time must be taken at a duly called annual or special meeting of
stockholders.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or more
resolution adopted from time to time by the Board of Directors. The Board of
Directors shall be divided into three classes designated as Class I, Class II,
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the date hereof, the term
of office of the Class I directors shall expire and Class I directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following the date hereof, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders following the date
hereof, the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at such
annual meeting.
Section 3. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
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ARTICLE XII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purposes of forming a Corporation pursuant to the Corporation Law of the State
of Delaware, do make this certificate, hereby declaring and certifying, under
penalties of perjury, that this is my act and deed and the facts herein stated
are true, and accordingly have hereunto set my hand on May 14, 1998.
-----------------------------------------
Todd Cleary
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Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
NETCOM SYSTEMS, INC.
Netcom Systems, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), pursuant to the provisions of the
General Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY
CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting ARTICLE IV of the Certificate of Incorporation in its
present form and substituting therefore a new ARTICLE IV as follows:
" ARTICLE IV
This Corporation is authorized to issue two classes of shares to be
designated, respectively, Common Stock ("COMMON") and Preferred Stock
("PREFERRED"). The total number of shares of Common this Corporation shall
have authority to issue is 200,000,000 with a par value of $0.001 per
share. The total number of shares of Preferred this Corporation shall have
authority to issue is 10,000,000 with a par value of $0.001 per share.
The Board of Directors is authorized, subject to limitations
prescribed by law, to provide for the issuance of the shares of Preferred
in series and, by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares
to be included in such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
(a) the number of shares constituting that series and the distinctive
designation of that series;
(b) the dividend rate on the shares of that series, whether dividends
shall be cumulative and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(c) whether that series shall have voting rights, in addition to the
voting rights provided by law and, if so, the terms of such voting rights;
(d) whether that series shall have conversion privileges and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) whether or not the shares of that series shall be redeemable and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
<PAGE>
(f) whether that series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amount of
such sinking fund; and
(g) the rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series."
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the provisions of Section 242 of the DGCL by (a) the Board of
Directors of the Corporation having duly adopted a resolution setting forth such
amendment and declaring its advisability and submitting it to the stockholders
of the Corporation for their approval, and (b) the stockholders of the
Corporation having duly adopted such amendment by vote of the holders of a
majority of the outstanding stock entitled to vote thereon in an action by
written consent in accordance with Section 228 of the DGCL.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Barry Phelps, its President, who hereby affirms, under
penalties of perjury, that this is the act and deed of the Corporation, and that
the facts stated herein are true as of [__________, 1998]
NETCOM SYSTEMS, INC.
By:
-----------------------------------
Barry Phelps
PRESIDENT
ATTEST
By:
----------------------------------
Gil Cabral
SECRETARY
<PAGE>
Exhibit 3.3
BYLAWS
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . 2
2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . 2
2.8 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . 3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. . . . 4
2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . . 5
2.14 NOMINATIONS AND PROPOSALS. . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. . . . . . 7
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . 8
3.6 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . 9
3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . .10
3.11 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . .10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . .10
3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . .10
3.14 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . .10
3.15 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . .11
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<PAGE>
ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . .11
4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . .12
4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . .12
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . .13
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . .13
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . .13
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . .13
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . .13
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.8 VICE PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.10 TREASURER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . . .15
5.12 ASSISTANT TREASURER. . . . . . . . . . . . . . . . . . . . . . . .15
5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . .15
ARTICLE VI INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . .16
6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . .16
6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . .17
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . .17
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . .17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . .18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . .18
ARTICLE VIII GENERAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . .18
8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . . .18
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . .18
8.4 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . . .19
8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . .20
8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . .20
8.7 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.8 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
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<PAGE>
8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.10 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . . .21
8.11 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . . .21
8.12 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . .21
ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
ARTICLE X DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE XI CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES. . . . . . . . . . . .23
11.2 DUTIES OF CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>
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<PAGE>
BYLAWS
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
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<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
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<PAGE>
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of the corporation, or any action that may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
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<PAGE>
In the event of the delivery, in the manner provided hereby, to the
corporation of the requisite written consent or consents to take corporate
action and/or any related revocation or revocations, the corporation may engage
independent inspectors of elections for the purpose of performing promptly a
ministerial review of the validity of the consents and revocations. For the
purpose of permitting the inspectors to perform such review, in the event such
inspectors are appointed, no action by written consent without a meeting shall
be effective until such date as such appointed independent inspectors certify to
the corporation that the consents delivered to the corporation in accordance
herewith represent at least the minimum number of votes that would be necessary
to take the corporate action. Nothing contained in these Bylaws shall in any
way be construed to suggest or imply that the board of directors or any
stockholder shall not be entitled to contest the validity of any consent or
revocation thereof, whether before or after any certification by any independent
inspectors, or to take any other action (including, without limitation, the
commencement, prosecution or defense of any litigation with respect thereto, and
the seeking of injunctive relief in such litigation).
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated written consent received in accordance herewith, a written
consent or consents signed by a sufficient number of holders to take such action
are delivered to the corporation in the manner prescribed herein.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
(i) ACTIONS OTHER THAN WRITTEN CONSENT. For the purpose of
determining the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock,
or other lawful purpose (other than the expression of consent to corporate
action in writing without a meeting) the directors may fix, in advance, a record
date, which, in the case of a meeting of stockholders, shall not be more than 60
days nor less than 10 days before the date of such meeting. If no record date
is fixed, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held and the record date for determining stockholders for any other purpose
pursuant to this Section 2.11(i) shall be at the close of business on the day on
which the board of directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at any
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
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<PAGE>
(ii) ACTION BY WRITTEN CONSENT. In order that the corporation
may determine the stockholders entitled to consent to corporate action in
writing without a meeting, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors. Any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall, by written notice to the secretary, request the board of
directors to fix a record date. The board of directors may, at any time within
ten (10) days after the date on which such a request is received, adopt a
resolution fixing the record date (unless a record date has previously been
fixed by the first sentence of this Section 2.11(ii)). If no record date has
been fixed by the board of directors pursuant to the first sentence of this
Section 2.11(ii) or otherwise within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or to any officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
applicable law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the date on which the board of directors adopts the resolution
taking such prior action.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of
Section 212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a
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<PAGE>
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
2.14 NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at any meeting of stockholders only (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.14.
For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice
shall be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
however, that in the event that less than 65 days notice of the meeting is given
to stockholders, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the public
announcement of an adjournment of a stockholders meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder
(or any successor thereto) (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder,
as they appear on the corporation's books, and of such beneficial owner, and
(ii) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
Notwithstanding any provision herein to the contrary, no business shall be
conducted at a stockholders meeting except in accordance with the procedures set
forth in this Section 2.14.
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<PAGE>
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be six (6). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in the certificate of incorporation and Section 3.4 of
these bylaws, directors shall be elected at each annual meeting of stockholders
to hold office until the next annual meeting. Directors need not be
stockholders unless so required by the certificate of incorporation or these
bylaws, wherein other qualifications for directors may be prescribed. Each
director, including a director elected to fill a vacancy, shall hold office
until his successor is elected and qualified or until his earlier resignation or
removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall
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<PAGE>
become effective, and each director so chosen shall hold office as provided in
this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar
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communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a
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quorum is not present at any meeting of the board of directors, then the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation.
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The loan, guaranty or other assistance may be with or without interest and may
be unsecured, or secured in such manner as the board of directors shall approve,
including, without limitation, a pledge of shares of stock of the corporation.
Nothing contained in this section shall be deemed to deny, limit or restrict the
powers of guaranty or warranty of the corporation at common law or under any
statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale,
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lease or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
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5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
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Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
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5.10 TREASURER
The treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
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INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion,
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prescribe any limitations or conditions with reference to the inspection, or
award such other and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
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The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
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8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
This corporation may have a corporate seal, which may be adopted or altered
at the pleasure of the board of directors, and may use the same by causing it or
a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
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8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with
Section 103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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<PAGE>
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation)
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Netcom Systems, Inc. hereby adopts the foregoing bylaws,
comprising twenty-two pages, as the Bylaws of the corporation.
Executed this 20th day of May, 1998.
Todd Cleary, Incorporator
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<PAGE>
Exhibit 5.1
[Form of WSGR Opinion]
June 10, 1998
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
RE: REGISTRATION STATEMENT ON FORM S-1
Gentlemen:
We have examined the Registration Statement on Form S-1 to be filed by
you with the Securities and Exchange Commission on or about June 10, 1998
(the "Registration Statement") in connection with the registration under the
Securities and Exchange Act of 1933, as amended, of 14,260,000 shares of your
Common Stock (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the issuance and
sale of the Shares pursuant to the plan of distribution set forth in the
Registration Statement.
It is our opinion that, when issued and sold in the manner described in
the Registration Statement, the Shares will be legally and validly issued,
fully-paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in
the Registration Statement and any amendments thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI,
Professional Corporation
/s/ WILSON, SONSINI, GOODRICH & ROSATI
<PAGE>
Exhibit 10.1
AMENDED AND RESTATED
1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF
NETCOM SYSTEMS, INC.,
a California corporation
This 1993 Non-Statutory Stock Option and Purchase Plan is amended and
restated as of February 18, 1997 and the number of shares set forth in Section 4
hereof reflects the two for one stock split effected in January 1997.
1. PURPOSE OF PLAN. The purpose of this Plan is to strengthen NETCOM
SYSTEMS, INC. (hereinafter the "Corporation") by providing non-statutory
incentive stock options as a means to attract, retain, and motivate corporate
personnel.
2. ADMINISTRATION OF PLAN. This plan shall be administered by a
Compensation Committee (hereinafter the "Committee") composed of members
selected by, and serving at the pleasure of, the Board of Directors. The
Committee shall have the power to make all determinations necessary for the
administration of the Plan, subject to the restrictions on committee powers set
forth in Section 311 of the California Corporations Code.
3. GRANT OF OPTIONS. The Corporation is hereby authorized to grant
nonstatutory stock options, i.e., stock options which are intended NOT to be
"incentive stock options" incentive stock options as defined in Internal Revenue
Code Section 422A, to key employees of the Corporation. Options may not be
granted to employees who own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the corporation, or of its
parent or subsidiary, except pursuant to the restrictions set forth in
Paragraphs 6 and 7. Any option granted under this Plan shall be granted within
10 years from the date this Plan is adopted, or the date this Plan is approved
by the shareholders pursuant to Paragraph 13, whichever is earlier.
4. STOCK SUBJECT TO PLAN. The aggregate number of shares that may be
issued pursuant to options granted under this Plan shall be 5,000,000 shares of
the Corporation's voting common stock.
5. AGGREGATE FAIR MARKET VALUE. The aggregate fair market value of the
stock, as determined in good faith by the Committee at the time the option is
granted, with respect to which incentive stock options are exercisable for the
first time by an employee during any calendar year (under all incentive stock
option plans of the Corporation and its parent and subsidiary corporations)
shall not exceed $100,000.00.
<PAGE>
6. EXERCISE OF OPTION. Any option granted pursuant to this Plan shall
contain provisions, established by the Committee, setting forth the manner of
exercising the option. However, no option granted under this Plan shall be
exercisable by its terms after the expiration of 10 years from the grant of the
option, and no option granted to a person who owns stock possessing more than 10
percent of the total combined voting power of all classes of the Corporation's
stock shall be exercisable by its terms after the expiration of five years from
the date of the grant. The option may be subject to earlier termination as
provided in Paragraph 9. The optionee shall have the right to receive property
at the time of exercising the option, so long as the property is subject to
inclusion in income under Internal Revenue Code Section 83.
7. OPTION PRICE. The price for a share of stock subject to an option
granted pursuant to this Plan shall not be less than the fair market value for
the stock at the time the option is granted, as determined in good faith by the
Committee at the time the option is granted. However, when an option is granted
to a person who owns stock possessing more than 10 percent of the total combined
voting power of all classes of the Corporation's stock, the purchase price per
share of the stock subject to the option shall not be less than 110 percent of
the fair market value of the stock at the time the option is granted, as
determined by the Committee in good faith at the time the option is granted.
8. OPTIONS NONTRANSFERABLE. Except as provided in paragraph 9 of this
Plan, the terms of any option granted under this Plan shall make the option
nontransferable by the optionee except by will or the laws of descent and
distribution, and exercisable only by the optionee during his or her lifetime.
9. TERMINATION OF EMPLOYMENT. Unless earlier cancelled by the
Corporation or breach of the option agreement, an optionee's option shall expire
three months after termination of employment for reasons other than death or
disability, subject to earlier termination pursuant to Paragraph 6 of this Plan.
An optionee's option shall expire 12 months after termination of employment due
to permanent and total disability, as defined in Internal Revenue Code
Section 22(e)(3), subject to earlier termination pursuant to Paragraph 6 of this
Plan. If an optionee should die while employed by the Corporation, or its
parent, subsidiary, or successor as defined in Section 425(a) of the Internal
Revenue Code, or within the 90-day period after termination of employment, and
more than one year after the grant of the option, the person to whom the
optionee's rights pass by will or the laws of descent and distribution may
exercise the option for any of the shares not previously exercised during
Employee's lifetime, within 12 months after the optionee's death, subject to
earlier termination pursuant to Paragraph 6 of this Plan.
10. STOCK SUBJECT TO OPTION.
a. The Corporation shall at all times during the term of this Plan
reserve the number of shares of its common stock required to meet the
requirements of this Plan, and shall pay all fees and expenses necessarily
incurred by the Corporation in connection with the exercise of options under
this Plan.
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<PAGE>
b. In the event of a stock split, reverse stock split, stock
dividend, combination, or reclassification of the Corporation's stock, an
appropriate and proportionate adjustment shall be made in the number of shares
to which stock options may be granted. A corresponding change shall be made to
the number and kind of shares, and the exercise price per share, of unexercised
options.
11. MERGER, CONSOLIDATION, OR DISSOLUTION OF CORPORATION.
a. Following the merger of one or more corporations into the
Corporation, or any consolidation of the Corporation and one or more
corporations in which the Corporation is the surviving corporation, the exercise
of options under this Plan shall apply to the shares of the surviving
corporation.
b. Notwithstanding any other provision of this Plan, all options
under this Plan shall terminate on the dissolution or liquidation of the
Corporation, or on any merger or consolidation in which the Corporation is not
the surviving corporation.
12. OTHER OPTION TERMS. Any option granted pursuant to this Plan shall
contain any other terms that the Board of Directors, the Corporation's legal
counsel, or the Committee deems necessary.
13. EFFECTIVE DATE OF PLAN. This Plan shall be effective upon approval by
the outstanding shares or unanimous written consent of the shareholders of the
Corporation.
14. AMENDMENT AND TERMINATION OF PLAN. The Board of Directors may at any
time amend or terminate this Plan. No option may be granted after termination
of this Plan. The amendment or termination of the Plan shall not, however,
alter any optionee's rights or obligations under an option previously granted,
unless the optionee consents to that alteration.
15. FINANCIAL DISCLOSURE. Optionees under this Plan shall receive, on a
periodic basis, financial and other information regarding the Corporation during
the period the options are outstanding, in the form of annual shareholder
reports or otherwise. This provision does not require the use of financial
statements.
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<PAGE>
AMENDMENT NO. 1
TO THE
1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF
NETCOM SYSTEMS, INC.,
a California corporation
This Amendment No. 1 to the 1993 Non-Statutory Stock Option and Purchase
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on
February 18, 1997, by the Company at the direction of the Company's Board of
Directors and a majority-in-interest of the Company's shareholders.
1. AMENDMENT TO SECTION 4 . Effective as of the date set forth above,
Section 4 of the Plan is hereby amended in its entirety to read as follows:
"4. STOCK SUBJECT TO PLAN. The aggregate number of shares that may be
issued pursuant to options granted under this Plan shall be 4,000,000 shares of
the Corporation's voting common stock."
With the exception of the amendment set forth above, the Plan shall remain
in full force and effect in accordance with its terms. This Amendment No. 1 to
the Plan is hereby executed by the President of the Company as of the date set
forth above.
__________________________________
Marc Hamon
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<PAGE>
AMENDMENT NO. 2 TO THE
1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF
NETCOM SYSTEMS, INC.,
a California corporation
This Amendment No. 2 to the 1993 Non-Statutory Stock Option and Purchase
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on
August 28, 1997, by the Company at the direction of the Company's Board of
Directors and a majority-in-interest of the Company's shareholders.
1. AMENDMENT TO SECTION 4. Effective as of the date set forth above,
Section 4 of the Plan is hereby amended in its entirety to read as follows:
"4. STOCK SUBJECT TO PLAN. The aggregate number of shares that may
be issued pursuant to options granted under this Plan shall be
3,922,000 shares of the Corporation's voting common stock."
With the exception of the amendment set forth above, the Plan shall remain
in full force and effect in accordance with its terms. This Amendment No. 2 to
the Plan is hereby executed by the President of the Company as of the date set
forth above.
___________________________________
Marc Hamon
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<PAGE>
AMENDMENT NO. 3 TO THE
1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF
NETCOM SYSTEMS, INC.
a California corporation
This Amendment No. 3 to the 1993 Non-Statutory Stock Option and Purchase
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on April
10, 1998, by the Company at the direction of the Company's Board of Directors.
Section 10 of the Plan is hereby amended to add a new subparagraph (c) as
follows:
"(c) CHANGE IN CONTROL. Effective upon the consummation of a Change in Control
(as defined below) of the Company, the number of shares under each Option
granted hereunder as to which such Option is vested and fully exercisable shall
be accelerated such that each Option shall be immediately vested as to that
additional number of shares as would be vested on the date one year following
consummation of a Change in Control if all conditions to such vesting were
satisfied. For purposes of the foregoing, a "Change in Control" shall be deemed
to have occurred upon any person or entity, together with all affiliates (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) thereof becoming the beneficial owner (as defined under Section
13(d) of the Exchange Act and Rule 13d-3 thereunder) of more than 50% of the
Company's then outstanding shares of Common Stock."
With the exception of the amendment set forth above, the Plan shall remain
in full force and effect in accordance with its terms.
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<PAGE>
AMENDMENT NO. 4 TO THE
1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF
NETCOM SYSTEMS, INC.,
a California corporation
This Amendment No. 4 to the 1993 Non-Statutory Stock Option and Purchase
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on May 12,
1998 at the direction of the Company's Board of Directors.
1. DELETION OF SECTIONS 10(b) AND 11. Effective as of the date set forth
above, Sections 10(b) and 11 of the Plan are hereby deleted in their entirety.
With the exception of the amendment set forth above, the Plan shall remain
in full force and effect in accordance with its terms.
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<PAGE>
STOCK OPTION AGREEMENT
(NON-STATUTORY STOCK OPTION)
This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into on
the execution date of the Option Certificate to which it is attached (the
"Certificate"), by and between NETCOM SYSTEMS, INC., a California corporation
(the "Company"), and the employee named in the Certificate ("Employee").
Pursuant to the 1993 Non-Statutory Stock Option and Purchase Plan of the
Company (the "Plan"), the Board of Directors of the Company has authorized the
grant to Employee of a non-statutory stock option (the "Option") to purchase
shares of the Company's no par value Common Stock (the "Common Stock"), upon the
terms and subject to the conditions set forth in this Agreement and in the Plan.
The Company and Employee agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Employee the right and
option (the "Option"), upon the terms and subject to the conditions set forth in
this Agreement, to purchase all or any portion of that number of shares of the
Common Stock (the "Shares") set forth in the Certificate, at the option exercise
price set forth in the Certificate (the "Exercise Price").
2. TERM OF OPTION. The Option shall terminate and expire on the Option
Expiration Date set forth in the Certificate, unless sooner terminated as
provided herein.
3. INSTALLMENTS.
a. Subject to the provisions of Paragraphs 3(b), 6 and 19(h) of this
Agreement, the Option shall become exercisable in installments. Each
installment shall include the number of Shares, and shall become exercisable (in
whole or in part) upon and after the dates set forth under the caption "Exercise
Schedule" in the Certificate. The installments shall be cumulative, I.E., the
Option may be exercised, as to any or all Shares covered by an installment, at
any time or times after the installment first becomes exercisable and until
expiration or termination of the Option.
b. Notwithstanding anything to the contrary contained in this
Agreement, the Option may not be exercised, in whole or in part, unless and
until any then applicable requirements of all state and federal laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
4. EXERCISE OF OPTION. There is no obligation to exercise the Option, in
whole or in part. The Option may be exercised, in whole or in part, only by
delivery to the Company of both:
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<PAGE>
a. Written notice of exercise in form and substance identical to
Exhibit "A" attached to this Agreement stating the number of shares of Common
Stock then being purchased (the "Purchased Shares"); and
b. Payment of the Exercise Price of the Purchased Shares, either in
cash, by check drawn payable to the order of the Company, or by any combination
of the above methods of payment.
Following receipt of the notice and payment referred to above, the Company
shall issue and deliver to Employee a stock certificate or stock certificates
evidencing the Purchased Shares; PROVIDED, HOWEVER, that the Company shall not
be obligated to issue a fraction or fractions of a share of its Common Stock,
and may pay to Employee, in cash or by check, the fair market value of any
fraction or fractions of a share exercised by Employee, which fair market value
shall be determined by the Board of Directors of the Company (or a committee
thereof) as of the date of such exercise.
5. EMPLOYMENT. In consideration for the grant of the Option, Employee
agrees to remain in the employ of, and continue to render services to, the
Company, any Subsidiary of the Company, or any Parent of the Company, as the
Board of Directors (or a committee thereof) of the Company may from time to time
direct, for a period of one year from the date of this Agreement. This
provision shall not obligate the Company, or any Subsidiary or Parent of the
Company, to continue to employ Employee for any period whatsoever. The sole
remedy to the Company should Employee breach his or her obligations under this
Paragraph 5 shall be to cancel this Agreement and the Option granted under this
Agreement. For the purposes of this Agreement, the terms "Subsidiary" and
"Parent" shall mean any present or future corporation which would be a
"subsidiary corporation" or a "parent corporation," respectively, of the
Company, as those terms are defined in Section 425 of the Internal Revenue Code
of 1986 (the "Code").
6. TERMINATION OF EMPLOYMENT. If Employee shall cease to be employed by
the Company, or any Subsidiary or any Parent of the Company, for any reason
other than death or permanent disability (see subparagraph (c)) or as provided
in subparagraph (b), subject to the cancellation remedy available to the Company
under Paragraph 5 of this Agreement, Employee shall have the right to exercise
the Option at any time within 90 days after such termination of employment and
prior to the date of Option termination under Paragraph 2 of this Agreement, to
the extent that his or her right to exercise the Option had accrued pursuant to
the provisions of Paragraph 3 of this Agreement and had not previously been
exercised at the date of such termination; and to the extent unexercised at the
end of period, the Option shall terminate. The Board of Directors of the
Company (or a committee thereof), in its sole and absolute discretion, shall
determine whether or not authorized leaves of absence shall constitute
termination of employment for the purposes of this Agreement.
a. If Employee shall cease to be employed by the Company, or any
Subsidiary or any Parent of the Company, because of Employee's involuntary
termination for the convenience of the employer and not for cause, Employee
shall have the right to exercise the Option, at any time
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<PAGE>
within 90 days after such termination of employment and prior to the date of
Option termination under Paragraph 2 of this Agreement, but only (1) to the
extent the Option has vested as of the effective date of Employee's termination
and (2) to the extent that his or her right to exercise the Option otherwise had
accrued pursuant to the provisions of Paragraph 3 of this Agreement and had not
previously been exercised at the date of such termination; and to the extent
unexercised at the end of this period, the Option shall terminate.
b. If Employee shall die or become permanently disabled while in the
employ of the Company, any Subsidiary or any Parent of the Company, then the
Employee, the Employee's executors or administrators or any person or persons
acquiring the Option directly from Employee by bequest or inheritance, may
exercise the Option, to the extent that his or her right to exercise the Option
had accrued pursuant to the provisions of Paragraph 3 of this Agreement and had
not previously been exercised, at any time with one year after Employee's death
or permanent disability, but not later than the Option Expiration Date set forth
in the Certificate; to the extent unexercised at the end of that period, the
Option shall terminate. If, prior to Employee's death or permanent disability,
Employee shall not have remained in the employ of, or shall not have continued
to render services to, the Company, any Subsidiary or any Parent for a period of
one year from the date of Agreement, the Option shall terminate as of the date
of Employee's death or permanent disability.
7. RESTRICTIONS ON PURCHASED SHARES. Employee shall not sell, transfer,
assign, pledge, hypothecate or otherwise dispose of any of the Purchased Shares
unless and until all of the following have occurred:
a. The Purchased Shares are disposed of pursuant to and in
conformity with an effective registration statement filed with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Act"), or Employee delivers to the Company a written opinion of counsel,
satisfactory to the Company and its counsel, to the effect that the proposed
disposition is exempt from the registration and prospectus delivery requirements
of the Act; and
b. Employee delivers to the Company a written opinion of counsel,
satisfactory in form and substance to the Company and its counsel, to the effect
that the proposed disposition will not result in a violation of the securities
laws of any state of the United States; and
c. Employee has complied with the provisions of Paragraph 9 of this
Agreement with respect to the Purchased Shares.
Any attempted transfer which is not in full compliance with this Paragraph 7
shall be null and void AB INITIO, and of no force or effect.
8. OPTION OF COMPANY TO REPURCHASE SHARES.
a. OPTION TO REPURCHASE. If at any time, prior to such time as the
Company shall issue and sell any shares of any class of securities of the
Company pursuant to an effective
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<PAGE>
registration statement filed with the Securities and Exchange Commission under
the Act, Employee shall cease to be employed by the Company, or any Subsidiary
or any Parent of the Company, regardless of the cause therefor, the Company
shall have the option to repurchase all, but not less than all, of the Purchased
Shares beneficially owned by Employee on the terms set forth in Paragraph 8.
The Company may exercise its option to repurchase by delivering to Employee or
his or her representative, as the case may be, written notice of its election to
purchase the Purchased Shares within 180 days of the date of termination of
Employee's employment; and upon receipt of such written notice, Employee shall
be obligated to sell his or her Purchased Shares to the Company and shall sell
such shares, on the terms and conditions contained in this Paragraph 8.
b. REPURCHASE PRICE. The per share price to be paid by the Company
for the Purchased Shares shall be the greater of:
- The per share exercise price for the Purchased Shares
(adjusted, if applicable, for all stock splits, stock dividends and
reorganizations); or
- The per share fair market value of the Purchased Shares,
with Fair Market Value determined in a manner consistent with Paragraph 4(b) of
this Agreement, and the following:
i. At any time, and from time to time, the Board of
Directors of the Company (or a committee thereof) may, but shall not be
obligated to, determine, by a majority vote, the per share fair market value of
the Common Stock of the Company as of the end of the most recently ended fiscal
year of the Company, and, if this determination is made, shall cause written
notice of such valuation to be sent to Employee. In the absence of fraud, the
valuation so determined shall become conclusive and binding upon Employee unless
he or she delivers a written notice of disagreement to the Company within 15
days following receipt of a notice of valuation. Any determination of value
made pursuant to this Paragraph 8(b)(1) shall remain effective for a period of
15 months from the date of the mailing of the notice to Employee or until a
subsequent determination of value shall be made by the Board of Directors (or a
committee thereof), whichever first occurs. During this period, the per share
fair market value for all Purchased Shares owned by Employee (unless Employee
has filed a notice of disagreement) shall be the valuation determined pursuant
to this Paragraph 8(b)(1), plus the net after-tax earnings, or minus the net
after-tax losses, per share of Common Stock of the Company for the period
commencing with the first day of the first month following the month which was
used as the determining date for valuation and ending upon the last day of the
fiscal quarter ending prior to the month in which the Company exercises its
option to repurchase under this Paragraph 8, less all cash dividends paid or
payable with respect to the Purchased Shares during such period and during the
period from the end of such quarter to the closing of the purchase and sale of
the Purchased Shares.
ii. If Employee has filed a notice of disagreement to a
valuation in effect under Paragraph 8(b)(1), or if there is no valuation in
effect under Paragraph 8(b)(1) at such time as the Company exercises its option
to purchase Purchased Shares from Employee, the
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<PAGE>
Company shall submit to Employee an estimate of the per share fair market value
of the Purchased Shares (which may be the same or different from the most recent
valuation by the Board of Directors (or a committee thereof)). Such valuation
shall be conclusive unless Employee responds in a like manner within 30 days
following receipt of the Company's estimate. If Employee and the Company do not
reach agreement as to the per share fair market value within 45 days following
the Company's exercise of its option to repurchase, the determination of the per
share fair market value shall be made by arbitration in Los Angeles County,
California. To institute arbitrationon proceedings, the Company shall appoint
an independent qualified appraiser and notify Employee of its appointment. If
Employee does not deliver written notice of appointment of another independent
qualified appraiser within 10 days after receipt of the Company's notice, the
Company's appraiser shall determine the per share fair market value. If
Employee does deliver a notice of appointment, the two appraisers shall appoint
a third independent qualified appraiser who shall determine the per share fair
market value of the Purchased Shares; the determination of the per share fair
market value completed in the manner provided in this Paragraph 8(b)(2) shall be
conclusive and binding upon Employee and the Company; in no event, however,
shall the per share fair market value determined by such appraiser or appraisers
be outside of the range of estimates of the per share fair market value
submitted by the Company and Employee. The cost of the appraiser(s) shall be
paid by the party whose estimate of the per share fair market value most varies
from the value determined by the appraiser(s), unless the parties' estimates
vary equally, in which event the cost of the appraiser(s) shall be borne equally
between them.
c. PAYMENT OF REPURCHASE PRICE. Within 30 days of the later to
occur of (1) the exercise by the Company of its option to repurchase, or (2) the
determination of the per share fair market value pursuant to Paragraph 8(b)(2)
of this Agreement, the Company shall pay the repurchase price for Purchased
Shares against Employee's delivery to the Company of certificates representing
the Purchased Shares, together with collateral instruments of transfer executed
in blank.
9. RIGHT OF FIRST REFUSAL.
a. Prior to such time as the Company shall issue and sell any shares
of any class of securities of the Company pursuant to an effective registration
statement filed with the Securities and Exchange Commission under the Act,
- Employee shall not have the right or power to pledge or
hypothecate any of the Purchased Shares, and
- Without complying with the provisions of this Paragraph 9,
Employee shall not have the right or power to sell, transfer, assign or
otherwise dispose of any of the Purchased Shares to any person or entity other
than the Company.
If Employee desires to sell, transfer, assign or otherwise dispose of any
of the Purchased Shares in any transaction, Employee shall first give the
Company a written offer (the "Offer") to
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<PAGE>
purchase such Purchased Shares for the same price and on the same terms as in
the proposed transaction, and such offer:
i. Shall remain open for at least 30 days from the date of
its transmittal;
ii. Shall state its exact termination date;
iii. Shall name the person or persons with whom the proposed
transaction is to be effected;
iv. Shall state the price, closing date, and all other
terms and conditions of the proposed transaction; and
v. Shall make reference to this Paragraph 9.
If the proposed transaction provides for consideration other than cash or
promissory notes, the Offer shall be deemed an offer for cash to the extent of
the fair market value of such other consideration and the notice shall state
Employee's estimate of such fair market value, which estimate shall be
conclusive and binding upon Employee, but not on the Company. If the Company
and the Employee cannot reach agreement with respect to the fair market value of
such other consideration prior to the expiration of the Offer, the question
shall be submitted to arbitration under the procedure set forth in Paragraph 8
of this Agreement and the Offer shall be deemed to remain open until ten days
after the fair market value of such other consideration has been determined by
arbitration.
b. The Company may accept the Offer by delivering written notice of
acceptance to Employee prior to the expiration of the Offer; and Employee shall
thereupon transfer such Purchased Shares to the Company on the terms and
conditions set forth in the Offer (as the same may be modified by arbitration).
c. If the Company does not accept the Offer prior to its expiration,
the Offer shall terminate, and Employee shall be free to transfer such Shares in
the manner and in the time period disclosed in the Offer. If the transaction
has not been so effected within 90 days following termination of the Offer, such
Purchased Shares shall again be subject to all of the provisions of this
Paragraph 9.
10. METHOD OF PAYMENT UPON REPURCHASE. Payment for all Shares repurchased
under Paragraphs 8 or 9 of Agreement shall be made by check or cash; however, if
the Board of Directors of the Company determines, on advice of counsel, that the
Company cannot then legally purchase such Shares by payment of check or cash,
and if the Company has not assigned its rights to purchase such Shares pursuant
to Paragraph 18(c) of this Agreement, the Company may make a written offer to
pay for such Shares with its non-negotiable notes, subordinated to all other
creditors of the
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<PAGE>
Company and maturing at such time as the Company may legally be able to pay for
such Shares, and Employee, or his or her representative, as the case may be, may
accept such offer in writing within fifteen days from the date of receipt
thereof. If such offer is not accepted, the Company shall have no further
obligation to purchase such Purchased Shares under Paragraphs 8 or 9 of this
Agreement.
11. ADJUSTMENTS UPON RECAPITALIZATION. Subject to any required action by
the stockholders of the Company:
a. If the outstanding shares of the Common Stock shall be divided
into a greater number of shares, or a dividend in Common Stock shall be paid in
respect of the Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of the Common Stock shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be proportionately
increased.
b. When any adjustment is required to be made in the Exercise Price,
the number of Shares purchasable upon the exercise of the Option shall be
changed to that number of Shares determined by:
i. Multiplying an amount equal to the number of Shares
purchasable on the exercise of the Option immediately prior to such adjustment
by the Exercise Price in effect immediately prior to such adjustment, and then
ii. Dividing that product by the Exercise Price in effect
immediately after such adjustment.
c. In case of any capital reorganization, any reclassification of
the Common Stock (other than a recapitalization described in Paragraph 11(a) of
this Agreement), or the consolidation or merger of the Company with another
person where the Company is the "surviving corporation," as defined in
Paragraph 11(h) of this Agreement (collectively, "Reorganizations"), Employee
shall thereafter be entitled upon exercise of the Option to purchase the kind
and number of shares of stock or other securities or property of the Company
receivable upon such Reorganization by a holder of the number of shares of the
Common Stock which the Option entitles Employee to purchase from the Company
prior to such Reorganization; and in any such case, appropriate adjustment shall
be made in the application of the provisions set forth in this Agreement with
respect to Employee's rights and interests thereafter, to the end that the
provisions set forth in this Agreement (including the specified changes and
other adjustments to the Exercise Price) shall thereafter be applicable in
relation to any Shares or other property thereafter purchasable upon exercise of
the Option.
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<PAGE>
d. If the Company is dissolved or liquidated, or is a party to a
merger or consolidation in which the Company is not the "surviving corporation"
(as defined in Paragraph 11(h) of this Agreement), then the Option will
terminate on the effective date of the dissolution, liquidation, merger or
consolidation; PROVIDED, HOWEVER, that the Employee shall have the right during
a 30-day period ending on the fifth day prior to the dissolution, liquidation,
merger or consolidation, to exercise the Option, TO THE EXTENT THE OPTION THEN
HAS BECOME VESTED, in whole or in part, and without regard to the installment
provisions contained in Paragraph 3(a) of this Agreement.
e. To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board of
Directors of the Company (or a committee thereof), and its determination shall
be final, binding and conclusive.
f. The provisions of this Paragraph 11 are intended to be exclusive,
and Employee shall have no other rights upon the occurrence of any of the events
described in this Paragraph 11.
g. The grant of the Option shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
h. The determination as to which party to a Reorganization is the it
"surviving corporation" shall be made on the basis of the relative equity
interests of the shareholders in the corporation existing after the
Reorganization, as follows: if following any Reorganization the holders of
outstanding voting securities of the Company prior to the Reorganization own
equity securities possessing more than 50% of the voting power of the
corporation existing after the Reorganization (excluding any shares in any
collation other than the Company owned by such holders prior to such
Reorganization), then for purposes of this Agreement, the Company shall be the
surviving corporation. In all other cases, the Company shall not be the
surviving corporation.
12. WAIVER OF RIGHTS TO PURCHASE STOCK. By signing this Agreement,
Employee acknowledges and agrees that neither the Company nor any other person
or entity is under any obligation to sell or transfer to Employee any option or
equity security of the Company, other than the shares of Common Stock subject to
the Option and any other right or option to purchase Common Stock which was
previously granted to Employee by the Board of Directors of the Company (or a
committee thereof). By signing this Agreement, Employee specifically waives all
rights which he or she may have had prior to the date of this Agreement to
receive any option or equity security of the Company, other than an option or
equity security granted to the Employee by the Board of Directors of the Company
(or a committee thereof).
13. INVESTMENT INTENT. Employee represents, warrants, and agrees that if
he or she exercises the Option in whole or in part, he or she will acquire the
Shares upon such exercise for the
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<PAGE>
purpose of investment and not with a view to the distribution of such Shares,
and that upon each exercise of the Option he or she will furnish to the Company
a written statement to such effect, executed under penalty of perjury under the
laws of the State of California, in the form attached hereto as Exhibit B.
14. LEGENDS ON STOCK CERTIFICATES; SECTION 260.141.11 STATEMENT. Employee
agrees that the Company may place on each certificate representing the Purchased
Shares the following legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN FOR
INVESTMENT AND ARE EXEMPT FROM REGISTRATION PURSUANT TO SECTION 4(2) OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION
25102(f) OF THE CALIFORNIA CORPORATIONS CODE. ACCORDINGLY, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW.
THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN FIRST
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAW, OR UNLESS SUCH SECURITIES ARE FROM REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAW. IN ADDITION, THESE SECURITIES MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE ISSUER AND
THE REGISTERED HOLDER HEREOF WHICH PROVIDES, AMONG OTHER THINGS, THAT THE
ISSUER HAS A RIGHT OF FIRST REFUSAL ON ANY PROPOSED SALE OR OTHER TRANSFER
OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE. A COPY OF SUCH AGREEMENT
IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION FOR WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Upon exercise of the Option, the Company shall deliver to Employee a copy of
Section 260.141.11 of the California Corporation Commissioner's Regulations.
15. NO RIGHTS AS SHAREHOLDER. Employee shall have no rights as a
shareholder with respect to the Shares until the date of the issuance to
Employee of a stock certificate or stock certificates evidencing the Shares.
Except as may be provided in Paragraph 11 of this Agreement, no adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
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<PAGE>
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued.
16. MODIFICATION. Subject to the terms and conditions and within the
limitations of the Plan and/or this Agreement, the Board of Directors of the
Company (or a committee thereof) may modify and extend or renew the Option, or
accept the surrender of and authorize the grant of a new option in substitution
for the Option (to the extent not previously exercised). No modification of the
Option shall, without the consent of Employee, alter or impair any rights of
Employee under the Option.
17. CHARACTER OF OPTION. The Option is intended to be a non-statutory
stock option, I.E., a stock option which is intended not to be an "incentive
stock option" as that term is defined in Section 422A of the Code.
18. WITHHOLDING. Employee shall make any arrangement required by the
Company (including accepting a lesser number of shares of Stock upon exercise)
to insure the proper withholding of the amount of tax, if any, required to be
withheld by the Company or a Parent or Subsidiary of the Company as a result of
the exercise of the Option.
19. GENERAL PROVISIONS.
a. FURTHER ASSURANCES. Employee shall promptly take all actions and
execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Agreement.
b. NOTICES. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given if personally delivered or if mailed by first class, certified mail,
return receipt requested, postage prepaid:
i. If to the Company, to:
Netcom Systems, Inc.
Attn: Chief Executive Officer
20500 Nordhoff Street
Chatsworth, California 91311
ii. If to Employee, to the address of Employee set forth in
the records of the Company,
or to such other address or addresses as may have been furnished by either party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be deemed to have been given two business days following the
date actually set.
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<PAGE>
c. TRANSFER OF RIGHTS UNDER THIS AGREEMENT. The Company may at any
time transfer and assign its rights and delegate its obligations under this
Agreement to any other person, corporation, firm or entity, including its
officers, directors and shareholders, with or without consideration.
d. OPTION NON-TRANSFERABLE. Employee may not assign or transfer the
Option except by will or the laws of descent and distribution, and only Employee
may exercise the Option during his or her lifetime.
e. SUCCESSORS. Except to the extent specifically limited by the
term and provisions of this Agreement, this Agreement is binding upon the
parties to this Agreement and their respective successors, assigns, heirs and
personal representatives.
f. CHOICE OF LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, which shall apply in all
respects, including statutes of limitation.
g. ATTORNEYS' FEES. In the event that any action, suit or other
proceeding is instituted upon any breach of this Agreement, the prevailing party
shall be paid by the other party thereto an amount equal to all of the
prevailing party's costs and expenses, including attorneys' fees, in each and
every such action, suit or proceeding (including any and all appeals or
petitions therefrom). As used in this Agreement, "attorneys' fees" shall mean
the full and actual cost of any legal services actually performed in connection
with the matter involved, calculated on the basis of the usual fee customarily
charged by the attorney performing such services, and shall not be limited to
reasonable attorneys' fees as defined in any statute or rule of court.
h. THE PLAN. This Agreement is made pursuant to the Plan, and it is
intended, and shall be interpreted in a manner, to comply therewith. Any
provision of this Agreement inconsistent with the Plan shall be superseded and
governed by the Plan.
i. MISCELLANEOUS. Titles and captions contained in this Agreement
are inserted only as a matter of convenience and for reference, and in no way
define, limit, extend or describe the scope of this Agreement or the intent of
any provision hereof. Except as specifically provided herein, neither this
Agreement nor any right pursuant hereto or interest herein shall be assignable
by any of the parties hereto without the prior written consent of the other
parties hereto.
The Signature Page to this Agreement consists of the last page of the
Certificate.
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<PAGE>
EXHIBIT "A"
NOTICE OF EXERCISE
[To be signed only upon exercise of the Option]
TO: Netcom Systems, Inc.
The undersigned, the holder of the enclosed Stock Option Agreement
(Non-Statutory Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder shares of Common
Stock of Netcom Systems, Inc. (the "Company"), and herewith encloses payment of
$_______________ in full payment of the purchase price of the Shares.
DATED: ____________________19__.
--------------------------------------------
Signature
[Signature must conform in all respects to
name of holder as specified on the face of
the Option.]
--------------------------------------------
Address
--------------------------------------------
City, State, Zip
--------------------------------------------
No. of Shares
[Insert here the number of shares called for
on the face of the Option (or, in the case of
a partial exercise, the number of shares
being exercised), in either case without any
adjustment for additional Common Stock, other
securities or property which, pursuant to the
adjustment provisions of the Option, may be
deliverable upon exercise.]
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<PAGE>
EXHIBIT "B"
REPRESENTATION LETTER
[To be signed only upon exercise of the Option]
[DATE]
Netcom Systems, Inc.
Attn: Marc Hamon, President
20500 Nordhoff Street
Chatsworth, CA 91311
Re: REPRESENTATIONS BY PROPOSED SHAREHOLDER
Gentlemen:
As a proposed stockholder of Netcom Systems, Inc., and in order to assure
you that the proposed issuance of shares with the requirements for exemption
from qualification afforded by Corporations Code, I hereby represent and warrant
to you the following:
19. I have a preexisting personal or business relationship with you,
consisting of contacts of such nature and duration as would enable me to be
aware of your general business and financial circumstances. In addition, by
reason of my own business or financial experience, I have the capacity to
protect my own interests in connection with the transaction.
20. I am acquiring the shares of Netcom Systems, Inc. for my own account,
and not with a view to or for sale in connection with any distribution of those
shares.
I declare under penalty of perjury, under the laws of the State of
California, that the foregoing is true and correct.
Very truly yours,
--------------------------------------------
[SIGNATURE OF OPTIONEE
--------------------------------------------
[NAME OF OPTIONEE]
cc: J. Anthony Vittal
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<PAGE>
NETCOM SYSTEMS, INC.
AMENDMENT NO. 1
TO 1993 STOCK OPTION AGREEMENT
This Amendment No. 1 to 1993 Stock Option Agreement is made and entered
into effective as of _____________, 1998 by and between Netcom Systems, Inc.
(the "Company") and the Optionee whose name appears on the last page hereof
(the "Optionee").
Optionee and the Company hereby agree that Section 11 of each Stock
Option Agreement between Optionee and the Company granted under the Company's
1993 Stock Option Plan (the "Agreement(s)") is hereby amended to read in its
entirety as follows:
"11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of Shares covered by this
Option, as well as the Exercise Price, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board of Directors
of the Company, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number
or price of shares of Common Stock subject to this Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Company shall notify the
Employee as soon as practicable prior to the effective date of such
proposed transaction. The Board of Directors of the Company, or any
committee thereof, in its discretion may provide for the Employee to
have the right to exercise the Option until ten (10) days prior to such
transaction as to all of the Shares covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition,
the Board of Directors of the Company, or any committee thereof, may
provide that any Company repurchase option applicable to any Shares
purchased upon exercise of the Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not
<PAGE>
been previously exercised, the Option will terminate immediately prior
to the consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of
the assets of the Company, the Option shall be assumed or an equivalent
option or right substituted by the successor corporation or a parent or
subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option,
the Employee shall fully vest in and have the right to exercise the
Option as to all of the Shares, including Shares as to which it would
not otherwise be vested or exercisable. If the Option becomes fully
vested and exercisable in lieu of assumption or substitution in the
event of a merger or sale of assets, the Company shall notify the
Employee in writing or electronically that the Option shall be fully
vested and exercisable for a period of fifteen (15) days from the date
of such notice, and the Option shall terminate upon the expiration of
such period. For the purposes of this paragraph, the Option shall be
considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share
subject to the Option immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its
parent, the Board of Directors of the Company, or any committee thereof,
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option, for each
Share subject to the Option, to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale
of assets."
With the exception of the amendment set forth above, the Agreement(s)
shall remain in full force and effect in accordance with its terms.
___________________________________
Name of Optionee
___________________________________
(Signature)
<PAGE>
Exhibit 10.2
SECOND AMENDED AND RESTATED
1997 STOCK PLAN OF
NETCOM SYSTEMS, INC.(1)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan in accordance with Section 4 hereof.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 hereof.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Netcom Systems, Inc., a California corporation.
(h) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services to such
entity.
________________________
(1) As amended March 10, 1998
<PAGE>
(i) "DIRECTOR" means a member of the Board of Directors of the
Company.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
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<PAGE>
(p) "OFFICER" means any employee whose annual aggregate direct
remuneration from the Company exceeds $60,000 and who is appointed by the Board
to a position of significant managerial responsibility.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written or electronic agreement
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(t) "OPTIONED STOCK" means the Common Stock subject to an Option or a
Stock Purchase Right.
(u) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the plan.
(v) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "PLAN" means this 1997 Stock Plan.
(x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(y) "SECTION 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(z) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(aa) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(bb) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 11 below.
(cc) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of Code.
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<PAGE>
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 3,959,550 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, such Shares shall become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) ADMINISTRATOR. The Plan shall be administered by the Board or a
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
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<PAGE>
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
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6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of the grant.
(B) granted to any other Service Provider, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
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(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement (of at
least thirty (30) days) to the extent that the Option is vested
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on the date of termination (but in no event later than the expiration of the
term of the Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable for
three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for twelve
(12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside
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of the Plan. After the Administrator determines that it will offer Stock
Purchase Rights under the Plan, it shall advise the offeree in writing or
electronically of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid, and the time within which such person must accept such
offer. The terms of the offer shall comply in all respects with Section
260.140.42 of Title 10 of the California Code of Regulations. The offer shall
be accepted by execution of a Restricted Stock purchase agreement in the form
determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five years from the date of
purchase.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
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provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has
not been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall (i) be
assumed, (ii) exchanged for an equivalent option or right substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation or
(iii) terminate, all as provided for herein. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, to the extent that 20% of the Optioned Stock has not already vested,
Optionee shall vest in and have the right to exercise the Option or Stock
Purchase Right as to 20% of the Optioned Stock. If 20% of an Option or Stock
Purchase Right becomes vested and exercisable, as provided for in the preceding
sentence, in lieu of assumption or substitution in the event of a merger or sale
of assets, the Administrator shall notify the Optionee in writing or
electronically that 20% of the Option or Stock Purchase Right shall be
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. All Optioned Stock that is not assumed or accelerated as provided for
herein, shall terminate and be of no further force and effect. For the purposes
of this paragraph, the Option or Stock Purchase Right shall be considered
assumed if, following the merger or sale of assets, the option or right confers
the right to purchase or receive, for each Share of Optioned Stock subject to
the Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to
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be solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
(d) CHANGE IN CONTROL. In the event of a change in control of the
Company whereby those persons and entities who constitute the shareholders of
the Company immediately prior to such change of control event, fail to hold at
least 50% of the outstanding capital stock of the Company following such change
of control event or any sale of all or substantially all of the Company's assets
(collectively, "Change of Control Events"), then, immediately prior to any such
Change of Control Event, 20% of any stock option granted within one year from
the date of such Change of Control Event shall become immediately vested and
exercisable.
13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present
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intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required.
16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
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AMENDMENT NO. 1 TO THE
SECOND AMENDED AND RESTATED
1997 STOCK OPTION PLAN OF
NETCOM SYSTEMS, INC.
a California corporation
This Amendment No. 1 to the Second Amended and Restated 1997 Stock Option
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on April
10, 1998, by the Company at the direction of the Company's Board of Directors.
Section 12(d) of the Plan is hereby amended read as follows:
"(d) CHANGE IN CONTROL. Effective upon the consummation of a Change in Control
(as defined below) of the Company, the number of shares under each Option
granted hereunder as to which such Option is vested and fully exercisable shall
be accelerated such that each Option shall be immediately vested as to that
additional number of shares as would be vested on the date one year following
consummation of a Change in Control if all conditions to such vesting were
satisfied. For purposes of the foregoing, a "Change in Control" shall be deemed
to have occurred upon any person or entity, together with all affiliates (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) thereof becoming the beneficial owner (as defined under Section
13(d) of the Exchange Act and Rule 13d-3 thereunder) of more than 50% of the
Company's then outstanding shares of Common Stock."
With the exception of the amendment set forth above, the Plan shall remain
in full force and effect in accordance with its terms.
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1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
The undersigned Optionee has been granted an Option to purchase Common Stock of
the Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number
Date of Grant
Vesting Commencement Date
Exercise Price per Share
Total Number of Shares Granted
Total Exercise Price
Type of Option: Incentive Stock Option
---
Nonstatutory Stock Option
---
Term/Expiration Date:
VESTING SCHEDULE:
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
20% of the Shares subject to the Option shall vest on the first anniversary of
the Vesting Commencement Date and the remainder of the Shares shall vest 1/48
per month thereafter, subject to Optionee's continuing to be a Service Provider
on such dates.
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TERMINATION PERIOD:
This Option shall be exercisable for three months after Optionee ceases to be a
Service Provider. Upon Optionee's death or disability, this Option may be
exercised for such longer period as provided in the Plan. In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by delivery of
an exercise notice in the form attached as Exhibit A (the AExercise Notice@)
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
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3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as
Exhibit B, and shall read the applicable rules of the Commissioner of
Corporations attached to such Investment Representation Statement.
4. LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any
of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless exercise
program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time
as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by Optionee. The terms of the
Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
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8. TERM OF OPTION. This Option may be exercised only within the term set out
in the Notice of Grant, and may be exercised during such term only in accordance
with the Plan and the terms of this Option.
9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will be no
regular federal income tax liability upon the exercise of the Option, although
the excess, if any, of the Fair Market Value of the Shares on the date of
exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal
income tax liability upon the exercise of a Nonstatutory Stock Option. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(c) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(d) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such
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disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by the
Optionee.
10. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
11. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT
THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY
CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT
OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE
PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
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<PAGE>
OPTIONEE: NETCOM SYSTEMS, INC.
- -------------------------------------- --------------------------------------
Signature By
- -------------------------------------- --------------------------------------
Print Name Title
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
Residence Address
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<PAGE>
EXHIBIT A
1997 STOCK PLAN
EXERCISE NOTICE
Netcom Systems, Inc.
20500 Nordhoff Street
Chatsworth, CA 91311
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ___________, ____, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Netcom Systems, Inc. (the
"Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock
Option Agreement dated ________, ______ (the "Option Agreement").
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full
purchase price of the Shares, as set forth in the Option Agreement.
3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance of the Shares (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or
any transferee (either being sometimes referred to herein as the "Holder") may
be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver
to the Company a written notice (the "Notice") stating: (i) the Holder's bona
fide intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number
of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide
cash price or other consideration for which the Holder proposes to transfer the
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
<PAGE>
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30)
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares
purchased by the Company or its assignee(s) under this Section shall be the
Offered Price. If the Offered Price includes consideration other than cash, the
cash equivalent value of the non-cash consideration shall be determined by the
Board of Directors of the Company in good faith.
(d) PAYMENT. Payment of the Purchase Price shall be made, at the option
of the Company or its assignee(s), in cash (by check), by cancellation of all or
a portion of any outstanding indebtedness of the Holder to the Company (or, in
the case of repurchase by an assignee, to the assignee), or by any combination
thereof within 30 days after receipt of the Notice or in the manner and at the
times set forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
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<PAGE>
(a) LEGENDS. Optionee understands and agrees that the Company shall cause
the legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by state or federal
securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY
COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARES.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY,
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES.
Optionee understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit B, the Investment Representation Statement.
(b) STOP-TRANSFER NOTICES. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
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<PAGE>
9. INTERPRETATION. Any dispute regarding the interpretation of this Agreement
shall be submitted by Optionee or by the Company forthwith to the Administrator
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Administrator shall be final and binding on all parties.
10. GOVERNING LAW; SEVERABILITY. This Agreement is governed by the internal
substantive laws but not the choice of law rules, of California.
11. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated herein by
reference. This Agreement, the Plan, the Option Agreement and the Investment
Representation Statement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and may not be modified adversely to the Optionee's
interest except by means of a writing signed by the Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: NETCOM SYSTEMS, INC.
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Its
ADDRESS: ADDRESS:
- ---------------------------------- 20500 Nordhoff St.
- ---------------------------------- Chatsworth, CA 91311
-----------------------------------
Date Received
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<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: NETCOM SYSTEMS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, a legend prohibiting their transfer without the
consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
<PAGE>
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under
Rule 701 at the time of the grant of the Option to the Optionee, the exercise
will be exempt from registration under the Securities Act. In the event the
Company becomes subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer
period as any market stand-off agreement may require) the Securities exempt
under Rule 701 may be resold, subject to the satisfaction of certain of the
conditions specified by Rule 144, including: (1) the resale being made through
a broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934); and, in the case of an affiliate, (2) the availability of certain
public information about the Company, (3) the amount of Securities being sold
during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
(e) Optionee understands that the certificate evidencing the Securities
will be imprinted with a legend which prohibits the transfer of the Securities
without the consent of the Commissioner of Corporations of California. Optionee
has read the applicable Commissioner's Rules with respect to such restriction, a
copy of which is attached.
Signature of Optionee:
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<PAGE>
----------------------------------
Date: , 19
--------------------- ----
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<PAGE>
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: RESTRICTION ON TRANSFER. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries
who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law
or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at
the sale that transfer of the securities is restricted under this rule,
(ii) delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
<PAGE>
Exhibit 10.3
NETCOM SYSTEMS, INC.
1998 STOCK PLAN (1)
1. PURPOSES OF THE PLAN. The purposes of this 1998 Stock Plan are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means Netcom Systems, Inc., a Delaware corporation.
__________________________
(1) All share numbers reflect post-split shares
<PAGE>
(h) "CONSULTANT" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
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<PAGE>
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "INSIDE DIRECTOR" means a Director who is an Employee.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "NOTICE OF GRANT" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(u) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(v) "OPTIONED STOCK" means the Common Stock subject to an Option or
Stock Purchase Right.
(w) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(x) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(y) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(z) "PLAN" means this 1998 Stock Plan.
(aa) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 of the Plan.
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<PAGE>
(bb) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(cc) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(dd) "SECTION 16(b)" means Section 16(b) of the Exchange Act.
(ee) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(ff) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(gg) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(hh) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 4,000,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year (beginning in 2000) equal to the lesser
of (i) 8,000,000 Shares, (ii) 4% of the outstanding Shares on such date or (iii)
a lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); PROVIDED, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
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<PAGE>
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
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(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as
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Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock
Options shall be taken into account in the order in which they were granted.
The Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 2,000,000 Shares.
(ii) The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 14.
(iii) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the limit
set forth in subsection (i) above. For this purpose, if the exercise price of
an Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 16 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
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(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
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(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option,
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the Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such
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offer. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. FORMULA OPTION GRANTS TO OUTSIDE DIRECTORS. All grants of Options to
Outside Directors pursuant to this Section shall be automatic and
nondiscretionary and shall be made strictly in accordance with the following
provisions:
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) No person shall have any discretion to select which Outside
Directors shall be granted Options under this Section or to determine the number
of Shares to be covered by such Options.
(c) Each person who first becomes an Outside Director following the
effective date of this Plan, as determined in accordance with Section 7 hereof,
shall be automatically granted an Option to purchase 60,000 Shares (the "First
Option") or the date on which such person first becomes an Outside Director,
whether through election by the stockholders of the Company or appointment by
the Board to fill a vacancy; provided, however, that an Inside Director who
ceases to be an Inside Director but who remains a Director shall not receive a
First Option.
(d) Each Outside Director shall be automatically granted an Option to
purchase 12,000 Shares (a "Subsequent Option") on the date of the annual meeting
of the stockholders of the
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Company, if as of such date, he or she shall have served on the Board for at
least the preceding six (6) months.
(e) Notwithstanding the provisions of subsections (c) and (d) hereof,
any exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 20 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with
Section 20 hereof.
(f) The terms of each Option granted pursuant to this Section shall
be as follows:
(i) the term of the Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
(iii) subject to Section 14 hereof, the First Option shall vest
and become exercisable as to 20% of the Shares subject to the Option on the
first anniversary of its date of grant, and as to 1/60th of the Shares subject
to the Option each full month thereafter, provided that the Optionee continues
to serve as a Director on such dates.
(iv) subject to Section 14 hereof, the Subsequent Option shall
vest and become exercisable as to 100% of the Shares subject to the Option the
anniversary of its date of grant, provided that the Optionee continues to serve
as a Director on such date.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock
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dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or Stock Purchase Right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its
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Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(d) CHANGE IN CONTROL. Effective upon the consummation of a
Change in Control (as defined below) of the Company, the number of shares
under each Option granted hereunder as to which such Option is vested and
fully exercisable shall be accelerated such that each Option shall be
immediately vested as to that additional number of shares as would be vested
on the date one year following consummation of a Change in Control if all
conditions to such vesting were satisfied. For purposes of the foregoing, a
"Change in Control" shall be deemed to have occurred upon any person or
entity, together with all affiliates (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof
becoming the beneficial owner (as defined under Section 13(d) of the Exchange
Act and Rule 13d-3 thereunder) of more than 50% of the Company's then
outstanding shares of Common Stock.
15. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) STOCKHOLDER APPROVAL. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
17. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be
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necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
19. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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NETCOM SYSTEMS, INC.
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1998 Stock Plan
shall have the same defined meanings in this Stock Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[20% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/60 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates].
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for thirty (30) after Optionee ceases to be a
Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for one year after Optionee ceases to be a Service Provider. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 16(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
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3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. TAX CONSEQUENCES. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) EXERCISING THE OPTION.
(i) NSO. The Optionee may incur regular federal income tax
liability upon exercise of a NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Exercised Shares on the date of
exercise over their aggregate Exercise Price. If the Optionee is an Employee or
a former Employee, the Company will be required to withhold from his or her
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
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<PAGE>
(ii) ISO. If this Option qualifies as an ISO, the Optionee
will have no regular federal income tax liability upon its exercise, although
the excess, if any, of the Fair Market Value of the Exercised Shares on the date
of exercise over their aggregate Exercise Price will be treated as an adjustment
to alternative minimum taxable income for federal tax purposes and may subject
the Optionee to alternative minimum tax in the year of exercise. In the event
that the Optionee ceases to be an Employee but remains a Service Provider, any
Incentive Stock Option of the Optionee that remains unexercised shall cease to
qualify as an Incentive Stock Option and will be treated for tax purposes as a
Nonstatutory Stock Option on the date three (3) months and one (1) day following
such change of status.
(b) DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
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<PAGE>
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: NETCOM SYSTEMS, INC.
- ----------------------------------- --------------------------------------
Signature By
- ----------------------------------- --------------------------------------
Print Name Title
- -----------------------------------
Residence Address
- -----------------------------------
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<PAGE>
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
Netcom Systems, Inc.
20500 Nordhoff Street
Chatsworth, CA 91311
Attention: [Secretary]
1. EXERCISE OF OPTION. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Netcom Systems, Inc. (the "Company") under
and pursuant to the 1998 Stock Plan (the "Plan") and the Stock Option Agreement
dated ___________, 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $____________, as required by the Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. RIGHTS AS STOCKHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 14 of the
Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
<PAGE>
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: NETCOM SYSTEMS, INC.
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Its
ADDRESS: ADDRESS:
- --------------------------------- 20500 Nordhoff Street
- --------------------------------- Chatsworth, CA 91311
-------------------------------------
Date Received
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<PAGE>
Exhibit 10.4
NETCOM SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN (1)
1. PURPOSE. The purpose of the 1998 Employee Stock Purchase Plan is to
provide employees of the Company and its Designated Subsidiaries with an
opportunity to purchase Common Stock of the Company through accumulated payroll
deductions. It is the intention of the Company to have the Plan qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The provisions of the Plan, accordingly, shall be construed
so as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Netcom Systems, Inc., a Delaware
corporation, and any Designated Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings,
commissions, overtime and bonuses, but exclusive of any other compensation.
(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first day of each Offering
Period.
(i) "EXERCISE DATE" shall mean the last day of each Offering Period.
- ------------------------
(1) All share numbers represent post-split shares.
<PAGE>
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
THE WALL STREET JOURNAL or such other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board, or;
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "OFFERING PERIOD" shall mean a period of approximately six (6)
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after February 15 and terminating on
the last Trading Day in the period ending the following August 14, or commencing
on the first Trading Day on or after August 15 and terminating on the last
Trading Day in the period ending the following February 14; provided, however,
that the first Offering Period under the Plan shall commence with the first
Trading Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and ending on the last
Trading Day on or before February 14, 1999. The duration of Offering Periods may
be changed pursuant to Section 4 of this Plan.
(l) "PLAN" shall mean this 1998 Employee Stock Purchase Plan.
(m) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE>
(o) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after February 15 and August 15 of each year, or on such other date as the
Board shall determine, and continuing thereafter until terminated in accordance
with Section 20 hereof; provided, however, that the first Offering Period under
the Plan shall commence with the first Trading Day on or after the date on which
the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before February 14,
1999. The Board shall have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future offerings
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected
thereafter.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such
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<PAGE>
authorization is applicable, unless sooner terminated by the participant as
provided in Section 10 hereof.
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<PAGE>
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during an
Offering Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to
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<PAGE>
purchase during each Offering Period more than 5,000 shares (subject to any
adjustment pursuant to Section 19), and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The Option shall
expire on the last day of the Offering Period.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. TERMINATION OF EMPLOYMENT. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be
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<PAGE>
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 300,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year (beginning in 1999) equal to the lesser of (i)
2,000,000 shares (as adjusted pursuant to Section 19 below), (ii) 1% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board. If, on a given Exercise Date, the number of shares with respect to which
options are to be exercised exceeds the number of shares then available under
the Plan, the Company shall make a pro rata allocation of the shares remaining
available for purchase in as uniform a manner as shall be practicable and as it
shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the
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<PAGE>
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
-8-
<PAGE>
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least
ten (10) business days prior to the New Exercise Date, that the Exercise Date
for the participant's option has been changed to the New Exercise Date and that
the participant's option shall be exercised automatically on the New Exercise
Date, unless prior to such date the participant has withdrawn from the Offering
Period as provided in Section 10 hereof.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the
Company's proposed sale or merger. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
20. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any other applicable law, regulation or
stock exchange rule), the Company shall obtain stockholder approval in such a
manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a
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<PAGE>
participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, and establish such other limitations or procedures as the Board
(or its committee) determines in its sole discretion advisable which are
consistent with the Plan.
21. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. TERM OF PLAN. Subject to Section 19, the Plan shall become effective
upon the date of the Company's initial public offering of its equity securities
registered on Form S-1 with the Securities and Exchange Commission. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 20 hereof.
-10-
<PAGE>
EXHIBIT A
NETCOM SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
Original Application Enrollment Date:
- ----- ----------
Change in Payroll Deduction Rate
- -----
Change of Beneficiary(ies)
- -----
1. _____________________________________ hereby elects to participate in the
Netcom Systems, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (not to exceed 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE
COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF
SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX
<PAGE>
WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE
COMMON STOCK. The Company may, but will not be obligated to, withhold from
my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year holding period, I understand that I will
be treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
----------------------------------------------------------
(First) (Middle) (Last)
- ------------------------- --------------------------------------------------
Relationship
--------------------------------------------------
(Address)
Employee's Social
Security Number:
--------------------------------------------------
Employee's Address:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
-2-
<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
------------------ --------------------------------------------------
Signature of Employee
--------------------------------------------------
Spouse's Signature (If beneficiary other than
spouse)
-3-
<PAGE>
EXHIBIT B
NETCOM SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Netcom Systems,
Inc. 1998 Employee Stock Purchase Plan which began on ___________ 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
---------------------------------------------
---------------------------------------------
---------------------------------------------
Signature:
---------------------------------------------
Date:
---------------------------------------
<PAGE>
Exhibit 10.5
[EXECUTION COPY]
- --------------------------------------------------------------------------------
RECAPITALIZATION AGREEMENT
BY AND AMONG
NETCOM SYSTEMS, INC.,
THE PURCHASERS NAMED HEREIN
AND
THE SELLERS NAMED HEREIN
- --------------------------------------------------------------------------------
August 29, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Section 1. Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . 1
1A. Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1B. Investment Transaction . . . . . . . . . . . . . . . . . . . . . . . 2
1C. Repurchase Transaction . . . . . . . . . . . . . . . . . . . . . . . 2
1D. Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2. Conditions of the Purchasers' Obligations at the Closing . . . . . 4
2A. Representations and Warranties; Covenants. . . . . . . . . . . . . . 4
2B. Amendment of Articles of Incorporation . . . . . . . . . . . . . . . 4
2C. Amendment of Bylaws. . . . . . . . . . . . . . . . . . . . . . . . . 4
2D. Shareholders Agreement . . . . . . . . . . . . . . . . . . . . . . . 4
2E. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . 4
2F. [Intentionally Omitted.] . . . . . . . . . . . . . . . . . . . . . . 4
2G. Escrow Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2H. Stock Purchase Agreement.. . . . . . . . . . . . . . . . . . . . . . 5
2I. Opinion of the Company's and the Sellers' Counsel. . . . . . . . . . 5
2J. Senior Debt Financing. . . . . . . . . . . . . . . . . . . . . . . . 5
2K. Repurchase Transaction . . . . . . . . . . . . . . . . . . . . . . . 5
2L. Release of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2M. Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2N. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2O. Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2P. Third Party Consents and Approvals . . . . . . . . . . . . . . . . . 6
2Q. Governmental Consents and Approvals. . . . . . . . . . . . . . . . . 6
2R. Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . 6
2S. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2T. Real Estate Matters. . . . . . . . . . . . . . . . . . . . . . . . . 6
2U. Solvency Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2V. Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2W. Closing Documents. . . . . . . . . . . . . . . . . . . . . . . . . . 7
2X. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3. Conditions of the Obligations of the Company and the
Sellers at the Closing . . . . . . . . . . . . . . . . . . . . . . 8
3A. Representations and Warranties; Covenants. . . . . . . . . . . . . . 8
3B. Amendment of Articles of Incorporation . . . . . . . . . . . . . . . 8
3C. Shareholders Agreement . . . . . . . . . . . . . . . . . . . . . . . 8
3D. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . 8
3E. Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3F. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3G. Governmental Consents and Approvals. . . . . . . . . . . . . . . . . 8
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
3H. Investment Transaction . . . . . . . . . . . . . . . . . . . . . . . 9
3I. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3J. Waiver.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4. Pre-Closing Covenants and Agreements . . . . . . . . . . . . . . . 9
4A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4B. Maintenance of Business. . . . . . . . . . . . . . . . . . . . . . . 9
4C. Third Party Notices and Consents . . . . . . . . . . . . . . . . . . 9
4D. Governmental Notices and Consents. . . . . . . . . . . . . . . . . . 9
4E. Operation of Business. . . . . . . . . . . . . . . . . . . . . . . .10
4F. Full Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4G. Compliance with Agreements and Laws. . . . . . . . . . . . . . . . .11
4H. Payment of Obligations.. . . . . . . . . . . . . . . . . . . . . . .11
4I. Notice of Material Developments. . . . . . . . . . . . . . . . . . .11
4J. Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4K. Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
4L. Actions with Respect to Repurchased Shares . . . . . . . . . . . . .12
4M. Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 5. Representations and Warranties of the Company and the Sellers. . .12
5A. Organization, Corporate Power and Licenses.. . . . . . . . . . . . .12
5B. Capital Stock and Related Matters. . . . . . . . . . . . . . . . . .13
5C. Subsidiaries; Investments. . . . . . . . . . . . . . . . . . . . . .14
5D. Authorization; No Breach. . . . . . . . . . . . . . . . . . . . . .14
5E. Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . .15
5F. Absence of Undisclosed Liabilities.. . . . . . . . . . . . . . . . .15
5G. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . .15
5H. Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
5I. Product Warranty; Product Certifications . . . . . . . . . . . . . .16
5J. Product Liability. . . . . . . . . . . . . . . . . . . . . . . . . .17
5K. Product Recall, etc. . . . . . . . . . . . . . . . . . . . . . . . .17
5L. No Material Adverse Effect.. . . . . . . . . . . . . . . . . . . . .17
5M. Absence of Certain Developments. . . . . . . . . . . . . . . . . . .17
5N. Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5O. Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5P. Contracts and Commitments. . . . . . . . . . . . . . . . . . . . . .21
5Q. International Trade Laws and Regulations.. . . . . . . . . . . . . .24
5R. Intellectual Property Rights.. . . . . . . . . . . . . . . . . . . .25
5S. Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . .26
5T. Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
5U. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5V. Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5W. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
5X. Compliance with Laws; Permits; Certain Operations. . . . . . . . . .29
5Y. Environmental and Safety Matters.. . . . . . . . . . . . . . . . . .30
5Z. Affiliated Transactions. . . . . . . . . . . . . . . . . . . . . . .31
5AA. Names and Locations. . . . . . . . . . . . . . . . . . . . . . . . .31
5BB. Suppliers and Customers. . . . . . . . . . . . . . . . . . . . . . .31
5CC. Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
5DD. Regulatory Status. . . . . . . . . . . . . . . . . . . . . . . . . .32
5EE. Margin Securities. . . . . . . . . . . . . . . . . . . . . . . . . .32
5FF. Small Business Matters.. . . . . . . . . . . . . . . . . . . . . . .32
5GG. Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Section 6. Representations and Warranties of the Sellers. . . . . . . . . . .32
6A. Capacity; Power and Authority. . . . . . . . . . . . . . . . . . . .32
6B. Authorization; No Breach. . . . . . . . . . . . . . . . . . . . . .33
6C. Title to Shares, etc.. . . . . . . . . . . . . . . . . . . . . . . .33
6D. Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6E. Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . .33
6F. Company Transactions.. . . . . . . . . . . . . . . . . . . . . . . .33
Section 7. Representations and Warranties of the Purchasers . . . . . . . . .34
7A. Organization, Power and Authority. . . . . . . . . . . . . . . . . .34
7B. Authorization; No Breach. . . . . . . . . . . . . . . . . . . . . .34
7C. Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
7D. Investment Representations.. . . . . . . . . . . . . . . . . . . . .34
Section 8. Indemnification and Other Agreements . . . . . . . . . . . . . . .35
8A. Survival of Representations and Warranties . . . . . . . . . . . . .35
8B. General Indemnification. . . . . . . . . . . . . . . . . . . . . . .36
8C. Press Release and Announcements. . . . . . . . . . . . . . . . . . .40
8D. Non-Compete; Non-Solicitation. . . . . . . . . . . . . . . . . . . .40
8E. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . .43
8F. Intellectual Property Rights Protection. . . . . . . . . . . . . . .44
8G. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . .44
8H. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . .45
8I. Option Re-Pricing. . . . . . . . . . . . . . . . . . . . . . . . . .45
8J. Option Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Section 9. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . .45
-iii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
Section 10. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . .53
10A. Conditions of Termination. . . . . . . . . . . . . . . . . . . . . .53
10B. Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . .54
Section 11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . .54
11A. Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . .54
11B. Remedies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
11C. Transfer of Restricted Securities. . . . . . . . . . . . . . . . . .55
11D. Consent to Amendments. . . . . . . . . . . . . . . . . . . . . . . .56
11E. Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . .56
11F. Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . .57
11G. Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . .57
11H. Descriptive Headings; Interpretation.. . . . . . . . . . . . . . . .57
11I. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .57
11J. No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . .57
11K. Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
11L. Cooperation on Tax Matters . . . . . . . . . . . . . . . . . . . . .58
11M. Schedules and Exhibits . . . . . . . . . . . . . . . . . . . . . . .58
11N. Treatment of the Preferred Stock . . . . . . . . . . . . . . . . . .58
11O. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . .59
11P. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
11Q. No Strict Construction.. . . . . . . . . . . . . . . . . . . . . . .62
EXHIBITS AND SCHEDULES
Exhibit A - Amended and Restated Articles of Incorporation
Exhibit B - Escrow Agreement
Exhibit C - Amended and Restated Bylaws
Exhibit D - Shareholders Agreement
Exhibit E - Registration Agreement
Exhibit F - Stock Purchase Agreement
Exhibit G - Opinion of Counsel for the Company and the Sellers
DISCLOSURE SCHEDULES:
Schedule of Purchasers
Schedule of Sellers
-iv-
<PAGE>
TABLE OF CONTENTS
(continued)
Contracts Schedule
Capitalization Schedule
Investments and Subsidiaries Schedule
Restrictions Schedule
Financial Statements Schedule
Liabilities Schedule
Accounts Receivable Schedule
Inventories Schedule
Product Warranty Schedule
Product Liability Schedule
Product Recall Schedule
Developments Schedule
Assets Schedule
Taxes Schedule
Intellectual Property Schedule
Employees Schedule
Employee Benefits Schedule
International Trade Compliance Schedule
Litigation Schedule
Insurance Schedule
Employees Schedule
Compliance Schedule
Permits Schedule
Environmental Schedule
Affiliated Transactions Schedule
Names and Locations Schedule
Suppliers and Customers Schedule
Indemnification Schedule
</TABLE>
-v-
<PAGE>
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "AGREEMENT") is made and
entered into as of August 29, 1997, by and among the Persons listed on the
SCHEDULE OF PURCHASERS attached hereto (each, a "PURCHASER" and collectively,
the "PURCHASERS"), Netcom Systems, Inc., a California corporation (the
"COMPANY"), and the Persons listed on the SCHEDULE OF SELLERS attached hereto
(each, a "SELLER" and collectively, the "SELLERS"). The Purchasers, the Company
and the Sellers are sometimes collectively referred to herein as the "PARTIES"
and individually as a "PARTY." Capitalized terms used herein and not otherwise
defined herein have the meanings given to such terms in Section 9 below.
WHEREAS, the Company desires to reconstitute its capital structure
through the sale of certain newly issued equity securities, the incurrence of
certain senior debt obligations and the repurchase of certain of its outstanding
equity securities, in each case on the terms and subject to the conditions set
forth herein;
WHEREAS, the Purchasers desire to purchase certain newly issued
equity securities of the Company on the terms and subject to the conditions set
forth herein; and
WHEREAS, the Sellers desire the Company to repurchase certain equity
securities of the Company held by the Sellers on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants, agreements
and understandings herein contained, the Parties hereby agree as follows:
Section 1. RECAPITALIZATION.
1A. AUTHORIZATION.
(i) The Company shall, and the Sellers shall cause the Company
to, authorize the filing under the laws of the State of California of amended
and restated articles of incorporation of the Company in the form of EXHIBIT A
attached hereto (as so amended and restated, the "ARTICLES OF INCORPORATION").
The Articles of Incorporation shall be duly filed by the Company on or prior to
the Closing Date and shall be in full force and effect under the laws of the
State of California as of the Closing.
(ii) The Company shall, and the Sellers shall cause the Company
to, authorize the purchase by the Company of all of the outstanding capital
stock of Netcom Systems Europe, a limited liability company organized under the
laws of the Republic of France ("NETCOM EUROPE"), from Henri Hamon and Elie
Hamon for an aggregate purchase price of not more than $3,000,000.
