<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
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 3576 95-4312521
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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)
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 GREGORY M. GALLO
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP
PROFESSIONAL CORPORATION 400 HAMILTON AVENUE
650 PAGE MILL ROAD PALO ALTO, CA 94301
PALO ALTO, CA 94304 (650) 328-6561
(650) 493-9300
</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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES TO AGGREGATE OFFERING AMOUNT OF
BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, $0.001 par value..................... $86,250,000 $23,978
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</TABLE>
(1) Estimated solely for the purpose of computing 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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
MAY 14, 1999
SHARES
[NETCOM SYSTEMS LOGO]
COMMON STOCK
-------------------------
This is the initial public offering of Netcom Systems, Inc., and we are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share.
We have applied to list the common stock on the Nasdaq National Market under the
symbol "NTCM."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts...................................... $ $
Proceeds, before expenses, to Netcom Systems................ $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Some of our stockholders have granted the underwriters the right to purchase up
to additional shares of common stock at the initial public offering
price to cover over-allotments.
BT ALEX. BROWN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
, 1999
<PAGE> 3
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,"
"Network Service Providers," "Enterprise 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," "Network Service Providers," "Enterprise
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: "SmartMetrics is Netcom
Systems measurement methodology: the necessary measurements that determine the
Quality of Service of a network based system. Netcom Systems SmartBits products
implement SmartMetrics methodology, recreating the traffic of millions of
connected computers. Then they analyze the results to accurately measure a
network's performance. Network service providers and enterprises use SmartBits
to validate that their networks can perform to contracted service levels.
Network Equipment manufacturers use SmartBits to develop new technologies,
accelerate time-to-market and prove that their products work for their
customers. Netcom Systems works with other network experts and standards bodies
to create independent test benchmarks for the networking industry. SmartBits is
used to determine the viability of new technology by leading networking
laboratories and trade publications."
INSIDE BACK COVER OF PROSPECTUS:
Graphic depicts a rectangle rotated clockwise approximately 20 degrees bearing
the words "Tested by 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 - Aetna Life Insurance - Ameritech -
Andersen Consulting - AT&T - Bell South - British Telecom - Cable Television
Lab - Cabletron - Cisco - Deutsche Telekom - D-Link - FORE Systems - France
Telecom - GTE - Hitachi - IBM - Los Alamos Laboratories - Lucent Technologies -
Matsushita - MCI WorldCom - Microsoft - NationsBank - NEC - Nortel Networks -
NTT - Southwestern Bell - Sprint - U.S. Army - Xylan.
"SmartBits(TM)" is our trademark. All rights reserved. All other trade names and
trademarks appearing in this prospectus are the property of their respective
holders.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, as well as our Consolidated Financial Statements and Notes to
Consolidated Financial Statements appearing elsewhere in this prospectus.
The terms "Netcom Systems," "we," "us," and "our" refer to Netcom Systems,
Inc. and our subsidiaries, Netcom Systems Europe S.A.R.L. and Netcom (Barbados)
Limited.
NETCOM SYSTEMS
We are a leading provider of network performance analysis solutions for
network equipment manufacturers, network service providers and enterprises. Our
flagship platform, SmartBits, analyzes networking equipment, including
infrastructure and enterprise switches and routers, and broadband access
devices, such as cable modems and xDSL devices, to determine performance,
reliability, scalability, interoperability, quality of service and proof of
service, before deployment on the network. SmartBits allows users to analyze
network performance by emulating complex, multi-technology networks through the
generation, reception and analysis of high speed network traffic flows. We have
sold our products to over 700 accounts including leading network equipment
manufacturers such as Cisco, Lucent Technologies and Nortel Networks;
semiconductor manufacturers; network service providers, including
telecommunications carriers and Internet service providers such as AT&T, GTE,
MCI WorldCom and Sprint; and enterprises such as Fortune 1000 companies,
financial institutions, systems integrators and government entities. In 1998, we
earned revenues of $73.5 million and net income of $18.6 million.
The increase in the number of individuals, groups and businesses exchanging
information electronically through LANs, WANs and the Internet has driven the
growth of the multi-billion dollar networking industry. As a result of this
growth, communications networks are encountering a number of significant
challenges:
- Networks are becoming increasingly constrained as the number of network
users and the volume of bandwidth-intensive multimedia and voice traffic
continues to grow substantially.
- Networks are becoming increasingly complex as the number of new
technologies and services designed to improve and differentiate network
performance creates complex interoperability issues.
- Networks are becoming increasingly mission-critical as functions such as
e-commerce, on-line trading, data warehousing, enterprise resource
planning and payroll processing are routinely performed on today's
networks.
As a result of these trends, network equipment manufacturers are under
time-to-market pressure to provide cost-effective, high performance equipment
with enhanced features, while at the same time ensuring that these products meet
interoperability standards and are highly reliable under increasingly variable
traffic conditions. Service providers and enterprises are under competitive
pressure to rapidly deploy new applications and services to increase revenues
and to intelligently manage their available bandwidth and minimize network
failures in a cost-effective manner. To meet these needs, network equipment
manufacturers, network service providers and enterprises require independent,
sophisticated and industry-recognized performance analysis solutions.
Our SmartBits solution allows simultaneous performance analysis over a wide
variety of networking technologies, including Ethernet, Fast Ethernet, Gigabit
Ethernet, Frame Relay, ATM, Token Ring and Packet over SONET, as well as
broadband access devices such as cable modems and xDSL devices. The intelligent
performance analysis capabilities of SmartBits enable users to
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<PAGE> 5
effectively analyze traditional networking performance parameters relating to
individual network components, as well as more sophisticated parameters
associated with large, multi-technology networks. The modular SmartBits platform
enables users to easily add or substitute our SmartCards and SmartModules, which
are technology-specific interface cards, within a common SmartBits chassis. Our
SmartBits solution is scalable, allowing for the addition of multiple SmartCards
or SmartModules within a single chassis and linkage of multiple SmartBits
chassis for performance analysis of network equipment replicating the demands of
up to 768 simultaneous connections. Our SmartBits chassis and SmartCards and
SmartModules are used in conjunction with a versatile suite of software
applications that address the performance analysis requirements of network
equipment manufacturers, network service providers and enterprises.
Our strategy is to strengthen and expand our market leadership in
developing, manufacturing and marketing network performance analysis solutions
to become the industry standard for network performance analysis. Key elements
of our strategy include:
- capitalizing on rapid technological change by creating network
performance analysis solutions for network technologies as they emerge;
- further penetrating and expanding our network equipment manufacturer
customer base by increasing sales to multiple functional departments
within our installed base and increasing sales to manufacturers of
emerging network technologies;
- further expanding our customer base in the service provider and
enterprise markets, as well as international markets, by leveraging our
leadership in performance analysis solutions; and
- leveraging our key relationships with industry experts and test labs,
networking publications and customers to be first to market with new
industry standard performance analysis solutions.
Our principal executive offices are located at 20550 Nordhoff Street,
Chatsworth, CA 91311, and our telephone number is (818) 700-5100. We were
incorporated in California in August 1989 and reincorporated in Delaware in June
1998. Our web site can be found at www.netcomsystems.com. Information contained
on our web site does not constitute part of this prospectus.
------------------------
Except as set forth in the Consolidated Financial Statements and the Notes
thereto or as otherwise indicated, all information in this prospectus assumes:
- the filing and effectiveness upon closing of this offering of a Restated
Certificate of Incorporation authorizing a class of undesignated
preferred stock;
- the automatic conversion of all outstanding shares of our convertible
preferred stock into common stock upon the closing of the offering;
- the redemption of all outstanding shares of our redeemable preferred
stock upon the closing of, and with the proceeds of, the offering;
- no exercise of options to purchase our common stock after March 31, 1999;
and
- no exercise of the underwriters' over-allotment option.
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THE OFFERING
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<S> <C>
Common stock offered by us......................... shares
Common stock to be outstanding after the
offering......................................... shares
Use of proceeds.................................... With our proceeds, we intend to redeem
approximately $54.3 million in
redeemable preferred stock. We intend
to use the remaining proceeds to repay
indebtedness and for working capital
and other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. NTCM
</TABLE>
The number of shares of common stock to be outstanding after the offering
is based on the number of shares outstanding as of March 31, 1999. This number
excludes:
- 6,763,765 shares of common stock issuable upon exercise of outstanding
stock options;
- 2,976,300 shares that have been set aside for future issuance under our
stock option plans; and
- 150,000 shares that have been set aside for future issuance under our
employee stock purchase plan.
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary consolidated financial data in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The data in the "As Adjusted"
column below reflects the conversion of all outstanding shares of convertible
preferred stock into common stock and the redemption of all outstanding shares
of redeemable preferred stock upon the closing of the offering, the sale of
common stock offered by us in this offering and the application of the estimated
net proceeds.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $2,080 $9,053 $27,454 $56,273 $73,474 $18,011 $19,513
Gross profit........................... 1,744 7,787 24,198 49,025 57,562 14,963 14,640
Operating expenses:
Research and development............. 446 833 1,681 3,527 8,588 1,662 2,665
Sales and marketing.................. 193 844 1,466 3,713 12,956 2,271 4,087
General and administrative........... 365 1,262 1,342 3,452 3,799 776 855
Amortization of deferred
compensation....................... -- -- -- -- 60 -- 133
Income from operations................. 740 4,848 19,709 38,333 32,159 10,254 6,900
Net income............................. $ 483 $2,958 $11,811 $22,796 $18,582 $ 5,648 $ 4,041
====== ====== ======= ======= ======= ======= =======
Pro forma net income per common share.. $ 0.73 $ 0.16
======= =======
Pro forma weighted average number of
common shares outstanding............ 25,606 25,688
======= =======
Pro forma diluted net income per common
share................................ $ 0.63 $ 0.13
======= =======
Pro forma weighted average number of
common shares and common equivalent
shares outstanding................... 29,542 30,335
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 17,970 $
Working capital............................................. 31,049
Total assets................................................ 57,264
Long-term debt, net of current portion...................... 35,000
Redeemable preferred stock.................................. 53,363
Stockholders' investment.................................... (50,734)
</TABLE>
5
<PAGE> 7
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information included in this prospectus
before deciding to invest in our stock.
BECAUSE A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM SALES TO A LIMITED
NUMBER OF NETWORK EQUIPMENT MANUFACTURERS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED AND THE PRICE OF OUR STOCK COULD FALL IF WE LOSE ONE OR MORE OF THESE
CUSTOMERS.
Historically, a significant amount of our revenues has been derived from
sales to our largest customers, all of whom are network equipment manufacturers.
If we lose any significant network equipment manufacturer as a customer or one
or more of these customers reduces, delays or cancels large orders, our sales
and results of operations would suffer and the price of our stock could fall.
U.S. sales to our four largest customers collectively accounted for 36.0% of our
revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in
1998. During the three month period ended March 31, 1999, U.S. sales to our four
largest customers represented 21.6% of our revenues. In the year ended December
31, 1996, sales to Bay Networks accounted for 14.9% of our revenues and sales to
Cisco accounted for 11.8% of our revenues. In the year ended December 31, 1997,
sales to each of Bay Networks and Cisco accounted for 10.9% of our revenues.
Sales to Cisco also accounted for 12.1% of our revenues in the year ended
December 31, 1998. No customer accounted for 10% or more of our revenues in the
first three months of 1999. Our international distributors may also make
additional sales to foreign divisions or affiliates of these customers which are
not reflected in the percentages above.
We anticipate that our results of operations in any given period will
continue to depend upon sales to a small number of customers. There are only a
limited number of network equipment manufacturers, and the number of these
manufacturers may decrease as a result of consolidation in the industry. Our
dependence on large orders from a limited number of network equipment
manufacturers makes our relationships with these manufacturers critical to the
success of our business. As these relationships evolve over time, adjustments to
product specifications, forecasts and delivery timetables may be required in
response to customer demands and expectations. If we are unable to satisfy
customer requirements or manage customer relationships successfully, we may lose
sales to these customers. As a result of this customer concentration, our
revenues may be subject to substantial period-to-period fluctuations which could
have a material adverse effect on our business, results of operations and
financial condition.
OUR FUTURE PERFORMANCE IS UNPREDICTABLE AND OUR QUARTERLY RESULTS MAY FLUCTUATE
WHICH COULD RESULT IN VOLATILITY IN THE PRICE OF OUR STOCK.
Our quarterly operating results could be adversely affected by a wide
variety of factors including the following:
- changes in the demand for our products;
- the timing, composition and size of orders from our customers, including
the possibility that significant orders will be made in the last month of
each quarter;
- spending patterns and budgetary resources of our customers;
- introductions or enhancements of products, or delays in the introductions
or enhancements of products;
- flaws in our products that we cannot detect and remedy in a timely
manner;
- shortages of critical components;
- pricing pressure;
- our ability to hire and retain additional sales, technical and marketing
personnel;
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<PAGE> 8
- the publication of opinions about us or our products, or our competitors
and their products, by industry analysts or others;
- exchange rate fluctuations; and
- seasonality and changes in global or regional economic conditions.
In addition, we cannot predict whether our current or future competitors
will develop or market technologies and products that offer higher performance
or are more cost-effective than our current or future products, thereby
rendering our products obsolete. Any increase in competition in the network
performance analysis market could result in increased pressure on us to reduce
prices and could result in a reduction in our revenues or a decrease in our
gross margins, each of which could cause our net income to decrease.
Consolidation in the computer networking industry may also disrupt
procurement decisions of our customers. As a result, these customers may delay
purchasing our products during the transition period following their
consolidation with another company and our revenues during this transition
period may decline. For example, during 1998, we believe that the consolidation
of two of our network equipment manufacturer customers contributed to a slow
down in sales to these customers. Further consolidation in the networking
industry could cause our revenues in any period to decline and could materially
adversely impact our results of operations for that period. In addition, we
cannot assure you that following a consolidation of our customers, they will
resume purchasing our products in volumes comparable to those purchased prior to
the consolidation.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results should not be relied upon as an indicator of our future
performance.
IF WE FAIL TO DEVELOP NEW PRODUCTS OR ENHANCEMENTS TO OUR EXISTING PRODUCTS AT
THE RATE REQUIRED BY OUR RAPIDLY CHANGING NETWORKING MARKET, OUR BUSINESS WILL
NOT GROW AND OUR STOCK PRICE MAY FALL.
The market for network performance analysis equipment is rapidly evolving
and is subject to rapid technology and market fluctuations. The market for our
products is characterized by:
- rapidly changing technologies;
- evolving industry standards;
- frequent competitive product introductions; and
- short product life cycles.
Our success will depend substantially upon our ability to enhance our
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. We are dependent upon sales of these products to
sustain and grow our revenues. If we are unable to develop new products and
enhanced functionalities to adapt to these changes or if we cannot offset a
decline in revenues of existing products by sales of new products, our business
would be materially adversely affected. In addition, our product development
process involves a number of risks. Developing technologically advanced products
is a complex and uncertain process requiring innovation as well as the accurate
anticipation of technology and market trends. We may not be able to successfully
develop new products or we may experience delays or unexpected costs in
connection with our efforts. We budget our research and development expenditures
based on planned product introductions and enhancements. However, the rapidly
evolving nature of the networking market could cause our actual research and
development costs to differ significantly from our budget. If we fail to timely
and cost-effectively develop new products that respond to new technologies and
the needs of the networking market, we will lose revenue and our business will
suffer.
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In addition, any new or enhanced products we introduce may contain
undetected or unresolved software or hardware defects when they are first
introduced or as new versions are released. It is possible that design defects
will occur in new products or upgrades after commencement of commercial
shipments. These defects could result in a loss of sales and additional costs as
well as damage to our reputation and the loss of relationships with our
customers and industry experts.
Additionally, our introductions of new products and product enhancements
may result in declines in sales of our existing products. We must effectively
manage the transition from older products to newer generation products 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. We routinely pre-announce the release of
new products. In the past, we have experienced reductions in sales of existing
products after we have announced the release of new products. If we are unable
to effectively manage future product introductions, our sales will decrease and
our business will suffer.
INCREASING COMPETITION IN THE NETWORK PERFORMANCE ANALYSIS MARKET COULD PREVENT
US FROM SUSTAINING AND GROWING OUR REVENUES OR PREVENT US FROM SUSTAINING
PROFITABILITY.
We face competition from the following sources:
- network equipment manufacturers that develop in-house products;
- test equipment manufacturers such as Hewlett-Packard;
- start-up companies focused on network performance measurement such as
IXIA Communications and Antara;
- companies specializing in asynchronous transfer mode, or ATM, performance
testing such as Adtech and RADCOM; and
- software-based network traffic simulators such as Ganymede Software and
Optimal Networks.
We may also face competition from other companies such as Network
Associates and some of our distributors who make products complimentary to
SmartBits. Some of our competitors and potential competitors have greater
resources, name recognition and sales capabilities than we do.
The network performance analysis market became increasingly competitive in
1998 which affected our business. Any further increase in competition in the
network performance analysis market could result in increased pressure on us to
reduce prices and could result in a reduction in our revenues and/or a decrease
in our margins, each of which could materially adversely impact our results of
operations. In addition, increased competition could prevent us from increasing
our market share, or cause us to lose our existing market share, either of which
would harm our business and could impact our profitability. We cannot predict
whether our current or future competitors will develop or market technologies
and products that offer higher performance or are more cost-effective than our
current or future products. To remain competitive, we must continue to develop
products and product enhancements which offer higher performance at a lower
cost. Our failure to do so will adversely affect our revenues and results of
operations.
IF WE DO NOT EXPAND INTO NEW MARKETS, WE MAY NOT BE ABLE TO GROW OUR BUSINESS OR
INCREASE OUR PROFITABILITY.
Our future growth depends in part on our ability to increase sales of our
products to our network service provider and enterprise customers from which we
derived 18.0% of our U.S. revenues in 1998 and 22.3% of our U.S. revenues in the
first three months of 1999. To effectively compete in the network performance
analysis markets for service providers and enterprises, we must develop new
products and enhancements to existing products and expand our sales,
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<PAGE> 10
marketing and customer support capabilities, which will result in substantial
increases in operating costs. If we cannot offset these increases in costs with
an increase in our revenues, our net income may fall and our stock price may
fall. Some of our existing and potential competitors have relationships with
many service providers and enterprises. We cannot assure you that we will be
successful in developing and marketing products in these new markets. Any
failure by us to increase sales in these new markets would adversely affect our
future growth.
OUR RESULTS OF OPERATIONS MAY SUFFER IF WE ARE UNABLE TO PROPERLY FORECAST
SALES.
We typically operate with little or no backlog. In addition, the sales
cycle for our products is generally not longer than sixty days and can be as
short as a few days. Furthermore, our 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 orders
received within the quarter, which are difficult to forecast. A significant
portion of our spending, including rent and headcount, is relatively fixed in
advance based on our forecast of future sales. If sales are below expectations
in any given quarter, the adverse impact of the shortfall on our quarterly
operating results may be magnified by our inability to adjust spending to
compensate for the shortfall. In addition, we began to invest significantly in
the infrastructure of our business beginning in the fourth quarter of 1997,
including significant investments in our research and development, customer
support and sales and marketing organizations. Our investments in 1998 included
a significant increase in personnel and an upgrade in information technology
systems. We anticipate that our operating expenses will likely increase in the
future as we continue to invest in our infrastructure. In the absence of a
corresponding increase in sales of our products, this increase in expenses may
prevent us from sustaining profitability in the future, particularly on a
quarter-to-quarter basis, and may cause material fluctuations in our quarterly
operating results. If our future quarterly operating results fall below the
expectations of analysts and investors, the price of our common stock may
decline significantly.
WE MUST DEVELOP AND EXPAND INDIRECT DISTRIBUTION CHANNELS TO INCREASE OUR
INTERNATIONAL SALES.
We depend on distributors for the substantial majority of our international
sales. The loss of one or more distributors or their failure to sell our
products internationally would limit our ability to sustain and grow our
revenues. We intend to enter into additional international markets and to
continue to expand our operations outside of the United States by adding
distributors and international sales and support personnel and pursuing
additional strategic relationships which will require significant management
attention and expenditure of significant financial resources. Our failure to be
successful in these efforts could materially adversely affect our results of
operations and cause our stock price to fall.
While we have contracts with most of our distributors, these contracts do
not require a distributor to purchase our products and, in some cases, may be
terminated by a distributor at any time without penalty. We cannot assure you
that any of our distributors will continue to market our products. In addition,
we may, from time to time, terminate some of our relationships with
distributors. Any such termination could have a negative impact on our business
and result in threatened or actual litigation. Also, some of our distributors
manufacture products with functionality complementary in some respects to
SmartBits, and, therefore, are potential competitors. These distributors may, in
the future, enhance their existing products or develop new products to compete
directly with us. In such event, these distributors would likely cease to
distribute our products. Our distributors also possess confidential information
concerning our products, product release schedules, and sales, marketing and
distribution operations. Although our contracts with our distributors contain
confidentiality provisions, we cannot assure you that any distributor would not
use our confidential information in competition with us or otherwise. If
9
<PAGE> 11
our distributors fail to successfully market and sell our products for these or
any other reasons, our international sales could be reduced or fail to grow and
our revenues could decline.
INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES AND COULD
DECREASE FOR REASONS UNIQUE TO INTERNATIONAL BUSINESS.
Sales to customers outside of the United States accounted for 25.5% of our
revenues in 1998 and 29.6% of our revenues in the three-month period ended March
31, 1999. We expect that international sales will continue to account for a
significant portion of our revenues in future periods. Any reduction in
international sales, or our failure to further develop our international
distribution channels could have a material adverse effect on our business,
results of operations and financial condition.
Our international operations are subject to particular risks, including:
- currency fluctuations;
- longer receivables collection periods;
- increased exposure to bad debt write-offs;
- political and economic instability;
- difficulties in enforcing agreements through foreign legal systems;
- unexpected changes in regulatory requirements;
- import or export licensing requirements;
- reduced protection of our intellectual property rights in some countries;
and
- local holidays and customary vacation times, which cause customers in
some markets to reduce their business activities.
In addition, if the export or import of our products is prohibited by the
laws of the United States or any foreign country in which we do business, or
uncertainty about such laws limits our ability to market our products
internationally, we could lose a substantial portion of our international sales.
Further, our international sales are primarily denominated in U.S. dollars. An
increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive on a price basis in international markets.
Portions of our international sales are currently denominated in French francs
and could be denominated in euros in the future. We do not engage in any hedging
activities to reduce our exposure to currency risk. Accordingly, fluctuations in
currency exchange rates for the French franc and possibly the euro could cause
our revenues to decline. These international factors, along with the ones listed
above, could cause future sales of our products to international customers to
decline and could damage our business.
WE DEPEND ON CONTRACT MANUFACTURERS TO MANUFACTURE ALL OF OUR PRODUCTS AND ANY
DELAY OR DISRUPTION IN PRODUCTION FROM THESE MANUFACTURERS COULD RESULT IN
LOST SALES TO CURRENT OR POTENTIAL CUSTOMERS.
We design all of the hardware subassemblies for our products and use the
services of contract manufacturers to build these subassemblies and our products
to our specifications. Our internal manufacturing operations consist primarily
of materials planning and procurement, quality control, final assembly and
testing of our products. We intend to regularly introduce new products and
product enhancements, which will require that we rapidly achieve volume
production by coordinating our efforts with those of our suppliers and contract
manufacturers. We do not have any long-term contracts with our contract
manufacturers. The inability of our contract manufacturers to provide us with
adequate supplies of high quality products or the loss of a
10
<PAGE> 12
current contract manufacturer would cause a delay in our ability to fulfill
customer orders while we obtain a replacement manufacturer. These delays could
result in client dissatisfaction and could result in lost sales to current or
new customers.
WE PURCHASE SEVERAL KEY COMPONENTS FROM SOLE OR LIMITED SOURCES AND COULD LOSE
SALES IF ANY OF THESE SOURCES FAIL TO FILL OUR NEEDS.
We purchase a number of key components and parts used in our products,
including microprocessors and integrated circuits, from sole or limited source
suppliers and are dependent upon supply from these sources to meet our needs. We
may encounter shortages and delays in obtaining components in the future which
could materially adversely affect our ability to meet customer orders. We
purchase components through purchase orders and we have no guaranteed supply
arrangements with our suppliers. The availability of many of these components is
dependent in part on our ability to provide our suppliers with accurate
forecasts of our future needs. Our ability to make accurate forecasts is
complicated by the typically short product life cycles and customer lead times
for our products. We also purchase components from foreign suppliers, which
places the supply of those components at risk of changing tariff and regulatory
structures, particularly those affecting the import and export of electronics
and technology. Any interruption in the supply of any of our key components that
we obtain from a sole or limited source could disrupt our operations and
materially adversely affect our business in any given period. In addition, any
increase in component costs could increase the cost of our products and result
in lower gross margins.
IF WE FAIL TO HIRE AND MANAGE ADDITIONAL PERSONNEL AND RETAIN KEY PERSONNEL, OUR
GROWTH COULD SLOW AND OUR REVENUES COULD FALL.
We have recently experienced rapid growth and a significant expansion in
the number of employees and the scope and complexity of our operating and
financial systems. We increased the number of our full-time employees from 140
to 226 individuals during the 12 months ended April 30, 1999. This growth has
placed and, if sustained, will continue to place, a significant strain upon our
management, operations, financial systems and resources. We believe that our
future success will depend in large part upon our continued ability to identify,
hire, retain and motivate highly skilled employees, who are in great demand. In
particular, we believe that we must expand our research and development,
marketing, sales and customer support capabilities in order to effectively serve
the evolving needs of our present and future customers. Competition for these
employees is intense. Our failure to hire additional qualified personnel in a
timely manner and on reasonable terms could adversely affect our business and
results of operations. In addition, our success depends on the continuing
contributions of our senior management and technical personnel, all of whom
would be difficult to replace. The loss of any one of them could adversely
affect our ability to execute our business strategy, which could cause our
results of operations and financial condition to suffer. We cannot assure you
that we will be successful in retaining these key personnel.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIPS WITH INDUSTRY EXPERTS, OUR PRODUCTS MAY
LOSE INDUSTRY AND MARKET RECOGNITION AND SALES COULD DECLINE.
We believe that our relationships with industry experts in the field of
network performance are critical for maintaining our industry credibility and
developing new products reflecting new technologies and testing methodologies in
a timely fashion. These experts have established standard testing methodologies
that evaluate new network equipment products and technologies. Through our
relationships, we provide these experts and their testing labs with SmartBits
solutions and engineering assistance to perform tests on these new network
equipment products and technologies. These industry experts reference our
network performance analysis products in their publications which has given our
products industry recognition as an independent network
11
<PAGE> 13
performance analysis solution. In addition, these labs offer us the opportunity
to test our products on the newest network equipment products and technologies.
We cannot assure you that we will be able to maintain our relationships with
industry experts or that our competitors, including new entrants, will not
obtain similar relationships with industry experts. If we are unable to maintain
these relationships, our network performance analysis solution may lose industry
recognition and sales of our products could decline.
OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY AFFECT
OUR ABILITY TO COMPETE.
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to compete
is dependent in part upon our proprietary technology. We rely on a combination
of contractual rights and copyright, patent, trademark and trade secret laws to
establish and protect our proprietary technology. Currently, we have one U.S.
patent application pending. We cannot assure you that this patent will be issued
or, if issued, will adequately protect the technology covered by the
application. We also generally enter into confidentiality agreements with our
employees, consultants, resellers, customers and potential customers, strictly
limit access to and distribution of our source code, and further limit the
disclosure and use of other proprietary information. We cannot assure you that
the steps taken by us in this regard will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain or use our products
or technology. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE OFFERING PRICE.
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. We are negotiating the initial offering price of the common
stock with the underwriters. However, the initial offering price may not be
indicative of the prices that will prevail in the public market after the
offering, and the market price of the common stock could fall below the initial
public offering price. You should read the "Underwriting" section for a
discussion of the factors considered in determining the initial public offering
price.
In addition, the market price of our common stock could fluctuate widely in
response to the following particular factors:
- actual or anticipated variations in operating results;
- announcements of technological innovations, new products or new services
by us or by our competitors or customers;
- changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel;
- future equity or debt offerings or our announcements of such offerings;
and
- general market and economic conditions.
12
<PAGE> 14
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the market for technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of our operating results.
MEMBERS OF MANAGEMENT AND OUR BOARD OF DIRECTORS, AND THEIR AFFILIATES, WILL
CONTROL % OF OUR COMMON STOCK, AND WILL BE ABLE TO ELECT OUR DIRECTORS AND
SIGNIFICANTLY INFLUENCE ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
Following this offering, members of our executive management team and our
board of directors and their affiliates will control approximately % of our
common stock. These management and board members and their affiliates, along
with other existing stockholders, have entered into a stockholders agreement
pursuant to which they have agreed to vote their shares together to elect
designated representatives to our board of directors and to maintain the number
of authorized directors. This agreement will only terminate with the consent of
the holders of two-thirds of the shares subject to the agreement. Accordingly,
these stockholders are able to elect all of our directors, will retain the
voting power to approve all matters requiring stockholder approval and have
significant influence over our business affairs. This concentration of ownership
and stockholders agreement could have the effect of delaying or preventing a
change in control. For a more complete discussion of this concentration of
ownership and the stockholders agreement, see "Principal Stockholders" and
"Certain Transactions."
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTERESTS OF OUR
STOCKHOLDERS, CAUSE US TO INCUR DEBT AND ASSUME CONTINGENT LIABILITIES.
As a part of our business strategy, we may make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although no such acquisitions or investments are currently pending. Any future
acquisitions would be accompanied by the risks encountered in acquisitions of
companies. These risks include:
- difficulties in assimilating the operations and personnel of the acquired
companies;
- diversion of management's attention from ongoing business concerns;
- our potential inability to maximize our financial and strategic position
through the successful incorporation of acquired technology and rights
into our products and services;
- additional expense associated with amortization of acquired assets;
- maintenance of uniform standards, controls, procedures and policies; and
- impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new management personnel.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our business,
operating results and financial condition. In addition, as a result of our
recapitalization in 1997 we are unable to account for any acquisition as a
pooling of interests until September 1999. In the event that we complete any
acquisition prior to September 1999, we would likely be required to amortize
goodwill related to that acquisition which could adversely affect our results of
operations. In addition, because we cannot be a party to an acquisition
transaction accounted for as a pooling of interests prior to September 1999,
third parties may be discouraged from attempting to acquire control of our
business.
13
<PAGE> 15
OUR FAILURE OR THE FAILURE OF OUR KEY SUPPLIERS OR MANUFACTURERS TO BE YEAR 2000
COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS.
Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. We generally represent
to our customers that we have achieved year 2000 compliance for our products.
However, any undetected year 2000 problem in our products, or any problem which
cannot be solved in a timely, cost-effective manner could substantially damage
our customer relationships, disrupt our business and subject us to threatened or
actual litigation. We are also subject to the following risks of the year 2000
issue:
- disruptions in systems we use to run our business; and
- disruptions in systems used by our suppliers or manufacturers.
Our internal information systems, including our financial accounting,
product development and operations systems, utilize software and hardware
provided by third parties. We employ widely available software applications and
other products from leading third-party vendors. Any failure of third-party
computer products used by us to be year 2000 compliant could interrupt and
disrupt our business. To fix any of these systems could require us to invest
substantially in our operating systems and to hire additional personnel.
However, since we cannot forecast with any certainty the impact, extent and
duration of any year 2000 problems on our operations, our customer or our
suppliers, there can be no assurance that our resources will be adequate to
withstand any prolonged disruption.