<PAGE>
(iii) The Company shall, and the Sellers shall cause the Company
to, authorize the issuance and sale to the Purchasers of an aggregate of
482,684 shares of its Class A Redeemable Preferred Stock, no par value per share
(the "REDEEMABLE PREFERRED STOCK"), having the rights and preferences set forth
in EXHIBIT A attached hereto.
(iv) The Company shall, and the Sellers shall cause the Company
to, authorize the issuance and sale to the Purchasers of an aggregate of
22,785,424 shares of its Class B Convertible Preferred Stock, no par value per
share (the "CONVERTIBLE PREFERRED STOCK" and, together with the Redeemable
Preferred Stock, the "PREFERRED STOCK"), having the rights and preferences set
forth in EXHIBIT A attached hereto. The Convertible Preferred Stock shall be
initially convertible into 22,785,424 shares of the Company's Common Stock, no
par value per share (the "COMMON STOCK"), as set forth in EXHIBIT A attached
hereto.
(v) The Company shall authorize the repurchase from the Sellers
of an aggregate of 9,133,332 shares of the Company's Common Stock (the
"REPURCHASED SHARES") for an aggregate purchase price equal to $139,666,913 (the
"REPURCHASE PRICE"). The Repurchase Price shall be paid in the manner provided
in Paragraph 1D below. The number of Repurchased Shares to be repurchased from
each Seller is set forth on the SCHEDULE OF SELLERS attached hereto.
(vi) The Company shall authorize the repurchase from the Other
Sellers of an aggregate of 447,645 shares of the Company's Common Stock pursuant
to the Stock Purchase Agreement for an aggregate purchase price equal to
$6,845,387.
1B. INVESTMENT TRANSACTION. On the basis of the representations,
warranties, covenants and agreements set forth herein and subject to the
satisfaction or waiver of the conditions set forth in Section 2 below, each of
the Purchasers and the Company agrees to and shall consummate, and the Sellers
shall cause the Company to consummate, at the Closing, the following transaction
(the "INVESTMENT TRANSACTION"): the Company shall sell to each Purchaser, and
each Purchaser shall purchase from the Company, the number of shares of
Redeemable Preferred Stock and Convertible Preferred Stock set forth opposite
such Purchaser's name on the SCHEDULE OF PURCHASERS attached hereto, upon
payment of immediately available funds in the amount set forth opposite such
Purchaser's name on the SCHEDULE OF PURCHASERS attached hereto, payable in the
manner set forth in Paragraph 1D(i) below. The aggregate purchase price for
such shares of Redeemable Preferred Stock shall be equal to $48,268,400 (the
"REDEEMABLE PREFERRED STOCK PURCHASE PRICE") and the aggregate purchase price
for such shares of Convertible Preferred Stock shall be equal to $48,268,400
(the "CONVERTIBLE PREFERRED STOCK PURCHASE PRICE" and, together with the
Redeemable Preferred Stock Purchase Price, the "PURCHASE PRICE").
1C. REPURCHASE TRANSACTION. On the basis of the representations,
warranties, covenants and agreements set forth herein and subject to the
satisfaction or waiver of the conditions set forth in Section 3 below and the
consummation of the Investment Transaction and the Senior Debt Transaction, the
Company and each of the Sellers agrees to and shall consummate, at the Closing,
the following transaction (the "REPURCHASE TRANSACTION"): the Company shall
repurchase
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from each Seller the number of Repurchased Shares set forth opposite such
Seller's name on the SCHEDULE OF SELLERS attached hereto and shall pay to each
such Seller (in the manner set forth in Paragraphs 1D(iv) and 1D(v) below) the
portion of the Repurchase Price set forth opposite such Seller's name on the
SCHEDULE OF SELLERS attached hereto. The Company shall report the Repurchase
Transaction as a redemption within the meaning of Section 302 of the Code in
which Section 302(b)(2) applies. All of the consideration paid by the Company
in the Repurchase Transaction shall be separately allocable to the Repurchased
Shares.
1D. CLOSING. The closing of each of the Investment Transaction
and the Repurchase Transaction (the "CLOSING") shall take place at the offices
of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California
94304, or at such other place as may be mutually agreeable to each of the
Parties, at 10:00 a.m., local time, on August 29, 1997, or, if any of the
conditions to Closing set forth in Section 2 and Section 3 below have not been
satisfied or waived by the Party entitled to the benefit thereof on or prior to
such date, on the second business day following satisfaction or waiver of such
conditions (the "CLOSING DATE"). The Investment Transaction and the Repurchase
Transaction shall each constitute a separate transaction hereunder. At the
Closing, the Parties shall consummate the transactions contemplated by this
Agreement in the following order:
(i) Each Purchaser shall deliver to the Company such
Purchaser's portion of the Purchase Price as set forth opposite such Purchaser's
name on the SCHEDULE OF PURCHASERS attached hereto, by wire transfer of
immediately available funds to an account designated by the Company.
(ii) The Company shall deliver to each Purchaser stock
certificates evidencing the shares of Redeemable Preferred Stock and Convertible
Preferred Stock to be issued to such Purchaser as set forth opposite such
Purchaser's name on the SCHEDULE OF PURCHASERS attached hereto, registered in
such Purchaser's name, upon payment of such Purchaser's portion of the Purchase
Price in the manner described in clause (i) above.
(iii) The Company shall consummate the Senior Debt
Transaction.
(iv) The Company shall pay to each Seller by wire transfer
of immediately available funds to an account designated by such Seller an amount
equal to the "Closing Cash Amount" set forth opposite such Seller's name on the
SCHEDULE OF SELLERS attached hereto.
(v) The Company shall deliver $7,111,765 of the Repurchase
Price to the Escrow Agent for deposit into an escrow account (the "ESCROW
ACCOUNT") established pursuant to the terms of an escrow agreement in the form
of EXHIBIT B attached hereto (the "ESCROW AGREEMENT") among the Company, the
Seller Representative, the Purchaser Representatives (as defined in the Escrow
Agreement) and the Escrow Agent. The Escrow Amount shall be available to
satisfy amounts owing to the Company Parties pursuant to Paragraph 8B below.
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(vi) Each Seller shall deliver to the Company the stock
certificate or certificates evidencing the Repurchased Shares held by such
Seller upon payment of the Repurchase Price in the manner described in the first
sentence of clause (iv) and clause (v) above, duly endorsed in blank or
accompanied by duly executed stock powers. The Company shall deliver to each
such Seller a new stock certificate or certificates representing any shares of
Common Stock owned by such Seller which were represented by the certificates
delivered pursuant to this clause (vi) but which were not repurchased by the
Company in connection with the Repurchase Transaction.
Section 2. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT THE
CLOSING. The obligation of the Purchasers to purchase and pay for the Preferred
Stock at the Closing is subject to the satisfaction as of the Closing of the
following conditions:
2A. REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties contained in Sections 5 and 6 hereof shall be
true and correct in all material respects at and as of the date hereof and at
and as of the Closing as though then made and as though the Closing Date was
substituted for the date of this Agreement throughout such representations and
warranties, except to the extent of any changes expressly contemplated by this
Agreement and except for any representations and warranties that speak only as
of a certain date (which representations and warranties shall be true and
correct in all material respects as of such date), and the Company and the
Sellers shall have performed in all material respects all of the covenants
required to be performed by the Company and the Sellers hereunder prior to the
Closing.
2B. AMENDMENT OF ARTICLES OF INCORPORATION. The Articles of
Incorporation shall have been amended and restated in the form of EXHIBIT A
attached hereto, shall be in full force and effect under the laws of the State
of California as of the Closing as so amended and restated and shall not have
been further amended or modified.
2C. AMENDMENT OF BYLAWS. The Company's Bylaws (the "BYLAWS")
shall have been amended and restated in the form of EXHIBIT C attached hereto,
shall be in full force and effect as of the Closing as so amended and restated
and shall not have been further amended or modified.
2D. SHAREHOLDERS AGREEMENT. The Company and the Sellers shall
have entered into a shareholders agreement in the form of EXHIBIT D attached
hereto (the "SHAREHOLDERS AGREEMENT"), and the Shareholders Agreement shall be
in full force and effect as of the Closing and shall not have been amended or
modified.
2E. REGISTRATION AGREEMENT. The Company and the Sellers shall
have entered into a registration agreement in the form of EXHIBIT E attached
hereto (the "REGISTRATION AGREEMENT"), and the Registration Agreement shall be
in full force and effect as of the Closing and shall not have been amended or
modified.
2F. [Intentionally Omitted.]
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2G. ESCROW AGREEMENT. The Company, the Seller Representative and
the Escrow Agent shall have entered into the Escrow Agreement, and the Escrow
Agreement shall be in full force and effect as of the Closing and shall not have
been amended or modified.
2H. STOCK PURCHASE AGREEMENT. The Company and all of the other
parties thereto (the "OTHER SELLERS") shall have entered into a Stock Purchase
Agreement in the form of EXHIBIT F attached hereto (the "STOCK PURCHASE
AGREEMENT"), and the Stock Purchase Agreement shall be in full force and effect
as of the Closing and shall not have been amended or modified. The transactions
contemplated by the Stock Purchase Agreement shall have been consummated on the
First Repurchase Date and the Stock Purchase Agreement shall have been
consummated simultaneously with the Closing hereunder in accordance with the
terms thereof.
2I. OPINION OF THE COMPANY'S AND THE SELLERS' COUNSEL. The
Purchasers shall have received from Wilson Sonsini Goodrich & Rosati, counsel
for the Company and the Sellers, an opinion in the form of EXHIBIT G attached
hereto, which shall be addressed to the Purchasers and dated as of the Closing
Date.
2J. SENIOR DEBT FINANCING. The Company shall have obtained
senior debt financing in an amount not less than $60,000,000 (consisting of a
term loan or loans in the aggregate amount of $50,000,000 and a revolving credit
facility in the amount of not less than $10,000,000) on terms satisfactory to
the Purchasers.
2K. REPURCHASE TRANSACTION. The Company and the Sellers shall
have simultaneously consummated the Repurchase Transaction in the manner set
forth in Paragraph 1D above.
2L. RELEASE OF LIENS. The Company shall have obtained releases
of all Liens (other than any Permitted Encumbrances) encumbering the assets and
properties of the Company and its Subsidiaries.
2M. AUDIT. The Purchasers shall have received and shall be
satisfied with the audited balance sheet of the Company as of July 31, 1997, and
the related statements of income and cash flows (or the equivalent) for the
fiscal year then ended (together with the opinion from Arthur Andersen LLP to be
delivered in connection therewith), and the matters set forth in the management
letters delivered with respect thereto.
2N. LITIGATION. No suit, action or other proceeding shall be
pending before any court or governmental or regulatory official, body or
authority in which it is sought to restrain or prohibit the transactions
contemplated hereby or that could reasonably be expected to have a Material
Adverse Effect (other than any such suit, action or proceeding brought by any of
the Parties against any of the other Parties), and no injunction, judgment,
order, decree or ruling with respect thereto shall be in effect.
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2O. FILINGS. The Company shall have made all filings required to
be made by the Company and shall have obtained all permits and other
authorizations required to be obtained by the Company under all applicable laws
(including federal and state securities laws) to consummate the transactions
contemplated by this Agreement in compliance with such laws (other than any
securities law filings required to be made after the Closing, which filings
shall be made promptly after the Closing).
2P. THIRD PARTY CONSENTS AND APPROVALS. The Company shall have
received or obtained all shareholder and material third party consents and
approvals that are necessary for the consummation of the transactions
contemplated hereby or that are required in order to prevent a breach of or
default under, a termination or modification of, or acceleration of the terms
of, any contract, agreement or document required to be listed on the attached
CONTRACTS SCHEDULE (collectively, the "THIRD PARTY APPROVALS"), in each case on
terms and conditions reasonably satisfactory to the Purchasers.
2Q. GOVERNMENTAL CONSENTS AND APPROVALS. The Parties shall have
received or obtained all governmental and regulatory consents and approvals that
are necessary for the consummation of the transactions contemplated hereby, in
each case on terms and conditions satisfactory to the Purchasers, and the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HART-SCOTT-RODINO ACT"), shall have expired or been terminated
(collectively, the "GOVERNMENTAL APPROVALS").
2R. MATERIAL ADVERSE CHANGE. Since July 31, 1997, there shall
have been no material adverse change or material adverse development in the
business, financial condition, operating results, assets, operations, business
prospects, cash flow, net worth or customer, supplier or employee relations of
the Company.
2S. EXPENSES. At the Closing, the Company shall have paid or
reimbursed the Purchasers for their fees and expenses as provided in Paragraph
11A below.
2T. REAL ESTATE MATTERS. The Purchasers shall have received a
letter of consent and estoppel certificate from each lessor of the Leased Real
Property in form and substance reasonably satisfactory to the Purchasers and
their special counsel and such other endorsements and affidavits and related
items as the Bank may request.
2U. SOLVENCY OPINION. The Purchasers shall have received an
opinion from Houlihan Lokey Howard & Zukin to the effect that, immediately
following the Closing and after giving effect to the transactions contemplated
hereby, (i) the fair market value and present fair saleable value of the
Company's assets exceed the Company's stated liabilities and identified
contingent liabilities, (ii) the Company should be able to pay its debts as they
become absolute and mature, and (iii) the capital remaining in the Company after
the consummation of the transactions contemplated by this Agreement will not be
unreasonably small for the business in which the Company is engaged and as
proposed to be conducted following the Closing.
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2V. PROCEEDINGS. All corporate proceedings taken or required to
be taken by the Company and the Sellers and the Other Sellers at or prior to the
Closing in connection with the transactions contemplated hereby shall have been
taken and all documents incident thereto shall be reasonably satisfactory in
form and substance to the Purchasers and their special counsel.
2W. CLOSING DOCUMENTS. At the Closing, the Company shall have
delivered to the Purchasers all of the following documents (except that the
documents referred to in clause (v) below shall only be delivered to the SBIC
Purchaser):
(i) a certificate of an officer of the Company, dated the Closing
Date, stating that the conditions specified in Section 1 and Paragraphs 2A
through 2V (other than Paragraphs 2D, 2E, 2G, 2I, 2J, 2S, 2T and 2V),
inclusive, have been fully satisfied;
(ii) certified copies of (a) the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement and each of the other agreements contemplated
hereby, the adoption and filing of the Articles of Incorporation referred
to in Paragraph 2B, the amendment and restatement of the Bylaws referred to
in Paragraph 2C, the Investment Transaction, the Repurchase Transaction,
the Senior Debt Transaction and the other transactions contemplated hereby
and (b) the resolutions duly adopted by the Company's shareholders adopting
the amendment and restatement of the Articles of Incorporation referred to
in Paragraph 2B the amendment and restatement of the Bylaws referred to in
Paragraph 2C and approving the amendment and restatement of the Stock
Option Plans;
(iii) certified copies of the Articles of Incorporation and the
Bylaws, each as in effect at the Closing;
(iv) copies of all Third Party Approvals and Governmental
Approvals (including all blue sky law filings and waivers of all preemptive
rights and rights of first refusal);
(v) copies of (a) duly completed and executed SBA Forms 480, 652
and 1031 (Parts A and B), (b) a business plan showing the Company's
financial projections (including balance sheets and income and cash flow
statements) for a five-year period, (c) a written certification from the
Company regarding its intended use of the proceeds from the Financing and
(d) a list, after giving effect to the transactions contemplated hereby, of
(1) the name of each of the Company's directors, (2) the name and title of
each of the Company's officers and (3) the name of each of the Company's
shareholders setting forth the number and class of shares held;
(vi) good standing certificates of the Company from its
jurisdiction of incorporation and each jurisdiction in which the Company is
qualified to do business as a foreign corporation, in each case dated as of
a recent date prior to the Closing Date; and
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(vii) such other documents relating to the transactions
contemplated by this Agreement as the Purchasers or their special counsel
may reasonably request.
2X. WAIVER. Any condition specified in this Section 2 may be
waived if consented to in writing by the Requisite Purchasers.
Section 3. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE
SELLERS AT THE CLOSING. The obligation of the Company and the Sellers to
consummate the transactions contemplated hereby is subject to the satisfaction
as of the Closing of the following conditions:
3A. REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties contained in Section 7 hereof shall be true and
correct in all material respects at and as of the date hereof and at and as of
the Closing as though then made and as though the Closing Date was substituted
for the date of this Agreement throughout such representations and warranties,
except to the extent of any changes expressly contemplated by this Agreement and
except for any representations and warranties that speak only as of a certain
date (which representations and warranties shall be true and correct in all
material respects as of such date), and the Purchasers shall have performed in
all material respects all of the covenants required to be performed by the
Purchasers hereunder prior to the Closing.
3B. AMENDMENT OF ARTICLES OF INCORPORATION. The Articles of
Incorporation shall be in full force and effect under the laws of the State of
California as of the Closing.
3C. SHAREHOLDERS AGREEMENT. The Purchasers shall have entered
into the Shareholders Agreement, and the Shareholders Agreement shall be in full
force and effect as of the Closing and shall not have been amended or modified.
3D. REGISTRATION AGREEMENT. The Purchasers shall have entered
into the Registration Agreement, and the Registration Agreement shall be in full
force and effect as of the Closing and shall not have been amended or modified.
3E. ESCROW AGREEMENT. The Purchaser Representatives and the
Escrow Agent shall have entered into the Escrow Agreement, and the Escrow
Agreement shall be in full force and effect as of the Closing and shall not have
been amended or modified.
3F. LITIGATION. No suit, action or other proceeding shall be
pending before any court or governmental or regulatory official, body or
authority in which it is sought to restrain or prohibit the transactions
contemplated hereby (other than any such suit, action or proceeding brought by
any of the Parties against any of the other Parties), and no injunction,
judgment, order, decree or ruling with respect thereto shall be in effect.
3G. GOVERNMENTAL CONSENTS AND APPROVALS. The Parties shall have
received or obtained all Governmental Approvals that are necessary for the
consummation of the transactions
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contemplated hereby, and the waiting period under the Hart-Scott-Rodino Act
shall have expired or been terminated.
3H. INVESTMENT TRANSACTION. The Purchasers shall have
immediately prior thereto purchased the Preferred Stock and the Company shall
have received payment therefor in full, in the manner set forth in Paragraph 1D
above.
3I. EXPENSES. At the Closing, the Company shall have paid or
reimbursed the Sellers for their fees and expenses as provided in Paragraph 11A
below.
3J. WAIVER. Any condition specified in this Section 3 may be
waived if consented to in writing by the Company and the Seller Representative.
Section 4. PRE-CLOSING COVENANTS AND AGREEMENTS. Each of the
Parties agrees as follows with respect to the period between the date of this
Agreement and the Closing:
4A. GENERAL. Each of the Parties shall use reasonable best
efforts to take all action and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the conditions set forth
in Sections 2 and 3 above). On the date hereof, the Company shall (and shall
cause the Other Sellers to) execute and deliver the Stock Purchase Agreement.
At the Closing, the applicable Parties shall execute and deliver the Escrow
Agreement, the Shareholders Agreement, the Registration Agreement and the other
agreements and instruments contemplated hereby to be executed and delivered at
the Closing.
4B. MAINTENANCE OF BUSINESS. The Company shall, and the Sellers
shall cause the Company to, (i) maintain its assets in good operating condition
and repair (normal wear and tear excepted), (ii) maintain insurance reasonably
comparable to that in effect on the date of the Latest Balance Sheet,
(iii) maintain inventory, supplies and spare parts at customary operating levels
consistent with current practices, and replace in accordance with past practice
any inoperable, worn out or obsolete assets with modern assets of comparable
quality, (iv) maintain its books, accounts and records in accordance with past
custom and practice as used in the preparation of the Latest Balance Sheet and
the financial statements described in Paragraph 5E below, and (v) maintain in
full force and effect the existence of all Intellectual Property Rights.
4C. THIRD PARTY NOTICES AND CONSENTS. The Company shall, and the
Sellers shall cause the Company to, use reasonable best efforts to give required
notices to third parties and obtain any required third party consents in
connection with the matters contemplated by this Agreement.
4D. GOVERNMENTAL NOTICES AND CONSENTS. Each of the Parties shall
give any notices to, make any filings with, and use reasonable best efforts to
obtain, any authorizations, consents and approvals of governments and
governmental agencies in connection with the matters contemplated by this
Agreement. Without limiting the generality of the foregoing, each of the
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Parties shall use reasonable best efforts to obtain an early termination of the
waiting period under the Hart-Scott-Rodino Act, and shall make any further
filings pursuant thereto that may be necessary, proper or advisable in
connection therewith, and the Company shall pay all filing and other fees
related to any filings under the Hart-Scott-Rodino Act.
4E. OPERATION OF BUSINESS. The Company shall, and the Sellers
shall cause the Company to, operate its business only in the usual and ordinary
course of business consistent with past practice and use reasonable best efforts
to preserve the goodwill and organization of its business and the relationships
with its customers, suppliers, employees and other Persons having business
relations with the Company. Without limiting the generality of the foregoing,
prior to the Closing, the Company shall not:
(i) take or omit to take any action that would require disclosure
under Paragraph 5M below or that would otherwise result in a material
breach of any of the representations, warranties or covenants made by the
Company or the Sellers in this Agreement;
(ii) take any action or omit to take any action which act or
omission would reasonably be anticipated to have a Material Adverse Effect;
(iii) (a) enter into any contract out of the ordinary course of
business or restricting in any material respect the conduct of its
business, (b) make any loans or Investments (other than advances to the
Company's employees in the ordinary course of business consistent with past
custom and practice), (c) increase any officer's or employee's
compensation, incentive arrangements or other benefits, except for
increases or bonuses made in the ordinary course of business consistent
with past custom and practice (it being understood, however, that no
bonuses or other extraordinary compensation may be paid (or authorized) to
the Seller Representative prior to the Closing), (d) redeem, purchase or
otherwise acquire directly or indirectly any of its issued and outstanding
capital stock, or any outstanding rights or securities exercisable or
exchangeable for or convertible into its capital stock, or make any
distribution or dividend to any of its shareholders or other Persons,
(e) amend its articles of incorporation or bylaws or issue or agree to
issue any capital stock or any rights to acquire, or securities convertible
into or exchangeable for, any of its capital stock, (f) directly or
indirectly engage in any transaction, arrangement or contract with any
officer, director, shareholder or other insider or Affiliate of the Company
which is not in the ordinary course of business consistent with past
practice and at arm's length, (g) execute any guaranty, issue any debt or
borrow any money, or (h) buy or sell any assets out of the ordinary course
of business consistent with past practice; or
(iv) enter into any transaction, arrangement or contract except on
an arm's-length basis in the ordinary course of business consistent with
past custom and practice.
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Notwithstanding the foregoing, nothing in this Paragraph 4E shall
prohibit the Company from taking any action or omitting to take any action as
required or as expressly contemplated by this Agreement.
4F. FULL ACCESS. The Company shall, and the Sellers shall cause
the Company to, afford, and cause its officers, directors, employees, attorneys,
accountants and other agents to afford, to the Purchasers and their accounting,
legal and other representatives and potential lenders, as well as their
respective officers, employees, affiliates and other agents, full and complete
access at all reasonable times and during normal business hours to the Company's
personnel and to business, financial, legal, tax, compensation and other data
and information concerning the Company's affairs and operations.
4G. COMPLIANCE WITH AGREEMENTS AND LAWS. The Company shall, and
the Sellers shall cause the Company to, (i) comply with all material obligations
pursuant to any contract or agreement, whether oral or written, express or
implied and (ii) comply with all material applicable laws.
4H. PAYMENT OF OBLIGATIONS. The Company shall, and the Sellers
shall cause the Company to, pay and discharge when payable all Taxes,
assessments and governmental charges imposed upon its properties or upon the
income or profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon unless contested in good faith by appropriate
proceedings) and pay and discharge all claims for labor, materials or supplies
in the ordinary course of business consistent with past practice.
4I. NOTICE OF MATERIAL DEVELOPMENTS. Each Party shall give
prompt written notice to the other Parties of (i) any known material variances
in any of its representations or warranties contained in Sections 5, 6 or 7
below, as the case may be, (ii) any known breach of any covenant hereunder by
such Party and (iii) any other material development affecting the ability of
such Party to consummate the transactions contemplated by this Agreement.
4J. EXCLUSIVITY. None of the Company, the Sellers or any of
their respective Affiliates, representatives, officers, employees, directors, or
agents shall, directly or indirectly, (i) submit, solicit, initiate, encourage
or discuss any proposal or offer from any Person (other than the Purchasers in
connection with the transactions contemplated hereby) or enter into any
agreement or accept any offer relating to or consummate any (a) reorganization,
liquidation, dissolution or recapitalization of the Company, (b) merger or
consolidation involving the Company, (c) purchase or sale of any assets or
capital stock (or any rights to acquire, or securities convertible into or
exchangeable for, any such capital stock) of the Company (other than a purchase
or sale of inventory in the ordinary course of business consistent with past
custom and practice or a purchase of stock as contemplated by this Agreement),
or (d) similar transaction or business combination involving the Company or its
assets (each of the foregoing transactions described in clauses (a) through (d),
a "COMPANY TRANSACTION") or (ii) furnish any information with respect to, assist
or participate in or facilitate in any other manner any effort or attempt by any
Person to do or seek to do any of the
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foregoing. The Company and each of the Sellers agree to notify the Purchasers
immediately if any Person makes any proposal, offer, inquiry or contact with
respect to a Company Transaction. In the event that any of the Company or the
Sellers breaches the provisions of this Paragraph 4J and the transactions
contemplated hereby are not consummated for any reason, the Company shall
promptly reimburse the Purchasers and their Affiliates for all out-of-pocket
fees and expenses incurred before or after the date of this Agreement by the
Purchasers and their Affiliates related to the transactions contemplated hereby,
including fees and expenses of legal counsel, accountants and other consultants
and advisors retained by the Purchasers in connection with the transactions
contemplated hereby. The foregoing provisions are in addition to, and not in
derogation of, any statutory or other remedy that the Purchasers may have for a
breach of this Paragraph 4J.
4K. TAX MATTERS. Without the prior written consent of the
Purchasers, the Company shall not make or change any election, change an annual
accounting period, adopt or change any accounting method, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim or assessment
relating to the Company, surrender any right to claim a refund of Taxes, consent
to any extension or waiver of the limitation period applicable to any Tax claim
or assessment relating to the Company, or take any other similar action, or omit
to take any action relating to the filing of any Tax Return or the payment of
any Tax, if such election, adoption, change, amendment, agreement, settlement,
surrender, consent or other action or omission would have the effect of
materially increasing the present or future Tax liability or decreasing any
present or future Tax asset of the Company or the Purchasers.
4L. ACTIONS WITH RESPECT TO REPURCHASED SHARES. Each Seller
agrees that such Seller shall not sell, redeem, convert, assign, exchange,
transfer, pledge or otherwise dispose of or encumber any interest in such
Seller's Repurchased Shares (or any other shares of Common Stock) or any stock
options, except as expressly contemplated by this Agreement.
4M. EMPLOYEES. The Company shall give the Purchasers prompt
written notice if any executive or key employee of the Company or any group of
employees of the Company terminates employment with the Company or if the
Company or any of the Sellers has knowledge that any executive or key employee
of the Company or group of employees of the Company has any plans to terminate
employment with the Company.
Section 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SELLERS. As a material inducement to the Purchasers to enter into this Agreement
and purchase the Preferred Stock hereunder, the Company and each of the Sellers
hereby represent and warrant to the Purchasers as follows:
5A. ORGANIZATION, CORPORATE POWER AND LICENSES. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California and is qualified to do business in every jurisdiction
in which its ownership of property or conduct of business requires it to
qualify, except where the failure to so qualify would not have a Material
Adverse Effect. The Company possesses all requisite corporate power and
authority necessary to
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own and operate its properties, to carry on its businesses as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's charter documents
and bylaws which have been furnished to the Purchasers' special counsel reflect
all amendments made thereto at any time prior to the date of this Agreement and
are correct and complete and will be amended prior to the Closing as required by
Paragraphs 2B and 2C above.
5B. CAPITAL STOCK AND RELATED MATTERS.
(i) As of the date hereof, the authorized capital stock of the
Company consists of 30,000,000 shares of Common Stock, of which 11,060,000
shares are issued and outstanding and are held beneficially and of record by the
Sellers as set forth on the CAPITALIZATION SCHEDULE attached hereto (free and
clear of all Encumbrances) and of which 5,200,000 shares are reserved for
issuance upon exercise of stock options authorized pursuant to the Stock Option
Plans. As of the Closing and immediately thereafter (and after giving effect to
the issuance of the Preferred Stock), the authorized capital stock of the
Company shall consist of (a) 482,684 shares of Redeemable Preferred Stock, all
of which shall be issued and outstanding, (b) 22,790,000 shares of Convertible
Preferred Stock, of which 22,785,424 shall be issued and outstanding and
(c) 50,000,000 shares of Common Stock, of which 2,212,000 shares shall be issued
and outstanding and 22,790,000 shares shall be reserved for issuance upon
conversion of the Convertible Preferred Stock and 6,268,397 shares shall be
reserved for issuance upon exercise of stock options authorized pursuant to the
Stock Option Plans. Except as set forth in the immediately preceding sentence
or on the CAPITALIZATION SCHEDULE, the Company does not have and as of the
Closing Date will not have outstanding any, stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor any rights or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock plans, other than, as of the Closing Date, any options granted pursuant to
the Stock Option Plans as of the Closing Date. The Company is not subject to
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, other than as expressly provided in or
contemplated by this Agreement and, as of the Closing, pursuant to the Articles
of Incorporation and the Shareholders Agreement. As of the date hereof and as
of the Closing and immediately thereafter, all of the outstanding shares of the
Company's capital stock are or shall be validly issued, fully paid and
nonassessable.
(ii) There are no statutory or contractual shareholder preemptive
rights or rights of first refusal or other similar restrictions with respect to
the issuance of the Preferred Stock hereunder or the issuance of any Common
Stock upon the conversion of the Convertible Preferred Stock. Except for such
violation or violations which individually or in the aggregate have not had and
would not reasonably be expected to have a Material Adverse Effect, the Company
has not violated any applicable federal or state securities laws in connection
with the offer, sale or issuance of any of its capital stock and the offer, sale
and issuance of the Preferred Stock hereunder, the grant of any stock options
under the Stock Option Plans and the issuance of Common Stock upon the
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conversion of the Convertible Preferred Stock does not require registration
under the Securities Act or any applicable state securities laws. Except for
the Shareholders Agreement to be executed and delivered at the Closing, there
are no agreements or understandings between the Company's shareholders or among
any other Person with respect to the voting or transfer of the Company's capital
stock or with respect to any other aspect of the Company's governance.
5C. SUBSIDIARIES; INVESTMENTS. Except with respect to the
contemplated Netcom Europe transaction and as set forth on the attached
INVESTMENTS AND SUBSIDIARIES SCHEDULE, the Company does not own or hold the
right to acquire any shares of stock or any other security or interest in any
other Person. Except as set forth on the INVESTMENTS AND SUBSIDIARIES SCHEDULE
attached hereto, the Company has never had any Subsidiaries and the Company does
not have any obligation to make any Investments in any Person.
5D. AUTHORIZATION; NO BREACH. The execution, delivery and
performance of this Agreement and all of the other agreements and instruments
contemplated hereby to which the Company is a party, the offering, sale and
issuance of the Preferred Stock hereunder, the repurchase of the Repurchased
Shares pursuant hereto, the consummation of the transactions contemplated by the
Stock Purchase Agreement, the consummation of the Senior Debt Transaction, the
issuance of Common Stock upon the conversion of the Convertible Preferred Stock,
the amendment and restatement of the Articles of Incorporation and the amendment
and restatement of the Bylaws have been duly authorized by the Company. This
Agreement and the Stock Purchase Agreement each constitute a valid and binding
obligation of the Company, enforceable in accordance with their respective
terms, and the Articles of Incorporation, when filed under the laws of the State
of California in accordance with the terms hereof, and all other agreements and
instruments contemplated hereby to which the Company is a party, when executed
and delivered by the Company in accordance with the terms hereof, shall each
constitute a valid and binding obligation of the Company, enforceable in
accordance with their respective terms. Except as set forth on the attached
RESTRICTIONS SCHEDULE, the execution and delivery by the Company of this
Agreement and all other agreements and instruments contemplated hereby to which
the Company is a party, the offering, sale and issuance of the Preferred Stock
hereunder, the repurchase of the Repurchased Shares pursuant hereto, the
consummation of the transactions contemplated by the Stock Purchase Agreement,
the consummation of the Senior Debt Transaction, the issuance of Common Stock
upon the conversion of the Convertible Preferred Stock, the amendment and
restatement of the Articles of Incorporation, the amendment and restatement of
the Bylaws and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under (whether with or without the passage of time, the giving of notice
or both), (iii) result in the creation of any Lien upon the Company's capital
stock or material assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any third party or any
court or administrative or governmental body or agency pursuant to, the
Company's articles of incorporation or bylaws, or any material law, statute,
rule or regulation to which the Company is subject, or any material agreement,
instrument,
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order, judgment or decree to which the Company is subject. Neither the Company
nor any of the Sellers is a party to or bound by any written or oral agreement
or understanding with respect to a Company Transaction other than this
Agreement, and all of them have terminated all discussions with third parties
(other than the Purchasers) regarding Company Transactions (other than any
unsolicited communications from third parties as to which the Company and the
Sellers have responded that they are unable to discuss a Company Transaction).
5E. FINANCIAL STATEMENTS. Attached hereto as the FINANCIAL
STATEMENTS SCHEDULE are the following financial statements:
(i) the audited balance sheet of the Company as of July 31, 1996
and the audited balance sheet of the Company as of July 31, 1997 (the
"LATEST BALANCE SHEET"), and the related statements of income and cash
flows (or the equivalent) for the fiscal years then ended; and
(ii) the unaudited balance sheet of the Company as of July 31,
1995 and the related statements of income and cash flows (or the
equivalent) for the fiscal year then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete, is consistent with the books and
records of the Company (which, in turn, are accurate and complete), fairly
presents the financial condition and operating results of the Company and has
been prepared in accordance with GAAP consistently applied as of the dates of
each such financial statement, subject in the case of the unaudited financial
statements to the absence of footnote disclosures (none of which footnote
disclosures would, alone or in the aggregate, be materially adverse to the
business, operations, assets, liabilities, financial condition, operating
results, cash flow or net worth of the Company).
5F. ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on
the attached LIABILITIES SCHEDULE, the Company does not have any obligation or
liability (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due and regardless of when asserted) arising out of
transactions entered into at or prior to the date hereof, or any action or
inaction at or prior to the date hereof, or any state of facts existing at or
prior to the date hereof, other than: (i) liabilities set forth on the
liabilities side of the Latest Balance Sheet (including any notes thereto),
(ii) liabilities that would not be required under GAAP to be set forth on a
balance sheet (or any notes thereto), (iii) liabilities and obligations which
have arisen after the date of the Latest Balance Sheet in the ordinary course of
business (none of which is a liability resulting from noncompliance with any
applicable laws, breach of contract, breach of warranty (in excess of any
warranty reserve specifically established with respect thereto and included on
the Latest Balance Sheet), tort, infringement, claim or lawsuit) and (iv) other
liabilities and obligations expressly disclosed in the Schedules referred to in
this Section 5.
5G. ACCOUNTS RECEIVABLE. Except as set forth on the attached
ACCOUNTS RECEIVABLE SCHEDULE, all accounts receivable reflected on the Latest
Balance Sheet and all accounts
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receivable to be reflected on the Company's books and records as of the Closing
Date (net of allowances for doubtful accounts as reflected thereon and as
determined in accordance with GAAP consistently applied) are or shall be valid
receivables arising in the ordinary course of business, and are or shall be
current and subject to no valid counterclaims or setoffs. No Person has any
Lien on such receivables or any part thereof, and no agreement for deduction,
free goods, discount or other deferred price or quantity adjustment has been
made with respect to any such receivables.
5H. INVENTORIES. Except as set forth on the attached INVENTORIES
SCHEDULE, the inventory shown on the Latest Balance Sheet and the inventory to
be shown on the Company's books and records as of the Closing Date (net of the
reserves applicable thereto as reflected thereon and as determined in accordance
with GAAP consistently applied), consists or shall consist of a quantity and
quality usable and saleable in the ordinary course of business, and is not
excess, obsolete or damaged (as determined in accordance with GAAP).
5I. PRODUCT WARRANTY; PRODUCT CERTIFICATIONS.
(i) All products and equipment manufactured, sold, leased or
delivered by the Company and all services rendered by the Company have been in
conformity in all material respects with all applicable contractual commitments
and all express and implied warranties, and to the best of the Company's
knowledge, the Company does not have any liability (and, to the Company's
knowledge, there is no reasonable basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against
it giving rise to any such liability) for replacement or repair thereof or other
damages in connection therewith in excess of any warranty reserve established
with respect thereto and included on the Latest Balance Sheet. No products or
equipment manufactured, sold, leased or delivered by the Company and no services
rendered by the Company are subject to any guaranty, warranty or other indemnity
beyond the applicable standard terms and conditions of such sale, lease or
service (including as a result of any course of conduct between the Company and
any Person or as a result of any statements in any of the Company's product or
promotional literature). The attached PRODUCT WARRANTY SCHEDULE includes copies
of such standard terms and conditions of sale, lease and service for the Company
(containing applicable guaranty, warranty and indemnity provisions). The
Company has not been notified in writing of any claims for (and the Company has
no knowledge of any threatened claims for) any extraordinary product returns,
warranty obligations or product services relating to any of its products or
services.
(ii) The Company holds all material product registrations,
accreditations and other certifications required for the conduct of its business
(all of such registrations, accreditations and certifications being referred to
herein as "PRODUCT CERTIFICATIONS"). The Company is in compliance with the
terms and conditions of all such Product Certifications and no notices have been
received by the Company alleging the failure to hold any Product Certification.
To the Company's knowledge, there is no reasonable basis for any present or
future action rescinding any such Product Certifications and no loss or
expiration of any such Product Certifications has had or would reasonably be
expected to have a Material Adverse Effect. All of such Product Certifications
will be held by the Company on identical terms immediately following the
Closing.
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<PAGE>
5J. PRODUCT LIABILITY. To the best of the Company's knowledge,
except as set forth on the attached PRODUCT LIABILITY SCHEDULE, the Company does
not have any liability (and, to the Company's knowledge, there is no reasonable
basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against it giving rise to any
liability) arising out of any injury to individuals or property as a result of
the ownership, possession or use of any products or equipment manufactured,
sold, leased or delivered by the Company or with respect to any services
rendered by the Company.
5K. PRODUCT RECALL, ETC. Except as set forth on the attached
PRODUCT RECALL SCHEDULE, there have been no product or equipment recalls,
withdrawals or seizures with respect to any products or equipment manufactured,
sold, leased or delivered by the Company or with respect to any services
rendered by the Company.
5L. NO MATERIAL ADVERSE EFFECT. Since July 31, 1997, there has
occurred no fact, event or circumstance which has had or would reasonably be
expected to have a Material Adverse Effect. Since July 31, 1997, the Company
has conducted its business only in the ordinary course of business consistent
with past practice.
5M. ABSENCE OF CERTAIN DEVELOPMENTS. Except as expressly
contemplated by this Agreement or as set forth on the attached DEVELOPMENTS
SCHEDULE, since July 31, 1997, the Company has not:
(i) issued any notes, bonds or other debt securities or any
capital stock or other equity securities or any securities or rights
convertible, exchangeable or exercisable into any capital stock or other equity
securities;
(ii) borrowed any amount or incurred or become subject to any
material liabilities, except current liabilities incurred in the ordinary course
of business consistent with past practice and liabilities under contracts
entered into in the ordinary course of business;
(iii) discharged or satisfied any material Lien or paid any
material obligation or liability, other than current liabilities paid in the
ordinary course of business;
(iv) declared, set aside or made any payment or distribution of
cash or other property to any of the Company's shareholders with respect to such
shareholder's capital stock or other equity securities or purchased, redeemed or
otherwise acquired any shares of its capital stock or other equity securities
(including any warrants, options or other rights to acquire its capital stock or
other equity securities);
(v) mortgaged or pledged any of its properties or assets or
subjected them to any Lien, except for Permitted Encumbrances;
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(vi) sold, assigned, transferred, leased, licensed or otherwise
encumbered any of its material tangible assets, except in the ordinary course of
business consistent with past practice, or canceled any material debts or
claims;
(vii) sold, assigned, transferred, leased, licensed or otherwise
encumbered any Intellectual Property Rights or other intangible assets,
disclosed any material proprietary confidential information to any Person (other
than to the Purchasers and other than in the ordinary course of business
consistent with past practice in circumstances in which it has imposed
reasonable confidentiality restrictions), or abandoned or knowingly permitted to
lapse any Intellectual Property Rights;
(viii) made or granted any bonus or any wage or salary increase to
any employee or group of employees (except as required by pre-existing contracts
described on the attached CONTRACTS SCHEDULE or in the ordinary course of
business consistent with past practice), or made or granted any increase in any
employee benefit plan or arrangement, or amended or terminated any existing
employee benefit plan or arrangement or adopted any new employee benefit plan or
arrangement;
(ix) suffered any extraordinary losses or waived any rights of
material value (whether or not in the ordinary course of business or consistent
with past practice);
(x) made capital expenditures or commitments therefor that
aggregate in excess of $250,000;
(xi) delayed or postponed the payment of any accounts payable or
any other liability or obligation or agreed or negotiated with any party to
extend the payment date of any accounts payable or accelerated the collection of
any accounts or notes receivable;
(xii) made any loans or advances to, guarantees for the benefit of,
or any Investments in, any Persons (other than advances to the Company's
employees in the ordinary course of business consistent with past practice);
(xiii) made any charitable contributions or pledges exceeding in the
aggregate $10,000;
(xiv) suffered any damage, destruction or casualty loss exceeding
in the aggregate $25,000, whether or not covered by insurance;
(xv) made any change in any method of accounting or accounting
policies, other than those required by GAAP which have been disclosed in writing
to the Purchasers, or made any write-down in the value of its inventory that is
material or that is other than in the usual, regular and ordinary course of
business consistent with past practice;
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<PAGE>
(xvi) made any Investment in or taken any steps to incorporate any
Subsidiary;
(xvii) amended its articles of incorporation, by-laws or other
organizational documents;
(xviii) entered into any agreement or arrangement prohibiting or
restricting it from freely engaging in any business or otherwise restricting the
conduct of its business;
(xix) entered into any contract other than in the ordinary course
of business consistent with past practice, entered into any other material
transaction, whether or not in the ordinary course of business or consistent
with past practice, or materially changed any business practice; or
(xx) agreed, whether orally or in writing, to do any of the
foregoing.
5N. ASSETS.
(i) Except as set forth on the attached ASSETS SCHEDULE, the
Company has good and valid title to, a valid leasehold interest in, or a valid
license to use, the material properties and assets, tangible or intangible, used
by it, located on its premises or shown on the Latest Balance Sheet or acquired
thereafter, free and clear of all Liens, except for properties and assets
disposed of in the ordinary course of business since the date of the Latest
Balance Sheet and except for Liens disclosed on the Latest Balance Sheet
(including any notes thereto) and Permitted Encumbrances.
(ii) Except as set forth on the attached ASSETS SCHEDULE, all of
the Company's material buildings, equipment, machinery, fixtures, improvements
and other material tangible assets (whether owned or leased) are in good
condition and repair (ordinary wear and tear excepted) and are fit for use in
the ordinary course of the Company's business as presently conducted and as
presently proposed to be conducted. All such assets have been installed and
maintained in all material respects in accordance with all applicable laws,
regulations and ordinances.
(iii) Except as set forth on the attached ASSETS SCHEDULE, the
Company owns, has a valid leasehold interest in, or has a valid license to use,
all of the material assets, properties and rights, whether tangible or
intangible, necessary for the conduct of its business as presently conducted and
as presently proposed to be conducted.
5O. TAX MATTERS.
(i) Except as set forth on the attached TAXES SCHEDULE:
(a) the Company has filed all Tax Returns which it is
required to file under applicable laws and regulations, and all such Tax
Returns are complete and correct in
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all material respects and have been prepared in material compliance with
all applicable laws and regulations;
(b) the Company has paid all material Taxes due and owing
by it (whether or not such Taxes are shown or required to be shown on a Tax
Return) and has withheld and paid over to the appropriate taxing authority
all material Taxes which it is required to withhold from amounts paid or
owing to any employee, shareholder, creditor or other third party;
(c) the accrual for Taxes on the Latest Balance Sheet
would be adequate to pay all Tax liabilities of the Company if its current
tax year were treated as ending on the date of the Latest Balance Sheet
(excluding any amount recorded which is attributable solely to timing
differences between book and Tax income);
(d) the assessment of any additional Taxes for periods for
which Tax Returns have been filed by the Company shall not exceed the
recorded liability therefor on the Latest Balance Sheet (excluding any
amount recorded which is attributable solely to timing differences between
book and Tax income);
(e) the federal income Tax Returns of the Company have
never been audited;
(f) the Company has not received from any foreign,
federal, state or local taxing authority (including jurisdictions where the
Company has not filed Tax Returns) any (i) written notice indicating an
intent to open an audit or other review, (ii) request for information
related to Tax matters or (iii) notice of deficiency or proposed adjustment
for any amount of Tax proposed, asserted or assessed by any taxing
authority against the Company;
(g) no foreign, federal, state or local tax audits or
administrative or judicial Tax proceedings are pending or, to the Company's
knowledge, being conducted with respect to the Company;
(h) no claim has ever been made by a taxing authority in a
jurisdiction where the Company does not file Tax Returns that the Company
is or may be subject to Taxes assessed by such jurisdiction;
(i) the Company has not been a member of an Affiliated
Group or filed or been included in a combined, consolidated or unitary
income Tax Return;
(j) the Company is not a party to or bound by any Tax
allocation or Tax sharing agreement;
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(k) there are no Liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company; and
(l) the Company shall not be required to (i) as a result
of a change in method of accounting for a taxable period ending on or prior
to the Closing Date, include any adjustment in taxable income for any
taxable period (or portion thereof) ending after the Closing Date, (ii) as
a result of any "closing agreement," as described in Section 7121 of the
Code (or any corresponding provision of state, local or foreign income Tax
law) executed on or before the Closing Date, include any item of income in,
or exclude any item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date, (iii) as a
result of any sale reported on the installment method where such sale
occurred on or prior to the Closing Date, include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period
(or portion thereof) ending after the Closing Date, or (iv) as a result of
any prepaid amount received on or prior to the Closing Date, include any
item of income in, or exclude any item of deduction from, taxable income
for any taxable period (or portion thereof) ending after the Closing Date.
(ii) The Company has not made an election under Section 341(f) of
the Code. The Company is not presently liable for the Taxes of another Person
(1) under Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local
or foreign law), (2) as a transferee or successor or (3) by contract or
indemnity or otherwise.
(iii) The materiality qualifications in clauses (i)(a) and (i)(b)
in this Paragraph 5O are included for disclosure purposes only and shall be
disregarded for purposes of determining whether there has been a breach of the
representations and warranties contained in such clauses and for purposes of
determining the amount of any resulting Loss and indemnification with respect
thereto.
5P. CONTRACTS AND COMMITMENTS.
(i) Except as expressly contemplated by this Agreement or as set
forth on the attached CONTRACTS SCHEDULE, the attached INTELLECTUAL PROPERTY
SCHEDULE, the attached EMPLOYEES SCHEDULE, or the attached EMPLOYEE BENEFITS
SCHEDULE, the Company is not a party to or bound by any written or oral:
(a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or material
arrangement or practice;
(b) collective bargaining agreement or any other contract
with any labor union, or severance agreements, programs, policies or
arrangements;
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(c) management agreement, contract for the employment of
any officer, individual employee or other Person on a full-time, part-time,
consulting or other basis providing annual cash or other compensation in
excess of $50,000 or providing for the payment of any cash or other
compensation or benefits upon the consummation of the transactions
contemplated hereby;
(d) contract or agreement requiring the consent of any
party thereto upon a change in control of the Company, containing any
provision which would result in a modification of any rights or obligations
of any party thereunder upon a change in control of the Company or which
would provide any party any remedy (including rescission or liquidated
damages) in the event of a change in control of the Company;
(e) contract under which it has advanced or loaned monies
to any other Person or otherwise agreed to advance, loan or invest any
funds (other than advances to the Company's employees in the ordinary
course of business consistent with past practice);
(f) agreement or indenture relating to borrowed money or
other Indebtedness or the mortgaging, pledging or otherwise placing a Lien
on any material asset or material group of assets of the Company or any
letter of credit arrangements;
(g) guaranty of any obligation for borrowed money or
otherwise (other than endorsements made for collection in the ordinary
course of business);
(h) lease or agreement under which the Company is lessee
of or holds or operates any property, real or personal, owned by any other
Person, except for any lease of personal property under which the aggregate
annual rental payments do not exceed $25,000;
(i) lease or agreement under which the Company is lessor
of or permits any third party to hold or operate any property, real or
personal, owned or controlled by the Company;
(j) license or royalty agreements;
(k) nondisclosure or confidentiality agreements (other
than those entered into in the ordinary course of business with customers,
suppliers and employees);
(l) contract or group of related contracts with the same
party or group of affiliated parties for the purchase of raw materials,
commodities, supplies, products, equipment or other personal property or
for the receipt of services under which the undelivered balance of such
products and services has a selling price in excess of $50,000 (other than
purchase orders entered into in the ordinary course of business or
contracts disclosed elsewhere in connection with this Paragraph 5P);
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(m) contract or group of related contracts with the same
party or group of affiliated parties for the sale of raw materials,
commodities, supplies, products or other personal property or for the
furnishing of services under which the undelivered balance of such products
or services due from the Company has a selling price in excess of $50,000
(other than purchase orders entered into in the ordinary course of business
or contracts disclosed elsewhere in connection with this Paragraph 5P);
(n) other contract or group of related contracts with the
same party or group of affiliated parties continuing over a period of more
than six months from the date or dates thereof, not terminable by the
Company upon 30 days' or less notice without penalty or involving more than
$50,000 (other than purchase orders entered into in the ordinary course of
business or contracts disclosed elsewhere in connection with this Paragraph
5P);
(o) contract or group of related contracts requiring the
payment of any fee, penalty or other amount by the Company in the event of
any failure to perform or late performance of such contract or contracts by
the Company;
(p) contract relating to the marketing, sale, advertising
or promotion of its products;
(q) warranty agreement with respect to products sold or
leased (other than any such agreement containing the standard terms and
conditions described on the attached PRODUCT WARRANTY SCHEDULE) or
indemnity agreement with any supplier under which it is obligated to
indemnify such supplier against product liability claims;
(r) agreements relating to the ownership of or investments
in any business or enterprise, including investments in joint ventures and
minority equity investments;
(s) assignment, license, indemnification or other
agreement with respect to any intangible property (including any
Intellectual Property Rights);
(t) agreement under which it has granted any Person any
registration rights (including demand or piggyback registration rights);
(u) sales representative, sales or distribution agreement
or material agreement relating to brokers or agents or the export and/or
import of any goods or equipment;
(v) power of attorney or other similar agreement or grant
of agency;
(w) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world; or
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(x) other agreement which is material to its operations or
business prospects or involves an annual consideration in excess of
$100,000, whether or not in the ordinary course of business.
(ii) With respect to the Company's obligations thereunder and, to
the Company's knowledge, with respect to the obligations of the other parties
thereto, all of the contracts, agreements and instruments set forth or required
to be set forth on the attached CONTRACTS SCHEDULE are valid, binding and
enforceable in accordance with their respective terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and other laws of general application effecting enforcement of creditors' rights
generally, rules of law governing specific performance, injunctive relief or
other equitable remedies, and limitations of public policy; and shall be in full
force and effect without penalty in accordance with their terms upon
consummation of the transactions contemplated hereby. The Company has performed
all material obligations required to be performed by it and is not in default
under or in breach of nor in receipt of any claim of default or breach under any
contract, agreement or instrument set forth or required to be set forth on the
attached CONTRACTS SCHEDULE; no event has occurred which with the passage of
time or the giving of notice or both would result in a default, breach or event
of noncompliance by the Company under any such contract, agreement or
instrument; the Company does not have any present expectation or intention of
not fully performing on a timely basis all such obligations required to be
performed by the Company under any contract, agreement or instrument to which
the Company is subject; no partially-filled or unfilled customer purchase order
or sales order is subject to cancellation or any other material modification by
the other party thereto or is subject to any penalty, right of set-off or other
charge by the other party thereto for late performance or delivery; and the
Company does not have any knowledge of any cancellation or anticipated
cancellation or any material breach by the other parties to any contract,
agreement, instrument or commitment to which it is a party. The Company is not
a party to any contract, agreement or commitment the performance of which could
reasonably be expected to have a Material Adverse Effect.
(iii) The Purchasers' special counsel has been supplied with a true
and correct copy of each of the written instruments, plans, contracts and
agreements and an accurate description of each of the oral arrangements,
contracts and agreements which are referred to on the attached CONTRACTS
SCHEDULE, together with all amendments, waivers or other changes thereto.
5Q. INTERNATIONAL TRADE LAWS AND REGULATIONS. Except as set
forth on the attached INTERNATIONAL TRADE COMPLIANCE SCHEDULE:
(i) The Company and each of the Sellers have complied and are in
compliance with all International Trade Laws and Regulations applicable to such
Person in connection with the conduct of the Company's business (including as
the same relates to recordkeeping requirements).
(ii) Neither the Company nor any of the Sellers are or have been
the subject of any civil or criminal investigation, litigation, audit, penalty,
proceeding or assessment, liquidated damages proceeding or claim, forfeiture or
forfeiture action, claim for additional customs duties or
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fees, denial orders, suspension of export privileges, governmental sanctions, or
any other action, proceeding or claim by any foreign, federal, state or local
governmental agency involving or otherwise relating to any alleged or actual
violation of International Trade Laws and Regulations or relating to any alleged
or actual underpayment of customs duties, fees, taxes or other amounts owed
pursuant to any International Trade Laws and Regulations and, to the knowledge
of the Company, there is no basis for any of the foregoing.
(iii) Neither the Company nor any of the Sellers have made or
provided any material false statement or material omission to any agency of any
federal, state or local government, purchaser of products, or foreign government
or foreign agency, in connection with the exportation of merchandise (including
with respect to export licenses, exceptions, and other export authorizations and
any filings required for or related to exportation of any item), the importation
of merchandise (including the valuation or classification of imported
merchandise, the duty treatment of imported merchandise, the eligibility of
imported merchandise for favorable duty rates or other special treatment,
country-of-origin marking, NAFTA Certificates, or other statements or
certificates concerning origin, quota or visa rights) or other approvals
required by a foreign government or agency or any other requirement relating to
any International Trade Laws and Regulations.
(iv) Neither the Company nor any of the Sellers have made any
payment, offer, gift, promise to give, or authorized or otherwise participated
in, assisted or facilitated any payment or gift related to the Company's
business that is prohibited by the United States Foreign Corrupt Practices Act.
(v) Neither the Company nor any of the Sellers have engaged in or
otherwise participated in, assisted or facilitated any transaction related to
the Company's business that is prohibited by any applicable embargo or related
trade restriction imposed by the United States Office of Foreign Assets Control
or any other agency of the United States government.
(vi) The attached INTERNATIONAL TRADE COMPLIANCE SCHEDULE sets
forth a list of each foreign jurisdiction to which the Company exports any
products, equipment, software or technology, each foreign jurisdiction from
which the Company imports any products, equipment, software or technology and
each foreign jurisdiction to which the Company's products, equipment, software
or technology (or products of such technology) are reexported.
5R. INTELLECTUAL PROPERTY RIGHTS.
(i) The attached INTELLECTUAL PROPERTY SCHEDULE contains a
complete and accurate list of all (a) patented or registered Intellectual
Property Rights owned or, to the Company's knowledge, used by the Company,
(b) pending patent applications and applications for other registrations of
Intellectual Property Rights filed by or on behalf of the Company, and
(c) material unregistered Intellectual Property Rights owned or used by the
Company. The attached INTELLECTUAL PROPERTY SCHEDULE also contains a complete
and accurate list of all material licenses and other rights granted by the
Company to any third party with respect to any Intellectual Property Rights and
all
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material licenses and other rights granted by any third party to the Company
with respect to any Intellectual Property Rights, in each case identifying the
subject Intellectual Property Rights. The Company owns and possesses sufficient
title to and ownership of, or has sufficient valid and enforceable licenses to,
all Intellectual Property Rights necessary for the operation of its business as
presently conducted and as presently proposed to be conducted, free and clear of
all Liens. Without limiting the generality of the foregoing, the Company owns
and possesses all right, title and interest in and to all Intellectual Property
Rights created or developed by or under the direction or supervision of any of
the Sellers relating to the business of the Company. To the knowledge of the
Company, it is not and will not be necessary to utilize any Intellectual
Property Rights of any of its employees developed, invented or made prior to
their employment by the Company except for any such Intellectual Property Rights
that have previously been assigned to the Company. Except as set forth on the
attached INTELLECTUAL PROPERTY SCHEDULE, the loss or expiration of any
Intellectual Property Right or related group of Intellectual Property Rights
owned or used by the Company has not had and would not reasonably be expected to
have a Material Adverse Effect, and no loss or expiration of any Intellectual
Property Right is pending or, to the Company's knowledge, threatened or
reasonably foreseeable. The Company has taken commercially reasonable steps to
maintain and protect its trade secrets. To the Company's knowledge, the owners
of any Intellectual Property Rights licensed to the Company have taken
commercially reasonable action to maintain and protect the Intellectual Property
Rights which are subject to such licenses.
(ii) Except as set forth on the attached INTELLECTUAL PROPERTY
SCHEDULE, (a) there have been no claims made against the Company asserting the
invalidity, misuse or unenforceability of any of the Intellectual Property
Rights owned or used by the Company and, to the Company's knowledge, there is no
basis for any such claim, (b) the Company has not received any notices of, and
has no knowledge of any facts which indicate a likelihood of, any infringement
or misappropriation by, or conflict with, any third party with respect to any
Intellectual Property Rights (including any demand or request that the Company
license any rights from a third party), (c) the conduct of the Company's
business has not infringed, misappropriated or conflicted with and does not
infringe, misappropriate or conflict with any Intellectual Property Rights of
other Persons, and (d) to the Company's knowledge, the Intellectual Property
Rights owned by or licensed to the Company have not been infringed,
misappropriated or conflicted by other Persons. The transactions contemplated
by this Agreement will have no material adverse effect on the Company's right,
title or interest in and to the Intellectual Property Rights listed on the
INTELLECTUAL PROPERTY SCHEDULE and all of such Intellectual Property Rights
shall be owned or available for use by the Company on substantially identical
terms and conditions immediately after the Closing.
5S. LITIGATION, ETC. Except as set forth on the attached
LITIGATION SCHEDULE, there are no (and, during the five years preceding the date
hereof, there have not been any) actions, suits, proceedings (including any
arbitration proceedings), orders or, to the Company's knowledge, investigations
or claims pending or, to the Company's knowledge, threatened against the Company
(or to the Company's knowledge, pending or threatened against any of the
officers, directors or employees of the Company with respect to its business or
proposed business activities), or pending or threatened by the Company against
any Person, at law or in equity, or before or by any
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governmental department, commission, board, bureau, agency or instrumentality
(including any actions, suits, proceedings or investigations with respect to the
transactions contemplated by this Agreement); the Company is not subject to any
arbitration proceedings under collective bargaining agreements or otherwise or,
to the Company's knowledge, any governmental investigations or inquiries; and,
to the Company's knowledge, there is no basis for any of the foregoing. The
foregoing includes, without limitation, actions pending or threatened involving
the prior employment of any of the Company's employees, their use in connection
with the Company's businesses of any information or techniques allegedly
proprietary to any of their former employers or their obligations under any
agreements with prior employers. Except as set forth thereon, the Company is
fully insured with respect to each of the matters set forth on the attached
LITIGATION SCHEDULE. The Company is not subject to any judgment, order or
decree of any court or other governmental agency, and the Company has not
received any opinion or memorandum or advice from its legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability which could
have a Material Adverse Effect.
5T. BROKERAGE. Except for the Company's obligations to Broadview
Associates, LLC for up to $682,000 and Montgomery Securities for up to
$1,653,610 in each case pursuant to the agreements described on the CONTRACTS
SCHEDULE attached hereto, there are and shall be no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement to which the Company is a party or to which the Company is subject.
5U. INSURANCE. The attached INSURANCE SCHEDULE contains a
description of each insurance policy maintained by the Company with respect to
its properties, assets and business, and each such policy shall be in full force
and effect as of the Closing. The Company is not in default with respect to its
obligations under any insurance policy maintained by it, and the Company has
never been denied insurance coverage. Except as set forth on the attached
INSURANCE SCHEDULE, the Company has no self-insurance or co-insurance programs
and, to the Company's knowledge, the reserves set forth on the Latest Balance
Sheet are adequate to cover all anticipated liabilities with respect to any such
self-insurance or co-insurance programs.
5V. EMPLOYEES. To the Company's knowledge, as of the date
hereof, no executive or key employee of the Company and no group of employees of
the Company has any plans to terminate employment with the Company. The Company
has no material labor relations problems (including any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). The EMPLOYEES SCHEDULE attached hereto contains a correct and
complete list of all employees of the Company who are not citizens of the United
States and who are not permanent residents of the United States (together with a
listing of each such employee's work authorization status and work authorization
expiration date). None of the Company, the Sellers nor, to Company's knowledge,
any of its other employees or consultants are subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or other agreement or
judgment, decree or order of any court or administrative agency, relating to,
affecting or in conflict with the present or proposed business activities of the
Company or such Person's duties to the Company, except for
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agreements between the Company and its present and former employees. The
Company has not received any notice alleging that any violation of any such
agreements has occurred. The EMPLOYEES SCHEDULE attached hereto contains a
correct and complete list of all employees and consultants of the Company which
have executed and delivered to the Company any (i) agreement providing for the
nondisclosure by such Person of any confidential information of the Company or
(ii) agreement providing for the assignment or license by such Person to the
Company of any Intellectual Property Rights (an "INVENTIONS AGREEMENT"). No
current employee or consultant of the Company has, pursuant to an agreement
specified in clause (ii) of the preceding sentence, excluded works or inventions
made prior to his or her employment with the Company from any Inventions
Agreement between the Company and such Person.
5W. ERISA.
(i) The Company does not have any obligation to contribute to (or
any other liability, including current or potential withdrawal liability, with
respect to) any "multiemployer plan" (as defined in Section 3(37) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")).
(ii) The Company does not maintain or have any obligation to
contribute to (or any other liability with respect to) any plan or arrangement,
whether or not terminated, which provides medical, health, life insurance or
other welfare-type benefits for current or future retired or terminated
employees or any dependents of such employees (except for limited continued
medical benefit coverage required to be provided under Section 4980B of the Code
("COBRA") or as required under applicable state law).
(iii) The Company does not maintain, contribute to or have any
actual or potential liability under (or with respect to) any employee plan which
is a "defined benefit plan" (as defined in Section 3(35) of ERISA).
(iv) The Company does not maintain, contribute to or have any
actual or potential liability under (or with respect to) any employee plan which
is a "defined contribution plan" (as defined in Section 3(34) of ERISA), whether
or not terminated, other than the Netcom Systems, Inc. 401(k) Plan (the "401(K)
PLAN"). The 401(k) Plan is listed on the EMPLOYEE BENEFITS SCHEDULE.
(v) Except as set forth on the attached EMPLOYEE BENEFITS
SCHEDULE under the heading "Other Plans" (the "OTHER PLANS"), the Company does
not maintain, contribute to or have any actual or potential liability under (or
with respect to) any material plan or arrangement providing benefits or
remuneration to current or former employees or independent contractors,
including any employment contract, bonus or incentive plan, plan for deferred
compensation, employee health or other welfare benefit plan, severance
arrangement or other material policy, program or arrangement, whether or not
terminated.
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(vi) With respect to the 401(k) Plan and the Other Plans set forth
on the attached EMPLOYEE BENEFITS SCHEDULE (the "PLANS"), all required payments,
premiums, contributions, reimbursements or accruals for all periods ending prior
to or as of the Closing Date shall have been made or properly accrued. None of
the Plans has any material unfunded liabilities which are not reflected on the
Latest Balance Sheet.
(vii) The Plans and all related trusts, insurance contracts and
funds have been maintained, funded and administered in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
applicable laws. The Company has timely complied with all reporting and
disclosure obligations as they apply to the Plans, and the Company has complied
with the requirements of COBRA. To the Company's knowledge, none of the Company
or any trustee or administrator of any Plan has engaged in any transaction with
respect to the Plans which would subject the Company or any trustee or
administrator of the Plans, or any party dealing with any such Plan, nor do the
transactions contemplated by this Agreement constitute transactions which would
subject any such party, to either a civil penalty assessed pursuant to Part
502(i) of ERISA, or any other penalty or excise tax or the tax or penalty on
prohibited transactions imposed by Section 4975 of the Code or any other penalty
or excise tax. No actions, suits or claims with respect to the assets of the
Plans (other than routine claims for benefits) are pending or, to the Company's
knowledge, threatened which could result in or subject the Company to any
liability and there are no circumstances which would give rise to or be expected
to give rise to any such actions, suits or claims.
(viii) A favorable determination letter from the Internal Revenue
Service has been received by the Company with respect to the 401(k) Plan to the
effect that it is qualified under Section 401(a) of the Code (including
requirements imposed by the Tax Reform Act of 1986 and subsequent legislation),
and, to the Company's knowledge, there are no circumstances which would cause
the 401(k) Plan to lose such qualified status.
(ix) The Company has provided the Purchasers with (a) the most
recent favorable determination letter issued with respect to the 401(k) Plan and
(b) true and complete copies of all documents pursuant to which the Plans are
maintained and administered, including the most recent summary plan description.
(x) For purposes of this Paragraph 5W, the term "COMPANY"
includes all organizations under common control with the Company pursuant to
Section 414 of the Code.
5X. COMPLIANCE WITH LAWS; PERMITS; CERTAIN OPERATIONS. Except as
set forth on the attached COMPLIANCE SCHEDULE:
(i) The Company has complied and is in compliance with all
applicable laws, ordinances, codes, rules, requirements and regulations of
foreign, federal, state and local governments and all agencies thereof relating
to the operation of its business and the maintenance and operation of its
properties and assets. No notices have been received by and, to the Company's
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knowledge, no claims have been filed or threatened against the Company alleging
a violation of any such laws, ordinances, codes, rules, requirements or
regulations.
(ii) The Company holds and is in compliance with all
permits, licenses, bonds, approvals, certificates, registrations, accreditations
and other authorizations of all foreign, federal, state and local governmental
agencies required for the conduct of its business and the ownership of its
properties (including as the same relate to International Trade Laws and
Regulations and Environmental and Safety Requirements), and the attached PERMITS
SCHEDULE sets forth a list of all of such material permits, licenses, bonds,
approvals, certificates, registrations, accreditations and other authorizations.
No notices have been received by the Company alleging the failure to hold any of
the foregoing. All of such material permits, licenses, bonds, approvals,
accreditations, certificates, registrations and authorizations will be available
for use by the Company immediately after the Closing.
5Y. ENVIRONMENTAL AND SAFETY MATTERS.
(i) Except as set forth on the attached ENVIRONMENTAL SCHEDULE:
(a) The Company has complied with and is in compliance
with all Environmental and Safety Requirements. The Company has not
received any oral or written notice, report or information regarding any
actual or alleged violation of Environmental and Safety Requirements or any
liabilities or potential liabilities relating to it or its facilities
arising under Environmental and Safety Requirements.
(b) Neither this Agreement nor the consummation of the
transactions contemplated hereby will result in any obligations for site
investigation or cleanup, or notification to or consent of any government
agencies or third parties under any Environmental and Safety Requirements
(including any so called "transaction-triggered" or "responsible property
transfer" laws and regulations).
(c) To the best of the Company's knowledge, none of the
following exists at any property or facility owned, occupied or operated by
the Company:
(1) underground storage tanks;
(2) asbestos-containing material in any form
or condition;
(3) materials or equipment containing
polychlorinated biphenyls; or
(4) landfills, surface impoundments or other
disposal areas.
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(d) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or Released
any substance (including any hazardous substance) or owned, occupied or
operated any facility or property in a manner that has given or could give
rise to any liabilities (including any liability for response costs,
corrective action costs, personal injury, natural resource damages,
property damage or attorneys fees or any investigative, corrective or
remedial obligations) pursuant to CERCLA or any other Environmental and
Safety Requirements.
(e) The Company has not, either expressly or by operation
of law, assumed or undertaken any liability or corrective, investigatory or
remedial obligation of any other Person relating to any Environmental and
Safety Requirements.
(f) No Environmental Lien has attached to any property
owned, leased or operated by the Company.
5Z. AFFILIATED TRANSACTIONS. Except as set forth on the attached
AFFILIATED TRANSACTIONS SCHEDULE, no officer, director, shareholder, employee or
Affiliate of the Company or, to the Company's knowledge, any individual related
by blood, marriage or adoption to any such individual or any entity in which any
such Person or individual owns any beneficial interest, is a party to any
agreement, contract, commitment or transaction with the Company or has any
material interest in any material property used by the Company (including any
Intellectual Property Rights).
5AA. NAMES AND LOCATIONS. Except as set forth on the attached
NAMES AND LOCATIONS SCHEDULE, during the five-year period prior to the execution
and delivery of this Agreement, the Company has not used any name or names under
which it has invoiced account debtors, maintained records concerning its assets
or otherwise conducted business. All of the tangible assets and properties of
the Company are located at the locations set forth on the attached NAMES AND
LOCATIONS SCHEDULE.
5BB. SUPPLIERS AND CUSTOMERS. The SUPPLIERS AND CUSTOMERS
SCHEDULE attached hereto accurately sets forth a list of the top ten customers
and suppliers of the Company by dollar volume of sales and purchases,
respectively, for each of the fiscal years ended July 31, 1997 and July 31,
1996. The Company has not received any indication from any material supplier to
the effect that, and the Company has no reason to believe that, such supplier
will stop, materially decrease the rate of, or materially change the terms
(whether related to payment, price or otherwise) with respect to, supplying
materials, products or services to the Company (whether as a result of the
consummation of the transactions contemplated hereby or otherwise). The Company
has not received any indication from any material customer of the Company to the
effect that, and the Company has no reason to believe that, such customer will
stop, or materially decrease the rate of, buying products of the Company
(whether as a result of the consummation of the transactions contemplated hereby
or otherwise).
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5CC. REAL PROPERTY. The Company does not own any real property.
The REAL PROPERTY SCHEDULE attached hereto sets forth a list of all of the
leases, subleases and licenses ("LEASES") of real property (the "LEASED REAL
PROPERTY") in which the Company has a leasehold, subleasehold and licensed
interest. The Company holds a valid and existing leasehold, subleasehold or
license interest under each of the Leases. With respect to each Lease listed on
the attached REAL PROPERTY SCHEDULE, there are no disputes, oral agreements, or
forbearance programs in effect as to such Lease and the Company has not
assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest in the Lease. Except for the Leased Real Property, there is no real
property which is leased or otherwise used in the Company's business.
5DD. REGULATORY STATUS. Since its date of incorporation, the
Company has not been, and as of the Closing Date shall not be, a "United States
real property holding corporation," as defined in Section 897(c)(2) of the Code
and in Section 1.897-2(b) of the Treasury Regulations issued thereunder. The
Company is not an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company," as such
terms are defined under the Investment Company Act of 1940, as amended.
5EE. MARGIN SECURITIES. The Company is not engaged in the
business of extending credit for the purpose of buying or carrying "margin
securities" within the meaning of Regulations G, T, U or X promulgated by the
Board of Governors of the Federal Reserve Board.
5FF. SMALL BUSINESS MATTERS. The Company acknowledges that the
SBIC Purchaser is a federally licensed SBIC under the SBIC Act. The Company,
together with its "affiliates" (as that term is defined in 13 CFR Section
121.103), is a "small business concern" within the meaning of the SBIC
Regulations, including 13 CFR Section 121.301. The information regarding the
Company and its affiliates set forth in SBA Form 480, Form 652 and Parts A and B
of Form 1031 delivered at the Closing will be accurate and complete. The
Company does not presently engage in any activities for which an SBIC is
prohibited from providing funds by the SBIC Regulations (including 13 CFR
Section 107.720).
5GG. DISCLOSURE. To the knowledge of the Sellers (other than
Henri Hamon and Stephane Johnson), there is no fact which the Company has not
disclosed to the Purchasers in writing and of which any of its shareholders,
officers, directors or executive employees is aware which has had or would
reasonably be expected to have a Material Adverse Effect.
Section 6. REPRESENTATIONS AND WARRANTIES OF THE SELLERS. As a
material inducement to the Purchasers to enter into this Agreement and purchase
the Preferred Stock hereunder, each Seller, with respect to itself and not
jointly with respect to any of the other Sellers, hereby represents and warrants
to the Purchasers and the Company as follows:
6A. CAPACITY; POWER AND AUTHORITY. Such Seller possesses all
requisite capacity, power and authority necessary to carry out the transactions
contemplated by this Agreement.
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6B. AUTHORIZATION; NO BREACH. This Agreement and all other
agreements contemplated hereby to which such Seller is a party, when executed
and delivered by such Seller in accordance with the terms hereof, shall each
constitute a valid and binding obligation of such Seller, enforceable against
such Seller in accordance with its terms. The execution and delivery by such
Seller of this Agreement and all other agreements contemplated hereby to which
such Seller is a party, the repurchase of the Repurchased Shares from such
Seller hereunder, and the fulfillment of and compliance with the respective
terms hereof and thereof by such Seller, do not and shall not (i) conflict with
or result in a breach of the terms, conditions or provisions of, (ii) constitute
a default under (whether with or without the passage of time, the giving of
notice or both), (iii) result in the creation of any lien, security interest,
charge or encumbrance upon such Seller's assets pursuant to, (iv) give any third
party the right to modify, terminate or accelerate any obligation under,
(v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any third party or any court or administrative or governmental body or
agency pursuant to, or any law, statute, rule or regulation to which such Seller
is subject, or any agreement, instrument, order, judgment or decree to which
such Seller is subject, except for any filing, notice or authorization required
pursuant to the Hart-Scott-Rodino Act.
6C. TITLE TO SHARES, ETC. Such Seller is the record and
beneficial owner of, and has good and marketable title to, the Repurchased
Shares set forth opposite such Seller's name on the SCHEDULE OF SELLERS attached
hereto, free and clear of all Liens, agreements, voting trusts, proxies and
other arrangements or restrictions of any kind whatsoever (collectively,
"ENCUMBRANCES"). At the Closing, such Seller shall sell to the Company good and
marketable title to such Repurchased Shares free and clear of all Encumbrances.
6D. BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement to which
such Seller is a party or to which such Seller is subject. Such Seller shall
pay, and hold the Company and the Purchasers and the other Sellers harmless
against, any liability, loss or expense (including reasonable attorneys' fees
and out-of-pocket expenses) arising in connection with any such claim.
6E. LITIGATION, ETC. There are no actions, suits, proceedings
(including any arbitration proceedings), orders, investigations or claims
pending or, to such Seller's knowledge, threatened against or affecting such
Seller in which it is sought to restrain or prohibit or to obtain damages or
other relief in connection with the transactions contemplated hereby.
6F. COMPANY TRANSACTIONS. Such Seller is not a party to or bound
by any agreement with respect to a Company Transaction other than this
Agreement, and such Seller has terminated all discussions with third parties
(other than the Purchasers) regarding Company Transactions.
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Section 7. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. As a
material inducement to the Company and the Sellers to enter into this Agreement
and take the actions set forth in Section 1, each Purchaser, with respect to
itself and not jointly with respect to any of the other Purchasers, hereby
represents and warrants to the Company and the Sellers as follows:
7A. ORGANIZATION, POWER AND AUTHORITY. Such Purchaser (if not a
natural person) is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Such Purchaser possesses all
requisite power and authority necessary to carry out the transactions
contemplated by this Agreement.
7B. AUTHORIZATION; NO BREACH. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which such Purchaser is a party have been duly authorized by such Purchaser.
This Agreement and all other agreements contemplated hereby to which such
Purchaser is a party, when executed and delivered by such Purchaser in
accordance with the terms hereof, shall each constitute a valid and binding
obligation of such Purchaser, enforceable in accordance with its terms. The
execution and delivery by such Purchaser of this Agreement and all other
agreements contemplated hereby to which such Purchaser is a party, the purchase
of the Preferred Stock hereunder, and the fulfillment of and compliance with the
respective terms hereof and thereof by such Purchaser, do not and shall not
(i) conflict with or result in a breach of the terms, conditions or provisions
of, (ii) constitute a default under (whether with or without the passage of
time, the giving of notice or both), (iii) give any third party the right to
modify, terminate or accelerate any obligation under, (iv) result in a violation
of, or (v) require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the organizational
documents of such Purchaser, or any material law, statute, rule or regulation to
which such Purchaser is subject, or any material agreement, instrument, order,
judgment or decree to which such Purchaser is subject, except for any filing,
notice or authorization required pursuant to the Hart-Scott-Rodino Act or the
SBIC Act.