We have contacted third-party suppliers of components and our key
subcontractors used in the manufacture of our products to identify, and to the
extent possible, resolve issues involving the year 2000 problem. However, we
have limited or no control over the actions of these third-party suppliers and
subcontractors. Thus, while we expect that we will be able to resolve any
significant year 2000 problems with these third parties, there can be no
assurance that these suppliers and subcontractors will resolve any or all year
2000 problems before the occurrence of a material disruption to the operation of
our business. Any failure of these third parties to resolve year 2000 problems
in a timely manner could have a material adverse effect on our business,
financial condition and results of operations.
We are also subject to external forces that might generally affect industry
and commerce, such as a utility or transportation company's year 2000 compliance
failures and related service interruptions.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS WHICH MAY DELAY OR
PREVENT A CHANGE OF CONTROL.
Provisions of our charter 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 us. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock. These provisions include:
- division of the board of directors into three separate classes;
- elimination of cumulative voting in the election of directors;
- prohibitions on our stockholders from acting by written consent and
calling special meetings;
- procedures for advance notification of stockholder nominations and
proposals; and
- the ability of the board of directors to alter our bylaws without
stockholder approval.
14
<PAGE> 16
In addition, our board of directors has the authority to issue up to
5,000,000 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 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 our
outstanding voting stock.
In addition, we are 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. The preceding provisions of our charter and
bylaws, as well as Section 203 of the Delaware General Corporation Law, could
discourage potential acquisition proposals, delay or prevent a change of control
and prevent changes in our management.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
materially adversely affect the trading price of our common stock. Such sales
also might make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have
shares outstanding. Of these shares, the shares sold in this
offering will be freely tradeable in the public market. The remaining 25,689,275
shares of common stock available for sale in the public market are limited by
restrictions under the securities laws and 180-day lock-up agreements applicable
to these shares and will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE NUMBER
----------------------------- -----------
<S> <C>
Immediately................................................. shares
90th day after the date of this prospectus.................. shares
180th day after the date of this prospectus................. shares
</TABLE>
In addition, we have 2,976,300 shares of our common stock available for
future grant pursuant to our stock option plans, and 6,763,765 shares subject to
outstanding options at March 31, 1999. of these outstanding
options are also subject to a 180-day lockup agreement. We intend to register,
prior to the expiration of the lock-up, the shares of common stock reserved for
issuance under our stock option plans and shares of common stock reserved for
issuance under our employee stock purchase plan. Accordingly, shares underlying
vested options will be eligible for resale in the public market beginning on
expiration of the lock-up.
BT Alex. Brown may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
WE WILL USE APPROXIMATELY $54.3 MILLION OF THE NET PROCEEDS OF THIS OFFERING TO
REDEEM SENIOR SECURITIES AND WE WILL HAVE SUBSTANTIAL DISCRETION AS TO HOW TO
USE THE REMAINING NET PROCEEDS FROM THIS OFFERING.
The net proceeds to us from this offering are estimated to be approximately
$ million, assuming the shares are sold at a price of $ per share
and after deducting underwriting discounts and estimated offering expenses. We
intend to use approximately $54.3 million of the net proceeds of the offering to
redeem all outstanding shares of our redeemable preferred stock. We will use any
remaining proceeds to repay indebtedness and for general corporate purposes,
including working capital. We have agreed to repay a term loan, the principal
amount of which was $45.0 million at March 31, 1999, in quarterly installments.
The installments will be $7.5 million for July and October 1999 and $2.5 million
per quarter thereafter with a final payment of $5,0 million in April 2002. Our
management will have broad discretion to allocate any remaining proceeds and to
determine the timing of expenditures in ways with which our
15
<PAGE> 17
stockholders may not agree. We cannot predict that investment of the
proceeds will yield a favorable or any return. See "Use of Proceeds."
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK.
Although we have paid dividends on our common stock in the past, we
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any dividends in the foreseeable future. See
"Dividend Policy."
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares of our common stock, you will suffer an immediate
and substantial dilution of approximately $ in net tangible book value
per share, or approximately % of the offering price of $ per share. If
optionholders exercise options, you will suffer further dilution. See
"Dilution."
FORWARD-LOOKING STATEMENTS
This prospectus contains statements under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," that
are "forward-looking statements." These forward-looking statements include
statements about our plans, objectives, expectations and intentions and other
statements contained in this prospectus that are not historical facts. When used
in this prospectus, the words "expect," "anticipate," "intend," "plan,"
"believe," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors." We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common
stock in the offering, assuming an initial public offering price of $ per
share and after deducting the underwriting discounts and estimated offering
expenses of $700,000, are estimated to be $ .
We intend to use approximately $54.3 million of the net proceeds to redeem
all outstanding shares of our redeemable preferred stock. Following this
redemption, no shares of redeemable preferred stock will be outstanding.
A second purpose of this offering is to repay indebtedness. We have agreed
to repay a term loan, the principal amount of which was $45.0 million at March
31, 1999, in quarterly installments. The installments will be $7.5 million for
July and October 1999 and $2.5 million per quarter thereafter with a final
payment of $5.0 million in April 2002. Following the redemption and repayment
described above, we expect to use any remaining net proceeds of this offering
for general corporate purposes including sales and marketing, hiring of
additional consultants and staff, and working capital. We may also use a portion
of the net proceeds to fund acquisitions of products, technologies or businesses
that are related or complementary to our business. Although we have no present
agreements or commitments and are not currently engaged in any negotiations with
respect to any such transactions, we continue to evaluate these opportunities.
Pending use of the net proceeds for the foregoing purposes, we intend to invest
the net proceeds in investment grade interest bearing marketable securities.
DIVIDEND POLICY
Although we declared a $2.7 million dividend on our common stock in 1996
and repurchased shares of our common stock in connection with our
recapitalization in 1997, we intend to retain earnings, if any, and we do not
intend to pay cash dividends in the foreseeable future. See "Certain
Transactions." In addition, our credit facility limits our ability to declare
and pay dividends. Any future determination to pay cash dividends will be at the
discretion of our board of directors and will be dependent upon our financial
condition, results of operations, capital requirements, general business
conditions and such other factors as the board of directors may deem relevant.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
1999. The As Adjusted column gives effect to the sale in this offering of
shares of common stock at a price of $ per share less
underwriting discounts and estimated offering expenses payable by Netcom
Systems, the conversion of all outstanding shares of convertible preferred stock
into 22,903,436 shares of common stock, the redemption of all outstanding shares
of redeemable preferred stock and the reclassification of $10.0 million in
long-term debt into short-term debt following the closing of the offering.
This table excludes:
- 6,763,765 shares of common stock issuable upon exercise of outstanding
stock options;
- 2,976,300 shares that have been set aside for future issuance under our
stock option plans; and
- 150,000 shares that have been set aside for future issuance under our
employee stock purchase plan.
For a further discussion of our option plans, see "Management -- Employee
Benefit Plans" and Note 12 of Notes to Consolidated Financial Statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion...................... $ 35,000 $ 25,000
--------- ---------
Redeemable preferred stock, $0.001 par value:
Authorized -- 485,184 shares (actual); no shares (as
adjusted)
Issued and outstanding -- 485,184 (actual);
no shares (as adjusted)................................ 53,363 --
---------
Stockholders' investment (deficit):
Convertible preferred stock, $0.001 par value:
Authorized -- 22,903,437 shares (actual); no shares (as
adjusted)
Issued and outstanding -- 22,903,436 shares (actual);
no shares (as adjusted).............................. 48,518 --
Common stock, $0.001 par value:
Authorized -- 50,000,000 shares (actual); 200,000,000
shares (as adjusted)
Issued and outstanding -- 2,785,839 shares (actual);
25,689,275 shares (as adjusted)...................... 3
Additional paid-in capital................................ 12,547
Deferred compensation..................................... (1,217) (1,217)
Retained deficit.......................................... (110,576) (110,576)
Accumulated other comprehensive loss...................... (9) (9)
--------- ---------
Stockholders' investment.................................... (50,734)
--------- ---------
Total capitalization........................................ $ 37,629 $
========= =========
</TABLE>
18
<PAGE> 20
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, 1999. Our pro forma net tangible book value
(deficit) at March 31, 1999 was approximately $( million) or
approximately $( ) per share. Without taking into account any changes
in such net tangible book value per share after March 31, 1999, other than to
give effect to the sale of the shares of common stock offered hereby at an
assumed initial public offering price of $ per share and the receipt of the
net proceeds of such sale, the pro forma net tangible book value at March 31,
1999 would have been approximately $ million or approximately $ per
share. This represents an immediate increase in net tangible book value per
share of $ to existing stockholders and an immediate dilution of
$ per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value (deficit) per share as of
March 31, 1999............................................ $
Increase per share attributable to new investors..........
Pro forma net tangible book value per share after the
offering.................................................. $
Dilution per share to new investors.........................
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and new investors with respect to
the total number of shares of common stock purchased from us, the total price
paid and the average price per share paid, using an initial public offering
price of $ per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
---------------- ---------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................
New investors....................................
Total....................................... 100.0% 100.0%
===== =====
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 6,763,765 shares of common stock at a weighted average
exercise price of $2.57 per share outstanding on March 31, 1999. To the extent
that these options become exercisable and are exercised, there will be further
dilution to new investors.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at December 31, 1997 and
1998 and for each of the years in the three-year period ended December 31, 1998
are derived from our consolidated financial statements that have been audited by
Arthur Andersen LLP, independent public accountants, and are included elsewhere
in this prospectus. The statement of operations data for the year ended December
31, 1995 and the balance sheet data at December 31, 1995 and 1996 is derived
from our audited financial statements that are not included herein. The
statements of operations data for the year ended December 31, 1994 and the
balance sheet data at December 31, 1994 are derived from unaudited consolidated
financial statements not included in this prospectus. The consolidated statement
of operations data for the three months ended March 31, 1998 and 1999 and the
consolidated balance sheet data at March 31, 1999 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,
--------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................ $2,080 $9,053 $27,454 $56,273 $73,474 $18,011 $19,513
Cost of goods sold...................... 336 1,266 3,256 7,248 15,912 3,048 4,873
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 1,744 7,787 24,198 49,025 57,562 14,963 14,640
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development.............. 446 833 1,681 3,527 8,588 1,662 2,665
Sales and marketing................... 193 844 1,466 3,713 12,956 2,271 4,087
General and administrative............ 365 1,262 1,342 3,452 3,799 776 855
Amortization of deferred
compensation....................... -- -- -- -- 60 -- 133
------ ------ ------- ------- ------- ------- -------
Total operating expenses................ 1,004 2,939 4,489 10,692 25,403 4,709 7,740
------ ------ ------- ------- ------- ------- -------
Income from operations.................. 740 4,848 19,709 38,333 32,159 10,254 6,900
Other income (expense), net............. 6 65 244 (662) (2,020) (682) (328)
------ ------ ------- ------- ------- ------- -------
Income before provision for income
taxes................................. 746 4,913 19,953 37,671 30,139 9,572 6,572
Provision for income taxes.............. 263 1,955 8,142 14,875 11,557 3,924 2,531
------ ------ ------- ------- ------- ------- -------
Net income.............................. $ 483 $2,958 $11,811 $22,796 $18,582 $ 5,648 $ 4,041
====== ====== ======= ======= ======= ======= =======
Pro forma net income per common share... $ 0.73 $ 0.16
======= =======
Pro forma weighted average number of
common shares outstanding............. 25,606 25,688
======= =======
Pro forma diluted net income per common
share................................. $ 0.63 $ 0.13
======= =======
Pro forma weighted average number of
common shares and common equivalent
shares outstanding.................... 29,542 30,335
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ------ ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $469 $2,885 $ 9,314 $ 17,708 $ 19,597 $ 24,390 $ 17,970
Working capital..................... 716 3,735 12,505 23,312 31,802 28,836 31,049
Total assets........................ 986 5,683 18,110 34,129 54,155 42,805 57,264
Long-term debt, net of current
portion........................... -- -- -- 47,500 37,500 47,500 35,000
Redeemable preferred stock.......... -- -- -- 49,520 52,579 50,255 53,363
Stockholders' investment............ 777 3,854 13,014 (71,004) (54,084) (66,111) (50,734)
</TABLE>
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the Consolidated 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.
OVERVIEW
We are a leading provider of network performance analysis solutions. Our
flagship platform, SmartBits, analyzes networking equipment, including
infrastructure and enterprise switches and routers, and broadband access
devices, such as cable modems and xDSL devices, to determine performance,
reliability, scalability, interoperability, quality of service and proof of
service, before deployment on the network. SmartBits allows users to analyze
network performance by emulating complex, multi-technology networks through the
generation, reception and analysis of high speed network traffic flows. We were
incorporated and began operations in 1989. In 1994, we introduced our SmartBits
platform. We have been profitable in each of the past four years in which our
financial statements were audited.
Beginning in the fourth quarter of 1997, we began to invest significantly
in the infrastructure of our business to position us for growth in existing and
new markets and in anticipation of increased competition. Since that time, our
primary focus has been and continues to be to build a customer-centric
organization that delivers quality products through research and development in
new technologies and supports those products both with an in-house service
department and with strong field support. Our efforts to build a
customer-centric organization have included activities that resulted in reduced
gross and operating margins. For example, during 1998 we significantly increased
personnel in our customer support organization. Further, beginning in the third
quarter of 1998 we reduced prices on our products to aggressively compete with a
new entrant in our markets. In addition, we have made significant investments in
sales and marketing to increase the awareness of our products in new markets,
particularly among service providers and enterprises. During the year ended
December 31, 1998, total operating expenses were $25.4 million, as compared to
$10.7 million during the year ended December 31, 1997, an increase of $14.7
million. Of that increase, approximately $14.3 million related to sales and
marketing and research and development. During the year ended December 31, 1998,
we also invested $1.5 million in building our customer support infrastructure,
which is accounted for under cost of goods sold. These investments in our
infrastructure demonstrate our commitment to our customers and we plan to
continue to invest in infrastructure to support our customers.
We realize revenues primarily from the sale of SmartBits systems, as well
as from the licensing of related software and software maintenance contracts.
System and software revenues are generally recognized at the time of shipment to
customers or distributors, net of estimated allowances for product returns.
Maintenance contracts typically require us to provide technical support and
software updates to customers. Maintenance revenues are deferred and recognized
ratably over the term of the maintenance period, which is typically one year.
Post-contract support obligations are insignificant and we accrue them at the
time of the sale.
We market and sell our products and services in the United States through a
direct sales force, except in Hawaii where we use a distributor.
Internationally, we sell primarily through distributors in 35 separate markets
worldwide, although we do sell directly in France, the United Kingdom, Denmark
and Ireland. International sales represented 29.6% of our revenues in the three
month period ended March 31, 1999, 25.5% of our revenues in 1998, 26.1% of our
revenues in 1997 and 16.7% of our revenues in 1996. Our international sales are
denominated in U.S. dollars and French francs. Sales to distributors occur, in
almost all cases, after the distributor has received an order from its customer.
As a result, distributors generally do not inventory our
21
<PAGE> 23
products and we have historically incurred very few product returns from our
distributors. Typically, distributors receive a commission or sales discount to
our international sales prices. Commissions to distributors are payable only
after our receipt of payment for these sales. To date, we have incurred no bad
debt write-offs based on sales to distributors, although there can be no
assurance that we will not incur bad debt write-offs in the future.
Historically, a significant amount of our revenues has been generated by
sales to our largest customers, all of whom are network equipment manufacturers.
U.S. sales to our four largest customers collectively accounted for 36.0% of our
revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in
1998. Our customer concentration was less pronounced in the first three months
of 1999, when U.S. sales to our four largest customers represented 21.6% of our
revenues. In the year ended December 31, 1996, sales to Bay Networks accounted
for 14.9% of our revenues and sales to Cisco accounted for 11.8% of our
revenues. In the year ended December 31, 1997, sales to each of Bay Networks and
Cisco accounted for 10.9% of our revenues. Sales to Cisco also accounted for
12.1% of our revenues in the year ended December 31, 1998. No customer accounted
for 10% or more of our revenues in the first three months of 1999. Our
international distributors may also make additional sales to foreign divisions
or affiliates of these customers which are not reflected in the percentages
above. We anticipate that our results of operations in any given quarter will
continue to depend upon sales to a small number of customers. As a result of
this customer concentration, our revenues from quarter to quarter may be subject
to substantial fluctuations, which could have a material adverse effect on our
business, financial condition and results of operations.
In connection with this offering, certain stock option grants have been
considered to be compensatory for financial accounting purposes. The amount of
this compensation represents the difference between the exercise price of the
stock options and the fair market value of our common stock at the time of
issuance. Stock-based compensation of $60,000 was amortized during the year
ended December 31, 1998 and $133,000 was amortized during the three month period
ended March 31, 1999. As of May 1999, stock-based compensation of $1.8 million
will be amortized over the remaining vesting periods of the related options
using an accelerated method, including $672,000 for the nine month period ending
December 31, 1999.
22
<PAGE> 24
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain
consolidated statement of operations data as a percentage of our revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 11.9 12.9 21.7 16.9 25.0
----- ----- ----- ----- -----
Gross profit.................................. 88.1 87.1 78.3 83.1 75.0
----- ----- ----- ----- -----
Operating expenses:
Research and development...................... 6.1 6.3 11.7 9.3 13.6
Sales and marketing........................... 5.3 6.6 17.6 12.6 20.9
General and administrative.................... 4.9 6.1 5.2 4.3 4.4
Amortization of deferred compensation......... -- -- 0.1 -- 0.7
----- ----- ----- ----- -----
Total operating expenses........................ 16.3 19.0 34.6 26.2 39.6
Income from operations.......................... 71.8 68.1 43.7 56.9 35.4
Other income (expense), net..................... 0.9 (1.2) (2.7) (3.8) (1.7)
----- ----- ----- ----- -----
Income before provision for income taxes........ 72.7 66.9 41.0 53.1 33.7
----- ----- ----- ----- -----
Provision for income taxes...................... 29.7 26.4 15.7 21.8 13.0
----- ----- ----- ----- -----
Net income...................................... 43.0% 40.5% 25.3% 31.3% 20.7%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Revenues. Revenues were $19.5 million for the three month period ended
March 31, 1999, as compared to $18.0 million for the three month period ended
March 31, 1998, an increase of $1.5 million or 8.3%. This increase was due
primarily to increased international revenues combined with increased sales to
Internet service providers and telecommunications carriers, partially offset by
price reductions.
Gross Profit. Gross profit was $14.6 million for the three month period
ended March 31, 1999, as compared to $15.0 million for the three month period
ended March 31, 1998, a decrease of $0.4 million. Gross margin was 75.0% for the
three month period ended March 31, 1999, as compared to 83.1% for the three
month period ended March 31, 1998. The decrease in gross margin was due
primarily to price erosion as a result of new competition, combined with an
increase in manufacturing and customer support personnel to support expanding
operations. Gross margins may decrease over the next 12 months due to factors
that could include further price erosion and increases in overhead and customer
support, the mix of product sales, new competition, changes in the networking
industry and increases in component and contract manufacturing costs.
Research and Development. Research and development expense was $2.7 million
for the three month period ended March 31, 1999, as compared to $1.7 million for
the three month period ended March 31, 1998, an increase of $1.0 million.
Research and development expense was 13.6% of revenues for the three month
period ended March 31, 1999, as compared to 9.3% of revenues for the three month
period ended March 31, 1998. The increase in research and development expense in
absolute dollars and as a percentage of revenues was due primarily to increased
staffing levels, purchases of development materials and consulting fees.
Research and development costs are expensed as incurred. We expect 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.
23
<PAGE> 25
Sales and Marketing. Sales and marketing expense was $4.1 million for the
three month period ended March 31, 1999, as compared to $2.3 million for the
three month period ended March 31, 1998, an increase of $1.8 million. Sales and
marketing expense was 20.9% of revenues for the three month period ended March
31, 1999, as compared to 12.6% of revenues for the three month period ended
March 31, 1998. 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, as well as various
marketing and promotional programs. We expect 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 we attempt to increase market penetration and
pursue new market opportunities.
General and Administrative. General and administrative expense was $0.9
million for the three month period ended March 31, 1999, as compared to $0.8
million for the three month period ended March 31, 1998, an increase of $0.1
million. General and administrative expense was 4.4% of revenues for the three
month period ended March 31, 1999, as compared to 4.3% of revenues for the three
month period ended March 31, 1998. We expect that general and administrative
expenditures will continue to increase in absolute dollars for at least the next
12 months as our administrative staff and internal systems grow to support
expanding operations and our status as a public company.
Amortization of Deferred Compensation. Amortization of deferred
compensation was $0.1 million for the three month period ended March 31, 1999.
In that period, we recorded deferred compensation in the amount of $1.0 million,
which related to the granting of employee stock options below fair market value.
The deferred compensation will be amortized over five years, which is the
vesting period of the options, using an accelerated method.
Other Income (Expense), Net. In August 1997, we entered into a credit
agreement with two banks under which we borrowed $50.0 million through a term
loan facility. Interest expense relating to the borrowings was $0.7 million
during the three month period ended March 31, 1999, as compared to $0.9 million
for the three month period ended March 31, 1998. The decrease in interest
expense was due to the reduction of outstanding borrowings through required $2.5
million principal payments made in October 1998 and January 1999. We expect
interest expense to decrease for at least the next 12 months as we continue to
reduce outstanding borrowings by $7.5 million in each of July and October 1999
and an additional $2.5 million in each three month period following the October
1999 payment with a final payment of $5.0 million in April 2002. Interest income
was $0.4 million during the three month period ended March 31, 1999, as compared
to $0.2 million during the three month period ended March 31, 1998. The increase
in interest income was due to increased cash and investments. We expect interest
income to increase for at least the next 12 months as our cash and investments
increase from operating activities as well as from proceeds from the offering.
Provision for Income Taxes. Our effective tax rate was 38.5% for the three
month period ended March 31, 1999, as compared to 41.0% for the three month
period ended March 31, 1998. The decrease in the effective tax rate resulted
primarily from increased benefits from research and development tax credits and
from our foreign sales corporation.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues were $73.5 million for the year ended December 31, 1998,
as compared to $56.3 million for the year ended December 31, 1997, an increase
of $17.2 million or 30.6%. This increase was due primarily to increased sales in
new markets such as sales to Internet service providers, telecommunications
carriers and enterprises, increased international sales as well as increased
sales to our traditional customer base of network equipment manufacturers,
partially offset by price reductions.
24
<PAGE> 26
Gross Profit. Gross profit was $57.6 million for the year ended December
31, 1998, as compared to $49.0 million for the year ended December 31, 1997, an
increase of $8.6 million. Gross margin was 78.3% for the year ended December 31,
1998, as compared to 87.1% for the year ended December 31, 1997. The decrease in
gross margin was due primarily to price erosion as a result of new competition,
combined with an increase in manufacturing and customer support personnel to
support expanding operations.
Research and Development. Research and development expense was $8.6 million
for the year ended December 31, 1998, as compared to $3.5 million for the year
ended December 31, 1997, an increase of $5.1 million. Research and development
expense was 11.7% of revenues for the year ended December 31, 1998, as compared
to 6.3% of revenues for the year ended December 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, consulting fees and
purchases of materials used in the development of new products and product
enhancements.
Sales and Marketing. Sales and marketing expense was $13.0 million for the
year ended December 31, 1998, as compared to $3.7 million for the year ended
December 31, 1997, an increase of $9.3 million. Sales and marketing expense was
17.6% of revenues for the year ended December 31, 1998, as compared to 6.6% of
revenues for the year ended December 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, including
product investments in independent test labs.
General and Administrative. General and administrative expense was $3.8
million for the year ended December 31, 1998, as compared to $3.5 million for
the year ended December 31, 1997, an increase of $0.3 million. General and
administrative expense was 5.2% of revenues for the year ended December 31,
1998, as compared to 6.1% of revenues for the year ended December 31, 1997. The
increase in general and administrative expense in absolute dollars was due
primarily to increased staffing levels and increased accounting and legal costs.
Other Income (Expense), Net. Interest expense relating to outstanding
borrowings was $3.5 million during the year ended December 31, 1998, as compared
to $1.2 million for the year ended December 31, 1997. The increase in interest
expense was due to the borrowings being outstanding only for approximately three
months during 1997. Interest income was $1.4 million during the year ended
December 31, 1998, as compared to $0.6 million for the year ended December 31,
1997, an increase of $0.8 million. The increase in interest income was primarily
due to increased cash and investments.
Provision for Income Taxes. Our effective tax rate was 38.4% for the year
ended December 31, 1998, as compared to 39.5% for the year ended December 31,
1997. The decrease in the effective tax rate was primarily due to the
establishment of our foreign sales corporation at the end of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues were $56.3 million 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 105.0%. The increase was primarily due to the introduction
of new products, further market acceptance of existing products, expansion into
international markets and the acquisition of one of our international
distributors, Netcom Systems Europe. Our international revenues were $14.7
million for the year ended December 31, 1997, as compared to $4.6 million for
the year ended December 31, 1996, an increase of $10.1 million. This increase
was primarily due to increased sales through distributors in our international
markets, and secondarily as a result of the acquisition of Netcom Systems Europe
in September 1997.
25
<PAGE> 27
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 in manufacturing
personnel to support expanding operations as well as increased volume sales
discounts given 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% of revenues 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 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 was $1.2 million for the year ended December 31, 1997, as compared to
no interest expense in 1996. Interest income increased $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. Our 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 as well as certain other tax benefits were
caused primarily by the exercise of a substantial number of employee stock
options in connection with a recapitalization in the third quarter of 1997.
Accordingly, we do not expect these tax benefits to recur to the same extent in
future periods.
26
<PAGE> 28
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present statement of operations data in dollars and as
a percentage of our revenues. This quarterly information is unaudited but has
been prepared on a basis consistent with our audited financial statements
presented elsewhere herein, and in our 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues..................... $10,115 $12,958 $15,912 $17,288 $18,011 $19,344 $17,601 $18,518 $19,513
Cost of goods sold........... 1,163 1,575 2,017 2,493 3,048 4,043 4,286 4,535 4,873
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 8,952 11,383 13,895 14,795 14,963 15,301 13,315 13,983 14,640
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research and development... 748 589 805 1,385 1,662 2,134 2,256 2,536 2,665
Sales and marketing........ 540 761 1,090 1,322 2,271 3,313 3,606 3,766 4,087
General and
administrative........... 753 965 805 929 776 778 1,301 944 855
Amortization of deferred
compensation............. -- -- -- -- -- 30 15 15 133
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 2,041 2,315 2,700 3,636 4,709 6,255 7,178 7,261 7,740
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 6,911 9,068 11,195 11,159 10,254 9,046 6,137 6,722 6,900
Other income (expense),
net........................ 189 167 (107) (911) (682) (525) (508) (305) (328)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes............... 7,100 9,235 11,088 10,248 9,572 8,521 5,629 6,417 6,572
Provision for income taxes... 2,804 3,628 4,459 3,984 3,924 3,132 2,182 2,319 2,531
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................... $ 4,926 $ 5,607 $ 6,629 $ 6,264 $ 5,648 $ 5,389 $ 3,447 $ 4,098 $ 4,041
======= ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........... 11.5 12.1 12.7 14.4 16.9 20.9 24.3 24.5 25.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 88.5 87.9 87.3 85.6 83.1 79.1 75.7 75.5 75.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research and development... 7.4 4.5 5.1 8.0 9.3 11.0 12.8 13.7 13.6
Sales and marketing........ 5.4 5.9 6.8 7.6 12.6 17.1 20.5 20.3 20.9
General and
administrative........... 7.4 7.5 5.1 5.4 4.3 4.2 7.5 5.2 4.4
Amortization of deferred
compensation............. -- -- -- -- -- -- -- -- 0.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 20.2 17.9 17.0 21.0 26.2 32.3 40.8 39.2 39.6
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 68.3 70.0 70.3 64.6 56.9 46.8 34.9 36.3 35.4
Other income (expense),
net........................ 1.9 1.3 (0.6) (5.3) (3.8) (2.7) (2.9) (1.7) (1.7)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes............... 70.2 71.3 69.7 59.3 53.1 44.1 32.0 34.6 33.7
Provision for income taxes... 27.7 28.0 28.0 23.1 21.8 16.2 12.4 12.5 13.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................... 42.5% 43.3% 41.7% 36.2% 31.3% 27.9% 19.6% 22.1% 20.7%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Beginning in 1994, our revenues increased in every quarter until the three
month period ended September 30, 1998. In the second half of 1998, the emergence
of new entrants in the network performance analysis market resulted in our
decision to reduce prices and caused delays in the purchasing decisions of
several of our customers. General market conditions, particularly an economic
downturn in Asia, also created uncertainty among our network equipment
manufacturer customers. In addition, industry consolidation during this period
disrupted
27
<PAGE> 29
procurement decisions by some of our largest customers. Due primarily to these
factors, our quarterly revenues declined for the three month period ended
September 30, 1998 relative to the three month period ended June 30, 1998. At
the end of 1998 and during the three month period ended March 31, 1999, we
increased our customer base, primarily among Internet service providers and
telecommunications carriers. For the three month period ended March 31, 1999,
revenues increased by $1.0 million over the three month period ended December
31, 1998. Gross margin has decreased primarily due to the effects of increases
in manufacturing and customer support personnel and to price erosion caused by
new competition. Research and development expenses increased relatively
consistently in each of the quarters presented. Sales and marketing expenses
increased significantly beginning in the three month period ended June 30, 1998
due to pronounced increases in headcount and promotional efforts. General and
administrative expenses increased slightly, or remained relatively constant,
each quarter, except for the three month period ended September 30, 1998,
primarily due to increased legal and accounting costs related to preparation of
our public offering.
A number of factors could cause quarterly revenues and operating results to
vary significantly, including changes in demand for our products, the timing,
composition and size of orders from our customers, and spending patterns and
budgetary resources of our customers. Operating results may also fluctuate on a
quarterly basis based upon factors such as the introduction of product
enhancements by us or our competitors, and market acceptance of new products
offered by us or our competitors. Quarterly operating results could also be
affected by the relative percentages of products sold through our direct and
indirect sales channels, product pricing and competitive conditions in our
markets. Any unfavorable change in these or other factors could have a material
adverse effect on our business, financial condition and results of operations.
Accordingly, we believe that period-to-period comparisons of our results of
operations may not be meaningful and should not be relied upon as an indication
of our future performance. Furthermore, there can be no assurance that we will
be able to sustain profitability on a quarterly or annual basis.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through cash provided by
operating activities. At March 31, 1999, our principal source of liquidity was
our cash, cash equivalents and short-term investments of $34.3 million. In
August 1997, we established an unsecured $10.0 million revolving line of credit
with NationsBank, an affiliate of NationsBanc Montgomery Securities, and
BankBoston which we subsequently reduced to $2.0 million in 1998. At March 31,
1999, there were no borrowings outstanding under the line of credit.
In August 1997, we underwent a recapitalization in which we received net
proceeds of $91.0 million from the issuance and sale of redeemable and
convertible preferred stock and $50.0 million from borrowings under a term loan
facility with two banks. We used these proceeds, together with $14.7 million
from our existing cash balances, to repurchase shares of our common stock for
$155.7 million.
In addition to our term loan facility, we have a $2.0 million revolving
line of credit with the same banks. Both the term loan and the line of credit
are unsecured and mature in August 2002. The line of credit also contains a $2.0
million letter of credit subfacility. The term loan is due and payable in
quarterly installments which began on October 31, 1998. The amount of the
installments will be $7.5 million for July and October 1999, declining to $2.5
million per quarter thereafter with a final payment of $5.0 million in April
2002. At March 31, 1999, $45.0 million was outstanding on the term loan and no
amount was outstanding on the line of credit.