7C. BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement to which
such Purchaser is a party or to which such Purchaser is subject. Such Purchaser
shall pay, and hold the Company and the Sellers and the other Purchasers
harmless against, any liability, loss or expense (including reasonable
attorneys' fees and out-of-pocket expenses) arising in connection with any such
claim.
7D. INVESTMENT REPRESENTATIONS.
(i) Such Purchaser is acquiring the Restricted Securities to be
purchased by it hereunder for its own account, not as a nominee or agent, with
the present intention of holding such securities for purposes of investment, and
such Purchaser has no intention of selling such securities in a public
distribution in violation of the federal securities laws or any applicable state
securities laws; PROVIDED THAT nothing contained herein shall prevent such
Purchaser or any subsequent holder
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of such Restricted Securities from transferring such securities in compliance
with the provisions of Paragraph 11C below.
(ii) Such Purchaser is an "accredited investor" as defined in Rule
501(a) under the Securities Act.
(iii) Such Purchaser understands that the purchase of the
Restricted Securities involves substantial risk. Such Purchaser or its
officers, members or partners has experience as an investor in securities of
companies in the development or growth stage and acknowledges that such
Purchaser is able to fend for itself, can bear the economic risk of such
Purchaser's investment in the Restricted Securities and has such knowledge and
experience in financial or business matters that such Purchaser is capable of
evaluating the merits and risks of its investment in the Restricted Securities.
(iv) Such Purchaser understands that the Restricted Securities to
be purchased by it hereunder have not been registered under the Securities Act
on the basis that the sale provided for in this Agreement is exempt from the
registration provisions thereof and that the Company's reliance on such
exemption is predicated in part upon the representations of such Purchaser set
forth herein.
(v) Such Purchaser acknowledges that the offer and sale of the
Restricted Securities to such Purchaser has not been accomplished by the
publication of any advertisement.
(vi) Such Purchaser has consulted its own tax advisor and is not
relying on the Company or any Seller for tax advice.
Section 8. INDEMNIFICATION AND OTHER AGREEMENTS.
8A. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in this Agreement shall survive the Closing as
follows:
(i) the representations and warranties in Paragraph 5O (Tax
Matters), Paragraph 5Q (International Trade Laws and Regulations), Paragraph 5W
(ERISA), Paragraph 5X (Compliance with Laws; Permits; Certain Operations),
Paragraph 5Y (Environmental and Safety Matters) and Paragraph 5FF (Small
Business Matters) shall terminate when the applicable statutes of limitations
with respect to the liabilities in question expire (after giving effect to any
extensions or waivers thereof), plus thirty (30) days;
(ii) the representations and warranties in Paragraph 5B (Capital
Stock and Related Matters), Paragraph 5T (Brokerage), Paragraph 6A (Capacity;
Power and Authority), Paragraph 6C (Title to Shares), Paragraph 6D (Brokerage),
Paragraph 6F (Company Transactions), Paragraph 7D (Brokerage), the first and
second and last sentences of Paragraph 5D (Authorization; No Breach), the first
sentence of Paragraph 6B (Authorization; No Breach) and the first and second
sentences of Paragraph 7B (Authorization; No Breach) shall not terminate;
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(iii) the representations and warranties in Paragraph 5R
(Intellectual Property Matters) shall terminate on the second anniversary of the
Closing Date; and
(iv) all other representations and warranties in this Agreement
and the Schedules and Exhibits attached hereto or in any writing delivered by
any Party to another Party in connection with this Agreement shall terminate
sixty (60) days after the receipt by the Purchasers of the Company's audited
financial statements for the fiscal year ended July 31, 1998 (together with a
duly executed opinion with respect thereto from the Company's independent public
accountants);
PROVIDED THAT any representation or warranty in respect of which indemnity may
be sought under Paragraph 8B, and the indemnity with respect thereto, shall
survive the time at which it would otherwise terminate pursuant to this
Paragraph 8A if notice of the inaccuracy or breach or potential inaccuracy or
breach thereof giving rise to such right or potential right of indemnity shall
have been given to the Party against whom such indemnity may be sought prior to
such time. The representations and warranties in this Agreement shall survive
for the periods set forth in this Paragraph 8A and shall in no event be affected
by any investigation, inquiry or examination made for or on behalf of any Party,
or the knowledge of any Party's officers, directors, shareholders, employees or
agents or the acceptance by any Party of any certificate or opinion hereunder.
8B. GENERAL INDEMNIFICATION.
(i) INDEMNIFICATION BY THE SELLERS. Each of the Sellers shall
indemnify each of the Company and the Purchasers and their respective
Affiliates, shareholders (other than the Sellers), partners, officers,
directors, employees, agents, representatives, successors and permitted assigns
(collectively, the "COMPANY PARTIES") and save and hold each of them harmless
against and pay on behalf of or reimburse such Company Parties as and when
incurred for any loss, liability, demand, claim, action, cause of action, cost,
damage, deficiency, Tax, penalty, fine or expense, whether or not arising out of
third party claims (including interest, penalties, reasonable attorneys' fees
and expenses and all amounts paid in investigation, defense or settlement of any
of the foregoing) (collectively, "LOSSES"), which any such Company Party may
suffer, sustain or become subject to, as a result of, in connection with,
relating or incidental to or by virtue of: (a) any breach of any representation
or warranty of the Company or the Sellers under Section 5 (other than
Paragraph 5R) or Section 6 of this Agreement; (b) any breach of any
representation or warranty of the Company or the Sellers under Paragraph 5R of
this Agreement; (c) any nonfulfillment or breach of any covenant or agreement by
the Company or any of the Sellers under this Agreement required to be performed
or complied with by the Company or any of the Sellers at or prior to the
Closing; (d) any nonfulfillment or breach of any covenant or agreement by any of
the Sellers under this Agreement required to be performed or complied with by
any of the Sellers after the Closing; or (e) any claim by any Person (other than
the Purchasers) with respect to, or arising as a result of, any Company
Transaction (other than the Company Transaction that is the subject of this
Agreement); PROVIDED THAT the Sellers shall not have any liability under
clauses (a), (c), (d) or (e) above (other than with respect to the
representations and warranties contained in Paragraph 5B and Paragraph 6C and
the covenants and agreements contained in this Section 8) unless the aggregate
of all Losses relating
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thereto for which the Sellers would, but for this proviso, be liable exceeds on
a cumulative basis an amount equal to $250,000, and then the Sellers shall be
liable only to the extent of such excess; and PROVIDED FURTHER that the Sellers
shall not have any liability under clause (b) above unless the aggregate of all
Losses relating thereto for which the Sellers would, but for this proviso, be
liable exceeds on a cumulative basis an amount equal to $1,000,000, and then the
Sellers shall be liable only to the extent of such excess; and PROVIDED FURTHER
that the Sellers' aggregate liability under clauses (a), (b), (c) and (d) above
(other than with respect to the representations and warranties contained in
Paragraph 5B and Paragraph 6C and the covenants and agreements contained in this
Section 8) shall in no event exceed $15,000,000 (it being understood, however,
that nothing in this Agreement (including this Paragraph 8B) shall limit or
restrict any of the Company Parties' right to maintain or recover any amounts in
connection with any action or claim based upon fraudulent misrepresentation or
deceit). All indemnification payments for the benefit of the Company under this
Paragraph 8B shall be deemed to be adjustments to the Repurchase Price set forth
in Paragraph 1A above. All indemnification payments for the benefit of any
Purchaser under this Paragraph 8B shall be deemed to be adjustments to the
Purchase Price set forth in Paragraph 1B above. In no event shall the Sellers'
obligations in respect of the indemnification provided for in this Paragraph 8B,
or any expense reimbursement obligation of the Company provided for herein, be
treated as subordinated indebtedness of the Company or as a restricted payment
pursuant to any agreement to which the Company is a party or be otherwise
restricted or deferred. Subject to the limitations set forth above, if and to
the extent any provision of this Paragraph 8B is unenforceable for any reason,
each Seller hereby agrees to make the maximum contribution to the payment and
satisfaction of any Loss for which indemnification is provided for in this
Paragraph 8B which is permissible under applicable laws. Notwithstanding any
provision herein to the contrary, in no event shall the Sellers be obligated to
make duplicative indemnity payments hereunder (i.e., if the Company incurs a
Loss for which it is entitled to (and actually receives) indemnification from
the Sellers hereunder, the Sellers shall not thereafter be liable to the
Purchasers or any other Company Parties for the same Loss, unless the Purchasers
or any such other Company Parties have also incurred a Loss with respect to the
matter which gave rise to such indemnification obligation). Except with respect
to injunctive relief, the Company and the Purchasers acknowledge and agree (on
behalf of themselves and the other Company Parties) that from and after the
Closing their sole and exclusive remedy with respect to any and all claims
relating to the subject matter of this Agreement shall be pursuant to the
indemnification provisions set forth in this Paragraph 8B.
(ii) INDEMNIFICATION BY THE PURCHASERS. Each Purchaser shall,
with respect to the representations, warranties, covenants and agreements made
by such Purchaser and not with respect to the representations, warranties,
covenants or agreements made by any of the other Purchasers, indemnify the
Company and its Affiliates, shareholders, officers, directors, employees,
agents, representatives, successors and permitted assigns (collectively, the
"PURCHASER INDEMNIFIED PARTIES") and hold them harmless against any Losses which
the Purchaser Indemnified Parties may suffer, sustain or become subject to, as a
result of, in connection with, relating or incidental to or by virtue of: (a)
any breach of any representation or warranty of such Purchaser under Section 7
of this Agreement; or (b) any nonfulfillment or breach of any covenant or
agreement by such Purchaser under this Agreement.
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(iii) NATURE OF CERTAIN INDEMNIFICATION OBLIGATIONS. The
representations and warranties of each of the Sellers in Section 6 of this
Agreement and the covenants and agreements made by each of the Sellers under
this Agreement (other than as specifically set forth in this Paragraph 8B) in
such Seller's individual capacity that are required to be performed or complied
with by such Seller after the Closing (such as those set forth in Paragraphs 8D
and 8E of this Agreement) are several obligations. This means that the
particular Seller making the representation, warranty, covenant or agreement
will be solely responsible for any Losses the Company Parties may suffer as a
result of any breach or nonfulfillment of any such representations, warranties,
covenants or agreements. The other representations and warranties made in or
pursuant to this Agreement and the covenants and agreements made by the Company
and the Sellers under this Agreement that are required to be performed or
complied with by the Company or the Sellers at or prior to the Closing are
subject to the following provisions. Each Seller shall be responsible to the
extent provided in this Paragraph 8B only for its Pro Rata Share of any
particular Loss the Company Parties may suffer as a result of any breach or
nonfulfillment of such representations, warranties, covenants and agreements.
"PRO RATA SHARE" means with respect to the share of any Seller in a particular
Loss that fraction equal to the portion of the Repurchase Price allocable to the
Repurchased Shares held by such Seller over the Repurchase Price.
(iv) CALCULATION OF LOSSES; MANNER OF PAYMENT. The Parties shall
make appropriate adjustments for tax consequences and insurance coverage in
determining the amount of any Losses for purposes of this Paragraph 8B. Any
indemnification of the Company Parties or the Purchaser Indemnified Parties
pursuant to this Paragraph 8B shall be effected by wire transfer of immediately
available funds from one or more of the Sellers or the Purchasers, as the case
may be, to an account designated by any Company Party or Purchaser Indemnified
Party, as the case may be, within 15 days after the determination thereof. Any
such indemnification payments shall include interest at the Applicable Rate
calculated on the basis of the actual number of days elapsed over 360, from the
date any such Loss is suffered or sustained to the date of payment. Any amounts
owing from the Sellers pursuant to this Paragraph 8B shall first be made to the
extent possible from the Escrow Funds (as defined in the Escrow Agreement) in
the Escrow Account and thereafter shall be made directly by the Sellers in
accordance with the terms of this Paragraph 8B(iv).
(v) DEFENSE OF THIRD PARTY CLAIMS. Any Person making a claim for
indemnification under this Paragraph 8B (an "INDEMNITEE") shall notify the
indemnifying party (an "INDEMNITOR") of the claim in writing promptly after
receiving written notice of any action, lawsuit, proceeding, investigation or
other claim against it (if by a third party), describing the claim, the amount
thereof (if known and quantifiable) and the basis thereof; PROVIDED THAT the
failure to so notify an Indemnitor shall not relieve the Indemnitor of its
obligations hereunder except to the extent that (and only to the extent that)
such failure shall have caused the damages for which the Indemnitor is obligated
to be greater than such damages would have been had the Indemnitee given the
Indemnitor prompt notice hereunder. Any Indemnitor shall be entitled to
participate in the defense of such action, lawsuit, proceeding, investigation or
other claim giving rise to an Indemnitee's claim for indemnification at such
Indemnitor's expense, and at its option (subject to the limitations set forth
below) shall be entitled to assume the defense thereof by appointing a reputable
counsel reasonably
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acceptable to the Indemnitee to be the lead counsel in connection with such
defense; PROVIDED THAT, prior to the Indemnitor assuming control of such defense
it shall first verify to the Indemnitee in writing that such Indemnitor shall be
responsible (with no reservation of any rights) for all liabilities and
obligations relating to such claim for indemnification (to the extent provided
in this Paragraph 8B) and that it shall provide indemnification (whether or not
otherwise required hereunder) to the Indemnitee (to the extent provided in this
Paragraph 8B) with respect to such action, lawsuit, proceeding, investigation or
other claim giving rise to such claim for indemnification hereunder; and
PROVIDED FURTHER, that:
(1) the Indemnitee shall be entitled to participate in
the defense of such claim and to employ counsel of its choice for
such purpose; PROVIDED THAT the fees and expenses of such separate
counsel shall be borne by the Indemnitee (other than any reasonable
fees and expenses of such separate counsel that are incurred prior
to the date the Indemnitor effectively assumes control of such
defense which, notwithstanding the foregoing, shall be borne by the
Indemnitor);
(2) the Indemnitor shall not be entitled to assume control
of such defense and shall pay the fees and expenses of counsel
retained by the Indemnitee if (A) the claim for indemnification
relates to or arises in connection with any criminal proceeding,
action, indictment, allegation or investigation; (B) the claim seeks
an injunction or equitable relief against the Indemnitee; (C) the
Indemnitee has been advised in writing by counsel that a reasonable
likelihood exists of a conflict of interest between the Indemnitor
and the Indemnitee; (D) upon petition by the Indemnitee, the
appropriate court rules that the Indemnitor failed or is failing to
vigorously prosecute or defend such claim; or (E) the Indemnitee
reasonably believes that the Loss relating to the claim could exceed
the maximum amount that such Indemnitee could then be entitled to
recover under the applicable provisions of Paragraph 8B; and
(3) if the Indemnitor shall control the defense of any
such claim, the Indemnitor shall obtain the prior written consent of
the Indemnitee before entering into any settlement of a claim or
ceasing to defend such claim if, pursuant to or as a result of such
settlement or cessation, injunctive or other equitable relief will
be imposed against the Indemnitee or if such settlement does not
expressly and unconditionally release the Indemnitee from all
liabilities and obligations with respect to such claim, without
prejudice.
(vi) CERTAIN WAIVERS AND CONSENTS. Each Seller hereby agrees that
such Seller shall not make any claim for indemnification against the Company
(whether pursuant to the Articles of Incorporation or any indemnification
agreement existing between the Company and such Seller or under applicable law
or otherwise) by reason of the fact that such Seller is or was a shareholder,
director, officer, employee or agent of the Company or is or was serving at the
request of the Company as a partner, trustee, director, officer, employee or
agent of another entity (whether such
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claim is for judgments, damages, penalties, fines, costs, amounts paid in
settlement, losses, expenses or otherwise) with respect to any action, suit,
proceeding, complaint, claim or demand brought by any of the Company Parties
against such Seller pursuant to this Agreement and such Seller hereby
acknowledges and agrees that such Seller shall have no claims or right to
contribution or indemnity from the Company with respect to any amounts paid by
the Sellers pursuant to this Paragraph 8B. Except as provided in the
immediately preceding sentence, nothing in this Paragraph 8B(vi), however, shall
prohibit, restrict or modify any right of the Sellers to receive indemnification
from the Company to the extent such Seller is otherwise entitled to
indemnification pursuant to the Articles of Incorporation or any indemnification
agreement existing between the Company and such Seller and applicable law with
respect to any claim which does not give rise to or evidence the existence of a
breach of any of the representations, warranties, covenants or agreements of the
Company or the Sellers contained in this Agreement and which does not give rise
to or evidence the existence of an indemnification obligation by the Sellers
pursuant to this Paragraph 8B. Each of the Purchasers and the Sellers hereby
consents to the consummation of the Repurchase Transaction and the transactions
contemplated by the Stock Purchase Agreement pursuant to Sections 502, 503 and
506 of the General Corporation Law of the State of California as in effect as of
the date hereof and as of the Closing Date. Each of the Purchasers and the
Sellers has received historical financial information regarding the Company
(including the Latest Balance Sheet) and has also received pro forma financial
information after giving effect to the Repurchase Transaction and the
transactions contemplated by the Stock Purchase Agreements.
8C. PRESS RELEASE AND ANNOUNCEMENTS. Unless required by law (in
which case each Party agrees to consult with the other Parties prior to any such
disclosure as to the form and content of such disclosure), no press releases or
other releases of information related to this Agreement or the transactions
contemplated hereby will be issued or released prior to the Closing without the
consent of the Company, the Requisite Purchaser and the Seller Representative.
8D. NON-COMPETE; NON-SOLICITATION.
(i) Each Seller (which, for purposes of this Paragraph 8D only,
shall exclude Richard Bass) acknowledges that such Seller is familiar with the
trade secrets of the Company and with other confidential information concerning
the Company, including all (a) inventions, technology and research and
development of the Company, (b) customers and clients and customer and client
lists of the Company, (c) products (including products under development) and
services of the Company and related costs and pricing structures and
manufacturing techniques, (d) accounting and business methods and practices of
the Company and (e) similar and related confidential information and trade
secrets of the Company. Each Seller further acknowledges that such Seller's
services have been and shall be of special, unique and extraordinary value to
the Company, that such Seller (in the case of the Seller Representative) is the
founder of the Company and that each such Seller has been substantially
responsible for the growth and development of the Company and the creation and
preservation of the Company's goodwill. Each Seller acknowledges and agrees
that the Company would be irreparably damaged if such Seller were to provide
services to any Person competing with the Company or engaged in a similar
business and that such
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competition by such Seller would result in a significant loss of goodwill by the
Company. Each Seller further acknowledges and agrees that the covenants and
agreements set forth in this Paragraph 8D were a material inducement to the
Purchasers to enter into this Agreement and to perform their obligations
hereunder, and that the Purchasers would not obtain the benefit of the bargain
set forth in this Agreement as specifically negotiated by the Parties if such
Seller breached the provisions of this Paragraph 8D. Therefore, in further
consideration of the Repurchase Price to be paid to the Sellers hereunder for
the Repurchased Shares (which Repurchase Price is being funded in part with the
proceeds from the Investment Transaction hereunder) and the goodwill of the
Company sold by the Sellers, each Seller agrees that until the second
anniversary of the date of such Seller's termination of employment with the
Company and its Subsidiaries, such Seller shall not directly or indirectly own
any interest in, manage, control, participate in (whether as an officer,
director, employee, partner, agent, representative or otherwise), consult with,
render services for, or in any other manner engage anywhere in the Restricted
Territories in any business competing with, or similar to, the business of the
Company and any of its Subsidiaries, including any business engaged in the
design, manufacture, assembly, development, sale or distribution of network test
and measurement equipment (including as the same is used in the LAN and WAN
equipment markets); PROVIDED THAT nothing herein shall prohibit such Seller from
being a passive owner of not more than 5% of the outstanding stock of any class
of a corporation which is publicly traded so long such Seller has no active
participation in the business of such Person, and PROVIDED, FURTHER, that,
notwithstanding anything herein to the contrary, in the event that either Jing
Zhang or Stephane Johnson is involuntarily terminated by the Company without
Cause, the obligations of such Seller pursuant to this Paragraph 8D shall
terminate at the earlier of (x) the first anniversary of the date of such
Seller's termination of employment with the Company and its Subsidiaries or (y)
such time following such Seller's termination of Employment with the Company and
its Subsidiaries as the Company shall cease to pay such Seller an amount, in
accordance with the Company's regular payroll practices, equal to the base
salary payable to such Seller immediately prior to the termination of such
Seller's employment with the Company and its Subsidiaries. For purposes of this
Agreement, "CAUSE" shall mean (a) Seller's continued failure to perform his
duties and responsibilities in good faith and to the best of his ability for a
period of thirty days after written notice thereof from the Company to Seller;
(b) Seller personally engaging in fraud, (c) a Seller being convicted of a
felony; (d) a Seller breaching any material term of this Agreement or any other
agreement with the Company which continues uncured for a period of thirty days
after written notice; (e) a Seller's commencement of employment with another
employer while he is an employee of the Company; or (f) material nonconformance
with the Company's standard business practices and policies generally known by
Company's employees, made known or made available to a Seller or delivered in
writing to a Seller. In addition, for purposes of this Agreement, "RESTRICTIVE
TERRITORIES" shall mean (i) the California counties of Los Angeles, Orange, San
Bernadino, San Diego, Ventura, Fresno, Alameda, Alpine, Amador, Butte,
Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Glenn, Humboldt,
Imperial, Inyo, Kern, Kings, Lake, Lassen, Madera, Marin, Mariposa, Mendocino,
Merced, Modoc, Mono, Monterey, Napa, Nevada, Placer, Plumas, Riverside,
Sacramento, San Benito, San Francisco, San Joaquin, San Luis Obispo, San Mateo,
Santa Barbara, Santa Clara, Santa Cruz, Shasta, Sierra, Siskiyou, Solano,
Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Yolo and Yuba,
and (ii) any other states, possessions, territories or
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jurisdictions of the United States of America and all other countries, nations,
territories and areas of the world. Each Seller acknowledges that the business
of the Company and its Subsidiaries has been conducted on a worldwide scale
(including as the same relates to the design, production, promotion, marketing
and sale of its products and services), that a significant percentage of the
Company's sales are made in foreign jurisdictions and that the geographic
restrictions set forth above are reasonable and necessary to protect the
goodwill of the Company's business being sold by the Sellers pursuant to this
Agreement.
(ii) For so long as a Seller has continuing obligations under
Paragraph 8D(i) above, such Seller shall not directly, or indirectly through
another entity, (a) induce or attempt to induce any employee of the Company or
any of its Subsidiaries to leave the employ of the Company or such Subsidiary,
or in any way interfere with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (b) hire any person who was an employee
of the Company or any of its Subsidiaries at any time during the six month
period immediately prior to the date on which such hiring would take place (it
being conclusively presumed by the Parties so as to avoid any disputes under
this Paragraph 8D(ii) that any such hiring within such six month period is in
violation of clause (a) above), or (c) call on, solicit or service any customer,
supplier, licensee, licensor or other business relation of the Company or any of
its Subsidiaries in order to induce or attempt to induce such Person to cease
doing business with the Company or such Subsidiary, or in any way interfere with
the relationship between any such customer, supplier, licensee or business
relation and the Company or any of its Subsidiaries (including making any
negative statements or communications about the Company or any of its
Subsidiaries).
(iii) If, at the time of enforcement of the covenants contained in
this Paragraph 8D (the "RESTRICTIVE COVENANTS"), a court shall hold that the
duration, scope or area restrictions stated herein are unreasonable under
circumstances then existing, the Parties agree that the maximum duration, scope
or area reasonable under such circumstances shall be substituted for the stated
duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law. Each Seller has consulted with legal counsel regarding the
Restrictive Covenants and based on such consultation has determined and hereby
acknowledges that the Restrictive Covenants are reasonable in terms of duration,
scope and area restrictions and are necessary to protect the goodwill of the
Company's business and the substantial investment in the Company made by the
Purchasers hereunder. Each Seller further acknowledges and agrees that the
Restrictive Covenants are being entered into by such Seller solely in connection
with the sale by such Seller of the goodwill of the Company's business and not
directly or indirectly in connection with such Seller's employment or other
relationship with the Company.
(iv) If a Seller breaches, or threatens to commit a breach of, any
of the Restrictive Covenants, the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the others
and severally enforceable, and each of which is in addition to, and not in lieu
of, any other rights and remedies available to the Company at law or in equity:
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(a) the right and remedy to have the Restrictive
Covenants specifically enforced by any court of competent jurisdiction, it
being agreed that any breach or threatened breach of the Restrictive
Covenants would cause irreparable injury to the Company and that money
damages would not provide an adequate remedy to the Company; and
(b) the right and remedy to require such Seller to
account for and pay over to the Company any profits, monies, accruals,
increments or other benefits derived or received by such Seller as the
result of any transactions constituting a breach of the Restrictive
Covenants.
(v) In the event of any breach or violation by a Seller of any of
the Restrictive Covenants, the time period of such covenant with respect to such
Seller shall be tolled until such breach or violation is resolved.
8E. CONFIDENTIALITY. The Purchasers acknowledge that all
"confidential information" (as defined in the Confidentiality Agreement)
provided to them by the Company is subject to the terms of a Confidentiality
Agreement between the Company and one or more of the Purchasers (the
"CONFIDENTIALITY AGREEMENT"), the terms of which are incorporated herein by
reference. If the transactions contemplated hereby are not consummated, the
Purchasers shall return to the Company and keep confidential all information and
materials regarding the Company and the Sellers reasonably designated by the
Company as confidential (except to the extent (i) disclosure of such information
is required by law, (ii) the information was previously known to the Purchasers
or (iii) the information becomes publicly known except through the actions or
inactions of the Purchasers). Effective upon the consummation of the
transactions contemplated hereby, the Confidentiality Agreement shall terminate.
Whether or not the transactions contemplated hereby are consummated, the Company
and the Sellers shall return to the Purchasers and keep confidential all
information and materials regarding any of the Purchasers reasonably designated
by any of the Purchasers as confidential (except to the extent (i) disclosure of
such information is required by law, (ii) the information was previously known
to the Company or the Sellers or (iii) the information becomes publicly known
except through the actions or inactions of the Company or the Sellers). If the
transactions contemplated hereby are consummated, each Seller agrees not to
disclose or use at any time, either during such Seller's employment or
consultancy with the Company or thereafter, any Confidential Information
(whether or not such information is or was developed by such Seller), except to
the extent that such disclosure or use is directly related to and required by
the performance of such Seller's duties to the Company. Such Seller further
agrees to take all appropriate steps to safeguard such Confidential Information
and to protect it against disclosure, misuse, espionage, loss and theft. In the
event any Seller is required by law to disclose any Confidential Information,
such Seller shall promptly notify the Company in writing, which notification
shall include the nature of the legal requirement and the extent of the required
disclosure, and shall cooperate with the Company to preserve the confidentiality
of such information consistent with applicable law.
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8F. INTELLECTUAL PROPERTY RIGHTS PROTECTION. The Sellers shall
provide the Company and its Subsidiaries and their respective successors,
assigns or other legal representatives full and reasonable cooperation and
assistance at the Company's or such Subsidiary's request and expense in the
protection of all Intellectual Property Rights now or hereafter owned or used by
the Company or any of its Subsidiaries against any claims or demands of
invalidity or unenforceability, and in the prosecution or defense of any
interference, opposition, reexamination, reissue, infringement or other
proceeding that may arise in connection with the Company's or any of its
Subsidiaries' right, title and interest in and to such Intellectual Property
Rights, including execution and delivery of any and all affidavits, testimonies,
declarations, oaths, exhibits, assignments, powers of attorney or other
documentation as may be reasonably required.
8G. DISPUTE RESOLUTION.
(i) In the event of any dispute or disagreement between the
Parties following the Closing as to the interpretation of any provision of this
Agreement or the performance of any obligations hereunder, the matter, upon the
written request of any Party, shall be referred to representatives of the
Parties for decision (the "REPRESENTATIVES"). The Representatives shall
promptly meet in a good faith effort to resolve the dispute. If the
Representatives do not agree upon a decision within 30 calendar days after
reference of the matter to them, each of the Parties shall be free to exercise
the remedies available to it under Paragraph 8G(ii) below.
(ii) Any controversy, dispute or claim arising out of or relating
in any way to this Agreement or the transactions arising hereunder which is not
resolved by negotiation pursuant to Paragraph 8G(i) above shall be settled
exclusively by arbitration in the City of Los Angeles, California. Such
arbitration shall be administered by the Center for Public Resources Institute
for Dispute Resolutions (the "INSTITUTE") in accordance with its then prevailing
Rules for Non-Administered Arbitration of Business Disputes (except as otherwise
provided herein) by one independent and impartial arbitrator who shall be
selected by the Sellers and the Purchasers in accordance with such Rules.
Notwithstanding anything to the contrary provided in Paragraph 11O hereof, the
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
Section 1 ET SEQ. The fees and expenses of the Institute and the arbitrator
shall be shared equally by the Company on the one hand and the Sellers on the
other hand and advanced by them from time to time as required; PROVIDED THAT at
the conclusion of the arbitration, the arbitrator shall award costs and expenses
(including the costs of the arbitration previously advanced and the fees and
expenses of attorneys, accountants and other experts) and interest at the
Applicable Rate to the prevailing Party or Parties. The arbitrator shall permit
and facilitate such discovery as the Party initiating such claim shall
reasonably request. The arbitrator shall render his or her award within 90 days
of the conclusion of the arbitration hearing. The arbitrator shall be expressly
empowered to determine the amount of any Losses subject to indemnification
hereunder in accordance with the terms and provisions of this Agreement.
Notwithstanding anything to the contrary provided in this Paragraph 8G(ii) and
without prejudice to the above procedures, any Party may apply to any court of
competent jurisdiction for temporary injunctive or other provisional judicial
relief if such action is necessary to avoid irreparable damage or to preserve
the status quo until such time as the arbitrator is selected and
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available to hear such Party's request for temporary relief. The award rendered
by the arbitrator shall be final and not subject to judicial review (absent
manifest error), and judgment thereon may be entered in any court of competent
jurisdiction. Notwithstanding anything to the contrary provided in Paragraph
8G(i) or this Paragraph 8G(ii), the Company or the Purchasers may elect to
enforce any of the provisions of Paragraphs 8D or 8E or the Exhibits attached
hereto by application to a court of competent jurisdiction for equitable or
legal relief (including damages or injunctive relief) rather than pursuant to
the above procedures.
8H. FURTHER ASSURANCES. In case at any time after the Closing
any further action is necessary or desirable to carry out the purposes of this
Agreement or the transactions contemplated hereby, each of the Parties will take
such further action (including the execution and delivery of such further
instruments and documents) as any other Party may reasonably request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Paragraph 8B above).
8I. OPTION RE-PRICING. Promptly following the Closing, the
Company shall secure an independent third party valuation regarding the fair
market value of the Company's Common Stock. In the event that the subsequently
determined fair market value of the Company's Common Stock is less than the
exercise price of any stock options issued and outstanding as of the Closing,
the Company shall take all necessary action to re-price such stock options to
match the then-assessed fair market value of the Company's Common Stock.
8J. OPTION GRANTS. The Parties acknowledge that, following the
Closing, the Company intends to grant options to purchase an aggregate of
1,285,000 shares of the Company's Common Stock to the holders of options to
purchase the Company's Common Stock immediately prior to the Closing (other than
James C. Jordan), and that the exercise price for such options shall be equal to
the fair market value of the Company's Common Stock at the time of grant.
Section 9. DEFINITIONS. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"AFFILIATE" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "CONTROL" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"AFFILIATED GROUP" means any affiliated group as defined in Code
Section 1504 that has filed a consolidated return for federal income tax
purposes (or any similar group under state, local or foreign law) for a period
during which the Company or any of its Subsidiaries was a member.
"AGREEMENT" has the meaning set forth in the Preamble.
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"APPLICABLE RATE" means the base rate basis charged by the Bank from
time to time pursuant to the Senior Loan Documents.
"ARTICLES OF INCORPORATION" has the meaning set forth in Paragraph
1A(i).
"BANK" means NationsBank of Texas, N.A., a national banking
association.
"BYLAWS" has the meaning set forth in Paragraph 2C.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"CLOSING" has the meaning set forth in Paragraph 1D.
"CLOSING DATE" has the meaning set forth in Paragraph 1D.
"COBRA" has the meaning set forth in Paragraph 5W(ii).
"CODE" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular Code section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"COMMON STOCK" has the meaning set forth in Paragraph 1A(i).
"COMPANY PARTIES" has the meaning set forth in Paragraph 8B(i).
"COMPANY TRANSACTION" has the meaning set forth in Paragraph 4J.
"CONFIDENTIAL INFORMATION" means all information of a confidential
or proprietary nature (whether or not specifically labeled or identified as
"confidential"), in any form or medium, that is or was disclosed to, or
developed or learned by, any Seller and that relates to the business, products,
services or research or development of the Company or its Subsidiaries or their
respective suppliers, distributors or customers. Confidential Information
includes, but is not limited to, the following: (i) internal business
information (including information relating to strategic and staffing plans and
practices, business, training, marketing, promotional and sales plans and
practices, cost, rate and pricing structures and accounting and business
methods); (ii) identities of, individual requirements of, specific contractual
arrangements with, and information about, the Company's suppliers, distributors
and customers and their confidential information; (iii) trade secrets, know-how,
compilations of data and analyses, techniques, systems, formulae, research,
records, reports, manuals, documentation, models, data and data bases relating
thereto; (iv) inventions, innovations, improvements, developments, methods,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) and (v) other Intellectual Property Rights.
Confidential Information shall not include information that a Seller can
demonstrate is publicly known through
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no wrongful act or breach of any obligation of confidentiality or was rightfully
received by such Seller from a third party without a breach of any obligation of
confidentiality by such third party.
"CONFIDENTIALITY AGREEMENT" has the meaning set forth in Paragraph
8E.
"ENCUMBRANCES" has the meaning set forth in Paragraph 6C.
"ENVIRONMENTAL LIEN" shall mean any Lien, whether recorded or
unrecorded, in favor of any governmental entity, relating to any liability of
the Company arising under any Environmental and Safety Requirements.
"ENVIRONMENTAL AND SAFETY REQUIREMENTS" shall mean all federal,
state, local and foreign statutes, regulations, ordinances and other provisions
having the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law, in each case
concerning public health and safety, worker health and safety and pollution or
protection of the environment (including, without limitation, all those relating
to the presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
Release, threatened Release, control or cleanup of any hazardous or otherwise
regulated materials, substances or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum products or
byproducts, asbestos, polychlorinated biphenyls, noise, radiation or radon),
each as amended and as now or hereafter in effect.
"ERISA" has the meaning set forth in Paragraph 5W(i).
"ESCROW ACCOUNT" has the meaning set forth in Paragraph 1D(iii).
"ESCROW AGENT" means First Trust of California, National
Association.
"ESCROW AGREEMENT" has the meaning set forth in Paragraph 1D(v).
"ESCROW AMOUNT" has the meaning set forth in the Escrow Agreement.
"EXCHANGE ACT" means, the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"401(K) PLAN" has the meaning set forth in Paragraph 5W(iv).
"FINANCING" means the purchase of Preferred Stock by the SBIC
Purchaser hereunder.
"GAAP" means United States generally accepted accounting principles.
"GOVERNMENTAL APPROVALS" has the meaning set forth in Paragraph 2Q.
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"HART-SCOTT-RODINO ACT" has the meaning set forth in Paragraph 2Q.
"INDEBTEDNESS" means at a particular time, without duplication,
(i) any indebtedness for borrowed money or issued in substitution for or
exchange of indebtedness for borrowed money, (ii) any indebtedness evidenced by
any note, bond, debenture or other debt security, (iii) any indebtedness for the
deferred purchase price of property or services with respect to which a Person
is liable, contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course of
business which are not more than six months past due), (iv) any commitment by
which a Person assures a creditor against loss (including contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including guarantees in the
form of an agreement to repurchase or reimburse), (vi) any obligations under
capitalized leases with respect to which a Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or with respect to which
obligations a Person assures a creditor against loss, (vii) any indebtedness
secured by a Lien on a Person's assets and (viii) any unsatisfied obligation for
"withdrawal liability" to a "multiemployer plan" as such terms are defined under
ERISA.
"INDEMNITEE" has the meaning set forth in Paragraph 8B(v).
"INDEMNITOR" has the meaning set forth in Paragraph 8B(v).
"INSTITUTE" has the meaning set forth in Paragraph 8G(ii).
"INTELLECTUAL PROPERTY RIGHTS" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) internet domain names,
trademarks, service marks, trade dress, trade names, logos and corporate names
and registrations and applications for registration thereof together with all of
the goodwill associated therewith, (iii) copyrights (registered or unregistered)
and copyrightable works and registrations and applications for registration
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data, data bases and documentation thereof,
(vi) trade secrets and other confidential information (including ideas,
formulas, compositions, inventions (whether patentable or unpatentable and
whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
and (vii) copies and tangible embodiments thereof (in whatever form or medium).
"INTERNATIONAL TRADE LAWS AND REGULATIONS" shall mean all federal,
state, local and foreign statutes, executive orders, proclamations, regulations,
rules, directives, decrees, ordinances and similar provisions having the force
or effect of law and all judicial and administrative orders, rulings,
determinations and common law concerning the importation of merchandise, the
export or reexport of products, services and technology, the terms and conduct
of international transactions, making or receiving international payments and
the authorization to hold an ownership interest in a business located in a
country other than the United States, including but not limited to the Tariff
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Act of 1930 as amended and other laws administered by the United States Customs
Service, regulations issued or enforced by the United States Customs Service,
the Export Administration Act of 1979 as amended, the Export Administration
Regulations, the International Emergency Economic Powers Act, the Arms Export
Control Act, the International Traffic in Arms Regulations, any other export
controls administered by an agency of the United States government, Executive
Orders of the President regarding embargoes and restrictions on trade with
designated countries and Persons, the embargoes and restrictions administered by
the United States Office of Foreign Assets Control, the Foreign Corrupt
Practices Act, the antiboycott regulations administered by the United States
Department of Commerce, the antiboycott regulations administered by the United
States Department of the Treasury, legislation and regulations of the United
States and other countries implementing the North American Free Trade Agreement
(NAFTA), antidumping and countervailing duty laws and regulations, laws and
regulations by other countries concerning the ability of U.S. Persons to own
businesses and conduct business in those countries, restrictions by other
countries on holding foreign currency and repatriating funds and other laws and
regulations adopted by the governments or agencies of other countries relating
to the same subject matter as the United States statutes and regulations
described above.
"INVESTMENT" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interests (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"INVESTMENT TRANSACTION" has the meaning set forth in Paragraph 1B.
"LATEST BALANCE SHEET" has the meaning set forth in Paragraph 5E(i).
"LEASED REAL PROPERTY" has the meaning set forth in Paragraph 5CC.
"LIEN" or "LIENS" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any filing or agreement to file a
financing statement as debtor under the Uniform Commercial Code or any similar
statute (other than to reflect ownership by a third party of property leased to
the Company under a lease which is not in the nature of a conditional sale or
title retention agreement), or any subordination arrangement in favor of another
Person.
"LOSS" or "LOSSES" has the meaning set forth in Paragraph 8B(i).
"MATERIAL ADVERSE EFFECT" means a material and adverse effect upon
the business, operations, assets, liabilities, financial condition, operating
results, cash flow, net worth or employee, customer or supplier relations of the
Company.
"NETCOM EUROPE" has the meaning set forth in Paragraph 1A(ii).
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"OTHER PLANS" has the meaning set forth in Paragraph 5W(v).
"OTHER SELLERS" has the meaning set forth in Paragraph 2H.
"PARTY" or "PARTIES" has the meaning set forth in the Preamble.
"PERMITTED ENCUMBRANCES" shall mean (i) statutory liens for current
Taxes or other governmental charges not yet due and payable or the amount or
validity of which is being contested in good faith by appropriate proceedings by
the Company and for which appropriate reserves have been established in
accordance with GAAP; (ii) mechanics', carriers', workers', repairers' and
similar statutory liens arising or incurred in the ordinary course of business
for amounts which are not delinquent and which are not, individually or in the
aggregate, material to the Company's business; (iii) zoning, entitlement,
building and other land use regulations imposed by governmental agencies having
jurisdiction over the Leased Real Property which are not violated by the current
use and operation of the Leased Real Property; (iv) covenants, conditions,
restrictions, easements and other similar matters of record affecting title to
the Leased Real Property which do not materially impair the occupancy or use of
the Leased Real Property for the purposes for which it is currently used in
connection with the Company's business; (v) Liens of landlords or lessors under
leases arising by contract or operation of law; (vi) Liens arising from purchase
money or capitalized leases for capital assets used in Company's business and
rights of lessors under capital leases; PROVIDED THAT no such Liens shall extend
to any assets of the Company other than those financed by such purchase money
obligation or capital lease (and the proceeds thereof); (vii) Liens incurred to
secure the purchase price, cost of construction or improvement of property or
Liens incurred to secure the Indebtedness incurred to finance such purchase
price or cost; PROVIDED THAT (a) any such Lien shall attach only to the property
so purchased, constructed or improved, and (b) the amount of Indebtedness
secured by any such Liens hall not exceed the purchase price of such property;
(viii) Liens in favor of customs and revenue authorities which secure payment of
customs in connection with the importation of goods in the ordinary course of
business; (ix) Liens which constitute rights of set-off of a customary nature or
bankers' Liens on amounts on deposit, whether arising by contract or by
operation of law, in connection with arrangements entered into with depository
institutions in the ordinary course of business; and (x) Liens on insurance
policies or the proceed of insurance policies incurred solely to secure the
financing of premiums owing with respect thereto.
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PLANS" has the meaning set forth in Paragraph 5W(vi).
"PREFERRED STOCK" has the meaning set forth in Paragraph 1A(iii).
"PRODUCT CERTIFICATIONS" has the meaning set forth in Paragraph
5I(ii).
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"PURCHASE PRICE" has the meaning set forth in Paragraph 1B.
"PURCHASER INDEMNIFIED PARTIES" has the meaning set forth in
Paragraph 8B(ii).
"PURCHASER" or "PURCHASERS" has the meaning set forth in the
Preamble.
"REGISTRATION AGREEMENT" has the meaning set forth in Paragraph 2E.
"RELEASE" shall have the meaning set forth in CERCLA.
"REPRESENTATIVES" has the meaning set forth in Paragraph 8G(i).
"REPURCHASE PRICE" has the meaning set forth in Paragraph 1A(v);
PROVIDED THAT, for purposes of Paragraph 8B(iii), "REPURCHASE PRICE" means
$146,242,089.
"REPURCHASE TRANSACTION" has the meaning set forth in Paragraph 1C.
"REPURCHASED SHARES" has the meaning set forth in Paragraph 1A(v).
"REQUISITE PURCHASERS" means those Purchasers holding at least
66-2/3% of the Common Stock issued or issuable upon conversion of the
Convertible Preferred Stock held (or to be purchased) by all of the Purchasers.
"RESTRICTIVE COVENANTS" has the meaning set forth in Paragraph
8D(iii).
"RESTRICTED SECURITIES" means (i) the Preferred Stock issued
hereunder, (ii) the Common Stock issued upon conversion of the Convertible
Preferred Stock issued hereunder, (iii) any other securities of the Company held
by any of the Parties (including any Common Stock held by the Sellers) as of the
Closing Date and (iv) any securities issued or exchanged with respect to the
securities referred to in clauses (i), (ii) and (iii) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have been (a) effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) been distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or become eligible for sale pursuant to Rule 144(k) (or any
similar provision then in force) under the Securities Act or (c) been otherwise
transferred and new certificates for them not bearing the Securities Act legend
set forth in Paragraph 11C(v) have been delivered by the Company in accordance
with Paragraph 11C(v). Whenever any particular securities cease to be
Restricted Securities, the holder thereof shall be entitled to receive from the
Company, without expense, new securities of like tenor not bearing a Securities
Act legend of the character set forth in Paragraph 11C(v).
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"SBA" means the United States Small Business Administration, and any
successor agency performing the functions thereof.
"SBIC" means a Small Business Investment Company licensed by the SBA
under the SBIC Act.
"SBIC ACT" means the Small Business Investment Act of 1958, as
amended.
"SBIC PURCHASER" means NationsBanc Capital Corp.
"SBIC REGULATIONS" means the SBIC Act and the regulations issued by
the SBA thereunder, codified at Title 13 of the Code of Federal Regulations ("13
CFR"), Parts 107 and 121.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
"SELLER OR SELLERS" has the meaning set forth in the preamble.
"SELLER REPRESENTATIVE" means Marc Hamon.
"SENIOR DEBT TRANSACTION" means the financing to be provided to the
Company at the Closing pursuant to the Senior Loan Documents.
"SENIOR LOAN DOCUMENTS" means the Credit Agreement, dated as of the
Closing Date, by and among the Company, the Bank and the other lenders named
therein, and all other agreements and instruments contemplated thereby, in each
case as the same may be amended or modified from time to time in accordance with
their respective terms.
"SHAREHOLDERS AGREEMENT" has the meaning set forth in Paragraph 2D.
"STOCK OPTION PLANS" has the meaning set forth in Paragraph 2F.
"STOCK PURCHASE AGREEMENT" has the meaning set forth in
Paragraph 2H.
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to
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have a majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director or general partner of such limited liability company, partnership,
association or other business entity.
"TAX" or "TAXES" means federal, state, county, local, foreign or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including
deficiencies, penalties, additions to tax, and interest attributable thereto)
whether disputed or not.
"TAX RETURN" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
"THIRD PARTY APPROVALS" has the meaning set forth in Paragraph 2P.
"TREASURY REGULATIONS" means the United States Treasury Regulations
promulgated under the Code, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 10. TERMINATION.
10A. CONDITIONS OF TERMINATION. This Agreement may be terminated
at any time prior to the Closing:
(i) by the mutual written consent of the Parties;
(ii) by the Requisite Purchasers if there has been a material
misrepresentation, material breach of warranty or material breach of a covenant
by the Company or any Seller in the representations and warranties or covenants
set forth in this Agreement or the Schedules and Exhibits attached hereto, which
in the case of any breach of covenant has not been cured within twenty (20) days
after written notification thereof by the Requisite Purchasers to the Company
and the Sellers;
(iii) by the Company and the Sellers if there has been a material
misrepresentation, material breach of warranty or material breach of covenant by
the Purchasers in the representations and warranties or covenants set forth in
this Agreement or the Schedules and Exhibits attached hereto, which in the case
of any breach of covenant has not been cured within twenty (20) days after
written notification thereof by the Company and the Sellers to the Purchasers;
or
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(iv) by the Requisite Purchasers or the Company and the Sellers if
the transactions contemplated hereby have not been consummated by September 15,
1997; PROVIDED THAT the Party electing termination pursuant to this clause (iv)
is not in breach of any of its representations, warranties, covenants or
agreements contained in this Agreement or the Schedules and Exhibits attached
hereto.
In the event of termination by either the Requisite Purchasers or the Company
and the Sellers pursuant to this Paragraph 10A, written notice thereof
(describing in reasonable detail the basis therefor) shall forthwith be
delivered to the other Parties.
10B. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Requisite Purchasers or the Company and the Seller
Representative as provided above, this Agreement shall forthwith become void and
of no further force and effect, except that the covenants and agreements set
forth in the last two sentences of Paragraph 4J and Paragraphs 8E, 10A, 10B,
11A, 11B, 11D, 11E, 11F, 11G, 11H, 11I, 11J, 11M, 11O, 11P, 11Q and 11R shall
survive such termination indefinitely, and except that nothing in Paragraph 10A
or this Paragraph 10B shall be deemed to release any Party from any liability
for any breach by such Party of the terms and provisions of this Agreement or to
impair the right of any Party to compel specific performance by another Party of
its obligations under this Agreement.
Section 11. MISCELLANEOUS.
11A. FEES AND EXPENSES. Each Party shall pay all of its own fees
and expenses (including fees and expenses of legal counsel, accountants,
investment bankers and other representatives and consultants) in connection with
this Agreement and the consummation of the transactions contemplated hereby;
PROVIDED THAT upon the consummation of the Closing hereunder, the Company shall
pay all such fees and expenses incurred by the Parties or reimburse the Parties
for such fees and expenses. In addition, the Company shall pay, and shall hold
each Purchaser harmless against liability for the payment of, all stamp and
other Taxes which may be payable in respect of the execution and delivery of
this Agreement or the issuance, delivery or acquisition of any Preferred Stock
or the issuance of any Common Stock upon conversion of the Convertible Preferred
Stock. If any legal action or other proceeding relating to this Agreement, the
agreements contemplated hereby, the transactions contemplated hereby or thereby
or the enforcement of any provision of this Agreement or the agreements
contemplated hereby is brought against any Party, the prevailing Party in such
action or proceeding shall be entitled to recover all reasonable expenses
relating thereto (including attorneys' fees and expenses) from the Party against
which such action or proceeding is brought in addition to any other relief to
which such prevailing Party may be entitled.
11B. REMEDIES. The Purchasers shall have all rights and remedies
set forth in this Agreement and the Articles of Incorporation and all rights and
remedies which the Purchasers have been granted at any time under any other
agreement or contract executed in connection with the transactions contemplated
hereby and, with respect to any additional rights the Purchasers may have
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against the Company, all of the rights which the Purchasers have under
applicable law. Each of the Parties acknowledges and agrees that the other
Parties would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the Parties agrees that the other Parties
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the Parties and the matter.
11C. TRANSFER OF RESTRICTED SECURITIES.
(i) Restricted Securities are transferable only pursuant to (a)
public offerings registered under the Securities Act, (b) Rule 144 or Rule 144A
of the Securities and Exchange Commission (or any similar rule or rules then in
force) if such rule is available and (c) subject to the conditions specified in
subparagraph (ii) below, any other legally available means of transfer.
(ii) In connection with the transfer of any Restricted Securities
(other than a transfer described in clause (a) or (b) of subparagraph (i)
above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of Kirkland & Ellis, Wilson Sonsini Goodrich & Rosati or other
counsel which (to the Company's reasonable satisfaction) is knowledgeable in
securities law matters to the effect that such transfer of Restricted Securities
may be effected without registration of such Restricted Securities under the
Securities Act. In addition, if the holder of the Restricted Securities
delivers to the Company an opinion of Kirkland & Ellis, Wilson Sonsini Goodrich
& Rosati or such other counsel that no subsequent transfer of such Restricted
Securities shall require registration under the Securities Act, the Company
shall promptly upon such contemplated transfer deliver new certificates or
instruments, as the case may be, for such Restricted Securities which do not
bear the Securities Act legend set forth in Paragraph 11C(v) below. If the
Company is not required to deliver new certificates or instruments, as the case
may be, for such Restricted Securities not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this Paragraph 11C(ii) and Paragraph 11C(v) below.
(iii) Upon the request of a holder of Restricted Securities, the
Company shall promptly supply to such holder or such holder's prospective
transferees all information regarding the Company required to be delivered in
connection with a transfer pursuant to Rule 144A of the Securities and Exchange
Commission.
(iv) If any Restricted Securities become eligible for sale
pursuant to Rule 144(k), the Company shall, upon the request of the holder of
such Restricted Securities, remove the legend set forth in Paragraph 11C(v) from
the certificates or instruments, as the case may be, representing such
Restricted Securities.
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(v) Each certificate or instrument representing Restricted
Securities shall be imprinted with a legend in substantially the following form:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended. The transfer of the securities
represented hereby is subject to the conditions specified in the
Recapitalization Agreement dated as of August 29, 1997, by and among
the issuer (the "COMPANY") and certain investors, and the Company
reserves the right to refuse the transfer of such securities until
such conditions have been fulfilled with respect to such transfer. A
copy of such conditions shall be furnished by the Company to the
holder hereof upon written request and without charge."
11D. CONSENT TO AMENDMENTS. This Agreement may be amended, or any
provision of this Agreement may be waived; PROVIDED THAT any such amendment or
waiver shall be binding upon the Company only if set forth in a writing executed
by the Company and referring specifically to the provision alleged to have been
amended or waived, any such amendment or waiver shall be binding upon the
Sellers only if set forth in a writing executed by the Seller Representative and
referring specifically to the provision alleged to have been amended or waived,
and any such amendment or waiver shall be binding upon the Purchasers only if
set forth in a writing executed by the Requisite Purchasers and referring
specifically to the provision alleged to have been amended or waived. No course
of dealing between or among the Parties shall be deemed effective to modify,
amend or discharge any part of this Agreement or any rights or obligations of
any Party under or by reason of this Agreement.
11E. SUCCESSORS AND ASSIGNS.
(i) This Agreement and all covenants and agreements
contained herein and rights, interests or obligations hereunder, by or on behalf
of any of the Parties hereto, shall bind and inure to the benefit of the
respective successors and assigns of the Parties hereto whether so expressed or
not, except that neither this Agreement nor any of the covenants and agreements
herein or rights, interests or obligations hereunder may be assigned or
delegated by any Seller, or assigned or delegated by the Company prior to the
Closing, without the prior written consent of the Requisite Purchasers.
(ii) Each of the Purchasers may (at any time prior to the
Closing), in its sole discretion, assign in whole or in part its rights and
obligations pursuant to this Agreement (including the right to purchase any
Preferred Stock) to one or more of its Affiliates, and each of the Purchasers
may, in its sole discretion, direct the Company to convey any Preferred Stock to
one or more of its Affiliates subject to compliance with applicable securities
laws. In connection with any such assignment, the assigning Purchaser shall
cause the prospective assignee to execute and deliver to the Parties a
counterpart to this Agreement and the Shareholders Agreement and an
acknowledgment by such Person agreeing to be bound by all terms and provisions
hereof as a "Purchaser" hereunder and as "Investor" and "Shareholder" under the
Shareholders Agreement.
-56-
<PAGE>
Each of the Purchasers and, following the Closing, the Company and its
Subsidiaries may assign its rights pursuant to this Agreement, including its
rights to indemnification, to any of its lenders as collateral security. Each
of the Purchasers and, following the Closing, the Company and its Subsidiaries
may assign this Agreement and its rights and obligations hereunder in connection
with a merger or consolidation involving the Company or any of its Subsidiaries
or in connection with a sale of stock or assets of the Company or any of its
Subsidiaries or other disposition of the Company or any of its Subsidiaries.
11F. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any Person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law in any respect by a court of
competent jurisdiction, such provision shall be ineffective only to the extent
of such prohibition or illegality or unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
11G. COUNTERPARTS. This Agreement may be executed simultaneously
in counterparts (including by means of telecopied signature pages), any one of
which need not contain the signatures of more than one Party, but all such
counterparts taken together shall constitute one and the same Agreement.
11H. DESCRIPTIVE HEADINGS; INTERPRETATION. The headings and
captions used in this Agreement and the table of contents to this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized terms used in any Schedule or
Exhibit attached hereto and not otherwise defined therein shall have the
meanings set forth in this Agreement. The use of the word "including" herein
shall mean "including without limitation." The Parties intend that each
representation, warranty and covenant contained herein shall have independent
significance. If any Party has breached any representation, warranty or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
11I. ENTIRE AGREEMENT. This Agreement and the agreements and
documents referred to herein contain the entire agreement and understanding
between the Parties with respect to the subject matter hereof and supersede all
prior agreements and understandings (including that certain letter agreement,
dated July 20, 1997, between Summit Partners, L.P., Montgomery Securities and
the Company), whether written or oral, relating to such subject matter in any
way.
11J. NO THIRD-PARTY BENEFICIARIES. This Agreement is for the sole
benefit of the Parties and their permitted successors and assigns and nothing
herein expressed or implied shall give or be construed to give any Person, other
than the Parties and such permitted successors and assigns, any legal or
equitable rights hereunder.
-57-
<PAGE>
11K. SCHEDULES. Nothing in any Schedule attached hereto shall be
adequate to disclose an exception to a representation or warranty made in this
Agreement unless such Schedule identifies the exception with particularity.
Without limiting the generality of the foregoing, the mere listing (or inclusion
of a copy) of a document or other item shall not be adequate to disclose an
exception to a representation or warranty made in this Agreement, unless the
representation or warranty has to do with the existence of the document or other
item itself. No exceptions to any representations or warranties disclosed on
one Schedule shall constitute an exception to any other representations or
warranties made in this Agreement unless the substance of such exception is
disclosed as provided herein on each such other applicable Schedule or a
specific cross-reference to a disclosure on another Schedule is made.
11L. COOPERATION ON TAX MATTERS. The Parties shall cooperate
fully, as and to the extent reasonably requested by each Party and at the
requesting Party's expense, in connection with any audit, litigation or other
proceeding with respect to Taxes. Such cooperation shall include the retention
and (upon any Party's request) the provision of records and information which
are reasonably relevant to any such audit, litigation or other proceeding and
making employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Parties
agree (i) to retain all books and records with respect to Tax matters pertinent
to the Company and its Subsidiaries relating to any taxable period beginning
before the Closing Date until the expiration of the statute of limitations (and,
to the extent notified by any Party, any extensions thereof) applicable to such
taxable periods, and to abide by all record retention agreements entered into
with any taxing authority, and (ii) to give each Party reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if any Party so requests, the Purchasers, the Company or the Sellers, as the
case may be, shall allow such party to take possession of such books and
records.
11M. SCHEDULES AND EXHIBITS. All Schedules and Exhibits attached
hereto or referred to herein are hereby incorporated in and made a part of this
Agreement as if set forth in full herein.
11N. TREATMENT OF THE PREFERRED STOCK. The Company covenants and
agrees that (i) so long as federal income tax laws prohibit a deduction for
distributions made by the Company with respect to preferred stock, it shall
treat all distributions paid by it on the Preferred Stock as nondeductible
dividends on all of its tax returns, (ii) it shall treat the Preferred Stock as
preferred stock in all of its financial statements and other reports and shall
treat all distributions paid by it on the Preferred Stock as dividends on
preferred stock in such statements and reports. The Company agrees that the
"issue price" of the Redeemable Preferred Stock for purposes of Code Section 305
is equal to $100 per share. Accordingly, the Company will not report the
Redeemable Preferred Stock as having any constructive distributions under Code
Section 305. The Company agrees that the Convertible Preferred Stock is stock
which participates in corporate growth to a significant extent within the
meaning of Treasury Regulation Section 1.305-5(a), and hence will not be treated
as preferred stock for purposes of Code Section 305 and the regulations
thereunder. Accordingly, the Company has determined
-58-
<PAGE>
that there will not be constructive dividends under Treasury Regulation Section
1.305-5(b) with respect to the Convertible Preferred Stock.
11O. GOVERNING LAW. The corporate law of the State of California
shall govern all issues and questions concerning the relative rights and
obligations of the Company and the holders of its equity securities. All other
issues and questions concerning the construction, validity, enforcement and
interpretation of this Agreement and the Schedules and Exhibits hereto shall be
governed by, and construed in accordance with, the laws of the State of
California without giving effect to any choice of law or conflict of law rules
or provisions (whether of the State of California or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of California. In furtherance of the foregoing, the internal law of the
State of California shall control the interpretation and construction of this
Agreement (and all Schedules and Exhibits hereto), even though under that
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
11P. NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, one day after being sent to the recipient by reputable
overnight courier service (charges prepaid), upon machine-generated
acknowledgment of receipt after transmittal by facsimile or five days after
being mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to the Purchasers, the Sellers and the Company at the addresses
indicated below or to such other address or to the attention of such other
person as the recipient party has specified by prior written notice to the
sending party.
THE COMPANY
Netcom Systems, Inc.
20550 Nordoff Street
Chatsworth, California 91311
Attn: Chief Executive Officer
Phone: (818) 700-5100
Facsimile: (818) 700-5109
-59-
<PAGE>
WITH A COPY TO:
(which shall not constitute notice to the Company)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
Summit Partners, L.P.
499 Hamilton Avenue, Suite 200
Palo Alto, California 94301
Attn: Mr. Walter G. Kortschak
Phone: (415) 321-1166
Facsimile: (415) 321-1188
Northstar Investors, LLC
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Attn: Mr. Derek Lemke
Phone: (415) 627-2682
Facsimile: (415) 249-5704
NationsBanc Capital Corp.
NationsBank Corporate Center
10th Floor
100 North Tryon
Charlotte, North Carolina 28255
Attn: Mr. Robert H. Sheridan III
Phone: (704) 386-5109
Facsimile: (704) 386-6432
-60-
<PAGE>
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Ted H. Zook, Esq.
Phone: (312) 861-2294
Facsimile: (312) 861-2200
Fennesbresque, Clark, Swindell & Hay
NationsBank Corporate Center
29th Floor
100 North Tryon Street
Charlotte, North Carolina 28202
Attn: John S. Chinuntdet, Esq.
Phone: (704) 338-4716
Facsimile: (704) 347-3838
THE SELLERS:
To the Sellers at their respective addresses listed on the SCHEDULE
OF SELLERS attached hereto.
WITH A COPY TO:
(which shall not constitute notice to the Sellers)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
THE PURCHASERS:
To the Purchasers at their respective addresses
listed on the SCHEDULE OF PURCHASERS attached hereto
-61-
<PAGE>
WITH COPY TO:
(which shall not constitute notice to the Purchasers)
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Ted H. Zook, Esq.
Phone: (312) 861-2294
Facsimile: (312) 861-2200
Fennesbresque, Clark, Swindell & Hay
NationsBank Corporate Center
29th Floor
100 North Tryon Street
Charlotte, North Carolina 28202
Attn: John S. Chinuntdet, Esq.
Phone: (704) 338-4716
Facsimile: (704) 347-3838
11Q. NO STRICT CONSTRUCTION. The Parties have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the Parties, and no presumption or burden
of proof shall arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Recapitalization Agreement on the date first written above.
NETCOM SYSTEMS, INC.
By:
---------------------------------------
Its:
---------------------------------------
SUMMIT VENTURES IV., L.P.
By: Summit Partners, IV, L.P., its General
Partner
By: Stamps, Woodsum & Co. IV, its General
Partner
By:
---------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
---------------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
---------------------------------------
Todd A. Binkowski, its
Authorized Signatory
NORTHSTAR INVESTORS, LLC
By:
---------------------------------------
Its:
---------------------------------------
[Signature Page to Recapitalization Agreement]
<PAGE>
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS Spitfire, LLC, its General Partner
By:
---------------------------------------
William B. Bunting
Its:
---------------------------------------
Peter Mooney, as nominee for
BROADVIEW PARTNERS GROUP
By:
---------------------------------------
Its:
---------------------------------------
BAIN SECURITIES, INC.
By:
---------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
---------------------------------------
Its:
---------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
---------------------------------------
Its:
---------------------------------------
--------------------------------------------
Steven E. Bochner
--------------------------------------------
Nevan C. Elam
--------------------------------------------
Todd Cleary
[Signature Page to Recapitalization Agreement]
<PAGE>
--------------------------------------------
Marc Hamon
--------------------------------------------
Henri Hamon
--------------------------------------------
James C. Jordan
--------------------------------------------
Jing Zhang
--------------------------------------------
Warren B. Phelps III
--------------------------------------------
Stephane Johnson
--------------------------------------------
Richard Bass
[Signature Page to Recapitalization Agreement]
<PAGE>
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Number of Shares Purchase Price Number of Shares Purchase Price Total Purchase
of Redeemable for Redeemable of Convertible for Convertible Price for
Name and Address Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Summit Ventures IV, L.P. 236,856 $ 23,685,576 11,180,936 $23,685,576 $47,371,152
c/o Summit Partners, L.P.
499 Hamilton Avenue
Suite 200
Palo Alto, California 94301
Attn: Walter G. Kortschak
Phone: (415) 321-1166
Facsimile: (415) 321-1188
Summit Investors III, L.P. 3,236 323,624 152,769 323,624 647,248
c/o Summit Partners, L.P.
499 Hamilton Avenue
Suite 200
Palo Alto, California 94301
Attn: Walter G. Kortschak
Phone: (415) 321-1166
Facsimile: (415) 321-1188
NationsBanc Capital Corp. 80,000 8,000,000 3,776,454 8,000,000 16,000,000
c/o NationsBank Capital Investors
NationsBank Corporate Center, 10th
Floor
100 North Tryon
Charlotte, North Carolina 28255
Attn: Robert H. Sheridan III
Phone: (704) 386-5109
Facsimile: (704) 386-6432
Northstar Investors, LLC 145,092 14,509,200 6,849,166 14,509,200 29,018,400
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Attn: Derek Lemke
Phone: (415) 627-2682
Facsimile: (415) 249-5704
Spitfire Capital Partners, L.P. 15,000 1,500,000 708,085 1,500,000 3,000,000
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Attn: William Bunting
Phone: (415 ) 627-2426
Facsimile: (415) 249-5704
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Purchase Price Number of Shares Purchase Price Total Purchase
of Redeemable for Redeemable of Convertible for Convertible Price for
Name and Address Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Bain Securities, Inc. 500 50,000 23,603 50,000 100,000
c/o Bain & Company, Inc.
Two Cooley Place
Boston, Massachusetts 02116
Attn: Leonard C. Bands
Phone: (617) 572-3178
Facsimile: (617) 572-3266
Peter Mooney, as nominee for 1,500 150,000 70,808 150,000 300,000
Broadview Partners Group
c/o Broadview Associates
950 Tower Lane
18th Floor
Foster City, California 94404
Attn: Stephen S. Smith
Phone: (415) 378-4700
Facsimile: (415) 378-4710
WS Investment Company 97B 250 25,000 11,801 25,000 50,000
c/o Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
WSGR Profit Sharing Trust 100 10,000 4,721 10,000 20,000
FBO Steven E. Bochner
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
Steven E. Bochner 93 9,300 4,343 9,200 18,500
c/o Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
Nevam C. Elam 50 500 2,360 5,000 10,000
c/o Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Purchase Price Number of Shares Purchase Price Total Purchase
of Redeemable for Redeemable of Convertible for Convertible Price for
Name and Address Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Todd Cleary 7 700 378 800 1,500
c/o Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Phone: (415) 354-4110
Facsimile: (415) 496-4084
-------------- ------------- ------------- ------------- -------------
482,684 $ 48,268,400 22,785,424 $ 48,268,400 $ 96,536,800
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF SELLERS
Number of Repurchase Exercise Net Repurchase Escrow Closing Cash
Name and Address Repurchased Shares Price Price Price Amount Amount
- ----------------------------- ------------------ ----------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marc Hamon 8,000,000 $ 122,336,000 -- $ 122,336,000 $ 6,273,979 $ 116,062,021
20550 Nordoff Street
Chatsworth, California 91311
James C. Jordan 840,000 12,845,280 795,000 12,050,280 617,996 11,432,284
20550 Nordoff Street
Chatsworth, California 91311
Warren B. Phelps III 26,666 407,776 33,332 374,444 19,204 355,240
20550 Nordoff Street
Chatsworth, California 91311
Jing Zhang 80,000 1,223,360 133,333 1,090,027 55,902 1,034,125
20550 Nordoff Street
Chatsworth, California 91311
Stephane Johnson 26,666 407,776 33,332 374,444 19,204 355,240
20550 Nordoff Street
Chatsworth, California 91311
Richard Bass 160,000 2,446,720 0 2,446,720 125,480 2,321,240
___________________
___________________
------------------ ----------- --------- -------------- ----------- -------------
9,133,332 $ 139,666,912 $ 994,997 $ 138,671,915 $ 7,111,765 $ 131,560,150
------------------ ----------- --------- -------------- ----------- -------------
------------------ ----------- --------- -------------- ----------- -------------
</TABLE>
<PAGE>
Exhibit 10.6
Execution Copy
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$60,000,000
CREDIT AGREEMENT
AMONG
NETCOM SYSTEMS, INC.
CERTAIN LENDERS NAMED HEREIN
BANKBOSTON, N.A., AS DOCUMENTATION AGENT
AND
NATIONSBANK OF TEXAS, N.A., AS ADMINISTRATIVE AGENT
August 29, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 Definitions
Section 1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.2 Amendments and Renewals. . . . . . . . . . . . . . . . . . . . 23
Section 1.3 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 2 Advances
Section 2.1 The Advances . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.2 Manner of Borrowing and Disbursement . . . . . . . . . . . . . 24
Section 2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.5 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.6 Reduction of Revolving Credit Commitment . . . . . . . . . . . 29
Section 2.7 Non-Receipt of Funds by the Administrative Agent . . . . . . . 30
Section 2.8 Payment of Principal of Advances . . . . . . . . . . . . . . . 30
Section 2.9 Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 2.10 Manner of Payment. . . . . . . . . . . . . . . . . . . . . . . 31
Section 2.11 LIBOR Lending Offices. . . . . . . . . . . . . . . . . . . . . 32
Section 2.12 Sharing of Payments. . . . . . . . . . . . . . . . . . . . . . 32
Section 2.13 Calculation of LIBOR Rate. . . . . . . . . . . . . . . . . . . 33
Section 2.14 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.15 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 3 Conditions Precedent
Section 3.1 Conditions Precedent to the Initial Advances and the
Initial Letters of Credit. . . . . . . . . . . . . . . . . . . 42
Section 3.2 Conditions Precedent to All Advances and Letters of Credit . . 44
Section 3.3 Conditions Precedent to Conversions and Continuations. . . . . 45
ARTICLE 4 Representations and Warranties
Section 4.1 Representations and Warranties . . . . . . . . . . . . . . . . 45
Section 4.2 Survival of Representations and Warranties, etc. . . . . . . . 53
ARTICLE 5 General Covenants
Section 5.1 Preservation of Existence and Similar Matters. . . . . . . . . 53
Section 5.2 Business; Compliance with Applicable Law . . . . . . . . . . . 54
<PAGE>
Section 5.3 Maintenance of Properties. . . . . . . . . . . . . . . . . . . 54
Section 5.4 Accounting Methods and Financial Records . . . . . . . . . . . 54
Section 5.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 5.6 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . 54
Section 5.7 Visits and Inspections . . . . . . . . . . . . . . . . . . . . 55
Section 5.8 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.9 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.10 Environmental Law Compliance . . . . . . . . . . . . . . . . . 57
Section 5.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 57
Section 5.12 Restricted Domestic Subsidiaries . . . . . . . . . . . . . . . 58
ARTICLE 6 Information Covenants
Section 6.1 Monthly Financials.. . . . . . . . . . . . . . . . . . . . . . 58
Section 6.2 Quarterly Financial Statements and Information . . . . . . . . 58
Section 6.3 Annual Financial Statements and Information;
Certificate of No Default . . . . . . . . . . . . . . . . . . 59
Section 6.4 Compliance Certificate . . . . . . . . . . . . . . . . . . . . 59
Section 6.5 Copies of Other Reports and Notices. . . . . . . . . . . . . . 59
Section 6.6 Notice of Litigation, Default and Other Matters. . . . . . . . 60
Section 6.7 ERISA Reporting Requirements . . . . . . . . . . . . . . . . . 60
ARTICLE 7 Negative Covenants
Section 7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.2 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.3 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 7.4 Liquidation, Merger. . . . . . . . . . . . . . . . . . . . . . 65
Section 7.5 Sales of Assets. . . . . . . . . . . . . . . . . . . . . . . . 66
Section 7.6 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 7.7 Restricted Payments. . . . . . . . . . . . . . . . . . . . . . 67
Section 7.8 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . 67
Section 7.9 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . 67
Section 7.10 Maximum Leverage Ratio . . . . . . . . . . . . . . . . . . . . 67
Section 7.11 Minimum Fixed Charge Coverage Ratio. . . . . . . . . . . . . . 68
Section 7.12 Minimum EBITDA and Net Income. . . . . . . . . . . . . . . . . 68
Section 7.13 Sale or Discount of Receivables. . . . . . . . . . . . . . . . 68
Section 7.14 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 7.15 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 7.16 Amendment of Organizational Documents. . . . . . . . . . . . . 68
Section 7.17 Amendments and Waivers of Institutional Debt . . . . . . . . . 69
Section 7.18 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . 69
<PAGE>
ARTICLE 8 Default
Section 8.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . 69
Section 8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
ARTICLE 9 Changes in Circumstances
Section 9.1 LIBOR Basis Determination Inadequate . . . . . . . . . . . . . 73
Section 9.2 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.3 Increased Costs. . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.4 Effect On Base Rate Advances . . . . . . . . . . . . . . . . . 75
Section 9.5 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.6 Replacement Lender . . . . . . . . . . . . . . . . . . . . . . 76
ARTICLE 10 Agreement Among Lenders
Section 10.1 Agreement Among Lenders. . . . . . . . . . . . . . . . . . . . 76
Section 10.2 Lender Credit Decision . . . . . . . . . . . . . . . . . . . . 79
Section 10.3 Benefits of Article. . . . . . . . . . . . . . . . . . . . . . 79
ARTICLE 11 Miscellaneous
Section 11.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 11.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 11.3 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 11.4 Calculation by the Lenders Conclusive and Binding. . . . . . . 81
Section 11.5 Set-Off. . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 11.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 11.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 11.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 11.9 Interest and Charges . . . . . . . . . . . . . . . . . . . . . 83
Section 11.10 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Section 11.11 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . 84
Section 11.12 Exception to Covenants . . . . . . . . . . . . . . . . . . . . 84
Section 11.13 No Liability of Issuing Bank . . . . . . . . . . . . . . . . . 85
Section 11.14 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 85
Section 11.15 No Duties of Documentation Agent . . . . . . . . . . . . . . . 85
Section 11.16 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 11.17 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 86
Section 11.18 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 86
Section 11.19 Consent by Administrative Agent and the Lenders. . . . . . . . 86
</TABLE>
<PAGE>
SCHEDULES AND EXHIBITS
Schedule 1: LIBOR Lending Offices
Schedule 2: Existing Liens
Schedule 3: Existing Litigation
Schedule 4: Capitalization
Schedule 5: Existing Investments
Schedule 6: Existing Indebtedness
Schedule 7: Authorizstion, Qualification and Good Standing
Schedule 8: Labor Relations
Exhibit A: Revolving Credit Note
Exhibit B: Term Loan Note
Exhibit C: Compliance Certificate
Exhibit D: Assignment and Acceptance
Exhibit E: Subsidiary Guaranty
Exhibit F: Notice of Borrowing
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of August 29, 1997, among NETCOM SYSTEMS,
INC., a California corporation (the "Borrower"), the Lenders from time to time
party hereto, BANKBOSTON, N.A., as documentation agent, and NATIONSBANK OF
TEXAS, N.A., a national banking association, as administrative agent for the
Lenders.
BACKGROUND
The Lenders have been requested to provide the Borrower funds to
(a) consummate the Netcom Recapitalization (as hereinafter defined),
(b) refinance a portion of the existing debt of the Borrower (including trade
payables), (c) pay certain fees and expenses related to the Netcom
Recapitalization, (d) finance acquisitions and to finance the repurchase of the
Netcom Preferred Stock, in each case to the extent permitted hereunder, and
(e) finance the ongoing working capital and general corporate requirements of
the Borrower and its Subsidiaries (as hereinafter defined). The Lenders have
agreed to provide such financing, subject to the terms and conditions set forth
below.
In consideration of the mutual covenants and agreements contained herein,
and other good and valuable consideration hereby acknowledged, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 DEFINED TERMS. For purposes of this Agreement:
"ACQUISITION" means any transaction pursuant to which the Borrower or any
of its Subsidiaries, (a) whether by means of a capital contribution or purchase
or other acquisition of stock or other securities or other equity participation
or interest, (i) acquires more than 50% of the equity interest in any Person
pursuant to a solicitation by the Borrower or such Subsidiary of tenders of
equity securities of such Person, or through one or more negotiated block,
market, private or other transactions, or a combination of any of the foregoing,
or (ii) makes any corporation a Subsidiary of the Borrower or such Subsidiary,
or causes any corporation, other than a Subsidiary of the Borrower or such
Subsidiary, to be merged into the Borrower or such Subsidiary (or agrees to be
merged into any other corporation other than a wholly-owned Subsidiary
(excluding directors' qualifying shares) of the Borrower or such Subsidiary), or
(b) purchases all or substantially all of the business or assets of any Person
or of any operating division of any Person.
<PAGE>
"ACQUISITION CONSIDERATION" means the consideration given by the Borrower
or any of its Restricted Subsidiaries for an Acquisition, including but not
limited to the fair market value of any cash, property, stock or services given,
the amount of any Indebtedness assumed or incurred by the Borrower or any
Restricted Subsidiary of the Borrower in connection with such Acquisition and
any and all obligations of the Borrower or any Restricted Subsidiary of the
Borrower under or in connection with any incentive, earn-out or other similar
arrangements incurred by it in connection with such Acquisition.
"ADMINISTRATIVE AGENT" means NationsBank of Texas, N.A., a national banking
association, as administrative agent for Lenders, or such successor
administrative agent appointed pursuant to SECTION 10.1(b) hereof.
"ADVANCE" means any amount advanced by the Lenders to the Borrower pursuant
to ARTICLE 2 hereof on the occasion of any borrowing.
"AFFILIATE" means, as applied to any Person, any other Person that,
directly or indirectly, through one or more Persons, Controls or is Controlled
By or Under Common Control with, such Person.
"AGREEMENT" means this Credit Agreement, as amended, modified, supplemented
or restated from time to time.
"AGREEMENT DATE" means the date of this Agreement.
"APPLICABLE BASE RATE MARGIN" means 0.00%.
"APPLICABLE ENVIRONMENTAL LAWS" means applicable laws pertaining to the
protection of human health or the protection of the environment, including
without limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 (as amended from time to time, "CERCLA"), the
Resource Conservation and Recovery Act of 1976, as amended by the Used Oil
Recycling Act of 1980, the Solid Waste Disposal Act amendments of 1980, and the
Hazardous and Solid Waste Amendments of 1984 (as amended from time to time,
"RCRA").
"APPLICABLE LAW" means (a) in respect of any Person, all provisions of
constitutions, statutes, rules, regulations and final orders of governmental
bodies or regulatory agencies applicable to such Person and its properties,
including, without limiting the foregoing, all orders and decrees of all
Tribunals in proceedings or actions to which the Person in question is a party,
and (b) in respect of contracts relating to interest or finance charges that are
made or performed in the State of Texas, "Applicable Law" shall mean the laws of
the United States of America, including without limitation 12 USC Sections 85
and 86, as amended from time to time, and any other statute of the United States
of America now or at any time hereafter prescribing the maximum rates of
interest on loans and extensions of credit, and the laws of the State of Texas.
2
<PAGE>
"APPLICABLE LIBOR RATE MARGIN" means the following per annum percentages,
applicable in the following situations:
<TABLE>
<CAPTION>
Applicability Percentage
------------- ----------
<S> <C>
(a) INITIAL PRICING PERIOD 1.25%
(b) SUBSEQUENT PRICING PERIOD
(1) The Leverage Ratio is greater than or equal to 1.50 1.50%
to 1
(2) The Leverage Ratio is less than 1.50 to 1 but 1.25%
greater than or equal to 1.00 to 1
(3) The Leverage Ratio is less than 1.00 0.875%
</TABLE>
During the Subsequent Pricing Period, the Applicable LIBOR Rate Margin payable
by the Borrower on the LIBOR Advances outstanding hereunder shall be subject to
reduction or increase, as applicable and as set forth in the table above, on a
quarterly basis according to the Leverage Ratio, determined as of the end of the
most recent fiscal quarter of the Borrower; PROVIDED, that each adjustment in
the LIBOR Basis as a result of a change in the Applicable LIBOR Rate Margin
shall be effective on the Business Day of receipt by the Administrative Agent of
the financial statements required to be delivered pursuant to SECTION 6.2 or 6.3
hereof, as applicable, for each such fiscal quarter, and the corresponding
Compliance Certificate required pursuant to SECTION 6.4 hereof. If such
financial statements and Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable LIBOR Rate Margin
shall be 1.25% until such time as such financial statements and Compliance
Certificate are received.
"ASSIGNEES" means any assignee of a Lender pursuant to an Assignment
Agreement and shall have the meaning ascribed thereto in SECTION 11.6 hereof.
"ASSIGNMENT AGREEMENT" has the meaning specified in SECTION 11.6 hereof.
"AUTHORIZED SIGNATORY" means any Senior Officer and such other senior
personnel of the Borrower as may be duly authorized and designated in writing by
the Borrower to execute documents, agreements and instruments on behalf of the
Borrower, and to request Advances and Letters of Credit hereunder.
"BASE CASH FLOW" means, for any date of calculation, calculated for the
Borrower and its Restricted Subsidiaries on a consolidated basis, an amount
equal to the sum of (a) EBITDA, minus (b) Capital Expenditures, minus (c) cash
taxes.
"BASE RATE ADVANCE" means any Advance bearing interest at the Base Rate
Basis.
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<PAGE>
"BASE RATE BASIS" means, for any day, a per annum interest rate equal to
the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such
day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the Prime
Rate on such day plus (ii) the Applicable Base Rate Margin. The Base Rate Basis
shall be adjusted automatically without notice as of the opening of business on
the effective date of each change in the Prime Rate or Federal Funds Rate, as
applicable, to account for such change.
"BASLE ACCORD" means the proposals for risk-based capital framework
described by the Basle Committee on Banking Regulations and Supervisory
Practices in its paper entitled "International Convergence of Capital Management
and Capital Standards" dated July 1988, as amended, modified, and supplemented
and in effect from time to time or any replacement thereof.
"BUSINESS DAY" means a day on which commercial banks are open (a) for the
transaction of business in Dallas, Texas and San Francisco, California, and
(b) with respect to any LIBOR Advance, for the transaction of international
business (including dealings in U.S. Dollar deposits) in London, England.
"CAPITAL EXPENDITURES" means, for any period, expenditures made by the
Borrower and its Restricted Subsidiaries to acquire or construct fixed assets,
plant and equipment (including renewals, improvements and replacements during
such period and the aggregate amount of items leased or acquired under
Capitalized Lease Obligations at the cost of the item) computed in accordance
with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" means that portion of any obligation of the
Borrower or any Restricted Subsidiary of the Borrower as lessee under a lease
which at the time would be required to be capitalized on a balance sheet of the
Borrower or such Restricted Subsidiary prepared in accordance with GAAP.
"CHANGE OF CONTROL" means the occurrence of any of the following events
after the Agreement Date: (a) any Person or any Persons acting together which
would constitute a "group" (a "Group") for purposes of SECTION 13(D) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor provision thereto, other than the holders of the Netcom Convertible
Preferred Stock as of the close of business on the Agreement Date, together with
any Affiliates or Related Persons thereof, shall beneficially own (as defined in
Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act or
any successor provision thereto) more than 50% of the aggregate Voting Power of
the Borrower; or (b) any "Change of Control", "Change in Ownership", "Change in
Control" or similar event or circumstance, however designated, under any
agreement or document governing any Institutional Debt, the Netcom Convertible
Preferred Stock or the Netcom Redeemable Preferred Stock.
"CODE" means the Internal Revenue Code of 1986, as amended.
4
<PAGE>
"COMMITMENTS" means, collectively, the Revolving Credit Commitment and the
Term Loan Commitment, as reduced from time to time in the case of the Revolving
Credit Commitment pursuant to SECTION 2.6 hereof.
"COMPLIANCE CERTIFICATE" means a certificate, signed by an Authorized
Signatory, in substantially the form of EXHIBIT C, appropriately completed.
"CONTROL" or "CONTROLLED BY" or "UNDER COMMON CONTROL" means possession,
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of voting securities, by contract or
otherwise); provided, however, that in any event any Person which beneficially
owns, directly or indirectly, 20% or more (in number of votes) of the securities
having ordinary voting power for the election of directors of a corporation
shall be conclusively presumed to control such corporation.
"CONTROLLED GROUP" means as of the applicable date, as to any Person not an
individual, all members of a controlled group of corporations and all trades or
businesses (whether or not incorporated) which are under common control with
such Person and which, together with such Person, are treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code; provided, however,
that the Subsidiaries of the Borrower shall be deemed to be members of the
Borrower's Controlled Group; provided, further, however, that no Person that is
Controlled By any of the owners of the Netcom Preferred Stock shall be deemed to
be members of the Borrower's Controlled Group.
"DEBTOR RELIEF LAWS" means any applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar
debtor relief Laws affecting the rights of creditors generally from time to time
in effect and applicable to the relevant case.
"DEFAULT" means an Event of Default and/or any of the events specified in
SECTION 8.1, regardless of whether there shall have occurred any passage of time
or giving of notice that would be necessary in order to constitute such event an
Event of Default.
"DEFAULT RATE" means a simple per annum interest rate equal to (a) with
respect to Base Rate Advances, the lesser of (i) the Highest Lawful Rate or
(ii) the Base Rate Basis then in effect plus 2.00% or (b) with respect to LIBOR
Advances, the lesser of (i) the Highest Lawful Rate or (ii) the LIBOR Basis then
in effect plus 2.00%.
"DETERMINING LENDERS" means, on any date of determination, any combination
of Lenders having 51% of the aggregate principal amount of Advances then
outstanding; PROVIDED, HOWEVER, that if there are no Advances outstanding
hereunder, "Determining Lenders" means any combination of Lenders whose
Specified Percentages aggregate 51%.
"DIVIDEND" means, as to any Person, (a) any declaration or payment of any
dividend (other than a stock dividend) on, or the making of any distribution on
account of, any Equity Interests of
5
<PAGE>
such Person and (b) any purchase, redemption, or other acquisition or retirement
for value of any Equity Interests of such Person.
"DOCUMENTATION AGENT" means BankBoston, N.A.
"DOLLAR" or "$" means the lawful currency of the United States of America.
"DOMESTIC CASH AND CASH EQUIVALENTS" means with respect to the Borrower and
each Domestic Subsidiary of the Borrower (a) cash, (b) securities issued or
directly and fully guaranteed or insured by the United States Government, or any
agency or instrumentality thereof, or any state or municipality having
maturities of not more than one year from the date of acquisition,
(c) certificates of deposit and time deposits with maturities of one year or
less from the date of acquisition, bankers' acceptances with maturities not
exceeding one year and overnight bank deposits, in each case with any Lender or
with any domestic commercial bank having a combined capital and surplus in
excess of $100,000,000, (d) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (b) and
(c) entered into with any financial institution meeting the qualifications
specified in clause (c) above, (e) commercial paper issued by any Lender or the
parent corporation of any Lender, and commercial paper rated A-1 or the
equivalent thereof by Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies, Inc., a New York corporation, or P-1 or the equivalent
thereof by Moody's Investors Service, Inc., and in each case maturing within 270
days after the date of acquisition, and (f) a readily redeemable "money market
fund" or "money market mutual fund" advised by a bank described in clause (c)
hereof, or an investment advisor registered under Section 203 of the Investment
Advisors Act of 1940, that has and maintains an investment policy limiting its
investments primarily to instruments of the types described in clauses (a)
through (e) hereof and having on the date of such Investment total assets of at
least $100,000,000.00.
"DOMESTIC SUBSIDIARY" means any Subsidiary of the Borrower other than a
Foreign Subsidiary.
"EBIT" means, for any period, determined in accordance with GAAP on a
consolidated basis for the Borrower and its Restricted Subsidiaries, the sum of
(a) Pretax Net Income (excluding therefrom, to the extent included in
determining Pretax Net Income, any items of extraordinary gain, including net
gains on the sale of assets other than asset sales in the ordinary course of
business, and adding thereto, to the extent included in determining Pretax Net
Income, any items of extraordinary loss, including net losses on the sale of
assets other than asset sales in the ordinary course of business), plus
(b) interest expense (including, without limitation, all commissions, discounts,
fees payable hereunder and other amounts payable in connection with any
Indebtedness permitted hereunder and interest expense pursuant to Capitalized
Lease Obligations).
"EBITDA" means, for any period, determined in accordance with GAAP on a
consolidated basis for the Borrower and its Restricted Subsidiaries, the sum of
(a) EBIT, plus (b) depreciation, amortization and other non-cash charges and
expenses (to the extent included in determining EBIT),
6
<PAGE>
(c) accrued but unpaid dividends on the Netcom Convertible Preferred Stock and
the Netcom Redeemable Preferred Stock (to the extent included in determining
EBIT), plus (d) fees and expenses in connection herewith and in connection with
the Netcom Recapitalization, plus (e) fees and expenses in connection with
Acquisitions permitted hereunder, plus (f) write-up of assets as permitted by
purchase accounting (APB Nos. 16 and 17) in connection with the acquisition of
assets permitted hereunder.
"ELIGIBLE ASSIGNEE" means (a) any Lender; (b) a commercial bank organized
under the laws of the United States, or any state thereof, and having total
assets in excess of $1,000,000,000; (c) a savings and loan association or
savings bank organized under the laws of the United States, or any state
thereof, having total assets in excess of $1,000,000,000, and not in
receivership or conservatorship; and (d) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development, or a political subdivision of any such country, and
having total assets in excess of $1,000,000,000, provided that such bank is
acting through a branch or agency located in the country in which it is
organized or another country which is described in this clause; provided that,
no Affiliate of the Borrower shall qualify as an Eligible Assignee and provided,
further, that after the occurrence and during the continuance of any Event of
Default, the term "Eligible Assignee" shall also include a finance company,
insurance company or other financial institution or fund (whether a corporation,
partnership, trust or other entity) that is engaged in making, purchasing or
otherwise investing in commercial loans in the ordinary course of its business
and having a combined capital and surplus of at least $100,000,000 and the
central bank of any country which is a member of the Organization for Economic
Cooperation and Development.
"EQUITY INTEREST" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital stock
in any Person that is a corporation, and each class of partnership interest
(including, without limitation, general, limited and preference units) in any
Person that is a partnership, and each class of member interest in any Person
that is a limited liability company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any regulation promulgated thereunder.
"ERISA EVENT" means, with respect to the Borrower and its Subsidiaries,
(a) a Reportable Event (other than a Reportable Event not subject to the
provision for 30-day notice to the PBGC pursuant to regulations issued under
Section 4043 of ERISA), (b) the withdrawal of any such Person or any member of
its Controlled Group from a Plan subject to Title IV of ERISA during a plan year
in which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, (c) the filing of a notice of intent to terminate under Section 4041(c)
of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC,
(e) the failure to make required contributions which could result in the
imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or
(f) any other event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan or the
7
<PAGE>
imposition of any liability under Title IV of ERISA other than PBGC premiums due
but not delinquent under Section 4007 of ERISA.
"EVENT OF DEFAULT" means any of the events specified in SECTION 8.1,
provided that any requirement for notice or lapse of time has been satisfied.
"EXCLUDED MATTERS" has the meaning specified in SECTION 5.9(a) hereof.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas on the Business Day next
succeeding such day, provided that (a) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business Day,
and (b) if no such rate is so published on such next succeeding Business Day,
the Federal Funds Rate for such day shall be the average of the quotations for
the day for such transactions received by the Administrative Agent from three
Federal funds brokers of recognized standing selected by it.
"FEE LETTERS" has the meaning specified in SECTION 2.4(b) hereof.
"FIXED CHARGES" means, for any date of calculation, calculated for the
Borrower and its Restricted Subsidiaries on a consolidated basis, the sum of,
without duplication, (a) scheduled principal payments in respect of
Indebtedness, plus (b) cash interest expense (including cash interest expense
pursuant to Capitalized Lease Obligations), net of interest income, minus (c)
amortization of discount and debt issuance costs and fees and expenses payable
or amortized in connection with the Netcom Recapitalization, to the extent
included in cash interest expense.
"FIXED CHARGE COVERAGE RATIO" means the ratio of Base Cash Flow to Fixed
Charges for the four consecutive fiscal quarters ending on the date of
calculation.
"FOREIGN CASH AND CASH EQUIVALENTS" means with respect to each Foreign
Subsidiary of the Borrower (a) cash, (b) securities issued or directly and fully
guaranteed or insured by the government or any agency or instrumentality
thereof, or any state or municipality of the jurisdiction of organization of
such Foreign Subsidiary having maturities of not more than one year from the
date of acquisition, (c) certificates of deposit and time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank deposits,
in each case with any foreign commercial bank having a combined capital and
surplus in excess of $100,000,000, (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above, and (e) a readily redeemable
"money market fund" or "money market mutual fund" advised by a bank described in
clause (c) hereof.
8
<PAGE>
"FOREIGN RESTRICTED SUBSIDIARY" means any Foreign Subsidiary (i) designated
by the Borrower as a Foreign Restricted Subsidiary in writing to the
Administrative Agent, and (ii) 65% of whose Equity Interest shall be pledged to
the Administrative Agent to secure the Obligations, pursuant to documentation
reasonably acceptable to the Administrative Agent, provided the Lenders shall
have received such board resolutions, officers' certificates, corporate and
other documents and opinions of counsel as the Administrative Agent shall
reasonably request in connection with such pledge.
"FOREIGN SUBSIDIARY" means any Subsidiary of the Borrower which is not
organized under the laws of any state of the United States of America or the
District of Columbia.
"GAAP" means (i) as applied to periods of time prior to and including April
30, 1998, accounting principles previously utilized by the Borrower as reflected
in the quarterly financial statements prepared by the Borrower prior to the
Agreement Date and (ii) as applied to periods of time after April 30, 1998,
generally accepted accounting principles applied on a consistent basis, set
forth in the Opinions of the Accounting Principles Board of the American
Institute of Certified Public Accountants, or their successors which are
applicable in the circumstances as of the date in question. The requirement
that such principles be applied on a consistent basis shall mean that the
accounting principles applied in a current period are comparable in all material
respects to those applied in a preceding period.
"GUARANTOR" means each direct and indirect Restricted Subsidiary of the
Borrower, other than any Foreign Restricted Subsidiary.
"GUARANTY" or "GUARANTEED", means (a) as applied to an obligation of
another Person, (i) a guaranty, direct or indirect, in any manner, of any part
or all of such obligation, and (ii) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of nonperformance) of any
part or all of such obligation, including, without limiting the foregoing, any
reimbursement obligations with respect to amounts which may be drawn by
beneficiaries of outstanding letters of credit and (b) an agreement, direct or
indirect, contingent or otherwise, to maintain the net worth, working capital,
earnings or other financial performance of another Person; provided, however,
Guaranty does not mean (y) the endorsement of instruments for collection or
deposit in the ordinary course of business and (z) customary indemnities given
in connection with asset sales in the ordinary course of business.
"HIGHEST LAWFUL RATE" means at the particular time in question the maximum
rate of interest which, under Applicable Law, the Lenders are then permitted to
charge on the Obligations. If the maximum rate of interest which, under
Applicable Law, the Lenders are permitted to charge on the Obligations shall
change after the date hereof, the Highest Lawful Rate shall be automatically
increased or decreased, as the case may be, from time to time as of the
effective time of each change in the Highest Lawful Rate without notice to the
Borrower.
9
<PAGE>
"INDEBTEDNESS" means, with respect to any Person, without duplication,
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations under conditional
sale or other title retention agreements relating to property or assets
purchased by such Person, (d) all obligations issued or assumed as the deferred
purchase price of property or services (excluding trade accounts payable in the
ordinary course of business), (e) all obligations secured by any Lien on any
property or asset owned by such Person, whether or not the obligation secured
thereby shall have been assumed, valued, in the case of Indebtedness not
assumed, at the lesser of the amount of such Indebtedness or the fair market
value of all property securing such Indebtedness, (f) to the extent not
otherwise included, all Capitalized Lease Obligations of such Person, all
obligations in respect of letters of credit, bankers' acceptances and similar
instruments, and all net obligations under Interest Hedge Agreements, (g) the
principal portion of all obligations of such Person under any synthetic lease,
tax retention operating lease, off-balance sheet loan or similar off-balance
sheet financing product where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an Operating Lease pursuant
to GAAP, (h) all preferred stock issued by such Person and required by the terms
thereof to be redeemed, or for which mandatory sinking fund payments are due, by
a fixed date, and (i) any Guaranty of such Person of any obligation of another
Person constituting obligations of a type set forth above.
"INDEMNIFIED MATTERS" has the meaning specified in SECTION 5.9(a) hereof.
"INDEMNITEES" has the meaning specified in SECTION 5.9(a) hereof.
"INITIAL PRICING PERIOD" means the period from and including the Agreement
Date to and including the Rate Adjustment Date.
"INSTITUTIONAL DEBT" means unsecured Indebtedness for borrowed money which
may be raised by the Borrower after the Agreement Date in the private placement
or public debt markets pursuant to terms satisfactory to the Determining
Lenders, with only such changes and amendments as are not prohibited by SECTION
7.17 hereof, and which shall include Subordinated Debt.
"INTEREST HEDGE AGREEMENTS" means any and all agreements, devices or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including, but not
limited to, dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap, swap or
collar protection agreements, and forward rate currency or interest rate
options, as the same may be amended or modified and in effect from time to time,
and any and all cancellations, buy backs, reversals, terminations or assignments
of any of the foregoing.
"INTEREST PERIOD" means the period beginning on the day any LIBOR Advance
is made and ending one, two, three or six months thereafter (as the Borrower
shall select); PROVIDED, HOWEVER, that all of the foregoing provisions are
subject to the following:
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(i) if any Interest Period would otherwise end on a day which is
not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day, unless, with respect to a LIBOR Advance, the
result of such extension would be to extend such Interest Period into
another calendar month, in which event such Interest Period shall end on
the immediately preceding Business Day;
(ii) any Interest Period with respect to a LIBOR Advance that
begins on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Business Day of a calendar
month;
(iii) the Borrower may not select any Interest Period which ends
after the date of a scheduled principal payment on the Advances unless,
after giving effect to such selection, the aggregate unpaid principal
amount of the LIBOR Advances for which Interest Periods end after such
scheduled principal payment shall be equal to or less than the principal
amount to which the Advances are required to be reduced after such
scheduled principal payment is made;
(iv) the Borrower may not select any Interest Period in respect of
LIBOR Advances having an aggregate amount less than $500,000; and
(v) there shall be outstanding at any one time no more than five
Interest Periods in the aggregate.
"INVESTMENT" means any direct or indirect purchase or other acquisition of,
or beneficial interest in, capital stock or other securities of any other Person
which is not an Acquisition, or any direct or indirect loan, advance (other than
loans or advances to employees for moving and travel expenses, drawing accounts
and similar expenditures in the ordinary course of business) or capital
contribution to, or investment in any other Person, including without limitation
the purchase of accounts receivable of any other Person that are not current
assets or do not arise in the ordinary course of business.
"ISSUING BANK" means NationsBank of Texas, N.A., a national banking
association, in its capacity as issuer of the Letters of Credit.
"LAW" means any statute, law, ordinance, regulation, rule, order, writ,
injunction, or decree of any Tribunal.
"LENDER" means each financial institution shown on the signature pages
hereof so long as such financial institution maintains a portion of the
Commitments or is owed any part of the Obligations (including the Administrative
Agent in its individual capacity), and each Assignee that
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hereafter becomes a party hereto pursuant to SECTION 11.6 hereof, subject to the
limitations set forth therein.
"L/C RELATED DOCUMENTS" has the meaning specified in SECTION 2.15(e)
hereof.
"LETTER OF CREDIT" has the meaning specified in SECTION 2.15(a) hereof.
"LETTER OF CREDIT AGREEMENT" has the meaning specified in SECTION 2.15(b)
hereof.
"LETTER OF CREDIT FACILITY" has the meaning specified in SECTION 2.15(a)
hereof.
"LEVERAGE RATIO" means, for any date of calculation, the ratio of Total
Debt as of the date of determination to EBITDA calculated for the four
consecutive fiscal quarters immediately preceding the date of calculation. For
purpose of calculation of the Leverage Ratio only, with respect to assets not
owned at all times during the four fiscal quarters immediately preceding the
date of calculation of EBITDA, there shall be included in EBITDA the proforma
EBITDA of any assets acquired during any such four fiscal quarters for the
twelve months preceding the date of calculation.
"LIBOR ADVANCE" means an Advance which the Borrower requests to be made as
a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with
the provisions of SECTION 2.2 hereof.
"LIBOR BASIS" means a simple per annum interest rate equal to the lesser of
(a) the Highest Lawful Rate, or (b) the sum of the LIBOR Rate plus the
Applicable LIBOR Rate Margin. The LIBOR Basis shall, with respect to LIBOR
Advances subject to reserve or deposit requirements, be subject to premiums for
such reserve or deposit requirements assessed by each Lender to the extent
incurred by such Lender, which are payable by the Borrower directly to each
Lender. Once determined, the LIBOR Basis shall remain unchanged during the
applicable Interest Period.
"LIBOR LENDING OFFICE" means, with respect to a Lender, the office
designated as its LIBOR Lending Office on SCHEDULE 1 attached hereto, and, to
the extent that same does not result in increased costs to the Borrower, such
other office of the Lender or any of its Affiliates hereafter designated by
notice to the Borrower and the Administrative Agent.
"LIBOR RATE" means, for any LIBOR Advance for any Interest Period therefor,
the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "LIBOR RATE" shall mean, for any LIBOR Advance for any
Interest Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such
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Interest Period; PROVIDED, HOWEVER, if more than one rate is specified on
Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of
all such rates.
"LIEN" means, with respect to any property, any mortgage, lien, pledge,
collateral assignment, hypothecation, charge, security interest, title retention
agreement, levy, execution, seizure, attachment, garnishment or other similar
encumbrance of any kind in respect of such property, whether or not choate,
vested or perfected.
"LITIGATION" means any proceeding, claim, lawsuit, arbitration, and/or
investigation by or before any Tribunal, including, without limitation,
proceedings, claims, lawsuits, and/or investigations under or pursuant to any
environmental, occupational, safety and health, antitrust, unfair competition,
securities, Tax or other Law, or under or pursuant to any contract, agreement or
other instrument.
"LOAN DOCUMENTS" means this Agreement, the Notes, the L/C Related
Documents, the Fee Letters, any Interest Hedge Agreements entered into with any
Lender, and any other document or agreement executed or delivered from time to
time by the Borrower or any Restricted Subsidiary of the Borrower in connection
herewith.
"MATERIAL ADVERSE EFFECT" means any act or circumstance or event that
(a) causes an Event of Default, (b) would reasonably be expected to be material
and adverse to the business, financial condition or results of operations of the
Borrower and its Restricted Subsidiaries taken as a whole, or (c) in any manner
whatsoever does or would reasonably be expected to materially and adversely
affect (i) the validity or enforceability of the Loan Documents in any material
respect, (ii) the ability of the Borrower and its Restricted Subsidiaries taken
as a whole to perform their respective Obligations under the Loan Documents, or
(iii) the rights and remedies of the Lenders or the Administrative Agent under
the Loan Documents in any material respect.
"MULTIEMPLOYER PLAN" means, as to any Person, at any time, a "multiemployer
plan" within the meaning of Section 4001(a)(3) of ERISA and to which such Person
or any member of its Controlled Group is making, or is obligated to make
contributions or has made, or been obligated to make, contributions.
"NATIONSBANK" means NationsBank of Texas, N.A., a national banking
association, in its capacity as a Lender.
"NECESSARY AUTHORIZATION" means any right, franchise, license, permit,
consent, approval or authorization from, or any filing or registration with, any
Tribunal or any Person necessary to enable the Borrower or any Restricted
Subsidiary of the Borrower to maintain and operate its business and properties.
"NET CASH PROCEEDS" means, with respect to any sale, lease, transfer or
other disposition of any asset by any Person, the amount of cash received by
such Person in connection with such
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transaction (including cash proceeds of any property received in consideration
of any such sale, lease, transfer or other disposition) after deducting
therefrom the aggregate, without duplication, of the following amounts to the
extent properly attributable to such transaction or to the asset that is the
subject thereof: (i) reasonable brokerage commissions, legal fees, finder's
fees, financial advisory fees, accounting fees, underwriting fees, investment
banking fees and other similar commissions and fees, and expenses, in each case,
to the extent paid or payable by such Person; (ii) filing, recording or
registration fees or charges or similar fees or charges paid by such Person;
(iii) taxes paid or payable by such Person or any shareholder, partner or member
of such Person to governmental taxing authorities as a result of such sale or
other disposition; (iv) payment of the outstanding principal amount of, premium
or penalty, if any, and interest on any Indebtedness that is secured by a Lien
on the asset in question and that is required to be repaid under the terms
thereof as a result of such asset sale; and (v) reasonable reserves established
in good faith by the Borrower for escrows, purchase price adjustments and
indemnification obligations (provided, however, that upon satisfaction or
elimination of the applicable contingency(ies) for which any such reserve was
established any funds remaining in such reserve shall constitute Net Cash
Proceeds and shall immediately be distributed in accordance with the terms
hereof.
"NETCOM ARTICLES OF INCORPORATION" means the Second Amended and Restated
Articles of Incorporation, dated as of August 22, 1997.
"NETCOM CONVERTIBLE PREFERRED STOCK" means that certain convertible
preferred stock of the Borrower issued pursuant to the Netcom Recapitalization
Agreement.
"NETCOM ESCROW AGREEMENT" means that certain Netcom Systems, Inc. Escrow
Agreement, dated as of August 29, 1997, among the Borrower, the purchaser
representatives named therein, the seller representative named therein and the
escrow agent named therein.
"NETCOM PREFERRED STOCK" means, collectively, the Netcom Convertible
Preferred Stock and the Netcom Redeemable Preferred Stock.
"NETCOM RECAPITALIZATION" means the purchase by the Borrower of at least
10,215,644 shares of its shares of its common Equity Interests and the issuance
by the Borrower of the Netcom Convertible Preferred Stock and the Netcom
Redeemable Preferred Stock pursuant to the Netcom Recapitalization Agreement.
"NETCOM RECAPITALIZATION AGREEMENT" means that certain Recapitalization
Agreement, dated as of August 29, 1997, by and among the Borrower, the
purchasers named therein and the sellers named therein.
"NETCOM RECAPITALIZATION DOCUMENTS" means, collectively, the Netcom
Recapitalization Agreement, the Netcom Articles of Incorporation, the Netcom
Escrow Agreement, the Netcom Registration Agreement and the Netcom Shareholders'
Agreement.
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"NETCOM REDEEMABLE PREFERRED STOCK" means that certain redeemable preferred
stock of the Borrower issued pursuant to the Netcom Recapitalization Agreement.
"NETCOM REGISTRATION AGREEMENT" means that certain Netcom Systems, Inc.
Registration Agreement, dated as of August 29, 1997, among the Borrower, the
investors named therein and the shareholders of the Borrower named therein.
"NETCOM SHAREHOLDERS' AGREEMENT" means that certain Netcom Systems, Inc.
Shareholders Agreement, dated as of August 29, 1997, among the Borrower, the
investors named therein and the existing shareholders of the Borrower named
therein.
"NET INCOME" means net earnings (or deficit) after taxes of the Borrower
and its Subsidiaries, on a consolidated basis, determined in accordance with
GAAP.
"NOTES" means, collectively, the Revolving Credit Notes and the Term Loan
Notes.
"NOTICE OF BORROWING" has the meaning specified in SECTION 2.2(a) hereof.
"NOTICE OF ISSUANCE" has the meaning specified in SECTION 2.15(b) hereof.
"OBLIGATIONS" means (a) all obligations of any nature (whether matured or
unmatured, fixed or contingent, including the Reimbursement Obligations) of the
Borrower or any other Obligor to any Lender or the Administrative Agent under
any of the Loan Documents as they may be amended from time to time, and (b) all
obligations of the Borrower or any other Obligor for losses, damages, expenses
or any other liabilities of any kind that any Lender may suffer by reason of a
breach by the Borrower or any other Obligor of any obligation, covenant or
undertaking with respect to any Loan Document payable by the Borrower or any
other Obligor under any Loan Document.
"OBLIGOR" means any of the Borrower and the Guarantors.
"OPERATING LEASE" means any operating lease, as defined in the Financial
Accounting Standard Board Statement of Financial Accounting Standards No. 13,
dated November, 1976 or otherwise in accordance with GAAP, except to the extent
included in the definition of "Indebtedness".
"PARTICIPANT" has the meaning specified in SECTION 11.6(c) hereof.
"PARTICIPATION" has the meaning specified in SECTION 11.6(c) hereof.
"PAYMENT DATE" means the last day of the Interest Period for any LIBOR
Advance.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
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"PERMITTED DISTRIBUTIONS" means, collectively:
(a) redemptions of, or dividends with respect to, the Netcom
Preferred Stock if, and to the extent that, (i) immediately prior to and after
giving effect to each such dividend, redemption or dividend, the Leverage Ratio
of the Borrower is not greater than 0.75 to 1.00, (ii) no Default or Event of
Default would exist immediately prior to or after giving effect to such
redemption or dividend, (iii) at least 5 Business Days prior to the date of
declaration or payment (whichever is earlier) of any such redemption or
dividend, the Administrative Agent shall have received a Compliance Certificate
from the Borrower evidencing compliance with the requirements of clauses (i) and
(ii) above, and (iv) contemporaneously with the making or payment of any such
redemption or dividend, the Borrower shall have paid to the Lenders, in addition
to any other payments and/or prepayments required hereunder, an amount equal to
three times the amount of such redemption or dividend, for application to the
Obligations in accordance with the provisions of SECTION 2.5(d) hereof;
(b) Dividends or reductions of Indebtedness if, and to the extent
that, (i) immediately prior to, or contemporaneously with, such Dividend or
reduction of Indebtedness, the Borrower receives Net Cash Proceeds from the
sale, or other disposition of Equity Interests in the Borrower (other than in
connection with a Public Equity Offering) or capital contributions to the
Borrower in an amount sufficient to make the Dividends and reductions of
Indebtedness and the payments to the Lenders required hereby, (ii) no Default or
Event of Default would exist immediately prior to or after giving effect to such
redemption or dividend, (iii) at least 5 Business Days prior to the date of
declaration or payment (whichever is earlier) of any such Dividend or reduction
of Indebtedness, the Administrative Agent shall have received a certificate from
the Borrower evidencing compliance with the requirements of clause (ii) above,
and (iv) contemporaneously with the making or payment of any such Dividend or
reduction of Indebtedness, the Borrower shall have paid to the Lenders the
amounts required by SECTION 2.5(d).
(c) payments or distributions in respect of Institutional Debt
(other than Subordinated Debt) in connection with sales of assets of the
Borrower or any Restricted Subsidiary as to which the Borrower is required to
make a mandatory prepayment of the Obligations pursuant to SECTION 2.5(c) hereof
if, and to the extent that, (i) such Institutional Debt contractually ranks,
pari passu in right of payments with the Obligations and the payments or
distributions contemplated to be made by the Borrower are contractually required
to be made pursuant to the terms of the applicable documentation evidencing such
Institutional Debt, (ii) no Default or Event of Default would exist immediately
prior to or after giving effect to such payment or distribution, (iii) at least
5 Business Days prior to the date of declaration or payment (whichever is
earlier) of any such payment or distribution, the Administrative Agent shall
have received a certificate from the Borrower evidencing compliance with the
requirements of clause (ii) above, and (iv) contemporaneously with the making or
payment of any such payment or distribution, the Borrower shall have paid to the
Lenders the amounts required by SECTION 2.5(c).
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(d) redemption of Equity Interests of the Borrower with respect
to such Equity Interests owned by officers, directors and employees of the
Borrower or any of its Subsidiaries if, and to the extent that, (i) such
redemptions are made pursuant to the terms of any subscription agreement or
option or similar agreement entered into by the Borrower in the ordinary course
of business, (ii) contemporaneously, with each such redemption, the Borrower
shall have sold Equity Interests to other officers, directors or employees of
the Borrower or any of its Subsidiaries, for cash, in amounts equal to, or
greater than, the amount expended by the Borrower with respect to such
redemption and (iii) no Default or Event of Default would exist immediately
prior to or after giving effect to such redemption.
"PERMITTED LIENS" means, as applied to any Person:
(a) Any Lien in favor of the Lenders to secure the Obligations
hereunder;
(b) Liens for taxes, assessments, governmental charges, levies or claims
(i) not exceeding $50,000 or (ii) that are not yet delinquent or that are being
diligently contested in good faith by appropriate proceedings in accordance with
SECTION 5.6 hereof and for which adequate reserves shall have been set aside on
such Person's books to the extent required by GAAP, but only so long as no
foreclosure, restraint, sale or similar proceedings have been commenced with
respect thereto;
(c) Liens of carriers, landlords, warehousemen, mechanics, laborers and
materialmen and other similar Liens incurred in the ordinary course of business
(i) for sums not exceeding $50,000, (ii) sums not yet due or (iii) for sums
being contested in good faith, if such reserve or appropriate provision, if any,
as shall be required by GAAP shall have been made therefor;
(d) Liens incurred or deposits made in the ordinary course of business
in connection with worker's compensation, unemployment insurance or similar
legislation;
(e) Easements, right-of-way, restrictions and other similar encumbrances
on the use of real property which do not interfere in any material respect with
the ordinary conduct of the business of such Person;
(f) Liens created to secure the purchase price of assets acquired,
developed or constructed (or existing on property at the time such property is
acquired, developed or constructed) by such Person or created to secure
Indebtedness permitted by SECTION 7.1(c) or 7.1(h) hereof, which is incurred
solely for the purpose of financing the acquisition of such assets and incurred
at the time, or within 90 days after the date, of acquisition or which exists
against such assets at the time of acquisition, development or construction
thereof, so long as each such Lien shall at all times be confined solely to the
asset or assets so acquired, developed or constructed (and proceeds and products
thereof and accessions, replacements and substitutions therefor), and
refinancings thereof so long as any such Lien remains solely on the asset or
assets acquired (and the proceeds and products thereof and accessions,
replacements and substitutions therefor) and the amount of Indebtedness related
thereto is not increased;
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(g) Any Liens which are described on SCHEDULE 2 hereto, and Liens
resulting from the refinancing of the related Indebtedness, provided that the
Indebtedness secured thereby shall not be increased and the Liens shall not
cover additional assets of the Borrower unless otherwise expressly permitted
hereby;
(h) Liens arising from filing Uniform Commercial Code financing
statements for precautionary purposes relating solely to true leases of personal
property permitted by this Agreement under which the Borrower or any of its
Subsidiaries is a lessee or other precautionary or notice filings relating to
obligations not constituting Indebtedness;
(i) Any zoning or similar law or right reserved to or vested in any
Tribunal to control or regulate the use of any real property;
(j) Liens incurred or deposits made to secure the performance of bids,
tenders, leases, trade contracts (other than for Indebtedness), statutory
obligations, surety and appeal bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business;
(k) Attachment or judgment Liens in existence for less than sixty days
after the entry of the applicable judgment or with respect to which execution
has been stayed or the payment of which is covered in full (subject to a
customary deductible) by insurance maintained with responsible insurance
companies;
(l) Leases or subleases and licenses and sublicenses granted to others
in the ordinary course of the Borrower's or any of its Subsidiaries' business,
not interfering in any material respect with the business of the Borrower and
its Restricted Subsidiaries taken as a whole, and any interest or title of a
lessor, licensor or under any lease or license;
(m) Liens securing reimbursement of obligations in respect of
documentary letters of credit; provided, that such Liens attach only to the
documents, the goods covered thereby and the proceeds thereof;
(n) Liens in favor of customs and revenues authorities which secure
payment of customs duties in connection with the importation of goods;
(o) Liens on insurance policies and the proceeds thereof securing the
financing of the premiums with respect thereto;
(p) Liens of landlords arising in the ordinary course of business under
lease contracts (only to the extent that same cover tangible personal property
located on or at the real property covered by the applicable lease contract) or
by operation of law;
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(q) Liens consisting of rights of set-off of a customary nature or
bankers' liens on amounts on deposit, whether arising by contract or operation
of law, incurred in the ordinary course of business;
(r) Liens encumbering customary initial deposits and margin deposits,
and similar Liens and margin deposits, and similar Liens attaching to commodity
trading accounts or other brokerage accounts incurred in the ordinary course of
business, securing Indebtedness under any Interest Hedge Agreement;
(s) Liens on Equity Interests of any Unrestricted Subsidiary; and
(t) Any replacements or renewals of Liens (but no increases in the
Indebtedness secured thereby) permitted by clauses (f), (g) and (h) hereof.
"PERSON" means an individual, corporation, partnership, limited liability
company, trust or unincorporated organization, or a government or any agency or
political subdivision thereof.
"PLAN" means an employee benefit plan as defined in Section 3(3) of ERISA
(including a Multiemployer Plan) pursuant to which any employees of the
Borrower, its Subsidiaries or any member of their Controlled Group participate.
"PRETAX NET INCOME" means net profit (or loss) before taxes of the Borrower
and its Subsidiaries, on a consolidated basis, determined in accordance with
GAAP.
"PRIME RATE" means, at any time, the prime interest rate announced or
published by the Reference Lender from time to time as its reference rate for
the determination of interest rates for loans of varying maturities in United
States dollars to United States residents of varying degrees of creditworthiness
and being quoted at such time by the Reference Lender as its "prime rate;" it
being understood that such rate may not be the lowest rate of interest charged
by the Reference Lender.
"PUBLIC EQUITY OFFERING" means an offering of common stock of the Borrower
for cash pursuant to an effective registration statement under the Securities
Act of 1933, as amended, at a time when, or as a consequence of which, the
common stock of the Borrower is listed on a national securities exchange or
quoted on the national market system of NASDAQ.
"QUARTERLY DATE" means the last day of each January, April, July and
October, beginning October 31, 1997.
"RATE ADJUSTMENT DATE" means the date which is the date that the Lenders
receive the financial statements for the fiscal quarter ending January 31, 1998,
required to be delivered pursuant to SECTION 6.1 hereof.
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"REFERENCE LENDER" means NationsBank; provided that if NationsBank's
Commitments shall terminate and it shall have no Advances and Letters of Credit
outstanding hereunder, NationsBank shall cease to be the Reference Lender, and
Administrative Agent (after consultation with Borrower) shall, with notice to
Borrower and Lenders, designate another Lender as the Reference Lender.
"REIMBURSEMENT OBLIGATIONS" means, in respect of any Letter of Credit as at
any date of determination, the sum of (a) the maximum aggregate amount which is
then available to be drawn under such Letter of Credit plus (b) the aggregate
amount of all drawings under such Letter of Credit not theretofore reimbursed by
the Borrower.
"RELATED PERSON" of a Person means (a) any Affiliate of such Person,
(b) any individual or entity who directly or indirectly holds 10% or more of any
class of Equity Interests of such Person, (c) any relative of such Person by
blood, marriage or adoption not more remote than first cousin and (d) any
officer or director of such Person. No Lender hereunder shall be deemed to be a
Related Person.
"RELEASE DATE" means the date on which the Notes have been paid, all other
Obligations due and owing have been paid and performed in full, and the
Commitments have been terminated.
"REPORTABLE EVENT" has the meaning set forth in Section 4043(c) of ERISA.
"RESPONSIBLE OFFICER" means, of any Person, the President, chief operating
officer, chief executive officer, chief financial officer, treasurer or any
other executive officer of such Person.
"RESTRICTED PAYMENTS" means, collectively, (a) Dividends, and (b) any
(i) payment or prepayments of principal, premium or penalty on any Subordinated
Debt of the Borrower or any Subsidiary of the Borrower, (ii) defeasance,
redemption, purchase, repurchase or other acquisition or retirement for value,
in whole or in part, of any Institutional Debt (including, without limitation,
the setting aside of assets or the deposit of funds therefor), (iii) prepayment
of interest on any Institutional Debt and (iv) prepayment of principal, premium
or penalty on any Institutional Debt.
"RESTRICTED SUBSIDIARY" means any direct or indirect Subsidiary of the
Borrower other than an Unrestricted Subsidiary.
"REVOLVING COMMITMENT FEE" has the meaning specified in SECTION 2.4(a)
hereof.
"REVOLVING COMMITMENT MATURITY DATE" means August 28, 2002, or the earlier
date of termination in whole of the Revolving Credit Commitment pursuant to
SECTION 2.6 or 8.2 hereof.
"REVOLVING CREDIT ADVANCE" means an Advance made pursuant to SECTION 2.1(a)
hereof.
"REVOLVING CREDIT COMMITMENT" means $10,000,000.00 as reduced pursuant to
SECTION 2.6.
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"REVOLVING CREDIT NOTES" means the promissory notes of Borrower evidencing
Revolving Credit Advances hereunder, substantially in the form of EXHIBIT A
hereto, together with any extension, renewal, or amendment thereof, or
substitution therefor.
"RIGHTS" means rights, remedies, powers and privileges.
"SENIOR OFFICER" means any of the Chief Executive Officer, President, Chief
Financial Officer, any Vice President or the Treasurer of the Borrower.
"SOLVENT" means, with respect to any Person, that as of the date of
determination, (a) the fair saleable value of the assets of such Person is
greater than the total amount of liabilities (including contingent and
unliquidated liabilities) of such Person, (b) such Person is able to pay the
probable liabilities on such Person's then existing debts as they become
absolute and matured considering all financing alternatives and potential asset
sales reasonably available to such Person, and (c) such Person does not have
unreasonably small capital with which to carry on its business. In computing
the amount of contingent or unliquidated liabilities at any time, such
liabilities will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability discounted to present value
at rates believed to be reasonable by such Person.
"SPECIAL COUNSEL" means the law firm of Donohoe, Jameson & Carroll, P.C.,
or such other legal counsel as the Administrative Agent may select.
"SPECIFIED PERCENTAGE" means, as to any Lender, the percentage indicated
beside its name on the signature pages hereof or, if applicable, in its most
recent Assignment Agreement.
"SUBORDINATED DEBT" means any Indebtedness of the Borrower or any
Subsidiary of the Borrower having maturities and terms, and which is
subordinated to payment of the Obligations in a manner, approved in writing by
the Administrative Agent, with only such changes or amendments as are not
prohibited by SECTION 7.19 hereof.
"SUBSEQUENT PRICING PERIOD" means the period from and including the date
which is the first day following the end of the Initial Pricing Period to the
termination of the Commitments and the payment in full of the Obligations.
"SUBSIDIARY" of any Person means any corporation, partnership, joint
venture, trust or estate or other Person of which (or in which) more than 50%
of:
(a) the outstanding capital stock having voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency),
(b) the interest in the capital or profits of such partnership or joint
venture,
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(c) the beneficial interest of such trust or estate, or
(d) the equity interest of such other Person,
is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's Subsidiaries.
"SUBSIDIARY GUARANTY" means a guaranty, substantially in the form of
EXHIBIT E hereto, executed by each Restricted Domestic Subsidiary of the
Borrower, as amended, supplemented, modified, renewed or otherwise restated from
time to time.
"TAXES" has the meaning specified in SECTION 2.14 hereof.
"TERM LOAN ADVANCE" means an Advance made pursuant to SECTION 2.1(b)
hereof.
"TERM LOAN COMMITMENT" means $50,000,000 as terminated pursuant to
SECTION 2.1(b) hereof.
"TERM LOAN MATURITY DATE" means August 28, 2002, or the earlier date of
acceleration of the Term Loan Advances pursuant to SECTION 8.2 hereof.
"TERM LOAN NOTES" means the promissory notes of the Borrower evidencing
Term Loan Advances hereunder, substantially in the form of EXHIBIT B hereto,
together with any extension, renewal or amendment thereof, or substitution
therefor.
"TOTAL DEBT" means, as of any date of determination, determined for the
Borrower and its Restricted Subsidiaries on a consolidated basis,
(i) indebtedness for borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) non-contingent obligations
to pay the deferred purchase price of property or services other than trade
payables incurred in the ordinary course of business, and (iv) Capitalized Lease
Obligations.
"TRIBUNAL" means any state, commonwealth, federal, foreign, territorial, or
other court or government body, subdivision, agency, department, commission,
board, bureau, or instrumentality of a governmental or other regulatory or
public body or authority.
"UCC" means the Uniform Commercial Code of the relevant jurisdiction, as
amended from time to time.
"UNRESTRICTED SUBSIDIARIES" means, collectively, (i) the direct and
indirect Foreign Subsidiaries of the Borrower other than Restricted Foreign
Subsidiaries and (ii) such direct or indirect Domestic Subsidiaries of the
Borrower as the Borrower shall from time to time designate as Unrestricted
Subsidiaries in writing to the Administrative Agent.
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"UNUSED PORTION" means an amount equal to the result of (i) the Revolving
Credit Commitment minus (ii) the sum of (A) the outstanding Revolving Credit
Advances plus (B) outstanding Reimbursement Obligations in respect of the
Letters of Credit.
"VOTING POWER" means, with respect to any Person, the power ordinarily
(without the occurrence of a contingency) to elect the members of the board of
directors (or persons performing similar functions).
Section 1.2 AMENDMENTS AND RENEWALS. Each definition of an agreement in
this ARTICLE 1 shall include such agreement as amended to date, and as amended
or renewed from time to time in accordance with its terms.
Section 1.3 CONSTRUCTION. The terms defined in this ARTICLE 1 (except as
otherwise expressly provided in this Agreement) for all purposes shall have the
meanings set forth in SECTION 1.1 hereof, and the singular shall include the
plural, and vice versa, unless otherwise specifically required by the context.
All accounting terms used in this Agreement which are not otherwise defined
herein shall be construed in accordance with GAAP on a consolidated basis for
the Borrower and its Subsidiaries, unless otherwise expressly stated herein.
ARTICLE 2
ADVANCES
Section 2.1 THE ADVANCES.
(a) REVOLVING CREDIT ADVANCES. Each Lender severally agrees, upon the
terms and subject to the conditions of this Agreement, to make Revolving Credit
Advances to the Borrower from time to time in an aggregate principal amount not
to exceed its Specified Percentage of the Revolving Credit Commitment less its
Specified Percentage of the aggregate principal amount of all Reimbursement
Obligations then outstanding (assuming compliance with all conditions to
drawing), for the purposes set forth in SECTION 5.8 hereof. Subject to
SECTION 2.9 hereof, Revolving Credit Advances may be repaid and then reborrowed.
Notwithstanding any provision in any Loan Document to the contrary, in no event
shall the sum of the principal amount of all outstanding Revolving Credit
Advances and Reimbursement Obligations exceed the Revolving Credit Commitment.
(b) TERM LOAN ADVANCES. Each Lender severally agrees, upon the terms
and subject to the conditions of this Agreement, to make a Term Loan Advance to
the Borrower on the Agreement Date in a principal amount not to exceed its
Specified Percentage of the Term Loan Commitment for the purposes set forth in
SECTION 5.8 hereof. Notwithstanding any provision in any Loan Document to the
contrary, in no event shall the principal amount of all outstanding Term Loan
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Advances exceed the Term Loan Commitment. Immediately upon the making of the
Term Loan Advances, the Term Loan Commitment shall be automatically terminated.
Term Loan Advances may not be repaid and then reborrowed.
(c) Any Advance shall, at the option of the Borrower as provided in
SECTION 2.2 hereof (and, in the case of LIBOR Advances, subject to the
provisions of ARTICLE 9 hereof), be made as a Base Rate Advance or a LIBOR
Advance; provided that there shall not be outstanding, at any one time, more
than five LIBOR Advances.
Section 2.2 MANNER OF BORROWING AND DISBURSEMENT.
(a) BASE RATE ADVANCES. In the case of Base Rate Advances, the
Borrower, through an Authorized Signatory, shall give the Administrative Agent
prior to 1:00 p.m., Dallas, Texas time, on the date of any proposed Base Rate
Advance irrevocable written notice, or irrevocable telephonic notice followed
within one Business Day by written notice, in substantially the form of
EXHIBIT F hereto (a "Notice of Borrowing") (provided, however, that the
Borrower's failure to confirm any telephonic notice in writing shall not
invalidate any notice so given), of its intention to borrow a Base Rate Advance
hereunder. Such notice of borrowing shall specify the requested funding date,
which shall be a Business Day, and the amount of the proposed aggregate Base
Rate Advances to be made by Lenders.
(b) LIBOR ADVANCES. In the case of LIBOR Advances, the Borrower,
through an Authorized Signatory, shall give the Administrative Agent at least
three Business Days' irrevocable written notice, or irrevocable telephonic
notice followed within one Business Day by written notice (provided, however,
that the Borrower's failure to confirm any telephonic notice in writing shall
not invalidate any notice so given) pursuant to a Notice of Borrowing, of its
intention to borrow a LIBOR Advance hereunder. Notice shall be given to the
Administrative Agent prior to 1:00 p.m., Dallas, Texas time, in order for such
Business Day to count toward the minimum number of Business Days required.
LIBOR Advances shall in all cases be subject to ARTICLE 9 hereof. For LIBOR
Advances, the notice of borrowing shall specify the requested funding date,
which shall be a Business Day, the amount of the proposed aggregate LIBOR
Advances to be made by Lenders and the Interest Period selected by the Borrower,
provided that no such Interest Period shall extend past the Revolving Commitment
Maturity Date or the Term Loan Maturity Date, as appropriate, or prohibit or
impair the Borrower's ability to comply with SECTION 2.5 or 2.8 hereof.
(c) CONTINUATION/CONVERSION. Subject to SECTIONS 2.1 and 2.9 hereof,
the Borrower shall have the option (i) to convert at any time all or any part of
the outstanding Base Rate Advances to LIBOR Advances and all or any part of the
outstanding LIBOR Advances to Base Rate Advances or (ii) upon expiration of any
Interest Period applicable to a LIBOR Advance, to continue all or any portion of
such LIBOR Advance equal to $500,000 and integral multiples of $100,000 in
excess of that amount as a LIBOR Advance and the succeeding Interest Period(s)
of such continued LIBOR Advance shall commence on the last day of the Interest
Period of the LIBOR Advance to be continued; provided, however, (a) LIBOR
Advances may only be converted into Base Rate
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Advances on the expiration date of the Interest Period applicable thereto
unless, contemporaneously with any such conversion, the Borrower reimburses the
Lenders in accordance with SECTION 2.9 hereof and (b) notwithstanding anything
in this Agreement to the contrary, no outstanding Advance may be continued as,
or converted into, a LIBOR Advance when any Default or Event of Default has
occurred and is continuing. At least three Business Days prior to a proposed
conversion/continuation date, the Borrower, through an Authorized Signatory,
shall give the Administrative Agent irrevocable written notice, or irrevocable
telephonic notice followed within one Business Day by written notice (provided,
however, that the Borrower's failure to confirm any telephonic notice in writing
shall not invalidate any notice so given), stating (i) the proposed
conversion/continuation date (which shall be a Business Day), (ii) the amount of
the Advance to be converted/continued, (iii) in the case of a conversion to, or
a continuation of, a LIBOR Advance, the requested Interest Period, and (iv) in
the case of a conversion of a Base Rate Advance to a LIBOR Advance or
continuation of a LIBOR Advance, stating that no Default or Event of Default has
occurred and is continuing. If the Borrower shall fail to give any notice in
accordance with this SECTION 2.2(c), the Borrower shall be deemed irrevocably to
have requested that such LIBOR Advance be converted to a Base Rate Advance in
the same principal amount and that any Base Rate Advance be continued as a Base
Rate Advance. Notice shall be given to the Administrative Agent prior to 1:00
p.m., Dallas, Texas time, in order for such Business Day to count toward the
minimum number of Business Days required.
(d) MINIMUM AMOUNT. The aggregate amount of Base Rate Advances to be
made by the Lenders on any day shall be in a principal amount which is at least
$100,000; provided, however, that such amount may equal the unused amount of the
applicable Commitment. The aggregate amount of LIBOR Advances having the same
Interest Period and to be made by the Lenders on any day shall be in a principal
amount which is at least $500,000 and which is an integral multiple of $100,000.
(e) NOTICE AND DISBURSEMENT. The Administrative Agent shall promptly
notify the Lenders of each notice received from the Borrower pursuant to this
Section. Each Lender shall, not later than 2:00 p.m., Dallas, Texas time, on
the date of any Advance, deliver to the Administrative Agent, at its address set
forth herein, such Lender's Specified Percentage of such Advance in immediately
available funds in accordance with the Administrative Agent's instructions.
Prior to 2:30 p.m., Dallas, Texas time, on the date of any Advance hereunder,
the Administrative Agent shall, subject to satisfaction of the applicable
conditions set forth in ARTICLE 3, disburse the amounts made available to the
Administrative Agent by the Lenders by (i) transferring such amounts by wire
transfer pursuant to the Borrower's instructions, or (ii) in the absence of such
instructions, crediting such amounts to the account of the Borrower maintained
with the Administrative Agent. All Advances shall be made by each Lender
according to its Specified Percentage.
Section 2.3 INTEREST.
(a) ON BASE RATE ADVANCES.
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(i) The Borrower shall pay interest on the outstanding unpaid
principal amount of the Base Rate Advances outstanding from time to time,
until such Base Rate Advances are due (whether at maturity, by reason of
acceleration, by scheduled reduction, or otherwise) or repaid at a simple
interest rate per annum equal to the Base Rate Basis for the Base Rate
Advances as in effect from time to time. If at any time the Base Rate
Basis would exceed the Highest Lawful Rate, interest payable on the Base
Rate Advances shall be limited to the Highest Lawful Rate, but the Base
Rate Basis shall not thereafter be reduced below the Highest Lawful Rate
until the total amount of interest accrued on the Base Rate Advances equals
the amount of interest that would have accrued if the Base Rate Basis had
been in effect at all times; provided, that subject to the provisions of
SECTION 11.9 hereof, if at any time the Highest Lawful Rate continuously
exceeds the Base Rate Basis until the Advances are due (whether at
maturity, by reason of acceleration, by scheduled reduction or otherwise),
the total amount of interest accrued on the Base Rate Advances for such
period shall be calculated at the Highest Lawful Rate and no other amounts
of accrued interest shall be due from the Borrower.
(ii) Interest on the Base Rate Advances shall be computed on the
basis of a year of 365 or 366 days, as appropriate, for the actual number
of days elapsed, and shall be payable in arrears on each Quarterly Date and
on the Revolving Commitment Maturity Date and the Term Loan Maturity Date,
as appropriate.
(b) ON LIBOR ADVANCES.
(i) The Borrower shall pay interest on the unpaid principal
amount of each LIBOR Advance, from the date such Advance is made until it
is due (whether at maturity, by reason of acceleration, by scheduled
reduction, or otherwise) or repaid, at a rate per annum equal to the LIBOR
Basis for such LIBOR Advance. The Administrative Agent, whose
determination shall be prima facie evidence of the LIBOR Basis, shall
determine the LIBOR Basis on the second Business Day prior to the
applicable funding, conversion or continuation date and shall notify the
Borrower and the Lenders of such LIBOR Basis.
(ii) Subject to SECTION 11.9 hereof, interest on each LIBOR
Advance shall be computed on the basis of a 360-day year for the actual
number of days elapsed, and shall be payable in arrears on the applicable
Payment Date and on the Revolving Commitment Maturity Date and the Term
Loan Maturity Date, as appropriate; provided, however, that if the Interest
Period for such LIBOR Advance exceeds three months, interest shall also be
due and payable in arrears on each three-month anniversary of the
commencement of such Interest Period during such Interest Period.
(c) INTEREST AFTER AN EVENT OF DEFAULT. (i) After an Event of Default
specified in SECTION 8.1(b) as a result of the failure to make any required
principal or interest payment on the Loans or any required payment of fees under
SECTIONS 2.4(a) or 2.15(f), and during any continuance thereof, at the option of
the Determining Lenders, the Obligations shall bear interest at a rate per
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<PAGE>
annum equal to the Default Rate. Such interest shall be payable on the earlier
of demand or the Revolving Commitment Maturity Date and the Term Loan Maturity
Date, as appropriate, and shall accrue until the earlier of (i) waiver or cure
of the applicable Event of Default, (ii) agreement by the Determining Lenders to
rescind the charging of interest at the Default Rate, or (iii) payment in full
of the Obligations. The Lenders shall not be required to accelerate the
maturity of the Advances, to exercise any other rights or remedies under the
Loan Documents, or to give notice to the Borrower of the decision to charge
interest at the Default Rate.
Section 2.4 FEES.
(a) REVOLVING COMMITMENT FEE. Subject to SECTION 11.9 hereof, the
Borrower agrees to pay to the Administrative Agent, for the account of the
Lenders according to their Specified Percentages, a commitment fee on the daily
average Unused Portion during the period commencing on the Agreement Date and
ending on the Revolving Commitment Maturity Date (which fee shall be (i) payable
in arrears on each Quarterly Date and on the Revolving Commitment Maturity Date,
(ii) fully earned when due and, subject to SECTION 11.9 hereof, nonrefundable
when paid and (iii) subject to SECTION 11.9 hereof, computed on the basis of a
365 or 366-day year, as applicable, for the actual number of days elapsed) at
the rate of 0.375% per annum.
(b) OTHER FEES. Subject to SECTION 11.9 hereof, the Borrower agrees to
pay to the Administrative Agent, for the account of the Administrative Agent
and/or the Documentation Agent, as applicable, the fees on the dates and in the
amounts specified in the letter agreements (collectively, the "Fee Letters"),
dated as of, or prior to, the Agreement Date, among the Borrower, the
Administrative Agent and/or the Documentation Agent.
Section 2.5 PREPAYMENTS.
(a) VOLUNTARY ADVANCE PREPAYMENTS. Upon one Business Day's prior
telephonic notice (to be promptly followed by written notice) by an Authorized
Signatory to the Administrative Agent, LIBOR Advances may be voluntarily prepaid
but only so long as the Borrower concurrently reimburses the Lenders in
accordance with SECTION 2.9 hereof. Any notice of prepayment shall be
irrevocable. Subject to the other provisions of this Agreement, Base Rate
Advances may be voluntarily prepaid, in whole or in part, without prior notice
to the Administrative Agent or any Lender.
(b) MANDATORY PREPAYMENT. On or before the date of any reduction of the
Revolving Credit Commitment, the Borrower shall prepay applicable outstanding
Revolving Credit Advances in an amount necessary to reduce the sum of
outstanding Revolving Credit Advances and Reimbursement Obligations to an amount
less than or equal to the Revolving Credit Commitment as so reduced. To the
extent required by the immediately preceding sentence, the Borrower shall first
prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances. To
the extent that any prepayment requires that a LIBOR Advance be repaid on a date
other than the last day of its Interest Period, the Borrower shall reimburse
each Lender in accordance with SECTION 2.9 hereof.
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<PAGE>
To the extent that outstanding Revolving Credit Advances exceed the Revolving
Credit Commitment after any reduction thereof, the Borrower shall repay any such
excess amount and all accrued interest attributable to such excess Revolving
Credit Advances on the date of such reduction.
(c) PREPAYMENTS FROM SALES OF ASSETS. Within two Business Days (or, if
later, at the end of any Interest Period for any LIBOR Advance outstanding on
the date of receipt by the Borrower, but in any event not later than thirty
days) after receipt of Net Cash Proceeds from the sale or disposition after the
date hereof by the Borrower or any Restricted Subsidiary of any assets, (other
than sales or dispositions of Equity Interests of any such Restricted Subsidiary
or assets expressly permitted pursuant to clauses (a) through (c), (e), (f),
(g), (h) or (i) of Section 7.5 hereof), the Borrower shall prepay the Term Loan
Advances (and, thereafter, the Revolving Credit Advances when there are no Term
Loan Advances outstanding) in a principal amount equal to 75% of the amount of
such Net Cash Proceeds (the "Asset Sale Prepayment Amount"), provided, however
to the extent that any Institutional Debt (other than Subordinated Debt) is
required to be prepaid pursuant to the terms of the applicable documentation
governing such Institutional Debt, the Asset Sale Prepayment Amount shall be
adjusted to be an amount (the "Adjusted Asset Sale Prepayment Amount") equal to
the Asset Sale Prepayment Amount multiplied by a fraction, the numerator of
which is the outstanding principal amount of Advances and the denominator of
which is the sum of the outstanding principal amount or accreted value of
Advances and such Institutional Debt, provided that to the extent an amount of
such Net Cash Proceeds equal to the Asset Sale Prepayment Amount less the
Adjusted Asset Sale Prepayment Amount is not utilized to redeem or repay
Institutional Debt in accordance with the terms of the applicable documents in
respect of such Institutional Debt, such excess amount shall be applied to repay
Term Loan Advances (and, thereafter, the Revolving Credit Advances when there
are no Term Loss Advances outstanding). Each such prepayment of Term Loan
Advances pursuant to this SECTION 2.5(c) shall be applied pro rata to the unpaid
scheduled installment payments of the Term Loans. Any such prepayment of
Revolving Credit Advances pursuant to this SECTION 2.5(c) shall permanently
reduce the Revolving Credit Commitment by the amount of such prepayment.
(d) PREPAYMENT FROM SALES OF EQUITY INTERESTS. Within two Business Days
(or, if later, at the end of any Interest Period for any LIBOR Advance
outstanding on the date of receipt by the Borrower, but in any event not later
than thirty days) after receipt of Net Cash Proceeds from the sale or
disposition after the date hereof to any Person of any Equity Interests of the
Borrower or any of its Restricted Subsidiaries, the Borrower shall apply
(i) with respect to a Public Equity Offering of such Equity Interests, 100% of
such aggregate Net Cash Proceeds and (ii) with respect to any disposition of
such Equity Interests which is not a Public Equity Offering; 75% of such
aggregate Net Cash Proceeds, except for the sale or disposition of Equity
Interests the proceeds of which are utilized to purchase Equity Interests with
respect to Permitted Distributions under clause (d) of the definition thereof,
to prepay the Term Loan Advances (and, thereafter, the Revolving Credit Advances
when there are no Term Loan Advances outstanding). Each such prepayment of the
Term Loan Advances pursuant to this SECTION 2.5(d) shall be applied pro rata to
the unpaid scheduled installment payments of the Term Loan Advances. Any such
prepayment of Revolving Credit
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Advances pursuant to this SECTION 2.5(d) shall permanently reduce the Revolving
Credit Commitment by the amount of such prepayment.
(e) PREPAYMENT FROM ISSUANCE OF INSTITUTIONAL DEBT. Within two Business
Days (or, if later, at the end of any Interest Period for any LIBOR Advance
outstanding on the date of receipt by the Borrower, but in any event not later
than thirty days) after the receipt of Net Cash Proceeds from the issuance of
Institutional Debt (other than permitted refinancings pursuant to SECTION
7.1(d)) by the Borrower or any Restricted Subsidiary of the Borrower, the
Borrower shall apply 100% of such aggregate Net Cash Proceeds to prepay the Term
Loan Advances (and, thereafter, the Revolving Credit Advances when there are no
Term Loan Advances outstanding). Each such prepayment of the Term Loan Advances
pursuant to this SECTION 2.5(e) shall be applied pro rata to the unpaid
scheduled installment payments of the Term Loan Advances. Any such prepayment
of Revolving Credit Advances pursuant to this SECTION 2.5(e) shall permanently
reduce the Revolving Credit Commitment by the amount of such prepayment.
(f) PAYMENTS, GENERALLY. Any prepayment of any Advance shall be
accompanied by interest accrued on the principal amount being prepaid. Any
payment required to be made pursuant to SECTIONS 2.5(d), (e) or (f) above shall
first prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances.
Any voluntary partial payment of a Base Rate Advance shall be in a principal
amount which is at least $100,000. Any voluntary partial payment of a LIBOR
Advance shall be in a principal amount which is at least $250,000 and which is
an integral multiple of $50,000, and to the extent that any prepayment of a
LIBOR Advance is made on a date other than the last day of its Interest Period,
the Borrower shall reimburse each Lender in accordance with SECTION 2.9 hereof.
Any voluntary prepayment of any Term Loan Advance shall be applied pro rata to
the unpaid scheduled installment payments of the Term Loan Advances.
Section 2.6 REDUCTION OF REVOLVING CREDIT COMMITMENT.
(a) VOLUNTARY REDUCTION. The Borrower shall have the right, upon not
less than 5 Business Days' notice by an Authorized Signatory to the
Administrative Agent (if telephonic, to be confirmed by telex or in writing on
or before the date of reduction or termination), which shall promptly notify the
Lenders, to terminate or reduce the Revolving Credit Commitment. Each partial
termination shall be in an aggregate amount which is at least $500,000 and which
is an integral multiple of $100,000, and no voluntary reduction in the Revolving
Credit Commitment shall cause any LIBOR Advance to be repaid prior to the last
day of its Interest Period unless the Borrower shall reimburse each Lender in
accordance with SECTION 2.9 hereof.
(b) MANDATORY REDUCTION. On the Revolving Credit Commitment Maturity
Date, the Revolving Credit Commitment shall be automatically reduced to zero.
In addition, the Revolving Credit Commitment shall be permanently reduced by the
amount of any prepayment of Revolving Credit Advances required pursuant to
SECTIONS 2.5(c), (d) and (e) hereof.
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(c) GENERAL REQUIREMENTS. Upon any reduction of the Revolving Credit
Commitment pursuant to this Section, the Borrower shall immediately make a
repayment of Revolving Credit Advances in accordance with SECTION 2.5(b) hereof.
The Borrower shall reimburse each Lender in connection with any such payment in
accordance with SECTION 2.9 hereof to the extent applicable. The Borrower shall
not have any right to rescind any termination or reduction. Once reduced, the
Revolving Credit Commitment may not be increased or reinstated.
Section 2.7 NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT. Unless the
Administrative Agent shall have been notified by a Lender prior to the date of
any proposed Advance (which notice shall be effective upon receipt) that such
Lender does not intend to make the proceeds of such Advance available to the
Administrative Agent, the Administrative Agent may assume that such Lender has
made such proceeds available to the Administrative Agent on such date, and the
Administrative Agent may in reliance upon such assumption (but shall not be
required to) make available to the Borrower a corresponding amount. If such
corresponding amount is not in fact made available to the Administrative Agent
by such Lender, the Administrative Agent shall be entitled to recover such
amount on demand from such Lender (or, if such Lender fails to pay such amount
forthwith upon such demand, from the Borrower) together with interest thereon in
respect of each day during the period commencing on the date such amount was
available to the Borrower and ending on (but excluding) the date the
Administrative Agent receives such amount from (a) the Lender, at a per annum
rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal
Funds Rate, or (b) the Borrower, at the per annum rate applicable at the time to
such Advance. No Lender shall be liable for any other Lender's failure to fund
an Advance hereunder.
Section 2.8 PAYMENT OF PRINCIPAL OF ADVANCES.
(a) REVOLVING CREDIT ADVANCES. To the extent not otherwise required to
be paid earlier as provided herein, the principal amount of the Revolving Credit
Advances shall be due and payable on the Revolving Commitment Maturity Date.
(b) TERM LOAN ADVANCES. To the extent not otherwise required to be paid
earlier as provided herein, the principal amount of the Term Loan Advances shall
be repaid on each Quarterly Date and on the Term Loan Maturity Date in such
amounts as set forth next to each such date below:
<TABLE>
<CAPTION>
Amount of Reduction of
Quarterly Date Term Loan Advances as of each Date
<S> <C>
October 31, 1998 $2,500,000
January 31, 1999 $2,500,000
April 30, 1999 $2,500,000
July 31, 1999 $2,500,000
October 31, 1999 $2,500,000
January 31, 2000 $2,500,000
April 30, 2000 $2,500,000
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<PAGE>
<CAPTION>
Amount of Reduction of
Quarterly Date Term Loan Advances as of each Date
<S> <C>
July 31, 2000 $2,500,000
October 31, 2000 $2,500,000
January 31, 2001 $2,500,000
April 30, 2001 $2,500,000
July 31, 2001 $2,500,000
October 31, 2001 $2,500,000
January 31, 2002 $2,500,000
April 30, 2002 $5,000,000
July 31, 2002 $5,000,000
Maturity Date $5,000,000
or such other amount of Term Loan
Advances then outstanding
</TABLE>
Section 2.9 REIMBURSEMENT. Whenever any Lender shall sustain or incur
any losses or reasonable out-of-pocket expenses in connection with (a) failure
by the Borrower to borrow any LIBOR Advance after having given notice of its
intention to borrow in accordance with SECTION 2.2 hereof (whether by reason of
the Borrower's election not to proceed or the non-fulfillment of any of the
conditions set forth in ARTICLE 3 hereof), (b) any prepayment for any reason of
any LIBOR Advance in whole or in part (including, but not limited to, a
prepayment pursuant to SECTION 9.3(b) hereof) on other than the last day of an
Interest Period applicable to such LIBOR Advance, or (c) any prepayment of any
of its LIBOR Advances that is not made on any date specified in a notice of
prepayment given by the Borrower, the Borrower agrees to pay to any such Lender,
within 30 days after demand by such Lender, an amount sufficient to compensate
such Lender for all such losses (excluding loss of anticipated profits) and
out-of-pocket expenses, subject to SECTION 11.9 hereof; provided, that the
Borrower shall not be liable for any such losses and out-of-pocket expenses that
are attributable to such Lender's gross negligence or willful misconduct and
provided further that any claim for any such losses or expenses shall be made by
the applicable Lender within 90 days after such Lender becomes aware of the
facts or circumstances giving rise thereto. A certificate as to any amounts
payable to any Lender under this SECTION 2.9 submitted to the Borrower by such
Lender shall certify that such amounts were actually incurred by such Lender and
shall show in reasonable detail an accounting of the amount payable and the
calculations used to determine in good faith such amount and shall be prima
facie evidence of such amount.
Section 2.10 MANNER OF PAYMENT.
(a) Each payment (including prepayments) by the Borrower of the
principal of or interest on the Advances, fees, and any other amount owed under
this Agreement or any other Loan Document shall be made not later than 2:00 p.m.
(Dallas, Texas time) on the date specified for payment under this Agreement to
the Administrative Agent at the Administrative Agent's office, in lawful money
of the United States of America constituting immediately available funds.
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(b) If any payment under this Agreement or any other Loan Document shall
be specified to be made upon a day which is not a Business Day, it shall be made
on the next succeeding day which is a Business Day, unless, with respect to a
payment due in respect of a LIBOR Advance, such Business Day falls in another
calendar month, in which case payment shall be made on the preceding Business
Day. Any extension of time shall in such case be included in computing interest
and fees, if any, in connection with such payment.
(c) The Borrower agrees to pay principal, interest, fees and all other
amounts due under the Loan Documents without deduction for set-off or
counterclaim or any deduction whatsoever except, to the extent permitted
hereunder, applicable withholding taxes.
(d) If some but less than all amounts due from the Borrower are received
by the Administrative Lender, the Administrative Lender shall apply such amounts
in the following order of priority: (i) to the payment of the Administrative
Lender's expenses incurred on behalf of the Lenders then due and payable to the
Lenders, if any; (ii) to the payment of all other fees then due and payable;
(iii) to the payment of interest then due and payable on the Advances; (iv) to
the payment of all other amounts not otherwise referred to in this clause (d)
then due and payable under the Loan Documents; and (v) to the payment of
principal then due and payable on the Advances.
(e) Except where otherwise expressly provided in this Agreement, each
payment by the Borrower in respect of obligations relating to the Advances
(whether for principal, interest, fees or otherwise) shall be made to the
Administrative Lender for the Lenders PRO RATA in accordance with their
respective Specified Percentages.
Section 2.11 LIBOR LENDING OFFICES. Each Lender's initial LIBOR Lending
Office is set forth opposite its name in SCHEDULE 1 attached hereto. Each
Lender shall have the right at any time and from time to time to designate a
different office of itself or of any Affiliate of such Lender as such Lender's
LIBOR Lending Office, and to transfer any outstanding LIBOR Advance to such
LIBOR Lending Office. No such designation or transfer shall result in any
liability on the part of the Borrower for increased costs or expenses resulting
solely from such designation or transfer (except any such transfer which is made
by a Lender pursuant to SECTION 9.2 or 9.3 hereof, or otherwise for the purpose
of complying with Applicable Law). Increased costs for expenses resulting from
a change in law occurring subsequent to any such designation or transfer shall
be deemed not to result solely from such designation or transfer; provided, that
each Lender agrees to use its best efforts to redesignate any LIBOR Lending
Office affected by such change in law to any other LIBOR Lending Office
available to such Lender (consistent with regulatory requirements) if, in the
reasonable opinion of such Lender, such redesignation can be affected without
material cost to such Lender.
Section 2.12 SHARING OF PAYMENTS. If any Lender shall obtain a payment
(whether voluntary or involuntary, due to the exercise of any right of set-off,
or otherwise) on account of its Advances (other than pursuant to
SECTIONS 2.4(b), 2.14, 2.15(d), 9.3 or 9.5) in excess of its share of
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payments made by the Borrower according to its Specified Percentage, then in
each case, such Lender shall purchase from each other Lender such participation
in the Advances made by such other Lender as shall be necessary to cause such
purchasing Lender to share a ratable portion of the excess payment with each
other Lender (based on its Specified Percentage); provided, however, that if all
or any portion of such excess payment is thereafter recovered from such
purchasing Lender, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section, to the fullest extent permitted by law, may exercise
all its rights of payment (including the right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
Section 2.13 CALCULATION OF LIBOR RATE. The provisions of this Agreement
relating to calculation of the LIBOR Rate are included only for the purpose of
determining the rate of interest or other amounts to be paid hereunder that are
based upon such rate, it being understood that each Lender shall be entitled to
fund and maintain its funding of all or any part of a LIBOR Advance as it sees
fit.
Section 2.14 TAXES.