Cash provided by operating activities was $21.8 million during the year
ended December 31, 1998, $24.7 million during the year ended December 31, 1997
and $9.5 million during the year ended December 31, 1996. Cash provided by
operating activities was $5.3 million during the
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three month period ended March 31, 1999 and $7.4 million during the three month
period ended March 31, 1998. 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. In addition, during 1997 we received a $6.9 million tax benefit from
the exercise of stock options associated with our recapitalization.
Through August 1997, our investing activities consisted of the acquisition
of property and equipment. In September 1997, we acquired all of the outstanding
common shares of Netcom Systems Europe S.A.R.L., a research development, sales
and distribution company located near Paris, France. The purchase price was $3.0
million, plus $0.1 million of directly related costs. Net cash used for the
acquisition, net of cash acquired, was $2.4 million. During 1998, we purchased
investments, primarily corporate commercial paper, in the net amount of $14.7
million. During the three month period ended March 31, 1999, we increased these
investments by an additional net amount of $1.6 million.
Cash used in financing activities has consisted solely of $2.7 million used
for stockholder distributions during 1996, $14.7 million used in connection with
our recapitalization in 1997 and $2.5 million used to repay the term loan during
each of the three month periods ended December 31, 1998 and March 31, 1999. Cash
provided by financing activities has consisted solely of the exercise of
employee stock options, providing cash of $0.3 million for the year ended
December 31, 1998, $2.2 million for the year ended December 31, 1997, and $0.1
million from the repayment of a note receivable in 1998.
We believe that the net proceeds from this offering, together with our
current cash balances, cash provided by future operations and available
borrowings under our line of credit, will be sufficient to meet our 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 we experience continued growth in the future, our operating and
investing activities may require significant cash. Consequently, any such future
growth may require us to obtain additional capital. We cannot assure you that
additional capital, if required, will be available on acceptable terms, or at
all. If we are unable to obtain additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which would
materially adversely affect our business, financial condition and operating
results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Borrowings under both the term loan and the line of credit bear interest,
at our 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 our leverage ratio,
ranging from 0.875 percent to 1.5 percent per year. Through December 31, 1998,
we have selected the LIBOR Rate. However, we have an interest rate swap
agreement with the banks that results in our paying a fixed rate of 6.11 percent
on $25.0 million of the outstanding balance through October 5, 1999. At December
31, 1998, the interest rate in effect on the $22.5 million remaining outstanding
balance was 6.35 percent through June 2, 1999. A hypothetical 65 basis point
increase in interest rates would result in an approximate $130,000 increase,
approximately 5%, in our interest expense in 1999.
We generally invest our cash, cash equivalents and short-term investments
in corporate commercial paper or money market accounts. As of December 31, 1998,
the weighted average interest rate on these investments was approximately 5.5%.
A hypothetical 55 basis point decrease in interest rates would result in an
approximate $200,000 decrease, approximately 11%, in our interest income in
1999, assuming no change in cash balance.
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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. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish between 20th and 21st century dates. This may result in software
failures or the creation of erroneous results.
As a result, computer systems and/or software used by many companies may
need to be upgraded to account for this year 2000 problem. Our internal
information systems, including our financial accounting, product development and
operations systems, utilize software and hardware provided by third parties. In
most cases, we employ widely available software applications and other products
from leading third-party vendors and have been advised by these vendors that
their products are year 2000 compliant or that year 2000 versions will be
provided in a timely fashion.
Assessment of our products. Beginning in 1997, we began assessing the
ability of our software and products to operate properly in the year 2000.
During this assessment, we sent a questionnaire to our suppliers, requesting
compliance information and possible corrective action plans. We generally
represent to our customers that we have achieved year 2000 compliance for our
products and believe this to be the case. We believe our products do not contain
hardware components or software which involve the rollover of dates.
Assessment of our IT systems. Our internal systems include both our
information technology, or IT, and non-IT systems. We have initiated an
assessment of our significant internal IT systems. We believe we have identified
and tested all significant business critical applications such as accounting,
operations and sales management. Each of these systems has been acquired within
the past 15 months. We believe that these applications are all year 2000
compliant, although we cannot assure you of this. To the extent that we are not
able to test the technology provided by third-party vendors, we are seeking
assurances from vendors that their systems are year 2000 compliant. We are not
currently aware of any significant operational issues or costs associated with
preparing our internal IT systems for year 2000, although we cannot assure you
that no such operational issues or costs will arise. We continue to test and
will potentially make upgrades to Microsoft Office desktop applications, which
may not be year 2000 compliant. Additionally, Microsoft NT will be upgraded
during the summer of 1999 to ensure year 2000 compliance. The anticipated costs
for these upgrades are not expected to exceed $25,000, although we cannot assure
you that costs will not be greater. Currently, we have not incurred material
costs associated with our year 2000 compliance program.
Assessment of our non-IT systems. In addition to computers and related
systems, the operation of office and facilities equipment, such as fax machines,
telephone switches, security systems, and other common devices have been
assessed and are expected to have little or no disruption on our business due to
the year 2000 problem, although we cannot assure you of this. Most systems and
applications are less than one year old.
Assessment of our suppliers. As part of our year 2000 plan, we contacted
third-party suppliers of components and our key subcontractors used in the
delivery of our products to identify, and to the extent possible, resolve issues
involving the year 2000 problem. However, we have limited or no control over the
actions of these third-party suppliers and subcontractors. Thus, while we expect
that we will be able to resolve any significant year 2000 problems with these
third parties, there can be no assurance that these suppliers will resolve any
or all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure of these third parties to resolve year
2000 problems in a timely manner could have a material adverse effect on our
business, financial condition and results of operations.
Risks. We do not intend to develop any specific contingency plans to
address the effects of year 2000 problems. We believe that we have adequate
financial liquidity to sustain a temporary
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disruption in our business as a result of year 2000 problems. However, since we
cannot forecast with any certainty the impact, extent and duration of any year
2000 problems on our operations, our customers or our suppliers, there can be no
assurance that our resources will be adequate to withstand any prolonged
disruption. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as a utility or transportation company's year
2000 compliance failures and related service interruptions. In addition, our
customers are large companies with complex operations, and as such, we cannot
adequately assess the impact which year 2000 issues might have on their
operations. If current or future customers fail to achieve year 2000 compliance
or if they divert technology expenditures to address year 2000 compliance
problems, our business could be adversely affected.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998 and December 1998, the American Institute of Certified Public
Accounts, or AICPA, issued Statements of Position, or SOP, 98-4 and 98-9,
"Software Revenue Recognition," which provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
SOP 98-4 is effective for our fiscal year ending December 31, 1999. SOP 98-9 is
effective for our fiscal year ending December 31, 2000. Earlier application is
encouraged as of the beginning of the year or interim periods for which
financial statements or information have not been issued. Retroactive
application of the provisions of this SOP is prohibited. We have assessed the
provisions of SOP 98-4 and 98-9 and do not expect that adoption will have a
material impact on our financial statements.
In March 1998, AICPA issued SOP 98-1, "Software for Internal Use," which
provides guidance in accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for our fiscal year ending
December 31, 1999. We do not expect the adoption of SOP 98-1 to have a material
impact on our financial statements.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. We are required to adopt FAS 133 in the
fiscal year ending December 31, 2000. FAS 133 established methods for accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. We have not yet determined what
the effect of FAS 133 will be on our financial statements.
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BUSINESS
The following contains forward-looking statements that involve risks and
uncertainties. Our 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.
OVERVIEW
We are a leading provider of network performance analysis solutions for
network equipment manufacturers, network service providers and enterprises. Our
flagship platform, SmartBits, analyzes networking equipment, including
infrastructure and enterprise switches and routers, and broadband access
devices, such as cable modems and xDSL devices, to determine performance,
reliability, scalability, interoperability, quality of service and proof of
service, before deployment on the network. SmartBits allows users to analyze
network performance by emulating complex, multi-technology networks through the
generation, reception and analysis of high speed network traffic flows.
SmartBits offers a flexible, modular and scalable network performance platform
that allows our customers to deploy our solutions to fit their initial needs and
expand their systems as their needs evolve. Due to the importance of industry
recognition in our markets and rapidly evolving technology, we have established
relationships with several prominent industry experts and multiple technology
publications in the field of network performance analysis. Our customer base of
over 700 accounts includes leading network equipment manufacturers such as
Cisco, Lucent Technologies and Nortel Networks, semiconductor manufacturers,
telecommunications carriers and Internet service providers such as AT&T, GTE,
MCI WorldCom and Sprint, and enterprises such as Fortune 1000 companies,
financial institutions, systems integrators and government entities.
INDUSTRY BACKGROUND
The need for individuals, groups and businesses to exchange information
electronically has given rise to the multi-billion dollar networking industry.
Computers are now connected via hubs, switches and routers to form local area
networks, or LANs. LANs in multiple locations such as in remote and branch
offices, telecommuters and small office/home office users are interconnected by
public and private wide area networks, or WANs, enabling network users to access
and share information regardless of their locations. In addition, the emergence
of the Internet has provided a growing number of individuals with access to
these networks. As a result of these developments, communications networks are
encountering a number of significant challenges.
- Networks are becoming increasingly constrained. Networks are becoming
increasingly constrained due to the increase in communications traffic
across WANs as well as due to the rapid growth of the Internet. This
increase in network traffic and growth of the Internet are creating
bandwidth constraints at both the LAN level, which transmits data
primarily within a corporate network, as well as at the WAN backbone
level, which carries the majority of public and private network voice and
data traffic. In addition, there has been a dramatic increase in the use
of bandwidth-intensive multimedia applications that contain voice, video
and graphics. These applications are further burdening today's networks,
which require intelligent management of bandwidth. Finally, an increasing
amount of voice traffic is being migrated onto data networks, further
constraining today's networks.
- Networks are becoming more complex. Network complexity is increasing
significantly as new technologies and services are deployed. Multiple
high-speed technologies have been developed and now co-exist in LANs and
WANs. Examples of these networking technologies include Fast Ethernet,
Gigabit Ethernet, Frame Relay, ATM and Packet over SONET. In addition,
broadband access devices, including cable modems and xDSL devices,
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are being deployed to maximize the speed of access to the Internet of
both businesses and remote users. Advances in the capacity and
intelligence of network equipment have enabled telecom and Internet
service providers to offer an array of new differentiated services and
applications, including guaranteed quality of service, multicasting and
virtual private networks. The requirements for service providers to
effectively deploy, manage and bill for these services have further
complicated networks. In addition, the need to mediate between
co-existing voice and data traffic on the network has increased the
complexity of today's networks.
- Networks are becoming more mission-critical. E-commerce, on-line trading,
data warehousing, enterprise resource planning and payroll processing are
a few examples of the mission-critical applications that are routinely
performed on today's networks. These and many other mission-critical
applications require a robust networking infrastructure for the proper
operation of today's businesses. Any interruption in network service or
reduction in network performance can have immediate consequences in terms
of lost revenue, reduced productivity and damage to customer goodwill,
particularly as e-commerce continues to grow.
As a result of these trends, network equipment manufacturers are under
time-to-market pressure to provide cost-effective, high-performance equipment
with enhanced features, while at the same time ensuring that these products meet
interoperability standards and are highly reliable under increasingly variable
traffic conditions. Service providers and enterprises are under competitive
pressure to rapidly deploy new applications and services to increase revenues.
In addition, they must intelligently manage their available bandwidth and
minimize network failures in a cost-effective manner. Further, service providers
are increasingly being motivated to offer advanced network services, such as
guaranteed quality of service and service level agreements. To meet these needs,
network equipment manufacturers, service providers and enterprises require
independent, sophisticated and industry-recognized performance analysis
solutions.
Historically, network testing tools have existed to troubleshoot problems
after deployment of equipment on the network. Network engineers have
traditionally relied upon test instruments known as protocol analyzers to detect
the source of network performance problems after they have occurred. 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.
Today's switches and routers require a sophisticated performance analysis
solution that is able to scale to hundreds of ports, support a multitude of
technologies and measure key metrics such as the speed of the network, the time
required to process data, the variation in the time required to process data,
out of sequence data and quality of service. In addition, service providers and
enterprises require analysis solutions which can generate network traffic
simulating multiple users and can receive and analyze the performance of network
equipment under stressed conditions.
We believe that the growth of and increased dependence on network
communications has created a significant market opportunity for us to provide
network equipment manufacturers, network service providers and enterprises with
sophisticated performance analysis solutions.
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THE NETCOM SYSTEMS SOLUTION
Our flagship platform, SmartBits, enables network equipment manufacturers,
service providers and enterprises to analyze the performance, reliability,
scalability, interoperability, quality of service and proof of service of
network equipment, before deployment on the network. Our solution provides the
following key benefits:
- High Performance and Multi-Technology Platform. Our SmartBits system is
capable of generating, receiving and analyzing network traffic flows at
wire-rate speeds, which is the maximum speed that data can travel across
a particular device.
As the diagram below indicates, a single SmartBits chassis can
simultaneously analyze the performance of network equipment over a wide
variety of networking technologies, including Ethernet, Fast Ethernet,
Gigabit Ethernet, Token Ring, Frame Relay, ATM, and Packet over SONET, as
well as broadband access devices such as cable modems and xDSL devices.
[Graphic depicting SmartBits connected to various network equipment devices]
- IP Competency. Since our inception, we have focused on the development of
packet-based performance analysis equipment and, as a result, we have an
extensive understanding of Internet protocol, or IP, and frame
generation, tracking and analysis. Increasingly, the protocol used to
identify the data packets used by networks is IP. Unlike other traffic
generating devices, our SmartBits platform utilizes our proprietary
component-
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level technology to label and track individual data packets as they are
received and processed by networking equipment. This enables our
customers to ensure the performance of their IP network equipment and
applications and measure variables such as throughput, packet loss,
latency and jitter.
- Intelligent Performance Analysis. The intelligent performance analysis
capabilities of SmartBits, which includes our SmartMetrics testing
methodology, enable users to effectively analyze the performance of
individual network equipment components as well as the end-to-end
performance of large, multi-technology networks. SmartMetrics analyzes
traditional networking performance parameters relating to individual
network components, which include packet loss, throughput and latency, as
well as relating to more sophisticated parameters associated with overall
network performance such as stream latency, jitter, traffic flow and
bandwidth per connection. In addition, data networks are expanding to
include voice and video traffic and differentiated quality of service
levels. SmartMetrics enables analysis of advanced network functionality
such as mixed class throughput, session setup and break down, session
capacity and various quality of service levels.
- Flexible, Modular and Scalable System. The scalable and modular SmartBits
platform enables our customers to purchase any one of our four chassis
for use with our technology-specific interface cards, called SmartCards
or SmartModules. Our chassis can be linked together to simultaneously
replicate up to 768 ports. Customers may also choose from our library of
software tests to tailor their SmartBits system to their specific
requirements. Our flexible solution enables our customers to select the
combination of products that best suits their needs and to expand their
systems as their needs evolve, thereby leveraging the value of their
initial investments.
- Independent and Industry Recognized Solution. The SmartBits platform
serves as a common performance standard among users, manufacturers and
suppliers of network equipment. Network service providers and enterprises
use SmartBits to communicate existing and potential problems to equipment
manufacturers, which use the same SmartBits performance analysis
equipment to emulate, understand and solve these problems. In addition,
industry experts use SmartBits to evaluate network equipment from
multiple vendors and work closely with us to develop standard tests for
new technologies. The SmartBits platform has been recognized for several
years for its independent, multi-technology, high-port density
performance analysis capabilities by widely recognized technology
publications such as ATM World, Communications News, Computer Telephony,
Data Communications Magazine, Government Communications News, Internet
Week, Network Computing and Network World.
- Comprehensive Customer Support. The network performance analysis market
requires a high degree of customer interaction and support due to the
rapid pace of new product introduction and the increasing complexity of
new technologies. In recent years, we have invested significant resources
to build a customer support organization consisting of our sales
engineers in the field, our customer support center and our team of
support engineers. We believe our customer support organization
differentiates us from our competitors and increases customer loyalty. We
will continue to invest in this area to support our customers as new
technologies emerge and to expand the range of support services that we
provide.
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NETCOM SYSTEMS' STRATEGY
Our strategy is to strengthen and expand our market leadership in
developing, manufacturing and marketing network performance analysis solutions
become the industry standard for network performance analysis. Important
elements of our strategy are to:
- Capitalize on Rapid Technological Change. We believe that each new
technological advance in network computing represents a new market for
our performance analysis solution. We plan to continue to develop
performance analysis solutions for next generation LAN and public network
products and services and broadband access devices such as cable modems
and xDSL devices. We also plan to continue to develop new chassis
technology that is scalable to larger port counts and increased traffic
flows to enable SmartBits to emulate denser and more complex networks. We
intend to leverage our extensive IP knowledge to capitalize on the
increasing deployment of IP-centric networks. We plan to develop new
software applications to analyze performance features such as packet
sequencing and prioritization for the performance analysis of time
sensitive network traffic such as voice and video, as well as more
intelligent analysis such as policy-based network testing systems.
- Further Penetrate and Expand Our Network Equipment Manufacturer Customer
Base. We intend to increase sales to existing network equipment
manufacturer customers. We believe these customers are increasingly using
SmartBits in functional operations beyond research and development, such
as manufacturing, customer support and sales and marketing. We also
intend to continue to expand our relationships with manufacturers of
emerging network technologies, such as Extreme Networks, Foundry Networks
and Juniper Networks. We believe that relationships with emerging
companies will offer us new sales opportunities and the opportunity to
continue to provide competitive, technologically advanced network
performance analysis solutions.
- Expand into Additional Growing Markets. We intend to expand into the
service provider and enterprise markets, which increasingly require
solutions for analyzing and optimizing network equipment performance
before deployment on their mission-critical networks. In particular, we
plan to continue to target high growth service providers such as Level 3,
Qwest Communications and UUNet. To increase awareness of SmartBits among
these potential customers, we intend to promote our performance analysis
solutions through widely recognized publications and seminars and
emphasize our customer support capabilities. We believe we can leverage
our leadership in performance analysis equipment, our relationships with
leading network equipment manufacturers and industry experts, our
promotional efforts and our customer support infrastructure to further
penetrate these service provider and enterprise markets. Finally, we
intend to continue to develop and expand relationships with strategic
partners and distributors in order to expand our presence in Europe, Asia
and Latin America.
- Leverage Key Industry Relationships. We believe that our role as an
industry recognized provider of network performance analysis solutions
for next generation technologies is critical to our continued leadership
and success. We intend to continue to leverage our key relationships with
prominent industry experts and test labs, networking publications and
industry leading equipment manufacturers to position us to be first to
market with new industry standard tests that analyze the performance of
new networking technologies. We work closely with prominent industry
experts and test labs such as Robert Mandeville of European Network
Laboratories, Scott Bradner of Harvard University, Steve Bell of Silicon
Valley Networking Labs, Kevin Tolly of The Tolly Group, Barry Reinhold of
the University of New Hampshire and Lee Dorier of ZD Labs.
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CUSTOMERS
We have a customer base of over 700 accounts. We believe that our existing
customer base, including most industry leading network equipment manufacturers,
service providers and enterprises provides us with recognition among potential
customers. Set forth below are the seven largest U.S. purchasers of our
SmartBits systems in the categories of network equipment manufacturers, service
providers and enterprises, based on 1998 U.S. revenues. Also set forth below are
what we believe to be our three largest international customers for 1998 in each
of these categories, based in part upon information provided to us by our
distributors. The information set forth below has been compiled excluding sales
to foreign divisions and affiliates of our U.S. customers.
MANUFACTURERS
United States
3Com
Cabletron
Cisco
FORE Systems
IBM
Lucent Technologies
Xylan
International
D-Link
Hitachi
Nortel Networks (includes Bay Networks)
SERVICE PROVIDERS
United States
Ameritech
AT&T
Bell South
GTE
MCI WorldCom
Southwestern Bell
Sprint
International
British Telecom
Deutsche Telekom
France Telecom
ENTERPRISES
United States
Aetna Life Insurance
Andersen Consulting
Cable Television Lab
Los Alamos Laboratories
Microsoft
NationsBank
U.S. Army
International
Matsushita
NEC
NTT
Each of our target markets has different uses for SmartBits and different
purchasing practices. Currently, network equipment manufacturers represent a
significant amount of business for us. During 1998, U.S. sales to network
equipment manufacturers represented 82.0% of our U.S. revenues. Network
equipment manufacturers typically purchase an entire SmartBits system consisting
of one or more chassis, interface cards and software. The demand from network
equipment manufacturers for subsequent system purchases and add-on interface
cards is driven by their internal needs. For example, research and development
departments can use SmartBits to develop new network technologies, whereas
quality assurance and manufacturing departments can use SmartBits to analyze
new, improved or acquired products lines for interoperability and
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standards compliance. This allows us to sell SmartBits to departments throughout
an organization as illustrated below.
[Graphic depicting SmartBits connected to various networking technologies
encircled by representations of various departments in network equipment
manufacturer organizations]
A growing portion of our customer base includes service providers and
enterprises. These customers purchase SmartBits to ensure that equipment from
network equipment manufacturers conforms to industry standards and is fully
interoperable in multi-vendor and multi-technology 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. Usually, a service provider or
enterprise will purchase between one and four SmartBits chassis and then buy
additional stand-alone interface cards as the need arises to analyze the
performance of new technologies.
Historically, a significant amount of our revenues has been generated by
sales to our largest customers, all of whom are network equipment manufacturers.
U.S. sales to our four largest customers collectively accounted for 36.0% of our
revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in
1998. Our customer concentration was less pronounced in the first three months
of 1999, when U.S. sales to our four largest customers represented 21.6% of our
revenues. In the year ended December 31, 1996, sales to Bay Networks accounted
for 14.9% of our revenues and sales to Cisco accounted for 11.8% of our
revenues. In the year ended December 31, 1997, sales to each of Bay Networks and
Cisco accounted for 10.9% of our revenues. Sales to Cisco also accounted for
12.1% of our revenues in the year ended December 31, 1998. No customer accounted
for 10% or more of our revenues in the first three months of 1999. Our
international distributors may also make additional sales to foreign divisions
or affiliates of these customers which are not reflected in the percentages
above.
PRODUCTS
The SmartBits platform consists of the following family of products:
- SmartBits Chassis. Our SMB-2000, SMB-200, SMB-6000 and SMB-600 chassis
provide users with a comprehensive selection of products which can scale
to support up to 768 ports. In
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addition, we offer the SMB-10, a 20-slot expansion chassis, which expands
the capacity of the SMB-2000.
- SmartCard and SmartModule Interface Cards. Our broad portfolio of
SmartCards and SmartModules work in conjunction with our SmartBits
chassis to allow users to simultaneously analyze, in LAN and WAN
configurations, multiple networking technologies such as Ethernet, Fast
Ethernet, Gigabit Ethernet, Token Ring, Frame Relay, ATM and Packet over
SONET.
- Software Applications. Our suite of automated, graphical user interface
software applications performs sophisticated analyses such as raw
packet-level performance analysis, signaling, connection oriented
analysis, policy-based analysis, and broadband access device and system
testing.
- Custom Tools. Our user-customization tools allow users to create their
own test scenarios using industry-standard development environments.
With our products, a single SmartBits system can be configured to perform a
wide range of performance analysis scenarios. These various scenarios can be
applied to many of the emerging technologies currently used in the modern
networking infrastructure. Examples of these technologies and their related
products are listed below:
BROADBAND ACCESS
<TABLE>
<CAPTION>
RELATED PRODUCTS DESCRIPTION
<S> <C>
Interface Cards SmartBits can be used for testing high-speed Internet access
ML-5710A technologies with a combination of interface cards and
ML-7710A applications. SmartCableModem, for instance, allows cable
modem manufacturers to accelerate product development of
Applications their cable modem devices while at the same time easing the
SmartCableModem certification process. SmartxDSL offers the same benefits
SmartxDSL for xDSL manufacturers. Internet access providers can also
use SmartCableModem and SmartxDSL for product and system
verification prior to deployment. With the emergence of USB
as the preferred method of access for home users, the
ML-5710A also offers the same benefits for testing cable
modem and xDSL devices and systems using a USB interface.
</TABLE>
HIGH SPEED
<TABLE>
<CAPTION>
RELATED PRODUCTS DESCRIPTION
<S> <C>
Interface Cards The increase in network complexity is creating a demand for
GX-1405B higher speed networking technologies. Gigabit Ethernet and
GX-1420A Packet over SONET are two examples of these high speed
LAN-3200A technologies. The GX-1405B, GX-1420A, LAN-3200A and
LAN-6200A LAN-6200A address the need for testing gigabit fiber and
POS-6500A copper devices under heavy load. The POS-6500A allows users
to test the performance of their OC-12c Packet over SONET
devices to forward raw packets as well as to handle
policy-based traffic forwarding.
</TABLE>
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<PAGE> 41
POLICY-BASED
<TABLE>
<CAPTION>
RELATED PRODUCTS DESCRIPTION
<S> <C>
Interface Cards The complexity of communications devices is increasing
ML-5710 significantly as intelligent policy-based forwarding
ML-7710 functions are incorporated into the devices. The convergence
POS-6500A of data, voice and video requires devices to support various
types and classes of services. Our ML-5710, ML-7710, and
Applications POS-6500 interface cards are designed to enable such testing
SmartFlow at speeds up to 622 Mbps and with hundreds of ports. Our
SmartMulticastIP SmartFlow tests the ability of intelligent devices to handle
SmartTCP IP flows under various quality of service and differentiated
service settings. SmartMulticastIP provides an automated,
industry-standard method of testing the capability of
networking devices at handling multicast IP traffic that is
critical for point-to-multipoint communications such as
distant learning and data warehousing. Our SmartTCP tests
the ability of load balancing devices to effectively take
advantage of load balancing techniques for improved web
server access. Each ML-7710 card, for instance, can generate
up to 64 million IP flows for stress testing these devices
while analyzing proper handling and forwarding of traffic
based on the designated policy.
</TABLE>
INTERNET BACKBONE
<TABLE>
<CAPTION>
RELATED PRODUCTS DESCRIPTION
<S> <C>
Interface Cards As the volume of Internet traffic increases, carriers and
AT-9155C network service providers are faced with the challenge of
AT-9622 ensuring that their infrastructure can handle the increase
WN-3415 in traffic while at the same time users are requiring
WN-3420 improved performance. Our AT-9155C, AT-9622, WN-3415 and
WN-3420 interface cards and our ATM-Mesh-Test and
Applications FR-Mesh-Test applications can be used to characterize the
ATM-Mesh-Test performance limits of ATM and Frame Relay carrier class
FR-Mesh-Test switches with hundreds of ports. These products allow
network equipment manufacturers and service providers to
validate the performance of these high port density, high
speed devices for handling the traffic demands of the
Internet.
</TABLE>
In addition, we offer a family of Ethernet SmartCards that generate and
monitor Ethernet traffic at speeds up to 100Mbps, such as the LAN-3100A and
LAN-6100A, and the SX-7210 and SX-7410, which continue to represent a
substantial portion of our revenues.
A stand-alone SmartBits chassis, which comes bundled with our standard
software, lists in the U.S. for $12,495 for an SMB-2000, $4,995 for an SMB-200,
$14,995 for an SMB-6000 and $7,500 for an SMB-600. An SMB-10 expansion chassis
lists for $4,995. The U.S. list prices of SmartCards and SmartModules range from
$1,195 to $29,995, while the U.S. list prices of software applications range
from $1,995 to $20,000.
TECHNOLOGY
SmartBits consists of integrated software and hardware systems that provide
users with a robust performance analysis solution. Key features of our SmartBits
technology include:
- Modular, Wire Rate, IP-Based Core Engine. At the core of SmartBits is an
ASIC-based, IP packet generation, reception and analysis engine. Each
SmartCard and SmartModule contains a single core engine and physical
interface port. The core engine architecture is
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scalable from one kilobit per second to one gigabit per second, and is
capable of performing wire rate, real time traffic generation, reception
and analysis. The core engine can generate up to 64 million individual IP
flows with real time tracking and analysis. Our second generation of the
core engine is capable of applying a unique signature field for each
packet it generates. The signature field allows the core engine to
analyze parameters important to a user's quality of service such as
packet delay, packet delay variation, or jitter, and packet arriving
sequence for each class of IP flows. The proprietary technology
associated with our signature field is designed to guarantee that packets
containing the signature field are compatible with most network equipment
currently in operation.
- SmartMetrics and Quality of Service. To meet the needs of increasingly
complex IP networks, we have created an analysis methodology known as
SmartMetrics. SmartBits implements the SmartMetrics methodology to
analyze complex, scalable, high performance networks. SmartMetrics is
comprised of a set of analysis tools and tests designed to determine the
quality of service of a network-based system. Analyzing the quality of
network services requires the assessment of each network component under
a variety of conditions. SmartMetrics analyzes traditional networking
performance parameters such as packet loss, throughput and packet
latency, and more sophisticated parameters such as stream latency,
jitter, traffic flow, bandwidth per connection and quality of service.
- Scalable SmartBits Platform Architecture. The systems architecture of a
SmartBits chassis allows for the flexible implementation of the core IP
packet generation, reception and analysis engine. Up to eight SMB-200,
SMB-2000 or SMB-10 chassis can be used together in a single
configuration, allowing analysis of up to 640 network interface ports.
The SMB-600 and SMB-6000 chassis support up to six SmartModules per
system. Each SmartModule may contain up to 64 core engines and up to 16
physical interface ports. As many as eight SMB-600 or SMB-6000 chassis
can be used together in a single configuration, allowing analysis of up
to 768 network interface ports. A multiple SMB-600/6000 chassis
configuration is capable of simulating and analyzing billions of IP
traffic flows.
- Standards-Based Network Performance Tests. We have developed a rich set
of software applications to implement standards-based network performance
tests using the SmartBits architecture. The standard SmartBits software
applications enable customers to execute standards-based performance
tests for network devices, LANs and backbone networks. These performance
tests measure packet forwarding throughput, packet delivery latency,
packet loss and device stability. Our standard performance tests support
all technologies supported by SmartCards and SmartModules, including
Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, Frame Relay, ATM
and Packet over SONET.
- Testing Network Connection Resources. Certain modern network devices
incorporate additional intelligence which enables them to support
multiple virtual connections for each physical port. A virtual connection
must be made before data packets can be forwarded. With our applications,
SmartBits enables customers to measure and analyze the connection layer
performance, including the connection call set up and tear down rate,
simultaneous connection capacity and call setup latency. These
measurements enable network equipment manufacturers to improve the
performance of their devices and enable network service providers to
deploy systems that are compatible with a variety of technologies
including ATM, Frame Relay, VLAN, IP Multicast and TCP.
- Policy-Based Network Analysis. Our policy-based network analysis allows
for testing of different classes of service based on service level
agreements or applications. Policy affects the quality of service of each
IP flow forwarded by the network device. SmartBits products built with
our second generation core engine enable customers to measure and analyze
the quality of service implementation and performance for each class of
IP flow. The standard measurement of packet forwarding throughput, packet
forwarding error, forwarding latency
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<PAGE> 43
and jitter can be measured and tracked for each class of service provided
by the packet forwarding devices. With these measurements customers can
verify and measure quality of service implementation and improve
performance through real traffic, at capacity level testing. This enables
network service providers, particularly providers of virtual private
networks and voice over IP, to validate and meet quality of service
obligations under service level agreements.
SALES AND MARKETING
Our direct sales force markets and sells our products in the United States,
France, the United Kingdom, Denmark and Ireland and our distributors market and
sell our products in 35 countries throughout the world. As of April 30, 1999,
our sales group employed a direct sales team composed of 24 sales professionals,
15 sales engineers worldwide and 5 inside sales personnel worldwide. Sales
engineers are important to the sales process, since they are the primary
vehicles through which we provide value-added services to customers such as
training and troubleshooting. We are dedicated to establishing new international
distributor relationships and servicing the needs of current distributors.
International revenues represented 16.7% of our revenues in 1996, 26.1% of our
revenues in 1997, 25.5% of our revenues in 1998 and 29.6% of our revenues in the
first three months of 1999.
Our marketing strategy is to target network equipment manufacturers,
service providers and enterprises. Our marketing team creates the product
roadmap, defines innovative products to address the business needs of our
markets, and works to ensure timely delivery of products to meet and exceed
customer expectations. We partner with key trade publications and leading
industry test laboratories to create user awareness and demand for our products.
Awareness and educational initiatives also include trade shows, seminars, white
papers, application notes, mailing pieces, trade publications and advertising.
Our marketing group is also responsible for professional services that include
training, testing consultancy and support for large scale tests. We maintain
knowledge of new technology innovations by participating in technology forums
and industry standard bodies such as the Institute of Electrical and Electronic
Engineers, the Internet Engineering Task Force, the Gigabit Ethernet Alliance,
and ATM, ADSL, Quality of Service and Frame Relay forums. As of April 30, 1999,
the marketing group employed 24 people with extensive experience in the test,
measurement and network equipment marketplace. The marketing group also uses the
services of outside consultants.
CUSTOMER SUPPORT
We believe that superior technical services and support are critical to
customer satisfaction and the development of customer relationships. We also
believe that achieving high levels of customer satisfaction through, among other
things, the development of an extensive quality assurance infrastructure
differentiates us from our competitors and increases customer loyalty. We have
divided our customer support organization into two distinct units, customer
service and support engineering, to better meet customer needs. Both customer
service organizations are responsible for providing ongoing technical support
and training for our customers and distributors. Customers receive telephone and
e-mail support, and for a fee, receive new releases of our software and
firmware. As of April 30, 1999, we employed 13 customer support and support
engineering personnel. We believe that customer feedback obtained through
technical support is critical to our research and development efforts.
Our support engineering unit concentrates on supporting major accounts such
as the larger network equipment manufacturers 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 our research and development team to develop a solution,
testing the solution and delivering it to the customer. This group does
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on-site customer visits when necessary and develops new product training
programs for customer service representatives, systems engineers and sales
professionals.
RESEARCH AND DEVELOPMENT
We believe that research and development is critical to our business. Our
research and development efforts are focused on developing products for the
network performance analysis market and further enhancing existing products. Our
development efforts include:
- anticipating and addressing the performance analysis needs of network
equipment manufacturers, service providers and enterprises;
- focusing on emerging high growth networking technologies;
- emphasizing more intelligent performance analysis; and
- improving the ease of use and scalability of SmartBits.
Our future success depends on our ability to continue to enhance our
existing products and to develop products that solve the needs of our customers.
We closely monitor changing customer needs by communicating directly with our
customer base and distributors. We also receive input from active participation
in industry groups responsible for establishing technical standards.
Our research and development organization is composed of multiple project
groups. Each group consists of engineers dedicated to four activities: hardware,
firmware, software or quality assurance. 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. Software engineers include
application engineers and application user interface engineers. Application
engineers use compilers to produce software applications that are used by
network equipment manufacturers to rapidly create tailored tests for their
unique needs in manufacturing, quality assurance and customer support. Quality
assurance engineers ensure products are functioning according to specifications
prior to release and work closely with customer service in addressing customer
concerns.
Development schedules for technology products are inherently difficult to
predict, and there can be no assurance that we will introduce any proposed new
products in a timely fashion. Also, there can be no assurance that our product
development efforts will result in commercially successful products or that our
products will not contain software errors or other performance problems or be
rendered obsolete by changing technology or new product announcements by other
companies. Additionally, if we are to successfully introduce new products in the
future, we must recruit additional personnel, competition for whom is intense.
We have made and will continue to make significant investments in research
and development. Our research and development expenditures were $1.7 million in
1996, $3.5 million in 1997, $8.6 million in 1998 and $2.7 million in the first
three months of 1999. As of April 30, 1999, our research and development staff
consisted of 75 employees.
MANUFACTURING
Our manufacturing operations consist primarily of materials planning and
procurement, warehousing, distribution, quality control, logistics, final
assembly and test. We outsource the assembly of printed circuit boards to third
party contract manufacturers. We use a variety of independent third-party
contract assembly companies to perform printed circuit board assembly.
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This manufacturing process enables us to satisfy specific customer demands with
minimal capital and human resources. As of April 30, 1999, there were 45
employees in manufacturing.
We are dependent upon sole or limited source suppliers for key components
and parts used in our products, including microprocessors and integrated
circuits. We purchase sole or limited source components through purchase orders
and have no guaranteed supply arrangements with these suppliers. In addition,
the availability of many of these components is dependent in part on our ability
to provide our suppliers with accurate forecasts of our future requirements. Any
extended interruption in the supply of any of the key components currently
obtained from a sole or limited source, or in the time necessary to transition
to a replacement supplier's product or replacement component into our products,
could disrupt our operations and materially adversely affect our business in any
given period. We also purchase 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. We may also be subject to increases in component costs, which could
also have a material adverse effect on our business, results of operations and
financial condition.
Lead times for materials and components ordered by us vary and depend on
factors such as the specific supplier, contract terms and demand for a component
at a given time. We acquire materials, complete standard subassemblies and
assemble fully-configured systems based on our sales forecasts and historical
purchasing patterns. If orders do not match forecasts or substantially deviate
from historical patterns, we may have excess or inadequate inventory of
materials and components.
COMPETITION
We face competition from the following sources: network equipment
manufacturers that develop in-house products; test equipment manufacturers such
as Hewlett-Packard; start-up companies focused on network performance
measurement such as IXIA Communications and Antara; companies specializing in
ATM performance testing such as Adtech and RADCOM; software-based network
traffic simulators such as Ganymede Software and Optimal Networks. We may also
face competition from other companies such as Network Associates and some of our
distributors that sell networking products with functionality complementary to
SmartBits. Some of our competitors and potential competitors have greater
resources, name recognition and sales capabilities than we do.
Competitive factors in the network performance analysis market include:
- breadth of product features;
- product quality, reliability and functionality;
- conformance to industry-standard technologies;
- pricing;
- marketing and sales resources;
- customer service and support; and
- reputation.
The network performance analysis market became increasingly competitive in
1998 which affected our business. Any further increase in competition in the
network performance analysis market could result in increased pressure on us to
reduce prices for our products and could result in a reduction in our revenues
and/or in our margins, each of which could adversely impact our results of
operations. In addition, increased competition could prevent us from increasing
our market share, or cause us to lose our existing market share, either of which
would adversely affect our business and could impact our profitability. We
cannot predict whether our
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current or future competitors will develop or market technologies and products
that offer higher performance or are more cost-effective than our current or
future products. To remain competitive, we must continue to develop products and
product enhancements which offer higher performance at a lower cost. Our failure
to do so would adversely affect our revenues and results of operations.
PROPRIETARY RIGHTS
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to compete
is dependent in part upon our proprietary technology. We rely on a combination
of contractual rights and copyright, patent, trademark and trade secret laws to
establish and protect our proprietary technology. Currently, we have one U.S.
patent application pending. We generally enter into confidentiality agreements
with our employees, consultants, resellers, customers and potential customers.
We also strictly limit access to and distribution of our source code, and
further limit the disclosure and use of other proprietary information. We cannot
assure you that the steps taken by us in this regard will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain or use our products
or technology. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license to the technology that is the subject of
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of any litigation
and the resulting distraction of our management resources could adversely affect
our results of operations. We also cannot assure you that any licenses of
technology necessary for our business will be available or that, if available,
such licenses can be obtained on commercially reasonable terms. Our failure to
obtain such licenses, or to protect our proprietary technology, could have a
material adverse effect on our business and results of operations.
FACILITIES
Beginning in June 1999, our principal operations will be conducted out of
one leased building located in Calabasas, California with a total area of
107,169 square feet. This lease will expire on August 31, 2009. We maintain an
additional 50,000 square feet that we are seeking to sublease in Chatsworth,
California under a lease that expires on August 31, 2002. We also maintain seven
branch sales offices and three research and development facilities in the United
States. Our European operations are headquartered in Guyancourt, France. We
believe our existing facilities are adequate to meet our needs for the immediate
future and that future growth can be accommodated by leasing additional or
alternative space near our current facilities.
EMPLOYEES
As of April 30, 1999, we had 226 full-time employees. Of these, 75 were
involved in engineering, 82 in sales, marketing and customer support, 45 in
operations, and 24 in finance and administration. We consider that our relations
with our employees are good. We have not experienced any interruption of
operations as a result of labor disagreements.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Barry Phelps............................. 52 President, Chief Executive Officer and Director
Gil Cabral............................... 51 Vice President, Finance, Chief Financial
Officer and Secretary
James Jordan............................. 62 Vice President, Sales
Gene Zhang............................... 43 Vice President, Engineering
Mark Fishburn............................ 52 Vice President, Marketing
Dwight Olson............................. 48 Vice President, Operations
Stephane Johnson......................... 43 Vice President, International Sales
Walter Kortschak(1)(2)................... 40 Chairman of the Board
Richard Moley(1)......................... 60 Director
Robert H. Sheridan III(2)................ 36 Director
Michael West(2).......................... 49 Director
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Set forth below is information regarding the business experience during the
past five years for each of our officers and directors.
Barry Phelps has served as our President and Chief Executive Officer since
November 1997 and has served as a director of our company since January 1998.
From November 1996 to November 1997, Mr. Phelps served as our Vice President,
Finance and Chief Financial Officer. Prior to joining our company, Mr. Phelps
served as Chairman and Chief Executive Officer of MICOM Communications
Corporation from February 1992 to November 1996 and Vice President, Chief
Financial Officer from August 1988 to January 1992. MICOM was acquired by Nortel
Networks 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 our Vice President, Finance, Chief Financial
Officer and Secretary since October 1997. Prior to joining our company, 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.
James Jordan has served as our Vice President, Sales since December 1996.
Prior to joining our 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.
Gene Zhang has served as our Vice President, Engineering since April 1996.
From January 1988 to April 1996, Mr. Zhang held various positions at Wandel &
Goltermann Technologies, Inc., including Director of Engineering and Business
Unit Manager.
Mark Fishburn has served as our Vice President, Marketing since March 1997.
From July 1993 until he joined our company, Mr. Fishburn founded and was
President of Achieve, Inc. From
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October 1984 through June 1993, Mr. Fishburn held various management positions
at Retix, including UK Managing Director and Vice President, General Manager of
OSI Software Products.
Dwight Olson has served as our 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. Prior to joining MICOM, Mr. Olson held
management positions with Northern Telecom and ITT Electronics.
Stephane Johnson has served as our 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 1992, 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 served as our 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 our
company. Mr. Kortschak also serves as a director of E-Tek Dynamics, Inc., HMT
Technology Corporation and several privately held companies.
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 Corp., CMC Industries, Inc.,
Cidco, Inc. and Echelon, Inc.
Robert H. Sheridan III has served as a director since August 1997. Mr.
Sheridan is a Managing Director of Bank of America Capital Investors, the
principal investment group within Bank of America Corporation, and a Managing
Director of BA Capital Company, L.P., which is a stockholder of Netcom Systems.
Prior to joining a predecessor of Bank of America Capital Investors in January
1994, Mr. Sheridan worked in the corporate bank division of a predecessor of
Bank of America Corporation from June 1989 to January 1994. Mr. Sheridan serves
as a director of Cumulus Media, Inc.
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 following its acquisition of Octel Communications Corporation.
Before that, Mr. West was employed by Octel Communications Corporation from
September 1986 to September 1997, most recently as President and Chief Operating
Officer. Mr. West also served as a director of Octel Communications Corporation
from February 1995 to September 1997. Mr. West also serves on the board of
directors of several private companies.
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed.
There are no family relationships among any of our directors or executive
officers.
BOARD COMPOSITION AND ELECTION
We currently have authorized six directors and have one vacancy on the
board of directors. Upon the closing of the offering, we will have authorized
five directors. In accordance with the terms of our certificate of
incorporation, the terms of office of our board of directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders
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to be held in 2000, Class II, whose term will expire at the annual meeting of
stockholders to be held in 2001 and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2002. The Class I director is Mr.
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 our directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
our company. Our directors may be removed for cause by the affirmative vote of
the holders of a majority of our common stock.
Voting Agreement
In connection with our recapitalization in the third quarter of 1997,
Netcom Systems and certain of our directors, executive officers and stockholders
became parties to a stockholders agreement under which certain stockholders have
agreed to vote their shares to preserve the number of authorized directors of
our company at six and to elect certain representatives to serve as our
directors. Together, these persons and entities will hold 25,446,769 shares, or
% of our outstanding common stock following consummation of the offering.
Accordingly, these stockholders are able to elect all of our directors, will
retain the voting power to approve all matters requiring stockholder approval
and have significant influence over our business affairs. The provisions of the
stockholders agreement will survive the offering 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.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. The
audit committee consists of Messrs. Sheridan, West and Kortschak. The functions
of the audit committee are to review our annual budget and to meet with our
independent auditors to review our internal accounting procedures and financial
management practices. The compensation committee consists of Messrs. Moley and
Kortschak. The functions of the compensation committee are to determine
salaries, incentives and other forms of compensation for our directors, officers
and other employees and to administer our stock plans.
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 our formation, an officer or
employee of Netcom Systems. None of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Our 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 our stock plans and, following this offering,
employee directors will also be eligible to participate in our 1998
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Employee Stock Purchase Plan. Upon the closing of this offering, each outside
director will be granted options to purchase common stock under the 1998 Stock
Plan as follows:
- each new outside director shall automatically be granted a nonstatutory
stock option to purchase 6,000 shares of common stock on the first,
second, third, fourth and fifth anniversaries of the date on which such
person first becomes an outside director; and
- each outside director shall automatically be granted a subsequent option
to purchase 6,000 shares on the date of our annual meeting of
stockholders, if on that date he or she shall have served on the board
for at least 18 months.
Each option shall have a term of 10 years. The shares subject to each
option shall vest in full on the date of grant. The exercise price of each
option shall be 100% of the fair market value per share of our common stock on
the date of grant. For a more complete discussion of the options granted to our
directors, see "Employee Benefit Plans."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
We routinely deliver written offer letters containing provisions on salary
bonuses, benefits and stock option grants to prospective members of management
and other employees. In addition, we have entered into employment and
change-in-control agreements as described below.
We 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 original term of the agreement was
one year and the agreement has been renewed annually each year since 1994. If
not renewed by November 30 of any year, the agreement will automatically
terminate on December 1 of that year. Pursuant to this agreement, Mr. Jordan
agreed not to directly or indirectly compete with us in the manufacture or sale
of products which are identical or similar to our products for one year
following termination of his employment.
In September 1996, we entered into a written employment agreement with
Barry Phelps, our President and Chief Executive Officer. The agreement, as
amended over time, provides for certain bonuses and acceleration of options,
each of which has been paid or effected to date. In addition, the agreement with
Mr. Phelps requires that we provide three months' prior notice if we wish to
terminate Mr. Phelps' employment for convenience.
We 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 other benefits
to which Mr. Johnson is entitled. The original term of the agreement was one
year and the agreement has been renewed annually each year since 1996. 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 that if Mr.
Johnson is involuntarily terminated without cause at any time after September 1,
1997, we will continue to pay Mr. Johnson's salary and other benefits for three
months following the effective date of his termination. Pursuant to this
agreement, Mr. Johnson agreed not to directly or indirectly compete with us in
the manufacture or sale of products which are identical or similar to those of
our company for one year following termination of his employment.
In June 1997, we and Netcom Systems Europe entered into a written
employment agreement with Henry Hamon, who served as Netcom Systems Europe's
General Manager until February 1999. Currently, Mr. Hamon is on unpaid
sabbatical from Netcom Systems Europe. The agreement with Mr. Hamon sets forth
his base salary, sales commissions and bonuses. The term of employment covered
by the agreement extended to February 1, 1999. After February 1, 1999, we may
terminate the agreement for cause, as defined under French law, subject to a
three month notice period. Pursuant to this agreement, Mr. Hamon agreed not to
engage in any other
49
<PAGE> 51
employment, occupation, consulting or other business activity directly related
to our business for a period of six months following termination.
In May 1998, we entered into change-in-control agreements with each of our
executive officers. These agreements provide that if the executive officer's
employment is involuntarily terminated at any time within 24 months after a
change-in-control other than for cause, then the executive officer shall be
entitled to acceleration of all options and a severance payment equal to one
year of the executive officer's base compensation for our fiscal year then in
effect plus the executive officer's bonus calculated at one hundred percent of
target for our 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 termination, the executive officer shall continue to
participate in our health and dental insurance benefit plans. A
change-in-control is defined as:
- the acquisition by a third party of beneficial ownership of our
securities representing 50% or more of the total voting power represented
by our then outstanding voting securities; or
- a change in the composition of our board of directors as a result of
which fewer than a majority of the directors are incumbent directors 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 the election or nomination; or
- a merger or consolidation of us with any other corporation, other than a
merger or consolidation which would result in our voting securities
outstanding immediately prior thereto continuing to represent at least
50% of the total voting power represented by our voting securities or the
surviving entity outstanding immediately after the merger or
consolidation; or
- the approval by our stockholders of a plan of complete liquidation or of
an agreement for the sale or disposition by us of all or substantially
all of our assets.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid by us to
our Chief Executive Officer and to the other four most highly compensated
executive officers (collectively the "Named Executive Officers") during the
fiscal year ended December 31, 1998. Other annual compensation listed in the
following table represents sales commissions earned by that officer. 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 $50,000 or 10% of the total
of annual salary and bonus reported for the Named Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OTHER($) OPTIONS(#)
--------------------------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Barry Phelps................................. $199,050 $13,610 -- --
President and Chief Executive Officer
James Jordan................................. 151,792 -- $ 325,886 800,000
Vice President, Sales
Henry Hamon(1)............................... 93,157 -- 289,657 --
General Manager, Netcom Systems Europe
Stephane Johnson............................. 243,723 -- 92,642 --
Vice President, International Sales
Gene Zhang................................... 157,678 31,450 -- --
Vice President, Engineering
</TABLE>
- ---------------
(1) Mr. Hamon is currently on an unpaid sabbatical from Netcom Systems.
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<PAGE> 53
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
In 1998, we granted employees, consultants and directors options to
purchase 1,961,100 shares of common stock, excluding options to purchase 250,000
shares of common stock regranted upon the cancellation of other options in
connection with the repricing of options in November 1998. The following table
sets forth each grant of stock options made during the fiscal year ended
December 31, 1998 to each of the Named Executive Officers:
Potential realizable values for the following table are:
- net of exercise price before taxes;
- based on the assumption that our common stock appreciates at the annual
rate shown, compounded annually, from the date of grant until the
expiration of the ten-year term; and
- based on the assumption that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
These numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock price
growth. No stock appreciation rights were granted during the fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE OF
NUMBER OF PERCENTAGE ASSUMED ANNUAL RATES OF
SECURITIES OF TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#) 1998 ($/SH) DATE 5%($) 10%($)
---- ---------- ---------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry Phelps.................. -- -- -- -- -- --
James Jordan(1)............... 800,000 40.80% $2.00 1/08/08 $1,006,231 $2,549,988
Henry Hamon...................
Stephane Johnson.............. -- -- -- -- -- --
Gene Zhang.................... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The option granted to Mr. Jordan has a vesting schedule as follows: 33 1/3%
vests on the first, second and third anniversaries of the vesting
commencement date. The exercise price per share of Mr. Jordan's option is
equal to the fair value of the common stock on the date of grant as
determined in good faith by the board of directors.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises for
the fiscal year ended December 31, 1998 and exercisable and unexercisable
options held as of December 31, 1998 by the Named Executive Officers. The fair
market value of our common stock at the close of business on December 31, 1998
was determined by our Board of Directors to be $7.50 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry Phelps.......... -- -- 159,168 510,833 $ 963,342 $3,073,331
James Jordan.......... 150,000 $900,000 266,667 533,333 1,466,669 2,933,332
Henry Hamon........... -- -- 77,444 347,889 464,664 2,117,334
Stephane Johnson...... -- -- 106,334 299,000 648,004 1,802,333
Gene Zhang............ -- -- 78,333 301,667 469,998 1,810,002
</TABLE>
52
<PAGE> 54
EMPLOYEE BENEFIT PLANS
1993 Stock Plan
A total of 3,922,000 shares of common stock have been reserved for issuance
under our Amended and Restated 1993 Non-Statutory Stock Option and Purchase
Plan, as amended, or the 1993 Stock Plan. Under the 1993 Stock Plan, as of March
31, 1999, options to purchase 2,106,221 shares were outstanding, 1,815,779
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 nonstatutory stock options,
or options not intended to qualify within the meaning of Section 422 of the
Internal Revenue Code, to our key employees. The 1993 Stock Plan is administered
by 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 committee also determines the schedule upon which
options become exercisable. The term of options granted under the 1993 Stock
Plan is ten years or five years in the case of an employee holding more than 10%
of the voting power of all classes of our stock.
Options granted under the 1993 Stock Plan are not transferable by the
optionee except by will or the laws of descent and distribution, and each option
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 1993 Stock Plan must generally be exercised within three
months after an optionee's termination of employment or within 12 months after
an optionee's termination by disability or death, respectively. If an optionee
dies while employed by us or 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 12 months. 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 our company with or into another corporation, or a sale of
substantially all of our assets, each outstanding option shall be assumed or an
equivalent option or right substituted for by the successor corporation or a
parent or subsidiary of the successor corporation. If the successor corporation
refuses to assume or substitute the outstanding options, each outstanding option
will be fully vested and exercisable. Further, the administrator shall notify
the optionee that the option or stock purchase right, 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, the
option agreements under the 1993 Stock Plan authorize the board of directors, or
a committee of the board of directors, to accelerate the vesting of any
outstanding option prior to the effective date of a proposed dissolution or
liquidation of Netcom Systems.
1997 Stock Plan
A total of 4,959,550 shares of common stock have been reserved for issuance
under our Second Amended and Restated 1997 Stock Plan, as amended, or the 1997
Stock Plan. Under the 1997 Stock Plan, as of March 31, 1999, options to purchase
3,857,544 shares were outstanding, 125,706 shares of common stock had been
purchased pursuant to exercises of stock options and 976,300 shares were
available for future grant, although we do not plan to grant any additional
options pursuant to this plan following this offering.
The 1997 Stock Plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code, nonstatutory
stock options and SPRs to our employees, directors and consultants. Nonstatutory
stock options and SPRs may be granted to our employees, directors and
consultants. 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
53
<PAGE> 55
number of shares subject to each option. The board of directors also determines
the schedule upon which options become exercisable. Generally, options granted
under the 1997 Stock Plan vest 20% after the first year and monthly thereafter
for four years. The maximum term of options granted under the 1997 Stock Plan is
10 years.
Options and SPRs granted under the 1997 Stock Plan are not transferable by
the optionee except by will or by the laws of descent or distribution, and each
option and SPR is exercisable during the lifetime of the optionee only by that
optionee. Options granted under the 1997 Stock Plan must generally be exercised
within three months after the end of optionee's status as our employee, director
or consultant, or within 12 months after such optionee's termination by
disability or death, to the extent the optionee is vested on the date of
termination. However, an option may not be exercised later than the expiration
of the option's term.
The 1997 Stock Plan provides that in the event of a merger of us with or
into another corporation, or a sale of substantially all of our assets, each
outstanding option and SPR shall be:
- assumed;
- exchanged for an equivalent option or right; or
- 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, each option and SPR shall vest and be exercisable as
to 20% of the optioned stock to the extent that 20% of the optioned stock has
not already vested. The administrator shall notify the optionee that 20% of the
option or SPR shall be 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.
If any person or entity becomes the beneficial owner of more than 50% of our
outstanding common stock, then the vesting of each outstanding option will be
accelerated by one year. Finally, in the event of our proposed dissolution or
liquidation, the board of directors, or any of its committees, in its discretion
may accelerate the vesting of any outstanding option or SPR prior to the
effective date of the proposed transaction.
1998 Stock Plan
A total of 2,000,000 shares of common stock, plus annual increases,
beginning in 2000, equal to the lesser of:
- 4,000,000 shares,
- 5% of our outstanding shares on that date, and
- a lesser amount determined by the board of directors,
are currently reserved for issuance pursuant to our 1998 Stock Plan. Unless
terminated sooner, the 1998 Stock Plan will terminate automatically in May 2008.
The 1998 Stock Plan provides for the discretionary grant of incentive stock
options to employees, the grant of nonstatutory stock options and SPRs to
employees, directors and consultants, and the automatic grant of nonstatutory
stock options to non-employee directors.
The 1998 Stock Plan may be administered by the board of directors or a
committee of the board. 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.
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<PAGE> 56
In addition, the administrator has the authority to amend, suspend or
terminate the 1998 Stock Plan, provided that no such action shall impair the
rights of any optionee, unless mutually agreed upon in writing.
The exercise price of all incentive stock options granted under the 1998
Stock 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 Stock Plan is determined by the administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue 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 our 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
incentive stock options granted under the 1998 Stock Plan may not exceed ten
years.
In the case of SPRs, unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with us for any reason, including death or disability. The purchase
price for shares repurchased pursuant to the restricted stock purchase agreement
will be the original price paid by the purchaser and may be paid by cancellation
of any indebtedness of the purchaser to us. The repurchase option will lapse at
a rate determined by the administrator.
The 1998 Stock Plan provides that each non-employee director will
automatically be granted a nonstatutory stock option to purchase:
- 6,000 shares of common stock on the first, second, third, fourth and
fifth anniversaries of the date such person first becomes a non-employee
director, except for any employee director who subsequently becomes a
non-employee director ; and
- 6,000 shares on the date of our annual meeting, if he or she has served
on the board for at least 18 months.
Each option automatically granted to a non-employee director will have a
term of 10 years. The shares subject to each option will vest as to 100% of the
optioned stock on the date of grant. The exercise price of each option will be
100% of the fair market value per share of the common stock on the date of
grant.
Options and SPRs granted under the 1998 Stock Plan are generally not
transferable by the optionee, except by will or the laws of descent or
distribution, and are exercisable during the lifetime of the optionee only by
that optionee. Options granted under the 1998 Stock Plan must generally be
exercised within three months after the end of optionee's status as an employee,
director or consultant of our company, or within 12 months after such optionee's
termination by disability or death, but in no event later than the expiration of
the option's term.
The 1998 Stock Plan provides that in the event of a merger of our company
with or into another corporation, or a sale of substantially all of our assets,
each outstanding option and SPR must be assumed or an equivalent option
substituted for 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, the optionee will fully vest in and 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. 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, if any person or entity becomes the
beneficial owner of more than 50% of our outstanding common stock, then the
vesting of each outstanding option will be accelerated by one year. Finally, in
the event of our proposed
55
<PAGE> 57
dissolution or liquidation, the board of directors, or any of its committees, in
its discretion may accelerate the vesting of any outstanding option or SPR prior
to the effective date of the proposed transaction.
1998 Employee Stock Purchase Plan
Our 1998 Employee Stock Purchase Plan, as amended, or the 1998 Purchase
Plan, was adopted by the board of directors in May 1998 and was approved by the
stockholders in June 1998. A total of 150,000 shares of common stock has been
reserved for issuance under the 1998 Purchase Plan, plus annual increases
beginning on January 1, 2000 equal to the lesser of 1,000,000 shares, 1% of the
outstanding shares or a lesser amount determined by the board of directors.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, 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 and end on the last trading day of that six-month
period. The first offering period commences on the effective date of this
offering and ends on the last trading day on or before February 14, 2000.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, the 1998 Purchase Plan excludes from
participation any employee who:
- immediately after the grant, owns stock and/or options to purchase stock
representing 5% or more of the total combined voting power or value of
all classes of our capital stock; or
- has rights to purchase stock under all of our employee stock purchase
plans that accrue at a rate which exceed $25,000 worth of stock for each
calendar year.
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 2,500 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 credited to their account without
interest. Upon termination of employment a participant will be deemed to have
elected to withdraw from the 1998 Purchase Plan.
Payroll deductions credited to a participant's account and any 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 our merger with or into another corporation or a sale of substantially all of
our 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. In addition, in the event
of a proposed dissolution or liquidation of us 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 make a change in any option previously
granted which may adversely affect the rights of any participant, 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
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<PAGE> 58
Plan is in our best interests and our stockholders' best interests. The 1998
Purchase Plan will become effective on the consummation of this offering and
will terminate in 10 years, unless sooner terminated by the board of directors.
401(k) Plan
We maintain a tax-qualified retirement and deferred savings plan for our
employees, commonly known as a 401(k) plan. 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 was $10,000 in calendar year 1998. Under the 401(k)
plan, we may make discretionary matching contributions. Our contribution to the
401(k) plan in 1998 was $275,000 in the aggregate for all employees. A matching
contribution made by our company vests at 25% per year commencing on the first
anniversary of a participant's date of employment with our company. All amounts
contributed by participants and earnings on such contributions are fully vested
at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our 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:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This 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.
Our bylaws provide that we shall indemnify our directors, officers,
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions on behalf of Netcom Systems,
regardless of whether the bylaws permit such indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our 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 our company arising out of such person's services
as a director, officer, employee, agent or fiduciary of our company, any
subsidiary of our company or any other company or enterprise to which the person
provides services at our request. We believe 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 in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
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<PAGE> 59
CERTAIN TRANSACTIONS
In the third quarter of 1997, we underwent a recapitalization involving:
- a $50.0 million term loan pursuant to a credit agreement with
NationsBank, N.A., as administrative agent, BankBoston, N.A. as co-agent
and other financial institutions,
- the issuance of 485,184 shares of redeemable preferred stock for $48.5
million,
- the issuance of 22,903,436 shares of convertible preferred stock for
$48.5 million, and
- the repurchase of approximately 80% of our then-outstanding common stock
at $15.292 per share for $156.2 million.
The purchasers of redeemable preferred stock and convertible preferred stock,
and the holders of common stock repurchased in the recapitalization included,
among others, the following directors, executive officers and holders of more
than 5% of our common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
OF REDEEMABLE OF CONVERTIBLE OF COMMON STOCK
PREFERRED STOCK PREFERRED STOCK REPURCHASED
---------------- ---------------- ----------------
<S> <C> <C> <C>
Barry Phelps.............................. -- -- 26,666
Henry Hamon............................... -- -- 506,667
Marc Hamon................................ -- -- 8,000,000
Stephane Johnson.......................... -- -- 26,666
James Jordan.............................. -- -- 840,000
Gene Zhang................................ -- -- 80,000
Richard Moley............................. 2,500 118,013 --
BA Capital Company, L.P.(1)............... 80,000 3,776,454 --
Summit Ventures IV, L.P.(2)............... 236,856 11,180,936 --
Spitfire Capital Partners L.P.(3)......... 15,000 708,085 --
Northstar Investors, LLC(4)............... 145,092 6,849,166 --
</TABLE>
- ---------------
(1) These shares were originally purchased by NationsBanc Capital Corp., the
predecessor to BA Capital Company, L.P. Our director Robert H. Sheridan III
is an affiliate of BA Capital Company, L.P. as well as NationsBanc
Montgomery Securities LLC, an underwriter for this offering. Mr. Sheridan
disclaims beneficial ownership of the shares held by BA Capital Company,
L.P. except to the extent of his proportionate partnership interest therein.
(2) Our director Walter Kortschak is a general partner of Summit Ventures IV,
L.P. Mr. Kortschak disclaims beneficial ownership of the shares held by
Summit Ventures IV, L.P. except to the extent of his proportionate
partnership interest therein.
(3) Current and former employees of both NationsBanc Montgomery Securities LLC
and Thomas Weisel Partners LLC, both underwriters of this offering, are
limited partners of Spitfire Capital Partners L.P.