(a) Any and all payments by the Borrower hereunder shall be made, in
accordance with SECTION 2.10, free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges and
withholdings, and all liabilities with respect thereto, EXCLUDING, in the case
of each Lender and the Administrative Agent, (i) taxes imposed on, based upon or
measured by its overall net income, net worth or capital, and franchise taxes,
doing business taxes or minimum taxes imposed on it, by the jurisdiction under
the laws of which such Lender or the Administrative Agent (as the case may be)
is organized or in which it has its applicable lending office or any political
subdivision thereof; (ii) taxes imposed by reason of failure by the Lender or
the Administrative Agent to comply with the requirements of paragraph (e) of
this SECTION 2.14; and (iii) in the case of any Lender, any taxes in the nature
of transfer, stamp, recording or documentary taxes resulting from a transfer
(other than as a result of foreclosure) by such Lender of all or any portion of
its interest in this Agreement, the Notes or any other Loan Documents (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by Law to deduct or withhold any Taxes from or in respect of any sum
payable hereunder to any Lender or the Administrative Agent, (x) the sum payable
shall be increased as may be necessary so that after making all required
deductions for Taxes (including deductions applicable to additional sums payable
under this SECTION 2.14) such Lender or the Administrative Agent (as the case
may be) receives an amount equal to the sum it would have received had no such
deductions been made, (y) the Borrower shall make such deductions and (z) the
Borrower shall pay the full amount of Taxes deducted to the relevant taxation
authority or other authority in accordance with Applicable Law.
(b) In addition, the Borrower agrees to pay any and all stamp and
documentary taxes and any and all other excise and property taxes, charges and
similar levies (other than taxes described
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in clause (iii) of the first sentence of SECTION 2.14(a)) that arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Document
(hereinafter referred to as "Other Taxes").
(c) The Borrower will indemnify each Lender and the Administrative Agent
for the full amount of Taxes and Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this
SECTION 2.14) paid by such Lender or the Administrative Agent (as the case may
be) and all liabilities (including penalties, additions to tax, interest and
reasonable expenses) arising therefrom or with respect thereto whether or not
such Taxes or Other Taxes were correctly or legally asserted, other than
penalties, additions to tax, interest and expenses which are finally judicially
determined by a court of competent jurisdiction to have arisen as a result of
gross negligence or wilful misconduct on the part of such Lender or the
Administrative Agent. Any claim made by the Administrative Agent or a Lender
under this SECTION 2.14 (c) shall be made by the Administrative Agent or such
Lender within 90 days after the Administrative Agent or the applicable Lender
(as the case may be) becomes aware of the fact or circumstance giving rise
thereto. This indemnification by the Borrower shall be made within 30 days from
the date such Lender or the Administrative Agent (as the case may be) makes
written demand therefor.
(d) As soon as practicable after the date of any payment of Taxes, the
Borrower will furnish to the Administrative Agent the original or a certified
copy of a receipt evidencing payment thereof. For purposes of this SECTION 2.14
the terms "United States" and "United States Person" shall have the meanings set
forth in Section 7701 of the Code.
(e) Each Lender which is not a United States Person hereby agrees that:
(i) it shall, no later than the Agreement Date (or, in the case
of a Lender which becomes a party hereto pursuant to SECTION 11.6 after the
Agreement Date, the date upon which such Lender becomes a party hereto) and
at such times as necessary in the reasonable determination of the Borrower,
deliver to the Borrower through the Administrative Agent, with a copy to
the Administrative Agent:
(A) if any lending office is located in the United States,
two (2) accurate and complete signed originals of
Internal Revenue Service Form 4224 or any successor
form thereto ("Form 4224"),
(B) if any lending office is located outside the United
States, two (2) accurate and complete signed originals
of Internal Revenue Service Form 1001 or any successor
form thereto ("Form 1001"),
in each case establishing that such Lender is on the date of delivery
thereof entitled to receive payments of principal, interest, fees, or other
amounts payable at such lending office or lending offices under this
Agreement or any other Loan Document free from deduction or withholding of
United States federal income tax;
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(ii) if at any time such Lender changes its lending office or
lending offices or selects an additional lending office it shall, at the
same time or reasonably promptly thereafter, but only to the extent the
forms previously delivered by it hereunder are not effective with respect
to such changed or additional lending office or lending offices, deliver to
the Borrower through the Administrative Agent, with a copy to the
Administrative Agent, in replacement for the forms previously delivered by
it hereunder:
(A) if such changed or additional lending office is
located in the United States, two (2) accurate and
complete signed originals of Form 4224; or
(B) otherwise, two (2) accurate and complete signed
originals of Form 1001,
in each case establishing that such Lender is on the date of delivery
thereof entitled to receive payments of principal, interest, fees, or other
amounts payable at such changed or additional lending office under this
Agreement or any other Loan Document free from deduction of withholding of
United States federal income tax;
(iii) it shall, before or promptly after the occurrence of any
event (including the passing of time but excluding any event mentioned in
clause (ii) above) requiring a change in the most recent Form 4224 or Form
1001 previously delivered by such Lender and if the delivery of the same be
lawful, deliver to the Borrower through the Administrative Agent, with a
copy to the Administrative Agent, two (2) accurate and complete original
signed copies of Form 4224 or Form 1001, in each case establishing that
such Lender is on the date of delivery thereof entitled to receive payments
of principal, interest, fees, or other amounts payable under this Agreement
or any other Loan Document free from deduction or withholding of United
States federal income tax, in replacement for the forms previously
delivered by such Lender;
(iv) it shall, promptly upon the request of the Borrower to that
effect, deliver to the Borrower such other forms or similar documentation
as may be required from time to time by any applicable law, treaty, rule or
regulation in order to establish such Lender's tax status for withholding
purposes; and
(v) it shall notify the Borrower promptly after any event
(including an amendment to or a change in any applicable law or regulation
or in the written interpretation thereof by any regulatory authority or any
judicial authority or by ruling applicable to such Lender of any
governmental authority charged with the interpretation or administration of
any law) shall occur that results in such Lender no longer being capable of
receiving payments under this Agreement without any deduction or
withholding of United States federal income tax.
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(f) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this SECTION 2.14 shall survive the payment in full of the Obligations.
(g) Each Lender (and the Administrative Agent with respect to payments
to the Administrative Agent for its own account) agrees that (i) it will take
all reasonable actions by all usual means to maintain all exemptions, if any,
available to it from United States withholding taxes (whether available by
treaty, existing administrative waiver or by virtue of the location of any
Lender's lending office), (ii) it will use reasonable efforts (consistent with
its internal policy and legal and regulatory restrictions) to change the
jurisdiction of its lending office, if the making of such a change would avoid
the need for, or reduce the amount of, any such additional amounts which may
thereafter accrue and would not, in the reasonable judgment of such Lender, be
disadvantageous to such Lender, and (iii) otherwise cooperate with the Borrower
to minimize amounts payable by the Borrower under this SECTION 2.14; PROVIDED,
HOWEVER, no Lender nor the Administrative Agent shall be obligated by reason of
this SECTION 2.14(g) to (a) disclose any information regarding its tax affairs
or tax computations or reorder its tax or other affairs or tax or other planning
or (b) contest the payment of any Taxes or Other Taxes. Subject to the
foregoing, to the extent the Borrower pays sums pursuant to this SECTION 2.14
and the Lender or the Administrative Agent receives a refund of any or all of
such sums, the party receiving such refund shall promptly pay over all such
refunded sums to the Borrower, provided that no Default or Event of Default is
in existence at such time. At such time, if any, that such Default or Event of
Default is cured or waived, the party receiving such refund shall promptly pay
over all such refunded sums to the Borrower.
(h) If the Borrower becomes obligated to pay additional amounts
described in this SECTION 2.14 to any Lender, the Borrower may designate a
financial institution reasonably acceptable to the Administrative Agent to
replace such Lender by purchasing for cash and receiving an assignment of such
Lender's pro rata share of the Commitments and the Rights of such Lender under
the Loan Documents without recourse to or warranty by, or expense to, such
Lender, for a purchase price equal to the outstanding amounts owed to such
Lender (including such additional amounts owing to such Lender pursuant to this
SECTION 2.14). Upon execution of an Assignment Agreement, such other financial
institution shall be deemed to be a "Lender" for all purposes of this Agreement
as set forth in SECTION 11.6 hereof.
Section 2.15 LETTERS OF CREDIT.
(a) THE LETTER OF CREDIT FACILITY. The Borrower may request the Issuing
Bank, on the terms and conditions hereinafter set forth, to issue, and the
Issuing Bank shall, if so requested, issue, letters of credit (the "Letters of
Credit") for the account of the Borrower from time to time on any Business Day
from the date of the initial Advance until the Revolving Commitment Maturity
Date in an aggregate maximum drawable amount (assuming compliance with all
conditions to drawing) not to exceed, at any time outstanding, the lesser of
(i) $2,000,000 (or the U.S. dollar equivalent thereof in foreign currencies
acceptable to the Issuing Bank) (the "Letter of Credit Facility") and
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(ii) an amount equal to the Revolving Credit Commitment MINUS the aggregate
principal amount of Revolving Credit Advances then outstanding. No Letter of
Credit shall have an expiration date (including all rights of renewal) later
than the earlier of (i) the Revolving Commitment Maturity Date or (ii) one year
after the date of issuance thereof. Immediately upon the issuance of each
Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred
to each Lender, and each Lender shall be deemed to have purchased and received
from the Issuing Bank, in each case irrevocably and without any further action
by any party, an undivided interest and participation in such Letter of Credit,
each drawing thereunder and the obligations of the Borrower under this Agreement
in respect thereof in an amount equal to the product of (x) such Lender's
Specified Percentage times (y) the maximum amount available to be drawn under
such Letter of Credit (assuming compliance with all conditions to drawing).
Within the limits of the Letter of Credit Facility, and subject to the limits
referred to above, the Borrower may request the issuance of Letters of Credit
under this SECTION 2.15(a), repay any Revolving Credit Advances resulting from
drawings thereunder pursuant to SECTION 2.15(c) and request the issuance of
additional Letters of Credit under this SECTION 2.15(a).
(b) REQUEST FOR ISSUANCE. Each Letter of Credit shall be issued upon
notice, given not later than 1:00 p.m. (Dallas, Texas time) on the second
Business Day prior to the date of the proposed issuance of such Letter of Credit
(or such shorter period of time as may be acceptable to the Issuing Bank), by
the Borrower to the Issuing Bank. Each Letter of Credit shall be issued upon
notice given in accordance with the terms of any separate agreement between the
Borrower and the Issuing Bank in form and substance reasonably satisfactory to
the Borrower and the Issuing Bank providing for the issuance of Letters of
Credit pursuant to this Agreement and containing terms and conditions not
inconsistent with this Agreement (a "Letter of Credit Agreement"), PROVIDED that
if any such terms and conditions (other than any contractual choice of law to
govern any such Letter of Credit) are inconsistent with this Agreement, this
Agreement shall control. Each such notice of issuance of a Letter of Credit by
the Borrower (a "Notice of Issuance") shall be by telecopier, specifying
therein, in the case of a Letter of Credit, the requested (i) date of such
issuance (which shall be a Business Day), (ii) maximum amount of such Letter of
Credit, (iii) expiration date of such Letter of Credit, (iv) name and address of
the beneficiary of such Letter of Credit, and (v) form of such Letter of Credit
and specifying such other information as shall be required pursuant to the
relevant Letter of Credit Agreement. If the requested terms of such Letter of
Credit are acceptable to the Issuing Bank in its reasonable discretion, the
Issuing Bank will, upon fulfillment of the applicable conditions set forth in
ARTICLE 3 hereof, make such Letter of Credit available to the Borrower at its
office referred to in SECTION 11.1 or as otherwise agreed with the Borrower in
connection with such issuance.
(c) DRAWING AND REIMBURSEMENT. The payment by the Issuing Bank of a
draft drawn under any Letter of Credit shall constitute for all purposes of this
Agreement the making by the Issuing Bank of a Revolving Credit Advance, which
shall bear interest at the Base Rate Basis, in the amount of such draft (but
without any requirement for compliance with the conditions set forth in
ARTICLE 3 hereof). In the event that a drawing under any Letter of Credit is
not reimbursed by the Borrower by 12:00 noon (Dallas, Texas time) on the first
Business Day after such drawing, the
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Issuing Bank shall promptly notify Administrative Agent and each other Lender.
Each such Lender shall, on the first Business Day following such notification,
make a Revolving Credit Advance, which shall bear interest at the Base Rate
Basis, and shall be used to repay the applicable portion of the Issuing Bank's
Advance with respect to such Letter of Credit, in an amount equal to the amount
of its participation in such drawing for application to reimburse the Issuing
Bank (but without any requirement for compliance with the applicable conditions
set forth in ARTICLE 3 hereof) and shall make available to the Administrative
Agent for the account of the Issuing Bank, by deposit at the Administrative
Agent's office, in same day funds, the amount of such Advance. In the event
that any Lender fails to make available to the Administrative Agent for the
account of the Issuing Bank the amount of such Advance, the Issuing Bank shall
be entitled to recover such amount on demand from such Lender together with
interest thereon at a rate per annum equal to the lesser of (i) the Highest
Lawful Rate or (ii) the Federal Funds Rate.
(d) INCREASED COSTS. If, (i) any change after the Agreement Date in any
Law or in the interpretation thereof by any Tribunal charged with the
administration thereof or (ii) compliance by a Lender with any Law or any
guideline or requirement from any central bank or Tribunal (whether or not
having the force of law) adopted or promulgated after the Agreement Date
(including any implementation of the Basle Accord or similar guideline or
requirement adopted, promulgated or becoming effective after the Agreement Date)
shall either (A) impose, modify or deem applicable any reserve, special deposit
or similar requirement against letters of credit or guarantees issued by, or
assets held by, or deposits in or for the account of, the Issuing Bank or any
Lender or any corporation controlling the Issuing Bank or any Lender or
(B) impose on the Issuing Bank or any Lender or any corporation controlling the
Issuing Bank or any Lender any other condition regarding this Agreement or any
Letter of Credit, and the result of any event referred to in the preceding
clause (A) or (B) shall be to materially increase the cost to the Issuing Bank
or any corporation controlling the Issuing Bank of issuing or maintaining any
Letter of Credit or to any Lender or any corporation controlling such Lender of
purchasing any participation therein or making any Advance pursuant to
SECTION 2.15(c), then, within 10 days after demand by the Issuing Bank or such
Lender, the Borrower shall, subject to SECTION 11.9 hereof, pay to the Issuing
Bank or such Lender, from time to time as specified by the Issuing Bank or such
Lender, additional amounts that shall be sufficient to compensate the Issuing
Bank or such Lender or any corporation controlling such Lender for such
increased cost. Any claim by the Issuing Bank or any Lender under this SECTION
2.15 (d) shall be made within 90 days after the Issuing Bank or such Lender (as
the case may be) becomes aware of the fact or circumstance giving rise thereto.
A certificate as to the amount of such increased cost, submitted to the Borrower
by the Issuing Bank or such Lender, shall certify that such increased costs were
actually incurred by the Issuing Bank or such Lender and shall show in
reasonable detail an accounting of the amount payable and the calculation used
to determine in good faith such amount and shall constitute prima facie evidence
of such amount. In determining such amount, the Issuing Bank or such Lender may
use any reasonable averaging or attribution method which provides for the
allocation of such amounts among its affected customers in good faith and on an
equitable basis. Nothing in this SECTION 2.15(d) shall provide the Borrower or
any Subsidiary of the Borrower the right to inspect the records, files or books
of the Issuing Bank or any Lender. If the Borrower becomes obligated to pay
additional amounts described in this SECTION 2.15(d) to any Lender, the
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Borrower may designate a financial institution reasonably acceptable to the
Administrative Agent to replace such Lender by purchasing for cash and receiving
an assignment of such Lender's pro rata share of the Commitments and the Rights
of such Lender under the Loan Documents without recourse to or warranty by, or
expenses to, such Lender, for a purchase price equal to the outstanding amounts
owing to such Lender (including such additional amounts owing to such Lender
pursuant to this SECTION 2.15(d)). Upon execution of an Assignment Agreement,
such other financial institution shall be deemed to be a "Lender" for all
purposes of this Agreement as set forth in SECTION 11.6 hereof. The obligations
of the Borrower under this SECTION 2.15(d) shall survive termination of this
Agreement. The Issuing Bank or any Lender claiming any additional compensation
under this SECTION 2.15(d) shall use reasonable efforts (consistent with legal
and regulatory restrictions) to reduce or eliminate any such additional
compensation which may thereafter accrue and which efforts would not, in the
reasonable judgment of the Issuing Bank or such Lender, be otherwise
disadvantageous.
(e) OBLIGATIONS ABSOLUTE. The obligations of the Borrower under this
Agreement with respect to any Letter of Credit, any Letter of Credit Agreement
and any other agreement or instrument relating to any Letter of Credit or any
Revolving Credit Advance pursuant to SECTION 2.15(c) shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement, such Letter of Credit Agreement and such other agreement or
instrument under all circumstances, including, without limitation, the following
circumstances:
(i) any lack of validity or enforceability of this Agreement, any
other Loan Document, any Letter of Credit Agreement, any Letter of Credit
or any other agreement or instrument relating thereto (collectively, the
"L/C Related Documents");
(ii) (A) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Obligations of the Borrower in
respect of the Letters of Credit or any Revolving Credit Advance pursuant
to SECTION 2.15(c) or (B) any other amendment or waiver of or any consent
to departure from all or any of the L/C Related Documents;
(iii) the existence of any claim, set-off, defense (other than
final payment) or other right that the Borrower may have at any time
against any beneficiary or any transferee of a Letter of Credit (or any
Persons for whom any such beneficiary or any such transferee may be
acting), the Issuing Bank, any Lender or any other Person, whether in
connection with this Agreement, the transactions contemplated hereby or by
the L/C Related Documents or any unrelated transaction;
(iv) any statement or any other document presented under a Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect;
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(v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not comply with the terms
of the Letter of Credit, except for any payment made upon the Issuing
Bank's gross negligence or wilful misconduct;
(vi) any release or amendment or waiver of or consent to departure
from any guarantee, for all or any of the Obligations of the Borrower in
respect of the Letters of Credit or any Revolving Credit Advance pursuant
to SECTION 2.15(c); or
(vii) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing, including, without limitation, any
other circumstance that might otherwise constitute a defense available to,
or a discharge of, the Borrower or a guarantor, other than the Issuing's
Bank gross negligence or wilful misconduct.
(f) COMPENSATION FOR LETTERS OF CREDIT.
(i) CREDIT FEE. Subject to SECTION 11.9 hereof, the Borrower
shall pay to the Administrative Agent for the account of the Lenders
according to their Specified Percentages, a per annum fee (which shall be
payable quarterly in arrears on each Quarterly Date and on the Revolving
Commitment Maturity Date) equal to the product of the Applicable LIBOR Rate
Margin in effect from time to time multiplied by the average daily amount
available for drawing under all outstanding Letters of Credit. Subject to
SECTION 11.9 hereof, such fee shall be computed on the basis of a year
consisting of 365 or 366 days, as applicable, for the actual number of days
elapsed.
(ii) FRONTING FEE. Subject to SECTION 11.9 hereof, the Borrower
shall pay to the Administrative Agent for the account of the Issuing Bank a
per annum fronting fee (which shall be payable quarterly in arrears on each
Quarterly Date and on the Revolving Commitment Maturity Date) in an amount
equal to the product of (a) 0.125% times (y) the average daily amount
available for drawing under all outstanding Letters of Credit. Subject to
SECTION 11.9 hereof, such fee shall be computed on the basis of a 360-day
year for the actual number of days elapsed.
(iii) ADMINISTRATIVE FEE. Subject to SECTION 11.9 hereof, the
Borrower shall pay, with respect to each amendment, renewal or transfer of
each Letter of Credit and each drawing made thereunder, reasonable
documentary and processing charges in accordance with the Issuing Bank's
standard schedule for such charges in effect at the time of such amendment,
renewal, transfer or drawing, as the case may be.
(g) L/C CASH COLLATERAL ACCOUNT.
(i) Upon the occurrence of an Event of Default and demand by the
Administrative Agent pursuant to SECTION 8.2(c) (except in the case of an
Event of Default specified in SECTION 8.1(f) or (g) hereof, to the extent
permitted by applicable law, without
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any demand or taking of any other action by the Administrative Agent or any
Lender), the Borrower will promptly pay to the Administrative Agent in
immediately available funds an amount equal to the maximum amount then
available to be drawn under the Letters of Credit then outstanding. Any
amounts so received by the Administrative Agent shall be deposited by the
Administrative Agent in a deposit account maintained by the Issuing Bank
(the "L/C Cash Collateral Account").
(ii) As security for the payment of all Reimbursement Obligations
and for any other Obligations, the Borrower hereby grants, conveys,
assigns, pledges, sets over and transfers to the Administrative Agent (for
the benefit of the Issuing Bank and Lenders), and creates in the
Administrative Agent's favor (for the benefit of the Issuing Bank and
Lenders) a Lien in, all money, instruments and securities at any time held
in or acquired in connection with the L/C Cash Collateral Account, together
with all proceeds thereof. The L/C Cash Collateral Account shall be under
the sole dominion and control of the Administrative Agent and the Borrower
shall have no right to withdraw or to cause the Administrative Agent to
withdraw any funds deposited in the L/C Cash Collateral Account. At any
time and from time to time, upon the Administrative Agent's request, the
Borrower promptly shall execute and deliver any and all such further
instruments and documents, including UCC financing statements, as may be
necessary, appropriate or desirable in the Administrative Agent's judgment
to obtain the full benefits (including perfection and priority) of the
security interest created or intended to be created by this paragraph (ii)
and of the rights and powers herein granted. The Borrower shall not create
or suffer to exist any Lien on any amounts or investments held in the L/C
Cash Collateral Account other than the Lien granted under this
paragraph (ii).
(iii) The Administrative Agent shall (A) apply any funds in the L/C
Cash Collateral Account on account of Reimbursement Obligations when the
same become due and payable, (B) after the Revolving Commitment Maturity
Date, apply any proceeds remaining in the L/C Cash Collateral Account FIRST
to pay any unpaid Obligations then outstanding hereunder and THEN to refund
any remaining amount to the Borrower.
(iv) The Borrower, no more than once in any calendar month, may
direct the Administrative Agent to invest the funds held in the L/C Cash
Collateral Account (so long as the aggregate amount of such funds exceeds
any relevant minimum investment requirement) in (A) Cash and Cash
Equivalents or direct obligations of the United States or any agency
thereof, or obligations guaranteed by the United States or any agency
thereof, (B) one or more other types of investments permitted by the
Determining Lenders, in each case with such maturities as the Borrower,
with the consent of the Determining Lenders, may specify, or (C) any
combination of the investments described in clause (A) and (B) above,
pending application of such funds on account of Reimbursement Obligations
or on account of other Obligations, as the case may be. In the absence of
any such direction from the Borrower, the Administrative Agent shall invest
the funds held in the L/C Cash Collateral Account (so long as the aggregate
amount of such funds exceeds any relevant minimum
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investment requirement) in one or more types of investments with the
consent of the Determining Lenders with such maturities as the Borrower,
with the consent of the Determining Lenders, may specify, pending
application of such funds on account of Reimbursement Obligations or on
account of other Obligations, as the case may be. All such investments
shall be made in the Administrative Agent's name for the account of the
Lenders, subject to the ownership interest therein of the Borrower. The
Borrower recognizes that any losses or taxes with respect to such
investments shall be borne solely by the Borrower, and the Borrower agrees
to hold the Administrative Agent and the Lenders harmless from any and all
such losses and taxes, except to the extent that such losses or taxes are
finally judicially determined by a court of competent jurisdiction to be
the result of gross negligence or wilful misconduct of the Administrative
Agent. Administrative Agent may liquidate any investment held in the L/C
Cash Collateral Account in order to apply the proceeds of such investment
on account of the Reimbursement Obligations as provided in
SECTION 2.15(g)(iii) hereof (or on account of any other Obligation then due
and payable, as the case may be) without regard to whether such investment
has matured and without liability for any penalty or other fee incurred
(with respect to which the Borrower hereby agrees to reimburse the
Administrative Agent) as a result of such application; provided, that the
Administrative Agent shall use its best efforts to first liquidate such
investments, if any, which will not result in any penalty or other fee to
the Borrower.
(v) After the establishment of the L/C Cash Collateral Account
pursuant to SECTION 2.15(g)(i) hereof, the Borrower shall pay to the
Administrative Agent the fees customarily charged by the Issuing Bank with
respect to the maintenance of accounts similar to the L/C Cash Collateral
Account.
(vi) At such time as no Event of Default is in existence, the
Administrative Agent shall return any amount remaining in the L/C Cash
Collateral Account to the Borrower.
ARTICLE 3
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCES AND THE INITIAL
LETTERS OF CREDIT. The obligation of each Lender to make the initial Advance
and the obligation of the Issuing Bank to issue the initial Letter of Credit is
subject to (i) receipt by the Administrative Agent of the following items which
are to be delivered, in form and substance reasonably satisfactory to each
Lender, with a copy (except for the Notes and this Agreement) for each Lender,
and (ii) satisfaction of the following conditions which are to be satisfied:
(a) A loan certificate of each Obligor certifying as to the accuracy, in
all material respects, of its representations and warranties in the Loan
Documents, certifying, in the case of any such Obligor, that no Default or Event
of Default has occurred, and including a certificate of
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incumbency with respect to each Authorized Signatory, and including (i) a copy
of the articles or certificate of incorporation or other organizational
documents of such Obligor, certified to be true, complete and correct by the
secretary of state of its state of organization, (ii) a copy of a certificate of
good standing and a certificate of existence for its state of organization and,
in the case of any such Obligor, each state in which it is qualified to do
business, (iii) a copy of such Obligor's bylaws, partnership agreement or
similar document, certified to be true, complete and correct by its secretary or
general partner, as the case may be, and (iv) a copy of corporate or similar
resolutions authorizing the execution, delivery and performance of the Loan
Documents to be executed by such Obligor;
(b) a duly executed Revolving Credit Note and Term Loan Note payable to
the order of each Lender and in an amount for each Lender equal to its Specified
Percentage of each Commitment, respectively;
(c) UCC searches in appropriate jurisdictions with respect to the
Borrower, its property(ies) and its business(es);
(d) opinions of counsel to each Obligor addressed to the Lenders and in
form and substance satisfactory to the Lenders, dated the Agreement Date, and
covering certain of the matters set forth in SECTIONS 4.1(a), (b), (c), (h),
(m), (n) and (p) and such other matters incident to the transactions
contemplated hereby as the Administrative Agent or Special Counsel may
reasonably request;
(e) reimbursement for the Administrative Agent for Special Counsel's
reasonable and customary fees (on an hourly basis) and expenses rendered through
the date hereof, to the extent invoiced on or prior to the Agreement Date;
(f) evidence that all proceedings of each Obligor taken in connection
with the transactions contemplated by this Agreement and the other Loan
Documents shall be reasonably satisfactory in form and substance to the Lenders
and Special Counsel; and the Lenders shall have received copies of all documents
or other evidence which the Administrative Agent, Special Counsel or any Lender
may reasonably request in connection with such transactions;
(g) any fees or expenses required to be paid pursuant to the Fee
Letters;
(h) simultaneously with the making of the initial Advance, executed
UCC-3 Termination Statements to be filed in appropriate jurisdictions to
terminate all Liens against the Borrower and its Subsidiaries other than
Permitted Liens (or written agreements from each holder of such Liens to
promptly execute such Termination Statements);
(i) all Netcom Recapitalization Documents, which shall be in substance
and form reasonably satisfactory to the Determining Lenders;
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(j) consummation of the Netcom Recapitalization shall simultaneously
occur on terms and conditions set forth in the Netcom Recapitalization
Documents;
(k) evidence satisfactory to the Administrative Agent that (i) the
Netcom Convertible Preferred Stock has been issued and the Borrower has received
at least $48,268,400 in gross proceeds thereof, and (ii) the Netcom Redeemable
Preferred Stock has been issued and the Borrower has received at least
$48,268,400 in gross proceeds thereof;
(l) a pro forma balance sheet of the Borrower and its Subsidiaries
taking into account the Netcom Recapitalization and such other information
relating to the Netcom Recapitalization as the Determining Lenders may require;
(m) the Administrative Agent shall have received an opinion from
Houlihan Lokey Howard & Zukin Financial Advisors, Inc., addressed to the
Administrative Agent and the Lenders, in form and substance acceptable to the
Administrative Agent; and
(n) in form and substance reasonably satisfactory to the Lenders and
Special Counsel, such other documents, instruments and certificates as the
Administrative Agent or any Lender may reasonably require in connection with the
transactions contemplated hereby, including without limitation, evidence of the
status, organization or authority of the Borrower or any Subsidiary of the
Borrower, and the enforceability of the Obligations.
Section 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.
The obligation of each Lender to make each Advance hereunder (including the
initial Advance) and the obligation of the Issuing Bank to issue each Letter of
Credit (including the initial Letter of Credit) is subject to fulfillment of the
following conditions immediately prior to or contemporaneously with each such
Advance or issuance:
(a) With respect to each Advance and each issuance of a Letter of
Credit, all of the representations and warranties of the Borrower under this
Agreement, which, pursuant to SECTION 4.2 hereof, are made at and as of the time
of each such Advance or issuance, shall be true and correct in all material
respects, both before and after giving effect to the application of the proceeds
of the Advance or Letter of Credit.
(b) The incumbency of the Authorized Signatories shall be as stated in
the certificate of incumbency delivered in the Borrower's loan certificate
pursuant to SECTION 3.1(a) or as subsequently modified and reflected in a
certificate of incumbency delivered to the Administrative Agent. The Lenders
may, without waiving this condition, consider it fulfilled and a representation
by the Borrower made to such effect if no written notice to the contrary, dated
on or before the date of such Advance or Letter of Credit, is received by the
Administrative Agent from the Borrower prior to the making of such Advance or
issuance of such Letter of Credit;
(c) There shall not exist a Default or Event of Default hereunder;
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(d) The aggregate Advances and Letters of Credit, after giving effect to
such proposed Advance or Letter of Credit, shall not exceed the maximum
principal amount then permitted to be outstanding hereunder;
(e) No order, judgment, injunction or decree of any Tribunal shall
purport to enjoin or restrain any Lender or the Issuing Bank from making any
Advance or issuing any Letter of Credit;
(f) There shall be no Litigation pending against, or, to the Borrower's
current actual knowledge, threatened against the Borrower or any of its
Restricted Subsidiaries, or in any other manner relating directly and adversely
to the Borrower or any of its Restricted Subsidiaries, or any of their
respective properties, in any court or before any arbitrator of any kind or
before or by any governmental body which could reasonably be expected to have a
Material Adverse Effect; and
(g) There shall have occurred no material adverse change in the
business, assets, condition (financial or otherwise), results of operations or
business of the Borrower and its Restricted Subsidiaries, taken as a whole,
since July 31, 1997 (but after giving effect to the Netcom Recapitalization).
Notwithstanding the above, the obligation of each Lender to make a
Revolving Credit Advance pursuant to SECTION 2.15(c) shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, (i) the occurrence of any Default or Event of Default, (ii) the
failure of the Borrower to satisfy any condition set forth in this SECTION 3.2,
or (iii) any other circumstance, happening or event whatsoever.
Section 3.3 CONDITIONS PRECEDENT TO CONVERSIONS AND CONTINUATIONS. The
obligation of the Lenders to convert any existing Base Rate Advance into a LIBOR
Advance or to continue any existing LIBOR Advance is subject to the condition
precedent that on the date of such conversion or continuation no Event of
Default shall have occurred and be continuing or would result from the making of
such conversion or continuation. The acceptance of the benefits of each such
conversion and continuation shall constitute a representation and warranty by
the Borrower to each of the Lenders that no Event of Default shall have occurred
and be continuing or would result from the making of such conversion or
continuation.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1 REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to each Lender as follows:
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(a) ORGANIZATION; POWER; QUALIFICATION. As of the Agreement Date, the
respective jurisdiction of organization or incorporation and percentage
ownership by the Borrower of the Subsidiaries listed on SCHEDULE 4 are true and
correct. As of the Agreement Date, SCHEDULE 4 is a complete and accurate
listing (after giving effect to the Netcom Recapitalization), showing with
respect to the Borrower and each Subsidiary of the Borrower (a) its mailing
address, which is its principal place of business, (b) the classes of its Equity
Interests and the number of amount of its Equity Interests authorized and
outstanding, (c) each record and beneficial owner of its outstanding Equity
Interests, and (d) all outstanding options, rights, rights of conversion,
redemption, purchase or repurchase, rights of first refusal and similar rights
relating to the Equity Interests. All of the outstanding Equity Interests of
the Borrower and each Restricted Subsidiary of the Borrower is validly issued,
fully paid and non-assessable. Each of the Borrower and its Restricted
Subsidiaries is a corporation or other legal Person duly organized, validly
existing and in good standing under the laws of its state of incorporation or
organization. Each of the Borrower and its Restricted Subsidiaries has the
legal power and authority to own its properties and to carry on its business as
now being and hereafter proposed to be conducted. Each of the Borrower and its
Restricted Subsidiaries is authorized to do business, duly qualified and in good
standing in the jurisdiction as set forth in SCHEDULE 7 and no qualification or
authorization is necessary in any other jurisdictions in which the character of
its properties or the nature of its business requires such qualification or
authorization, except where the failure to be so qualified or authorized would
not reasonably be expected to have a Material Adverse Effect.
(b) AUTHORIZATION. The Borrower has legal power and has taken all
necessary legal action to authorize it to borrow and request Letters of Credit
hereunder. Each of the Borrower and its Restricted Subsidiaries has legal power
and has taken all necessary legal action to execute, deliver and perform the
Loan Documents to which it is party in accordance with the terms thereof, and to
consummate the transactions contemplated thereby. Each Loan Document has been
duly executed and delivered by the Borrower or the Restricted Subsidiary of the
Borrower executing it. Each of the Loan Documents to which the Borrower or any
of its Restricted Subsidiaries is a party is a legal, valid and binding
obligation of the Borrower or such Restricted Subsidiary, as applicable,
enforceable in accordance with its terms, subject, to enforcement of remedies,
to the following qualifications: (i) equitable principles generally, and
(ii) Debtor Relief Laws (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower or any Restricted Subsidiary of the
Borrower).
(c) COMPLIANCE WITH OTHER LOAN DOCUMENTS AND CONTEMPLATED TRANSACTIONS.
The execution, delivery and performance by the Borrower and its Restricted
Subsidiaries of the Loan Documents to which each is a party, and the
consummation of the transactions contemplated thereby, do not and will not
(i) require any consent or approval necessary on or prior to the Agreement Date
not already obtained, (ii) violate any Applicable Law, (iii) conflict with,
result in a breach of, or constitute a default under the certificate of
incorporation or by-laws or other applicable organizational documents of the
Borrower or any Restricted Subsidiary of the Borrower, (iv) conflict with,
result in a breach of, or constitute a default under any Necessary
Authorization, indenture, agreement or other instrument, to which the Borrower
or any Restricted Subsidiary of the Borrower
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is a party or by which they or their respective properties may be bound, the
effect of which would reasonably be expected to have a Material Adverse Effect,
or (v) result in or require the creation or imposition of any Lien (other than
Liens in favor of the Lenders to secure the Obligations hereunder) upon or with
respect to any property now owned or hereafter acquired by the Borrower or any
Restricted Subsidiary of the Borrower.
(d) BUSINESS. The Borrower and its Restricted Subsidiaries are engaged
primarily in the businesses of the development, manufacturing, sale and
distribution of network equipment and testing instrumentation and activities
reasonably related or incidental thereto.
(e) LICENSES, ETC. All Necessary Authorizations have been duly
obtained, and are in full force and effect without any known conflict with the
rights of others and free from any unduly burdensome restrictions, unless the
failure to obtain or have in effect such Necessary Authorizations would not
reasonably be expected to result in a Material Adverse Effect. The Borrower and
its Subsidiaries are and will continue to be in compliance with all provisions
thereof, except to the extent that any such failure to comply would not
reasonably be expected to have a Material Adverse Effect. No circumstance
exists which would reasonably be expected to impair the utility of the Necessary
Authorization or the right to renew such Necessary Authorization the effect of
which could reasonably be expected to have a Material Adverse Effect. No
Necessary Authorization is the subject of any pending or, to the best of the
knowledge of the Senior Officers of Borrower, threatened challenge, suspension,
cancellation or revocation, the effect of which would reasonably be expected to
have a Material Adverse Effect.
(f) COMPLIANCE WITH LAW. The Borrower and its Restricted Subsidiaries
are in compliance in all respects with all Applicable Laws, except where the
failure to so comply would not reasonably be expected to have a Material Adverse
Effect.
(g) TITLE TO PROPERTIES. The Borrower and its Restricted Subsidiaries
have good title to, or a valid leasehold or subleasehold interest in, all of
their material assets. None of their assets are subject to any Liens, except
Permitted Liens. No financing statement or other Lien filing (except relating
to Permitted Liens) is on file in any state or jurisdiction that names the
Borrower or any of its Restricted Subsidiaries as debtor or covers (or purports
to cover) any assets of the Borrower or any of its Restricted Subsidiaries. The
Borrower and its Restricted Subsidiaries have not signed any such financing
statement or filing, nor any security agreement authorizing any Person to file
any such financing statement or filing (except relating to Permitted Liens).
(h) LITIGATION. Except as reflected on SCHEDULE 3 hereto, as of the
Agreement Date, there is no Litigation pending against, or, to the current
actual knowledge of Borrower's Senior Officers, threatened against the Borrower
or any of its Restricted Subsidiaries, or in any other manner relating directly
and adversely to the Borrower or any of its Restricted Subsidiaries, or any of
their respective properties, in any court or before any arbitrator of any kind
or before or by any governmental body in which the amount claimed in an
aggregate amount (excluding liabilities for which credit worthy insurance
companies have acknowledged coverage) exceeds $1,000,000.
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(i) TAXES. All federal, material state and other material tax returns
of the Borrower and its Subsidiaries required by law to be filed have been duly
filed, or extensions have been timely filed, and all material Taxes shown to be
due and payable on such returns, have been paid prior to the time when any
penalties would attach thereto, unless the same are being diligently contested
in accordance with SECTION 5.6 hereof. The charges, accruals and reserves on
the books of the Borrower and its Restricted Subsidiaries in respect of their
Taxes are, in the reasonable judgment of the Borrower, adequate.
(j) FINANCIAL STATEMENTS; MATERIAL LIABILITIES.
(i) The Borrower has heretofore delivered to Lenders the audited
balance sheets of the Borrower and its Subsidiaries as at July 31, 1997,
and the related statements of earnings and changes in shareholders' equity
and statement of cash flows for the twelve-month period then ended. Such
financial statements were prepared in conformity with GAAP (other than as
set forth in the respective audit reports attached thereto) and fairly
present, in all material respects, the financial position of the Borrower
and its Subsidiaries as at the date thereof and the combined results of
operations and cash flows for the periods covered thereby.
(ii) The projected financial statements of the Borrower and its
Subsidiaries delivered to the Lenders prior to or on the Agreement Date
(taking into effect the Netcom Recapitalization) are based on good faith
estimates and assumptions made by the management of the Borrower and
believed to be reasonable at the time made, it being recognized by the
Lenders that such projections as to future events are not to be viewed as
facts and that actual results during the period or periods covered by any
such projections may differ in material respects from the projected
results.
(iii) The financial statements of the Borrower and its Restricted
Subsidiaries delivered to the Lenders pursuant to SECTIONS 6.1, 6.2 and 6.3
hereof fairly present in all material respects their respective financial
condition and their respective results of operations as of the dates and
for the periods shown, all in accordance with GAAP, subject, with respect
to the financial statements delivered pursuant to SECTION 6.1 and 6.2
hereof, to normal year-end adjustments and the absence of footnotes. The
latest of such financial statements reflects all material liabilities,
direct and contingent, of the Borrower and each Restricted Subsidiary of
the Borrower that are required to be disclosed in accordance with GAAP,
subject, with respect to the financial statements delivered pursuant to
SECTION 6.1 and 6.2 hereof, the absence of footnotes and appropriate
year-end adjustments.
(k) NO ADVERSE CHANGE. There has occurred no material adverse change in
the business, assets, condition (financial or otherwise), results of operations
or business of the Borrower and its Restricted Subsidiaries, taken as a whole,
since July 31, 1997 (but after giving effect to the Netcom Recapitalization).
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(l) ERISA. None of the Borrower or its Controlled Group maintains,
contributes to or has any liability with respect to any Plan subject to Title IV
of ERISA. Each such Plan (other than any Multiemployer Plan) is in compliance
in all material respects with the applicable provisions of ERISA, the Code, and
any other applicable Law, except to the extent that failure to so comply would
not reasonably be expected to have a Material Adverse Effect. With respect to
each Plan (other than any Multiemployer Plan) of the Borrower and each member of
its Controlled Group, all reports required under ERISA or any other Applicable
Law to be filed with any Tribunal, the failure of which to file could reasonably
be expected to result in liability of the Borrower or any member of its
Controlled Group in excess of $500,000, have been duly filed. All such reports
are true and correct in all material respects as of the date given. No Plan of
the Borrower or any member of its Controlled Group has been terminated under
Section 4041(c) of ERISA nor has any accumulated funding deficiency (as defined
in Section 412(a) of the Code) been incurred (without regard to any waiver
granted under Section 412 of the Code), nor has any funding waiver from the
Internal Revenue Service been received or requested, the result of which would
reasonably be expected to have a Material Adverse Effect. None of the Borrower
or any member of its Controlled Group has failed to make any contribution or pay
any amount due or owing as required under the terms of any such Plan, or by
Section 412 of the Code or Section 302 of ERISA by the due date under
Section 412 of the Code and Section 302 of ERISA, the result of which would
reasonably be expected to have a Material Adverse Effect. There has been no
ERISA Event or any event requiring disclosure under Section 4041(c)(3)(C) or
4063(a) of ERISA with respect to any Plan or its related trust of the Borrower
or any member of its Controlled Group since the effective date of ERISA, the
result of which would reasonably be expected to have a Material Adverse Effect.
The present value of the benefit liabilities, as defined in Title IV of ERISA,
of each Plan subject to Title IV of ERISA (other than a Multiemployer Plan) of
the Borrower and each member of its Controlled Group does not exceed by more
than $500,000 the present value of the assets of each such Plan as of the most
recent valuation date using each such Plan's actuarial assumptions at such date.
There are no pending, or to the Borrower's knowledge threatened, claims,
lawsuits or actions (other than routine claims for benefits in the ordinary
course) asserted or instituted against, and neither the Borrower nor any member
of its Controlled Group has knowledge of any threatened litigation or claims
against, the assets of any Plan or its related trust or against any fiduciary of
a Plan with respect to the operation of such Plan, the result of which would
reasonably be expected to have a Material Adverse Effect. None of the Borrower
or, to the Borrower's knowledge, any member of its Controlled Group has engaged
in any prohibited transactions, within the meaning of Section 406 of ERISA or
Section 4975 of the Code, in connection with any Plan the result of which would
reasonably be expected to have a Material Adverse Effect. None of the Borrower
or any member of its Controlled Group has withdrawn from any Multiemployer Plan,
nor has incurred or reasonably expects to incur (A) any liability under Title IV
of ERISA (other than premiums due under Section 4007 of ERISA to the PBGC),
(B) any withdrawal liability (and no event has occurred which with the giving of
notice under Section 4219 of ERISA would result in such liability) under
Section 4201 of ERISA as a result of a complete or partial withdrawal (within
the meaning of Section 4203 or 4205 of ERISA) from a Multiemployer Plan, or
(C) any liability under Section 4062 of ERISA to the PBGC or to a trustee
appointed under Section 4042 of ERISA, the result of which would reasonably be
expected to have a Material Adverse Effect. None of the Borrower, any member of
its Controlled Group, or any
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organization to which the Borrower or any member of its Controlled Group is a
successor or parent corporation within the meaning of ERISA Section 4069(b), has
engaged in a transaction within the meaning of ERISA Section 4069, the result of
which would reasonably be expected to have a Material Adverse Effect. None of
the Borrower or any member of its Controlled Group maintains or has established
any Plan (other than a Multiemployer Plan) which is a welfare benefit plan
within the meaning of Section 3(1) of ERISA and which provides for continuing
benefits or coverage for any participant or any beneficiary of any participant
after such participant's termination of employment, except as may be required by
any Applicable Law, the result of which would reasonably be expected to have a
Material Adverse Effect. Each of Borrower and its Controlled Group which
maintains a Plan which is a welfare benefit plan within the meaning of
Section 3(1) of ERISA has complied in all material respects with any applicable
notice and continuation requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, and the regulations thereunder. None of
the Borrower or any member of its Controlled Group maintains or has established
a multiemployer welfare benefit arrangement within the meaning of
Section 3(40)(A) of ERISA.
(m) COMPLIANCE WITH REGULATIONS G, T, U AND X. The Borrower is not
engaged principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying any margin stock
within the meaning of Regulations G, T, U and X of the Board of Governors of the
Federal Reserve System, and no part of the proceeds of the Advances or Letters
of Credit will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock in any
manner which might cause the borrowing of any Advances or the application of any
proceeds thereof to violate Regulations G, T, U and X of the Board of Governors
of the Federal Reserve System. No more than 25% of the assets of the Borrower
and its Restricted Subsidiaries consist of margin stock.
(n) REQUIRED CONSENTS. The Borrower and its Restricted Subsidiaries are
not required to obtain any material Necessary Authorization on or prior to the
Agreement Date that has not already been obtained from, or effect any material
filing or registration that has not already been effected with, any Tribunal in
connection with the execution and delivery of this Agreement or any other Loan
Document, or the performance thereof, in accordance with their respective terms,
including any borrowings hereunder.
(o) ABSENCE OF DEFAULT. The Borrower and its Restricted Subsidiaries
are in compliance in all material respects with all of the provisions of their
respective certificates of incorporation, by-laws and other organizational
documents, and no event has occurred or failed to occur, which has not been
remedied or waived, the occurrence or non-occurrence of which constitutes, or
which with the passage of time or giving of notice or both would constitute,
(i) an Event of Default or (ii) a default by the Borrower or any of its
Restricted Subsidiaries under any indenture, agreement or other instrument, or
any judgment, decree or order to which the Borrower or any of its Restricted
Subsidiaries or by which they or any of their respective properties is bound,
the result of which with respect to any default set forth in clause (ii) would
reasonably be expected to have a Material Adverse Effect.
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(p) GOVERNMENTAL REGULATION. Neither the Borrower nor any of its
Restricted Subsidiaries is subject to regulation under the Public Utility
Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act
or the Investment Company Act of 1940. Neither the entering into or performance
by the Borrower of this Agreement nor the issuance of the Notes violates any
provision of such act or requires any consent, approval, or authorization of, or
registration with, the Securities and Exchange Commission or any other Tribunal
pursuant to any provisions of such act.
(q) ENVIRONMENTAL MATTERS. No substance deemed hazardous by any
Applicable Environmental Law, has been placed (i) on any real property fee title
to which is now owned by the Borrower or any of its Restricted Subsidiaries or
(ii) by Borrower or any of its Restricted Subsidiaries on any real property
leased by the Borrower or any of its Restricted Subsidiaries, in either case in
a manner which does not comply with Applicable Environmental Laws, except to the
extent that the failure to so comply would not reasonably be expected to have a
Material Adverse Effect. The Borrower and its Restricted Subsidiaries are not
in violation of or subject to any existing, pending or, to the best knowledge of
the Borrower's Senior Officers, threatened investigation or inquiry by any
Tribunal or to any remedial obligations under any Applicable Environmental Laws,
the effect of which would reasonably be expected to have a Material Adverse
Effect. The Borrower and its Restricted Subsidiaries have not failed to obtain
any permits, licenses or similar authorizations (other than certificates of
occupancy and building permits and other authorizations required to construct,
occupy, operate or use any buildings, improvements, fixtures, and equipment
forming a part of any real property owned or leased by the Borrower or any
Restricted Subsidiary of the Borrower) that are required by any Applicable
Environmental Laws, except to the extent that the failure to so obtain would not
reasonably be expected to have a Material Adverse Effect. No hazardous
substances or solid wastes have been disposed of or otherwise released (i) on or
to the real property fee title to which is owned by the Borrower or any of its
Restricted Subsidiaries or (ii) by Borrower or any of its Restricted
Subsidiaries on or to any real property leased by Borrower or any of its
Restricted Subsidiaries, all within the meaning of the Applicable Environmental
Laws, the effect of which would reasonably be expected to have a Material
Adverse Effect.
(r) CERTAIN FEES. Except for fees and expenses incurred in connection
with the Netcom Recapitalization, no broker's, finder's or other fee or
commission will be payable by the Borrower (other than to the Lenders hereunder)
with respect to the making of the Commitments or the Advances hereunder. The
Borrower agrees to indemnify and hold harmless the Administrative Agent and each
Lender from and against any claims, demand, liability, proceedings, costs or
expenses asserted with respect to or arising in connection with any such fees or
commissions, including those related to the Netcom Recapitalization.
(s) PATENTS, ETC. The Borrower and its Restricted Subsidiaries have
collectively obtained or applied for or licensed or otherwise obtained the right
to use all patents, trademarks, service marks, trade names, copyrights, and
other rights, free from Liens (except Permitted Liens), that are
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necessary for the operation of their business as presently conducted and as
proposed to be conducted, except to the extent that the failure to so obtain,
apply, license or obtain the right to use would not reasonably be expected to
have a Material Adverse Effect. Nothing has come to the knowledge of Senior
Officers of the Borrower or any of its Restricted Subsidiaries to the effect
that (i) any process, method, part or other material presently contemplated to
be employed by the Borrower or any Restricted Subsidiary of the Borrower
infringes any valid and enforceable patent, trademark, service mark, trade name,
copyright, license or other right owned by any other Person, or (ii) there is
pending or overtly threatened any claim or litigation against or affecting the
Borrower or any Restricted Subsidiary of the Borrower contesting its right to
sell or use any such process, method, part or other material, which would
reasonably be expected to have a Material Adverse Effect.
(t) DISCLOSURE. All factual information furnished by the Borrower or
any of its Restricted Subsidiaries in writing to the Administrative Agent or any
Lender in connection with this Agreement or the other Loan Documents is, and all
other such factual information hereafter furnished by or on behalf of the
Borrower or any of its Restricted Subsidiaries in writing to the Administrative
Agent or any Lender in connection with this Agreement will be, true and accurate
in all material respects on the date as of which such information is dated or
certified and not incomplete by omitting to state any material fact necessary to
make such information not misleading at such time in light of the circumstances
under which such information was provided; PROVIDED, HOWEVER, the Lenders
acknowledge that financial projections and budgets are based on good faith
estimates and assumptions made by the management of the Borrower at the time
made, it being recognized by the Lenders that projections and budgets as to
future events are not to be viewed as facts and that actual results during the
period or periods covered by such projections and budgets may differ in material
respects from the projected results. There is no fact known to any of the
Senior Officers of the Borrower and not known to the public generally that would
reasonably be expected to have a Material Adverse Effect, which has not been set
forth in this Agreement or in the documents, certificates and statements
furnished to the Lenders by or on behalf of the Borrower in connection with the
transactions contemplated hereby.
(u) SOLVENCY. The Borrower is, and Borrower and its Subsidiaries on a
consolidated basis are, Solvent.
(v) LABOR RELATIONS. Except as provided on SCHEDULE 8, neither the
Borrower nor any Restricted Subsidiary is a party to a collective bargaining
agreement or similar agreement, and the Borrower and each Restricted Subsidiary
is in compliance in all material respects with all Laws respecting employment
and employment practices, terms and conditions of employment, wages and hours
and other laws related to the employment of its employees, except where the
failure to comply would not reasonably be expected to result in a Material
Adverse Effect, and there are no arrears in the payment of wages, withholding or
social security taxes, unemployment insurance premiums or other similar
obligations of the Borrower or any Restricted Subsidiary or for which the
Borrower or any Restricted Subsidiary may be responsible other than in the
ordinary course of business, except for such unpaid or unwithheld arrears which
would not reasonably be expected to result in a Material Adverse Effect. There
is no strike, work stoppage or labor dispute with any union or group of
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employees pending or overtly threatened involving Borrower or any Restricted
Subsidiary that would reasonably be expected to have a Material Adverse Effect.
(w) COMMON ENTERPRISE. The operations of the Borrower and its
Restricted Subsidiaries require financing on a basis such that the credit
supplied can be made available from time to time to the Borrower and various of
the Restricted Subsidiaries, as required for the continued successful operation
of the Borrower and its Restricted Subsidiaries as a whole. The Borrower and
its Restricted Subsidiaries expect to derive benefit (and the boards of
directors of the Borrower and its Restricted Subsidiaries have determined that
the Borrower and the Restricted Subsidiaries may reasonably be expected to
derive benefit), directly or indirectly, from the credit extended by Lenders
hereunder, both in their separate capacities and as members of the group of
companies, since the successful operation and condition of the Borrower and its
Restricted Subsidiaries is dependent on the continued successful performance of
the functions of the group as a whole.
Section 4.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All
representations and warranties made under this Agreement and the other Loan
Documents shall be deemed to be made at and as of the Agreement Date and at and
as of the date of each Advance and the date of issuance of each Letter of
Credit, and each shall be true and correct in all material respects when made,
except to the extent (a) previously fulfilled in accordance with the terms
hereof, (b) previously waived in writing by the Determining Lenders with respect
to any particular factual circumstance or permitted by the terms of this
Agreement or (c) such representations and warranties specifically relate to an
earlier date, in which case such representations and warranties shall have been
true and correct in all material respects on and as of such date. All such
representations and warranties shall survive, and not be waived by, the
execution hereof by any Lender, any investigation or inquiry by any Lender, or
by the making of any Advance or the issuance of any Letter of Credit under this
Agreement.
ARTICLE 5
GENERAL COVENANTS
So long as any of the Obligations (other than contingent indemnity
Obligations which expressly survive the termination of this Agreement) are
outstanding and unpaid or any Commitment is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled):
Section 5.1 PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. The Borrower
shall, and shall cause each Restricted Subsidiary of the Borrower to:
(a) except as otherwise permitted pursuant to SECTION 7.4 hereof,
preserve and maintain, or timely obtain and thereafter preserve and maintain,
its existence, rights, franchises, licenses, authorizations, consents,
privileges and all other Necessary Authorizations from any Tribunal, the loss of
which would reasonably be expected to have a Material Adverse Effect; and
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(b) except as otherwise permitted pursuant to SECTION 7.4 hereof,
qualify and remain qualified and authorized to do business in each jurisdiction
in which the character of its properties or the nature of its business requires
such qualification or authorization, unless the failure to do so would not
reasonably be expected to have a Material Adverse Effect.
Section 5.2 BUSINESS; COMPLIANCE WITH APPLICABLE LAW. The Borrower and
its Restricted Subsidiaries shall (a) engage primarily in the businesses set
forth in SECTION 4.1(d) hereof and those businesses reasonably related or
incidental thereto, and (b) comply in all respects with the requirements of all
Applicable Law, except where the failure to so comply would not reasonably be
expected to have a Material Adverse Effect.
Section 5.3 MAINTENANCE OF PROPERTIES. The Borrower shall, and shall
cause each Restricted Subsidiary of the Borrower to, maintain or cause to be
maintained all its properties (whether owned or held under lease) in adequate
operating condition and repair for purposes of their current use with due regard
to the age thereof, taken as a whole, subject to ordinary wear and tear, and
from time to time make or cause to be made all appropriate (in the reasonable
judgment of the Borrower) repairs, renewals, replacements, additions,
betterments and improvements thereto in accordance with past practice, except
where the failure to so maintain, repair, renew, replace or improve would not
reasonably be expected to have a Material Adverse Effect.
Section 5.4 ACCOUNTING METHODS AND FINANCIAL RECORDS. The Borrower
shall, and shall cause each Restricted Subsidiary of the Borrower to, maintain a
system of accounting established and administered in accordance with GAAP, keep
adequate records and books of account in which complete entries will be made and
all transactions reflected in accordance with GAAP, and keep accurate and
complete records of its respective assets.
Section 5.5 INSURANCE. The Borrower shall, and shall cause each
Restricted Subsidiary of the Borrower to, maintain insurance from responsible
companies in such amounts and against such risks as shall be customary and usual
in the industry for companies of similar size and capability.
Section 5.6 PAYMENT OF TAXES AND CLAIMS. The Borrower shall, and shall
cause each Restricted Subsidiary of the Borrower to, pay and discharge all
material taxes to which they are subject prior to the date on which penalties
attach thereto, and all lawful material claims for labor, materials and supplies
which, if unpaid, might by Law become a Lien upon any of its properties; except
that no such tax or claim need be paid which is being diligently contested in
good faith by appropriate proceedings and for which adequate reserves shall have
been set aside on the appropriate books, but only so long as any Lien related
thereto is a Permitted Lien. The Borrower shall, and shall cause each
Restricted Subsidiary of the Borrower to, timely file all material information
returns (or extensions of such filing deadlines) required by federal, state or
local tax authorities.
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Section 5.7 VISITS AND INSPECTIONS. The Borrower shall, and shall cause
each Subsidiary of the Borrower to, promptly permit representatives of the
Administrative Agent or any Lender from time to time after reasonable notice by
the Administrative Agent or any Lender to (a) visit and inspect the properties
of the Borrower and its Restricted Subsidiaries as often as the Administrative
Agent or any Lender shall reasonably deem advisable, (b) audit, inspect and make
extracts from and copies of the Borrower's and each such Restricted Subsidiary's
books and records, and (c) discuss with the Borrower's and each such Restricted
Subsidiary's directors, officers, employees and auditors, in the presence of a
Senior Officer of the Borrower, its business, assets, liabilities, financial
positions and results of operations, PROVIDED that such representatives of the
Administrative Agent or any Lender shall keep confidential all information
obtained pursuant to this SECTION 5.7 to the extent required by SECTION 11.14.
The Borrower shall pay the reasonable out-of-pocket expenses related to
inspections and audits performed (a) by, or on behalf of, any initial Lender on
any single occasion prior to July 31, 1998, (b) at any time by the
Administrative Agent and (c) after the occurrence and during the continuance of
an Event of Default by each Lender. Except after the occurrence and during the
continuance of an Event of Default, all such visits and inspections shall be
conducted during normal business hours. Following the occurrence and during the
continuance of an Event of Default, such visits and inspections shall be
conducted at any time requested by the Administrative Agent or any Lender
without any requirement for reasonable notice.
Section 5.8 USE OF PROCEEDS. The proceeds of the Advances shall be used
by the Borrower to (a) consummate the Netcom Recapitalization and pay certain
outstanding Indebtedness of the Borrower and its Restricted Subsidiaries and
trade payables, (b) pay certain fees and expenses related to the Netcom
Recapitalization, (c) finance acquisitions and to finance the repurchase of the
Netcom Preferred Stock, in each case to the extent permitted hereunder, and
(d) finance the ongoing working capital and general corporate requirements of
the Borrower and its Restricted Subsidiaries.
SECTION 5.9 INDEMNITY.
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(a) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD HARMLESS
THE ADMINISTRATIVE AGENT, EACH LENDER, EACH OF THEIR RESPECTIVE AFFILIATES, AND
EACH OF THEIR RESPECTIVE (INCLUDING SUCH AFFILIATES') OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS, SHAREHOLDERS AND CONSULTANTS (INCLUDING, WITHOUT
LIMITATION, THOSE RETAINED IN CONNECTION WITH THE SATISFACTION OR ATTEMPTED
SATISFACTION OF ANY OF THE CONDITIONS SET FORTH HEREIN) OF EACH OF THE FOREGOING
(COLLECTIVELY, "INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS,
REASONABLE COSTS, REASONABLE OUT-OF-POCKET EXPENSES AND REASONABLE DISBURSEMENTS
OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE
FEES AND DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY
INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH
INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), IMPOSED ON, INCURRED BY, OR
ASSERTED AGAINST SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL AND
WHETHER BASED ON ANY FEDERAL, STATE, OR LOCAL LAWS AND REGULATIONS, UNDER COMMON
LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT, TORT OR OTHERWISE, ARISING FROM OR
CONNECTED WITH THE PAST, PRESENT OR FUTURE OPERATIONS OF THE BORROWER OR ANY
SUBSIDIARY OF THE BORROWER OR THEIR RESPECTIVE PREDECESSORS IN INTEREST, OR THE
PAST, PRESENT OR FUTURE ENVIRONMENTAL CONDITION OF PROPERTY OF THE BORROWER OR
ANY SUBSIDIARY OF THE BORROWER), RELATING TO OR ARISING OUT OF THIS AGREEMENT,
THE OTHER LOAN DOCUMENTS, OR ANY ACT, EVENT OR TRANSACTION OR ALLEGED ACT, EVENT
OR TRANSACTION RELATING THERETO, INCLUDING IN CONNECTION WITH, OR AS A RESULT,
IN WHOLE OR IN PART, OF ANY ORDINARY NEGLIGENCE OF ADMINISTRATIVE AGENT OR ANY
LENDER (OTHER THAN THOSE MATTERS RAISED EXCLUSIVELY BY A PARTICIPANT AGAINST THE
ADMINISTRATIVE AGENT OR ANY LENDER AND NOT THE BORROWER), OR THE USE OR INTENDED
USE OF THE PROCEEDS OF THE ADVANCES OR LETTERS OF CREDIT HEREUNDER, OR IN
CONNECTION WITH ANY INVESTIGATION OF ANY POTENTIAL MATTER COVERED HEREBY, BUT
EXCLUDING (i) ANY CLAIM OR LIABILITY THAT ARISES AS THE RESULT OF THE GROSS
NEGLIGENCE OR WILFUL MISCONDUCT OF ANY INDEMNITEE, AS FINALLY JUDICIALLY
DETERMINED BY A COURT OF COMPETENT JURISDICTION, AND (ii) MATTERS RAISED BY ONE
LENDER AGAINST ANOTHER LENDER OR BY ANY SHAREHOLDERS OF A LENDER AGAINST A
LENDER OR ITS MANAGEMENT (COLLECTIVELY, EXCEPT FOR THE MATTERS REFERRED TO
CLAUSES (i) OR (ii) ABOVE, "INDEMNIFIED MATTERS", AND THE MATTERS REFERRED TO IN
CLAUSES (i) OR (ii) ABOVE, COLLECTIVELY, "EXCLUDED MATTERS"). TO THE EXTENT
THAT ANY INDEMNIFIED MATTER INVOLVES ONE OR MORE
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INDEMNITEES, SUCH INDEMNITEES SHALL USE THE SAME LEGAL COUNSEL UNLESS ANY
INDEMNITEE IN ITS REASONABLE DISCRETION DETERMINES THAT CONFLICTS EXIST OR MAY
ARISE IN CONNECTION WITH SUCH REPRESENTATION.
(b) WITHOUT DUPLICATION, THE BORROWER SHALL PERIODICALLY, UPON REQUEST,
REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE OUT-OF-POCKET LEGAL AND OTHER
ACTUAL REASONABLE EXPENSES (INCLUDING THE REASONABLE COST OF ANY INVESTIGATION
AND PREPARATION) INCURRED IN CONNECTION WITH ANY INDEMNIFIED MATTER; PROVIDED,
HOWEVER, THAT IF AN INDEMNITEE IS REIMBURSED HEREUNDER FOR SUCH AMOUNT, THE
AMOUNT SO PAID SHALL BE REFUNDED TO THE BORROWER IF AND TO THE EXTENT IT IS
FINALLY JUDICIALLY DETERMINED THAT THE INDEMNIFIED MATTER IN QUESTION WAS AN
EXCLUDED MATTER. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION OBLIGATIONS
UNDER THIS SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE BORROWER MAY
OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO EACH
INDEMNITEE, AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY
SUCCESSORS, ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES OF THE BORROWER, THE
ADMINISTRATIVE AGENT, THE LENDERS AND ALL OTHER INDEMNITEES. THIS SECTION SHALL
SURVIVE ANY TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE OBLIGATIONS.
Section 5.10 ENVIRONMENTAL LAW COMPLIANCE. The use which the Borrower or
any Restricted Subsidiary of the Borrower intends to make of any real property
which is owned or leased by it will not result in the disposal or other release
of any hazardous substance or solid waste on or to such real property which is
in violation of Applicable Environmental Laws, the effect of which would
reasonably be expected to have a Material Adverse Effect. As used herein, the
terms "hazardous substance" and "release" as used in this Section shall have the
meanings specified in CERCLA (as defined in the definition of Applicable
Environmental Laws), and the terms "solid waste" and "disposal" shall have the
meanings specified in RCRA (as defined in the definition of Applicable
Environmental Laws); provided, however, that if CERCLA or RCRA is amended so as
to broaden or lessen the meaning of any term defined thereby, such broader or
lesser meaning shall apply subsequent to the effective date of such amendment;
and provided further, to the extent that any other law applicable to the
Borrower, any Restricted Subsidiary or any of their properties establishes a
meaning for "hazardous substance," "release," "solid waste," or "disposal" which
is broader or lesser than that specified in either CERCLA or RCRA, such broader
or lesser meaning shall apply.
Section 5.11 FURTHER ASSURANCES. At any time or from time to time upon
request by the Administrative Agent, the Borrower or any Restricted Subsidiary
of the Borrower shall execute and deliver such further documents and do such
other acts and things as the Administrative Agent may reasonably request in
order to effect fully the purposes of this Agreement and the other Loan
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Documents and to provide for payment of the Obligations in accordance with the
terms of this Agreement and the other Loan Documents. Without limiting the
generality of the foregoing, the Borrower agrees to update and deliver to the
Administrative Agent SCHEDULE 4 hereto (with respect to the identities,
jurisdictions of incorporation and initial ownership of the Borrower's direct
and indirect Subsidiaries) at the time of delivery of the financial statements
set forth in SECTIONS 6.2 and 6.3 hereof if the information provided therein is
not complete and correct.
Section 5.12 RESTRICTED DOMESTIC SUBSIDIARIES. At any time that any
Person becomes a Restricted Domestic Subsidiary, (a) such Subsidiary shall
execute a Subsidiary Guaranty of the Obligations and (b) the Lenders shall
receive such board resolutions, officer's certificates, corporate and other
documents and opinions of counsel as the Administrative Agent shall reasonably
request in connection with the actions described in clause (a) above.
ARTICLE 6
INFORMATION COVENANTS
So long as any of the Obligations (other than contingent indemnity
Obligations which expressly survive the termination of this Agreement) are
outstanding and unpaid or any Commitment is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled), the Borrower shall
furnish or cause to be furnished to each Lender:
Section 6.1 MONTHLY FINANCIALS. As soon as available in any event within
30 days after the end of each month prior to July, 1998, monthly financial
reports of the Borrower (and its Subsidiaries with which it prepares
consolidated financial statements) on a consolidated basis, including a balance
sheet as at the end of the preceding calendar month and statements of income and
retained earnings and a related statement of cash flows for such month (prepared
in accordance with GAAP), such figures for the corresponding month of the
preceding fiscal year and comparisons to the budget for such month. Such
financial statements shall be certified by the chief financial officer of the
Borrower to be (to his knowledge) complete and accurate, to fairly present the
financial condition of the Borrower and its Subsidiaries and to be prepared in
accordance with GAAP;
Section 6.2 QUARTERLY FINANCIAL STATEMENTS AND INFORMATION. Within 60
after the end of each fiscal quarter of each fiscal year (other than the end of
a fiscal quarter which coincides with the end of a fiscal year), the
consolidated balance sheets of the Borrower and its Restricted Subsidiaries as
at the end of such fiscal quarter and the related consolidated statements of
income for such fiscal quarter and for the elapsed portion of the year ended
with the last day of such fiscal quarter, and consolidated statements of cash
flow for the elapsed portion of the year ended with the last day of such fiscal
quarter, all of which shall be certified by the chief executive officer,
president, chief financial officer, treasurer or other officer of the Borrower
acceptable to the Administrative Agent, to, in his or her opinion acting solely
in his or her capacity as an officer of the Borrower, present fairly in all
material respects, in accordance with GAAP (except for the absence of
footnotes), the
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financial position and results of operations of the Borrower and its Restricted
Subsidiaries as at the end of and for such fiscal quarter, and for the elapsed
portion of the year ended with the last day of such fiscal quarter, subject only
to normal year-end adjustments.
Section 6.3 ANNUAL FINANCIAL STATEMENTS AND INFORMATION; CERTIFICATE OF
NO DEFAULT.
(a) Within 120 days after the end of each fiscal year, a copy of (i) the
consolidated and consolidating balance sheets of the Borrower and its Restricted
Subsidiaries, as of the end of the current and prior fiscal years and (ii) the
consolidated and consolidating statements of earnings and consolidated
statements of changes in shareholders' equity, and statements of cash flow as of
and through the end of such fiscal year, all of which are prepared in accordance
with GAAP, and, with respect to the consolidated financial statements, certified
by independent certified public accountants reasonably acceptable to the
Determining Lenders (provided, however, any big six public accounting firm shall
be acceptable to the Lenders), whose opinion shall be in scope and substance in
accordance with generally accepted auditing standards and shall be unqualified
as to scope of audit and going concern.
(b) As soon as available, but in any event within 90 days following the
end of each fiscal year, a copy of the annual consolidated operating budget of
the Borrower and its Subsidiaries for the succeeding fiscal year.
Section 6.4 COMPLIANCE CERTIFICATE. At the time financial statements are
furnished pursuant to SECTIONS 6.2 and 6.3 hereof, the Compliance Certificate,
completed as provided therein.
Section 6.5 COPIES OF OTHER REPORTS AND NOTICES.
(a) Promptly upon their becoming available, a copy of (i) all reports or
letters submitted to the Borrower or any Restricted Subsidiary of the Borrower
by accountants in connection with any annual, interim or special audit,
including without limitation any report prepared in connection with the annual
audit referred to in SECTION 6.3 hereof, and any other comment letter submitted
to management in connection with any such audit, (ii) each regular, periodic or
other report and any registration statement (other than statements on Form S-8)
or prospectus (or material written communication in respect of any thereof)
filed by the Borrower or any Restricted Subsidiary of the Borrower with any
securities exchange, with the Securities and Exchange Commission or any
successor agency, and (iii) all press releases concerning financial aspects of
the Borrower or any Restricted Subsidiary of the Borrower;
(b) Promptly upon any Senior Officer of the Borrower becoming aware that
(i) the holder(s) of any note(s) or other evidence of indebtedness or other
security of the Borrower or any Restricted Subsidiary of the Borrower in excess
of $500,000 in the aggregate has given notice or taken any action with respect
to a breach, failure to perform, claimed default or event of default thereunder
or (ii) any event, circumstance or condition which would reasonably be expected
to be classified as a Material Adverse Effect, a written notice specifying the
details thereof (or the nature
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of any claimed default or event of default) and what action is being taken or is
proposed to be taken with respect thereto;
(c) Promptly upon any Senior Officer of the Borrower becoming aware
that any party to any Capitalized Lease Obligations in excess of $500,000 or
Operating Lease in which the annual rentals thereunder exceed $250,000, has
given notice or taken any action with respect to a breach, failure to perform,
claimed default or event of default thereunder, a written notice specifying the
details thereof (or the nature of any claimed default or event of default) and
what action is being taken or is proposed to be taken with respect thereto;
(d) Promptly upon receipt thereof, information with respect to and
copies of any notices received from any Tribunal relating to any order, ruling,
law, information or policy that relates to a breach of or noncompliance with any
Law, and could reasonably be expected to result in the payment of money by the
Borrower or any Restricted Subsidiary of the Borrower in an amount of $500,000
or more in the aggregate, or otherwise have a Material Adverse Effect, or result
in the loss or suspension of any Necessary Authorization where such loss could
reasonably be expected to have a Material Adverse Effect; and
(e) From time to time and promptly upon each request, such material
data, certificates, reports, statements, documents or further information
regarding the assets, business, liabilities, financial position, or results of
operations of the Borrower and its Subsidiaries, as the Administrative Agent may
reasonably request.
Section 6.6 NOTICE OF LITIGATION, DEFAULT AND OTHER MATTERS. Prompt
notice of the following events after any Senior Officer of the Borrower has
knowledge or notice thereof:
(a) The commencement of all Litigation and investigations by or before
any Tribunal, and all actions and proceedings in any court or before any
arbitrator involving claims for damages (including punitive damages) in excess
of $250,000 (after deducting the amount with respect to which creditworthy
insurance companies have acknowledged coverage), against or in any other way
relating directly to the Borrower, any Restricted Subsidiary of the Borrower, or
any of their respective properties or businesses; and
(b) Promptly upon the happening of any condition or event of which any
Senior Officer of the Borrower has current actual knowledge which constitutes a
Default, a written notice specifying the nature and period of existence thereof
and what action is being taken or is proposed to be taken with respect thereto.
Section 6.7 ERISA REPORTING REQUIREMENTS.
(a) Promptly and in any event (i) within 30 days after any Senior
Officer of the Borrower or any member of its Controlled Group has current actual
knowledge that any ERISA Event described in clause (a) of the definition of
ERISA Event or any event described in Section 4063(a)
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of ERISA with respect to any Plan of the Borrower or any member of its
Controlled Group has occurred, and (ii) within 10 days after any Senior Officer
of the Borrower or any member of its Controlled Group has current actual
knowledge that any other ERISA Event with respect to any Plan of the Borrower or
any member of its Controlled Group has occurred or a request for a minimum
funding waiver under Section 412 of the Code has been made with respect to any
Plan of the Borrower or any member of its Controlled Group, a written notice
describing such event and describing what action is being taken or is proposed
to be taken with respect thereto, together with a copy of any notice of such
event that is given to the PBGC;
(b) Promptly and in any event within ten Business Days after receipt
thereof directly by the Borrower with respect to any member of its Controlled
Group from the PBGC, copies of each notice received by the Borrower or any
member of its Controlled Group of the PBGC's intention to terminate any Plan or
to have a trustee appointed to administer any Plan;
(c) Promptly and in any event within 30 days after request by the
Administrative Agent, copies of each annual report (including Schedule B
thereto, if applicable) with respect to each Plan subject to Title IV of ERISA
of which Borrower or any member of its Controlled Group is the "plan sponsor";
(d) Promptly, and in any event within 10 Business Days after receipt
thereof, a copy of any correspondence the Borrower or any member of its
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability
pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief
financial officer of the Borrower or such member of its Controlled Group setting
forth details as to the events giving rise to such potential withdrawal
liability and the action which the Borrower or such member of its Controlled
Group is taking or proposes to take with respect thereto;
(e) Notification within 30 days of any material increases in the
benefits provided under any existing Plan which is not a Multiemployer Plan, or
the establishment of any new Plans, or the commencement of contributions to any
Plan to which the Borrower or any member of its Controlled Group was not
previously contributing, which could reasonably be expected in any such case to
result in an additional material liability to the Borrower;
(f) Notification within three Business Days after any Senior Officer of
the Borrower or any member of its Controlled Group knows that the Borrower or
any such member of its Controlled Group has filed or intends to file a notice of
intent to terminate any Plan under a distress termination within the meaning of
Section 4041(c) of ERISA and a copy of such notice; and
(g) Within three Business Days after receipt of written notice of
commencement thereof, notice of all actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting the Borrower or any member of
its Controlled Group with respect to any Plan, except those which, in the
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aggregate, if adversely determined could not reasonably be expected to have a
Material Adverse Effect.
ARTICLE 7
NEGATIVE COVENANTS
So long as any of the Obligations (other than contingent indemnity
Obligations which expressly survive the termination of this Agreement) are
outstanding and unpaid or any Commitment is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled):
Section 7.1 INDEBTEDNESS. The Borrower shall not, and shall not permit
any Restricted Subsidiary of the Borrower to, create, assume, incur or otherwise
become or remain obligated in respect of, or permit to be outstanding, or suffer
to exist any Indebtedness, except:
(a) Indebtedness under the Loan Documents;
(b) Accounts payable and accrued liabilities incurred in the ordinary
course of business;
(c) Indebtedness, including in respect of Capitalized Lease Obligations,
incurred to purchase or to finance (or to refinance within 90 days after the
purchase or lease thereof) the purchase of, capital assets, not to exceed,
together with Indebtedness permitted pursuant to clauses (h) and (q) of this
SECTION 7.1, $2,500,000 in the aggregate principal amount outstanding at any one
time;
(d) Institutional Debt (including renewals, replacements and
refinancings thereof); provided that the Net Cash Proceeds of such Institutional
Debt (and any additional Net Cash Proceeds attributable to all such renewals,
replacements and/or refinancings) are applied in accordance with, and to the
extent required by, SECTION 2.5(e) hereof.
(e) Hedging obligations under Interest Hedge Agreements entered into
with any Lender;
(f) Indebtedness existing on the Agreement Date which is described on
SCHEDULE 6 hereto, including renewals, replacements and refinancings (but no
increases, unless otherwise expressly permitted hereunder) thereof;
(g) Indebtedness in respect of endorsement of negotiable instruments in
the ordinary course of business;
(h) Indebtedness assumed in connection with Acquisitions permitted under
SECTION 7.6 or any other asset or property acquisition permitted hereby not to
exceed, together with Indebtedness permitted pursuant to clauses (c) and (q) of
this SECTION 7.1, $2,500,000 in the aggregate principal amount outstanding at
any one time;
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(i) Indebtedness owing to the Borrower or any Restricted Subsidiary by
the Borrower or any Restricted Subsidiary of the Borrower, which Indebtedness is
subordinated to the Obligations and evidenced by an entry on the financial
records of the Borrower and any such Restricted Subsidiary of the Borrower;
(j) Guaranties by the Borrower or Restricted Subsidiaries of the
Borrower of Indebtedness of the Borrower or other Restricted Subsidiaries of the
Borrower, to the extent such underlying Indebtedness is permitted hereunder;
(k) Indebtedness to the extent permitted under SECTION 7.3 hereof;
(l) Indebtedness incurred in connection with the financing of insurance
premiums;
(m) Indebtedness consisting of promissory notes issued by the Borrower
or any of its Restricted Subsidiaries to officers, directors and employees of
the Borrower or any of its Subsidiaries issued to purchase or redeem shares of
common Equity Interests of the Borrower pursuant to the terms of any
subscription agreement or option or similar agreement entered into in the
ordinary course of business by the Borrower not to exceed $500,000 in aggregate
principal amount outstanding at any time;
(n) Indebtedness incurred by the Borrower or any of its Restricted
Subsidiaries in the form of indemnification obligations, reserves, adjustment of
sale price or similar obligations, or from guarantees or letter of credit,
surety bonds or performance bonds securing the performance of the Borrower or
any such Subsidiary pursuant to such agreements, in connection with the
disposition of any business, assets or Subsidiaries of the Borrower or any of
its Subsidiaries;
(o) Indebtedness which may be deemed to exist pursuant to any
performance, surety, statutory, appeal or similar bond obtained in the ordinary
course of business;
(p) Indebtedness consisting of obligations in respect of incentive,
earn-out or other similar arrangements incurred in connection with Acquisitions,
subject to the limitations on Acquisition Consideration under SECTION 7.6
hereof; and
(q) Other Indebtedness not to exceed, together with Indebtedness
permitted pursuant to clauses (c) and (h) of this SECTION 7.1, $2,500,000 in the
aggregate principal amount outstanding at any one time.
Section 7.2 LIENS. The Borrower shall not, and shall not permit any
Restricted Subsidiary of the Borrower to, create, assume, incur, permit or
suffer to exist, directly or indirectly, any Lien on any of its assets, whether
now owned or hereafter acquired, except Permitted Liens. The Borrower shall
not, and shall not permit any Restricted Subsidiary to, agree with any other
Person that it shall not create, assume, incur, permit or suffer to exist or to
be created, assumed, incurred or permitted to exist, directly or indirectly, any
Lien on any of its assets other than in respect of
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Indebtedness permitted by SECTIONS 7.1(c), (d), (h) and (q), provided that such
agreement relates only to the assets purchased or acquired.
Section 7.3 INVESTMENTS. The Borrower shall not, and shall not permit
any Restricted Subsidiary of the Borrower to, make any Investment, except that
the Borrower and any Restricted Subsidiary of the Borrower may purchase or
otherwise acquire and own:
(a) Domestic Cash and Cash Equivalents, deposit accounts and Foreign
Cash and Cash Equivalents (provided that the Borrower and its Domestic
Subsidiaries may not purchase, acquire or own any Foreign Cash and Cash
Equivalents);
(b) Accounts receivable that arise in the ordinary course of business
and are payable on standard terms;
(c) Investments in existence on the Agreement Date which are described
on SCHEDULE 5 hereto;
(d) Investments which are Acquisitions permitted pursuant to SECTION 7.6
hereof;
(e) Investments in the form of Interest Hedge Agreements permitted by
SECTION 7.1(e) hereof;
(f) Net Investments in, and expenditures in respect of, Acquisitions of
Unrestricted Subsidiaries and joint ventures in an aggregate amount after the
Agreement Date not to exceed (calculated for such Investment or expenditure
immediately prior to the date of such Investment or Acquisition) 5% of the
lesser of (i) consolidated total assets of the Borrowers and its Subsidiaries or
(ii) EBITDA for the immediately preceding four fiscal quarters (which for
purposes of this section shall be calculated for the Borrower and its
Subsidiaries);
(g) Investments in the Borrower and Investments in Restricted
Subsidiaries of the Borrower (i) which have executed a Subsidiary Guaranty and
(ii) which have delivered to the Lenders such board resolutions, officer's
certificates, corporate and other documents and opinions of counsel as the
Administrative Agent shall reasonably request;
(h) Net Investments in, and expenditures in respect of, Foreign
Restricted Subsidiaries in an aggregate amount after the Agreement Date not to
exceed (calculated for such Investment or expenditure immediately prior to the
date of such Investment or Acquisition) the lesser of (i) 17% of consolidated
total assets of the Borrower and its Subsidiaries or (ii) 20% of EBITDA for the
immediately preceding four fiscal quarters (which for purposes of this clause
(h) shall be calculated for the Borrower and its Subsidiaries);
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(i) Investments consisting of non-cash consideration received in
connection with a sale of assets permitted by SECTION 7.5 not to exceed 25% (on
a sale-by-sale basis) of the consideration for any such sale;
(j) Investments arising from transactions by the Borrower or any of its
Restricted Subsidiaries with customers or suppliers in the ordinary course of
business, including prepayments and other credits made in the ordinary course of
business, endorsements of negotiable instruments, debt obligations and other
investments received in connection with the bankruptcy or reorganization of
customers and suppliers and in settlement of delinquent obligations of, and
other disputes with, customers and suppliers;
(k) Investments which are Capital Expenditures;
(l) Investments which are loans to management, officers and employees of
the Borrower or any of its Subsidiaries, the proceeds of which are used solely
to purchase Equity Interests of the Borrower;
(m) Investments in the form of the repurchase of common Equity Interests
of the Borrower pursuant to the Netcom Recapitalization;
(n) Investments which are pledges and deposits permitted under SECTION
7.2 hereof;
(o) Investments otherwise permitted under SECTION 7.7 hereof;
(p) Investments which are deposits made in the ordinary course of
business consistent with past practices to secure the performance of leases; and
(q) Other Investments not to exceed $250,000 in the aggregate amount
outstanding at any one time.
Section 7.4 LIQUIDATION, MERGER. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower to, at any time:
(a) liquidate or dissolve itself (or suffer any liquidation or
dissolution) or otherwise wind up, except that a Restricted Subsidiary of the
Borrower may liquidate or dissolve into the Borrower or a Restricted Subsidiary
of the Borrower; or
(b) enter into any merger or consolidation unless (i) with respect to a
merger or consolidation involving the Borrower, the Borrower shall be the
surviving corporation, or if the merger or consolidation involves a Restricted
Subsidiary of the Borrower which is a Guarantor and not the Borrower, such
Restricted Subsidiary shall be the surviving corporation, (ii) with respect to a
merger or consolidation involving an Unrestricted Subsidiary or a Restricted
Foreign Subsidiary, such Unrestricted Subsidiary or Restricted Foreign
Subsidiary may merge into the Borrower (which
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shall be the surviving corporation) or a Restricted Subsidiary of the Borrower
(which Restricted Subsidiary shall be the surviving entity), (iii) such
transaction shall not be utilized to circumvent compliance with any term or
provision herein and (iv) no Default or Event of Default shall then be in
existence or occur as a result of such transaction.
Section 7.5 SALES OF ASSETS. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower to, sell, transfer or otherwise
dispose of, any of its assets except (a) inventory in the ordinary course of
business, (b) obsolete or worn-out assets, (c) sales of assets in which the Net
Cash Proceeds from the disposition thereof (to the extent not applied pursuant
to clause (d) immediately following) are reinvested, within 120 days before or
after such disposition, in productive assets used in the business of the
Borrower and its Restricted Subsidiaries, (d) asset sales the Net Cash Proceeds
of which are applied in accordance with SECTION 2.5(c) hereof, (e) sales of
accounts receivable permitted by SECTION 7.13 hereof, (f) sales, leases,
licenses, transfers and other dispositions of assets by the Borrower or any
Restricted Subsidiary to the Borrower or any Restricted Subsidiary, (g) other
sales or dispositions of assets having an aggregate fair market value not
exceeding $250,000 during any fiscal year of the Borrower, (h) Investments
permitted under SECTION 7.3 hereof, and (i) liquidations, dissolutions and
mergers permitted by SECTION 7.4 hereof.
Section 7.6 ACQUISITIONS. The Borrower shall not, and shall not permit
any Restricted Subsidiary of the Borrower to, make any Acquisitions; provided,
however, if immediately prior to and after giving effect to the proposed
Acquisition there shall not exist a Default or Event of Default, the Borrower or
any Restricted Subsidiary of the Borrower may make Acquisitions so long as (i)
such Acquisition shall not be opposed by the board of the directors of the
Person being acquired, (ii) Lenders shall have received written notice at least
15 Business Days prior to the date of such Acquisition, (iii) the Administrative
Agent shall have received at least 5 Business Days prior to the date of such
Acquisition a Compliance Certificate setting forth the covenant calculations on
a pro forma basis (after giving effect to such Acquisition and the cost and
expense savings related thereto) immediately after giving effect to the proposed
Acquisition, (iv) the assets, property or business acquired shall be in the
business described in SECTION 4.1(d) hereof, (v) if such Acquisition results in
a Restricted Domestic Subsidiary, (A) such Subsidiary shall execute a Subsidiary
Guaranty of the Obligations and (B) the Lenders receive such board resolutions,
officer's certificates and opinions of counsel as the Administrative Agent shall
reasonably request in connection with the actions described in clause (A) above,
and (vi) if such Acquisition results in a Foreign Restricted Subsidiary, (A) 65%
of such Subsidiary's Equity Interests shall be pledged to secure the obligations
and (B) the Lenders receive such board resolutions, officer's certificates and
opinions of counsel as the Administrative Agent shall reasonably request with
clause (A) immediately preceding. Notwithstanding anything in this SECTION 7.6
or any other provision of this Agreement to the contrary, (a) Acquisition
Consideration for Acquisitions during any fiscal year may not exceed $10,000,00
in aggregate amount (excluding the Acquisition described in SCHEDULE 5 hereto),
and (b) the aggregate amount of expenditures in respect of Acquisitions of, and
Investments in, Unrestricted Subsidiaries by the Borrower and the Restricted
Subsidiaries after the Agreement Date shall not exceed the amount permitted by
SECTION 7.3(f) hereof.
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Section 7.7 RESTRICTED PAYMENTS. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower to, directly or indirectly
declare, pay or make any Restricted Payments except (a) Dividends payable by a
Restricted Subsidiary to the Borrower, (b) to purchase, redeem, retire or
otherwise acquire shares of Equity Interests of the Borrower, or options or
warrants to purchase shares of such Equity Interests, held by officers,
directors or employees of the Borrower or any of its Restricted Subsidiaries
pursuant to a compensation plan or arrangement in connection with the death,
disability or termination of employment of any such officer, director or
employee in all such cases taken as a whole, so long as the aggregate cash
payments shall not exceed $250,000 in aggregate principal amount during any
fiscal year, (c) Permitted Distributions; (d) Investments pursuant to SECTION
7.3 and (e) refinancings of Institutional Debt pursuant to SECTION 7.1(d);
provided, however, the Borrower shall not pay or make any Restricted Payments
permitted by this SECTION 7.7 unless there shall exist no Default or Event of
Default prior to or after giving effect to any such proposed Restricted Payment.
Section 7.8 AFFILIATE TRANSACTIONS. The Borrower shall not, and shall
not permit any Restricted Subsidiary of the Borrower to, at any time engage in
any transaction with an Affiliate (other than the Borrower or any other Obligor)
on terms materially less advantageous to the Borrower or such Restricted
Subsidiary than would be the case if such transaction had been effected with a
non-Affiliate; provided, that the Borrower and the Restricted Subsidiaries of
the Borrower may (i) pay reasonable and customary fees and expenses to their
respective directors, (ii) pay compensation to their respective officers and
employees, (iii) pay the transaction fees and expenses in connection with the
Netcom Recapitalization and (iv) provide goods and services to the Borrower and
the other Subsidiaries of the Borrower at a cost basis or any other fair and
reasonable basis customarily utilized to allocate charges among a consolidated
group of entities.
Section 7.9 COMPLIANCE WITH ERISA. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower to, directly or indirectly, or
permit any member of its Controlled Group to directly or indirectly,
(a) terminate any Plan so as likely to result in liability to the Borrower or
any member of its Controlled Group taken as a whole which would reasonably be
expected to have a Material Adverse Effect, (b) permit to exist any ERISA Event,
or any other event or condition with respect to a Plan which would reasonably be
expected to have a Material Adverse Effect, (c) make a complete or partial
withdrawal (within the meaning of Section 4201 of ERISA) from any Multiemployer
Plan which would reasonably be expected to have a Material Adverse Effect on the
Borrower or any member of its Controlled Group taken as a whole, or (d) enter
into any new Plan or modify any existing Plan so as to increase its obligations
thereunder which would reasonably be expected to have a Material Adverse Effect.
Section 7.10 MAXIMUM LEVERAGE RATIO. At the end of each fiscal quarter
occurring during the periods indicated below, the Borrower shall not permit the
Leverage Ratio (as calculated as of the last Business Day of each such fiscal
quarter) to be greater than the ratio set forth below opposite the period in
which such fiscal quarter occurs:
<TABLE>
<CAPTION>
Period Ratio
<S> <C>
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From and including the Agreement Date to and including 2.50 to 1
October 31, 1997
From and including November 1, 1997 to and including October 2.00 to 1
31, 1999
From and including November 1, 1999 to and including October 1.50 to 1
31, 2000
From and including November 1, 2000 and thereafter 1.00 to 1
</TABLE>
Section 7.11 MINIMUM FIXED CHARGE COVERAGE RATIO. At the end of each
fiscal quarter occurring during the periods indicated below, the Borrower shall
not permit the Fixed Charge Coverage Ratio (as calculated on the last Business
Day of each such fiscal quarter) to be less than the ratio set forth below
opposite the period in which such fiscal quarter occurs:
<TABLE>
<S> <C>
From and including the Agreement Date to and including 1.50 to 1
October 31, 1999
From and including November 1, 1999 and thereafter 1.25 to 1
</TABLE>
Section 7.12 MINIMUM EBITDA AND NET INCOME. The Borrower shall not permit
EBITDA or Net Income (as calculated in each case as of the last Business Day of
each such fiscal quarter) to be less than $1.00 at the end of (and calculated
with respect to) any fiscal quarter ending during this Agreement. Additionally,
the Borrower shall not permit EBITDA (which for purposes of this sentence shall
be calculated for the Borrower and its Restricted Domestic Subsidiaries) to be
less than $30,000,000 for any fiscal year during the term of this Agreement.
Section 7.13 SALE OR DISCOUNT OF RECEIVABLES. The Borrower shall not, and
shall not permit any Restricted Subsidiary of the Borrower to, directly or
indirectly, sell, with or without recourse, for discount or otherwise, any notes
or accounts receivable other than (a) in the ordinary course of business
consistent with such practices of the Borrower prior to the Agreement Date or
(b) discounting or sale of past-due receivables for collection in the ordinary
course of business and in accordance with the past practices of the Borrower or
the applicable Restricted Subsidiary.
Section 7.14 BUSINESS. Neither the Borrower nor any Restricted Subsidiary
of the Borrower shall primarily conduct any business other than the business
described in SECTION 4.1(d) hereof and other businesses permitted to be acquired
hereunder.
Section 7.15 FISCAL YEAR. Neither the Borrower nor any Restricted
Subsidiary of the Borrower shall change its fiscal year from July 31.
Section 7.16 AMENDMENT OF ORGANIZATIONAL DOCUMENTS. The Borrower shall
not, and shall not permit any Restricted Subsidiary of the Borrower to, amend
its articles of incorporation, bylaws or other applicable organizational
documents in any manner that would reasonably be expected to (a) result in a
Material Adverse Effect or (b) materially impair or materially and adversely
affect the Rights of the Administrative Agent or any Lender under any Loan
Documents.
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Section 7.17 AMENDMENTS AND WAIVERS OF INSTITUTIONAL DEBT. The Borrower
shall not, and shall not permit any Restricted Subsidiary to, change or amend
(or take any action or fail to take any action the result of which is an
effective amendment or change) or accept any waiver or consent with respect to,
any document, instrument or agreement relating to any Institutional Debt that
would result in (a) an increase in the principal, interest, overdue interest,
fees or other amounts payable under the Institutional Debt, (b) an acceleration
in any date fixed for payment or prepayment of principal, interest, fees or
other amounts payable under the Institutional Debt (including, without
limitation, as a result of any redemption), (c) a reduction in any percentage of
holders of the Institutional Debt required under the terms of the Institutional
Debt to take (or refrain from taking) any action under the Institutional Debt,
(d) a change in any covenant under the Institutional Debt making such covenant
more restrictive, (e) a change in any default or event of default (however
designated) under the Institutional Debt which makes such default or event of
default more restrictive, (f) a change in the definition of "Change of Control"
as provided in the Institutional Debt which would result in such definition
being more restrictive than such definition in this Agreement, (g) a change in
any of the subordination provisions of the Institutional Debt, (h) a change in
any covenant, term or provision in the Institutional Debt which would result in
such term or provision being more restrictive than the terms of this Agreement
and the other Loan Documents or (i) a change in any term or provision of the
Institutional Debt that could have, in any material respect, an adverse effect
on the interest of the Lenders.
Section 7.18 SALE AND LEASEBACK. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower to, directly or indirectly,
enter into any arrangement whereby it sells or transfers any of its assets, and
thereafter rents or leases such assets.
ARTICLE 8
DEFAULT
Section 8.1 EVENTS OF DEFAULT. Each of the following shall constitute an
Event of Default, whatever the reason for such event, and whether voluntary,
involuntary, or effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any governmental or
non-governmental body:
(a) Any representation or warranty made by the Borrower or any
Restricted Subsidiary under any Loan Document shall prove to have been incorrect
or misleading in any material respect when made;
(b) The Borrower shall fail to pay any (i) principal under any Note when
due, (ii) interest under any Note or any fees payable under SECTION 2.4(a) or
SECTION 2.15(f) hereof within two Business Days after the date due, or
(iii) other fees payable hereunder or any other costs, fees, expenses or other
amounts payable hereunder or under any other Loan Document within five Business
Days after the date due;
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(c) The Borrower or any Restricted Subsidiary shall default in the
performance or observance of any agreement or covenant contained SECTION 5.1
hereof or in ARTICLE 7 (other than SECTION 7.9) hereof;
(d) Any Obligor or any Restricted Subsidiary of the Borrower shall
default in the performance or observance of any other agreement or covenant
contained in this Agreement not specifically referred to elsewhere in this
SECTION 8.1, and such default shall not be cured within a period of thirty days
after the earlier of notice from the Administrative Agent thereof or actual
notice thereof by a Responsible Officer of any Obligor or such Restricted
Subsidiary;
(e) Any Obligor or any Restricted Subsidiary of the Borrower shall
default in the performance or observance of any agreement or covenant in any of
the Loan Documents (other than this Agreement) and such default shall not be
cured within a period of thirty days after the earlier of notice from the
Administrative Agent thereof or actual notice thereof by a Responsible Officer
of any Obligor or such Restricted Subsidiary;
(f) There shall be commenced an involuntary proceeding or an involuntary
petition shall be filed in a court having competent jurisdiction seeking
(i) relief in respect of any Obligor or any Restricted Subsidiary of the
Borrower, or a substantial part of the property or the assets of such Obligor or
Restricted Subsidiary of the Borrower, under Title 11 of the United States Code,
as now constituted or hereafter amended, or any other applicable Federal, state
or foreign bankruptcy law or other similar law, (ii) the appointment of a
receiver, liquidator, assignee, trustee, custodian, sequestrator or similar
official of any Obligor or any Restricted Subsidiary of the Borrower, or of any
substantial part of their respective properties, or (iii) the winding-up or
liquidation of the affairs of any Obligor or any Restricted Subsidiary of the
Borrower, and any such proceeding or petition shall continue unstayed and in
effect for a period of 60 consecutive days;
(g) Any Obligor or any Restricted Subsidiary of the Borrower shall
(i) file a petition, answer or consent seeking relief under Title 11 of the
United States Code, as now constituted or hereafter amended, or any other
applicable Federal, state or foreign bankruptcy law or other similar law,
(ii) consent to the institution of proceedings thereunder or to the filing of
any such petition or to the appointment or taking of possession of a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of any Obligor or any Restricted Subsidiary of the Borrower or of substantially
all of its properties, (iii) file an answer admitting the material allegations
filed against it in any such proceeding, (iv) make a general assignment for the
benefit of creditors, (v) become unable, admit in writing its ability or fail
generally to pay its debts as they become due, or (vi) any Obligor or any
Restricted Subsidiary of the Borrower shall take any corporate action in
furtherance of any such action;
(h) A final judgment or judgments shall be entered by any court against
any Obligor or any Restricted Subsidiary of the Borrower for the payment of
money which exceeds $500,000 in the aggregate in excess of insurance, or a
warrant of attachment or execution or similar process shall be
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issued or levied against property of any Obligor which, together with all other
such property of the Borrower and its Restricted Subsidiaries subject to other
such process, exceeds in value $500,000 in the aggregate, and if such judgment
or award is not insured or, within 60 days after the entry, issue or levy
thereof, such judgment, warrant or process shall not have been paid or
discharged or stayed pending appeal, or if, after the expiration of any such
stay, such judgment, warrant or process shall not have been paid or discharged;
(i) With respect to any Plan of the Borrower or any member of its
Controlled Group: (i) the Borrower, any such member, or any other
party-in-interest or disqualified person (other than any Lender) shall engage in
transactions which in the aggregate would reasonably be expected to result in a
direct or indirect liability to the Borrower or any member of its Controlled
Group under Section 409 or 502 of ERISA or Section 4975 of the Code; (ii) the
Borrower or any member of its Controlled Group shall incur any accumulated
funding deficiency, as defined in Section 412 of the Code, or request a funding
waiver from the Internal Revenue Service for contributions; (iii) the Borrower
or any member of its Controlled Group shall incur any withdrawal liability as a
result of a complete or partial withdrawal within the meaning of Section 4203 or
4205 of ERISA, or any other liability with respect to a Plan, unless the amount
of such liability has been funded within the Plan or pursuant to one or more
insurance contracts; (iv) the Borrower or any member of its Controlled Group
shall fail to make a required contribution by the due date under Section 412 of
the Code or Section 302 of ERISA which would result in the imposition of a lien
under Section 412 of the Code or Section 302 of ERISA; (v) the Borrower, any
member of its Controlled Group or any Plan sponsor shall notify the PBGC of an
intent to terminate, or the PBGC shall institute proceedings to terminate, or
the PBGC shall institute proceedings to terminate, any Plan subject to Title IV
of ERISA; (vi) a Reportable Event shall occur with respect to a Plan subject to
Title IV of ERISA, and within 15 days after the reporting of such Reportable
Event to the Administrative Agent, the Administrative Agent shall have notified
the Borrower in writing that the Determining Lenders have made a determination
that, on the basis of such Reportable Event, there are reasonable grounds for
the termination of such Plan by the PBGC or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan
and as a result thereof an Event of Default shall have occurred hereunder;
(vii) a trustee shall be appointed by a court of competent jurisdiction to
administer any Plan or the assets thereof; or (viii) any ERISA Event with
respect to a Plan subject to Title IV of ERISA shall have occurred, and 30 days
thereafter (A) such ERISA Event, other than such event described in clause (f)
of the definition of ERISA Event herein, (if correctable) shall not have been
corrected and (B) the then present value of such Plan's benefit liabilities, as
defined in Title IV of ERISA, shall exceed the then current value of assets
accumulated in such Plan; PROVIDED, HOWEVER, that the events listed in
subsections (i) - (viii) above shall constitute Events of Default only if the
maximum aggregate unpaid liability which the Borrower or any member of its
Controlled Group has a reasonable likelihood of incurring under the applicable
provisions of ERISA resulting from an event or events exceeds $500,000;
(j) Any Obligor or any Subsidiary of the Borrower shall default in the
payment of any Indebtedness in an aggregate amount of $1,250,000 or more beyond
any grace period provided with respect thereto, or any other event or condition
shall exist under any agreement or instrument under
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which such Indebtedness is created or evidenced beyond any applicable grace
period, if the effect of such event or condition is to permit or cause the
holder of such Indebtedness (or a trustee on behalf of any such holder) to
(i) cause such Indebtedness to become due or prepaid prior to its date of
maturity or (ii) require the any Obligor or any Subsidiary of the Borrower to
purchase, prepay or redeem such Indebtedness;
(k) Any Obligor shall assert in writing that any provision of any Loan
Document is invalid or not binding on or enforceable against any Obligor or any
material provision of any Loan Document shall for any reason cease to be valid
and binding on or enforceable against any party to it (other than the
Administrative Agent or any Lender) other than in accordance with its terms; or
(l) A Change of Control shall occur.
Section 8.2 REMEDIES. If an Event of Default shall have occurred and
shall be continuing:
(a) With the exception of an Event of Default specified in
SECTION 8.1(f) or (g) hereof, the Administrative Agent may at its election, and
shall upon the direction of the Determining Lenders, terminate the Commitments
and/or declare the principal of and interest on the Advances and all Obligations
and other amounts owed under the Loan Documents to be forthwith due and payable
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived, except for notices expressly set forth in the Loan
Documents.
(b) Upon the occurrence of an Event of Default specified in
SECTION 8.1(f) or (g) hereof, such principal, interest and other amounts shall
thereupon and concurrently therewith become due and payable and the Commitments
shall forthwith terminate, all without any action by the Administrative Agent,
any Lender or any holders of the Notes and without presentment, demand, protest
or other notice of any kind, all of which are expressly waived, anything in the
Loan Documents to the contrary notwithstanding.
(c) If any Letter of Credit shall be then outstanding, the
Administrative Agent may at its election, and shall upon the direction of the
Determining Lenders shall, demand upon the Borrower to, and forthwith upon such
demand (but in the case of an Event of Default specified in SECTION 8.1(f) or
(g) hereof, without any demand or taking of any other action by the
Administrative Agent or any Lender), the Borrower shall, pay to the
Administrative Agent in same day funds at the office of the Administrative Agent
for deposit in the L/C Cash Collateral Account, an amount equal to the maximum
amount available to be drawn under the Letters of Credit then outstanding.
(d) The Administrative Agent and the Lenders may exercise all of the
Rights granted to them under the Loan Documents or under Applicable Law.
(e) The Rights of the Administrative Agent and the Lenders hereunder
shall be cumulative, and not exclusive.
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ARTICLE 9
CHANGES IN CIRCUMSTANCES
Section 9.1 LIBOR BASIS DETERMINATION INADEQUATE. If with respect to any
proposed LIBOR Advance for any Interest Period, (i) any Lender determines that
deposits in dollars (in the applicable amount) are not being offered to that
Lender in the relevant market for such Interest Period or (ii) the Determining
Lenders determine that the LIBOR Rate for such proposed LIBOR Advance does not
adequately cover the cost to such Lender of making and maintaining such proposed
LIBOR Advance for such Interest Period, such Lender or Determining Lenders, as
the case may be, shall forthwith give notice thereof to the Borrower, whereupon
until such Lender or Determining Lenders, as the case may be, notify the
Borrower that the circumstances giving rise to such situation no longer exist,
the obligation of such Lender to make LIBOR Advances shall be suspended;
PROVIDED, HOWEVER, such Lender or the Determining Lenders, as the case may be,
shall promptly notify the Borrower if the circumstances giving rise to such
situation no longer exist.
Section 9.2 ILLEGALITY. If after the Agreement Date any change in
applicable law, rule or regulation, or adoption thereof, or any change in any
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or its LIBOR Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall make it unlawful or
impossible for such Lender (or its LIBOR Lending Office) to make, maintain or
fund its LIBOR Advances, such Lender shall so notify the Borrower and the
Administrative Agent. Before giving any notice to the Borrower pursuant to this
Section, the notifying Lender shall designate a different LIBOR Lending Office
or other lending office if such designation will avoid the need for giving such
notice and will not, in the sole judgment of the Lender, be materially
disadvantageous to the Lender. Upon receipt of such notice, notwithstanding
anything contained in ARTICLE 2 hereof, the Borrower shall repay in full the
then outstanding principal amount of each LIBOR Advance owing to the notifying
Lender, together with accrued interest thereon and any reimbursement required
under SECTION 2.9 hereof, on either (a) the last day of the Interest Period
applicable to such Advance, if the Lender may lawfully continue to maintain and
fund such Advance to such day, or (b) immediately, if the Lender may not
lawfully continue to fund and maintain such Advance to such day or if the
Borrower so elects. Concurrently with repaying each affected LIBOR Advance
owing to such Lender if the Borrower does not terminate this Agreement,
notwithstanding anything contained in ARTICLE 2 hereof, the Borrower may,
without any requirement to satisfy the conditions precedent set forth in
SECTION 3.1, 3.2 or 3.3, borrow a Base Rate Advance from such Lender, and such
Lender shall make such Base Rate Advance, in an amount such that the outstanding
principal amount of the Advances owing to such Lender shall equal the
outstanding principal amount of the Advances owing immediately prior to such
repayment.
Section 9.3 INCREASED COSTS.
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(a) If after the Agreement Date any change in or adoption of any law,
rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof or compliance by any Lender
(or its LIBOR Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency:
(i) shall subject a Lender (or its LIBOR Lending Office) to any
Tax (net of any tax benefit engendered thereby) with respect to its LIBOR
Advances or its obligation to make such Advances, or shall change the basis
of taxation of payments to a Lender (or to its LIBOR Lending Office) of the
principal of or interest on its LIBOR Advances or in respect of any other
amounts due under this Agreement, as the case may be, or its obligation to
make such Advances (except for changes in (A) the rate of tax on the
overall net income, net worth or capital of the Lender and franchise taxes,
doing business taxes or minimum taxes imposed upon such Lender and
(B) withholding taxes of any Tribunal other than the United States of
America or any state thereof); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of
the Federal Reserve System), special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, a
Lender's LIBOR Lending Office or shall impose on the Lender (or its LIBOR
Lending Office) or on the London interbank market any other condition
affecting its LIBOR Advances or its obligation to make such Advances (but
excluding any reserves or deposits that are included in the calculation of
LIBOR Basis);
and the result of any of the foregoing is to increase the cost to a Lender (or
its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to
reduce the amount of any sum received or receivable by a Lender (or its LIBOR
Lending Office) with respect thereto, by an amount deemed by a Lender to be
material, then, within 30 days after demand by a Lender, the Borrower agrees to
pay to such Lender such additional amount as will compensate such Lender for
such increased costs or reduced amounts, subject to SECTION 11.9 hereof. The
affected Lender will as soon as practicable notify the Borrower of any event of
which it has knowledge, occurring after the date hereof, which will entitle such
Lender to compensation pursuant to this Section and will designate a different
LIBOR Lending Office or other lending office if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the
reasonable judgment of the affected Lender made in good faith, be
disadvantageous to such Lender.
(b) A certificate of any Lender claiming compensation under this Section
and setting forth the additional amounts to be paid to it hereunder shall
certify that such amounts or costs were actually incurred by such Lender and
shall show in reasonable detail an accounting of the amount payable and the
calculations used to determine in good faith such amount and shall be conclusive
absent demonstrable error. In determining such amount, a Lender may use any
reasonable averaging and attribution methods. Nothing in this SECTION 9.3 shall
provide the Borrower or any Subsidiary of the Borrower the right to inspect the
records, files or books of any Lender. If a Lender demands
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compensation under this Section, the Borrower may at any time, upon at least
five Business Days' prior notice to the Lender, after reimbursement to the
Lender by the Borrower in accordance with this Section of all costs incurred,
prepay in full the then outstanding LIBOR Advances of the Lender, together with
accrued interest thereon to the date of prepayment, along with any reimbursement
required under SECTION 2.9 hereof. Concurrently with prepaying such LIBOR
Advances, the Borrower may, without any requirement to satisfy the conditions
precedent set forth in SECTION 3.1, 3.2 or 3.3, borrow a Base Rate Advance from
the Lender, and the Lender shall make such Base Rate Advance, in an amount such
that the outstanding principal amount of the Advances owing to such Lender shall
equal the outstanding principal amount of the Advances owing immediately prior
to such prepayment.
Section 9.4 EFFECT ON BASE RATE ADVANCES. If notice has been given
pursuant to SECTION 9.1, 9.2 or 9.3 hereof suspending the obligation of a Lender
to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be repaid or
prepaid, then, unless and until the Lender notifies the Borrower that the
circumstances giving rise to such repayment no longer apply, all Advances which
would otherwise be made by such Lender as LIBOR Advances shall be made instead
as Base Rate Advances.
Section 9.5 CAPITAL ADEQUACY. If (a) the introduction of or any change
in or in the interpretation of any law, rule or regulation after the Agreement
Date or (b) compliance by a Lender with any Law or any guideline or request from
any central bank or other governmental authority (whether or not having the
force of law) adopted or promulgated after the Agreement Date (including any
implementation of the Basle Accord or similar guideline or requirement adopted,
promulgated or becoming effective after the Agreement Date) affects or would
affect the amount of capital required or expected to be maintained by a Lender
or any corporation controlling such Lender, and such Lender determines that the
amount of such capital is increased by or based upon the existence of such
Lender's commitment or Advances hereunder and other commitments or advances of
such Lender of this type, then, within 30 days after demand by such Lender,
subject to SECTION 11.9, the Borrower shall immediately pay to such Lender, from
time to time as specified by such Lender, additional amounts sufficient to
compensate such Lender with respect to such circumstances, to the extent that
such Lender reasonably determines in good faith such increase in capital to be
allocable to the existence of such Lender's Commitments hereunder. A
certificate as to any additional amounts payable to any Lender under this
SECTION 9.5 submitted to the Borrower by such Lender shall certify that such
amounts were actually incurred by such Lender or corporation controlling such
Lender and shall show in reasonable detail an accounting of the amount payable
and the calculations used to determine in good faith such amount and shall
constitute prima facie evidence of such amount. In determining such amount,
such Lender or a corporation controlling such Lender may use any reasonable
averaging and attribution methods which provides for the allocation of such
amounts among its affected customers in good faith on an equitable basis. Any
claim by any Lender under this SECTION 9.5 shall be made within 90 days after
such Lender becomes aware of the fact or circumstance giving rise thereto.
Notwithstanding the foregoing, nothing in this SECTION 9.5 shall provide the
Borrower or any Subsidiary of the Borrower the right to inspect the records,
files or books of any Lender or any corporation controlling such Lender.
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Section 9.6 REPLACEMENT LENDER. If the Borrower becomes obligated to pay
additional amounts to any Lender described in SECTION 9.2, 9.3 or 9.5, the
Borrower may designate a financial institution reasonably acceptable to the
Administrative Agent to replace such Lender by purchasing for cash and receiving
an assignment of such Lender's pro rata share of such Lender's Commitment and
the Rights of such Lender under the Loan Documents without recourse to or
warranty by, or expense to, such Lender, for a purchase price equal to the
outstanding amounts owing to such Lender (including such additional amounts
owing to such Lender pursuant to SECTION 9.3 or 9.5). Upon execution of an
Assignment Agreement, such other financial institution shall be deemed to be a
"Lender" for all purposes of this Agreement as set forth in SECTION 11.6 hereof.
ARTICLE 10
AGREEMENT AMONG LENDERS
Section 10.1 AGREEMENT AMONG LENDERS. The Lenders agree among themselves
that:
(a) ADMINISTRATIVE AGENT. Each Lender hereby appoints the
Administrative Agent as its nominee in its name and on its behalf, to receive
all documents and items to be furnished hereunder; to act as nominee for and on
behalf of all Lenders under the Loan Documents; to, except as otherwise
expressly set forth herein, take such action as may be requested by the
Determining Lenders, provided that, (i) unless and until the Administrative
Agent shall have received such requests, the Administrative Agent may take such
administrative action, or refrain from taking such administrative action, as it
may deem advisable and in the best interests of the Lenders, and (ii) the
Administrative Agent shall not be required to take any action that exposes the
Administrative Agent to personal liability or that is contrary to any Loan
Document or Applicable Law; to arrange the means whereby the proceeds of the
Advances of the Lenders are to be made available to the Borrower; to distribute
promptly to each Lender information, requests and documents received from the
Borrower, and each payment (in like funds received) with respect to any of such
Lender's Advances, or the ratable amount of fees or other amounts; and to
deliver to the Borrower requests, demands, approvals and consents received from
the Lenders. Administrative Agent agrees to promptly distribute to each Lender,
at such Lender's address set forth below information, requests, documents and
payments received from the Borrower. The Administrative Agent shall have no
trustee or other fiduciary relationship in respect of any Lender by reason of
this Agreement or any other Loan Document. The Administrative Agent shall have
no duties or responsibilities except those expressly set forth in this
Agreement. The duties of the Administrative Agent are mechanical and
administrative in nature.
(b) REPLACEMENT OF ADMINISTRATIVE AGENT. Should the Administrative
Agent or any successor Administrative Agent ever cease to be a Lender hereunder,
or should the Administrative Agent or any successor Administrative Agent ever
resign as Administrative Agent, or should the Administrative Agent or any
successor Administrative Agent ever be removed with cause or without
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cause by the action of all Lenders (other than the Administrative Agent), then
the Lender appointed by the other Lenders (with the consent of the Borrower,
which consent shall not be unreasonably withheld) shall forthwith become the
Administrative Agent, and the Borrower and the Lenders shall execute such
documents as any Lender may reasonably request to reflect such change at no cost
to the Borrower. If the Administrative Agent also then serves in the capacity
of the Issuing Bank, such resignation or removal shall constitute resignation or
removal of the Issuing Bank and the successor Administrative Agent shall serve
in the capacity of the Issuing Bank. Any resignation or removal of the
Administrative Agent or any successor Administrative Agent shall become
effective upon the appointment by the Lenders of a successor Administrative
Agent; provided, however, if no successor Administrative Agent shall have been
so appointed and shall have accepted such appointment within 30 days after the
retiring Administrative Agent's giving of notice of resignation or the Lenders'
removal of the retiring Administrative Agent, then the retiring Administrative
Agent may, on behalf of the Lenders, appoint a successor Administrative Agent,
which shall be a commercial bank organized under the Laws of the United States
of America or of any State thereof and having a combined capital and surplus of
at least $500,000,000. Upon the acceptance of any appointment as the
Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations under
the Loan Documents, provided that if the retiring or removed Administrative
Agent is unable to appoint a successor Administrative Agent, the Administrative
Agent shall, after the expiration of a 60 day period from the date of notice, be
relieved of all obligations as Administrative Agent hereunder. Notwithstanding
any Administrative Agent's resignation or removal hereunder, the provisions of
this Article shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was the Administrative Agent under this
Agreement.
(c) EXPENSES. Each Lender shall pay its pro rata share, based on its
Specified Percentage, of any expenses paid by the Administrative Agent directly
and solely in connection with any of the Loan Documents if Administrative Agent
does not receive reimbursement therefor from other sources within 60 days after
the date incurred. Any amount so paid by the Lenders to the Administrative
Agent shall be returned by the Administrative Agent pro rata to each paying
Lender to the extent later paid by the Borrower or any other Person on the
Borrower's behalf to the Administrative Agent.
(d) DELEGATION OF DUTIES. The Administrative Agent may execute any of
its duties hereunder by or through officers, directors, employees, attorneys or
agents, and shall be entitled to (and shall be protected in relying upon) advice
of counsel concerning all matters pertaining to its duties hereunder.
(e) RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent and its
officers, directors, employees, attorneys and agents shall be entitled to rely
and shall be fully protected in relying on any writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telex or teletype
message, statement, order, or other document or conversation reasonably believed
by it or them in good faith to be genuine and correct and to have been signed or
made by the proper
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Person and, with respect to legal matters, upon opinions of counsel selected by
the Administrative Agent. The Administrative Agent may, in its reasonable
judgment, deem and treat the payee of any Note as the owner thereof for all
purposes hereof.
(f) LIMITATION OF ADMINISTRATIVE AGENT'S LIABILITY. Neither the
Administrative Agent nor any of its officers, directors, employees, attorneys,
shareholders or agents shall be liable for any action taken or omitted to be
taken by it or them hereunder in good faith and believed by it or them to be
within the discretion or power conferred to it or them by the Loan Documents or
be responsible for the consequences of any error of judgment, except for its or
their own gross negligence or wilful misconduct. Except as aforesaid, the
Administrative Agent shall be under no duty to enforce any rights with respect
to any of the Advances, or any security therefor. The Administrative Agent
shall not be compelled to do any act hereunder or to take any action towards the
execution or enforcement of the powers hereby created or to prosecute or defend
any suit in respect hereof, unless indemnified to its reasonable satisfaction
against loss, cost, liability and expense. The Administrative Agent shall not
be responsible in any manner to any Lender for the effectiveness,
enforceability, genuineness, validity or due execution of any of the Loan
Documents, or for any representation, warranty, document, certificate, report or
statement made herein or furnished in connection with any Loan Documents, or be
under any obligation to any Lender to ascertain or to inquire as to the
performance or observation of any of the terms, covenants or conditions of any
Loan Documents on the part of the Borrower. TO THE EXTENT NOT REIMBURSED BY THE
BORROWER, EACH LENDER HEREBY SEVERALLY INDEMNIFIES AND HOLDS HARMLESS THE
ADMINISTRATIVE AGENT, PRO RATA ACCORDING TO ITS SPECIFIED PERCENTAGE, FROM AND
AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND/OR DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THE
ADMINISTRATIVE AGENT (IN SUCH CAPACITY) IN ANY WAY WITH RESPECT TO ANY LOAN
DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THE
LOAN DOCUMENTS (INCLUDING ANY NEGLIGENT ACTION OF THE ADMINISTRATIVE AGENT),
EXCEPT TO THE EXTENT THE SAME ARE FINALLY DETERMINED BY A COURT OF COMPETENT
JURISDICTION TO RESULT FROM GROSS NEGLIGENCE OR WILFUL MISCONDUCT BY THE
ADMINISTRATIVE AGENT. THE INDEMNITY PROVIDED IN THIS SECTION 10.1(f) SHALL
SURVIVE TERMINATION OF THIS AGREEMENT.
(g) LIABILITY AMONG LENDERS. No Lender shall incur any liability (other
than the sharing of expenses and other matters specifically set forth herein and
in the other Loan Documents) to any other Lender, except for acts or omissions
in bad faith.
(h) RIGHTS AS LENDER. With respect to its commitment hereunder, the
Advances made by it and the Notes issued to it, the Administrative Agent shall
have the same rights as a Lender and may exercise the same as though it were not
the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the
context otherwise indicates, include the Administrative Agent in its individual
capacity. The Administrative Agent or any Lender may accept deposits from, act
as
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trustee under indentures of, and generally engage in any kind of business with,
the Borrower and any of its Affiliates, and any Person who may do business with
or own securities of the Borrower or any of its Affiliates, all as if the
Administrative Agent were not the Administrative Agent hereunder and without any
duty to account therefor to the Lenders.
Section 10.2 LENDER CREDIT DECISION. Each Lender acknowledges that it
has, independently and without reliance upon the Administrative Agent or any
other Lender and based upon the financial statements referred to in
SECTIONS 4.1(j), 6.1, 6.2 and 6.3 hereof, and such other documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Administrative Agent or any
other Lender and based upon such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement and the other Loan Documents. Each
Lender also acknowledges that its decision to fund the initial Advances shall
constitute evidence to the Administrative Agent that such Lender has deemed all
of the conditions set forth in SECTION 3.1 to have been satisfied.
Section 10.3 BENEFITS OF ARTICLE. None of the provisions of this Article
shall inure to the benefit of any Person other than Lenders and, with respect to
SECTION 10.1(b), the Borrower; consequently, no such other Person shall be
entitled to rely upon, or to raise as a defense, in any manner whatsoever, the
failure of the Administrative Agent or any Lender to comply with such
provisions.
ARTICLE 11
MISCELLANEOUS
Section 11.1 NOTICES.
(a) All notices and other communications under this Agreement shall be
in writing (except in those cases where giving notice by telephone is expressly
permitted) and shall be deemed to have been given on the date personally
delivered or sent by telecopy (answer back received), or three Business Days
after deposit in the mail, designated as certified mail, return receipt
requested, postage-prepaid, or one Business Day after being entrusted to a
reputable commercial overnight delivery service, addressed to the party to which
such notice is directed at its address determined as provided in this Section.
All notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:
(i) If to the Borrower, at:
20500 Nordhoff Street
Chatsworth, California 91311
Attention: Chief Financial Officer
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Telephone: (818) 700-5100
Telecopier: (818) 709-0827
(ii) If to the Administrative Agent, at:
NationsBank of Texas, N.A.
901 Main Street, 67th Floor
Dallas, Texas 75202-3714
Attention: Yousuf Omar
Telephone: (214) 508-3347
Telecopier: (214) 508-0980
(iii) If to a Lender, at its address shown below its name on the
signature pages hereof, or if applicable, set forth in its
Assignment Agreement.
(b) Any party hereto may change the address to which notices shall be
directed by giving 10 days' written notice of such change to the other parties.
Section 11.2 EXPENSES. The Borrower shall promptly pay:
(a) all reasonable out-of-pocket expenses of the Administrative Agent in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Loan Documents, the transactions contemplated hereunder
and thereunder, and the making of Advances hereunder, including without
limitation the reasonable fees and disbursements of Special Counsel;
(b) all reasonable out-of-pocket expenses, including reasonable
attorneys' fees, of the Administrative Agent in connection with the transactions
contemplated in this Agreement and the other Loan Documents and the preparation,
negotiation, execution and delivery of any waiver, amendment or consent by the
Administrative Agent relating to this Agreement or the other Loan Documents; and
(c) all reasonable out-of-pocket costs, expenses and attorneys' fees of
the Administrative Agent and each Lender incurred for enforcement, collection,
restructuring, refinancing and "work-out", or otherwise incurred in obtaining
performance under the Loan Documents, which in each case shall include without
limitation reasonable fees and expenses of consultants, counsel for the
Administrative Agent and any Lender.
Section 11.3 WAIVERS. The rights and remedies of the Lenders under this
Agreement and the other Loan Documents shall be cumulative and not exclusive of
any rights or remedies which they would otherwise have. No failure or delay by
the Administrative Agent or any Lender in exercising any right shall operate as
a waiver of such right. The Lenders expressly reserve the right to require
strict compliance with the terms of this Agreement in connection with any
funding of a request for an Advance. In the event that any Lender decides to
fund an Advance at a time when the
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Borrower is not in strict compliance with the terms of this Agreement, such
decision by such Lender shall not be deemed to constitute an undertaking by the
Lender to fund any further requests for Advances or preclude the Lenders from
exercising any rights available under the Loan Documents or at law or equity.
Any waiver or indulgence granted by the Lenders shall not constitute a
modification of this Agreement, except to the extent expressly provided in such
waiver or indulgence, or constitute a course of dealing by the Lenders at
variance with the terms of the Agreement such as to require further notice by
the Lenders of the Lenders' intent to require strict adherence to the terms of
the Agreement in the future. Any such actions shall not in any way affect the
ability of the Administrative Agent or the Lenders, in their discretion, to
exercise any rights available to them under this Agreement or under any other
agreement, whether or not the Administrative Agent or any of the Lenders are a
party thereto, relating to the Borrower.
Section 11.4 CALCULATION BY THE LENDERS CONCLUSIVE AND BINDING. Any
mathematical calculation required or expressly permitted to be made by the
Administrative Agent or any Lender under this Agreement shall constitute prima
facie evidence of any amount calculated.
Section 11.5 SET-OFF. In addition to any rights now or hereafter granted
under Applicable Law and not by way of limitation of any such rights, upon the
occurrence and during the continuation of an Event of Default, each Lender and
any subsequent holder of any Note, and any assignee of any Note is hereby
authorized by the Borrower at any time or from time to time, without notice to
the Borrower or any other Person, any such notice being hereby expressly waived,
to set-off, appropriate and apply any deposits (general or special (except trust
and escrow accounts), time or demand, including without limitation Indebtedness
evidenced by certificates of deposit, in each case whether matured or unmatured)
and any other Indebtedness at any time held or owing by such Lender or holder to
or for the credit or the account of the Borrower, against and on account of the
Obligations and other liabilities of the Borrower to such Lender or holder which
are then due and payable, irrespective of whether or not (a) the Lender or
holder shall have made any demand hereunder, or (b) the Lender or holder shall
have declared the principal of and interest on the Advances and other amounts
due hereunder to be due and payable as permitted by SECTION 8.2. Any sums
obtained by any Lender or by any assignee or subsequent holder of any Note shall
be subject to pro rata treatment of all Obligations and other liabilities
hereunder in accordance with each Lender's Specified Percentage.
Section 11.6 ASSIGNMENT.
(a) The Borrower may not assign or transfer any of its rights or
obligations hereunder or under the other Loan Documents without the prior
written consent of the Lenders.
(b) No Lender shall be entitled to assign or grant a participation in
its interest in this Agreement, its Notes or its Advances, except as hereinafter
set forth.
(c) Each Lender may sell participations to one or more banks or other
entities (the "Participants") in or to all or a portion of its rights and
obligations under this Agreement (including,
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without limitation, all or a portion of the Advances or Reimbursement
Obligations owing to it and the Note or Notes held by it) (the
"Participations"); PROVIDED, HOWEVER, that (i) such Lender's obligations under
this Agreement (including, without limitation, its Commitment to the Borrower
hereunder) shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Lender shall remain the holder of any such Note for all purposes of
this Agreement, (iv) the Borrower, the Administrative Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement and
(v) no Participant under any such Participation shall have any right to approve
any amendment or waiver of any provision of any Loan Document, or any consent to
any departure by the Borrower therefrom, except to the extent that such
amendment, waiver or consent would (A) reduce or postpone any date fixed for
payment of principal of, or interest on, the Notes or any fees or other amounts
payable hereunder or (B) increase the commitment of any Participant, in each
case to the extent subject to such Participation. Notwithstanding the
foregoing, the Borrower agrees that Participants shall be entitled to the
benefits of ARTICLE 9 hereof as though they were Lenders and the Lenders may,
subject to SECTION 11.14 hereof, provide copies of all financial information
received from the Borrower to such Participants.
(d) Each Lender may assign to one or more Eligible Assignees its rights
and obligations under this Agreement and the other Loan Documents; PROVIDED,
HOWEVER, that (i) each such assignment shall be subject to the prior written
consent of the Administrative Agent and Borrower, which consent shall not be
unreasonably withheld (PROVIDED, HOWEVER, notwithstanding anything herein to the
contrary, no consent of the Borrower is required for any assignment during any
time that an Event of Default has occurred and is continuing), (ii) no such
assignment shall be in a principal amount of Commitments less than $10,000,000,
unless the Commitments of a Lender are less than $10,000,000, in which case such
assignment may be in the aggregate amount of such Lender's Commitments,
(iii) the applicable Lender, Administrative Agent and Eligible Assignee shall
execute and deliver to the Administrative Agent an Assignment and Acceptance
Agreement (an "Assignment Agreement") in substantially the form of EXHIBIT D
hereto, together with the Notes subject to such assignment and (iv) the Eligible
Assignee executing the Assignment, shall deliver to the Administrative Agent a
processing fee of $3,500. Upon such execution, delivery and acceptance from and
after the effective date specified in each Assignment, which effective date
shall be at least three Business Days after the execution thereof, (A) the
Eligible Assignee thereunder shall be party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment, have the rights and obligations of a Lender hereunder and (B) the
applicable Lender shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment, relinquish such rights and
be released from such obligations under this Agreement.
(e) Notwithstanding anything in clause (d) above to the contrary, any
Lender may assign and pledge all or any portion of its Advances and Notes to any
Federal Reserve Bank as collateral security pursuant to Regulation A of F.R.S.
Board and any Operating Circular issued by such Federal Reserve Bank; provided,
however, that no such assignment under this clause (e) shall release the
assignor Lender from its obligations hereunder.
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(f) Upon its receipt of an Assignment Agreement executed by a Lender and
an Eligible Assignee, and any Note or Notes subject to such assignment, the
Borrower shall, subject to the Borrower's rights under SECTION 11.6(d), within
five Business Days after its receipt of such Assignment Agreement execute and
deliver to the Administrative Agent in exchange for the surrendered Notes new
Notes to the order of such Eligible Assignee in an amount equal to the portion
of the Advances and Commitments assigned to it pursuant to such Assignment
Agreement and new Notes to the order of the assignor Lender in an amount equal
to the portion of the Advances and Commitments retained by it hereunder. Such
new Notes shall be in an aggregate principal amount equal to the aggregate
principal amount of such surrendered Notes, shall be dated the effective date of
such Assignment Agreement and shall otherwise be in substantially the form of
EXHIBITS A and B hereto.
(g) Any Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this SECTION 11.6, disclose
to the Eligible Assignee or Participant or proposed Eligible Assignee or
participant, any information relating to the Borrower furnished to such Lender
by or on behalf of the Borrower, provided such Person agrees in writing to
handle such information in accordance with the standards set forth in
SECTION 11.14 hereof.
(h) Except as specifically set forth in this SECTION 11.6, nothing in
this Agreement or any other Loan Documents, expressed or implied, is intended to
or shall confer on any Person other than the respective parties hereto and
thereto and their successors and assignees permitted hereunder and thereunder
any benefit or any legal or equitable right, remedy or other claim under this
Agreement or any other Loan Documents.
(i) Notwithstanding anything in this SECTION 11.6 to the contrary, no
Eligible Assignee or Participant (nor the assigning or participating Lender)
shall be entitled to receive (whether individually or collectively) any greater
payment under SECTION 2.14 or SECTION 9.3 or SECTION 9.5 than such assigning or
participating Lender would have been entitled to receive with respect to the
interest assigned or participated to such Eligible Assignee or Participant.
Section 11.7 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
Section 11.8 SEVERABILITY. Any provision of this Agreement or any other
Loan Document which is for any reason prohibited or found or held invalid or
unenforceable by any court or governmental agency shall be ineffective to the
extent of such prohibition or invalidity or unenforceability without
invalidating the remaining provisions hereof or thereof in such jurisdiction or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 11.9 INTEREST AND CHARGES. It is not the intention of any parties
to this Agreement to make an agreement in violation of the laws of any
applicable jurisdiction relating to usury.
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Regardless of any provision in any Loan Documents, no Lender shall ever be
entitled to receive, collect or apply, as interest on the Obligations, any
amount in excess of the Highest Lawful Amount. If any Lender or participant
ever receives, collects or applies, as interest, any such excess, such amount
which would be excessive interest shall be deemed a partial repayment of
principal and treated hereunder as such; and if principal is paid in full, any
remaining excess shall be paid to the Borrower. In determining whether or not
the interest paid or payable, under any specific contingency, exceeds the
Highest Lawful Rate, the Borrower and the Lenders shall, to the maximum extent
permitted under Applicable Law, (a) characterize any nonprincipal payment as an
expense, fee or premium rather than as interest, (b) exclude voluntary
prepayments and the effect thereof, and (c) amortize, prorate, allocate and
spread in equal parts, the total amount of interest throughout the entire
contemplated term of the Obligations so that the interest rate is uniform
throughout the entire term of the Obligations; provided, however, that if the
Obligations are paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period of
existence thereof exceeds the Highest Lawful Rate, the Lenders shall refund to
the Borrower the amount of such excess or credit the amount of such excess
against the total principal amount of the Obligations owing, and, in such event,
the Lenders shall not be subject to any penalties provided by any laws for
contracting for, charging or receiving interest in excess of the Highest Lawful
Rate. This Section shall control every other provision of all agreements
pertaining to the transactions contemplated by or contained in the Loan
Documents.
Section 11.10 HEADINGS. Headings used in this Agreement are for
convenience only and shall not be used in connection with the interpretation of
any provision hereof.
Section 11.11 AMENDMENT AND WAIVER. The provisions of this Agreement may
not be amended, modified or waived except by the written agreement of the
Borrower and the Determining Lenders; provided, however, that no such amendment,
modification or waiver shall be made (a) without the consent of all Lenders, if
it would (i) increase the Specified Percentage or commitment of any Lender, or
(ii) extend or postpone the date of maturity of, extend the due date for any
payment of principal or interest on, reduce the amount of any installment of
principal or interest on, or reduce the rate of interest on, any Advance, the
Reimbursement Obligations or other amount owing under any Loan Documents to
which such Lender is entitled, or (iii) release any guaranty of the Obligations
(except pursuant to this Agreement or the other Loan Documents), or (iv) reduce
the fees payable hereunder to which such Lender is entitled, or (v) revise this
SECTION 11.11, or (vi) waive the date for payment of any principal, interest or
fees hereunder or (vii) amend the definition of "Determining Lenders" or
"Specified Percentage"; (b) without the consent of the Administrative Agent, if
it, would alter the rights, duties or obligations of the Administrative Agent;
or (c) without the consent of the Issuing Bank, if it would alter the rights,
duties or obligations of the Issuing Bank. Neither this Agreement nor any term
hereof may be amended orally, nor may any provision hereof be waived orally but
only by an instrument in writing signed by the Administrative Agent and, in the
case of an amendment, by the Borrower.
Section 11.12 EXCEPTION TO COVENANTS. Neither the Borrower nor any
Subsidiary of the Borrower shall be deemed to be permitted to take any action or
fail to take any action which is
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<PAGE>
permitted as an exception to any of the covenants contained herein or which is
within the permissible limits of any of the covenants contained herein if such
action or omission would result in the breach of any other covenant contained
herein.
Section 11.13 NO LIABILITY OF ISSUING BANK. The Borrower assumes all risks
of the acts or omissions of any beneficiary or transferee of any Letter of
Credit with respect to its use of such Letter of Credit. Neither the Issuing
Bank nor any Lender nor any of their respective officers or directors shall be
liable or responsible for: (a) the use that may be made of any Letter of Credit
or any acts or omissions of any beneficiary or transferee in connection
therewith; (b) the validity, sufficiency or genuineness of documents, or of any
endorsement thereon, even if such documents should prove to be in any or all
respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing
Bank against presentation of documents that do not comply with the terms of a
Letter of Credit, including failure of any documents to bear any reference or
adequate reference to the Letter of Credit; or (d) any other circumstances
whatsoever in making or failing to make payment under any Letter of Credit,
EXCEPT that the Borrower shall have a claim against the Issuing Bank, and the
Issuing Bank shall be liable to the Borrower, to the extent of any direct, but
not consequential, damages suffered by the Borrower that a court of competent
jurisdiction finally judicially determines were caused by (i) the Issuing Bank's
wilful misconduct or gross negligence or (ii) the Issuing Bank's wilful failure
to make lawful payment under a Letter of Credit after the presentation to it of
a draft and certificates strictly complying with the terms and conditions of the
Letter of Credit. In furtherance and not in limitation of the foregoing, the
Issuing Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any notice or
information to the contrary.
Section 11.14 CONFIDENTIALITY. Each Lender and the Administrative Agent
agrees (on behalf of itself and each of its Affiliates, directors, officers,
employees and representatives) to use reasonable efforts to keep confidential,
in accordance with customary procedures for handling confidential information of
this nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by the Borrower or any of its Affiliates
pursuant to this Agreement, provided that nothing herein shall limit the
disclosure of any such information (a) to the extent required by statute, rule,
regulation or judicial process, (b) to counsel for any Lender or the
Administrative Agent, (c) to bank examiners, auditors or accountants of any
Lender, (d) to the Administrative Agent or any other Lender or any Affiliate
thereof, (e) in connection with any Litigation to which any one or more of
Lenders is a party, (f) to the extent necessary in connection with the exercise
of any remedy under this Agreement or any other Loan Document, or (g) to any
Eligible Assignee or Participant (or prospective Eligible Assignee or
Participant) so long as such Eligible Assignee or Participant (or prospective
Eligible Assignee or Participant) agrees to handle such information in
accordance with the provisions of this SECTION 11.14.
Section 11.15 NO DUTIES OF DOCUMENTATION AGENT. The Borrower and each
Lender acknowledge that the Documentation Agent shall have no duties,
responsibilities or liabilities in its capacity as Documentation Agent
hereunder.
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SECTION 11.16 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
TEXAS (WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS) AND THE UNITED
STATES OF AMERICA. THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS,
AND THE BORROWER AND EACH SURETY, GUARANTOR, ENDORSER AND ANY OTHER PARTY EVER
LIABLE FOR PAYMENT OF ANY MONEY PAYABLE WITH RESPECT TO THE LOAN DOCUMENTS,
JOINTLY AND SEVERALLY WAIVE THE RIGHT TO BE SUED ELSEWHERE. WITHOUT EXCLUDING
ANY OTHER JURISDICTION, THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER
EACH AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS,
SHALL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS AND HEREBY SUBMITS WITH RESPECT TO ITSELF AND ITS
PROPERTY TO THE JURISDICTION OF ANY SUCH COURT FOR THE PURPOSE OF ANY SUIT,
ACTION, PROCEEDING OR JUDGMENT RELATING TO OR ARISING OUT OF THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT.
SECTION 11.17 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
ADMINISTRATIVE AGENT, THE DOCUMENT AGENT AND THE LENDERS HEREBY KNOWINGLY
VOLUNTARILY, IRREVOCABLY AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM
ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT TO EACH LENDER
ENTERING INTO THIS AGREEMENT AND MAKING ANY ADVANCES HEREUNDER.
SECTION 11.18 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE
OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES
HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 11.19 CONSENT BY ADMINISTRATIVE AGENT AND THE LENDERS. The
Administrative Agent and each of the Lenders hereby consents to the consummation
of the transactions contemplated by the Netcom Recapitalization Documents
pursuant to Section 506 of the General Corporation Law of the State of
California as in effect as of the Agreement Date. The Administrative Agent and
each of the Lenders has received historical financial information regarding the
Borrower (including audited financial statements, as of July 31, 1997, for the
Borrower) and have also received pro forma balance sheets giving effect to the
transactions contemplated by the Netcom Recapitalization Documents.
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<PAGE>
IN WITNESS WHEREOF, this Credit Agreement is executed as of the date first
set forth above.
BORROWER: NETCOM SYSTEMS, INC.
By:
--------------------------------
Name:
---------------------------
Title:
---------------------------
ADMINISTRATIVE AGENT: NATIONSBANK OF TEXAS, N.A., as
Administrative Agent
By:
--------------------------------
Name:
---------------------------
Title:
---------------------------
DOCUMENTATION AGENT: BANKBOSTON, N.A.
By:
--------------------------------
Name:
---------------------------
Title:
---------------------------
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<PAGE>
LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender
and Issuing Bank
Specified Percentage:
50%
By:
--------------------------------
Name:
---------------------------
Title:
---------------------------
901 Main Street, 67th Floor
Dallas, Texas 75202
Attn: Yousuf Omar
BANKBOSTON, N.A.
Specified Percentage:
50%
By:
--------------------------------
Name:
---------------------------
Title:
---------------------------
435 Tasso Street, Suite 250
Palo Alto, California 94301
with a copy to:
BankBoston, N.A.
High Technology Division
100 Federal Street MS 01-08-06
Boston, Massachusetts 02110
88
<PAGE>
SCHEDULE 1
LIBOR LENDING OFFICES
NATIONSBANK OF TEXAS, N.A.
901 Main Street, 67th Floor
Dallas, Texas 75202
BANKBOSTON, N.A.
100 Federal Street MS 01-08-06
Boston, Massachusetts 02110
89
<PAGE>
SCHEDULE 2
EXISTING LIENS
None
<PAGE>
SCHEDULE 3
EXISTING LITIGATION
None
<PAGE>
SCHEDULE 4
CAPITALIZATION
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
NAME INCORPORATION CLASS OF STOCK OF OWNERSHIP OWNER
<S> <C> <C> <C> <C>
Netcom Systems, Inc. California Common Stock 90.0% Marc Hamon
Common Stock 1.8% Jim Jordan
Common Stock 4.5% Henry Hamon
Common Stock 1.8% Dick Bass
Common Stock ** Harley Shanko
Common Stock ** Jerry Kattel
Preferred Stock* 49.1% Summit Ventures IV, L.P.
Preferred Stock* ** Summit Investors II, L.P.
Preferred Stock* 16.6% NationsBanc Capital Corp.
Preferred Stock* 30.1% Northstar Investors, LLC
Preferred Stock* 3.1% Spitfire Capital Partners, L.P.
Preferred Stock* ** Bain Securities, Inc.
Preferred Stock* ** Peter Mooney, as nominee for
Broadview Partners Group
Preferred Stock* ** WS Investment Company 97B
Preferred Stock* ** WSGR Profit Sharing Trust
Preferred Stock* ** Steven E. Bochner
Preferred Stock* ** Nevan C. Elam
Preferred Stock* ** Todd Cleary
</TABLE>
* Netcom Redeemable Preferred Stock and Netcom Convertible Preferred Stock.
** Less than 1%.
<PAGE>
SCHEDULE 5
EXISTING INVESTMENTS
The Company has entered into a Letter of Intent with Henry Hamon and Elie
Hamon concerning a proposed Stock Purchase Agreement whereby the Company would
purchase all of the outstanding shares of the French Societe a Responsabilite
Limitee Netcom Systems Europe, a company organized under the laws of the
Republic of France, held by Messrs. Hamon.
<PAGE>
SCHEDULE 6
EXISTING INDEBTEDNESS
None
<PAGE>
SCHEDULE 7
AUTHORIZATION, QUALIFICATION AND GOOD STANDING
The Borrower may be required to qualify to do business in Massachusetts,
New Hampshire and North Carolina, but it is not yet qualified to do business in
such states. As of the Agreement Date, the Borrower is in the process of
qualifying to do business in such states.
<PAGE>
SCHEDULE 8
LABOR RELATIONS
None
<PAGE>
Exhibit 10.7
[EXECUTION COPY]
NETCOM SYSTEMS, INC.
REGISTRATION AGREEMENT
THIS AGREEMENT is made as of August 29, 1997, by and among Netcom
Systems, Inc., a California corporation (the "COMPANY"), the parties listed as
Investors on the SCHEDULE OF INVESTORS attached hereto (collectively, the
"INVESTORS") and the parties listed as Existing Shareholders on the SCHEDULE OF
EXISTING SHAREHOLDERS attached hereto (collectively, the "EXISTING
SHAREHOLDERS").
WHEREAS, the parties to this Agreement are parties to a
Recapitalization Agreement dated as of August 29, 1997 (as the same may be
amended and modified from time to time in accordance with its terms, the
"RECAPITALIZATION AGREEMENT");
WHEREAS, in order to induce the Investors to enter into the
Recapitalization Agreement, the Company has agreed to provide the registration
rights set forth in this Agreement;
WHEREAS, the execution and delivery of this Agreement is a condition
to the Closing under the Recapitalization Agreement; and
WHEREAS, unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in paragraph 8 hereof.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEMAND REGISTRATIONS.
(a) REQUESTS FOR REGISTRATION. At any time after the Closing under
the Recapitalization Agreement, the holders of at least 66 2/3% of the Investor
Registrable Securities may request registration under the Securities Act of all
or any portion of their Registrable Securities on Form S-1 or any similar
long-form registration ("LONG-FORM REGISTRATIONS"), and the holders of at least
25% of the Investor Registrable Securities may request registration under the
Securities Act of all or any portion of their Investor Registrable Securities on
Form S-2 or S-3 or any similar short-form registration ("SHORT-FORM
REGISTRATIONS") if the Company is eligible to use any such short form. All
registrations requested pursuant to this paragraph 1(a) are referred to herein
as "DEMAND REGISTRATIONS." Each request for a Demand Registration shall specify
the approximate number of Registrable Securities requested to be registered and
the anticipated per share price range for such offering. Within ten days after
receipt of a request for a Demand Registration, the Company shall give written
notice of such requested registration to all other holders of Registrable
Securities and, subject to paragraph 1(d) below, shall include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice.
<PAGE>
(b) LONG-FORM REGISTRATIONS. The holders of Investor Registrable
Securities shall be entitled to request (i) four Long-Form Registrations in
which the Company shall pay all Registration Expenses ("COMPANY-PAID LONG-FORM
REGISTRATIONS") and (ii) an unlimited number of Long-Form Registrations in which
the holders of Investor Registrable Securities shall pay their share of the
Registration Expenses as set forth in paragraph 5 hereof; PROVIDED THAT the
aggregate offering value of the Registrable Securities requested to be included
in any Long-Form Registration must equal at least $3,000,000. A registration
shall not count as one of the permitted Company-paid Long-Form Registrations
until it has become effective, and neither the last nor any subsequent
Company-paid Long-Form Registration shall count as one of the permitted
Company-paid Long-Form Registrations unless the holders of Investor Registrable
Securities are able to register and sell at least 75% of the Investor
Registrable Securities requested to be included in such registration; PROVIDED
THAT in any event the Company shall pay all Registration Expenses in connection
with any registration initiated as a Company-paid Long-Form Registration whether
or not it has become effective and whether or not such registration has counted
as one of the permitted Company-paid Long-Form Registrations hereunder.
(c) SHORT-FORM REGISTRATIONS. In addition to the Long-Form
Registrations provided pursuant to paragraph 1(b) above, the holders of Investor
Registrable Securities shall be entitled to request an unlimited number of
Short-Form Registrations in which the Company shall pay all Registration
Expenses; PROVIDED THAT the aggregate offering value of the Registrable
Securities requested to be included in any Short-Form Registration must equal at
least $1,000,000. Demand Registrations shall be Short-Form Registrations
whenever the Company is permitted to use any applicable short form. After the
Company has become subject to the reporting requirements of the Securities
Exchange Act, the Company shall use its reasonable best efforts to make
Short-Form Registrations on Form S-3 available for the sale of Registrable
Securities. The Company shall pay all Registration Expenses in connection with
any registration initiated as a Short-Form Registration whether or not it has
become effective.
(d) PRIORITY ON DEMAND REGISTRATIONS. The Company shall not include
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of at least 66 2/3% of the
Investor Registrable Securities included in such registration. If a Demand
Registration is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and other
securities, if any, which can be sold in an orderly manner in such offering
within a price range acceptable to the holders of at least 66 2/3% of the
Investor Registrable Securities included in such registration, the Company shall
include in such registration (i) first, the Registrable Securities requested to
be included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of Registrable Securities owned by each
such holder and (ii) second, any other securities requested to be included in
such registration; PROVIDED THAT, notwithstanding the foregoing, in connection
with the first two registrations of Investor Registrable Securities pursuant to
this Agreement (whether pursuant to a Demand Registration or a Piggyback
Registration), if any such registration is a Demand Registration, the Company
shall include (i) first, the Investor Registrable Securities requested to be
included in such registration, pro rata among the holders of such Investor
Registrable Securities on the basis of the number of Investor
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<PAGE>
Registrable Securities owned by each such holder,(ii) second, the Other
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Other Registrable Securities on the basis of the
number of Other Registrable Securities owned by each such holder and (iii)
third, any other securities requested to be included in such registration (it
being understood, however, that neither the last nor any subsequent registration
subject to this proviso shall count as one of the two registrations subject to
this proviso unless the holders of Investor Registrable Securities are able to
register and sell at least 75% of the Investor Registrable Securities requested
to be included in such registration).
(e) EXPENSES. Any Persons other than holders of Registrable
Securities who participate in Demand Registrations which are not at the
Company's expense must pay their share of the Registration Expenses as provided
in paragraph 5 hereof.
(f) SELECTION OF UNDERWRITERS. The Company (acting through its Board
of Directors) shall select the investment banker(s) and manager(s) to administer
any offerings under this paragraph 1.
(g) OTHER REGISTRATION RIGHTS. Except as provided in this Agreement,
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company (whether as a demand registration
or piggyback registration), or any securities convertible or exchangeable into
or exercisable for such securities, without the prior written consent of the
holders of at least 66 2/3% of the Investor Registrable Securities; PROVIDED
THAT the Company may grant rights to other Persons to participate in Piggyback
Registrations so long as such rights are subordinate to the rights of the
holders of Investor Registrable Securities with respect to such Piggyback
Registrations.
(h) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company shall not be
obligated to effect any Demand Registration within 180 days after the effective
date of the Company's initial public offering of Common Stock under the
Securities Act or within 90 days after the effective date of a previous Demand
Registration or a previous registration in which the holders of Investor
Registrable Securities were given piggyback rights pursuant to paragraph 2
hereof. The Company may postpone for up to 90 days (up to 60 days in the case
of clause (ii) below) the filing or the effectiveness of a registration
statement for a Demand Registration if the Company's Board of Directors
determines in its reasonable good faith judgment that such Demand Registration
would reasonably be expected to have (i) a material adverse effect on (or
require premature disclosure of) any proposal or plan by the Company or any of
its Subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer,
reorganization or similar transaction or (ii) a material adverse effect on the
Company's business or stock price; PROVIDED THAT in such event, the holders of
Investor Registrable Securities initially requesting such Demand Registration
shall be entitled to withdraw such request and, if such request is withdrawn,
such Demand Registration shall not count as one of the permitted Demand
Registrations hereunder and the Company shall pay all Registration Expenses in
connection with such registration. The Company may delay a Demand Registration
hereunder only once in any twelve-month period.
-3-
<PAGE>
2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its securities under the Securities Act (other than pursuant to a Demand
Registration or a registration on Form S-4 or S-8 or any successor or similar
forms) and the registration form to be used may be used for the registration of
Registrable Securities (a "PIGGYBACK REGISTRATION"), the Company shall give
prompt written notice to all holders of Registrable Securities of its intention
to effect such a registration and, subject to paragraphs 2(c) and 2(d) below,
shall include in such registration all Registrable Securities with respect to
which the Company has received written requests for inclusion therein within 20
days after the receipt of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration Expenses of the holders of
Registrable Securities shall be paid by the Company in all Piggyback
Registrations whether or not such registration is consummated.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting the
marketability of the offering, the Company shall include in such registration
(i) first, the securities the Company proposes to sell, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
Registrable Securities owned by each such holder and (iii) third, any other
securities requested to be included in such registration; PROVIDED THAT,
notwithstanding the foregoing, in connection with the first two registrations of
Investor Registrable Securities pursuant to this Agreement (whether pursuant to
a Demand Registration or a Piggyback Registration), if any such registration is
to be made in connection with an underwritten primary registration on behalf of
the Company, the Company shall include (i) first, the securities the Company
proposes to sell,(ii) second, the Investor Registrable Securities requested to
be included in such registration, pro rata among the holders of such Investor
Registrable Securities on the basis of the number of Investor Registrable
Securities owned by each such holder,(iii) third, the Other Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Other Registrable Securities on the basis of the number of Other
Registrable Securities owned by each such holder and (iv) fourth, any other
securities requested to be included in such registration (it being understood,
however, that neither the last nor any subsequent registration subject to this
proviso shall count as one of the two registrations subject to this proviso
unless the holders of Investor Registrable Securities are able to register and
sell at least 75% of the Investor Registrable Securities requested to be
included in such registration).
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities (other than the holders of Investor Registrable Securities), and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting the
marketability of the offering, the Company shall include in such registration
(i) first, the securities requested to be
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<PAGE>
included therein by the holders requesting such registration and the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such securities on the basis of the number of securities owned by
each such holder and (ii)second, any other securities requested to be included
in such registration; PROVIDED THAT, notwithstanding the foregoing, in
connection with the first two registrations of Investor Registrable Securities
pursuant to this Agreement (whether pursuant to a Demand Registration or a
Piggyback Registration), if any such registration is to be made in connection
with an underwritten secondary registration on behalf of holders of the
Company's securities (other than the holders of Investor Registrable
Securities), the Company shall include (i) first, the securities requested to be
included therein by the holders requesting such registration and the Investor
Registrable Securities requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of securities
owned by each such holder, (ii) second, the Other Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Other Registrable Securities on the basis of the number of Other
Registrable Securities owned by each such holder and (iii) third, any other
securities requested to be included in such registration (it being understood,
however, that neither the last nor any subsequent registration subject to this
proviso shall count as one of the two registrations subject to this proviso
unless the holders of Investor Registrable Securities are able to register and
sell at least 75% of the Investor Registrable Securities requested to be
included in such registration).
(e) WITHDRAWAL BY THE COMPANY. If, at any time after giving written
notice of its intention to register any of its securities as set forth in
paragraph 2(a) and prior to the effective date of such registration statement
filed in connection with such registration, the Company's board of directors
shall determine in its good faith judgment for any reason not to register such
securities, the Company may, at its election, give written notice of such
determination to each holder of Registrable Securities and thereupon shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration (but not from its obligation to pay the Registration
Expenses in connection therewith as provided herein).