(4) Northstar Investors, LLC, an affiliate of NationsBanc Montgomery Securities
LLC, has subsequently distributed its shares to its members, some of whom
are affiliates or employees of NationsBanc Montgomery Securities LLC or
Thomas Weisel Partners LLC.
The purchasers of our convertible preferred stock are parties to a
stockholders agreement in which they have agreed to vote their shares to
preserve the number of authorized directors and to elect representatives to
serve as directors. Barry Phelps, our President and Chief Executive Officer and
a director, Gene Zhang, our Vice President, Engineering, and Stephane Johnson,
our Vice President, International Sales, are also parties to this agreement. The
parties to the stockholders agreement hold 25,446,769 shares, or % of our
outstanding common stock following consummation of the offering. Accordingly,
the parties to this stockholders agreement can control the election of our
directors.
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<PAGE> 60
The parties to the stockholders agreement are entitled to certain rights of
registration pursuant to a registration agreement between such persons and our
company, including certain demand and piggyback registration rights. See
"Description of Capital Stock -- Registration Rights of Certain Holders."
In September 1997, we purchased all of the outstanding shares of Netcom
Systems Europe, a company organized under the laws of France. In connection with
such purchase, Henry Hamon, brother of Marc Hamon, received $150,000 in
consideration for the sale of his shares in Netcom Systems Europe to us.
All of our securities referenced above were purchased or sold at prices
equal to the fair market value of such securities, as determined by our board of
directors, on the date of repurchase or issuance.
In 1997, we loaned $670,000 to Marc Hamon, a 5% stockholder, 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, we have granted options to our executive officers and
directors. We intend to grant options to our officers and directors in the
future.
We have entered into employment agreements with Barry Phelps, our President
and Chief Executive Officer, James Jordan, our Vice President, Sales, Stephane
Johnson, our Vice President International Sales, and Henry Hamon, who served as
Netcom Systems Europe's General Manager until February 1999. We have also
entered into change-in-control agreements with each of our executive officers.
The terms of these employment agreements and change-in-control agreements are
described in detail under "-- Employment Contracts and Termination of Employment
and Change-in-Control Agreements."
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us to indemnify our officers
and directors against 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. We
also intend to execute such agreements with our future directors and executive
officers.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 1999, 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:
- each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock,
- each of the Named Executive Officers,
- each of our directors, and
- all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 25,689,275 shares
of common stock outstanding as of March 31, 1999 and shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC. Shares of
common stock subject to options that are presently exercisable or exercisable
within 60 days of March 31, 1999 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options or
warrants, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. If any shares are issued
upon exercise of options, warrants or other rights to acquire our capital stock
that are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, there will be further dilution to new public
investors.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------- --------------------- --------------- ---------------
<S> <C> <C> <C>
5% Stockholders
Summit Partners(1)...................... 11,333,705 44.1%
BA Capital Company, L.P.(2)............. 3,776,454 14.7
TA Associates Group(3).................. 3,734,771 14.5
Marc Hamon(4)........................... 2,010,000 7.8
Named Executive Officers
Barry Phelps(5)......................... 226,111 *
James Jordan(6)......................... 626,667 2.4
Henry Hamon(7).......................... 304,000 1.1
Stephane Johnson(8)..................... 117,334 *
Gene Zhang(9)........................... 170,000 *
Directors
Walter Kortschak(10).................... 11,343,705 44.1
Robert H. Sheridan, III(11)............. 3,786,454 14.7
Richard Moley(12)....................... 128,013 *
Michael West(13)........................ 7,000 *
All officers and directors as a group
(12 persons)(14)..................... 16,734,417 62.5
</TABLE>
- ---------------
* Less than 1%
(1) The address of record for each member of Summit Partners is 499 Hamilton
Avenue, Suite 200, Palo Alto, CA 94301. Includes 152,769 shares of common
stock held by Summit Investors III, L.P. and 11,180,936 shares of common
stock held by Summit Ventures IV, L.P.
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<PAGE> 62
(2) The address of record for BA Capital Company, L.P. is 25th Floor, 100 North
Tryon, Charlotte, NC 28255.
(3) 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 3,092,498 shares of common stock held by TA/Advent VIII,
L.P., 580,423 shares of common stock held by Advent Atlantic and Pacific
III, L.P., and 61,850 shares of common stock held 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.
(4) The address of record for Marc Hamon is c/o Netcom Systems, Inc., 20550
Nordhoff Street, Chatsworth, CA 91311. Shares beneficially owned prior to
the offering include an aggregate of 10,000 shares issuable pursuant to
options exercisable within 60 days of March 31, 1999. Does not include
304,000 shares beneficially owned by Henry Hamon, Mr. Marc Hamon's adult
brother.
(5) Shares beneficially owned prior to the offering include an aggregate of
192,778 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(6) Shares beneficially owned prior to the offering include an aggregate of
266,667 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(7) Shares beneficially owned prior to the offering include an aggregate of
204,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999. Does not include 2,010,000 shares beneficially owned by
Marc Hamon, Mr. Henry Hamon's adult brother. Mr. Henry Hamon is currently
on an unpaid leave of absence from Netcom Systems.
(8) Shares beneficially owned prior to the offering consists of an aggregate of
117,334 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(9) Shares beneficially owned prior to the offering include an aggregate of
160,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(10) Shares beneficially owned prior to the offering include an aggregate of
10,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999. Also consists of 11,333,705 shares held by Summit Partners
prior to the offering. Walter Kortschak, a general partner of Summit
Ventures IV, L.P., is a director of our company. Mr. Kortschak disclaims
beneficial ownership of the shares held by Summit Partners except to the
extent of his proportionate partnership therein.
(11) Shares beneficially owned prior to the offering include an aggregate of
10,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999. Also consists of 3,776,454 shares held by BA Capital
Company, L.P. Robert H. Sheridan, III, is a director of Netcom Systems and
is the Senior Vice President of BA Equity Management GP, LLC, which is the
general partner of BA Equity Management, L.P., which is the sole member of
BA SBIC Management, which is the general partner of BA Capital Company,
L.P. Mr. Sheridan disclaims beneficial ownership of the shares held by BA
Capital Company, L.P. except to the extent of his proportionate partnership
therein.
(12) Shares beneficially owned prior to the offering include an aggregate of
10,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(13) Shares beneficially owned prior to the offering include an aggregate of
7,000 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999.
(14) Shares beneficially owned prior to the offering include an aggregate of
1,102,912 shares issuable pursuant to options exercisable within 60 days of
March 31, 1999. Also includes 11,333,705 shares held by Summit Partners and
3,776,454 shares held by BA Capital Company, L.P.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the offering, the total number of shares which we have
authority to issue will be 200,000,000 shares of common stock, $0.001 par value,
and 5,000,000 shares of undesignated preferred stock, $0.001 par value. As of
March 31, 1999, there were 25,689,275 shares of common stock outstanding which
were held of record by 99 stockholders, and no shares of undesignated preferred
stock outstanding. Upon completion of the offering, we will have outstanding
shares of common stock.
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
Our 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 other rights
and preferences, of the preferred stock.
Although there is no current intention to do so, our board of directors
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 our
company.
OPTIONS
As of March 31, 1999, we had outstanding options to purchase a total of
5,963,765 shares of common stock pursuant to the 1993 Stock Plan and the 1997
Stock Plan, and outstanding options to purchase an additional 800,000 shares
outside of our stock option plans. We have issued no options pursuant to our
1998 Stock Plan. Recommendations for option grants under the stock option 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 25,446,769 shares of common stock issued prior to this
offering are entitled to certain registration rights with respect to the
registration of these shares under the Securities Act of 1933. These rights are
provided under the terms of the Registration Agreement between us and the
holders of the registrable securities. If, following the offering, we register
any of our common stock either for our own account or for the account of other
security holders, the holders of registrable securities are entitled to include
their shares of common stock in the registration. 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 holders of 22,903,436
of the registrable securities may also require us to register all or a portion
of their shares on Form S-2 or S-3 when it becomes available to us. However,
among other limitations, the proposed aggregate selling
62
<PAGE> 64
price of those shares must be at least $1.0 million. In addition, beginning 180
days after the closing of this offering, the holders of 22,903,436 of the
registrable securities may also require us to register all or a portion of their
shares on Form S-1. However, among other limitations, the proposed aggregate
selling price of those shares must be at least $3.0 million. We must bear all
registration expenses and all selling expenses relating to registrable
securities, except that we are only be responsible for expenses for the first
four registrations on Form S-1 at the request of the holders of registrable
securities. If holders of registrable securities, by exercising their rights,
cause a large number of securities to be registered and sold in the public
market, those sales could have an adverse effect on the price of our common
stock. In addition, if we initiate a registration and include registrable
securities pursuant to the exercise of registration rights, the sale of these
registrable securities may have an adverse effect on our ability to raise
capital.
OUR CHARTER AND BYLAWS CONTAIN PROVISIONS WHICH MAY DELAY OR PREVENT A CHANGE OF
CONTROL
Provisions of our certificate of incorporation and our 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 our company.
These provisions could limit the price that investors might be willing to pay in
the future for shares of our common stock. For example, these provisions permit
us 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 could have the effect of delaying or
preventing a change in control of our company. In addition, we are 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 a stockholder became an interested stockholder, unless:
- prior to that date, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder; or
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced; or
- on or following that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that 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> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock and any sale of substantial amounts of common stock in the open market may
adversely affect the market price of our common stock.
Upon completion of the offering, we will have outstanding
shares of common stock. Of these shares, the shares sold in the
offering will be freely tradable without restriction or further registration
under the Securities Act unless purchased by "affiliates" as that term is
defined in Rule 144 of the Securities Act.
The remaining 25,689,275 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. Of these shares,
shares will be subject to "lock-up" agreements described below on
the effective date of the offering. On the effective date of the offering,
shares not subject to the lock-up agreements described below will
be eligible for sale pursuant to Rule 144(k). In addition, 90 days after the
effective date of this offering, shares not subject to the
lock-up agreements described below will be eligible for sale pursuant to Rule
701. Upon expiration of the lock-up agreements 180 days after the effective date
of the offering, shares will become eligible for sale, subject in
some cases to the limitations of Rule 144. In addition, holders of stock options
could exercise their options and sell the shares issued upon exercise as
described below.
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE NUMBER
----------------------------- -------------
<S> <C>
Immediately................................................. shares
90th day after the date of this prospectus.................. shares
180th day after the date of this prospectus................. shares
</TABLE>
In addition, we have 2,976,300 shares of our common stock available for
future grant pursuant to our stock plans, and 6,763,765 shares subject to
outstanding options at March 31, 1999. of such outstanding
options are also subject to the 180-day lockup. The outstanding
options not subject to a lock-up will be available for sale beginning 90 days
following the effective date of the offering, assuming the options are vested
and exercised. We intend to register, prior to the expiration of the lock-up all
of the shares of common stock reserved for issuance under our stock option plans
and an additional 150,000 shares of common stock reserved for issuance under our
1998 Employee Stock Purchase Plan. This registration will permit the resale of
vested shares by non-affiliates in the public market without restriction
beginning on expiration of the lock-up.
Each of our officers, directors and substantially all other stockholders
have agreed with BT Alex. Brown not to sell or otherwise dispose of any their
shares for a period of 180 days after the date of this prospectus. BT Alex.
Brown, however, may in its sole discretion, at any time and without notice,
release all or any portion of the shares subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
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<PAGE> 66
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering.
RULE 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a compensatory stock or option plan
or other written agreement before the effective date of the offering is entitled
to resell such shares 90 days after the effective date of the offering in
reliance on Rule 144, without having to comply with certain restrictions,
including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date of this prospectus.
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<PAGE> 67
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives BT Alex. Brown
Incorporated, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated,
NationsBanc Montgomery Securities LLC and Thomas Weisel Partners, the
underwriters' representatives, have individually agreed to purchase from us the
following numbers of shares of common stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- -----------
<S> <C>
BT Alex. Brown Incorporated.................................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
NationsBanc Montgomery Securities LLC.......................
Thomas Weisel Partners LLC..................................
-----------
Total..................................................
===========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to specified conditions and that the underwriters will
purchase all shares of the common stock offered in the offering if any of the
shares are purchased.
We have been advised by the underwriters' representatives that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus and
to dealers at that price less a concession not in excess of $ per share. The
underwriters may allow, and the dealers may re-allow, a concession not in excess
of $ per share to other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the underwriters'
representatives.
Some of our stockholders have granted the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to additional shares of common stock at the initial public
offering price less the underwriting discounts and commissions described on the
cover page of this prospectus. If the underwriters exercise the option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of the option shares that the number of shares of common stock to be
purchased by it in the above table bears to the total number of shares to be
sold in the offering. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the common stock offered in
the offering. If purchased, the underwriters will offer the option shares on the
same terms as those on which the shares are being offered.
At our request, the underwriters have reserved up to shares of
common stock for sale, at the initial public offering price, to employees and
friends of ours through a directed share program. The number of shares of common
stock available for sale to the general public in the public offering will be
reduced to the extent that employees and friends purchase the reserved shares.
AMOUNTS PAYABLE TO THE UNDERWRITERS
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share................................................. $ $
Total..................................................... $
</TABLE>
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act of 1933.
Each of our officers, directors and a substantial majority of our
stockholders and optionholders have agreed with BT Alex. Brown Incorporated not
to offer, pledge, sell, contract
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<PAGE> 68
to sell or otherwise transfer or dispose of, or enter into any transaction which
is designed to, or could be expected to result in the disposition of any portion
of, any common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of BT Alex. Brown Incorporated, except in the
case of gifts, transfers to immediate family members, transfers from
partnerships or corporations to their beneficial owners, and transfers of shares
purchased in this offering. Such consent may be given at any time without public
notice. We have entered into a similar agreement, except that we may issue, and
grant options to purchase, shares of common stock or any securities convertible
into, exercisable for or exchangeable for shares of common stock, pursuant to
the exercise of outstanding options and our issuance of options and stock
granted under our existing stock option and stock purchase plans.
The underwriters' representatives have advised us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiation among us and the underwriters' representatives.
Among the factors considered in negotiations are prevailing market conditions,
our results of operations in recent periods, the market capitalizations and
stages of development of other companies that we and the underwriters'
representatives believe to be comparable to us, estimates of our business
potential, the present stage of our development and other factors deemed
relevant.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the underwriters' syndicate account. Additionally, to cover
over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities, and, if
commenced, the activities may be discontinued at any time. The underwriters'
representatives, on behalf of the underwriters, also may reclaim selling
concessions allowed to an underwriter or dealer, if the syndicate repurchases
shares distributed by that underwriter or dealer.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 32 filed
public offerings of equity securities, of which 12 have been completed, and has
acted as a syndicate member in an additional ten public offerings of equity
securities.
BA Capital Company, L.P. and certain other persons and entities related to
or affiliated with NationsBanc Montgomery Securities LLC own 5,582,216 shares of
our convertible preferred stock. The shares owned by these entities will
represent % of our outstanding capital stock after this offering. In addition,
Thomas W. Weisel and other members and employees of Thomas Weisel Partners LLC
own 479,647 shares of our convertible preferred stock or % of our outstanding
capital stock after this offering. All of these shares were acquired from us on
the same terms as every other purchaser of our convertible preferred stock or
were acquired by transfer from another stockholder.
This offering will be conducted in accordance with the provisions of Rule
2720(b)(15) of the rules of the National Association of Securities Dealers, Inc.
In accordance with those provisions, BT Alex. Brown Incorporated will serve as a
"qualified independent underwriter" and will recommend the maximum offering
price for the shares of common stock we are offering in this prospectus. As the
qualified independent underwriter, BT Alex. Brown Incorporated has performed due
diligence with respect to the information contained in this prospectus and has
participated in the preparation of this prospectus. The price of common stock
offered in this
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<PAGE> 69
prospectus will not be higher than the maximum public offering price recommended
by BT Alex. Brown Incorporated.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Steven E. Bochner, a member of Wilson Sonsini Goodrich & Rosati, and
other attorneys of Wilson Sonsini Goodrich & Rosati beneficially own 11,802
shares of our common stock. In addition, WS Investment Company 97B, an
investment fund for the benefit of attorneys of Wilson Sonsini Goodrich &
Rosati, owns 11,801 shares of our common stock. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Gray
Cary Ware & Freidenrich LLP, Palo Alto, California.
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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement, under
the Securities Act with respect to the common stock to be sold under this
prospectus. Prior to the offering we were not required to file reports with the
SEC. This prospectus does not contain all the information set forth in the
registration statement. For further information about our company and the shares
of common stock to be sold in the offering, please refer to the registration
statement. Statements made in this prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the registration
statement are summaries of the terms of contract, agreements or documents and
are not necessarily complete. Complete exhibits have been filed with the
registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The registration statement and other
information filed with the SEC is available at the web site maintained by the
SEC on the worldwide web at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
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<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
(audited), and as of March 31, 1999 and Pro Forma March
31, 1999 (unaudited)...................................... F-3
Consolidated Statements of Income for each of the three
years in the period ended December 31, 1998 (audited), and
for the three months ended March 31, 1998 and 1999
(unaudited)............................................... F-4
Consolidated Statements of Class A Redeemable Preferred
Stock, Stockholders' Investment and Comprehensive Income
for each of the three years in the period ended December
31, 1998 (audited), and for the three months ended March
31, 1999 (unaudited)...................................... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998 (audited), and
for the three months ended March 31, 1998, and 1999
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netcom Systems, Inc.:
We have audited the accompanying consolidated balance sheets of NETCOM
SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of income, Class A redeemable
preferred stock, stockholders' investment and comprehensive income and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 22, 1999
F-2
<PAGE> 72
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
----------------------------- -----------------------------
1997 1998 ACTUAL PRO FORMA
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 17,708,000 $ 19,597,000 $ 17,970,000 $ 17,970,000
Short-term investments.................................... -- 14,731,000 16,339,000 16,339,000
Accounts receivable, net of allowance for doubtful
accounts of $350,000 in 1997, $675,000 in 1998 and
$489,000 in 1999........................................ 9,508,000 9,360,000 10,151,000 10,151,000
Inventories............................................... 2,885,000 2,676,000 3,201,000 3,201,000
Prepaid expenses and other................................ 100,000 915,000 997,000 997,000
Income taxes receivable................................... -- 455,000 455,000 455,000
Deferred income taxes..................................... 1,224,000 2,228,000 1,571,000 1,571,000
------------- ------------- ------------- -------------
Total current assets................................ 31,425,000 49,962,000 50,684,000 50,684,000
------------- ------------- ------------- -------------
Property and Equipment, at cost:
Machinery and equipment................................... 1,318,000 3,367,000 3,839,000 3,839,000
Office equipment.......................................... 466,000 1,215,000 1,388,000 1,388,000
Leasehold improvements.................................... 305,000 -- -- --
Construction-in-process................................... -- 333,000 2,471,000 2,471,000
------------- ------------- ------------- -------------
2,089,000 4,915,000 7,698,000 7,698,000
Less--accumulated depreciation and amortization............. (405,000) (1,251,000) (1,602,000) (1,602,000)
------------- ------------- ------------- -------------
1,684,000 3,664,000 6,096,000 6,096,000
------------- ------------- ------------- -------------
Other Assets:
Income taxes receivable................................... 455,000 -- -- --
Deferred income taxes..................................... 247,000 178,000 142,000 142,000
Deferred financing costs.................................. 275,000 215,000 200,000 200,000
Deposits.................................................. 43,000 136,000 142,000 142,000
------------- ------------- ------------- -------------
1,020,000 529,000 484,000 484,000
------------- ------------- ------------- -------------
$ 34,129,000 $ 54,155,000 $ 57,264,000 $ 57,264,000
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of notes payable.......................... $ 2,500,000 $ 10,000,000 $ 10,000,000 $ 10,000,000
Accounts payable.......................................... 2,916,000 2,108,000 3,106,000 3,106,000
Accrued expenses.......................................... 2,243,000 4,853,000 4,236,000 4,236,000
Deferred revenue.......................................... 454,000 503,000 593,000 593,000
Income taxes payable...................................... -- 696,000 1,700,000 1,700,000
------------- ------------- ------------- -------------
Total current liabilities........................... 8,113,000 18,160,000 19,635,000 19,635,000
------------- ------------- ------------- -------------
Notes payable, net of current portion....................... 47,500,000 37,500,000 35,000,000 35,000,000
------------- ------------- ------------- -------------
Commitments and Contingencies (Note 10)
Class A redeemable preferred stock, $0.001 par value:
Authorized-485,184 shares;
Issued and outstanding-485,184 shares in 1997, 1998 and
1999.................................................... 49,520,000 52,579,000 53,363,000 53,363,000
------------- ------------- ------------- -------------
Stockholders' Investment:
Class B convertible preferred stock, $0.001 par value:
Authorized-22,903,437 shares;
Issued and outstanding-22,903,436 shares in 1997, 1998
and 1999 and no shares in pro forma 1999.............. 48,518,000 48,518,000 48,518,000 --
Common stock, $0.001 par value:
Authorized-50,000,000 shares;
Issued and outstanding -- 2,527,840 shares in 1997 and
2,778,639 shares in 1998, 2,785,839 shares in 1999 and
25,689,275 shares in pro forma 1999................... 3,000 3,000 3,000 26,000
Additional paid-in capital................................ 9,976,000 11,576,000 12,547,000 61,042,000
Deferred compensation..................................... -- (390,000) (1,217,000) (1,217,000)
Note receivable for stock purchase........................ (120,000) -- -- --
Retained deficit.......................................... (129,356,000) (113,833,000) (110,576,000) (110,576,000)
Accumulated other comprehensive income (loss)............. (25,000) 42,000 (9,000) (9,000)
------------- ------------- ------------- -------------
(71,004,000) (54,084,000) (50,734,000) (50,734,000)
------------- ------------- ------------- -------------
$ 34,129,000 $ 54,155,000 $ 57,264,000 $ 57,264,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 73
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... $27,454,000 $56,273,000 $73,474,000 $18,011,000 $19,513,000
Cost of goods sold......................... 3,256,000 7,248,000 15,912,000 3,048,000 4,873,000
----------- ----------- ----------- ----------- -----------
Gross profit........................... 24,198,000 49,025,000 57,562,000 14,963,000 14,640,000
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development................. 1,681,000 3,527,000 8,588,000 1,662,000 2,665,000
Sales and marketing...................... 1,466,000 3,713,000 12,956,000 2,271,000 4,087,000
General and administrative............... 1,342,000 3,452,000 3,799,000 776,000 855,000
Amortization of deferred compensation.... -- -- 60,000 -- 133,000
----------- ----------- ----------- ----------- -----------
4,489,000 10,692,000 25,403,000 4,709,000 7,740,000
----------- ----------- ----------- ----------- -----------
Income from operations................. 19,709,000 38,333,000 32,159,000 10,254,000 6,900,000
Other income (expense):
Interest income.......................... 244,000 640,000 1,433,000 232,000 440,000
Interest expense......................... -- (1,233,000) (3,545,000) (900,000) (724,000)
Other income (expense)................... -- (69,000) 92,000 (14,000) (44,000)
----------- ----------- ----------- ----------- -----------
244,000 (662,000) (2,020,000) (682,000) (328,000)
----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes............................... 19,953,000 37,671,000 30,139,000 9,572,000 6,572,000
Provision for income taxes................. 8,142,000 14,875,000 11,557,000 3,924,000 2,531,000
----------- ----------- ----------- ----------- -----------
Net income................................. 11,811,000 22,796,000 18,582,000 5,648,000 4,041,000
Less: accrued preferred stock dividends.... -- (1,002,000) (3,059,000) (735,000) (784,000)
----------- ----------- ----------- ----------- -----------
Net income applicable to common shares..... $11,811,000 $21,794,000 $15,523,000 $ 4,913,000 $ 3,257,000
=========== =========== =========== =========== ===========
Net income per common share:
Basic net income per common share........ $ 1.08 $ 2.70 $ 5.74 $ 1.92 $ 1.17
=========== =========== =========== =========== ===========
Weighted average number of common shares
outstanding............................ 10,939,979 8,074,625 2,702,342 2,559,107 2,784,586
=========== =========== =========== =========== ===========
Diluted net income per common and common
equivalent shares outstanding.......... $ 0.89 $ 1.27 $ 0.63 $ 0.19 $ 0.13
=========== =========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding... 13,298,643 17,987,601 29,542,164 29,064,358 30,335,074
=========== =========== =========== =========== ===========
Pro forma net income per common share:
Basic net income per common share........ $ 0.73 $ 0.16
=========== ===========
Weighted average number of common shares
outstanding............................ 25,605,778 25,688,022
=========== ===========
Diluted net income per common and common
equivalent shares outstanding.......... $ 0.63 $ 0.13
=========== ===========
Weighted average number of common and
common equivalent shares outstanding... 29,542,164 30,335,074
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 74
NETCOM SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CLASS A REDEEMABLE PREFERRED STOCK, STOCKHOLDERS' INVESTMENT AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
CLASS A CLASS B
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- ------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995....................... -- $ -- -- $ -- 10,920,500 $ 11,000
Net income...................................... -- -- -- -- -- --
Comprehensive income............................
Cash distributions to shareholders.............. -- -- -- -- -- --
Issuance of common stock for services........... -- -- -- -- 39,500 --
------- ----------- ----------- ----------- ----------- --------
BALANCE, December 31, 1996....................... -- -- -- -- 10,960,000 11,000
Issuance of common stock........................ -- -- -- -- 100,000 --
Exercise of employee stock options.............. -- -- -- -- 1,367,646 2,000
Issuance of stock options as compensation to
non-employees................................. -- -- -- -- -- --
Tax benefit from non-qualified stock options.... -- -- -- -- -- --
------- ----------- ----------- ----------- ----------- --------
BALANCE, August 29, 1997, prior to
Recapitalization................................ -- -- -- -- 12,427,646 13,000
Net income...................................... -- -- -- -- -- --
Foreign currency translation adjustments........ -- -- -- -- -- --
Comprehensive income............................
Recapitalization................................ 485,184 48,518,000 22,903,436 48,518,000 (10,215,642) (10,000)
Acquisition of Netcom Systems Europe............ -- -- -- -- -- --
Exercise of employee stock options.............. -- -- -- -- 315,836 --
Accrued dividends on redeemable preferred
stock......................................... 1,002,000 -- -- -- --
------- ----------- ----------- ----------- ----------- --------
BALANCE, December 31, 1997....................... 485,184 49,520,000 22,903,436 48,518,000 2,527,840 3,000
Net income...................................... -- -- -- -- -- --
Foreign currency translation adjustments........ -- -- -- -- -- --
Comprehensive income............................
Exercise of employee stock options.............. -- -- -- -- 250,799 --
Deferred compensation........................... -- -- -- -- -- --
Deferred compensation amortization.............. -- -- -- -- -- --
Tax benefit from non-qualified stock options.... -- -- -- -- -- --
Repayment of note receivable.................... -- -- -- -- --
Accrued dividends on redeemable preferred
stock......................................... 3,059,000 -- -- -- --
------- ----------- ----------- ----------- ----------- --------
BALANCE, December 31, 1998....................... 485,184 52,579,000 22,903,436 48,518,000 2,778,639 3,000
Net income...................................... -- -- -- -- -- --
Foreign currency translation adjustments........ -- -- -- -- -- --
Comprehensive income............................
Exercise of employee stock options.............. -- -- -- -- 7,200 --
Deferred compensation........................... -- -- -- -- -- --
Deferred compensation amortization.............. -- -- -- -- -- --
Accrued dividends on redeemable preferred
stock......................................... -- 784,000 -- -- -- --
------- ----------- ----------- ----------- ----------- --------
BALANCE, March 31, 1999.......................... 485,184 $53,363,000 22,903,436 $48,518,000 2,785,839 $ 3,000
======= =========== =========== =========== =========== ========
<CAPTION>
ADDITIONAL RETAINED
PAID-IN DEFERRED NOTE COMPREHENSIVE EARNINGS
CAPITAL COMPENSATION RECEIVABLE INCOME (DEFICIT)
----------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995....................... $ 221,000 $ -- $ -- $ 3,622,000
Net income...................................... -- -- -- $11,811,000 11,811,000
-----------
Comprehensive income............................ 11,811,000
-----------
Cash distributions to shareholders.............. -- -- -- (2,700,000)
Issuance of common stock for services........... 49,000 -- -- --
----------- ----------- --------- -------------
BALANCE, December 31, 1996....................... 270,000 -- -- 12,733,000
Issuance of common stock........................ 600,000 -- (600,000) --
Exercise of employee stock options.............. 1,895,000 -- -- --
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................................ 9,696,000 -- (600,000) 12,733,000
Net income...................................... -- -- -- 22,796,000 22,796,000
Foreign currency translation adjustments........ -- -- -- (25,000) --
-----------
Comprehensive income............................ 22,771,000
-----------
Recapitalization................................ (10,000) -- 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)
----------- ----------- --------- -------------
BALANCE, December 31, 1997....................... 9,976,000 -- (120,000) (129,356,000)
Net income...................................... -- -- -- 18,582,000 18,582,000
Foreign currency translation adjustments........ -- -- -- 67,000 --
-----------
Comprehensive income............................ 18,649,000
-----------
Exercise of employee stock options.............. 290,000 -- -- --
Deferred compensation........................... 450,000 (450,000) -- --
Deferred compensation amortization.............. -- 60,000 -- --
Tax benefit from non-qualified stock options.... 860,000 -- -- --
Repayment of note receivable.................... -- -- 120,000 --
Accrued dividends on redeemable preferred
stock......................................... -- -- -- (3,059,000)
----------- ----------- --------- -------------
BALANCE, December 31, 1998....................... 11,576,000 (390,000) -- (113,833,000)
Net income...................................... -- -- -- 4,041,000 4,041,000
Foreign currency translation adjustments........ (51,000)
-----------
Comprehensive income............................ $ 3,990,000
===========
Exercise of employee stock options.............. 11,000 -- -- --
Deferred compensation........................... 960,000 (960,000) -- --
Deferred compensation amortization.............. -- 133,000 -- --
Accrued dividends on redeemable preferred
stock......................................... -- -- -- (784,000)
----------- ----------- --------- -------------
BALANCE, March 31, 1999.......................... $12,547,000 $(1,217,000) $ -- $(110,576,000)
=========== =========== ========= =============
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME INVESTMENT
------------- -------------
<S> <C> <C>
BALANCE, December 31, 1995....................... $ -- $ 3,854,000
Net income...................................... -- 11,811,000
Comprehensive income............................
Cash distributions to shareholders.............. -- (2,700,000)
Issuance of common stock for services........... -- 49,000
-------- -------------
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
Net income...................................... -- 22,796,000
Foreign currency translation adjustments........ (25,000) (25,000)
Comprehensive income............................
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)
-------- -------------
BALANCE, December 31, 1997....................... (25,000) (71,004,000)
Net income...................................... -- 18,582,000
Foreign currency translation adjustments........ 67,000 67,000
Comprehensive income............................
Exercise of employee stock options.............. -- 290,000
Deferred compensation........................... -- --
Deferred compensation amortization.............. -- 60,000
Tax benefit from non-qualified stock options.... -- 860,000
Repayment of note receivable.................... -- 120,000
Accrued dividends on redeemable preferred
stock......................................... -- (3,059,000)
-------- -------------
BALANCE, December 31, 1998....................... 42,000 (54,084,000)
Net income...................................... -- 4,041,000
Foreign currency translation adjustments........ (51,000) (51,000)
Comprehensive income............................