3. HOLDBACK AGREEMENTS.
(a) No holder of Registrable Securities shall effect any public sale
or distribution (including sales pursuant to Rule 144) of equity securities of
the Company, or any securities convertible into or exchangeable or exercisable
for such securities, during the seven days prior to and the 180-day period
beginning on the effective date of the Company's initial public offering of its
Common Stock under the Securities Act or during the seven days prior to and the
90-day period beginning on the effective date of the next registered public
offering of the Company's Common Stock (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree in writing.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 180-day
period beginning on the effective date of the Company's initial public offering
of its Common Stock under the Securities Act or during the seven days prior to
and the 90-day period beginning on the effective date of (A) the next registered
public
-5-
<PAGE>
offering of the Company's Common Stock and (B) any underwritten Demand
Registration or any underwritten Piggyback Registration in which Registrable
Securities are included (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or any successor or similar form), unless
the underwriters managing the registered public offering otherwise agree, and
(ii) shall cause each holder of at least 2% of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such periods (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree in writing.
4. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company shall
as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective; PROVIDED
THAT before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall (if requested) furnish to the counsel
selected by the holders of at least 66 2/3% of the Investor Registrable
Securities covered by such registration statement copies of all such documents
proposed to be filed, which documents shall be subject to the review and comment
of such counsel;
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of either
(i) not less than 120 days or, if such registration statement relates to an
underwritten offering, such longer period as in the opinion of counsel for the
underwriters a prospectus is required by law to be delivered in connection with
sales of Registrable Securities by any underwriter or dealer or (ii) such
shorter period as will terminate when all of the securities covered by such
registration statement have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in such
registration statement (but in any event not before the expiration of any longer
period required under the Securities Act), and to comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such registration statement until such time as all such securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement and the prospectus
used in connection therewith;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such
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<PAGE>
registration statement (including each preliminary prospectus) and such other
documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller (including any underwriter) reasonably requests and do any and all
other acts and things which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller; PROVIDED THAT the Company shall not
be required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction;
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designation of all such Registrable Securities covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing
that, to secure NASDAQ authorization for such Registrable Securities and,
without limiting the generality of the foregoing, to arrange for at least two
market makers to register as such with respect to such Registrable Securities
with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
at least 66 2/3% of the Investor Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities (including effecting a stock split or
a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney,
-7-
<PAGE>
accountant or other agent retained by any such seller or underwriter, all
necessary financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities; and
(n) obtain a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the holders of at least 66 2/3%
of the Investor Registrable Securities being sold reasonably request.
5. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions payable with respect to Registrable Securities, which shall be paid
by the holders of such Registrable Securities) and other Persons retained by the
Company (all such expenses being herein called "REGISTRATION EXPENSES"), shall
be borne as provided in this Agreement, except that the Company
-8-
<PAGE>
shall, in any event, pay its internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or on the NASD automated
quotation system.
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company shall reimburse the holders of Registrable Securities
included in such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of at least 66 2/3% of the Investor Registrable
Securities included in such registration.
(c) To the extent Registration Expenses are not required to be paid
by the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by, or
relating to any action or proceeding arising out of or based upon, any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities, except with respect to any information supplied by any
underwriter for use in such registration statement, prospectus or other offering
document and except that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any preliminary prospectus, the
indemnity agreement contained in this paragraph 6(a) shall not inure to the
benefit of the underwriter from whom the Person asserting any such losses,
claims, damages, liabilities or expenses purchased shares concerned (or to the
benefit of any Person controlling such underwriter) to the extent that any such
loss, claim, damage, liability or expense of the underwriter or controlling
Person results from an untrue statement or omission in the preliminary
prospectus which was corrected in the prospectus if a copy of the prospectus was
not sent or given to such Person as required by the Securities Act.
-9-
<PAGE>
(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder shall furnish to
the Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; PROVIDED THAT the obligation to indemnify
shall be individual, not joint and several, for each holder and shall be limited
to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (PROVIDED THAT the failure to give such prompt
notice shall not impair any Person's right to indemnification hereunder to the
extent such failure has not prejudiced the indemnifying party) and (ii) unless
in such indemnified party's reasonable judgment a conflict of interest between
such indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and shall survive the transfer of securities. Each
indemnifying party also agrees to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the event
the indemnification provided for herein is unavailable for any reason.
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.
-10-
<PAGE>
8. DEFINITIONS.
(a) "INVESTOR REGISTRABLE SECURITIES" means (i) any Common Stock
issued or issuable upon conversion of the Convertible Preferred Stock issued
pursuant to the Recapitalization Agreement, (ii) any securities issued or
issuable with respect to the securities referred to in clause (i) above by way
of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization and
(iii) any other shares of Common Stock held by Persons holding securities
described in clauses (i) or (ii) above.
(b) "OTHER REGISTRABLE SECURITIES" means (i) any Common Stock held by
the Existing Shareholders and (ii) any Common Stock issued or issuable with
respect to the Common Stock referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Other Registrable Securities held by any Existing Shareholder, such
securities shall cease to be Other Registrable Securities when the aggregate
number of Other Registrable Securities held by such Person does not exceed one
percent of the number of shares of Common Stock then outstanding as shown by the
most recent report or statement published by the Company and such Person has
held such securities for at least one year.
(c) "REGISTRABLE SECURITIES" means, collectively, the Investor
Registrable Securities and the Other Registrable Securities. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when they have been distributed to the public pursuant to an offering
registered under the Securities Act or sold to the public through a broker,
dealer or market maker in compliance with Rule 144 under the Securities Act (or
any similar rule then in force) or repurchased by the Company or any Subsidiary.
For purposes of this Agreement, a Person shall be deemed to be a holder of
Registrable Securities, and the Registrable Securities shall be deemed to be in
existence, whenever such Person has the right to acquire directly or indirectly
such Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected, and such Person shall be entitled to exercise the
rights of a holder of Registrable Securities hereunder (it being understood,
however, that any Registrable Securities which are not shares of Common Stock
shall be converted into or exercised for shares of Common Stock immediately
prior to the closing of any registration pursuant to which such Common Stock is
to be sold).
(d) Unless otherwise stated, other capitalized terms contained herein
have the meanings set forth in the Recapitalization Agreement.
9. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. Except as provided for herein, the
Company shall not hereafter enter into any agreement with respect to its
securities which is inconsistent with or violates the rights granted to the
holders of Registrable Securities in this Agreement.
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<PAGE>
(b) REMEDIES. Any Person having rights under any provision of this
Agreement shall be entitled to enforce such rights specifically, to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(c) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company, the holders of at least 66 2/3% of the Investor
Registrable Securities and the holders of a majority of the Other Registrable
Securities (but only to the extent that the holders of Other Registrable
Securities would be adversely affected by such amendment or waiver).
(d) SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(e) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts (including by means of telecopied signature pages), any
one of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same Agreement.
(g) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(h) GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement shall
be governed by, and construed in accordance with, the laws of the State of
California, without giving effect to any choice of law or conflict of law rules
or provisions (whether of the State of California or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of California.
(i) NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by
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<PAGE>
reputable overnight courier service (charges prepaid) or five days after being
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to each Investor at the address indicated on the SCHEDULE OF
INVESTORS attached hereto and to each Existing Shareholder at the address
indicated on the SCHEDULE OF EXISTING SHAREHOLDERS attached hereto and to the
Company at the address indicated below:
TO THE COMPANY:
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Attn: Chief Executive Officer
WITH A COPY TO:
(which shall not constitute notice to the Company)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Steven E. Bochner, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Agreement as of the date first written above.
NETCOM SYSTEMS, INC.
By:
-----------------------------------------
Its:
-----------------------------------------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P., its General
Partner
By: Stamps, Woodsum & Co. IV, its General
Partner
By:
-----------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
--------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
-----------------------------------------
Todd A. Binkowski, its
Authorized Signatory
NORTHSTAR INVESTORS, LLC
By:
-----------------------------------------
Its:
----------------------------------------
[Signature Page to Registration Agreement]
<PAGE>
SPITFIRE CAPITAL PARTNERS,
L.P.
By: MS Spitfire LLC, its General Partner
By:
-----------------------------------------
William B. Bunting
Its:
----------------------------------------
PETER MOONEY, AS NOMINEE FOR
THE BROADVIEW PARTNERS GROUP
By:
-----------------------------------------
Its:
----------------------------------------
BAIN SECURITIES, INC.
By:
-----------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
-----------------------------------------
Its:
----------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
-----------------------------------------
Its:
----------------------------------------
--------------------------------------------
Steven E. Bochner
--------------------------------------------
Nevan C. Elam
--------------------------------------------
Todd Cleary
[Signature Page to Registration Agreement]
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<PAGE>
--------------------------------------------
Marc Hamon
--------------------------------------------
Henri Hamon
--------------------------------------------
James Jordan
--------------------------------------------
Warren B. Phelps III
--------------------------------------------
Jing Zhang
--------------------------------------------
Stephane Johnson
--------------------------------------------
Richard Bass
[Signature Page to Registration Agreement]
<PAGE>
SCHEDULE OF INVESTORS
Summit Ventures IV, L.P. WS Investment Company 97B
499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati
Palo Alto, California 94301 650 Page Mill Road
Attn.: Mr. Walter G. Kortschak Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Summit Investors III, L.P.
499 Hamilton Avenue WSGR Profit Sharing Trust FBO
Palo Alto, California 94301 Steven E. Bochner
Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
NationsBanc Capital Corp. Palo Alto, California 94304
NationsBank Corporate Center Attn: Steven E. Bochner, Esq.
10th Floor
100 North Tryon Steven E. Bochner
Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati
Attn: Mr. Robert H. Sheridan III 650 Page Mill Road
Palo Alto, California 94304
Northstar Investors, LLC
c/o Montgomery Securities Nevan C. Elam
600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati
San Francisco, California 94111 650 Page Mill Road
Attn: Mr. Derek Lemke Palo Alto, California 94304
Spitfire Capital Partners, L.P. Todd Cleary
c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati
600 Montgomery Street 650 Page Mill Road
San Francisco, California 94111 Palo Alto, California 94304
Attn: Mr. William B. Bunting
WITH A COPY TO:
Peter Mooney as nominee for (which shall not constitute notice to the
the Broadview Partners Group Investors)
c/o Broadview Associates
950 Tower Lane Kirkland & Ellis
18th Floor 200 East Randolph Drive
Foster City, California 94404 Chicago, Illinois 60601
Attn: Mr. Stephen S. Smith Attn: Ted H. Zook, Esq.
Bain Securities, Inc. Fennebresque, Clark, Swindell & Hay
c/o Bain & Company, Inc. NationsBank Corporate Center
Two Copley Place 29th Floor
Boston, Massachusetts 02116 100 North Tryon Street
Attn: Leonard C. Banos Charlotte, North Carolina 28202
Attn: John S. Chinuntdet, Esq.
<PAGE>
SCHEDULE OF EXISTING SHAREHOLDERS
Marc Hamon
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Henri Hamon
Netcom Systems Europe
4, rue de Galilee
Immeuble Le Bellevue
ZAC du Moulin a vent 78280
Guyancourt, France
James Jordan
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Warren B. Phelps III
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Jing Zhang
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Stephane Johnson
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Richard Bass
Point of View, Inc.
410 Boylston Street
5th Floor
Boston, Massachusetts 02116
With a Copy to:
- --------------
(which shall not constitute notice to the Existing Shareholders)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E Bochner, Esq.
<PAGE>
NETCOM SYSTEMS, INC.
AMENDMENT NO. 1 TO REGISTRATION AGREEMENT
THIS AMENDMENT NO. 1 TO REGISTRATION AGREEMENT (this "AMENDMENT") is
made as of September 25, 1997, by and among Netcom Systems, Inc., a California
corporation (the "COMPANY"), the parties listed as Investors on the SCHEDULE OF
INVESTORS attached hereto (collectively, the "INVESTORS"), the parties listed as
Existing Shareholders on the SCHEDULE OF EXISTING SHAREHOLDERS attached hereto
(collectively, the "EXISTING SHAREHOLDERS") and Richard Moley ("MOLEY").
WHEREAS, the Company, the Investors and the Existing Shareholders are
parties to that certain Registration Agreement dated as of August 29, 1997 (the
"AGREEMENT").
WHEREAS, Moley is purchasing shares of the Company's Class A
Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a
Preferred Stock Purchase Agreement, dated as of the date hereof, by and between
the Company and Moley (the "PURCHASE AGREEMENT").
WHEREAS, the Company, the Existing Shareholders and the Investors
desire to enter into this Amendment for the purposes of making Moley a party to
the Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. INVESTOR. For all purposes of the Agreement (as amended by this
Amendment), the term "INVESTOR" shall include Moley.
2. INVESTOR REGISTRABLE SECURITIES. For all purposes of the
Agreement (as amended by this Amendment), the term "INVESTOR REGISTRABLE
SECURITIES" shall include (i) any Common Stock of the Company issued or issuable
upon conversion of the Class B Convertible Preferred Stock of the Company issued
pursuant to the Purchase Agreement, (ii) any securities issued or issuable with
respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization and (iii) any
other shares of Common Stock held by Persons (as such term is defined in the
Agreement) holding securities described in clauses (i) or (ii) above.
3. SEVERABILITY. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Amendment.
4. COUNTERPARTS. This Amendment may be executed simultaneously in
two or more counterparts (including by means of telecopied signature pages), any
one of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same Amendment.
5. DESCRIPTIVE HEADINGS. The descriptive headings of this Amendment
are inserted for convenience only and do not constitute a part of this
Amendment.
6. GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Amendment shall
be governed by, and construed in accordance with, the laws of the
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<PAGE>
State of California, without giving effect to any choice of law or conflict of
law rules or provisions (whether of the State of California or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of California.
7. NOTICES. All notices and other communications to Moley provided
for or permitted under the Agreement (as amended by this Amendment) shall be
made at the address of Moley set forth in the Company's books and records.
8. FULL FORCE AND EFFECT. Except as amended hereby, the Agreement
shall remain in full force and effect.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to
Registration Agreement as of the date first written above.
NETCOM SYSTEMS, INC.
By:
-----------------------------------------
Its:
----------------------------------------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P., its General
Partner
By: Stamps, Woodsum & Co. IV, its General
Partner
By:
-----------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
-----------------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
-----------------------------------------
Todd A. Binkowski, its
Authorized Signatory
NORTHSTAR INVESTORS, LLC
By:
-----------------------------------------
Its:
----------------------------------------
[Amendment No. 1 to Registration Agreement]
<PAGE>
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS Spitfire LLC, its General Partner
By:
-----------------------------------------
William B. Bunting
Its:
----------------------------------------
PETER MOONEY, AS NOMINEE FOR
THE BROADVIEW PARTNERS GROUP
By:
-----------------------------------------
Its:
----------------------------------------
BAIN SECURITIES, INC.
By:
-----------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
-----------------------------------------
Its:
----------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
-----------------------------------------
Its:
----------------------------------------
--------------------------------------------
Steven E. Bochner
--------------------------------------------
Nevan C. Elam
--------------------------------------------
Todd Cleary
[Amendment No. 1 to Registration Agreement]
<PAGE>
--------------------------------------------
Marc Hamon
--------------------------------------------
Henri Hamon
--------------------------------------------
James Jordan
--------------------------------------------
Warren B. Phelps III
--------------------------------------------
Jing Zhang
--------------------------------------------
Stephane Johnson
--------------------------------------------
Richard Bass
--------------------------------------------
Richard Moley
[Amendment No. 1 to Registration Agreement]
<PAGE>
SCHEDULE OF INVESTORS
Summit Ventures IV, L.P. WS Investment Company 97B
499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati
Palo Alto, California 94301 650 Page Mill Road
Attn.: Mr. Walter G. Kortschak Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
Summit Investors III, L.P.
499 Hamilton Avenue WSGR Profit Sharing Trust FBO
Palo Alto, California 94301 Steven E. Bochner
Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
NationsBanc Capital Corp. Palo Alto, California 94304
NationsBank Corporate Center Attn: Steven E. Bochner, Esq.
10th Floor
100 North Tryon Steven E. Bochner
Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati
Attn: Mr. Robert H. Sheridan III 650 Page Mill Road
Palo Alto, California 94304
Northstar Investors, LLC
c/o Montgomery Securities Nevan C. Elam
600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati
San Francisco, California 94111 650 Page Mill Road
Attn: Mr. Derek Lemke Palo Alto, California 94304
Spitfire Capital Partners, L.P. Todd Cleary
c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati
600 Montgomery Street 650 Page Mill Road
San Francisco, California 94111 Palo Alto, California 94304
Attn: Mr. William B. Bunting
Peter Mooney as nominee for
the Broadview Partners Group
c/o Broadview Associates
950 Tower Lane
18th Floor
Foster City, California 94404
Attn: Mr. Stephen S. Smith
Bain Securities, Inc.
c/o Bain & Company, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attn: Leonard C. Banos
<PAGE>
SCHEDULE OF EXISTING SHAREHOLDERS
Marc Hamon
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Henri Hamon
Netcom Systems Europe
4, rue de Galilee
Immeuble Le Bellevue
ZAC du Moulin a vent 78280
Guyancourt, France
James Jordan
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Warren B. Phelps III
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Jing Zhang
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Stephane Johnson
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Richard Bass
Point of View, Inc.
410 Boylston Street
5th Floor
Boston, Massachusetts 02116
<PAGE>
Exhibit 10.8
[EXECUTION COPY]
NETCOM SYSTEMS, INC.
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT (this "AGREEMENT") is made and entered
into as of August 29, 1997, by and among Netcom Systems, Inc., a California
corporation (the "COMPANY"), each of the Persons listed on the SCHEDULE OF
INVESTORS attached hereto (each, an "INVESTOR" and collectively, the
"INVESTORS") and each of the Persons listed on the SCHEDULE OF EXISTING
SHAREHOLDERS attached hereto (each, an "EXISTING SHAREHOLDER" and collectively,
the "EXISTING SHAREHOLDERS"). The Investors and the Existing Shareholders are
collectively referred to herein as the "SHAREHOLDERS" and individually as a
"SHAREHOLDER." Except as otherwise provided herein, capitalized terms used
herein are defined in paragraph 9 hereof.
The Investors shall purchase shares of the Company's Class A
Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a
Recapitalization Agreement, dated as of August 29, 1997, by and among the
Investors, the Existing Shareholders and the Company (as the same may be amended
from time to time in accordance with its terms, the "RECAPITALIZATION
AGREEMENT"). The Existing Shareholders are holders on the date hereof of shares
of the Company's Common Stock and/or options to purchase shares of the Company's
Common Stock.
The Company and the Shareholders desire to enter into this Agreement
for the purposes, among others, of (i) establishing the composition of the
Company's board of directors (the "BOARD"), (ii) assuring continuity in the
management and ownership of the Company and (iii) limiting the manner and terms
by which Shares may be transferred. The execution and delivery of this
Agreement is a condition to the Closing under the Recapitalization Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. BOARD OF DIRECTORS.
(a) From and after the Closing (as defined in the Recapitalization
Agreement) and until the provisions of this paragraph 1 cease to be effective,
each holder of Shares shall vote all of his, her or its Shares which are voting
shares and any other voting securities of the Company over which such holder has
voting control and shall take all other necessary or desirable actions within
his, her or its control (whether in his, her or its capacity as a shareholder,
director, member of a board committee or officer of the Company or otherwise,
and including attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Company shall take all necessary or desirable actions within its control
(including calling special board and shareholder meetings), so that:
(i) the authorized number of directors on the Board shall be
established at five (5) directors;
<PAGE>
(ii) the following representatives shall be elected to the
Board:
(A) one representative designated by the Existing
Shareholders (the "EXISTING SHAREHOLDER DIRECTOR"), which
representative shall be designated pursuant to the first sentence of
paragraph 1A of Section 1 of Subdivision D of Article V of the
Articles of Incorporation so long as any Convertible Preferred Stock
remains outstanding or pursuant to the second sentence of paragraph 1A
of Subdivision D of Article V of the Articles of Incorporation at such
time as there is no Convertible Preferred Stock outstanding (in either
case, determined by a vote of the Existing Shareholders owning a
majority of the Shares held by all of the Existing Shareholders), with
Marc Hamon serving as the Existing Shareholder Director as of the date
hereof;
(B) three representatives designated by the Investors
(the "INVESTOR DIRECTORS"), which representatives shall be designated
pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of
the Articles of Incorporation so long as any Convertible Preferred
Stock remains outstanding or pursuant to the second sentence of
paragraph 1A of Subdivision D of Article V of the Articles of
Incorporation at such time as there is no Convertible Preferred Stock
outstanding (in either case, determined by a vote of the Investors
owning at least 66 2/3% of the Shares held by all of the Investors),
one of which (who shall initially be Walter G. Kortschak) to be
selected by Summit, one of which (who shall initially be Robert H.
Sheridan III) to be selected by NCC and one of which (who shall
initially be William B. Bunting) to be selected by Northstar so long
as such representative is reasonably acceptable to Summit; and
(C) one representative (the "OTHER DIRECTOR") mutually
designated by the Investors (determined by a vote of the Investors
owning at least 66 2/3% of the Shares held by all of the Investors)
and the Existing Shareholders (determined by a vote of the Existing
Shareholders owning a majority of the Shares held by all of the
Existing Shareholders), which representative shall be designated
pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of
the Articles of Incorporation so long as any Convertible Preferred
Stock remains outstanding or pursuant to the second sentence of
paragraph 1A of Subdivision D of Article V of the Articles of
Incorporation at such time as there is no Convertible Preferred Stock
outstanding;
(iii) for so long as any Investor shall hold any Shares, one of
the Investor Directors shall serve as Chairman of the Board having the
powers and duties of such office as set forth in the Company's bylaws, with
Walter G. Kortschak serving as Chairman of the Board as of the date hereof;
(iv) the composition of the board of directors of each of the
Company's Subsidiaries (a "SUB BOARD") shall be the same as that of the
Board (subject to the
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<PAGE>
requirements of any jurisdiction that the Sub Board include only residents
of such jurisdiction or that the Sub Board also include one or more
residents of such jurisdiction);
(v) (A) a three member Compensation Committee of the Board
shall be established and shall include the three Investor Directors and (B)
any other committees established by the Board or a Sub Board shall (to the
extent possible) be proportionately equivalent to that of the Board;
(vi) (A) the removal from the Board or a Sub Board (with or
without cause) of the Existing Shareholder Director shall be at the written
request of the Existing Shareholders (determined by a vote of the Existing
Shareholders owning a majority of the Shares held by all of the Existing
Shareholders), but only upon such written request and under no other
circumstances, (B) the removal from the Board or a Sub Board (with or
without cause) of any Investor Director shall be at the written request of
the Investor who is entitled to select such Investor Director pursuant to
subparagraph (ii)(B) above, but only upon such written request and under no
other circumstances and (C) the removal from the Board or a Sub Board (with
or without cause) of the Other Director shall be at the mutual written
request of the Investors (determined by a vote of the Investors owning at
least 66 2/3% of the Shares held by all of the Investors) and the Existing
Shareholders (determined by a vote of the Existing Shareholders owning a
majority of the Shares held by all of the Existing Shareholders), but only
upon such mutual written request and under no other circumstances; and
(vii) (A) in the event that the Existing Shareholder Director
ceases to serve as a member of the Board or a Sub Board during his or her
term of office, the resulting vacancy on the Board or a Sub Board shall be
filled by a representative designated as provided in subparagraph (ii)(A)
above, (B) in the event that any Investor Director ceases to serve as a
member of the Board or a Sub Board during his or her term of office, the
resulting vacancy on the Board or a Sub Board shall be filled by the
Investor who is entitled to select such Investor Director as provided in
subparagraph (ii)(B) above, and (C) in the event that the Other Director
ceases to serve as a member of the Board or a Sub Board during his or her
term of office, the resulting vacancy on the Board or a Sub Board shall be
filled by a representative designated as provided in subparagraph (ii)(C)
above.
(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by each director in connection with attending the meetings of the Board
or a Sub Board and any committees thereof. So long as any Investor Director,
Other Director or Existing Shareholder Director serves on the Board or a Sub
Board, the Company's Articles of Incorporation and bylaws shall provide for
indemnification and exculpation of directors to the fullest extent permitted
under applicable law.
(c) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this paragraph 1, the individual
previously holding such directorship shall be elected to such position, or if
such individual fails or declines to serve, the election of an individual to
such directorship shall be accomplished in accordance with the Company's
Articles of Incorporation and
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<PAGE>
bylaws and applicable law; PROVIDED THAT the Shareholders shall vote to remove
such individual if the party or parties which failed to designate such
directorship so direct.
(d) The right of each of Summit, NCC and Northstar to select one of
the Investor Directors under this paragraph 1 shall terminate at such time as
such Person (together with its Affiliates) shall hold less than 25% of the
Shares held by such Person immediately following the Closing, and at such time
the remaining Investor or Investors holding more than 25% of the Shares held by
such Persons immediately following the Closing shall have the right to designate
a representative(s) to fill the vacant Investor Director or Investor Directors'
positions (determined by a vote of such remaining Investors owning at least
66 2/3% of the Shares held by all such remaining Investors).
(e) The provisions of this paragraph 1 shall survive the Company's
initial Public Offering (unless terminated in connection therewith by a vote of
the Investors owning at least 66 2/3% of the Shares held by all of the
Investors) and shall remain in full force and effect thereafter until terminated
by a vote of the Investors owning at least 66 2/3% of the Shares held by all of
the Investors.
2. REPRESENTATIONS AND WARRANTIES. Each Shareholder represents and
warrants that (i) this Agreement has been duly authorized, executed and
delivered by such Shareholder and constitutes the valid and binding obligation
of such Shareholder, enforceable in accordance with its terms, and (ii) such
Shareholder has not granted and is not a party to any proxy, voting trust or
other agreement which is inconsistent with, conflicts with or violates any
provision of this Agreement. No holder of Shares shall grant any proxy or
become party to any voting trust or other agreement which is inconsistent with,
conflicts with or violates any provision of this Agreement.
3. RESTRICTIONS ON TRANSFER OF SHARES.
(a) GENERAL. No holder of Shares shall sell, transfer, assign,
pledge or otherwise dispose of (whether with or without consideration and
whether voluntarily or involuntarily or by operation of law) any interest in any
Shares (a "TRANSFER"), except pursuant to a Public Sale or an Approved Sale (an
"EXEMPT TRANSFER") or the provisions of this paragraph 3. Prior to making any
Transfer other than an Exempt Transfer, each Existing Shareholder transferring
any Shares (a "TRANSFERRING SHAREHOLDER") shall deliver a written notice (a
"SALE NOTICE") to the Company and the Shareholders other than the Transferring
Shareholder (the "OTHER SHAREHOLDERS") in order to allow the Company and the
Investors to exercise the rights granted pursuant to paragraphs 3(b) and 3(c)
below and the Existing Shareholders to exercise the rights granted pursuant to
paragraph 3(c) below. Prior to making any transfer other than an Exempt
Transfer, each Investor transferring any shares of Common Stock (a "TRANSFERRING
SHAREHOLDER") shall deliver a written notice (a "SALE NOTICE") to the Other
Shareholders in order to allow the Other Shareholders to exercise the rights
granted pursuant to paragraph 3(c) below. The Sale Notice shall disclose in
reasonable detail the identity of the prospective transferee(s), the number of
Shares to be transferred and the terms and conditions of the proposed Transfer.
In no event shall any Transfer of Shares pursuant to this paragraph 3 be made by
any Existing Shareholder for any consideration other than cash payable upon
consummation of such Transfer or in installments over time. No Shareholder
shall consummate any Transfer until
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<PAGE>
30 days after the Sale Notice has been given to the Company and the Other
Shareholders (the "ELECTION PERIOD"), unless the parties to the Transfer have
been finally determined pursuant to this paragraph 3 prior to the expiration of
such 30-day period. The date of the first to occur of such events is referred
to herein as the "AUTHORIZATION DATE."
(b) FIRST REFUSAL RIGHTS APPLICABLE TO EXISTING SHAREHOLDERS. The
Company may elect to purchase all or any portion of an Existing Shareholder's
Shares to be transferred upon the same terms and conditions as those set forth
in the Sale Notice by delivering a written notice of such election to such
Existing Shareholder and the Investors within 20 days after the Sale Notice has
been delivered to the Company. If the Company has not elected to purchase all
of such Existing Shareholder's Shares to be transferred, the Investors may elect
to purchase the remaining Shares to be transferred upon the same terms and
conditions as those set forth in the Sale Notice by delivering written notice of
such election to such Existing Shareholder within 25 days after the Sale Notice
has been given to the Investors. If more than one of the Investors elects to
purchase such Shares, the Shares to be sold shall be allocated among the
Investors pro rata according to the number of Shares owned by each such
Investor. If the Company and/or the Investors have not elected to purchase all
of such Existing Shareholder's Shares specified in the Sale Notice, such
Existing Shareholder may Transfer the Shares specified in the Sale Notice,
subject to the provisions of paragraph 3(c) below, at a price and on terms no
more favorable to the transferee(s) thereof than specified in the Sale Notice
during the 30-day period immediately following the Authorization Date. Any such
Existing Shareholder's Shares not transferred within such 30-day period shall be
subject to the provisions of this paragraph 3 upon subsequent Transfer. If the
Company or any of the Investors have elected to purchase any Shares hereunder,
the Transfer of such shares shall be consummated as soon as practical after the
delivery of the election notice(s) to the Transferring Shareholder, but in any
event within 15 days after the expiration of the Election Period. The Company
and/or the Investors may assign their rights under this paragraph 3(b) to one or
more designees.
(c) PARTICIPATION RIGHTS. If the Company and/or the Investors have
not elected to purchase all of the Shares to be transferred by an Existing
Shareholder pursuant to paragraph 3(b) above, or in the event of a Transfer of
shares of Common Stock by an Investor, each Other Shareholder may elect to
participate in the contemplated Transfer by delivering written notice to the
Transferring Shareholder and the Company within 30 days after receipt by such
Other Shareholder of the Sale Notice. If any Other Shareholder has elected to
participate in such Transfer, the Transferring Shareholder and the electing
Other Shareholder(s) shall be entitled to sell in the contemplated Transfer, at
the same price and on the same terms, a number of shares of Common Stock equal
to the product of (i) the quotient determined by dividing the percentage of
Shares owned by such Person by the aggregate percentage of Shares owned by the
Transferring Shareholder and all electing Other Shareholder(s) and (ii) the
number of shares of Common Stock to be sold in the contemplated sale.
FOR EXAMPLE, if the Sale Notice contemplated a sale of 100 shares of Common
Stock, and if the Transferring Shareholder was at such time the owner of
30% of all Shares and if one Other Shareholder elected to participate and
such Other Shareholder owned 20% of all Shares, the Transferring
Shareholder would be entitled to sell 60 shares of Common Stock
(30% DIVIDED BY 50% x 100 shares of Common Stock) and the
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<PAGE>
electing Other Shareholder would be entitled to sell 40 shares of Common
Stock (20% DIVIDED BY 50% x 100 shares of Common Stock).
The Transferring Shareholder shall use his, her or its best efforts to obtain
the agreement of the prospective transferee(s) to the participation of the Other
Shareholders in the contemplated Transfer and shall not Transfer any shares of
Common Stock to the prospective transferee(s) if such transferee(s) refuses to
allow the participation of the Other Shareholders. Each Shareholder
transferring shares of Common Stock pursuant to this paragraph 3(c) shall pay
its pro rata share (based on the number of shares of Common Stock to be sold) of
the expenses incurred by the Shareholders in connection with such Transfer and
shall be obligated to join on a pro rata basis (based on the number of shares of
Common Stock to be sold) in any indemnification or other obligations that the
Transferring Shareholder agrees to provide in connection with such Transfer
(other than any such obligations that relate specifically to a particular
Shareholder such as indemnification with respect to representations and
warranties given by a Shareholder regarding such Shareholder's title to and
ownership of shares of Common Stock).
(d) CERTAIN PERMITTED TRANSFERS. The restrictions contained in this
paragraph 3 shall not apply with respect to any Transfer of Shares by any
Shareholder (i) in the case of any Shareholder which is an individual, pursuant
to applicable laws of descent and distribution or among such Shareholder's
Family Group or (ii) in the case of an Investor, among its Affiliates or among
any of the other Investors or their Affiliates (collectively referred to herein
as "PERMITTED TRANSFEREES"); PROVIDED THAT such restrictions shall continue to
be applicable to the Shares after any such Transfer and the transferees of such
Shares shall agree in writing to be bound by the provisions of this Agreement as
a condition precedent to any such Transfer. An individual Shareholder's "FAMILY
GROUP" means such Shareholder's spouse and descendants (whether natural or
adopted) or any trust, family partnership or other entity established solely for
the benefit of such Shareholder and/or such Shareholder's spouse and/or
descendants. An Investor's "AFFILIATE" means any other Person directly or
indirectly controlling, controlled by or under common control with such Investor
and any partner or member of an Investor which is a partnership or limited
liability company. Notwithstanding the foregoing, no party hereto shall avoid
the provisions of this Agreement by making one or more transfers to one or more
Permitted Transferees and then disposing of all or any portion of such party's
interest in any such Permitted Transferee.
(e) TERMINATION OF RESTRICTIONS. The restrictions set forth in this
paragraph 3 shall continue with respect to each Share following any Transfer
thereof (other than an Exempt Transfer or a Transfer to the Company or an
Investor or its designee pursuant to paragraph 3(b) above or a Transfer pursuant
to paragraph 3(c) above); PROVIDED THAT all such restrictions shall terminate
upon the consummation of a Public Offering.
4. HOLDBACK AGREEMENT. No Shareholder shall effect any public sale
or distribution (including sales pursuant to Rule 144 or any similar provision
then in force) under the Securities Act of any Shares or of any other capital
stock or equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such stock or securities, during the seven days
prior to, and the 180-day period beginning on, the effective date of the
Company's initial public offering of its Common Stock under the Securities Act
or during the seven days prior to, and
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<PAGE>
the 90-day period beginning on the effective date of the next registered public
offering of the Company's Common Stock (except as part of such underwritten
registration), unless the underwriters managing the registration otherwise
agree. The restrictions on transfer set forth in this paragraph 4 shall
continue with respect to each Share until the date on which such Share has been
transferred in a Public Sale.
5. SALE OF THE COMPANY.
(a) If the Board and the holders of at least 66 2/3% of the Shares
held by the Investors approve a sale of all or substantially all of the
Company's assets determined on a consolidated basis or a sale or exchange of all
or substantially all of the Company's outstanding capital stock (whether by
merger, sale, recapitalization, consolidation, reorganization, combination or
otherwise) to any Person or Persons (an "APPROVED SALE"), each holder of Shares
shall vote for, consent to and raise no objections against such Approved Sale
and shall waive any dissenters' rights, appraisal rights or similar rights in
connection therewith. If the Approved Sale is structured as a sale of stock,
each holder of Shares shall agree to sell all of his, her or its Shares and
rights to acquire Shares on the terms and conditions approved by the Board and
the holders of at least 66 2/3% of the Shares held by the Investors. Each
holder of Shares shall take all necessary and desirable actions in his, her or
its capacity as a shareholder in connection with the consummation of the
Approved Sale as requested by the Company (including attendance at meetings in
person or by proxy for purposes of obtaining a quorum and execution of written
consents in lieu of meetings).
(b) The obligations of the holders of Shares with respect to an
Approved Sale are subject to the satisfaction of the following conditions:
(i) upon the consummation of the Approved Sale, all of the holders of Common
Stock shall receive the same form and amount of consideration per share of
Common Stock, or if any holders of Common Stock are given an option as to the
form and amount of consideration to be received, all holders shall be given the
same option; and (ii) in connection with the Approved Sale all holders of Shares
representing then currently exercisable rights to acquire shares of Common Stock
(including all holders of Convertible Preferred Stock) shall only be permitted
to either (A) exercise such rights (including conversion rights in the case of
the holders of Convertible Preferred Stock) prior to the consummation of the
Approved Sale and participate in such sale as holders of Common Stock or
(B) upon the consummation of the Approved Sale, receive in exchange for such
rights consideration equal to the amount determined by multiplying (1) the same
amount of consideration per share of Common Stock received by the holders of
Common Stock in connection with the Approved Sale less the exercise price (if
any) per share of Common Stock of such rights to acquire Common Stock by (2) the
number of shares of Common Stock represented by such then currently exercisable
rights and shall not be entitled to exercise their rights under paragraph 4A of
Subdivision C of Article V of the Company's Articles of Incorporation in
connection with any such Approved Sale and receive the aggregate consideration
provided for thereunder in preference to the holders of Common Stock.
(c) Each holder of Shares shall bear his, her or its pro rata share
(based upon the number of Shares held by such holder) of the costs of any
Approved Sale to the extent such costs are incurred for the benefit of all
holders of Shares and are not otherwise paid by the Company or the acquiring
party and shall be obligated to join on a pro rata basis (based on the number of
Shares
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<PAGE>
held by such holder) in any indemnification or other obligations that the
Investors holding at least [66 2/3%] of the Shares held by all of the Investors
agree to provide in connection with such Approved Sale (other than any such
obligations that relate specifically to a holder of Shares such as
indemnification with respect to representations and warranties given by a holder
regarding such holder's title to and ownership of Shares).
(d) In order to secure each Existing Shareholder's obligation to vote
his, her or its Shares and other voting securities of the Company in accordance
with the provisions of this paragraph 5, each Existing Shareholder hereby
appoints the Investor Representative as his, her or its true and lawful proxy
and attorney-in-fact, with full power of substitution, to vote all of his, her
or its Shares and other voting securities of the Company for the approval and
consummation of an Approved Sale and all such other matters as expressly
provided for in this paragraph 5. The Investor Representative may exercise the
irrevocable proxy granted to it hereunder at any time any Existing Stockholder
fails to comply with the provisions of this paragraph 5. The proxies and powers
granted by each Existing Shareholder pursuant to this paragraph 5(d) are coupled
with an interest and are given to secure the performance of each Existing
Shareholder's obligations and duties under this paragraph 5. Such proxies and
powers shall be irrevocable for so long as such Existing Shareholder holds any
Shares and shall survive the death, incompetency, disability, bankruptcy or
dissolution of such Existing Shareholder and the subsequent holders of his, her
or its Shares.
(e) The provisions of this paragraph 5 shall terminate upon the
consummation of a Public Offering.
6. FIRST REFUSAL RIGHTS APPLICABLE TO ISSUANCES OF COMMON STOCK.
(a) Except for issuances of Common Stock (a) to the Company's and any
of its Subsidiaries' employees, consultants, lenders or lessors as approved by
the Board or the Compensation Committee (including pursuant to options or other
rights to acquire Common Stock approved by the Board or the Compensation
Committee), (b) in connection with the acquisition of another company or
business or (c) pursuant to a Public Offering, if the Company authorizes the
issuance or sale of any shares of Common Stock or any securities (including debt
securities) containing options or rights to acquire any shares of Common Stock
(other than as a dividend on the outstanding shares of Common Stock) or any
securities exchangeable for or convertible into Common Stock or such securities
exchangeable for or convertible into Common Stock, the Company shall first offer
to sell to each Investor holding any Shares and to each of the Existing
Shareholders holding any Shares, a portion of such shares or securities equal to
the quotient determined by dividing (1) the number of shares of Common Stock
held by such Person (including the number of shares of Common Stock issuable
upon conversion of the Convertible Preferred Stock) by (2) the total number of
shares of Common Stock then outstanding (including the number of shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock). Each
Investor and each of the Existing Shareholders shall be entitled to purchase
such shares or securities at the most favorable price and on the most favorable
terms as such shares or securities are to be offered or sold to any other
Persons; PROVIDED THAT if all Persons entitled to purchase or receive such stock
or securities are required to also purchase other securities of the Company,
each Investor and each of the Existing Shareholders exercising their rights
pursuant to this paragraph shall also be required to
-8-
<PAGE>
purchase the same strip of securities (on the same terms and conditions) that
such other Persons are required to purchase. The purchase price for all shares
and securities offered to the Investors and the Existing Shareholders shall be
payable in cash or, to the extent otherwise consistent with the terms offered to
any other Persons, installments over time.
(b) In order to exercise its purchase rights hereunder, an Investor
or an Existing Shareholder must within 20 days after receipt of written notice
from the Company describing in reasonable detail the shares or securities being
offered, the purchase price therefor, the payment terms and such Investor's or
such Existing Shareholder's percentage allotment, deliver a written notice to
the Company describing its election hereunder. If all of the shares and
securities offered to the Investors and the Existing Shareholders are not fully
subscribed by the Investors and the Existing Shareholders, the remaining stock
and securities shall be reoffered by the Company to any of the Investors or the
Existing Shareholders purchasing such Person's full allotment upon the terms set
forth in this paragraph, except that such holders must exercise their purchase
rights within five days after receipt of such reoffer.
(c) Upon the expiration of the offering periods described above, the
Company shall be entitled to sell such shares or securities which the Investors
and the Existing Shareholders have not elected to purchase during the 60 days
following such expiration on terms and conditions no more favorable to the
purchasers thereof than those offered to the Investors and the Existing
Shareholders. Any shares or securities offered or sold by the Company after
such 60-day period must be reoffered to the Investors and the Existing
Shareholders pursuant to the terms of this paragraph 6.
(d) The rights of the Investors and the Existing Shareholders under
this paragraph 6 shall terminate upon the consummation of a Public Offering.
7. LEGEND. Each certificate evidencing Shares and each certificate
issued in exchange for or upon the Transfer of any Shares (if such shares remain
Shares after such Transfer) shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"The securities represented by this certificate are subject to a
Shareholders Agreement dated as of August 29, 1997, among the issuer of
such securities (the "COMPANY") and certain of the Company's shareholders,
as amended and modified from time to time. A copy of such Shareholders
Agreement shall be furnished without charge by the Company to the holder
hereof upon written request."
The Company shall imprint such legend on certificates evidencing Shares
outstanding as of the date hereof. The legend set forth above shall be removed
from the certificates evidencing any shares which cease to be Shares in
accordance with paragraph 9 hereof.
8. TRANSFERS; FUTURE SALES. Prior to any holder of Shares
Transferring any Shares (other than pursuant to an Exempt Transfer) to any
Person, such holder shall cause the prospective transferee to be bound by this
Agreement and to execute and deliver to the Company and the other Shareholders a
counterpart of this Agreement. Transferees of Shares held by Investors shall be
-9-
<PAGE>
deemed to be Investors hereunder. Transferees of Shares held by Existing
Shareholders (other than the Investors or their designees, who shall be deemed
to be Investors hereunder) shall be deemed to be Existing Shareholders hereunder
(except that no such transferees from the Existing Shareholders shall have the
right to participate in any sale of shares of Common Stock by the Investors
pursuant to paragraph 3(c) above). The provisions of this paragraph 8 shall
terminate upon the consummation of a Public Offering.
9. DEFINITIONS.
"ARTICLES OF INCORPORATION" means the Company's articles of
incorporation as in effect from time to time.
"CLOSING" has the meaning given to such term in the Recapitalization
Agreement.
"COMMON STOCK" means the Company's common stock, no par value per
share.
"CONVERTIBLE PREFERRED STOCK" means the Company's Class B Convertible
Preferred Stock, no par value per share.
"EVENT OF NONCOMPLIANCE" has the meaning given to such term in the
Articles of Incorporation.
"FINANCING" has the meaning given to such term in the Recapitalization
Agreement.
"INVESTOR REPRESENTATIVE" means Summit.
"NCC" means NationsBanc Capital Corp., a Texas corporation.
"NORTHSTAR" means Northstar Investors, LLC, a Delaware limited
liability company.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PUBLIC OFFERING" means any offering by the Company of its Common
Stock to the public pursuant to an effective registration statement under the
Securities Act or any comparable statement under any similar federal statute
then in force.
"PUBLIC SALE" means any sale of Shares to the public pursuant to an
offering registered under the Securities Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
Securities Act (or any similar provision then in force).
"SBA" has the meaning given to such term in the Recapitalization
Agreement.
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<PAGE>
"SBIC PURCHASER" has the meaning given to such term in the
Recapitalization Agreement.
"SBIC REGULATIONS" has the meaning given to such term in the
Recapitalization Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.
"SHARES" means (i) any Common Stock purchased or otherwise acquired or
held by any Shareholder, (ii) any Common Stock issued or issuable directly or
indirectly upon the conversion, exercise or exchange of any securities purchased
or otherwise acquired by any Shareholder which are convertible into or
exercisable or exchangeable for Common Stock (including the Convertible
Preferred Stock and any stock options granted by the Company) and (iii) any
capital stock or other equity securities issued or issuable directly or
indirectly with respect to the securities referred to in clauses (i) or (ii)
above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular securities constituting Shares hereunder,
such securities shall cease to be Shares when they have been (x) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them or (y) sold to the public through a broker,
dealer or market maker pursuant to Rule 144 (or any similar provision then in
force) under the Securities Act.
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more Subsidiaries
of that Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the limited
liability company, partnership or other similar ownership interest thereof is at
the time owned or controlled, directly or indirectly, by that Person or one or
more Subsidiaries of that Person or a combination thereof. For purposes hereof,
a Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of the limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing director, managing member or general partner of
such limited liability company, partnership, association or other business
entity.
"SUMMIT" means Summit Ventures IV, L.P., a Delaware limited
partnership.
10. FINANCIAL STATEMENTS AND OTHER INFORMATION. So long as any
Investor or Existing Shareholder holds any Shares, the Company shall deliver to
such Investor or Existing Shareholder, as the case may be:
(a) Not later than 30 days prior to the last day of each fiscal year,
capital and operating expense budgets, projections of sources and applications
of funds and profit and loss projections (prepared in accordance with generally
accepted accounting principles, consistently
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<PAGE>
applied) for the Company (and each of the Subsidiaries with which it prepares
consolidated financial statements) on a consolidated basis for each month of the
next succeeding fiscal year, all itemized in reasonable detail and prepared by
Company. Any material revisions made in such budgets or projections shall be
furnished promptly to each Investor and Existing Shareholder;
(b) As soon as available and in any event within 90 days after the
end of each fiscal year, audited financial statements of the Company (and the
Subsidiaries with which it prepares consolidated financial statements) on a
consolidated and consolidating basis, including a balance sheet as at the end of
such fiscal year, statements of income and retained earnings and a related
statement of cash flows for such fiscal year and the figures for the preceding
year, together with all notes thereto, prepared in reasonable detail and in
accordance with generally accepted accounting principles consistently applied
and accompanied by the report thereof of an independent accounting firm of
recognized national standing as may be selected by the Company, (i) stating,
among other things, that in the course of their audit, nothing has come to their
attention suggesting that a condition or event has occurred that constitutes an
Event of Noncompliance or a default or event of default under the Senior Loan
Documents (as such term is defined in the Recapitalization Agreement) and (ii)
containing no exceptions or qualifications (except for qualifications regarding
specific contingent liabilities) (or if there was such a condition or event,
specifying the same);
(c) As soon as available and in any event within 45 days after the
end of each fiscal quarter, unaudited financial statements of the Company (and
the Subsidiaries with which it prepares consolidated financial statements) on a
consolidated and consolidating basis, including a balance sheet as at the end of
the preceding fiscal quarter, statements of income and retained earnings and a
related statement of cash flows for such quarter (prepared in accordance with
generally accepted accounting principles, consistently applied), such figures
for the corresponding fiscal quarter of the preceding fiscal year and
comparisons to the budget for such fiscal quarter. Such financial statements
shall be certified by the chief financial officer of the Company to be (to his
knowledge) complete and accurate, to fairly present the financial condition of
the Company and its Subsidiaries and to be prepared in accordance with generally
accepted accounting principles, consistently applied;
(d) As soon as available in any event within 30 days after the end of
each month, monthly financial reports of the Company (and the Subsidiaries with
which it prepares consolidated financial statements) on a consolidated basis,
including a balance sheet as at the end of the preceding calendar month and
statements of income and retained earnings and a related statement of cash flows
for such month (prepared in accordance with generally accepted accounting
principles, consistently applied), such figures for the corresponding month of
the preceding fiscal year and comparisons to the budget for such month. Such
financial statements shall be certified by the chief financial officer of the
Company to be (to his knowledge) complete and accurate, to fairly present the
financial condition of the Company and its Subsidiaries and to be prepared in
accordance with generally accepted accounting principles, consistently applied;
(e) As soon as reasonably possible and in any event within 30 days
after the end of each month, a statement signed by the chief financial officer
of the Company, setting forth in
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<PAGE>
reasonable detail a consolidated report setting forth operational data
reasonably requested by each Investor;
(f) Promptly, and in no event more than ten days after receipt
thereof, copies of all audit reports, so-called "management letters" and other
communications and reports submitted to the Company or any of its Subsidiaries
by independent certified public accountants in connection with each interim or
special audit of the Company or any of its Subsidiaries made by such
accountants; and
(g) Promptly, but in any event within ten days after the Company has
knowledge thereof, (i) written notice of any actual or anticipated material
adverse change in the operations or financial condition of the Company or any of
its Subsidiaries, and (ii) copies of any report of any Person with respect to
the condition of the Company or any Subsidiary citing any material adverse
condition at the Company or such Subsidiary.
11. SBIC REGULATORY PROVISIONS.
(a) NUMBER OF STOCKHOLDERS. As long as the SBIC Purchaser holds any
Class A Redeemable Preferred Stock of the Company or any Shares, the Company
shall notify the SBIC Purchaser (i) at least 15 days prior to taking any action
after which the number of record holders of the Company's voting stock would be
increased from fewer than 50 to 50 or more, and (ii) of any other action or
occurrence after which the number of record holders of the Company's voting
stock was increased (or would increase) from fewer than 50 to 50 or more, as
soon as practicable after the Company becomes aware that such other action or
occurrence has occurred or is proposed to occur.
(b) USE OF PROCEEDS. At the same time the Company delivers its
annual audited financials hereunder and at such other times as the SBIC
Purchaser reasonable requests, the Company shall deliver to the SBIC Purchaser a
written statement certified by the Company's president or chief financial
officer describing in reasonable detail the use of the proceeds of the Financing
by the Company and its Subsidiaries. In addition to any other rights granted
hereunder, the Company shall grant the SBIC Purchaser and the SBA access to the
Company's books and records for the purpose of verifying the use of such
proceeds and verifying the certifications made by the Company in SBA Forms 480
and 652 delivered pursuant to the Recapitalization Agreement and for the purpose
of determining whether the principal business activity of the Company and its
Subsidiaries continues to constitute an eligible business activity (within the
meaning of the SBIC Regulations).
(c) ECONOMIC IMPACT INFORMATION. Promptly after the end of each
fiscal year, the Company shall deliver to the SBIC Purchaser a written
assessment of the economic impact of the SBIC Purchaser's investment in the
Company, specifying the full-time equivalent jobs created or retained in
connection with the investment, the impact of such SBIC Purchaser's Financing on
the revenues and profits of the Company and its Subsidiaries and on taxes paid
by the Company and its employees.
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<PAGE>
(d) PROHIBITED ACTIVITIES. Neither the Company nor any of its
Subsidiaries shall engage in any activities for which an SBIC is prohibited from
providing funds by the SBIC Regulations (including 13 CFR Section 107.720).
12. INSPECTION RIGHTS. The Company shall permit any representatives
designated by any Investor and any Existing Shareholder (so long as such
Investor or Existing Shareholder holds any Shares), upon reasonable notice and
during normal business hours and at such other times as any such holder may
reasonably request (and, in the Company's discretion, subject to the execution
of a satisfactory confidentiality agreement), to visit and inspect any of the
properties of the Company and its Subsidiaries and examine the corporate and
financial records of the Company and its Subsidiaries.
13. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted
Transfer of any Shares in violation of any provision of this Agreement shall be
void, and the Company shall not record such Transfer on its books or treat any
purported transferee of such Shares as the owner of such Shares for any purpose.
14. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by the Company, the Investors holding
at least 66 2/3% of the Shares then held by the Investors and the Existing
Shareholders holding a majority of the Shares then held by the Existing
Shareholders. The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
15. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this
Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
16. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
17. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Company and its successors and assigns and the Shareholders and any
subsequent holders of Shares and the respective successors and assigns of each
of them, so long as they hold Shares; PROVIDED THAT the rights of the
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<PAGE>
Existing Shareholders under paragraphs 1, 3(c), 6 and 12 above may not be
assigned without the prior written approval of the holders of at least 66 2/3%
of the Shares held by the Investors.
18. COUNTERPARTS. This Agreement may be executed in multiple
counterparts (including by means of telecopied signature pages), each of which
shall be an original and all of which taken together shall constitute one and
the same agreement.
19. REMEDIES. The parties hereto shall be entitled to enforce their
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto agree and acknowledge that money
damages would not be an adequate remedy for any breach of the provisions of this
Agreement and that the Company and any Shareholder may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief (without posting a bond or other security)
in order to enforce or prevent any violation of the provisions of this
Agreement.
20. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) to the Company at the address set forth below and to any other
recipient at the address indicated on the schedules hereto and to any subsequent
holder of Shares subject to this Agreement at such address as indicated by the
Company's records, or at such address or to the attention of such other Person
as the recipient party has specified by prior written notice to the sending
party. Notices shall be deemed to have been given hereunder when delivered
personally, five days after deposit in the U.S. mail and one day after deposit
with a reputable overnight courier service (charges prepaid). The Company's
address is:
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Attention: Chief Executive Officer
WITH A COPY TO:
(which shall not constitute notice to the Company)
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Steven E. Bochner, Esq.
21. GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of California
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.
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<PAGE>
22. BUSINESS DAYS. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is then located, the
time period shall automatically be extended to the business day immediately
following such Saturday, Sunday or legal holiday.
23. DESCRIPTIVE HEADINGS, ETC. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement. The use of the term "including" herein shall mean "including without
limitation."
24. NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question or intent or interpretation arises, this Agreement shall
be construed as it was drafted jointly by the parties hereto, and no presumption
or burden of proof shall arise favoring or disfavoring any party hereto by
virtue of the authorship of any of the provisions of this Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
NETCOM SYSTEMS, INC.
By:
---------------------------------------------------
Its:
---------------------------------------------------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum& Co. IV,
its General Partner
By:
---------------------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
---------------------------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
---------------------------------------------------
Todd A. Binkowski, its Authorized Signatory
NORTHSTAR INVESTORS, LLC
By:
---------------------------------------------------
Its:
---------------------------------------------------
[Signature Page to Shareholders Agreement]
<PAGE>
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS Spitfire LLC, its General Partner
By:
---------------------------------------------------
William B. Bunting, its Authorized Signatory
PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS
GROUP
By:
---------------------------------------------------
Its:
--------------------------------------------------
BAIN SECURITIES, INC.
By:
---------------------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
---------------------------------------------------
Its:
--------------------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
---------------------------------------------------
Its:
--------------------------------------------------
------------------------------------------------------
Steven E. Bochner
------------------------------------------------------
Nevan C. Elam
------------------------------------------------------
Todd Cleary
[Signature Page to Shareholders Agreement]
<PAGE>
------------------------------------------------------
Marc Hamon
------------------------------------------------------
Henri Hamon
------------------------------------------------------
James Jordan
------------------------------------------------------
Warren B. Phelps III
------------------------------------------------------
Jing Zhang
------------------------------------------------------
Stephane Johnson
------------------------------------------------------
Richard Bass
[Signature Page to Shareholders Agreement]
<PAGE>
Consent and Community Property Waiver
The undersigned hereby acknowledges that the undersigned has read this
Agreement and understands its contents. The undersigned is aware that this
Agreement provides for the purchase of shares of Common Stock from the
undersigned's spouse. The undersigned hereby acknowledges and agrees that the
interest of the undersigned's spouse in such Common Stock is subject to this
Agreement and any interest the undersigned may have in such Common Stock shall
be irrevocably bound by this Agreement and further that the undersigned's
community property interest, if any, shall be similarly bound by this Agreement.
The undersigned has sought legal advice with respect to such waiver and has
determined after carefully reviewing this Agreement that the undersigned will
waive such community property right.
--------------------------------------------
By: [Spouse's Name]
- ------------------------------
Witness
<PAGE>
SCHEDULE OF INVESTORS
Name and Address
- ----------------
Summit Ventures IV, L.P. WS Investment Company 97B
499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati
Palo Alto, California 94301 650 Page Mill Road
Attn: Mr. Walter G. Kortschak Palo Alto, California 94304
Attn: Steven E Bochner, Esq.
Summit Investors III, L.P.
499 Hamilton Avenue WSGR Profit Sharing Trust FBO
Palo Alto, California 94301 Steven E. Bochner
Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
NationsBanc Capital Corp. Palo Alto, California 94304
NationsBank Corporate Center Attn: Steven E Bochner, Esq.
10th Floor
100 North Tryon Steven E. Bochner
Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati
Attn: Mr. Robert H. Sheridan III 650 Page Mill Road
Palo Alto, California 94304
Northstar Investors, LLC
c/o Montgomery Securities Nevan C. Elam
600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati
San Francisco, California 94111 650 Page Mill Road
Attn: Mr. Derek Lemke Palo Alto, California 94304
Spitfire Capital Partners, L.P. Todd Cleary
c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati
600 Montgomery Street 650 Page Mill Road
San Francisco, California 94111 Palo Alto, California 94304
Attn: Mr. William B. Bunting
Peter Mooney as nominee for
the Broadview Partners Group
c/o Broadview Associates
950 Tower Lane
18th Floor
Foster City, California 94404
Attn: Mr. Stephen S. Smith
Bain Securities, Inc.
c/o Bain & Company, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attn: Mr. Leonard C. Banos
<PAGE>
With a Copy to:
- --------------
(which shall not constitute notice to the Investors)
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Ted H. Zook, Esq.
Fennebresque, Clark, Swindell & Hay
100 North Tryon Street, Suite 2900
Charlotte, North Carolina 28202-4011
Attn: John S. Chinuntdet, Esq.
<PAGE>
SCHEDULE OF EXISTING SHAREHOLDERS
Name And Address
- ----------------
Marc Hamon
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Henri Hamon
Netcom Systems Europe
4, rue de Galilee
Immeuble Le Bellevue
ZAC du Moulin a vent 78280
Guyancourt, France
James Jordan
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Warren B. Phelps III
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Jing Zhang
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Stephane Johnson
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Richard Bass
Point of View, Inc.
410 Boylston Street
5th Floor
Boston, Massachusetts 02116
With a Copy to:
- --------------
(which shall not constitute notice to the Existing Shareholders)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Steven E. Bochner, Esq.
<PAGE>
NETCOM SYSTEMS, INC.
AMENDMENT NO. 1 TO SHAREHOLDERS AGREEMENT
THIS AMENDMENT NO. 1 TO SHAREHOLDERS AGREEMENT (this "AMENDMENT") is
made and entered into as of September 25, 1997, by and among Netcom Systems,
Inc., a California corporation (the "COMPANY"), each of the Persons listed on
the SCHEDULE OF INVESTORS attached hereto (each, an "INVESTOR" and collectively,
the "INVESTORS"), each of the Persons listed on the SCHEDULE OF EXISTING
SHAREHOLDERS attached hereto (each, an "EXISTING SHAREHOLDER" and collectively,
the "EXISTING SHAREHOLDERS") and Richard Moley ("MOLEY").
WHEREAS, the Company, the Investors and the Existing Shareholders are
parties to that certain Shareholders Agreement dated as of August 29, 1997 (the
"AGREEMENT").
WHEREAS, Moley is purchasing shares of the Company's Class A
Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a
Preferred Stock Purchase Agreement, dated as of the date hereof, by and between
the Company and Moley.
WHEREAS, the Company, the Existing Shareholders and the Investors
desire to enter into this Amendment for the purposes of making Moley a party to
the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Amendment hereby agree as
follows:
1. INVESTOR. For all purposes of the Agreement (as amended by this
Amendment), the term "INVESTOR" shall include Moley.
2. NOTICES. All notices and other communications to Moley provided
for or permitted under the Agreement (as amended by this Amendment) shall be
made at the address of Moley set forth in the Company's books and records.
3. GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of California
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.
4. DESCRIPTIVE HEADINGS, ETC. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement. The use of the term "including" herein shall mean "including without
limitation."
5. FULL FORCE AND EFFECT. Except as amended hereby, the Agreement
shall remain in full force and effect.
* * * * *
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 1 to Shareholders Agreement on the day and year first above written.
NETCOM SYSTEMS, INC.
By:
---------------------------------------------------
Its:
--------------------------------------------------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum& Co. IV,
its General Partner
By:
---------------------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
---------------------------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
---------------------------------------------------
Todd A. Binkowski, its Authorized Signatory
NORTHSTAR INVESTORS, LLC
By:
---------------------------------------------------
Its:
--------------------------------------------------
[Amendment No. 1 to Shareholders Agreement]
<PAGE>
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS Spitfire LLC, its General Partner
By:
---------------------------------------------------
William B. Bunting, its Authorized Signatory
PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS
GROUP
By:
---------------------------------------------------
Its:
--------------------------------------------------
BAIN SECURITIES, INC.
By:
---------------------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
---------------------------------------------------
Its:
--------------------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
---------------------------------------------------
Its:
--------------------------------------------------
------------------------------------------------------
Steven E. Bochner
------------------------------------------------------
Nevan C. Elam
------------------------------------------------------
Todd Cleary
[Amendment No. 1 to Shareholders Agreement]
<PAGE>
------------------------------------------------------
Marc Hamon
------------------------------------------------------
Henri Hamon
------------------------------------------------------
James Jordan
------------------------------------------------------
Warren B. Phelps III
------------------------------------------------------
Jing Zhang
------------------------------------------------------
Stephane Johnson
------------------------------------------------------
Richard Bass
------------------------------------------------------
Richard Moley
[Amendment No. 1 to Shareholders Agreement
<PAGE>
SCHEDULE OF INVESTORS
Name and Address
- ----------------
Summit Ventures IV, L.P. WS Investment Company 97B
499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati
Palo Alto, California 94301 650 Page Mill Road
Attn: Mr. Walter G. Kortschak Palo Alto, California 94304
Attn: Steven E Bochner, Esq.
Summit Investors III, L.P.
499 Hamilton Avenue WSGR Profit Sharing Trust FBO
Palo Alto, California 94301 Steven E. Bochner
Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
NationsBanc Capital Corp. Palo Alto, California 94304
NationsBank Corporate Center Attn: Steven E Bochner, Esq.
10th Floor
100 North Tryon Steven E. Bochner
Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati
Attn: Mr. Robert H. Sheridan III 650 Page Mill Road
Palo Alto, California 94304
Northstar Investors, LLC
c/o Montgomery Securities Nevan C. Elam
600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati
San Francisco, California 94111 650 Page Mill Road
Attn: Mr. Derek Lemke Palo Alto, California 94304
Spitfire Capital Partners, L.P. Todd Cleary
c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati
600 Montgomery Street 650 Page Mill Road
San Francisco, California 94111 Palo Alto, California 94304
Attn: Mr. William B. Bunting
Peter Mooney as nominee for
the Broadview Partners Group
c/o Broadview Associates
950 Tower Lane
18th Floor
Foster City, California 94404
Attn: Mr. Stephen S. Smith
Bain Securities, Inc.
c/o Bain & Company, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attn: Mr. Leonard C. Banos
<PAGE>
SCHEDULE OF EXISTING SHAREHOLDERS
Name and Address
- ----------------
Marc Hamon
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Henri Hamon
Netcom Systems Europe
4, rue de Galilee
Immeuble Le Bellevue
ZAC du Moulin a vent 78280
Guyancourt, France
James Jordan
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Warren B. Phelps III
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Jing Zhang
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Stephane Johnson
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Richard Bass
Point of View, Inc.
410 Boylston Street
5th Floor
Boston, Massachusetts 02116
<PAGE>
NETCOM SYSTEMS, INC.
AMENDMENT NO. 2 TO SHAREHOLDERS AGREEMENT
THIS AMENDMENT NO. 2 TO SHAREHOLDERS AGREEMENT (this "AMENDMENT") is
made and entered into as of January 8, 1998, by and among Netcom Systems, Inc.,
a California corporation (the "COMPANY"), each of the Persons listed on the
SCHEDULE OF INVESTORS attached hereto (each, an "INVESTOR" and collectively, the
"INVESTORS"), each of the Persons listed on the SCHEDULE OF EXISTING
SHAREHOLDERS attached hereto (each, an "EXISTING SHAREHOLDER" and collectively,
the "EXISTING SHAREHOLDERS").
WHEREAS, the Company, the Investors and the Existing Shareholders are
parties to that certain Shareholders Agreement dated as of August 29, 1997, as
amended (the "AGREEMENT").
WHEREAS, The parties hereto wish to amend certain provisions of the
Agreement relating to the voting of shares of capital stock of the Company as
set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Amendment hereby agree as
follows:
1. RESTATEMENT. Section 1 of the Agreement is amended and restated
in its entirety to read as follows:
" 1. BOARD OF DIRECTORS.
(a) From and after the Closing (as defined in the Recapitalization
Agreement) and until the provisions of this paragraph 1 cease to be effective,
each holder of Shares shall vote all of his, her or its Shares which are voting
shares and any other voting securities of the Company over which such holder has
voting control and shall take all other necessary or desirable actions within
his, her or its control (whether in his, her or its capacity as a shareholder,
director, member of a board committee or officer of the Company or otherwise,
and including attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Company shall take all necessary or desirable actions within its control
(including calling special board and shareholder meetings), so that:
(i) the authorized number of directors on the Board shall be
established at six (6) directors;
(ii) the following representatives shall be elected to the
Board:
-1-
<PAGE>
(A) one representative designated by the Existing
Shareholders (the "EXISTING SHAREHOLDER DIRECTOR"), which
representative shall be designated pursuant to the first sentence of
paragraph 1A of Section 1 of Subdivision D of Article V of the
Articles of Incorporation so long as any Convertible Preferred Stock
remains outstanding or pursuant to the second sentence of paragraph 1A
of Subdivision D of Article V of the Articles of Incorporation at such
time as there is no Convertible Preferred Stock outstanding (in either
case, determined by a vote of the Existing Shareholders owning a
majority of the Shares held by all of the Existing Shareholders), with
Marc Hamon serving as the Existing Shareholder Director as of the date
hereof;
(B) three representatives designated by the Investors
(the "INVESTOR DIRECTORS"), which representatives shall be designated
pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of
the Articles of Incorporation so long as any Convertible Preferred
Stock remains outstanding or pursuant to the second sentence of
paragraph 1A of Subdivision D of Article V of the Articles of
Incorporation at such time as there is no Convertible Preferred Stock
outstanding (in either case, determined by a vote of the Investors
owning at least 66 2/3% of the Shares held by all of the Investors),
one of which (who shall initially be Walter G. Kortschak) to be
selected by Summit, one of which (who shall initially be Robert H.
Sheridan III) to be selected by NCC and one of which (who shall
initially be William B. Bunting) to be selected by Northstar so long
as such representative is reasonably acceptable to Summit; and
(C) two representatives (the "OTHER DIRECTORS")
mutually designated by the Investors (determined by a vote of the
Investors owning at least 66 2/3% of the Shares held by all of the
Investors) and the Existing Shareholders (determined by a vote of the
Existing Shareholders owning a majority of the Shares held by all of
the Existing Shareholders), which representatives shall be designated
pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of
the Articles of Incorporation so long as any Convertible Preferred
Stock remains outstanding or pursuant to the second sentence of
paragraph 1A of Subdivision D of Article V of the Articles of
Incorporation at such time as there is no Convertible Preferred Stock
outstanding;
(iii) for so long as any Investor shall hold any Shares, one of
the Investor Directors shall serve as Chairman of the Board having the
powers and duties of such office as set forth in the Company's bylaws, with
Walter G. Kortschak serving as Chairman of the Board as of the date hereof;
(iv) the composition of the board of directors of each of the
Company's Subsidiaries (a "SUB BOARD") shall be the same as that of the
Board (subject to the requirements of any jurisdiction that the Sub Board
include only
-2-
<PAGE>
residents of such jurisdiction or that the Sub Board also include one or
more residents of such jurisdiction);
(v) (A) a three member Compensation Committee of the Board
shall be established and shall include the three Investor Directors and (B)
any other committees established by the Board or a Sub Board shall (to the
extent possible) be proportionately equivalent to that of the Board;
(vi) (A) the removal from the Board or a Sub Board (with or
without cause) of the Existing Shareholder Director shall be at the written
request of the Existing Shareholders (determined by a vote of the Existing
Shareholders owning a majority of the Shares held by all of the Existing
Shareholders), but only upon such written request and under no other
circumstances, (B) the removal from the Board or a Sub Board (with or
without cause) of any Investor Director shall be at the written request of
the Investor who is entitled to select such Investor Director pursuant to
subparagraph (ii)(B) above, but only upon such written request and under no
other circumstances and (C) the removal from the Board or a Sub Board (with
or without cause) of any Other Director shall be at the mutual written
request of the Investors (determined by a vote of the Investors owning at
least 66 2/3% of the Shares held by all of the Investors) and the Existing
Shareholders (determined by a vote of the Existing Shareholders owning a
majority of the Shares held by all of the Existing Shareholders), but only
upon such mutual written request and under no other circumstances; and
(vii) (A) in the event that the Existing Shareholder Director
ceases to serve as a member of the Board or a Sub Board during his or her
term of office, the resulting vacancy on the Board or a Sub Board shall be
filled by a representative designated as provided in subparagraph (ii)(A)
above, (B) in the event that any Investor Director ceases to serve as a
member of the Board or a Sub Board during his or her term of office, the
resulting vacancy on the Board or a Sub Board shall be filled by the
Investor who is entitled to select such Investor Director as provided in
subparagraph (ii)(B) above, and (C) in the event that any Other Director
ceases to serve as a member of the Board or a Sub Board during his or her
term of office, the resulting vacancy on the Board or a Sub Board shall be
filled by a representative designated as provided in subparagraph (ii)(C)
above.
(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by each director in connection with attending the meetings of the Board
or a Sub Board and any committees thereof. So long as any Investor Director,
Other Director or Existing Shareholder Director serves on the Board or a Sub
Board, the Company's Articles of Incorporation and bylaws shall provide for
indemnification and exculpation of directors to the fullest extent permitted
under applicable law.
(c) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this paragraph 1, the individual
previously holding such directorship shall be elected to such position, or if
such individual fails or declines to serve, the election
-3-
<PAGE>
of an individual to such directorship shall be accomplished in accordance with
the Company's Articles of Incorporation and bylaws and applicable law; PROVIDED
THAT the Shareholders shall vote to remove such individual if the party or
parties which failed to designate such directorship so direct.
(d) The right of each of Summit, NCC and Northstar to select one of
the Investor Directors under this paragraph 1 shall terminate at such time as
such Person (together with its Affiliates) shall hold less than 25% of the
Shares held by such Person immediately following the Closing, and at such time
the remaining Investor or Investors holding more than 25% of the Shares held by
such Persons immediately following the Closing shall have the right to designate
a representative(s) to fill the vacant Investor Director or Investor Directors'
positions (determined by a vote of such remaining Investors owning at least 66
2/3% of the Shares held by all such remaining Investors).
(e) The provisions of this paragraph 1 shall survive the Company's
initial Public Offering (unless terminated in connection therewith by a vote of
the Investors owning at least 66 2/3% of the Shares held by all of the
Investors) and shall remain in full force and effect thereafter until terminated
by a vote of the Investors owning at least 66 2/3% of the Shares held by all of
the Investors."
2. GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of California
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.
3. DESCRIPTIVE HEADINGS, ETC. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement. The use of the term "including" herein shall mean "including without
limitation."
4. FULL FORCE AND EFFECT. Except as amended hereby, the Agreement
shall remain in full force and effect.
* * * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 1 to Shareholders Agreement on the day and year first above written.
NETCOM SYSTEMS, INC.
By:
---------------------------------------------------
Its:
--------------------------------------------------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum& Co. IV,
its General Partner
By:
---------------------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By:
---------------------------------------------------
Authorized Signatory
NATIONSBANC CAPITAL CORP.
By:
---------------------------------------------------
Todd A. Binkowski, its Authorized Signatory
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS Spitfire LLC, its General Partner
By:
---------------------------------------------------
William B. Bunting, its Authorized Signatory
[Amendment No. 2 to Shareholders Agreement]
-5-
<PAGE>
PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS
GROUP
By:
-----------------------------------------------
Its:
----------------------------------------------
BAIN SECURITIES, INC.
By:
-----------------------------------------------
Leonard C. Banos, its Vice President
WS INVESTMENT COMPANY 97B
By:
-----------------------------------------------
Its:
----------------------------------------------
WSGR PROFIT SHARING TRUST FBO
STEVEN E. BOCHNER
By:
-----------------------------------------------
Its:
----------------------------------------------
ADVENT ATLANTIC AND PACIFIC III
By:
-----------------------------------------------
Its:
----------------------------------------------
CHASE VENTURE CAPITAL ASSOC., L.P.
By:
-----------------------------------------------
Its:
----------------------------------------------
[Amendment No. 2 to Shareholders Agreement]
-6-
<PAGE>
TA ADVENT VIII
By:
----------------------------------------------
Its:
----------------------------------------------
TA VENTURE INVESTORS
By:
----------------------------------------------
Its:
----------------------------------------------
-------------------------------------------------
Steven E. Bochner
-------------------------------------------------
Nevan C. Elam
-------------------------------------------------
Todd Cleary
-------------------------------------------------
Marc Hamon
-------------------------------------------------
Henri Hamon
-------------------------------------------------
James Jordan
-------------------------------------------------
Warren B. Phelps III
[Amendment No. 2 to Shareholders Agreement]
-7-
<PAGE>
-------------------------------------------------
Jing Zhang
-------------------------------------------------
Stephane Johnson
-------------------------------------------------
Richard Bass
-------------------------------------------------
Richard Moley
-------------------------------------------------
David A. Baylor
-------------------------------------------------
Richard J. Cadenasso
-------------------------------------------------
Allen Chozen
-------------------------------------------------
Lewis W. Coleman
-------------------------------------------------
David V. Crowder
-------------------------------------------------
Frank M. Dunlevy
-------------------------------------------------
Clark L. Gerhardt, Jr.
[Amendment No. 2 to Shareholders Agreement]
-8-
<PAGE>
-------------------------------------------------
Seth J. Gersch
-------------------------------------------------
Ansel M. Hall
-------------------------------------------------
John D. Hershey
-------------------------------------------------
Wilson T. Hileman, Jr.
-------------------------------------------------
Brett A. Hodess
-------------------------------------------------
Benjamin Howe
-------------------------------------------------
Murray C. Huneke
-------------------------------------------------
David M. Jacquin
-------------------------------------------------
Craig R. Johnson
-------------------------------------------------
Scott C. Kovalik
-------------------------------------------------
David S. Lehmann
[Amendment No. 2 to Shareholders Agreement]
-9-
<PAGE>
-------------------------------------------------
Mark L. Lehmann
-------------------------------------------------
Derek Lemke-von Ammon
-------------------------------------------------
Jack G. Levin
-------------------------------------------------
Robert D. Long
-------------------------------------------------
Karl L. Matthies
-------------------------------------------------
J. Sanford Miller
-------------------------------------------------
Bernard M. Notas
-------------------------------------------------
Harry K. Plant
-------------------------------------------------
Bruce G. Potter
-------------------------------------------------
David B. Readerman
-------------------------------------------------
Rand L. Rosenberg
[Amendment No. 2 to Shareholders Agreement]
-10-
<PAGE>
-------------------------------------------------
Joseph M. Schell
-------------------------------------------------
Rex Sherry
-------------------------------------------------
Peter B. Stoneberg
-------------------------------------------------
Thomas A. Thornhill, III
-------------------------------------------------
John P. Tinker
-------------------------------------------------
Otto V. Tschudi
-------------------------------------------------
Thomas W. Weisel
-------------------------------------------------
Michael L. Yagemann
[Amendment No. 2 to Shareholders Agreement]
-11-
<PAGE>
SCHEDULE OF INVESTORS
Name and Address
- ----------------
Summit Ventures IV, L.P. Summit Investors III, L.P.
499 Hamilton Avenue 499 Hamilton Avenue
Palo Alto, California 94301 Palo Alto, California 94301
Attn: Mr. Walter G. Kortschak Attn: Mr. Walter G. Kortschak
NationsBanc Capital Corp. TA Venture Investors
NationsBank Corporate Center c/o TA Associates, Inc.
10th Floor High Street Tower, Suite 2500
100 North Tryon 125 High Street
Charlotte, North Carolina 28255 Boston, MA 02110
Attn: Mr. Robert H. Sheridan III Attn: Mr. Thomas Alber
Spitfire Capital Partners, L.P. Peter Mooney as nominee for
c/o Montgomery Securities the Broadview Partners Group
600 Montgomery Street c/o Broadview Associates
San Francisco, California 94111 950 Tower Lane
Attn: Mr. William B. Bunting 18th Floor
Foster City, California 94404
Attn: Mr. Stephen S. Smith
Bain Securities, Inc. WS Investment Company 97B
c/o Bain & Company, Inc. c/o Wilson Sonsini Goodrich & Rosati
Two Copley Place 650 Page Mill Road
Boston, Massachusetts 02116 Palo Alto, California 94304
Attn: Mr. Leonard C. Banos Attn: Steven E Bochner, Esq.
WSGR Profit Sharing Trust FBO Steven E. Bochner
Steven E. Bochner c/o Wilson Sonsini Goodrich & Rosati
c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road
650 Page Mill Road Palo Alto, California 94304
Palo Alto, California 94304
Attn: Steven E Bochner, Esq.
Nevan C. Elam Todd Cleary
c/o Wilson Sonsini Goodrich & Rosati c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road 650 Page Mill Road
Palo Alto, California 94304 Palo Alto, California 94304
Richard Moley Chase Venture Capital Assoc., L.P.
19910 Robin Way 380 Madison Avenue
Saratoga, CA 95070 New York, NY 10017
Attn: Jeff Walker
-12-
<PAGE>
TA Advent VIII Advent Atlantic and Pacific III
c/o TA Associates, Inc. c/o TA Associates, Inc.
High Street Tower, Suite 2500 High Street Tower, Suite 2500
125 High Street 125 High Street
Boston, MA 02110 Boston, MA 02110
Attn: Mr. Thomas Alber Attn: Mr. Thomas Alber
David A. Baylor Richard J. Cadenasso
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Allen Chozen Lewis W. Coleman
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
TA Advent VIII Advent Atlantic and Pacific III
c/o TA Associates, Inc. c/o TA Associates, Inc.
High Street Tower, Suite 2500 High Street Tower, Suite 2500
125 High Street 125 High Street
Boston, MA 02110 Boston, MA 02110
Attn: Mr. Thomas Alber Attn: Mr. Thomas Alber
David A. Baylor Richard J. Cadenasso
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Allen Chozen Lewis W. Coleman
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
David V. Crowder Frank M. Dunlevy
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Clark L. Gerhardt, Jr. Seth J. Gersch
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Ansel M. Hall John D. Hershey
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Wilson T. Hileman, Jr. Brett A. Hodess
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Benjamin Howe Murray C. Huneke
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
David M. Jacquin Craig R. Johnson
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
-13-
<PAGE>
Scott C. Kovalik David S. Lehmann
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Mark L. Lehmann Derek Lemke-von Ammon
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Jack G. Levin Robert D. Long
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Karl L. Matthies J. Sanford Miller
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Bernard M. Notas Harry K. Plant
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Bruce G. Potter David B. Readerman
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Rand L. Rosenberg Joseph M. Schell
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Rex Sherry Peter B. Stoneberg
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Thomas A. Thornhill, III John P. Tinker
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
-14-
<PAGE>
Otto V. Tschudi Thomas W. Weisel
c/o Montgomery Securities c/o Montgomery Securities
600 Montgomery Street 600 Montgomery Street
San Francisco, California 94111 San Francisco, California 94111
Michael L. Yagemann
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
-15-
<PAGE>
SCHEDULE OF EXISTING SHAREHOLDERS
Name and Address
- ----------------
Marc Hamon
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Henri Hamon
Netcom Systems Europe
4, rue de Galilee
Immeuble Le Bellevue
ZAC du Moulin a vent 78280
Guyancourt, France
James Jordan
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Warren B. Phelps III
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Jing Zhang
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Stephane Johnson
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Richard Bass
Point of View, Inc.
410 Boylston Street
5th Floor
Boston, Massachusetts 02116
-16-
<PAGE>
Exhibit 10.9
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. Basic Provisions ("Basic Provisions")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes
only, March 28, 1996, is made by and between Nordhoff Industrial Complex, a
California General Partnership ("Lessor") and Netcom Systems, Inc., a California
corporation ("Lessee"), (collectively, the "Parties," or individually a
"Party").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known by the street address of 20500 Nordhoff Street, Chatsworth,
located in the County of Los Angeles, State of California, and generally
described as (describe briefly the nature of the property) an approximately
23,014 square foot concrete tilt-up building situated on approximately 47,045
square feet of land, zoned MR-2. CC&R's attached hereto and made a part of this
Lease by reference ("Premises"). (See Paragraph 2 for further provisions.)
1.3 TERM: Five (5) years and 0 months ("Original Term") commencing
April 15, 1996 ("Commencement Date") and ending April 14, 2001 ("Expiration
Date"). (See Paragraph 3 for further provisions.
1.4 EARLY POSSESSION: See Addendum Paragraph 49 ("Early Possession
Date"). (See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $16,800.00 per month ("Base Rent"), payable on the
first day of each month commencing See Addendum 49. (See Paragraph 4 for
further provisions.) /X/ If this box is checked, there are provisions in this
Lease for the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $16,800.00 as Base Rent for the
Base rent for first month of Lease term.
1.7 SECURITY DEPOSIT: $16,800.00 ("Security Deposit"). (See
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: Assembly, distribution and sales of computer
network test equipment and related legal uses. (See Paragraph 6 for further
provisions.)
1.9 INSURING PARTY: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
DELPHI BUSINESS PROPERTIES represents
- ---------------------------------------------------------------------
/ / Lessor exclusively ("Lessor's Broker"); /X/ both Lessor and Lessee, and
represents
- ---------------------------------------------------------------------
/ / Lessee exclusively ("Lessee's Broker"); / / both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by: N/A ("Guarantor"). (See Paragraph 37 for further
provisions.)
<PAGE>
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting
of Paragraphs 49 through 61 and Exhibits ___ all of which constitute a part of
this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning, heating,
and loading doors, if any, in the Premises, other than those constructed by
Lessee, shall in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within six
(6) months following the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during
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such period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of
the Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when
the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as aforesaid,
the period free of the obligation to pay Base Rent, if any, that Lessee would
otherwise have enjoyed shall run from the date of delivery of possession and
continue for a period equal to what Lessee would otherwise have enjoyed under
the terms hereof, but minus any days of delay caused by the acts, changes or
omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base Rent
and all other rent and charges for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of the calendar month involved. Payment of Base Rent and
other charges shall be made to Lessor at its address stated herein or to such
other persons or at such other addresses as Lessor may from time to time
designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessees assignees or
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subtenants, and by prospective assignees and subtenants of the Lessee, its
assignees and subtenants, for a modification of said permitted purpose for which
the premises may be used or occupied, so long as the same will not impair
structural integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome to the Premises
and the improvements thereon, and is otherwise permissible pursuant to this
Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days give a written notification of the same, which notice
shall include an explanation of Lessor's reasonable objections to the change in
use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of existence
use, manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action or proceeding given to, or
received from, any governmental authority or private party, or persons entering
or occupying the Premises, concerning the presence, spill, release, discharge
of, or exposure to, any Hazardous Substance or contamination in, on, or about
the Premises, including but not limited to all such documents as may be involved
in any Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend
and hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all loss of rents and/or
damages, liabilities, judgments, costs, claims, liens, expenses, penalties,
permits and attorney's and consultant's fees arising out of or involving any
Hazardous Substance or storage tank brought onto the Premises by or for Lessee
or under Lessee's control. Lessee's obligations under this Paragraph 6 shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation
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including consultant's and attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances or storage tanks, unless specifically so agreed by Lessor
in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any
time, in the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying compliance
by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited to
the installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and
destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part thereof in good
order, condition and repair, structural and non-structural (whether or not such
portion of the Premises requiring repairs, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use, the elements or
the age of such portion of the Premises), including, without limiting the
generality of the foregoing, all equipment or facilities serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrant fixtures, walls
(interior and exterior), foundations, ceilings, roofs, floors, windows, doors,
plate glass, skylights, landscaping, driveways, parking lots, fences, retaining
walls, signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take
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all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements
of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises),
2.3 (relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of, any
needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "Lessee Owned Alterations and/or Utility Installations" are defined
as Alterations and/or Utility Installations made by lessee that are not yet
owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any
Alterations or Utility Installations in, on, under or about the Premises without
Lessor's prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof), as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during the term of this Lease as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during
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the term of this Lease shall be done in a good and workmanlike manner, with good
and sufficient materials, and in compliance with all Applicable Law. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may (but without obligation to do so) condition
its consent to any requested Alteration or Utility Installation that costs
$10,000 or more upon Lessee's providing Lessor with a lien and completion bond
in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Additions made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee Owned
Alterations and Utility Installations. Unless otherwise instructed per
subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon and be surrendered by Lessee with
the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or
Lessee is the Insuring Party, Lessee shall pay for all insurance required under
this Paragraph 8 except to the extent
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of the cost attributable to liability insurance carried by Lessor in excess of
$1,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an Additional Insured - Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insure a contact" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring
Party, Lessor shall also maintain liability insurance described in
Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 PROPERLY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and to the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has
a deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the event
of an Insured Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss
of the full rental and other charges payable by Lessee to Lessor under this
Lease for one (1) year (including all real estate taxes, insurance costs, and
any scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of
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repairs or replacement of the Premises, to provide for one full year's loss of
rental revenues from the date of any such loss. Said insurance shall contain an
agreed valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Losses shall be
liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide Lessor
with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B +, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days' prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such policies,
furnish Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof, or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If
the Insuring Party shall fail to procure and maintain the insurance required to
be carried by the Insuring Party under this Paragraph 8, the other Party may,
but shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any
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obligation on Lessee's part to be performed under this Lease. The foregoing
shall include, but not be limited to, the defense or pursuit of any claim or any
action or proceeding involved therein, and whether or not (in the case of claims
made against Lessor) litigated and/or reduced to judgment, and whether well
founded or not. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the cause
of such damage or injury or the means of repairing the same is accessible or
not. Lessor shall not be liable for any damages arising from any act or neglect
of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50% or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make the
insurance proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance
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proceeds are not sufficient to effect such repair, the Insuring Party shall
promptly contribute the shortage in proceeds (except as to the deductible which
is Lessee's responsibility) as and when required to complete said repairs. In
the event, however, the shortage in proceeds was due to the fact that, by reason
of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding
that there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs (including any destruction required by
any authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and
(ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee falls to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's
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option terminate this Lease as of the expiration of said sixty (60) day period
following the occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within ten (10) days after the expiration of the
Exercise Period, notwithstanding any term or provision in the grant of option to
the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage - Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Bass Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times the
then monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to terminate
this Lease as of the date sixty (60) days following the giving of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the investigation and remediation of such Hazardous Substance
Condition totally at Lessee's expense and without reimbursement from Lessor
except to the extent of an amount equal to twelve (12) times the then monthly
Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with
the funds required of Lessee or satisfactory assurance thereof within thirty
(30) days following Lessee's said commitment. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination. If
a Hazardous Substance Condition occurs for which Lessee is not legally
responsible, there shall be abatement of Lessee's obligations under this Lease
to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed
twelve (12) months.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of
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Lessee's Security Deposit as has not been, or is not then required to be, used
by Lessor under the terms of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term
of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the right,
at Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Real Property Taxes to be paid
in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
rate, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective
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valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any
of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in
Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be
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adjusted to require that the base index be determined with reference to the
index applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new market rental bears to the Base Rent in effect
immediately prior to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default or
Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 or ten percent (10%) of the
current monthly Base Rent, whichever is greater, as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation as
may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in
Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to
require that the Security Deposit be increased to an amount equal to six (6)
times the then monthly Base Rent, and Lessor may make the actual receipt by
Lessor of the amount required to establish such Security Deposit a condition to
Lessor's consent to such transaction.
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(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment structure
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included In all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease, provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not, by
reason of this or any other assignment of such sublease to Lessor, nor by reason
of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessees shall rely upon any such statement and
request from Lessor and shall pay such rents and other charges to Lessor without
any obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" Is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" is defined as the occurrence of any one or more of the following
Defaults, and, where a grace period for cure after notice is specified herein,
the failure by Lessee to cure such Default prior to the expiration of the
applicable grace period, shall entitle Lessor to pursue the remedies set forth
in Paragraphs 13.2 and/or 13.3:
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(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recision of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11, and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The
making by lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101
or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given
to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a guarantor, (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the guarantors that existed at the
time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without
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notice), Lessor may at its option (but without obligation to do so), perform
such duty or obligation on Lessee's behalf, including but not limited to the
obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such performance
by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor.
If any check given to Lessor by Lessee shall not be honored by the bank upon
which it is drawn, Lessor, at its option, may require all future payments to be
made under this Lease by Lessee to be made only by cashier's check. In the
event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or
without further notice or demand, and without limiting Lessor in the exercise of
any right or remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at
the time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1 (b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises, or
for the giving or paying by Lessor to or for
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Lessee of any cash or other bonus, inducement or consideration for Lessee's
entering into this Lease, all of which concessions are hereinafter referred to
as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this Lease
to be performed or observed by Lessee during the term hereof as the same may be
extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined
in Paragraph 13.1, any such inducement Provision shall automatically be deemed
deleted from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an Inducement Provision shall be immediately due and payable
by Lessee to Lessor, and recoverable by Lessor as additional rent due under this
Lease, notwithstanding any subsequent cure of said Breach by Lessee. The
acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this Paragraph shall not be deemed a waiver by Lessor of the
provisions of this Paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of Base Rent,
then notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such
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condemnation, Lessor shall to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay
to said Brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate written agreement between
Lessor and said Brokers (or in the event there is no separate written agreement
between Lessor and said Brokers, the sum of $SEP AGREEMENT) for brokerage
services rendered by said Brokers to Lessor in this transaction.
15.3 Lessee and Lessor each represent and warrant to the other that
it has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.4 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party" ) shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
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19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement. or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes.
Either Party may by written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a Sunday or legal holiday, it shall be deemed received on the next business
day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
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25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device" ), now
or hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent. .
30.3 Non-Disturbance. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any options
to extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) or Broker in any such
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proceeding, action, or appeal thereon, shall be entitled to reasonable
attorney's fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "Prevailing Party" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorney's fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the Premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the "Premises, except
that Lessee may, with Lessor's prior written consent, install (but not on the
roof) such signs as are reasonably required to advertise Lessee's own business.
The installation of any sign on the Premises by or for Lessee shall be subject
to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting),
Lessor may, as a condition to considering any such request by Lessee, require
that Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the
cost Lessor will incur in considering and responding to Lessee's request.
Except as otherwise provided, any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's
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consent to any act, assignment of this Lease or subletting of the Premises by
Lessee shall not constitute an acknowledgment that no Default or Breach by
Lessee of this Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise specifically stated
in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be in
the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if
any such Guarantor fails or refuses, upon reasonable request by Lessor to give:
(a) evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has
the following meaning: (a) the right to extend the term of this Lease or to
renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first offer
to purchase other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
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(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
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46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in Interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS EASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Los Angeles, California Executed at Los Angeles, California
on March 29, 1996 on March 29, 1996
by LESSOR: by LESSEE:
NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC.,
a California General Partnership a California Corporation
By By
--------------------------------- ------------------------------------
Name Printed: Gerald L. Katell Name Printed: Marc Hamon
Title: General Partner Title: President
By By
--------------------------------- ------------------------------------
Name Printed: Name Printed:
Title: Title:
Address: 1455 Atlantic Drive Address: 21818 Lassen Street, Unit 6
Pacific Palisades, CA 90272 Chatsworth CA 91311
Tel. No. (___) 459-7200 Fax No. (___) 459-9856 Tel. No. (818) 704-5109
Fax No. (818) 709-7881
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NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071. (213) 687-8777. Fax. No. (213) 687-8616.
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEASE- NET
March 28, 1996
By and between Nordhoff Industrial Complex, a California General Partnership,
Lessor, and Netcom Systems, Inc., a California corporation, Lessee
This Addendum is attached to and made apart of the above referenced instrument,
and all references herein to the Lease shall include this Addendum.
49. COMMENCEMENT DATE. The "Commencement Date" hereunder shall be April
15, 1996, or such later date as Lessor delivers possession of the Premises to
Lessee in the condition required hereunder. Lessee shall not be entitled to
possession of the Premises prior to the Commencement Date, except upon such
terms and conditions as may hereafter be agreed to in writing between Lessor and
Lessee. Lessee shall not be required to pay Base Rent for the second and fourth
month of the Lease Term, and the Base Rent paid upon execution as set forth in
paragraph in paragraph 1.6 shall be credited to the first month of the Lease
Term. In the event the Commencement Date is a day other than the first day of a
calendar month, the Base Rent payable three months after the Commencement Date
shall be for the prorated portion of the balance of such month, and thereafter,
commencing on the first day of the next following calendar month, the full
amount of the Base Rent shall be payable on the first day of each calendar
month. A prorated Base Rent shall be payable for the last partial month of the
Lease Term. This lease shall commence on the later of April 15, 1996 or on the
date on which the Lessor completes the tenant improvements as defined in
paragraph 51 below.
50. See attached Addendum to Standard Lease-Rent Adjustments-Initial Term,
made a part hereof by reference.
51. LESSOR TENANT IMPROVEMENTS. Prior to commencement date, Lessor, at
Lessors sole cost and expense shall complete the following:
a. Paint the interior office space to match the existing paint color.
b. Replace the existing carpet with carpet of like quality and color.
In addition, Lessor shall insure that the Premises conforms to the ADA if
required. Any required corrective work shall not be required to be completed by
the commencement date, but shall be completed as expeditiously as possible.
52. LESSEE TENANT IMPROVEMENTS. Lessor shall construct the tenant
improvements as stated within this paragraph, upon submission of a plan by
Lessee. However, prior to construction Lessee shall pay to Lessor the actual
cost of these improvements plus a construction management fee which are an
actual cost to the Lessor. The work pursuant to this paragraph shall be
completed in a timely workmanlike manner, but the work pursuant to this
paragraph shall not effect the commencement date. Lessee tenant improvements
are as follows:
a. Add two (2) doors.
b. Relocate three (3) doors in three (3) offices to opposite walls.
c. Remove three (3) walls that divide three offices.
d. Close off three (3) doors.
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53. HOLDOVER RENT. If, not withstanding the provisions of the Lease,
Lessee is a holdover tenant following expiration of the Lease Term, Lessee
shall be obligated to pay during any such Holdover tenancy an amount equal to
150% of all rent that was payable hereunder during the last month of the Lease
Term.
54. OPTION TO EXTEND. Provided Lessee has not been and is not in default
of any term or condition of this Lease as of the commencement of the renewal
term, lessee shall have the one option to renew the term of the lease for one
additional five year term, on the same terms and conditions of the Lease, except
that the Base Rent shall be adjusted to the then prevailing market rental rate
for a comparable leases in the comparable areas of the West San Fernando Valley
Area. Such option shall be exercised (if at all) by Lessee giving Lessor at
least 270 days prior irrevocable written notice.
The prevailing market rental shall be determined in the following manner:
Prevailing market rental rate shall be determined taking into account all
relevant factors, including (to the extent relevant) number of months of free
rent, if any (which shall be part of the determination of the rental rate),
Lessee improvement obligations, moving allowances, and leasing commissions and
costs. The term "comparable leases" shall not include leases entered into under
special circumstances affecting the economics of the tenancies, including
following the exercise of options to lease space at other than then current
prevailing market rate, the lease of awkward or unusually shaped space or space
without windows or other usual amenities, leases entered into under conditions
where the Lessor was forced to lease the space by external legal, economic, or
other pressures not generally applicable to the market, or the sublease or space
by a sublessor not primarily in the business of leasing space. Prior to the
date which is five (5) months before the expiration of the then current term,
and assuming that Lessee has properly exercised its option to renew, Lessor
shall give Lessee notice of Lessor's proposed prevailing market rental value for
the Premises. Lessee shall give Lessor written notice within thirty (30) days
thereafter as to whether or not Lessee agrees with Lessor's proposed prevailing
market rental value. If Lessee disagrees with Lessor's proposed prevailing
market rental value, the parties shall negotiate in good faith to resolve their
differences for a period of thirty (30) days. Upon the expiration of such
thirty (30) day period, if the parties are not in agreement as to such fair
market rental value by giving written notice to the other party, such notice
containing the name of an appraiser appointed by such initiating party. Within
fifteen (15) days thereafter, the party receiving such notice shall appoint its
own appraiser and give notice thereof to the initiating party. If the second
appraiser is not appointed within such fifteen day period, then the appraiser
selected by the initiating party shall determine the fair market rental value of
the Premises, and such appraisal shall be binding upon the parties. If the
second appraiser is timely appointed, then the two appraisers shall confer and
attempt to agree on the prevailing market value. If the two appraisers are
unable to agree, but the higher appraisal is no more than ten percent (10%)
higher than the lower appraisal, then the prevailing market rental value shall
be the average of the two appraisals. If the higher appraisal is more than ten
percent (10%) greater than the lower appraisal, the two appraisers shall
together select a third appraiser who shall also determine the prevailing market
rental value. If three appraisers are ultimately appointed and any two
appraisers agree on the prevailing market rental value, the value agreed upon by
the two appraisers shall be the prevailing market rental value. If the three
appraisers all determine different prevailing market rental values, then the
prevailing market rental value shall be the average of the two closest
appraisals.
All appraisers shall be members of the MAI and shall have at least ten (10)
years' experience appraising similar property in the West San Fernando Valley
Area. Each party shall bear the cost of the appraiser appointed by such party,
and the parties shall share equally in the cost of the third appraiser, if
appointed.
If the two appraisers initially appointed are unable to agree on a third
appraiser, then either party shall have the right to apply to the presiding
judge of the Superior Court having jurisdiction over the Premises for the
appointment of a third appraiser.
The rent determined in accordance to the foregoing shall be subject to
adjustments pursuant to the attached Addendum to Standard Lease paragraph
59-Rent Adjustments - Extended Term.
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55. SUBLEASE PROFITS. Lessee shall pay to Lessor, as additional Base
Rent, fifty percent (50%) of any "profits" from any sublease of the Premises or
a portion thereof or an assignment of the Lease. For purpose of this paragraph,
"Profits" shall mean the amount by which (i) all rentals and other payments
received by Lessee during the preceding calendar month from or on behalf of
subtenants hereunder exceeds (ii) the sum of (x) all Base Rent paid hereunder
during the proceeding calendar month, plus (y) all attorney fees, brokerage
commissions, and other direct out-of-pocket payments made by Lessee to obtain
subtenants or an assignment, plus (z) the cost to Lessee of all Leasehold
improvements (this is excluding furniture, equipment and machinery) made to
obtain such subtenants or assignee, all amortized over the term of any sublease
or assignment.
56. DISPUTE RESOLUTION. The parties hereto agree that any dispute of
controversy arising out of or relating to this Lease, or to the interpretation,
performance, or breach thereof, shall be heard and decided by means of a
reference pursuant to Section 638 ET SEQ. of the Code of Civil Procedure of the
State of California. Such reference shall be made to a retired judge of the
Superior Court of the State of California (the "Referee") who shall hear such
dispute or controversy until the final determination thereof pursuant to Article
VI, Section 21, of the California Constitution, Section 638 ET SEQ. of the
California Code of Civil Procedure, and Rule 244 (a) of the California Rules of
Court. The term "Referee" as used herein is intended to refer to and include
the term "Temporary Judge" as used in the said provisions of the California
Constitution and the California Rules of Court. The Referee shall be selected
by mutual agreement of the Parties from the list of retired judges maintained by
the Superior Court of the State of California for the County of Los Angeles,
Central District. If the Parties are unable to agree upon a retired judge to
serve as the Referee, then upon petition by either Party to the presiding judge
of the Superior Court of the State of California for the County of Los Angeles,
Central District (or such other judge as the presiding judge may designate for
such purpose), such judge shall in his or her sole discretion select the
particular retired judge who shall serve as the Referee. The cost of the
Referee shall initially be divided equally between the Parties, it being
understood and agreed that, upon judgment, the prevailing Party shall be
entitled to reimbursement from the other Party of all costs of litigation,
including the cost of the Referee.
57. OPTION TO PURCHASE - RIGHT OF FIRST PRESENTATION. Before Lessor
shall, during the original term hereof, sell the Property, Lessor shall give
Lessee written notice (a "Purchase Notice") specifying a proposal for the
purchase price of the Property, the closing date of the purchase, and a list of
the responsibility for closing expenses. Lessor shall not be obligated to have
received any offer to purchase the Property at the time the Purchase Notice is
given. Lessee shall have ten (10) days following the Purchase Notice to elect
irrevocably to purchase the Property identified on the terms specified in the
Purchase Notice, which election shall be evidenced by written notice given by
Lessee to Lessor (a "Purchase Acceptance Notice"). If Lessee fails timely to
give a Purchase Acceptance Notice, Lessor shall be free to sell the Property to
any other party or parties at a price not less than the price set forth in the
Purchase Notice, for a period of 12 months following delivery of the Purchase
Notice.
58. TITLE. Lessee is entering into this Lease subject to all matters of
title of record with respect to the Premises, which specifically include, but
are not limited to, that certain instrument entitled Declaration of Protective
Covenants for Nordhoff Industrial Complex, recorded as Instrument No. 79-812910
on July 24, 1979 in the official records of Los Angeles County, California.
59. See attached Addendum to Standard Lease-Rent Adjustments-Extended
Term.
60. LESSOR LIABILITY. Notwithstanding any other provision of this Lease,
in no event shall Lessor be liable to Lessee for any consequential damages or
any damages to Lessee's business or lost profits. Furthermore, all liability of
Lessor under the Lease shall be limited to Lessor's interest in the Premises.
Lessor's interest in the Premises shall be deemed to include any proceeds of any
insurance policy held by Lessor relating to the Premises. No recourse shall be
had by Lessee for any reason to any assets of Lessor, or Lessor's partners,
other than Lessor's interest in the Premises.
61. FINANCIAL INFORMATION. If at any time during the Lease Term Lessee is
not a publicly held company, then (i) Lessee shall provide Lessor with financial
statements and information concerning Lessee in substantially the same form as
would be publicly available if Lessee were a company subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, and (ii) Lessee
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authorizes Lessor to obtain any and all information concerning the financial
condition and credit of Lessee, including credit reports, that Lessor may deem
necessary or appropriate in connection with this Lease, including all such
information as may be required by any person to whom Lessor intends to grant a
Security Device. Lessee consents to having Lessor disclose this Lease to any
person as may be necessary to obtain credit information concerning Lessee.
LESSOR: LESSEE:
NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC.
a California General Partnership a California Corporation
By: By:
------------------------------ ----------------------------------
Name Printed: Gerald L. Katell Name Printed: Marc Harmon
Date: Date:
------------------------------ ----------------------------------
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<PAGE>
RENT ADJUSTMENT(S) --- INITIAL LEASE TERM
ADDENDUM TO
STANDARD LEASE
Dated March 28, 1996
By and Between (Lessor) NORDHOFF INDUSTRIAL COMPLEX
(Lessee) NETCOM SYSTEMS, INC.
Property Address: 20500 NORDHOFF STREET, CHATSWORTH, CA 91311
Paragraph 50
A. RENT ADJUSTMENTS: INITIAL LEASE TERM
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
/X/ I. Cost of Living Adjustment(s) (COL)
(a) On (Fill in COL Adjustment Date(s): November 1, 1997; May 1,
1999; November 1, 2000 the monthly rent payable under paragraph 1.5 ("Base
Rent") of the attached Lease shall be adjusted by the change, if any, from the
Base Month specified below, in the Consumer Price Index of the Bureau of Labor
Statistics of the U.S. Department of Labor for (select one): / / CPIW (Urban
Wage Earners and Clerical Workers) or / / CPI U (All Urban Consumers), for (Fill
in Urban Area): Los Angeles - Anaheim - Riverside, All Items (1982-1984 = 100),
herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P. I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C. P.I.
of the calendar month which is two (2) months prior to (select one): X the first
---
month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or
/ / (Fill in Other "Base Month"): ___________________. The sum so calculated
shall constitute the new monthly rent hereunder, but in no event, shall any
such new monthly rent be less than the rent payable for the month immediately
preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in accordance with the then rules of
said association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
(d) Said increases shall not exceed ten (10%) percent, nor be less
than four (4%) percent, per adjustment period.
(a) On (Fill in MRV Adjustment Date(s): _______________________
________________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an
agreed upon new MRV for the specified term. If agreement cannot be reached,
then:
i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next 30 days.
Any associated costs will be split equally between the parties, or
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<PAGE>
ii) Both Lessor and Lessee shall each immediately select and pay
the appraiser or broker of their choice to establish a MRV within the next 30
days. If, for any reason, either one of the appraisals is not completed within
the next 30 days, as stipulated, then the appraisal that is completed at that
time shall automatically become the new MRV. If both appraisals are completed
and the two appraisers/brokers cannot agree on a reasonable average MRV then
they shall immediately select a third mutually acceptable appraiser/broker to
establish a third MRV within the next 30 days. The average of the two
appraisals closest.
Initials: Initials:
---------- ---------
---------- ---------
RENT ADJUSTMENT(S)
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616.
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<PAGE>
RENT ADJUSTMENT(S) --- EXTENDED LEASE TERM
ADDENDUM TO
STANDARD LEASE
DATED MARCH 28, 1996
BY AND BETWEEN (LESSOR) NORDHOFF INDUSTRIAL COMPLEX
(LESSEE) NETCOM SYSTEMS, INC.
PROPERTY ADDRESS: 20500 NORDHOFF STREET, CHATSWORTH, CA 91311
Paragraph 59
A. RENT ADJUSTMENTS: EXTENDED LEASE TERM
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
I. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): NOVEMBER 1, 2002, May
1, 2004; November 1, 2005 the monthly rent payable under paragraph 1.5 ("Base
Rent") of the attached Lease shall be adjusted by the change, if any, from
the Base Month specified below, in the Consumer Price Index of the Bureau of
Labor Statistics of the U.S. Department of Labor for (select one): /X/ CPI W
(Urban Wage Earners and Clerical Workers) or / / CPI U (All Urban Consumers),
for (Fill in Urban Area): Los Angeles - Anaheim - Riverside, All Items
(1982)-1984 = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the
C.P.I. of the calendar month which is two (2) months prior to (select one): /
/ the first month of the term of this Lease as set forth in paragraph 1.3
("Base Month") or /X/ (Fill in Other "Base Month"): May 2001. The sum so
calculated shall constitute the new monthly rent hereunder, but in no event,
shall any such new monthly rent be less than the rent payable for the month
immediately preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted
for decision to the American Arbitration Association in accordance with the
then rules of said association and the decision of the arbitrators shall be
binding upon the parties. The cost of said Arbitrators shall be paid equally
by Lessor and Lessee.
(d) Said increase shall not exceed ten (10%) percent, nor be less
than four (4%) percent, per adjustment period.
Initials: Initials:
--------- ---------
--------- ---------
RENT ADJUSTMENT(S)
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<PAGE>
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616.
-34-
<PAGE>
NORDHOFF INDUSTRIAL COMPLEX
FIRST AMENDMENT TO STANDARD INDUSTRIAL LEASE/COMMERCIAL LEASE
This First Amendment is dated May 20, 1996 and is by and between Nordhoff
Industrial Complex, a California General Partnership ("Landlord"), and Netcom
Systems, Inc., a California Corporation ("Tenant").
The following changes are made to the original lease dated March 28, 1996 (the
"Lease") between Landlord and Tenant:
1. Paragraph 7.4 (b). is deleted and replaced with the following new
paragraph:
7.4. OWNERSHIP; REMOVAL, SURRENDER; AND RESTORATION.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor. Lessee
shall, at the Lessee's sole expense, promptly repair any damage to the Premises
resulting from the removal of Lessee Owned Alterations including signage. The
building repair shall be of first class quality and workmanship. Upon removal
of signage, the building shall be repaired, sealed with a waterproofing material
and painted to match the existing color.
Except as specifically set forth by this First Amendment, the Lease shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of
the date and year first written above.
LESSOR: LESSEE:
NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC.,
a California General Partnership a California Corporation
By: By:
--------------------------------- -----------------------------------
Name Printed: Gerald L. Katell Name Printed: Marc Hamon
---------------- ----------
Date: 8/9/96 Date: 7/29/96
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<PAGE>
SECOND AMENDMENT TO LEASE
This Second Amendment to Standard Industrial/Commercial Single-Tenant Lease
- - Net (the "SECOND AMENDMENT") is entered into as of this 26th day of March,
1997 by and between Nordhoff Industrial Complex, a California general
partnership, ("LESSOR") and Netcom Systems, Inc., a California corporation
("LESSEE") with reference to the following recitals.
RECITALS:
A. On or about March 28, 1996, Lessor and Lessee entered into a Standard
Industrial/Commercial Single-Tenant Lease - Net (the "ORIGINAL LEASE") for that
certain premises located at 20500 Nordhoff Street in Chatsworth, California (the
"EXISTING PREMISES"). On or about May 20, 1996, Lessor and Lessee entered into
a "First Amendment to Standard Industrial Lease/Commercial Lease (the "FIRST
AMENDMENT"). The Original Lease and the First Amendment are hereinafter
collectively referred to as the "LEASE".
B. Lessor and Lessee wish to amend the Lease on the terms and conditions
set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. NEW PREMISES. On the Effective Date (as defined below), Lessee shall
deliver possession of the Existing Premises to Lessor and from and after the
Effective Date the "Premises" for purposes of the Lease shall mean the real
property and improvements commonly known as 20550 Nordhoff Street (for purposes
of this Second Amendment the "NEW PREMISES") and generally depicted on
Exhibit "A" attached hereto.
2. DELIVERY OF EXISTING PREMISES. On the Effective Date, Lessee shall
deliver possession of the Existing Premises to Lessor in the condition required
by Paragraph 7.4(c) of the Original Lease. Lessee acknowledges and agrees that
all of Lessee's personal property must be removed from the Existing Premises on
or before the Effective Date.
3. EXTENDED TERM. The term of the Lease is hereby extended to the date
which is five (5) years after the Effective Date. Provided, however, if the
Effective Date occurs on a date other than the first day of a calendar month,
the term of the Lease shall be from the Effective Date until the date which is
five (5) years after the first day of the calendar month immediately following
the calendar month in which the Effective Date occurs.
4. NEW BASE RENT. Prior to the Effective Date, Lessee shall continue to
pay the Base Rent and all other charges described in the Lease as if this Second
Amendment had not been entered into. From and after the Effective Date, the
Base Rent shall be determined as follows:
(a) INITIAL BASE RENT. Commencing on the Effective Date and
continuing until the date which is twenty (20) calendar months after the
Effective Date, the monthly Base Rent shall be Thirty Seven Thousand Four
Hundred Forty Dollars ($37,440) (the "NEW BASE RENT"). Provided, however, if
the Effective Date occurs on a date other than the first day of a calendar
month, the New Base Rent shall commence on the Effective Date and continue until
the date which is twenty (20) months after the first day of the calendar month
immediately following the calendar month in which the Effective Date occurs.
The first day after the last day of the twenty (20) month period referred to
above is hereinafter referred to as the "FIRST ADJUSTMENT DATE".
(b) ADJUSTMENTS TO BASE RENT DURING INITIAL TERM. On the First
Adjustment Date and on the date which is twenty (20) months after the First
Adjustment Date (hereinafter the "NEW COL ADJUSTMENT DATES"), the New Base Rent
shall be increased in accordance with the terms and conditions of the addendum
to the Original Lease entitled "Rent Adjustment(s) --- Initial Lease Term"
(hereinafter the "PRIMARY TERM RENT ADJUSTMENT ADDENDUM"). As of the Effective
Date, the "COL Adjustment Dates" described in the Primary Term Rent Adjustment
Addendum shall be
<PAGE>
deleted and the New COL Adjustment Dates shall be substituted in their place.
As of the Effective Date, the Base Month (as defined in the Primary Term Rent
Adjustment Addendum) shall be the calendar month which is two (2) months prior
to the Effective Date.
(c) ADJUSTMENTS TO BASE RENT DURING OPTION TERM. If the term of the
Lease is extended pursuant to paragraph 54 of the "Addendum to Standard
Industrial/Commercial Single-Tenant Lease - Net" (the "ADDENDUM") attached to
the Original Lease, the prevailing market Base Rent determined in accordance
with paragraph 54 for the option term shall continue to be subject to adjustment
in accordance with the addendum to the Original Lease entitled "Rent
Adjustment(s): Extended Lease Term" (hereinafter the "EXTENDED TERM RENT
ADJUSTMENT ADDENDUM"). As of the Effective Date, the "COL Adjustment Dates"
described in the Extended Term Rent Adjustment Addendum shall be deleted and the
following new COL Adjustment Dates shall be substituted in their place: the
date which is twenty (20) calendar months after the first day of the option term
and the date which is forty (40) calendar months after the first day of the
option term. As of the Effective Date, the Base Month (as defined in the
Extended Term Rent Adjustment Addendum) shall be the calendar month which is two
(2) months prior to the first day of the option term.
5. SECURITY DEPOSIT. As of the Effective Date, Lessee shall pay to
Lessor Twenty Thousand Six Hundred Forty Dollars ($20,640) and this amount shall
be added to Lessee's existing Security Deposit (as defined in Paragraph 1.7 of
the original Lease).
6. EFFECTIVE DATE.
(a) DEFINITION OF EFFECTIVE DATE. Lessor anticipates that the
Improvements will be Substantially Completed (as defined below) on or about
June 1, 1997. For purposes of this Amendment, the Effective Date shall be the
date which is two (2) days after the date on which the construction of the
Improvements (as defined in the Work Letter Agreement attached hereto) are
Substantially Complete. The Improvements shall be deemed to be "SUBSTANTIALLY
COMPLETE" on the earlier to occur of the following dates: (i) the date the
Improvements are substantially complete (except for minor "punch-list" items
that do not unreasonably interfere with Lessee's use or enjoyment of the New
Premises and except for completion of any trade fixtures, utility installations
or other improvements being installed by Lessee) or (ii) the date Lessee
commences business operations in the New Premises. If the Effective Date occurs
on a date other than the first day of a calendar month, the Base Rent due during
the calendar month in which the Effective Date occurs shall be prorated on a per
diem basis based on the Base Rent due under the Lease prior to the Effective
Date and the Base Rent due under the Lease after the Effective Date.
(b) LESSEE DELAYS. For purposes of this Second Amendment, "LESSEE
DELAYS" means any delay in the completion of the Improvements resulting from any
act or failure to act by Lessee or Lessee's employees, agents, independent
contractors, consultants and/or any other person performing or required to
perform services on behalf of Lessee. For each day that the Substantial
Completion of the Improvements is delayed due to a Lessee Delay, Lessee shall
pay to Lessor Six Hundred Eighty Eight Dollars ($688).
7. EARLY ENTRY. Lessee shall have the right to enter the New Premises
prior to the Substantial Completion of the Improvements to install phone
systems, furniture, fixtures and other equipment, and early entry for such
purposes shall not constitute the commencement of business operations by Lessee
at the New Premises. Lessee agrees that: (i) Lessee shall not materially
interfere with Lessor or Lessor's contractors completing work within the New
Premises; (ii) Lessee, together with its employees, agents and independent
contractors will be subject to and will work under the direction of Lessor's
contractor; (iii) prior to entry upon the New Premises by Lessee, Lessee agrees
to pay for and provide to Lessor certificates evidencing the existence and the
amounts of liability insurance for the New Premises; and (iv) Lessee and its
agents and contractors agree to comply with all applicable laws, regulations,
permits and other approvals required to perform its work at the New Premises.
8. IMPROVEMENTS TO PREMISES.
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<PAGE>
(a) IMPROVEMENTS PAID FOR BY LESSOR. Lessor agrees to pay, at
Lessor's sole cost and expense, for the following items:
(i) the cost of installing the exterior windows identified on
Exhibit "B" attached hereto (the "EXTERIOR WINDOWS"). The Exterior Windows
shall be of the same general type, design and quality as the existing exterior
windows at the New Premises;
(ii) the cost of installing new carpet inside the New Premises
(the "NEW CARPET"). The New Carpet shall be of a quality that is comparable to
the quality of the carpet in Lessee's Existing Premises and the color of the
carpet shall be reasonably acceptable to Lessor;
(iii) the cost of painting the interior walls of the New
Premises with paint of a quality that is comparable to the quality of the paint
in Lessee's Existing Premises;
(iv) the cost of replacing the existing air conditioning units
on the roof of the New Premises;
(v) the cost of repairing faucets, toilets or other broken
fixtures in the bathrooms presently located in the New Premises;
(vi) to the extent required by the existing City of Los Angeles
(the "CITY") ordinances relating to seismic safety, the cost of causing the
ceiling of the New Premises to comply with such laws; and
(vii) if at the time Lessee obtains a permit from the City for
the construction of the Improvements (as defined in the Work Letter Agreement
attached hereto as Exhibit "C"), the City requires that certain improvements be
made to the Premises to comply with the requirements of Title 24, fifty percent
(50%) of the cost of constructing such improvements shall be paid by Lessor and
fifty percent (50%) of the cost shall be paid by Lessee.
(b) OTHER LESSEE IMPROVEMENTS. Lessor agrees to cause the
Improvements to be constructed by a contractor selected by Lessor. Lessee shall
pay all costs of constructing the Improvements. The cost of constructing the
Improvements shall mean all costs of any type or nature incurred by Lessor to
cause the Improvements to be constructed including, but not limited to,
architectural and engineering fees, the cost of labor and materials, the cost of
insurance and permits and any construction management or similar fees paid by
Lessor to its management company. The estimated cost of constructing the
Improvements shall be paid by Lessee to Lessor in weekly progress payments (or
in longer intervals, at Lessor's discretion), based on Lessor's determination of
the amount of work completed and the monies owed to third parties involved in
the construction of the Improvements (e.g., contractors, subcontractors,
materialmen, Lessor's management company). The progress payments shall be paid
by Lessee to Lessor within five (5) days after demand by Lessor. It is the
intention of Lessor and Lessee that Lessor not be obligated to advance any cost
of constructing the Improvements and that Lessor receive all amounts payable
with respect to the construction of the Improvements prior to Lessor being
obligated to pay such amounts to third parties. It shall be a default by Lessee
under the Lease if Lessee fails to pay the monies requested by Lessor as
provided above within the required five (5) day periods.
(c) Paragraphs 51 and 52 of the Addendum shall not apply to the New
Premises.
9. REPAIRS TO NEW PREMISES. Lessor shall repair at its sole cost and
expense any latent structural defects in the New Premises. Except as otherwise
provided in this paragraph 9 and in paragraph 8 above, Lessee acknowledges that
it is accepting the New Premises in its "as is" condition without any
representation or warranty from Lessor.
10. OPTION TO PURCHASE. Paragraph 57 of the Addendum is hereby deleted in
its entirety.
11. EARTHQUAKE INSURANCE. Notwithstanding anything to the contrary
contained in the Lease (including, but not limited to, Paragraph 8.3(a) of the
Original Lease), from and after the date
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<PAGE>
of this Second Amendment, Lessee shall reimburse Lessor for the cost of any
earthquake insurance purchased by Lessor for the New Premises; provided,
however, in no event shall such reimbursement exceed Three Thousand Dollars
($3,000.00) in any one calendar year.
12. SIGNS. Lessor shall have the right to place "for sale" and/or "for
lease" signs on the Premises from and after the date of this Second Amendment.
13. PARKING. Part of the Premises is composed of a parking lot area.
Lessee shall be entitled to use up to one hundred seventy-nine (179) parking
spaces in the parking lot area. Lessor reserves the right to permit other
persons or entities to use the remaining parking spaces in the parking lot area.
14. BROKERS. Lessee and Lessor each represent and warrant to the other
that neither have had any dealings with any person, firm, broker or finder other
than Delphi Business Properties ("BROKER") in connection with the negotiation of
this Second Amendment and/or consummation of the transaction contemplated
hereby, and that no broker or other person, firm or entity other than Broker is
entitled to any commission or finder's fee in connection with this Amendment.
Lessee and Lessor hereby agree to indemnify, defend, protect and hold harmless
the other from and against liability for compensation or charges which may be
claimed by any broker, finder or other similar party (other than Broker) by
reason of any dealings or actions of the indemnifying party, including any
costs, expenses, or attorneys' fees reasonably incurred with respect thereto.
15. GENERAL. If there is a conflict between the terms and conditions of
this Second Amendment and the terms and conditions of the Lease, the terms and
conditions of this Second Amendment shall control. Except as modified by this
Second Amendment, all terms and conditions of the Lease shall remain unmodified
and in full force and effect. Unless otherwise defined herein, capitalized
terms used in this Second Amendment shall have the same meaning as capitalized
terms used in the Lease.
16. COUNTERPARTS AND FACSIMILE. This Second Amendment may be executed in
counterparts. Each counterpart shall be deemed an original, and all
counterparts shall be deemed the same instrument with the same effect as if all
parties hereto had signed the same signature page. In addition, a copy of this
Second Amendment executed by a party hereto and telecopied to the other party
shall be deemed to constitute delivery of an originally executed copy of this
Second Amendment to the other party. A facsimile signature shall be enforceable
to the same extent as an original signature.
IN WITNESS WHEREOF, the parties hereby execute this Second Amendment as of
the date first written above.
"LESSOR"
Nordhoff Industrial Complex,
a California general partnership
By:
--------------------------------------
Gerald L. Katell, General Partner
"LESSEE"
Netcom Systems, Inc.,
a California corporation
By:
--------------------------------------
Marc Hamon, President
-4-
<PAGE>
EXHIBIT "A"
New Premises
<PAGE>
EXHIBIT "B"
Exterior Windows
<PAGE>
EXHIBIT "C"
WORK LETTER AGREEMENT
This Work Letter Agreement ("AGREEMENT") is entered into by and between
Netcom Systems, Inc. ("LESSOR") and Nordhoff Industrial Complex ("LESSEE").
Concurrently with the execution of this Agreement, Lessor and Lessee have
entered into a Second Amendment to Lease (the "SECOND AMENDMENT"). In
consideration of the mutual covenants hereinafter contained, Lessor and Lessee
hereby agree as follows:
1. LESSEE IMPROVEMENT COORDINATOR. Within three (3) days after the
Second Amendment is executed by Lessor and Lessee, Lessor and Lessee shall each
designate in writing the name of one person who shall be that party's tenant
improvement representative. All communication concerning the tenant
improvements shall be directed to the appropriate party's tenant improvement
representative. Lessee shall not have the right or authority to instruct
Lessor's contractor to take any action. Any action Lessee desires Lessor's
contractor to take shall be communicated by Lessee to Lessor's tenant
improvement representative, and Lessor's tenant improvement representative shall
give the necessary instructions to the contractor.
2. PLANS AND SPECIFICATIONS.
(a) PLANS. Attached hereto as Exhibit 1 and incorporated herein by
this reference are plans and specifications (the "PLANS") which have been
approved by Lessor and Lessee. The Plans describe the improvements (the
"IMPROVEMENTS") which will be made to the Premises by Lessor. Lessor shall
construct the Improvements using Lessor's building standard materials (the
"STANDARDS"). Except as set forth in the Plans, Lessor shall not be obligated
to make any other improvements to the Premises.
3. SPECIFICATIONS FOR BUILDING STANDARD IMPROVEMENTS. Specifications and
details for the Standards are available from Lessor. No deviations shall be
permitted from the Standards.
4. CONSTRUCTION OF IMPROVEMENTS.
(a) CONSTRUCTION. Within a reasonable period following the receipt
of a building permit, Lessor shall instruct its contractor to commence
construction of the Improvements.
(b) COMPLETION. Lessor shall endeavor to cause the contractor to
substantially complete construction of the Improvements in a diligent manner,
but Lessor shall not be liable for any loss or damage as a result of delays in
construction or delivery of possession of the Premises.
5. CHANGE ORDERS. If Lessee desires to make any change in the Plans
which is reasonable and practical (which shall be conclusively determined by
Lessor), such change may only be requested by the delivery to Lessor by Lessee
of a proposed written "CHANGE ORDER" specifically setting forth the requested
change. Lessor shall have five (5) days from the receipt of the proposed Change
Order to provide Lessee with Lessor's disapproval of the proposed change stating
the reason(s) for such disapproval, or if Lessor approves the proposed change,
the following items: (i) a summary of any increase in the cost caused by such
change (the "CHANGE ORDER COST"), (ii) a statement of the number of days of any
delay caused by such proposed change (the "CHANGE ORDER DELAY"), and (iii) a
statement of the cost of the Change Order Delay (the "CHANGE ORDER DELAY
EXPENSE"), which Change Order Delay Expense shall be the product of the number
of days of delay multiplied by Six Hundred Eighty Eight Dollars ($688). Lessee
shall then have three (3) business days to approve the Change Order Cost, the
Change Order Delay and the Change Order Delay Expense. If Lessee approves these
items, Lessor shall promptly execute the Change Order and cause the appropriate
changes to the Plans to be made. If Lessee fails to respond to Lessor within
said three (3) business day period, the Change Order Cost, the Change Order
Delay and the Change Order Delay Expense shall be deemed disapproved by Lessee
and Lessor shall have no obligation to perform any work set forth in the
proposed Change Order. The Change Order Cost shall include all
<PAGE>
costs associated with the Change Order, including, without limitation,
architectural fees, engineering fees and construction costs, as conclusively
determined by Lessor. The Change Order Delay shall include all delays caused by
the Change Order, including, without limitation, all design and construction
delays, as conclusively determined by Lessor. The Change Order Cost and the
Change Order Delay Expense shall be paid by Lessee to Lessor by check within
five (5) days after the Change Order is approved by Lessee.
-2-
<PAGE>
EXHIBIT 1
PLANS
<PAGE>
Exhibit 10.11
NETCOM SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of _______
__, 1998 by and between Netcom Systems, Inc., a Delaware corporation (the
"Company"), and ______________ ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and
its related entities;
WHEREAS, in order to induce Indemnitee to continue to provide services
to the Company, the Company wishes to provide for the indemnification of, and
the advancement of expenses to, Indemnitee to the maximum extent permitted by
law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty
in obtaining liability insurance for the Company's directors, officers,
employees, agents and fiduciaries, the significant increases in the cost of
such insurance and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same
time as the availability and coverage of liability insurance has been
severely limited;
WHEREAS, the Company and Indemnitee desire to continue to have in place
the additional protection provided by an indemnification agreement and to
provide indemnification and advancement of expenses to the Indemnitee to the
maximum extent permitted by Delaware law;
WHEREAS, the Company and Indemnitee are parties to that certain
Indemnification Agreement dated June 16, 1997 (the "Prior Agreement") entered
into when the Company was a California corporation;
WHEREAS, the Company has reincorporated or expects shortly to
reincorporate in Delaware; and
WHEREAS, in view of the considerations set forth above, the Company and
Indemnitee desire to amend and restate the Prior Agreement as set forth
herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree that, effective
upon the closing of the merger between Netcom Systems, Inc., a California
corporation and Netcom Systems, Inc., a Delaware corporation, the Prior
Agreement is amended and restated in its entirety to read as set forth below.
<PAGE>
1. CERTAIN DEFINITIONS.
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock
of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing more than 50% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by
the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two thirds (2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof, or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of related transactions) all or
substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative
dispute resolution mechanism, or any hearing, inquiry or investigation that
Indemnitee in good faith believes might lead to the institution of any such
action, suit, proceeding or alternative dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other.
(c) References to the "Company" shall include, in addition to
Netcom Systems, Inc., any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger to which Netcom
Systems, Inc. (or any of its wholly owned subsidiaries) is a party which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees, agents or fiduciaries, so that
if Indemnitee is or was a director, officer, employee, agent or fiduciary of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee, agent or fiduciary
of another corporation, partnership, joint venture, employee benefit plan,
trust or other enterprise, Indemnitee shall stand in the same position under
the provisions of this Agreement
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<PAGE>
with respect to the resulting or surviving corporation as Indemnitee would
have with respect to such constituent corporation if its separate existence
had continued.
(d) "Covered Event" shall mean any event or occurrence related to
the fact that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or any subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity.
(e) "Expenses" shall mean any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating
in (including on appeal), or preparing to defend, to be a witness in or to
participate in, any action, suit, proceeding, alternative dispute resolution
mechanism, hearing, inquiry or investigation), judgments, fines, penalties
and amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), actually and
reasonably incurred, of any Claim and any federal, state, local or foreign
taxes imposed on the Indemnitee as a result of the actual or deemed receipt
of any payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant
to Section 3 of Expenses in advance of the settlement of or final judgement
in any action, suit, proceeding or alternative dispute resolution mechanism,
hearing, inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning
the rights of Indemnitee under this Agreement, or of other indemnitees under
similar indemnity agreements).
(h) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed
on Indemnitee with respect to an employee benefit plan; and references to
"serving at the request of the Company" shall include any service as a
director, officer, employee, agent or fiduciary of the Company which imposes
duties on, or involves services by, such director, officer, employee, agent
or fiduciary with respect to an employee benefit plan, its participants or
its beneficiaries; and if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have
acted in a manner "not opposed to the best interests of the Company" as
referred to in this Agreement.
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<PAGE>
(i) "Reviewing Party" shall mean, subject to the provisions of
Section 2(d), any person or body appointed by the Board of Directors in
accordance with applicable law to review the Company's obligations hereunder
and under applicable law, which may include a member or members of the
Company's Board of Directors, Independent Legal Counsel or any other person
or body not a party to the particular Claim for which Indemnitee is seeking
indemnification.
(j) "Section" refers to a section of this Agreement unless
otherwise indicated.
(k) "Voting Securities" shall mean any securities of the Company
that vote generally in the election of directors.
2. INDEMNIFICATION.
(a) INDEMNIFICATION OF EXPENSES. Subject to the provisions of
Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to
the fullest extent permitted by law if Indemnitee was or is or becomes a
party to or witness or other participant in, or is threatened to be made a
party to or witness or other participant in, any Claim (whether by reason of
or arising in part out of a Covered Event), including all interest,
assessments and other charges paid or payable in connection with or in
respect of such Expenses.
(b) REVIEW OF INDEMNIFICATION OBLIGATIONS. Notwithstanding the
foregoing, in the event any Reviewing Party shall have determined (in a
written opinion, in any case in which Independent Legal Counsel is the
Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder
under applicable law, (i) the Company shall have no further obligation under
Section 2(a) to make any payments to Indemnitee not made prior to such
determination by such Reviewing Party, and (ii) the Company shall be entitled
to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company)
for all Expenses theretofore paid in indemnifying Indemnitee; PROVIDED,
HOWEVER, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee is entitled to be indemnified hereunder under applicable law,
any determination made by any Reviewing Party that Indemnitee is not entitled
to be indemnified hereunder under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expenses
theretofore paid in indemnifying Indemnitee until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). Indemnitee's obligation to
reimburse the Company for any Expenses shall be unsecured and no interest
shall be charged thereon.
(c) INDEMNITEE RIGHTS ON UNFAVORABLE DETERMINATION; BINDING
EFFECT. If any Reviewing Party determines that Indemnitee substantively is
not entitled to be indemnified hereunder in whole or in part under applicable
law, Indemnitee shall have the right to commence litigation seeking an
initial determination by the court or challenging any such determination by
such Reviewing Party or any aspect thereof, including the legal or factual
bases therefor, and,
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subject to the provisions of Section 15, the Company hereby consents to
service of process and to appear in any such proceeding. Absent such
litigation, any determination by any Reviewing Party shall be conclusive and
binding on the Company and Indemnitee.
(d) SELECTION OF REVIEWING PARTY; CHANGE IN CONTROL. If there has
not been a Change in Control, any Reviewing Party shall be selected by the
Board of Directors, and if there has been such a Change in Control (other
than a Change in Control which has been approved by a majority of the
Company's Board of Directors who were directors immediately prior to such
Change in Control), any Reviewing Party with respect to all matters
thereafter arising concerning the rights of Indemnitee to indemnification of
Expenses under this Agreement or any other agreement or under the Company's
Certificate of Incorporation or Bylaws as now or hereafter in effect, or
under any other applicable law, if desired by Indemnitee, shall be
Independent Legal Counsel selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and Indemnitee
as to whether and to what extent Indemnitee would be entitled to be
indemnified hereunder under applicable law and the Company agrees to abide by
such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such
counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto. Notwithstanding any other provision of this
Agreement, the Company shall not be required to pay Expenses of more than one
Independent Legal Counsel in connection with all matters concerning a single
Indemnitee, and such Independent Legal Counsel shall be the Independent Legal
Counsel for any or all other Indemnitees unless (i) the Company otherwise
determines or (ii) any Indemnitee shall provide a written statement setting
forth in detail a reasonable objection to such Independent Legal Counsel
representing other Indemnitees.
(e) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. EXPENSE ADVANCES.
(a) OBLIGATION TO MAKE EXPENSE ADVANCES. Upon receipt of a
written undertaking by or on behalf of the Indemnitee to repay such amounts
if it shall ultimately be determined that the Indemnitee is not entitled to
be indemnified therefor by the Company, the Company shall make Expense
Advances to Indemnitee.
(b) FORM OF UNDERTAKING. Any written undertaking by the
Indemnitee to repay any Expense Advances hereunder shall be unsecured and no
interest shall be charged thereon.
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<PAGE>
(c) DETERMINATION OF REASONABLE EXPENSE ADVANCES. The parties
agree that for the purposes of any Expense Advance for which Indemnitee has
made written demand to the Company in accordance with this Agreement, all
Expenses included in such Expense Advance that are certified by affidavit of
Indemnitee's counsel as being reasonable shall be presumed conclusively to be
reasonable.
4. PROCEDURES FOR INDEMNIFICATION AND EXPENSE ADVANCES.
(a) TIMING OF PAYMENTS. All payments of Expenses (including
without limitation Expense Advances) by the Company to the Indemnitee
pursuant to this Agreement shall be made to the fullest extent permitted by
law as soon as practicable after written demand by Indemnitee therefor is
presented to the Company, but in no event later than forty-five (45) business
days after such written demand by Indemnitee is presented to the Company,
except in the case of Expense Advances, which shall be made no later than
twenty (20) business days after such written demand by Indemnitee is
presented to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company
notice in writing as soon as practicable of any Claim made against Indemnitee
for which indemnification will or could be sought under this Agreement.
Notice to the Company shall be directed to the Chief Executive Officer of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee). In
addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this
Agreement, the termination of any Claim by judgment, order, settlement
(whether with or without court approval) or conviction, or upon a plea of
NOLO CONTENDERE, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by this Agreement or applicable law. In addition, neither the
failure of any Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by any Reviewing Party that Indemnitee
has not met such standard of conduct or did not have such belief, prior to
the commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under this Agreement or
applicable law, shall be a defense to Indemnitee's claim or create a
presumption that Indemnitee has not met any particular standard of conduct or
did not have any particular belief. In connection with any determination by
any Reviewing Party or otherwise as to whether the Indemnitee is entitled to
be indemnified hereunder, the burden of proof shall be on the Company to
establish that Indemnitee is not so entitled.
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<PAGE>
(d) NOTICE TO INSURERS. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company
has liability insurance in effect which may cover such Claim, the Company
shall give prompt notice of the commencement of such Claim to the insurers in
accordance with the procedures set forth in the respective policies. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnitee, all amounts payable as a result
of such Claim in accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated hereunder to provide indemnification for or make any Expense
Advances with respect to the Expenses of any Claim, the Company, if
appropriate, shall be entitled to assume the defense of such Claim with
counsel approved by Indemnitee (which approval shall not be unreasonably
withheld) upon the delivery to Indemnitee of written notice of the Company's
election to do so. After delivery of such notice, approval of such counsel
by Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to Indemnitee under this Agreement for any fees or
expenses of separate counsel subsequently employed by or on behalf of
Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's separate counsel in any such
Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such
defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's separate
counsel shall be Expenses for which Indemnitee may receive indemnification or
Expense Advances hereunder.
5. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. The Company hereby agrees to indemnify the Indemnitee
to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by the other provisions of
this Agreement, the Company's Certificate of Incorporation, the Company's
Bylaws or by statute. In the event of any change after the date of this
Agreement in any applicable law, statute or rule which expands the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits afforded
by such change. In the event of any change in any applicable law, statute or
rule which narrows the right of a Delaware corporation to indemnify a member
of its board of directors or an officer, employee, agent or fiduciary, such
change, to the extent not otherwise required by such law, statute or rule to
be applied to this Agreement, shall have no effect on this Agreement or the
parties' rights and obligations hereunder except as set forth in Section
10(a) hereof.
(b) NONEXCLUSIVITY. The indemnification and the payment of
Expense Advances provided by this Agreement shall be in addition to any
rights to which Indemnitee may be entitled
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<PAGE>
under the Company's Certificate of Incorporation, its Bylaws, any other
agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise. The indemnification
and the payment of Expense Advances provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in
an indemnified capacity even though subsequent thereto Indemnitee may have
ceased to serve in such capacity.
6. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable
hereunder.
7. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however,
for all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee
acknowledge that in certain instances, federal law or applicable public
policy may prohibit the Company from indemnifying its directors, officers,
employees, agents or fiduciaries under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy
to indemnify Indemnitee.
9. LIABILITY INSURANCE. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or
fiduciaries, Indemnitee shall be covered by such policies in such a manner as
to provide Indemnitee the same rights and benefits as are provided to the
most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of
the Company but is an officer; or of the Company's key employees, agents or
fiduciaries, if Indemnitee is not an officer or director but is a key
employee, agent or fiduciary.
10. EXCEPTIONS. Notwithstanding any other provision of this Agreement,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for
Expenses resulting from acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or
applicable law; PROVIDED, HOWEVER, that notwithstanding any limitation set
forth in this Section 10(a) regarding the Company's obligation to provide
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<PAGE>
indemnification, Indemnitee shall be entitled under Section 3 to receive
Expense Advances hereunder with respect to any such Claim unless and until a
court having jurisdiction over the Claim shall have made a final judicial
determination (as to which all rights of appeal therefrom have been exhausted
or lapsed) that Indemnitee has engaged in acts, omissions or transactions for
which Indemnitee is prohibited from receiving indemnification under this
Agreement or applicable law.
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or make Expense
Advances to Indemnitee with respect to Claims initiated or brought
voluntarily by Indemnitee and not by way of defense, counterclaim or
crossclaim, except (i) with respect to actions or proceedings brought to
establish or enforce a right to indemnification under this Agreement or any
other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Covered Events, (ii) in specific cases if the Board of Directors has approved
the initiation or bringing of such Claim, or (iii) as otherwise required
under Section 145 of the Delaware General Corporation Law, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification or insurance recovery, as the case may be.
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any Expenses
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each
of the material assertions made by the Indemnitee as a basis for such action
was not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each
of the material defenses asserted by Indemnitee in such action was made in
bad faith or was frivolous.
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute; PROVIDED,
HOWEVER, that notwithstanding any limitation set forth in this Section 10(d)
regarding the Company's obligation to provide indemnification, Indemnitee
shall be entitled under Section 3 to receive Expense Advances hereunder with
respect to any such Claim unless and until a court having jurisdiction over
the Claim shall have made a final judicial determination (as to which all
rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has
violated said statute.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors,
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assigns (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or
assets of the Company), spouses, heirs and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect, and whether by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve
as a director, officer, employee, agent or fiduciary (as applicable) of the
Company or of any other enterprise at the Company's request.
13. EXPENSES INCURRED IN ACTION RELATING TO ENFORCEMENT OR
INTERPRETATION. In the event that any action is instituted by Indemnitee
under this Agreement or under any liability insurance policies maintained by
the Company to enforce or interpret any of the terms hereof or thereof,
Indemnitee shall be entitled to be indemnified for all Expenses incurred by
Indemnitee with respect to such action (including without limitation
attorneys' fees), regardless of whether Indemnitee is ultimately successful
in such action, unless as a part of such action a court having jurisdiction
over such action makes a final judicial determination (as to which all rights
of appeal therefrom have been exhausted or lapsed) that each of the material
assertions made by Indemnitee as a basis for such action was not made in good
faith or was frivolous; provided, however, that until such final judicial
determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.
In the event of an action instituted by or in the name of the Company under
this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be indemnified for all Expenses incurred by
Indemnitee in defense of such action (including without limitation costs and
expenses incurred with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action a court having
jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each
of the material defenses asserted by Indemnitee in such action was made in
bad faith or was frivolous; provided, however, that until such final judicial
determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.
14. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i)
if delivered by hand and signed for by the party addressed, on the date of
such delivery, or (ii) if mailed by domestic certified or registered mail
with postage prepaid, on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the signature page of
this Agreement, or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of
Delaware for all purposes in connection
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with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
commenced, prosecuted and continued only in the Court of Chancery of the
State of Delaware in and for New Castle County, which shall be the exclusive
and only proper forum for adjudicating such a claim.
16. SEVERABILITY. The provisions of this Agreement shall be severable
in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and
the remaining provisions shall remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the
provisions of this Agreement (including without limitation each portion of
this Agreement containing any provision held to be invalid, void or otherwise
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. CHOICE OF LAW. This Agreement, and all rights, remedies,
liabilities, powers and duties of the parties to this Agreement, shall be
governed by and construed in accordance with the laws of the State of
Delaware without regard to principles of conflicts of laws.
18. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required
and shall do all acts that may be necessary to secure such rights and to
enable the Company effectively to bring suit to enforce such rights.
19. AMENDMENT AND TERMINATION. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless it is in writing
signed by both the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed to be or shall constitute a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver.
20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
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IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement as of the date first above written.
NETCOM SYSTEMS, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Address: Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
AGREED TO AND ACCEPTED
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Exhibit 10.10
CHANGE IN CONTROL AGREEMENT
This Change in Control Agreement (the "Agreement") is made and entered
into effective as of May 6, 1998, by and between Netcom Systems, Inc., a
California corporation (the "Company") and the employee of the Company whose
name appears on the last page hereof (the "Employee").
R E C I T A L S
A. The Employee is and has been employed by the Company.
B. The Company and the Employee desire to enter into this Agreement to
provide additional financial security and benefits to the Employee and to
encourage the Employee to continue his employment with the Company.
C. Certain capitalized terms used in the Agreement are defined in
Section 3 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Employee by the Company,
the parties agree as follows:
1. EMPLOYMENT RELATIONSHIP. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as
defined under applicable law. If the Employee's employment terminates for
any reason, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement, or
as may otherwise be available in accordance with the Company's established
employee plans and policies at the time of termination.
2. SEVERANCE BENEFITS.
(a) TERMINATION AS PART OF OR FOLLOWING A CHANGE OF CONTROL.
Subject to Sections 4 and 5 below, if the Employee's employment with the
Company terminates at any time within twenty-four months after a Change of
Control, then the Employee shall be entitled to receive severance benefits as
follows:
(i) INVOLUNTARY TERMINATION. If the Employee's employment
terminates as a result of Involuntary Termination other than for Cause, the
Employee shall be entitled to receive a severance payment equal to one year
of the Employee's base compensation for the Company's fiscal year then in
effect plus Employee's bonus calculated at one hundred percent of target for
the Company's fiscal year then in effect. Any severance payments to which
the Employee is entitled pursuant to this Section 2(a)(i) shall be paid to
the Employee (or to the Employee's estate or beneficiary in the event of the
Employee's death) in a lump sum on or prior to the Employee's Termination
Date. In addition, if the
<PAGE>
Employee's employment terminates as a result of Involuntary Termination other
than for Cause, then for the one year period commencing on the Employee's
Termination Date, Employee shall continue to participate in the Company's
health and dental insurance benefit plans in accordance with the rules
established for individual participation in such plans, as such rules may be
amended from time to time.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the
Employee voluntarily resigns from the Company (other than as an Involuntary
Termination), or if the Company terminates the Employee's employment for
Cause, then the Employee shall not be entitled to receive severance or other
benefits except for those (if any) as may then be established under the
Company's then existing severance and benefits plans and policies at the time
of such resignation or termination.
(iii) DISABILITY; DEATH. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or if the
Employee's employment terminates due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
Disability or death.
(b) OPTIONS. Subject to Sections 4 and 5 below, in the event
Employee becomes entitled to severance benefits pursuant to Section 2(a)(i)
above, then the unvested portion of any stock option(s) held by the Employee
granted by the Company (or any successor in interest thereto to the extent
that such options were granted in exchange for options granted by the
Company), shall, as of Employee's Termination Date, immediately vest and
become exercisable in full, and the Employee shall have the right to exercise
such additional vested portion of such stock option(s) at such time.
3. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee
and intended to result in substantial personal enrichment of the Employee,
(ii) conviction of a felony that is demonstrably injurious to the Company,
(iii) a willful act by the Employee which constitutes gross misconduct and
which is demonstrably injurious to the Company, and (iv) continued violations
by the Employee of the Employee's obligations as an employee of the Company
that are demonstrably willful and deliberate on the Employee's part after
there has been delivered to the Employee a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties, and Employee has been
given fourteen (14) days to perform after receipt of such written demand.
(b) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a
person that directly or indirectly controls,
-2-
<PAGE>
is controlled by, or is under common control with, the Company) of the
"beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the Board of Directors of
the Company (the "Board") as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof,
or (B) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination; or
(iii) A merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or the approval by the stockholders of the Company
of a plan of complete liquidation of the Company or of an agreement for the
sale or disposition by the Company of all or substantially all the Company's
assets.
(c) DISABILITY. "Disability" shall mean that the Employee has been
unable to substantially perform his duties under this Agreement as the result
of his incapacity due to physical or mental illness for at least 26 weeks,
and such incapacity is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee's legal representative (such Agreement as to acceptability not to be
unreasonably withheld).
(d) EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(e) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the significant reduction of
the Employee's duties, authority or responsibilities relative to the
Employee's duties, authority and responsibilities as in effect immediately
prior to such reduction or the assignment to the Employee of such reduced
duties, authority or responsibilities; (ii) without the Employee's express
written consent, a substantial reduction, without good business reasons, of
the facilities and perquisites (including office space and location)
available to the Employee immediately prior to such reduction; (iii) without
the Employee's express written consent, a reduction by the Company in the
base compensation of the Employee as in effect immediately prior to such
reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits to which the Employee is entitled immediately prior to such
reduction with the result that the Employee's overall benefits package is
significantly reduced; (v) the relocation of the Employee to a facility or a
location more than 30 miles from the Employee's then present location,
without the Employee's express written consent; (vi) any purported
termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
-3-
<PAGE>
relied upon are not valid; or (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 6
below.
(f) TERMINATION DATE. "Termination Date" shall mean (i) if the
Employee's employment is terminated by the Company for Disability, thirty
(30) days after notice of termination is given to the Employee (provided that
the Employee shall not have returned to the performance of the Employee's
duties on a full-time basis during such thirty (30)-day period), (ii) if the
Employee's employment is terminated by the Company for any other reason, the
date on which the Company delivers notice of termination to the Company or
such later date, not to exceed ninety (90) days, specified in the notice of
termination, or (iii) if the Agreement is terminated by the Employee, the
date on which the Employee delivers notice of termination to the Company.
4. LIMITATION ON PAYMENTS.
(a) In the event that the severance and other benefits provided
for in this Agreement or otherwise payable to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 4
would be subject to the excise tax imposed by Section 4999 of the Code, then
the Employee's severance benefits under Section 2 shall be payable either (i)
in full, or (ii) as to such lesser amount which would result in no portion of
such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of severance benefits under this Agreement, notwithstanding
that all or some portion of such severance benefits may be taxable under
Section 4999 of the Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Employee under the terms of this
Agreement is necessary to comply with the provisions of Section 4(a), the
Employee shall be entitled to select which payments or benefits will be
reduced and the manner and method of any such reduction of such payments or
benefits (including but not limited to the number of options that would vest
under Section 2(b)) subject to reasonable limitations (including, for
example, express provisions under the Company's benefit plans) (so long as
the requirements of Section 4(a) are met). Within fifteen (15) days after
the amount of any required reduction in payments and benefits is finally
determined in accordance with the provisions of Section 4(c), the Employee
shall notify the Company in writing regarding which payments or benefits are
to be reduced. If no notification is given by the Employee, the Company will
determine which amounts to reduce. If, as a result of any reduction required
by Section 4(a), amounts previously paid to the Employee exceed the amount to
which the Employee is entitled, the Employee will promptly return the excess
amount to the Company.
(c) Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 4 shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required
by this Section 4, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and
-4-
<PAGE>
may rely on reasonable, good faith interpretations concerning the application
of Sections 280G and 4999 of the Code. The Company and the Employee shall
furnish to the Accountants such information and documents as the Accountants
may reasonably request in order to make a determination under this Section.
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 4.
5. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by
the Board, upon receipt of a written opinion of the Company's independent
public accountants, that the enforcement of any Section or subsection of this
Agreement, including, but not limited to, Section 2(b) hereof, which allows
for the acceleration of vesting of options to purchase shares of the
Company's common stock upon a termination in connection with a Change of
Control, would preclude accounting for any proposed business combination of
the Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be
accounted for as a pooling of interests, then any such Section of this
Agreement shall be null and void, but only if the absence of enforcement of
such Section would preserve the pooling treatment. For purposes of this
Section 5, the Board's determination shall require the unanimous approval of
the disinterested Board members.
6. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this Section 6(a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, devisees and legatees.
7. NOTICE.
(a) GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its Chief
Financial Officer.
-5-
<PAGE>
(b) NOTICE OF TERMINATION. Any termination by the Company for
Cause or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 7(a) of this Agreement. Such notice shall indicate
the specific termination provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
Termination Date (which shall be not more than ninety (90) days after the
giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Employee hereunder or preclude
the Employee from asserting such fact or circumstance in enforcing his rights
hereunder.
8. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the party hereto whose interests are adversely
affected thereby (provided that Employee may not sign on behalf of the
Company for such purpose). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of
the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
shall replace and supersede any prior agreement between the parties hereto
relating to the accrual of any benefits to the Employee in connection with a
change in control or organic change to the Company (other than stock option
agreements, if any) and all such agreements shall henceforth be void and of
no further force and effect.
(d) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(f) ARBITRATION. Any dispute or controversy arising out of,
relating to or in connection with this Agreement shall be settled exclusively
by binding arbitration in San Jose, California, in accordance with the
California Code of Civil Procedure section 1280 et seq., as amended,
including, but not limited to, sections 1283, 1283.05 and 1283.1, such that
the full degree of discovery permitted under the
-6-
<PAGE>
aforementioned statutes will be allowed in any dispute hereunder. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
The prevailing party shall be awarded its counsel fees and expenses,
including costs of arbitration. Punitive damages shall not be awarded.
(g) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Section 8(g)
shall be void.
(h) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(i) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a
section of this Agreement shall mean the corporation that actually employs
the Employee.
(j) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
* * * *
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: NETCOM SYSTEMS, INC.
By:
---------------------------------
Title:
-------------------------------
EMPLOYEE: -------------------------------
Name:
-------------------------------
-8-
<PAGE>
Exhibit 21.1
The Company has the following wholly owned subsidiaries:
Netcom Systems Europe S.A.R.L., a company organized under the laws of France.
Netcom (Barbados) Limited
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
June 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES F-3 AND F-4 IN THE COMPANY'S
FORM S-1 REGISTRATION STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,708
<SECURITIES> 0
<RECEIVABLES> 9,858
<ALLOWANCES> 350
<INVENTORY> 2,885
<CURRENT-ASSETS> 31,880
<PP&E> 2,089
<DEPRECIATION> 405
<TOTAL-ASSETS> 34,129
<CURRENT-LIABILITIES> 8,113
<BONDS> 47,500
49,520
48,518
<COMMON> 5
<OTHER-SE> (119,527)
<TOTAL-LIABILITY-AND-EQUITY> 34,129
<SALES> 56,273
<TOTAL-REVENUES> 56,273
<CGS> 7,248
<TOTAL-COSTS> 10,692
<OTHER-EXPENSES> 69
<LOSS-PROVISION> 250
<INTEREST-EXPENSE> 1,233
<INCOME-PRETAX> 37,671
<INCOME-TAX> 14,875
<INCOME-CONTINUING> 22,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,796
<EPS-PRIMARY> 1.35
<EPS-DILUTED> .68
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES F-3 AND F-4 IN THE COMPANY'S
FORM S-1 REGISTRATION STATEMENT FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,390
<SECURITIES> 0
<RECEIVABLES> 11,010
<ALLOWANCES> 400
<INVENTORY> 3,468
<CURRENT-ASSETS> 39,997
<PP&E> 2,807
<DEPRECIATION> 550
<TOTAL-ASSETS> 42,805
<CURRENT-LIABILITIES> 11,161
<BONDS> 47,500
50,255
48,518
<COMMON> 5
<OTHER-SE> (114,634)
<TOTAL-LIABILITY-AND-EQUITY> 42,805
<SALES> 18,011
<TOTAL-REVENUES> 18,011
<CGS> 3,048
<TOTAL-COSTS> 4,709
<OTHER-EXPENSES> 14
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 900
<INCOME-PRETAX> 9,572
<INCOME-TAX> 3,924
<INCOME-CONTINUING> 5,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,648
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.10
</TABLE>