Exercise of employee stock options.............. -- 11,000
Deferred compensation........................... -- --
Deferred compensation amortization.............. -- 133,000
Accrued dividends on redeemable preferred
stock......................................... -- (784,000)
-------- -------------
BALANCE, March 31, 1999.......................... $ (9,000) $ (50,734,000)
======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 75
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------------------
1996 1997 1998 1998 1999
----------- ------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................. $11,811,000 $ 22,796,000 $ 18,582,000 $ 5,648,000 $ 4,041,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 25,000 319,000 922,000 145,000 351,000
Provision for doubtful accounts.......... 50,000 250,000 325,000 50,000 30,000
Deferred compensation amortization....... -- -- 60,000 -- 133,000
Interest expense relating to deferred
financing costs........................ -- 20,000 60,000 15,000 15,000
Issuance of common stock or stock options
for services........................... 49,000 15,000 -- -- --
Loss on retirement of property and
equipment.............................. -- -- 249,000 -- --
Change in operating assets and
liabilities:
Accounts receivable.................... (4,803,000) (2,096,000) (177,000) (1,152,000) (821,000)
Inventories............................ (410,000) (2,334,000) 209,000 (583,000) (525,000)
Prepaid expenses and other............. 224,000 (19,000) (815,000) (44,000) (82,000)
Income taxes receivable................ -- (455,000) -- 455,000 --
Deferred income taxes.................. (669,000) (632,000) (935,000) (161,000) 693,000
Deposits............................... (15,000) (25,000) (93,000) (1,000) (6,000)
Accounts payable....................... 377,000 1,994,000 (808,000) (1,586,000) 998,000
Accrued expenses....................... 528,000 1,266,000 2,610,000 1,333,000 (617,000)
Deferred revenue....................... 205,000 249,000 49,000 (28,000) 90,000
Income taxes payable................... 2,157,000 3,324,000 1,556,000 3,329,000 1,004,000
----------- ------------- ------------ ----------- -----------
Net cash provided by operating
activities........................ 9,529,000 24,672,000 21,794,000 7,420,000 5,304,000
----------- ------------- ------------ ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment........ (400,000) (1,371,000) (3,151,000) (718,000) (2,783,000)
Purchases of investments, net.............. -- -- (14,731,000) -- (1,608,000)
Cash used in acquisition of Netcom Systems
Europe, net of cash acquired............. -- (2,374,000) -- -- --
----------- ------------- ------------ ----------- -----------
Net cash used in investing
activities........................ (400,000) (3,745,000) (17,882,000) (718,000) (4,391,000)
----------- ------------- ------------ ----------- -----------
Cash Flows From Financing Activities:
Distributions to stockholders.............. (2,700,000) -- -- -- --
Proceeds from repayment of note
receivable............................... -- -- 120,000 -- --
Borrowings under notes payable, net of
deferred financing costs................. -- 49,705,000 -- -- --
Payments on notes payable.................. -- -- (2,500,000) -- (2,500,000)
Net proceeds from sale of preferred
stock.................................... -- 91,322,000 -- -- --
Exercise of stock options.................. -- 2,187,000 290,000 2,000 11,000
Repurchase of common stock................. -- (155,722,000) -- -- --
----------- ------------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities.............. (2,700,000) (12,508,000) (2,090,000) 2,000 (2,489,000)
----------- ------------- ------------ ----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents........................... -- (25,000) 67,000 (22,000) (51,000)
----------- ------------- ------------ ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ 6,429,000 8,394,000 1,889,000 6,682,000 (1,627,000)
Cash and Cash Equivalents, beginning of
period..................................... 2,885,000 9,314,000 17,708,000 17,708,000 19,597,000
----------- ------------- ------------ ----------- -----------
Cash and Cash Equivalents, end of period..... $ 9,314,000 $ 17,708,000 $ 19,597,000 $24,390,000 $17,970,000
=========== ============= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 76
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 systems for network equipment manufacturers,
network service providers and enterprises. The Company's flagship platform,
SmartBits, analyzes networking equipment, including infrastructure and
enterprise switches and routers, and broadband access devices, such as cable
modems and xDSL devices, to determine performance, reliability, scalability,
interoperability, quality of service and proof of service, before deployment on
the network.
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, 1998, was on deposit with two financial
institutions.
INVESTMENTS
The Company accounts for its investments under the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
At December 31, 1998, short-term investments consisted of corporate
commercial paper. As defined by the standard, the Company has classified its
investments in these debt securities as "held-to-maturity" investments and all
investments are recorded at their amortized cost basis, which approximated their
fair value at December 31, 1998. All short-term investments mature by March
1999.
CONCENTRATION OF CREDIT RISK
During 1996, the Company had sales to two customers which represented 27
percent of sales. 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. During 1998, the Company had sales
to one of the customers which represented
F-7
<PAGE> 77
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12 percent of sales. At December 31, 1998, there were no customers with an
accounts receivable balance greater than 10 percent of total accounts
receivable.
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
consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Raw materials............................................... $ 708,000 $ 893,000
Work-in-process............................................. 1,845,000 930,000
Finished goods.............................................. 332,000 853,000
---------- ----------
$2,885,000 $2,676,000
========== ==========
</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 and $80,000 at
December 31, 1997 and 1998, respectively.
REVENUE RECOGNITION
The Company realizes revenues from sales 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 are recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 97-2, "Software
Revenue Recognition." 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).
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 and the effects of exchange rate
changes on intercompany transactions of long-term investment nature, which are
not significant,
F-8
<PAGE> 78
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are included in stockholders' investment in the December 31, 1997 and 1998
consolidated balance sheets. Gains and losses resulting from foreign currency
transactions denominated in a currency other than the functional currency are
included in "other income (expense)" in the 1997 and 1998 statements of income
and comprehensive 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.
OTHER FINANCIAL INSTRUMENTS
The Company has entered into an interest-rate swap agreement to modify the
interest characteristics of its outstanding long-term debt. An interest-rate
swap agreement is determined by matching principal balance and terms with that
of a specific debt obligation. Such an agreement involves the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of interest
expense related to the debt (the accrual method of accounting). The related
amount payable to or receivable from counterparties is included in accrued
liabilities or other assets, respectively.
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.
DEFERRED COMPENSATION
During 1998, the Company recorded deferred compensation in the amount of
$450,000, 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) using an accelerated method.
COMPREHENSIVE INCOME
During 1997 and 1998, "Other Comprehensive Income" related solely to
foreign currency translation adjustments. During 1997 and 1998, translation
gains (losses) net of tax, were $(25,000) and $67,000, respectively.
Comprehensive income was $11,811,000, $22,771,000 and $18,649,000 in 1996, 1997
and 1998, respectively. Accumulated Other Comprehensive Income (Loss) as of
December 31, 1997 and 1998 was $(25,000) and $42,000, respectively.
F-9
<PAGE> 79
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
Cash paid for income taxes was $4,998,000, $12,315,000 and $10,935,000 in
1996, 1997 and 1998, respectively. Cash paid for interest was $977,000 and
$3,310,000 in 1997 and 1998, respectively. There was no cash paid for interest
in 1996.
During 1997, the Company issued 100,000 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 80,000 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. In 1998, the Company received an $860,000 tax benefit from the
exercise of non-qualified stock options, accrued $3,059,000 of dividends
relating to the Company's Class A redeemable preferred stock and recorded
$450,000 of deferred compensation. These non-cash transactions are excluded from
the 1997 and 1998 statements 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 cost 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).
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform
to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998 and December 1998, the American Institute of Certified Public
Accounts (AICPA) issued Statements of Position (SOP) 98-4 and 98-9, "Software
Revenue Recognition," which provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 98-4
is effective for the Company's year ending December 1999. SOP 98-9 is effective
for the Company's year ending December 2000. Earlier application is encouraged
as of the beginning of the year or interim periods for which financial
statements or information have not been issued. Retroactive application of the
provisions of this SOP is prohibited. The Company has assessed the provisions of
SOP 98-4 and 98-9 and does not expect that adoption will have a material impact
on its financial statements.
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use,"
which provides guidance in accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for the Company's
year ending December 31, 1999. The Company does not expect the adoption of SOP
98-1 to have a material impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The Company is required to adopt
SFAS 133 on January 1, 2000. SFAS 133 established methods for accounting for
derivative financial instruments and hedging
F-10
<PAGE> 80
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
activities related to those instruments as well as other hedging activities. The
Company has not yet determined what the effect of SFAS 133 will be on its
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.
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, 1996, 1997 and 1998, and for the unaudited
three month periods ended March 31, 1998 and 1999 (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Net income.................................. $11,811 $ 22,796 $ 18,582 $ 5,648 $4,041
Less: preferred stock dividends............. -- (1,002) (3,059) (735) (784)
------- -------- -------- ------- ------
Net income applicable to common shares...... $11,811 $ 21,794 $ 15,523 $ 4,913 $3,257
======= ======== ======== ======= ======
Weighted average number of common shares
used to compute basic net income per
common share.............................. 10,940 8,075 2,702 2,559 2,784
Dilutive effect of stock options............ 1,179 2,069 3,936 3,602 4,647
Dilutive effect of convertible preferred
stock..................................... -- 7,844 22,904 22,903 22,904
------- -------- -------- ------- ------
Weighted average number of common shares
used to compute diluted net income per
common and common equivalent share........ 13,299 17,988 29,542 29,064 30,335
======= ======== ======== ======= ======
Basic net income per common share........... $ 1.08 $ 2.70 $ 5.74 $ 1.92 $ 1.17
======= ======== ======== ======= ======
Diluted net income per common and common
equivalent share.......................... $ 0.89 $ 1.27 $ 0.63 $ 0.19 $ 0.13
======= ======== ======== ======= ======
</TABLE>
3. RECAPITALIZATION
On August 29, 1997, the Company, its common stockholders (the Sellers) and
certain investors (the Purchasers) entered into a Recapitalization Agreement
(the Recapitalization) pursuant to which the Company reconstituted its capital
structure through the sale of certain newly issued equity securities, the
establishment of senior debt obligations and the repurchase of certain of its
outstanding common shares. The Recapitalization was accomplished as a result of
three related transactions, which are 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 485,184 shares of Class A
redeemable preferred stock, $0.001 par value (redeemable
F-11
<PAGE> 81
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECAPITALIZATION (CONTINUED)
preferred), and an aggregate of 22,903,436 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 $2.12, respectively.
Immediately following the closing of the Recapitalization, the
Purchasers held approximately 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 was $91,322,000. See Note 6 for details relating
to the redeemable preferred and convertible preferred.
2. The Senior Credit Facility. 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 stockholder of the
Company (including shares issued upon exercise of vested stock options)
at the approximate price of $15.29 per share. Immediately prior to the
Recapitalization, the Company had 11,060,000 shares of common stock
outstanding and approximately 1,709,000 shares relating to outstanding
vested stock options. The total aggregate number of common shares
repurchased by the Company (after the exercise of stock options) was
10,215,642 and the total aggregate cash paid by the Company to the
stockholders 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 stockholder 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 $1.50 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 a Company stockholder 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 any premium paid in the transaction
($1,987,000) as an increase to retained deficit in the accompanying 1997
financial statements.
F-12
<PAGE> 82
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. During 1998, the commitment
on the line of credit was reduced to $2,000,000.
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, 1998, the Company has selected the LIBOR Rate. However, the Company
has an interest rate swap agreement with the banks that results in the Company
paying a fixed rate of 6.11 percent on $25,000,000 of the outstanding balance
through October 5, 1999. At December 31, 1998, the interest rate in effect on
the $22,500,000 remaining outstanding balance was 6.35 percent through June 2,
1999.
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, 1998.
At December 31, 1998, $47,500,000 was outstanding on the term loan and no
amount was outstanding on the line of credit.
Future principal maturities under the term loan facility at December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $10,000,000
2000........................................................ 10,000,000
2001........................................................ 10,000,000
2002........................................................ 17,500,000
-----------
$47,500,000
===========
</TABLE>
In April 1999, the credit agreement was amended so that if the Company was
to repay its Class A redeemable preferred stock obligations from proceeds of a
public offering of its common stock, then an additional $10,000,000 would become
due on the term loan in 1999 thereby making 1999 principal maturities
$20,000,000.
F-13
<PAGE> 83
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
485,184 shares of Class A redeemable preferred stock (redeemable preferred) 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.
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.
During 1997 and 1998, $1,002,000 and $3,059,000 of dividends, respectively,
were accrued on the redeemable preferred, none of which has 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 22,903,436 shares of Class B convertible preferred stock
(convertible preferred) at the approximate price of $2.12 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 Company's solvency, the Company
must redeem all shares of convertible preferred.
F-14
<PAGE> 84
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK (CONTINUED)
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. 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. In September 1998, the Company effected
a two-for-one reverse stock split of its common stock and reduced the authorized
shares to 50,000,000. All shares 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.
In March 1997, the Company sold 100,000 shares of its common stock at a
price of $6.00 per share in exchange for a note receivable in the amount of
$600,000. In connection with the Recapitalization, $480,000 of the note
receivable was reduced upon the repurchase of 80,000 shares of the common stock
by the Company. During 1998, the remaining balance of $120,000 was repaid.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109,
"Accounting for Income Taxes." 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> 85
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, 1996, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................................ $6,956,000 $12,175,000 $ 9,770,000
State.......................................... 1,855,000 3,332,000 2,536,000
Foreign........................................ -- -- 186,000
---------- ----------- -----------
8,811,000 15,507,000 12,492,000
Deferred......................................... (669,000) (632,000) (935,000)
---------- ----------- -----------
Provision for income taxes....................... $8,142,000 $14,875,000 $11,557,000
========== =========== ===========
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1996, 1997
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory federal rate...... $6,984 35.0% $13,185 35.0% $10,549 35.0%
State income taxes, net of federal
benefit................................. 1,175 5.9 2,145 5.7 1,616 5.4
Foreign taxes at rates less than
domestic................................ -- -- -- (28) --
Research credits.......................... (50) (0.3) (480) (1.3) (300) (1.0)
Foreign sales corporation tax benefit..... -- -- -- -- (297) (1.0)
Other items, net.......................... 33 0.2 25 0.1 17 --
------ ---- ------- ---- ------- ----
$8,142 40.8% $14,875 39.5% $11,557 38.4%
====== ==== ======= ==== ======= ====
</TABLE>
During 1997, the Company recorded pre-tax income from U.S. operations in
the amount of $37,866,000 and a pre-tax loss from foreign operations in the
amount of $195,000. Consequently, there was no income tax liability relating to
foreign operations as of December 31, 1997. During 1998, the Company recorded
pre-tax income from U.S. operations in the amount of $29,597,000 and pre-tax
income from foreign operations in the amount of $542,000.
The Company does not provide U.S. 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> 86
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, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accrued vacation............................................ $ 119,000 $ 153,000
State taxes................................................. 595,000 844,000
Depreciation................................................ (21,000) --
Allowance for doubtful accounts............................. 144,000 277,000
Inventory reserve........................................... 139,000 477,000
Accrued warranty............................................ 41,000 123,000
Deferred revenue............................................ 186,000 206,000
Other....................................................... 21,000 148,000
---------- ----------
Total current deferred asset........................... 1,224,000 2,228,000
Net operating loss carryforward............................. 247,000 178,000
---------- ----------
$1,471,000 $2,406,000
========== ==========
</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 realize the NOL over a six year period.
At December 31, 1998, the NOL carryforward was approximately $509,000.
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, 1997 or 1998.
F-17
<PAGE> 87
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
countries is as follows (revenues are attributed to countries based on location
of customer):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
United States................................. $22,863,000 $41,596,000 $54,735,000
Japan......................................... 1,268,000 4,181,000 4,408,000
Canada........................................ 210,000 2,330,000 2,983,000
United Kingdom................................ 381,000 1,599,000 2,767,000
Taiwan........................................ 777,000 2,563,000 2,755,000
Other foreign countries....................... 1,955,000 4,004,000 5,826,000
----------- ----------- -----------
Total................................. $27,454,000 $56,273,000 $73,474,000
=========== =========== ===========
Property and equipment:
United States................................. $ 491,000 $ 1,553,000 $ 3,203,000
France........................................ -- 131,000 461,000
----------- ----------- -----------
Total................................. $ 491,000 $ 1,684,000 $ 3,664,000
=========== =========== ===========
</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 stockholder of its common stock (see Note 11). Total rental expense under all
operating leases was $155,000, $405,000 and $490,000 in 1996, 1997 and 1998,
respectively.
During 1998, the Company entered into a 10 year lease agreement for a new
primary facility. The agreement calls for average monthly rental payments of
approximately $84,000. The Company expects the agreement to become effective
beginning May 1999. In connection with the lease agreement, the Company has
purchase commitments relating to tenant improvements for the new facility in the
approximate amount of $3,500,000 and purchase commitments for machinery and
office equipment in the approximate amount of $1,000,000. In January 1999, the
Company entered into a letter of credit agreement with a bank to guarantee
payment of the tenant improvements. The Company has pledged $3,500,000 of its
short-term investments as security against the agreement. The credit agreement
is expected to expire in July 1999.
F-18
<PAGE> 88
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum commitments under existing operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 1,061,000
2000........................................................ 1,368,000
2001........................................................ 1,421,000
2002........................................................ 1,293,000
2003........................................................ 969,000
Thereafter.................................................. 5,722,000
-----------
$11,834,000
===========
</TABLE>
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 twenty-four 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 one hundred 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.
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 and in 1998 was
approximately $449,000.
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 to its directors,
officers, employees and consultants totaling up to approximately 9,882,000
shares of common stock. Options are generally granted at exercise prices not
less than the fair market value 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
$1.50 per share (options representing 2,235,000 shares) were cancelled and
regranted at the exercise price of $1.50 per share (the newly established fair
market value of the Company's common stock).
F-19
<PAGE> 89
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS (CONTINUED)
The following summarizes option activity for 1996, 1997 and 1998 (in
thousands, except exercise price data):
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
WTD. AVG. WTD. AVG. WTD. AVG.
FIXED OPTIONS SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 2,100 $1.52 3,922 $2.16 4,694 $ 1.44
Granted................................ 1,822 2.88 4,703 2.04 2,211 4.98
Exercised.............................. -- -- (1,683) 1.28 (251) 1.16
Cancelled.............................. -- -- (2,248) 3.90 (449) 10.00
----- ----- ------ ----- ----- ------
Outstanding at year-end................ 3,922 $2.16 4,694 $1.44 6,205 $ 2.10
===== ===== ====== ===== ===== ======
Options exercisable at year-end........ 410 $0.38 103 $1.42 874 $ 1.32
===== ===== ====== ===== ===== ======
Weighted average fair value of options
granted during the year.............. $0.16 $0.56 $ 1.02
===== ===== ======
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE NUMBER OF SHARES
RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE DECEMBER 31, 1998
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
$0.05 - 0.10.................... 67,000 6.3 67,000
0.38 - 0.50.................... 53,000 6.3 10,000
1.25.................... 479,000 7.2 226,000
1.50.................... 3,806,000 8.7 571,000
2.00.................... 1,172,000 9.0 --
3.00 - 4.50.................... 147,000 9.3 --
7.50.................... 502,000 9.6 --
--------- -------
6,226,000 874,000
========= =======
</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 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 and comprehensive 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 and comprehensive income, was $15,000. Had the Company
applied the fair value based method of accounting,
F-20
<PAGE> 90
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK BASED COMPENSATION PLANS (CONTINUED)
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>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income -- as reported....................... $11,811,000 $22,796,000 $18,582,000
Net income -- pro forma......................... $11,737,000 $22,139,000 $17,589,000
</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 5.5 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 150,000 shares of
common stock has been reserved for issuance under the 1998 Purchase Plan. No
shares have been issued under this plan.
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 and
1998 were $45,000 and $275,000, respectively.
14. UNAUDITED INFORMATION
INTERIM FINANCIAL INFORMATION
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 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. The results for the interim 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, 1999 reflects the
conversion of the Class B convertible preferred stock into 22,903,436 shares of
common stock as if the conversion occurred on March 31, 1999.
F-21
<PAGE> 91
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
PRO FORMA NET INCOME PER COMMON SHARE
Unaudited pro forma net income per common and common equivalent share for
the year ended December 31, 1998 and for the three month period ended March 31,
1999, 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, 1998 and the three month period ended March 31, 1999 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Net income.................................................. $18,582 $ 4,041
======= =======
Pro forma weighted average number of common shares used to
compute basic net income per common share................. 25,606 25,688
Dilutive effect of stock options............................ 3,936 4,647
------- -------
Pro forma weighted average number of common shares used to
compute diluted net income per common share............... 29,542 30,335
======= =======
Basic net income per common share........................... $ 0.73 $ 0.16
======= =======
Diluted net income per common share......................... $ 0.63 $ 0.13
======= =======
</TABLE>
STOCK BASED COMPENSATION PLANS
The following summarizes option activity for the three month period ended
March 31, 1999:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
FIXED OPTIONS (IN THOUSANDS) EXERCISE PRICE
------------- -------------- ----------------
<S> <C> <C>
Outstanding at beginning of period......................... 6,205 $2.10
Granted.................................................. 626 7.50
Exercised................................................ (7) 1.58
Canceled................................................. (60) 3.73
----- -----
Outstanding at end of period............................... 6,764 $2.57
===== =====
Options exercisable at end of period....................... 1,891 $1.52
===== =====
Weighted average fair value of options granted during the
period................................................... $1.78
=====
</TABLE>
F-22
<PAGE> 92
NETCOM SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
During the three month period ended March 31, 1999, 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................................... $4,041,000
Net income -- pro forma..................................... $3,804,000
</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.
COMPREHENSIVE INCOME
During the three month period ended March 31, 1999, "Other Comprehensive
Income" related solely to foreign currency translated adjustments. During the
period, translation losses, net of tax, were $51,000. Comprehensive income was
$3,990,000 during the period. "Accumulated Other Comprehensive Loss" as of March
31, 1999 was $9,000.
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 $857,000 during the three month
period ended March 31, 1999. Cash paid for interest during the three month
period ended March 31, 1998 was $773,000. Cash paid for interest during the
three month period ended March 31, 1999 was $409,000. During the three month
period ended March 31, 1999, the Company recorded deferred compensation in the
amount of $960,000. This non-cash transaction is excluded from the March 31,
1999 statement of cash flows.
DEFERRED COMPENSATION
During the three month period ended March 31, 1999, the Company recorded
deferred compensation in the amount of $960,000, which related to the granting
of employee stock options below fair market value. Amortization relating to
deferred compensation was $133,000 during the period.
COMMON STOCK
In April 1999, the Company recorded compensation in the amount of $272,000,
which related to the issuance of 22,000 shares of its common stock to a
consultant for past services performed. The compensation was recorded based on
the fair value of the shares on the date of issuance.
In May 1999, the Company's board of directors approved an increase of the
authorized shares of the Company's common stock to 200,000,000.
F-23
<PAGE> 93
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Forward-Looking Statements............ 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 32
Management............................ 46
Certain Transactions.................. 58
Principal Stockholders................ 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 64
Underwriting.......................... 66
Legal Matters......................... 68
Experts............................... 68
Where You Can Find More
Information......................... 68
Index to Consolidated Financial
Statements.......................... F-1
- --------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL , 1999 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE IN THESE SHARES OF
COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS AN UNDERWRITER AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BT ALEX. BROWN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
NATIONSBANC MONTGOMERY
SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 94
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 Netcom Systems 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............................................ $ 23,978
NASD Filing Fee............................................. 9,125
The Nasdaq National Market System Listing Fee............... 100,000
Printing.................................................... 125,000
Legal Fees and Expenses..................................... 250,000
Accounting Fees and Expenses................................ 125,000
Registrar and Transfer Agent Fees........................... 10,000
Miscellaneous............................................... 56,897
--------
Total............................................. $700,000
========
</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 VI 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) During the three years prior to the date hereof, the Registrant has
issued and sold the following unregistered securities:
(1) On July 10, 1996, the Registrant sold 39,500 shares of common
stock to one investor in consideration of services rendered.
(2) On January 16, 1997, the Registrant effected a 2-for-1 stock split
of its common stock for no consideration.
(3) On March 26, 1997, the Registrant sold 100,000 shares of common
stock to one investor at a per share purchase price of $6.00.
II-1
<PAGE> 95
(4) On August 27, 1997, the Registrant sold 1,367,646 shares upon the
exercise of options at prices ranging from $0.05 per share to $1.50 per
share.
(5) 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.
(6) On August 29, 1997, the Registrant sold 22,785,424 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 $2.1184 per share, payable in cash.
(7) 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.
(8) On September 10, 1997, the Registrant sold 118,013 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 $2.1184 per share, payable in cash.
(9) On October 13, 1997, the Registrant sold 33,333 shares upon the
exercise of options at prices ranging from $1.25 to $1.50 per share.
(10) On October 16, 1997, the Registrant sold 534 shares upon the
exercise of options at a price of $1.25 per share.
(11) On October 17, 1997, the Registrant sold 21,067 shares upon the
exercise of options at prices ranging from $0.05 to $1.50 per share.
(12) On October 20, 1997, the Registrant sold 34,785 shares upon the
exercise of options at prices ranging from $0.10 to $1.50 per share.
(13) On October 21, 1997, the Registrant sold 24,347 shares upon the
exercise of options at prices ranging from $0.05 to $1.50.
(14) On October 22, 1997, the Registrant sold 800 shares upon the
exercise of options at a price of $1.50 per share.
(15) On October 23, 1997, the Registrant sold 20,000 shares upon the
exercise of options at a price of $1.25 per share.
(16) On October 27, 1997, the Registrant sold 17,190 shares upon the
exercise of options at a price of $1.50 per share.
(17) On October 28, 1997, the Registrant sold 6,000 shares upon the
exercise of options at a price of $0.50 per share.
(18) On November 17, 1997, the Registrant sold 2,000 shares upon the
exercise of options at a price of $1.50 per share.
(19) On November 20, 1997, the Registrant sold 1,334 shares upon the
exercise of options at a price of $1.25 per share.
(20) On January 7, 1998, the Registrant sold 33,333 shares upon the
exercise of options at a price of $0.375 per share.
(21) On May 5, 1998, the Registrant sold 150,000 shares upon the
exercise of options at a price of $1.50 per share.
(22) On May 11, 1998, the Registrant sold 66,666 shares upon the
exercise of options at a price of $0.375 per share.
II-2
<PAGE> 96
(23) On June 4, 1998, the Registrant sold 800 shares upon the exercise
of options at a price of $1.50 per share.
(24) On January 6, 1999, the Registrant sold 6,000 shares upon the
exercise of options at a price of $1.50 per share.
(25) On March 5, 1999, the Registrant sold 1,200 shares upon the
exercise of options at a price of $2.00 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 described in items (a)(1), (3) and
(5) through (8) were deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act as transactions by an
issuer not involving a public offering and the sales of the above securities
described in items (a)(4) and (9) through (25) were deemed to be exempt from
registration under the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act as 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 Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant, as currently in
effect.
3.2* Form of Restated Certificate of Incorporation of Registrant,
to be filed immediately following the closing of the
offering made under this Registration Statement.
3.3 Bylaws of Netcom Systems.
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, as amended, and form of Stock Option
Agreement thereunder.
10.4 1998 Employee Stock Purchase Plan, as amended.
10.5 Recapitalization Agreement, dated August 29, 1997, between
Registrant and certain stockholders.
10.6 Credit Agreement, dated August 29, 1997, between Registrant,
the lenders named therein, BankBoston, N.A., as co-agent,
and NationsBanc of Texas, N.A., as administrative agent.
10.7 Registration Agreement, dated August 29, 1997, as amended,
between Registrant and certain stockholders.
10.8 Stockholders agreement, dated August 29, 1997, as amended,
between Registrant and certain stockholders.
</TABLE>
II-3
<PAGE> 97
<TABLE>
<S> <C>
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.
10.13 Industrial Real Estate Lease, dated June 25, 1998, between Registrant and Cypress Land Company.
10.14* Letter Agreement, dated September 24, 1996, between Registrant and Barry Phelps.
10.15* Employment Agreement, dated September 1, 1996, between Registrant and Stephane Johnson as amended
on November 19, 1996.
10.16* Employment Agreement, dated December 1, 1994, between Registrant and James Jordan.
10.17* Employment Agreement between Registrant and Henry Hamon.
10.18 First Amendment to Credit Agreement, dated May 13, 1999, among Registrant, the lenders named
therein, and NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as
administrative agent.
11.1 Calculation of earnings per share (contained in Notes 2 and 14 of the Notes to Consolidated
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-6).
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (First Quarter 1999).
</TABLE>
- ---------------
* 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.
II-4
<PAGE> 98
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-5
<PAGE> 99
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 Chatsworth,
State of California, on the 14th day of May, 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BARRY PHELPS President, Chief Executive May 14, 1999
- ----------------------------------------------------- Officer and Director
Barry Phelps
/s/ GIL CABRAL Vice President, Finance, Chief May 14, 1999
- ----------------------------------------------------- Financial Officer and Secretary
Gil Cabral
/s/ WALTER G. KORTSCHAK Director May 14, 1999
- -----------------------------------------------------
Walter G. Kortschak
/s/ RICHARD MOLEY Director May 14, 1999
- -----------------------------------------------------
Richard Moley
/s/ ROBERT H. SHERIDAN III Director May 14, 1999
- -----------------------------------------------------
Robert H. Sheridan III
/s/ MICHAEL WEST Director May 14, 1999
- -----------------------------------------------------
Michael West
</TABLE>
II-6
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant, as currently in
effect.
3.2* Form of Restated Certificate of Incorporation of Registrant,
to be filed immediately following the closing of the
offering made under this Registration Statement.
3.3 Bylaws of Netcom Systems.
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, as amended, and form of Stock Option
Agreement thereunder.
10.4 1998 Employee Stock Purchase Plan, as amended.
10.5 Recapitalization Agreement, dated August 29, 1997, between
Registrant and certain stockholders.
10.6 Credit Agreement, dated August 29, 1997, between Registrant,
the lenders named therein, BankBoston, N.A., as co-agent,
and NationsBanc of Texas, N.A., as administrative agent.
10.7 Registration Agreement, dated August 29, 1997, as amended,
between Registrant and certain stockholders.
10.8 Stockholders agreement, dated August 29, 1997, as amended,
between Registrant and certain stockholders.
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.
10.13 Industrial Real Estate Lease, dated June 25, 1998, between
Registrant and Cypress Land Company.
10.14* Letter Agreement, dated September 24, 1996, between
Registrant and Barry Phelps.
10.15* Employment Agreement, dated September 1, 1996, between
Registrant and Stephane Johnson as amended on November 19,
1996.
10.16* Employment Agreement, dated December 1, 1994, between
Registrant and James Jordan.
10.17* Employment Agreement between Registrant and Henry Hamon.
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<S> <C> <C>
10.18 First Amendment to Credit Agreement, dated May 13, 1999,
among Registrant, the lenders named therein, and
NationsBank, N.A. (successor by merger to NationsBank of
Texas, N.A.), as administrative agent.
11.1 Calculation of earnings per share (contained in Notes 2 and
14 of the Notes to Financial Statement).
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-6).
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (First Quarter 1999).
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation, originally incorporated on May 15, 1998)
Barry Phelps and Gilbert Cabral hereby certify that:
1. They are, respectively, the President and Secretary of Netcom Systems,
Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation is hereby amended
and restated in its entirety to read as follows:
"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 73,388,621 shares, consisting of:
(1) 485,184 shares of Class A Redeemable Preferred Stock, $0.001 par value
per share (the "Class A Preferred");
<PAGE> 2
(2) 22,903,437 shares of Class B Convertible Preferred Stock, $0.001 par
value per share (the "Class B Preferred"); and
(3) 50,000,000 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."
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.
-2-
<PAGE> 3
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
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%
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C>
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), 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
-4-
<PAGE> 5
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 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
-5-
<PAGE> 6
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 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
-6-
<PAGE> 7
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 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.
-7-
<PAGE> 8
(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 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.
-8-
<PAGE> 9
"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, 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.
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<PAGE> 10
"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 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).
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C. CLASS B CONVERTIBLE PREFERRED STOCK
Effective upon the filing of this First Amended and Restated Certificate of
Incorporation, each outstanding share of Class B Convertible Preferred Stock
shall become, without action of the holder thereof, one half (1/2) of a share of
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, 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
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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 662/3% 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 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
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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 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
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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.
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
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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:
(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
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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 $2.1184 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 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:
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(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.
(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
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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 $2.1184. 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 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
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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 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
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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 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 (without providing for a proportional subdivision of
the Class B Convertible Preferred Stock), 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 (without providing for a proportional
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combination of the Class B Convertible Preferred Stock), 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), 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.
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(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 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
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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.
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 662/3% 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 662/3% 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 662/3% 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
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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 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
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<PAGE> 25
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 (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 $2.1184.
"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.
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"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.
"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
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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 consent of the holders of at least 662/3% 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 662/3% 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
Effective upon the filing of this First Amended and Restated Certificate of
Incorporation, each outstanding share of Common Stock shall become, without
action of the holder thereof, one half (1/2) of a share of 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
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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 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.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
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 VII
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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 VII, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE VIII
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 IX
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 X
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
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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 XI
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."
* * *
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3. The foregoing First Amended and Restated Certificate of Incorporation
has been duly approved by the required vote of the stockholders in accordance
with the Certificate of Incorporation and the provisions of Sections 242 and 245
of the Delaware General Corporation Law.
The undersigned parties hereby acknowledge that the foregoing First Amended
and Restated Certificate of Incorporation is their act and deed and that the
facts stated herein are true.
Executed at Chatsworth, California, this 29th day of September, 1998.
- ------------------------------------- ---------------------------------------
Barry Phelps, President Gilbert Cabral, Secretary
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
NETCOM SYSTEMS, INC.
(a Delaware corporation)
as amended on
May 13, 1999
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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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
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.
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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.
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
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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.
(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
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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 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.
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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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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
Unless otherwise provided for in our certificate of incorporation, the
authorized number of directors shall be five (5). 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 become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
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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 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.
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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 quorum is not present at any meeting of the board of
directors, then the directors present thereat
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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. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or
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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.
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5.7 PRESIDENT
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.
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ARTICLE VI
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.
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
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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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 con tinue 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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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.
/s/ TODD CLEARY
---------------------------------------
Todd Cleary, Incorporator
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EXHIBIT 5.1
Netcom Systems, Inc.
20550 Nordhoff Street
Chatsworth, CA 91311
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on May 14, 1999, (as such may be amended or
supplemented, the "Registration Statement"), in connection with the registration
under the Securities Act of 1933, as amended, of shares of Common Stock of
Netcom Systems, Inc. with a maximum aggregate offering price of $86,250,000 (the
"Shares"). The Shares to be offered by the Company are to be sold to the
underwriters as described in such Registration Statement for the sale to the
public or issued to the Representatives of the underwriters. As your counsel in
connection with the transaction, we have examined the proceedings proposed to be
taken in connection with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares when issued and sold
in the manner referred to in the Registration Statement will be legally and
validly issued, fully paid and nonassessable.
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, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRIGH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
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.
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
<PAGE> 2
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.
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
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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> 4
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.
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Marc Hamon
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<PAGE> 5
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.
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Marc Hamon
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<PAGE> 6
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> 7
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> 8
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> 9
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 within 90 days after
such termination of employment and prior to the date of Option termination
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<PAGE> 10
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 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,
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<PAGE> 11
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 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
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<PAGE> 12
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 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;
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<PAGE> 13
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 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:
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<PAGE> 14
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.
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.
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<PAGE> 15
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 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
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<PAGE> 16
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
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.
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<PAGE> 17
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.
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.
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<PAGE> 18
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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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.]
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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> 20
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> 21
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 been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action.
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<PAGE> 22
(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)
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<PAGE> 1
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.
(i) "Director" means a member of the Board of Directors of the
Company.
- ----------
(1) As amended March 10, 1998
<PAGE> 2
(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.
(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.
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<PAGE> 3
(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.
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,
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<PAGE> 4
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;
(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;
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<PAGE> 5
(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.
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
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<PAGE> 6
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.
(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.
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<PAGE> 7
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 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,
-7-
<PAGE> 8
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 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
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<PAGE> 9
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
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
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<PAGE> 10
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 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
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<PAGE> 11
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 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.
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<PAGE> 12
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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<PAGE> 13
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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<PAGE> 14
AMENDMENT NO. 2 TO THE
SECOND AMENDED AND RESTATED
1997 STOCK OPTION PLAN OF
NETCOM SYSTEMS, INC.
a Delaware corporation
This Amendment No. 2 to the Second Amended and Restated 1997 Stock Option
Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on January
21, 1999, by the Company at the direction of the Company's Board of Directors.
The first paragraph of Section 3 of the Plan is hereby amended to read as
follows:
"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 4,959,500 Shares. The Shares may be authorized but unissued,
or reacquired 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> 15
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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<PAGE> 16
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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<PAGE> 17
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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<PAGE> 18
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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<PAGE> 19
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> 20
OPTIONEE: NETCOM SYSTEMS, INC.
- ------------------------------------- ----------------------------------------
Signature By
- ------------------------------------- ----------------------------------------
Print Name Title
- -------------------------------------
- -------------------------------------
Residence Address
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<PAGE> 21
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> 22
(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 dis position 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> 23
(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 HYPO THECATION 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> 24
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 con stitute 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> 25
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> 26
(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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--------------------------------
Date:___________________, 19____
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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> 1
Exhibit 10.3
NETCOM SYSTEMS, INC.
1998 STOCK PLAN
AS AMENDED ON MAY 13, 1999
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.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
<PAGE> 2
(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.
(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.
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<PAGE> 3
(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.
(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.
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<PAGE> 4
(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 2,000,000 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) 4,000,000 Shares, (ii) 5% 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.
(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
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<PAGE> 5
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;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
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<PAGE> 6
(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 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.
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<PAGE> 7
(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
(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
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<PAGE> 8
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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<PAGE> 9
(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
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<PAGE> 10
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, 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,
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<PAGE> 11
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 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 6,000 Shares (each, a
"First Option") on each of the first, second, third, fourth and fifth
anniversaries of the date on which such person first becomes an Outside
Director, so long as such person is serving as an Outside Director on such dates
whether through election by the stockholders of the Company or appointment by
the Board to fill a vacancy; provided, however, that
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<PAGE> 12
an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive any First Options.
(d) Each Outside Director shall be automatically granted an Option to
purchase 6,000 Shares (a "Subsequent Option") on the date of each annual
meeting of the stockholders of the Company, if as of such date, he or she shall
have served on the Board for at least the preceding eighteen (18) months.
Subsequent Options shall be in addition to First Options.
(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 Options and the
Subsequent Options shall vest and become exercisable as to 100% of the Shares
subject to the Option on its date of grant.
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 dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in
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<PAGE> 13
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 Parent, the Administrator may, with
the consent of the successor corporation, provide for the
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<PAGE> 14
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.
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<PAGE> 15
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 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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<PAGE> 16
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> 17
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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<PAGE> 18
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> 19
(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> 20
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> 21
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> 22
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> 1
EXHIBIT 10.4
NETCOM SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
AS AMENDED ON MAY 13, 1999
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.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
<PAGE> 2
(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, 2000. 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; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(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> 3
(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,
2000. 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> 4
authorization is applicable, unless sooner terminated by the participant as
provided in Section 10 hereof.
-4-
<PAGE> 5
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 parti
cipation 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> 6
purchase during each Offering Period more than 2,500 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> 7
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 150,000 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)
1,000,000 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 parti cipant'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> 8
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> 9
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 Sections 19 and 20
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> 10
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.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require
stockholder approval or the consent of any Plan participants.
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 pur chased 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.
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<PAGE> 11
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.
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<PAGE> 12
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> 13
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:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
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<PAGE> 14
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)
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<PAGE> 15
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> 1
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> 2
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.
(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
<PAGE> 3
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 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
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<PAGE> 4
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.
(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
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<PAGE> 5
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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<PAGE> 8
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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<PAGE> 9
(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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<PAGE> 10
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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<PAGE> 12
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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<PAGE> 13
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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<PAGE> 14
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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<PAGE> 15
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, order, judgment or decree to
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<PAGE> 16
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> 18
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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<PAGE> 19
(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> 20
(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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<PAGE> 22
(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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<PAGE> 24
(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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<PAGE> 28
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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<PAGE> 37
(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 competition by such Seller would result
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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 jurisdictions of the United States of America and all other
countries, nations, territories and areas
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<PAGE> 43
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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<PAGE> 45
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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<PAGE> 46
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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<PAGE> 48
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 have
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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 against the Company, all of the rights which the Purchasers have under
applicable law. Each of the
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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. Each
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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.
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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 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
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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> 61
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> 62
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> 63
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.
* * * * *
-62-
<PAGE> 64
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> 65
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> 66
----------------------------------------
Marc Hamon
----------------------------------------
Henri Hamon
----------------------------------------
James C. Jordan
----------------------------------------
Jing Zhang
----------------------------------------
Warren B. Phelps III
----------------------------------------
Stephane Johnson
----------------------------------------
Richard Bass
[Signature Page to Recapitalization Agreement]
<PAGE> 67
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Number of Purchase Number of Purchase Total
Shares of Price for Shares of Price for Purchase
Redeemable Redeemable Convertible Convertible Price for
Preferred Preferred Preferred Preferred Preferred
Name and Address Stock Stock Stock Stock 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> 68
<TABLE>
<CAPTION>
Number of Purchase Number of Purchase Total
Shares of Price for Shares of Price for Purchase
Redeemable Redeemable Convertible Convertible Price for
Preferred Preferred Preferred Preferred Preferred
Name and Address Stock Stock Stock Stock 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> 69
<TABLE>
<CAPTION>
Number of Purchase Number of Purchase Total
Shares of Price for Shares of Price for Purchase
Redeemable Redeemable Convertible Convertible Price for
Preferred Preferred Preferred Preferred Preferred
Name and Address Stock Stock Stock Stock 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> 70
SCHEDULE OF SELLERS
<TABLE>
<CAPTION>
Number of
Repurchased Repurchase Exercise Net Repurchase Escrow Closing Cash
Name and Address 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> 1
EXHIBIT 10.6
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.
"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
<PAGE> 2
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> 3
"Applicable LIBOR Rate Margin" means the following per annum
percentages, applicable in the following situations:
<TABLE>
<CAPTION>
Applicability Percentage
- ------------- ----------
<S> <C> <C>
(a) Initial Pricing Period 1.25%
(b) Subsequent Pricing Period
(1) The Leverage Ratio is greater than or equal to 1.50 to 1 1.50%
(2) The Leverage Ratio is less than 1.50 to 1 but greater 1.25%
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.
3
<PAGE> 4
"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> 5
"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> 6
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> 7
(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
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<PAGE> 8
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.
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<PAGE> 9
"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.
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<PAGE> 10
"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 hereafter becomes a
party hereto pursuant to Section 11.6 hereof, subject to the limitations set
forth therein.
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<PAGE> 12
"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 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.
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"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 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
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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.
"Netcom Redeemable Preferred Stock" means that certain redeemable
preferred stock of the Borrower issued pursuant to the Netcom Recapitalization
Agreement.
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"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.
"Permitted Distributions" means, collectively:
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<PAGE> 16
(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).
(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
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<PAGE> 17
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;
(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
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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;
(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;
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(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.
"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.
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"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.
"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.
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"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,
(c) the beneficial interest of such trust or estate, or
(d) the equity interest of such other Person,
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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.
"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.
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"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
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.
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(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 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
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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.
(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
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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 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
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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. 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.
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(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 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
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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.
(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.
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<PAGE> 30
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
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
</TABLE>
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<PAGE> 31
<TABLE>
<CAPTION>
Amount of Reduction of
Quarterly Date Term Loan Advances as of each Date
-------------- ----------------------------------
<S> <C>
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.
(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.
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<PAGE> 32
(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 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
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<PAGE> 33
(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 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,
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<PAGE> 34
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;
(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:
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<PAGE> 35
(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.
(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
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<PAGE> 36
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 (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
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<PAGE> 37
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 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
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<PAGE> 38
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 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
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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;
(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
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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 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
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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
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
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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 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;
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(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;
(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;
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(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;
(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;
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(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:
(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
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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 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.
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(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.
(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.
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(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).
(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
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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 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)
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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.
(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.
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(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 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
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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
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
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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
(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
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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.
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
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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.
(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),
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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 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.
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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
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:
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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 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.
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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 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.
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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) 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
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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
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;
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(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;
(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
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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 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;
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(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);
(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;
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(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 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
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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.
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.
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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>
From and including the Agreement Date to and including October 31, 1997 2.50 to 1
From and including November 1, 1997 to and including October 31, 1999 2.00 to 1
From and including November 1, 1999 to and including October 31, 2000 1.50 to 1
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 October 31, 1999 1.50 to 1
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,
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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.
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.
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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;
(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
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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 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
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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 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
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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.
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,
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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.
(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);
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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 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
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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.
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
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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 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.
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(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 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,
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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 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
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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
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;
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(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 "workout", 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 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
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<PAGE> 81
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, 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
81
<PAGE> 82
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.
(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.
82
<PAGE> 83
(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. 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
83
<PAGE> 84
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 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.
84
<PAGE> 85
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.
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
85
<PAGE> 86
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.
86
<PAGE> 87
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:
-------------------------------
87
<PAGE> 88
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> 89
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
<PAGE> 90
SCHEDULE 2
EXISTING LIENS
None
<PAGE> 91
SCHEDULE 3
EXISTING LITIGATION
None
<PAGE> 92
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> 93
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> 94
SCHEDULE 6
EXISTING INDEBTEDNESS
None
<PAGE> 95
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> 96
SCHEDULE 8
LABOR RELATIONS
None
<PAGE> 97
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> 98
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <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......................53
Section 5.3 Maintenance of Properties.....................................54
</TABLE>
<PAGE> 99
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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........................................54
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..............................57
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 ....................................58
Section 6.4 Compliance Certificate........................................58
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..................................................61
Section 7.2 Liens.........................................................63
Section 7.3 Investments...................................................63
Section 7.4 Liquidation, Merger...........................................65
Section 7.5 Sales of Assets...............................................65
Section 7.6 Acquisitions..................................................65
Section 7.7 Restricted Payments...........................................66
Section 7.8 Affiliate Transactions........................................66
Section 7.9 Compliance with ERISA.........................................67
Section 7.10 Maximum Leverage Ratio........................................67
Section 7.11 Minimum Fixed Charge Coverage Ratio...........................67
Section 7.12 Minimum EBITDA and Net Income.................................67
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..................68
Section 7.18 Sale and Leaseback............................................68
</TABLE>
<PAGE> 100
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE 8 Default
Section 8.1 Events of Default.............................................69
Section 8.2 Remedies......................................................71
ARTICLE 9 Changes in Circumstances
Section 9.1 LIBOR Basis Determination Inadequate..........................72
Section 9.2 Illegality....................................................72
Section 9.3 Increased Costs...............................................73
Section 9.4 Effect On Base Rate Advances..................................74
Section 9.5 Capital Adequacy..............................................74
Section 9.6 Replacement Lender............................................75
ARTICLE 10 Agreement Among Lenders
Section 10.1 Agreement Among Lenders.......................................75
Section 10.2 Lender Credit Decision........................................78
Section 10.3 Benefits of Article...........................................78
ARTICLE 11 Miscellaneous
Section 11.1 Notices.......................................................79
Section 11.2 Expenses......................................................79
Section 11.3 Waivers.......................................................80
Section 11.4 Calculation by the Lenders Conclusive and Binding.............80
Section 11.5 Set-Off.......................................................80
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......................................................83
Section 11.11 Amendment and Waiver..........................................84
Section 11.12 Exception to Covenants........................................84
Section 11.13 No Liability of Issuing Bank..................................84
Section 11.14 Confidentiality...............................................85
Section 11.15 No Duties of Documentation Agent..............................85
Section 11.16 Governing Law.................................................85
Section 11.17 Waiver of Jury Trial..........................................85
Section 11.18 Entire Agreement..............................................86
Section 11.19 Consent by Administrative Agent and the Lenders...............86
</TABLE>
<PAGE> 101
TABLE OF CONTENTS
(CONTINUED)
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
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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..........................3
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............................................................4
2H. Stock Purchase Agreement....................................................4
2I. Opinion of the Company's and the Sellers' Counsel...........................4
2J. Senior Debt Financing.......................................................5
2K. Repurchase Transaction......................................................5
2L. Release of Liens............................................................5
2M. Audit.......................................................................5
2N. Litigation..................................................................5
2O. Filings.....................................................................5
2P. Third Party Consents and Approvals..........................................5
2Q. Governmental Consents and Approvals.........................................5
2R. Material Adverse Change.....................................................6
2S. Expenses....................................................................6
2T. Real Estate Matters.........................................................6
2U. Solvency Opinion............................................................6
2V. Proceedings. ..............................................................6
2W. Closing Documents...........................................................6
2X. Waiver......................................................................7
Section 3. Conditions of the Obligations of the Company and the Sellers at the Closing.......7
3A. Representations and Warranties; Covenants...................................7
3B. Amendment of Articles of Incorporation......................................7
3C. Shareholders Agreement......................................................7
3D. Registration Agreement......................................................8
3E. Escrow Agreement............................................................8
3F. Litigation..................................................................8
3G. Governmental Consents and Approvals.........................................8
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3H. Investment Transaction......................................................8
3I. Expenses....................................................................8
3J. Waiver......................................................................8
Section 4. Pre-Closing Covenants and Agreements..............................................8
4A. General.....................................................................8
4B. Maintenance of Business.....................................................8
4C. Third Party Notices and Consents............................................9
4D. Governmental Notices and Consents...........................................9
4E. Operation of Business.......................................................9
4F. Full Access................................................................10
4G. Compliance with Agreements and Laws........................................10
4H. Payment of Obligations.....................................................10
4I. Notice of Material Developments............................................10
4J. Exclusivity................................................................10
4K. Tax Matters................................................................11
4L. Actions with Respect to Repurchased Shares.................................11
4M. Employees..................................................................11
Section 5. Representations and Warranties of the Company and the Sellers....................11
5A. Organization, Corporate Power and Licenses.................................11
5B. Capital Stock and Related Matters..........................................12
5C. Subsidiaries; Investments..................................................13
5D. Authorization; No Breach. .................................................13
5E. Financial Statements.......................................................14
5F. Absence of Undisclosed Liabilities.........................................14
5G. Accounts Receivable........................................................14
5H. Inventories................................................................14
5I. Product Warranty; Product Certifications...................................15
5J. Product Liability..........................................................15
5K. Product Recall, etc........................................................15
5L. No Material Adverse Effect.................................................16
5M. Absence of Certain Developments............................................16
5N. Assets.....................................................................17
5O. Tax Matters................................................................18
5P. Contracts and Commitments..................................................20
5Q. International Trade Laws and Regulations...................................22
5R. Intellectual Property Rights...............................................23
5S. Litigation, etc. ..........................................................24
5T. Brokerage..................................................................25
5U. Insurance..................................................................25
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5V. Employees..................................................................25
5W. ERISA......................................................................26
5X. Compliance with Laws; Permits; Certain Operations..........................27
5Y. Environmental and Safety Matters...........................................28
5Z. Affiliated Transactions....................................................28
5AA. Names and Locations........................................................29
5BB. Suppliers and Customers....................................................29
5CC. Real Property..............................................................29
5DD. Regulatory Status..........................................................29
5EE. Margin Securities..........................................................29
5FF. Small Business Matters.....................................................29
5GG. Disclosure.................................................................30
Section 6. Representations and Warranties of the Sellers....................................30
6A. Capacity; Power and Authority..............................................30
6B. Authorization; No Breach. .................................................30
6C. Title to Shares, etc.......................................................30
6D. Brokerage..................................................................30
6E. Litigation, etc. ..........................................................31
6F. Company Transactions.......................................................31
Section 7. Representations and Warranties of the Purchasers.................................31
7A. Organization, Power and Authority..........................................31
7B. Authorization; No Breach. .................................................31
7C. Brokerage..................................................................31
7D. Investment Representations.................................................32
Section 8. Indemnification and Other Agreements.............................................32
8A. Survival of Representations and Warranties.................................32
8B. General Indemnification. ..................................................33
8C. Press Release and Announcements. ..........................................37
8D. Non-Compete; Non-Solicitation..............................................37
8F. Intellectual Property Rights Protection....................................40
8G. Dispute Resolution.........................................................40
8H. Further Assurances.........................................................41
8I. Option Re-Pricing..........................................................41
Section 9. Definitions......................................................................42
Section 10. Termination.....................................................................49
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10A. Conditions of Termination..................................................49
10B. Effect of Termination......................................................49
Section 11. Miscellaneous...................................................................50
11A. Fees and Expenses..........................................................50
11B. Remedies...................................................................50
11C. Transfer of Restricted Securities..........................................50
11D. Consent to Amendments......................................................51
11E. Successors and Assigns.....................................................52
11F. Severability...............................................................52
11G. Counterparts...............................................................52
11H. Descriptive Headings; Interpretation.......................................52
11I. Entire Agreement...........................................................53
11J. No Third-Party Beneficiaries...............................................53
11K. Schedules..................................................................53
11L. Cooperation on Tax Matters.................................................53
11M. Schedules and Exhibits.....................................................54
11N. Treatment of the Preferred Stock...........................................54
11O. Governing Law..............................................................54
11P. Notices....................................................................54
11Q. No Strict Construction.....................................................57
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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
Contracts Schedule
Capitalization Schedule
Investments and Subsidiaries Schedule
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TABLE OF CONTENTS
(CONTINUED)
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
Company is not presently chedule
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<PAGE> 1
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> 2
(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> 3
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.
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<PAGE> 4
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> 5
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
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<PAGE> 6
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> 7
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,
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<PAGE> 8
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> 9
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> 10
(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> 11
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.
- 11 -
<PAGE> 12
(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
- 12 -
<PAGE> 13
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.
* * * * *
- 13 -
<PAGE> 14
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> 15
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]
<PAGE> 16
----------------------------------------
Marc Hamon
----------------------------------------
Henri Hamon
----------------------------------------
James Jordan
----------------------------------------
Warren B. Phelps III
----------------------------------------
Jing Zhang
----------------------------------------
Stephane Johnson
----------------------------------------
Richard Bass
[Signature Page to Registration Agreement]
<PAGE> 17
SCHEDULE OF INVESTORS
<TABLE>
<S> <C>
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.
c/o Montgomery Securities Todd Cleary
600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati
San Francisco, California 94111 650 Page Mill Road
Attn: Mr. William B. Bunting Palo Alto, California 94304
Peter Mooney as nominee for
the Broadview Partners Group with a copy to:
c/o Broadview Associates (which shall not constitute notice to the Investors)
950 Tower Lane
18th Floor
Foster City, California 94404 Kirkland & Ellis
Attn: Mr. Stephen S. Smith 200 East Randolph Drive
Chicago, Illinois 60601
Bain Securities, Inc. Attn: Ted H. Zook, Esq.
c/o Bain & Company, Inc.
Two Copley Place Fennebresque, Clark, Swindell & Hay
Boston, Massachusetts 02116 NationsBank Corporate Center
Attn: Leonard C. Banos 29th Floor
100 North Tryon Street
Charlotte, North Carolina 28202
Attn: John S. Chinuntdet, Esq.
</TABLE>
<PAGE> 18
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> 19
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 State of
California, without giving effect to any choice of law or conflict of law rules
or provisions (whether
- 1 -
<PAGE> 20
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.
* * * * *
- 2 -
<PAGE> 21
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> 22
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> 23
----------------------------------------
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> 24
SCHEDULE OF INVESTORS
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 25
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> 1
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> 2
(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 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);
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<PAGE> 3
(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 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.
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<PAGE> 4
(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
Pa 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 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."
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<PAGE> 5
(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 con templated 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 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 trans-
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<PAGE> 6
feree(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 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.
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<PAGE> 7
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 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).
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<PAGE> 8
(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 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
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<PAGE> 9
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
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.
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<PAGE> 10
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.
"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.
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<PAGE> 11
"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 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
-11-
<PAGE> 12
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 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
-12-
<PAGE> 13
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.
(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-
<PAGE> 14
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
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
-14-
<PAGE> 15
(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.
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.
* * * * *
-15-
<PAGE> 16
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> 17
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> 18
----------------------------------------
Marc Hamon
----------------------------------------
Henri Hamon
----------------------------------------
James Jordan
----------------------------------------
Warren B. Phelps III
----------------------------------------
Jing Zhang
----------------------------------------
Stephane Johnson
----------------------------------------
Richard Bass
[Signature Page to Shareholders Agreement]
<PAGE> 19
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> 20
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Name and Address
- ----------------
<S> <C>
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
</TABLE>
<PAGE> 21
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> 22
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> 23
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> 24
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> 25
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> 26
----------------------------------------
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> 27
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Name and Address
- ----------------
<S> <C>
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
</TABLE>
<PAGE> 28
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> 29
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> 30
(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> 31
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 of an individual to
such directorship shall be accomplished in accordance with the
-3-
<PAGE> 32
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> 33
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> 34
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> 35
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> 36
----------------------------------------
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> 37
----------------------------------------
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> 38
----------------------------------------
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> 39
----------------------------------------
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> 40
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Name and Address
- ----------------
<S> <C>
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
</TABLE>
-12-
<PAGE> 41
<TABLE>
<S> <C>
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
</TABLE>
-13-
<PAGE> 42
<TABLE>
<S> <C>
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
</TABLE>
-14-
<PAGE> 43
<TABLE>
<S> <C>
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
</TABLE>
-15-
<PAGE> 44
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> 1
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.)
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.
<PAGE> 2
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 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,
-2-
<PAGE> 3
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 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
-3-
<PAGE> 4
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 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.
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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 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
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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 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.
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(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 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
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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 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
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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 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,
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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 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
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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 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
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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 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
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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
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.
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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 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
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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.
(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
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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:
(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.
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(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 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
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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 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
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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 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.
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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.
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
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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.
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
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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 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
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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 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
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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.
(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
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<PAGE> 25
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.
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
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<PAGE> 26
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 Tel. No. (818) 704-5109
Fax No. (___) 459-9856 Fax No. (818) 709-7881
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.
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<PAGE> 27
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.
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
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<PAGE> 28
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.
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
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<PAGE> 29
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 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> 30
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> 31
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> 32
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> 33
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.
-33-
<PAGE> 34
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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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 deleted and the New COL Adjustment Dates shall be
substituted in their place. As of the Effective
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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.
(a) Improvements Paid for by Lessor. Lessor agrees to pay,
at Lessor's sole cost and expense, for the following items:
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(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 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.
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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
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EXHIBIT "A"
New Premises
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EXHIBIT "B"
Exterior Windows
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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 costs associated
with the Change Order, including, without limitation, architectural fees,
engineering
<PAGE> 42
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.
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EXHIBIT 1
PLANS
<PAGE> 1
EXHIBIT 10.10
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 sig nificant 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;
<PAGE> 2
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.
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
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<PAGE> 3
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 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> 4
(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, subject to the provisions of Section 15, the Company hereby
consents to service of process and to appear in any
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<PAGE> 5
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.
(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
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<PAGE> 6
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 determi nation 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> 7
(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 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
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<PAGE> 8
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 indem nifying 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 Com pany'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 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
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<PAGE> 9
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, 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 suc-
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<PAGE> 10
cession 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 ulti mately 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 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
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<PAGE> 11
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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<PAGE> 12
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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<PAGE> 1
EXHIBIT 10.11
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> 2
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,
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<PAGE> 3
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
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<PAGE> 4
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
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<PAGE> 5
Section 4, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and 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.
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<PAGE> 6
(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,
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including, but not limited to, sections 1283, 1283.05 and 1283.1, such that the
full degree of discovery permitted under the 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.
* * * *
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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:
-----------------------------------
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<PAGE> 1
EXHIBIT 10.12
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
DEFINED CONTRIBUTION PLAN
BASIC PLAN DOCUMENT NUMBER 03
The Plan set forth herein may be adopted by an Employer and accepted by
the Plan Administrator and, if applicable, the Trustee by executing an Adoption
Agreement, which together shall constitute the Employer's Plan, for the
exclusive benefit of its eligible Employees and their Beneficiaries, as fully as
if set forth in said Adoption Agreement; provided, however, no Employer may
adopt this Plan except with the consent of Connecticut General Life Insurance
Company.
ARTICLE I - DEFINITIONS
1.1 Accrued Benefit. The term Accrued Benefit means the value of the
Participant's Account on any applicable date.
1.2 Additional Matching Contributions. The term Additional Matching
Contributions means additional discretionary Matching Contributions made to the
Plan by the Employer, as authorized by its Board of Directors by resolution.
Additional Matching Contributions shall be treated as Matching Contributions for
nondiscrimination testing and allocation purposes.
1.3 Adoption Agreement. The term Adoption Agreement means the
prescribed agreement by which the Employer adopts this Plan, and which sets
forth the elective provisions of this Plan as specified by the Employer.
1.4 Alternate Payee. The term Alternate Payee means a person, other
than the Participant, identified under a QDRO to be a recipient of part or all
of the Participant's benefit under the Plan.
1.5 Annuity. The term Annuity means a series of payments made over a
specified period of time.
1.6 Annuity Contract. The term Annuity Contract means the group
annuity contract form issued by the Insurance Company to fund the benefits
provided under this Plan, as such contract may be amended from time to time in
accordance with the terms thereof. The Employer will specify and communicate to
its Employees the types of investments available under this Plan and Annuity
Contract.
1.7 Annuity Starting Date. The term Annuity Starting Date means the
first day of the first period for which an amount is paid as an Annuity or any
other form.
1.8 Beneficiary. The term Beneficiary means the beneficiary or
beneficiaries entitled to any benefits under a Participant's Account hereunder
upon the death of a Participant, Beneficiary or Alternate Payee pursuant to a
QDRO. If any Life Insurance Policy is purchased on the life of a
<PAGE> 2
Participant hereunder, the Beneficiary under such Policy shall be designated
separately therein. However, any such Beneficiary designation shall be subject
to the terms of Section 3C.
A Participant's Beneficiary shall be his Spouse, if any, unless
the Participant designates a person or persons other than his Spouse as
Beneficiary with his Spouse's written consent. A Participant may designate a
Beneficiary on the form approved by the Plan Administrator.
If any distribution is made to a Beneficiary in the form of an
Annuity, and if such Annuity provides for a death benefit, then such Beneficiary
shall also have a right to designate a beneficiary and to change that
beneficiary from time to time. As an alternative to receiving the benefit in the
form of an Annuity, the Beneficiary may elect to receive a single cash payment
or any other form of payment provided by the Employer's election in the Adoption
Agreement.
If no Beneficiary has been designated pursuant to the provisions
of this Section, or if no Beneficiary survives the Participant and he has no
surviving Spouse, then the Beneficiary under the Plan shall be the deceased
Participant's surviving children in equal shares or, if there are no surviving
children, the Participant's estate. If a Beneficiary dies after becoming
entitled to receive a distribution under the Plan but before distribution is
made to him in full, and if no other Beneficiary has been designated to receive
the balance of the distribution in that event, the estate of the deceased
Beneficiary shall be the Beneficiary for the balance of the distribution.
If the Employer so elects in the Adoption Agreement, an
Alternate Payee and/or Beneficiary shall be allowed to direct the investment of
his segregated portion of the Participant's Account, pursuant to Section 5A. An
individual who is designated as an Alternate Payee in a QDRO relating to a
Participant's benefits under this Plan shall be treated as a Beneficiary
hereunder, to the extent provided by such order.
1.9 Board of Directors. The term Board of Directors means the
Employer's board of directors or other comparable governing body.
1.10 CODA. The term CODA means cash or deferred arrangement as
described in Code section 401(k) and the regulations thereunder.
1.11 Code. The term Code means the Internal Revenue Code of 1986, as
amended from time to time.
1.12 Compensation. The term Compensation means Compensation as
defined below. For any Self-Employed Individual covered under the Plan,
Compensation shall mean Earned Income. Compensation shall include only that
Compensation which is actually paid to the Participant during the applicable
Determination Period. Except as provided elsewhere in this Plan, the
"Determination Period" shall be the period elected by the Employer in the
Adoption Agreement. If the Employer makes no election, the Determination Period
shall be the Plan Year.
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An Employer may elect in the Adoption Agreement to use one of
the following definitions of Compensation for purposes of allocating all
contributions:
(a) Wages, Tips, and Other Compensation Box on Form W-2.
(Information required to be reported under Code sections 6041, 6051 and 6052).
Wages within the meaning of Code section 3401(a) and all other payments of
compensation to an Employee by the Employer (in the course of the Employer's
trade or business) for which the Employer is required to furnish the Employee a
written statement under Code sections 6041(d), 6051(a)(3), and 6052.
Compensation must be determined without regard to any rules under Code section
3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the exception for
agricultural labor in Code section 3401(a)(2)).
(b) Section 3401(a) Wages. Wages as defined in Code section
3401(a) for the purposes of income tax withholding at the source but determined
without regard to any rules that limit the remuneration included in wages based
on the nature or location of the employment or the services performed (such as
the exception for agricultural labor in Code section 3401(a)(2)).
(c) 415 Safe-Harbor Compensation. Wages, salaries, and fees
for professional services and other amounts received (without regard to whether
or not an amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer maintaining the Plan to the extent that
the amounts are includable in gross income (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses, fringe
benefits, and reimbursements or other expense allowances under a nonaccountable
plan as described in Code section 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred
compensation which are not includable in the Employee's gross income for the
taxable year in which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are deductible by the
Employee, or any distributions from a plan of deferred compensation;
(2) Amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or
other disposition of stock acquired under a qualified stock option; and
(4) Other amounts which received special tax
benefits, or contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract described in
Code section 403(b) (whether or not the contributions are actually excludable
from the gross income of the Employee).
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<PAGE> 4
(d) Modified Wages, Tips, and Other Compensation Box on Form
W-2. Compensation as defined in subsection (a) above, but reduced by all of the
following items (even if includable in gross income): reimbursements or other
expense allowances, fringe benefits (cash or noncash), moving expenses, deferred
compensation, and welfare benefits. This definition may not be used by
standardized plans or plans using a contribution or allocation formula that is
integrated with Social Security.
(e) Modified Section 3401(a) Wages. Compensation as defined
in subsection (c) above, but reduced by all of the following items (even if
includable in gross income): reimbursements or other expense allowances, fringe
benefits (cash or noncash), moving expenses, deferred compensation, and welfare
benefits. This definition may not be used by standardized plans or plans using a
contribution or allocation formula that is integrated with Social Security.
(f) Modified 415 Safe-Harbor Compensation. Compensation as
defined in subsection (d) above, but reduced by all of the following items (even
if includable in gross income): reimbursements or other expense allowances,
fringe benefits (cash or noncash), moving expenses, deferred compensation, and
welfare benefits. This definition may not be used by standardized plans or plans
using a contribution or allocation formula that is integrated with Social
Security.
(g) Regular or Base Salary or Wages. Regular or base salary
or wages (excluding overtime and bonuses) received during the applicable period
by the Employee from the Employer. This definition may not be used by
standardized plans or plans using a contribution or allocation formula that is
integrated with Social Security.
(h) Regular or Base Salary Wages plus Overtime And/or
Bonuses. Regular or base salary or wages, plus either or both overtime and/or
bonuses, as elected by the Employer in the Adoption Agreement, received during
the applicable period by the Employee from the Employer. This definition may not
be used by standardized plans or plans using a contribution or allocation
formula that is integrated with Social Security.
(i) A Reasonable Alternative Definition of Compensation, as
that term is used in Code section 414(s)(3) and the regulations thereunder,
provided that the definition does not favor Highly Compensated Employees and
satisfies the nondiscrimination requirements under Code section 414(s). This
definition may not be used by standardized plans or plans using a contribution
or allocation formula that is integrated with Social Security.
Notwithstanding the above, if elected by the Employer in
the Adoption Agreement, Compensation shall include any amount which is
contributed by the Employer pursuant to a salary reduction agreement and which
is not includable in the gross income of the Employee under Code sections 125,
402(e)(3), 402(h)(1)(B) or 403(b).
For years beginning on or after January 1, 1989, and
before January 1, 1994, the annual Compensation of each Participant taken into
account for determining all benefits provided under the Plan for any Plan Year
shall not exceed $200,000. This limitation shall be adjusted by the
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<PAGE> 5
Secretary at the same time and in the same manner as under Code section 415(d)
(unless a lesser amount is elected by the Employer in the Adoption Agreement),
except that the dollar increase in effect on January 1 of any calendar year is
effective for Plan Years beginning in such calendar year and the first
adjustment to the $200,000 limitation is effective on January 1, 1990.
For Plan Years beginning on or after January 1, 1994,
the annual Compensation of each Participant taken into account for determining
all benefits provided under the Plan for any Plan Year shall not exceed
$150,000, as adjusted for increases in the cost-of-living in accordance with
Code section 401(a)(17)(B). The cost-of-living adjustment in effect for a
calendar year applies to any Determination Period beginning in such calendar
year.
If a Determination Period consists of fewer than 12
calendar months, then the annual compensation limit is an amount equal to the
annual compensation limit for the calendar year in which the compensation period
begins, multiplied by the ratio obtained by dividing the number of full months
in the period by 12.
In determining the Compensation of a Participant for
purposes of this limit, the rules of Code section 414(q)(6) shall apply, except
in applying such rules, the term "family" shall include only the spouse of the
Participant and any lineal descendants of the Participant who have not attained
age 19 before the close of the year. If, as a result of the application of such
rules, the adjusted annual Compensation limit is exceeded, then (except for
purposes of determining the portion of Compensation up to the integration level
if this Plan uses a contribution or allocation formula that is integrated with
Social Security), the limit shall be prorated among the affected individuals in
proportion to each such individual's Compensation as determined under this
Section prior to the application of this limit.
If Compensation for any prior Determination Period is
taken into account in determining an Employee's contributions or benefits for
the current year, the Compensation for such prior Determination Period is
subject to the applicable annual compensation limit in effect for that prior
period. For this purpose, in determining allocations in Plan Years beginning on
or before January 1, 1989, the annual compensation limit in effect for
Determination Periods before that date is $200,000. In addition, in determining
allocations in Plan Years beginning on or after January 1, 1994, the annual
compensation limit in effect for Determination Periods beginning before that
date is $150,000.
1.13 Considered Net Profits. The term Considered Net Profits means
the entire amount of the accumulated or current operating profits (excluding
capital gains from the sale or involuntary conversion of capital or business
assets) of the Employer after all expenses and charges other than (1) the
Employer contribution to this and any other qualified plan, and (2) federal,
state or local taxes based upon or measured by income, as determined by the
Employer, either on an estimated basis or a final basis, in accordance with the
generally accepted accounting principles used by the Employer. When, for any
Plan Year, the amount of Considered Net Profits has been determined by the
Employer, and the Employer contribution made on the basis of such determination,
such determination and contribution shall be final and conclusive and shall not
be subject to change
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<PAGE> 6
because of any adjustments in income or expense which may be required by the
Internal Revenue Service or otherwise. Such determination and contribution shall
not be open to question by any Participant either before or after the Employer
contribution has been made.
In the case of an Employer that is a non-profit entity, the
term Considered Net Profits means the entire amount of the accumulated or
current operating surplus (excluding capital gains from the sale or involuntary
conversion of capital or business assets) of the Employer after all expenses and
charges other than (1) the contribution made by the Employer to the Plan, and
(2) federal, state or local taxes based upon or measured by income, in
accordance with the generally accepted accounting principles used by the
Employer.
1.14 Contribution Period. The term Contribution Period means that
regular period, specified by the Employer in its Adoption Agreement, for which
the Employer shall make Employer contributions, if any, and that regular period
specified by the Employer in its Adoption Agreement, for which Participants may
make Employee Contributions, if any, and Elective Deferral Contributions, if
any. The first Contribution Period may be an irregular period, not longer than
one month, commencing not prior to the Effective Date. However, the first
Contribution Period for Elective Deferral Contributions may not commence before
the later of the Plan's Effective Date or adoption date.
1.15 Davis-Bacon Act. The term Davis-Bacon Act means the Davis-Bacon
Act (40 U.S.C. section 276(a) et seq., as amended from time to time), which
guarantees minimum wages to laborers and mechanics employed on Federal
government contracts for the construction, alteration, or repair of public
buildings or works. The minimums are the amounts found by the Secretary of Labor
to be prevailing for similar workers in the area in which the work is to be
done.
The term "wages" as used in the Davis-Bacon Act includes, in
addition to the basic hourly rate of pay, contributions irrevocably made to
trustees for pension benefits for laborers and mechanics employed on Federal
government contracts and the cost of other fringe benefits. However, overtime
pay is to be computed only on the basis of the basic hourly rate of pay.
1.16 Disability. The term Disability means a Participant's incapacity
to engage in any substantial gainful activity because of a medically
determinable physical or mental impairment which can be expected to result in
death, or which has lasted or can be expected to last for a continuous period of
not less than 12 months. The performance and degree of such impairment shall be
supported by medical evidence. All Participants in similar circumstances shall
be treated alike.
If elected by the Employer in the Adoption Agreement,
nonforfeitable contributions will be made to the Plan on behalf of each disabled
Participant who is not a Highly Compensated Employee (within the meaning of
Section 1.29 of the Plan).
1.17 Disability Retirement Date. The term Disability Retirement Date
means the first day of the month after the Plan Administrator has determined
that a Participant's incapacity is a Disability. A Participant who retires from
the Service of the Employer as of his Disability
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<PAGE> 7
Retirement Date shall have a Vesting Percentage of 100% and shall be entitled to
receive a distribution of the entire value of his Participant's Account and any
Life Insurance Policies, or the values thereof, as of his Disability Retirement
Date, subject to the provisions of Section 3A and Section 3C.
1.18 Early Retirement Date. If the Employer has specified in its
Adoption Agreement that Early Retirement is permitted, then the term Early
Retirement Date means the first day of the month coinciding with or next
following the date a Participant is separated from Service with the Employer for
any reason other than death or Disability, provided that on such date the
Participant has attained the conditions specified by the Employer in its
Adoption Agreement and has not attained his Normal Retirement Age. A Participant
who retires from the Service of the Employer on his Early Retirement Date shall
have a Vesting Percentage of 100% and shall be entitled to receive a
distribution of the entire value of his Participant's Account and any Life
Insurance Policies, or the values thereof, as of his Early Retirement Date,
subject to the provisions of Section 3A and Section 3C.
If a Participant separates from Service before satisfying the
age requirement for Early Retirement, but has satisfied the Service requirement,
the Participant shall be 100% vested as of his Termination of Employment date,
but he will not be eligible for a distribution of the entire value of his
Participant's Account until satisfying such age requirement.
1.19 Earned Income. The term Earned Income means the net earnings
from self-employment in the trade or business with respect to which the Plan is
established, and for which the personal services of the individual are a
material income-producing factor. Net earnings will be determined without regard
to items not included in gross income and the deductions allocable to such
items. Net earnings are reduced by contributions made by the Employer to a
qualified plan to the extent deductible under Code section 404.
Net earnings shall be determined with regard to the deductions
allowed to the taxpayer by Code section 164(f) for taxable years beginning after
December 31, 1989.
1.20 Effective Date. The term Effective Date means the date specified
by the Employer in its Adoption Agreement as the Effective Date of the Plan.
1.21 Elective Deferral Contributions. The term Elective Deferral
Contributions means contributions made by the Employer to the Plan at the
election of the Participant, in lieu of cash compensation, and shall include
contributions made pursuant to a Salary Deferral Agreement or other deferral
mechanism.
With respect to any taxable year, a Participant's elective
deferral is the sum of all Employer contributions made on behalf of such
Participant pursuant to an election to defer under any CODA, any simplified
employee pension cash or deferred arrangement as described in section
402(h)(1)(B), any eligible deferred compensation plan as described in section
457, any plan described in section 501(c)(18), and any Employer contributions
made on the behalf of a Participant
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<PAGE> 8
for the purchase of an annuity contract under section 403(b) pursuant to a
salary reduction agreement.
Elective Deferral Contributions shall not include those
contributions properly distributed as Excess Annual Additions, as defined in
Section 4C.1(b).
1.22 Employee. The term Employee means any employee of the Employer
maintaining the Plan or any other employer required to be aggregated with such
Employer under Code sections 414(b), (c), (m), or (o).
The term Employee also includes any Leased Employee deemed to be
an Employee of the Employer in accordance with Code sections 414(n) or (o).
1.23 Employee Contributions. The term Employee Contributions means
contributions to this Plan or any other plan, that are designated or treated at
the time of contribution as after-tax contributions made by the Employee and are
allocated to a separate account to which attributable earnings and losses are
allocated. Such term includes Required Employee Contributions, Voluntary
Employee Contributions, Prior Required Employee Contributions, and Prior
Voluntary Employee Contributions.
1.24 Employer. The term Employer means the employer that adopts this
Plan. In the case of a group of Employers that constitutes a controlled group of
corporations (as defined in Code section 414(b)) or that constitutes trades or
businesses (whether or not incorporated) that are under common control (as
defined in section 414(c)) or that constitutes an affiliated service group (as
defined in section 414(m)), Service with all such employers shall be considered
Service with the Employer for purposes of eligibility and vesting. The term
Employer shall also mean any Adopting Employer as defined in Section 6E.2.
A state or local government or political subdivision thereof, or
any agency or instrumentality thereof, or any organization exempt from tax under
Subtitle A of the code, may not elect a 401(k) option (CODA) in the Adoption
Agreement.
1.25 Entry Date. The term Entry Date means either the Effective Date
or each applicable date thereafter as specified by the Employer in its Adoption
Agreement, when an Employee who has fulfilled the eligibility requirements
commences participation in the Plan.
If an Employee is not in the active Service of the Employer as
of his initial Entry Date, his subsequent Entry Date shall be the date he
returns to the active Service of the Employer, provided he still meets the
eligibility requirements. If an Employee does not enroll as a Participant as of
his initial Entry Date, his subsequent Entry Date shall be the applicable Entry
Date as specified by the Employer in the Adoption Agreement when the Employee
actually enrolls as a Participant.
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1.26 ERISA. The term ERISA means the Employee Retirement Income
Security Act of 1974 (PL93-406) as it may be amended from time to time, and any
regulations issued pursuant thereto as such Act and such regulations affect this
Plan and Trust.
1.27 Fiduciary. The term Fiduciary means any or all of the following,
as applicable:
(a) Any Person who exercises any discretionary authority or
control respecting the management of the Plan or its assets;
(b) Any Person who renders investment advice for a fee or
other compensation, direct or indirect, respecting any monies or other property
of the Plan or has authority or responsibility to do so;
(c) Any Person who has discretionary authority or
responsibility in the administration of the Plan;
(d) Any Person who has been designated by a Named Fiduciary
pursuant to authority granted by the Plan, who acts to carry out a fiduciary
responsibility, subject to any exceptions granted directly or indirectly by
ERISA.
1.28 Forfeiture. The term Forfeiture means the amount, if any, by
which the value of a Participant's Account exceeds his Vested Interest upon the
occurrence of an immediate Break-in-Service, a 1-Year Break-in-Service or 5
consecutive 1-Year Breaks-in-Service, as elected by the Employer in its Adoption
Agreement pursuant to Section 3D.5, following such Participant's Termination of
Employment.
1.29 Highly Compensated Employee. The term Highly Compensated
Employee includes both Highly Compensated Active Employees and Highly
Compensated Former Employees.
As elected by the Employer in the Adoption Agreement, the method
to determine Highly Compensated Employees shall be:
(a) Traditional Method: A "Highly Compensated Active
Employee" includes any Employee who performs service for the Employer during the
Determination Year and who, during the Look-Back Year;
(1) Received Compensation from the Employer in
excess of $75,000 (as adjusted pursuant to Code section 415(d)); or
(2) Received Compensation from the Employer in
excess of $50,000 (as adjusted pursuant to Code section 415(d)) and was a member
of the top-paid group for such year; or
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(3) Was an officer of the Employer and received
Compensation during such year that is greater than 50 percent of the dollar
limitation in effect under Code section 415(b)(1)(A).
The term Highly Compensated Employee also
includes: (1) Employees who are described in the preceding sentence if the term
"Determination Year" is substituted for the term "Look-Back Year" and who are
one of the 100 employees who received the most Compensation from the Employer
during the Determination Year; and (2) Employees who are 5-percent owners at any
time during the Look-Back Year or Determination Year.
If no officer has satisfied the Compensation
requirement of (3) above during either a Determination Year or Look-Back Year,
the highest paid officer for such year shall be treated as a Highly Compensated
Employee.
For this purpose, the Determination Year shall
be the Plan Year. The Look-Back Year shall be the period elected by the Employer
in the Adoption Agreement.
A "Highly Compensated Former Employee" includes
any Employee who separated from Service (or was deemed to have separated) prior
to the Determination Year, performs no service for the Employer during the
Determination Year, and was a highly compensated active employee for either the
separation year or any Determination Year ending on or after the Employee's 55th
birthday.
If an Employee is, during a Determination Year
or Look-Back Year, a family member of either a 5-percent owner who is an active
or former Employee or a Highly Compensated Employee who is one of the 10 most
Highly Compensated Employees ranked on the basis of Compensation paid by the
Employer during-such year (a "Top 10 Highly Compensated Employee"), then the
family member and the 5-percent owner or Top 10 Highly Compensated Employee
shall be aggregated. In such case, the family member and 5-percent owner or Top
10 Highly Compensated Employee shall be treated as a single Employee receiving
Compensation and Plan contributions or benefits equal to the sum of such
Compensation and contributions or benefits of the family member and 5-percent
owner or Top 10 Highly Compensated Employee. For purposes of this Section, the
term "family member" includes the Spouse, lineal ascendants and descendants of
the Employee or former Employee and the spouses of such lineal ascendants and
descendants.
The determination of who is a Highly Compensated
Employee, including the determinations of the number and identity of the
Employees in the top-paid group, the top 100 Employees, the number of Employees
treated as officers and the Compensation that is considered, will be made in
accordance with Code section 414(q) and the regulations thereunder.
For purposes of this definition, Compensation
shall mean compensation as defined in Code section 415(c)(3) except that
elective or salary reduction contributions to a cafeteria plan, CODA or
tax-sheltered annuity shall be included in Compensation.
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(b) Simplified Method For Employers In More than One
Geographic Area: If elected by the Employer in the Adoption Agreement, the
Traditional Method above will be modified by substituting $50,000 for $75,000 in
(1) and by disregarding (2). This simplified definition of Highly Compensated
Employee will apply to Employers that maintain significant business activities
(and employ Employees) in at least two significant, separate geographic areas.
(c) Alternative Simplified Method: If elected by the
Employer in the Adoption Agreement, Highly Compensated Employees shall be
determined as follows: A Highly Compensated Active Employee includes any
Employee who performs service for the Employer during the Determination Year and
who:
(1) Is a 5-percent owner; or
(2) Received Compensation from the Employer in
excess of $75,000 (as adjusted pursuant to Code section 415(d)); or
(3) Received Compensation from the Employer in
excess of $50,000 (as adjusted pursuant to Code section 415(d)) and was a member
of the top-paid group for such year; or
(4) Was an officer of the Employer and received
Compensation during such year that is greater than 50 percent of the dollar
limitation in effect under Code section 415(b)(1)(A).
Under this simplified definition, the look-back
provisions of Code section 414(q) do not apply.
(d) Alternative Simplified Method With Snapshot: If the
Alternative Simplified Method of determining Highly Compensated Employees is
selected by the Employer, the Employer may elect in the Adoption Agreement to
substantiate that the Plan complies with the nondiscrimination requirements on
the basis of the Employer's work force on a single day during the Plan Year,
provided that day is reasonably representative of the Employer's work force and
the Plan's coverage throughout the Plan Year. The day elected by the Employer
and indicated on the Adoption Agreement shall be the "Snapshot Day."
To apply the Alternative Simplified Method on a snapshot
basis:
(1) The Employer determines who is a Highly
Compensated Employee on the basis of the data as of the Snapshot Day, except as
provided in (3) below.
(2) If the determination of who is a Highly
Compensated Employee is made earlier than the last day of the Plan Year, the
Employee's Compensation that is used to determine an Employee's status must be
protected for the Plan Year under a reasonable method established by the
Employer.
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(3) If there are Employees not employed on the
Snapshot Day who are taken into account in testing, they must be determined to
be either Highly Compensated Employees or non-Highly Compensated Employees. In
addition to those Employees who are determined to be Highly Compensated
Employees on the Plan's Snapshot Day, the Employer must treat as a Highly
Compensated Employee any eligible Employee for the Plan Year who:
(a) Terminated employment prior to the
Snapshot Day and was a Highly Compensated Employee in the prior Plan Year;
(b) Terminated employment prior to the
Snapshot Day and (i) was a 5-percent owner, or (ii) has Compensation for the
Plan Year greater than or equal to the projected Compensation of any Employee
who is treated as a Highly Compensated Employee on the Snapshot Day (except for
Employees who are Highly Compensated Employees solely because they are 5 percent
owners or officers), or (iii) was an officer and has Compensation greater than
or equal to the projected Compensation of any other officer who is a Highly
Compensated Employee on the Snapshot Day solely because that person is an
officer; or
(c) Becomes employed after the Snapshot Day
and (i) is a 5 percent owner, or (ii) has Compensation for the Plan Year greater
than or equal to the projected Compensation of any Employee who is treated as a
Highly Compensated Employee on the Snapshot Day (except for Employees who are
Highly Compensated Employees solely because they are 5-percent owners or
officers), or (iii) is an officer and has Compensation greater than or equal to
the projected Compensation of any officer who is a Highly Compensated Employee
on the Snapshot Day solely because that person is an officer.
1.30 Insurance Company. The term Insurance Company means Connecticut
General Life Insurance Company, a legal reserve life insurance company of
Hartford, Connecticut. If any company other than Connecticut General Life
Insurance Company has issued any Life Insurance Policy held by the Trustee under
the Plan, then with respect to such Policy only and matters pertaining directly
thereto, the term Insurance Company shall be deemed to refer to such other
issuing company.
1.31 Late Retirement Date. The term Late Retirement Date means the
first day of the month coinciding with or next following the date a Participant
is separated from Service with the Employer after his Normal Retirement Age, for
any reason other than death.
1.32 Leased Employee. The term Leased Employee means any person
(other than an Employee of the recipient Employer) who, pursuant to an agreement
between the recipient Employer and any other person ("leasing organization"),
has performed services for the recipient Employer (or for the recipient Employer
and related persons determined in accordance with Code section 414(n)(6)) on a
substantially full-time basis for a period of at least one year, and such
services are of a type historically performed by employees in the business field
of the recipient Employer. Contributions or benefits provided a Leased Employee
by the leasing organization which are
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attributable to services performed for the recipient Employer shall be treated
as provided by the recipient Employer.
A Leased Employee shall not be considered an Employee of the
recipient Employer if: such employee is covered by a money purchase pension plan
of the leasing organization providing: (a) a nonintegrated employer contribution
rate of at least 10 percent of compensation, as defined in Code section
415(c)(3), but including amounts contributed by the employer pursuant to a
salary reduction agreement which are excludable from the Leased Employee's gross
income under Code section 125, section 402(e)(3), section 402(h)(1)(B) or
section 403(b), (b) immediate participation, and (c) full and immediate vesting;
and Leased Employees do not constitute more than 20 percent of the recipient's
non-highly compensated work force.
1.33 Life Annuity. The term Life Annuity means an Annuity payable
over the life or life expectancy of one or more individuals.
1.34 Life Insurance Policy. The term Life Insurance Policy (or
Policy) means a policy of individual life insurance purchased from the Insurance
Company on the life of any Participant.
1.35 Matching Contributions. The term Matching Contributions means
contributions made by the Employer to the Plan for a Participant on account of
either Elective Deferral Contributions or Required Employee Contributions. In
addition, any Forfeiture reallocated as a Matching Contribution shall be
considered a Matching Contribution for purposes of this Plan. If elected by the
Employer in the Adoption Agreement, Matching Contributions shall be made out of
Considered Net Profits in an amount specified by the Employer in its Adoption
Agreement for each $1.00 contributed as either an Elective Deferral Contribution
or a Required Employee Contribution, as further specified by the Employer in its
Adoption Agreement. The term Matching Contributions shall include Additional
Matching Contributions.
Should there be insufficient Considered Net Profits of the
Employer for such Employer contribution, the amount of such Matching
Contributions may be diminished to the amount that can be made from the
Employer's Considered Net Profits.
The Employer may designate at the time of contribution that all
or a portion of such Matching Contributions be treated as Qualified Matching
Contributions.
If elected by the Employer in the Adoption Agreement, Partners
shall not be entitled to receive Matching Contributions. If Partners are
entitled to receive Matching Contributions, such Contributions shall be
considered Elective Deferral Contributions for all purposes under this Plan.
1.36 Money Purchase Pension Contributions. The term Money Purchase
Pension Contributions means contributions made to the Plan by the Employer in
accordance with a definite formula as specified in the Adoption Agreement.
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1.37 Named Fiduciary. The term Named Fiduciary means the
Administrator and any other Fiduciary designated by the Employer, and any
successor thereto.
1.38 Nonelective Contributions. The term Nonelective Contributions
means contributions made to the Plan by the Employer in accordance with a
definite formula as specified in the Adoption Agreement. The Employer may
designate at the time of contribution that the Nonelective Contribution shall be
treated as a Qualified Nonelective Contribution.
1.39 Non-Trusteed. The term Non-Trusteed means that the Employer has
specified in the Adoption Agreement that there will not be a Trust as a part of
the Plan. Contributions under a Non-Trusteed plan will be made directly to the
Insurance Company. If the Employer specifies in the Adoption Agreement that the
Plan is Non-Trusteed, then the terms and provisions of this Plan relating to the
Trust shall be of no force or effect.
1.40 Normal Retirement Age. The term Normal Retirement Age means the
age selected in the Adoption Agreement. If the Employer enforces a mandatory
retirement age, the Normal Retirement Age is the lesser of that mandatory age or
the age specified in the Adoption Agreement.
Notwithstanding the vesting schedule elected by the Employer in
the Adoption Agreement, an Employee's right to his or her account balance shall
be nonforfeitable upon the attainment of Normal Retirement Age.
1.41 Normal Retirement Date. The term Normal Retirement Date means
the first day of the month coinciding with or next following the date a
Participant attains his Normal Retirement Age. If a Participant retires from the
Service of the Employer on his Normal Retirement Date, he shall receive a
distribution of the entire value of his Participant's Account, as of his Normal
Retirement Date, subject to the provisions of Section 3A and Section 3C.
1.42 Owner-Employee. The term Owner-Employee means an individual who
is a sole proprietor, or who is a Partner owning more than 10 percent of either
the capital or profits interest of the Partnership.
1.43 Participant. The term Participant means any person who has a
Participant's Account in the Plan and/or Trust.
If elected by the Employer in the Adoption Agreement, for
purposes of the investment of contributions as described in Section 5A, the term
Participant shall include former Participants, Beneficiaries, and Alternate
Payees. Former Participants shall include those Participants who upon
Termination of Employment elected to defer distribution in accordance with
Section 3A of the Plan.
1.44 Participant's Account. The term Participant's Account means the
sum of the following sub-accounts maintained on behalf of each Participant.
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(a) Money Purchase Pension Contributions, if any, plus any
income and minus any loss thereon;
(b) Nonelective Contributions, if any, plus any income and
minus any loss thereon;
(c) Matching Contributions, if any, plus any income and
minus any loss thereon;
(d) Qualified Nonelective Contributions, if any, plus any
income and minus any loss thereon;
(e) Qualified Matching Contributions, if any, plus any
income and minus any loss thereon;
(f) Prior Employer Contributions, if any, plus any income
and minus any loss thereon;
(g) Elective Deferral Contributions, if any, plus any income
and minus any loss thereon;
(h) Employee Contributions, if any, plus any income and
minus any loss thereon;
(i) QVEC Contributions, if any, plus any income and minus
any loss thereon.
(j) Rollover Contributions, if any, plus any income and
minus any loss thereon;
A Participant's Account shall be invested in accordance with
rules established by the Plan Administrator that shall be applied in a
consistent and nondiscriminatory manner.
1.45 Participant's Employer Stock Account. The term Participant's
Employer Stock Account means that portion, if any, of the Participant's Account
which is invested in shares of the Employer's stock. Such Participant's Employer
Stock Account shall be credited with dividends paid, if any. Such Participant's
Employer Stock Account will be valued on each day that the public exchange, over
which the Employer's stock, is traded, is open for unrestricted trading.
Amounts that are invested in the Participant's Employer Stock
Account may be invested in any short term account prior to actual investment in
the Participant's Employer Stock Account.
As elected by the Employer in the Adoption Agreement:
(a) The Trustee will vote the shares of the Employer's stock
invested in the Participant's Employer Stock Account; or
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(b) The Trustee will vote the shares of the Employer's stock
in accordance with any instructions received by the Trustee from the
Participant. The Trustee may request voting instructions from the Participants
provided this is done in a consistent and nondiscriminatory manner.
The ability of a Participant who is subject to the
reporting requirements of section 16(a) of the Securities Exchange Act of 1934
(the "Act") to make withdrawals or investment changes involving the
Participant's Employer Stock Account may be restricted by the Plan Administrator
to comply with the rules under section 16(b) of the Act.
A money purchase pension plan making an initial
investment in shares of the Employer's stock after December 31, 1974, may not
acquire shares to the extent that the aggregate fair market value of the
Employer's stock held by the Plan will exceed 10 percent of the fair market
value of the assets of the Plan.
1.46 Partner. The term Partner means a member of a Partnership.
1.47 Partnership. The term Partnership means a partnership as defined
in Code section 7701(a)(2) and the regulations thereunder and includes a
syndicate, group, pool, joint venture, or other unincorporated organization
through or by means of which any business, financial operation, or venture is
carried on, and which is not a corporation or a trust or estate within the
meaning of the Code. A joint undertaking merely to share expenses is not a
Partnership. In addition, mere co-ownership of property which is maintained,
kept in repair, and rented or leased does not constitute a Partnership.
1.48 Person. The term Person means any natural person, partnership,
corporation, trust or estate.
1.49 Plan. The term Plan means this Connecticut General Life
Insurance Company Defined Contribution Plan and the Adoption Agreement as
adopted by the Employer and as both may be amended from time to time.
1.50 Plan Administrator. The term Plan Administrator means the Person
or Persons designated by the Employer in its Adoption Agreement and any
successor(s) thereto. If more than one Person shall be designated, the committee
thus formed shall be known as the Administrative Committee and all references in
the Plan to the Plan Administrator shall be deemed to apply to the
Administrative Committee. The Plan Administrator shall signify in writing his
acceptance of his responsibility as a Named Fiduciary.
1.51 Plan Year. The term Plan Year means the 12-consecutive month
period specified by the Employer in the Adoption Agreement.
If the Plan Year changes to a different 12-consecutive month
period, the first new Plan Year shall begin before the end of the last old Plan
Year. In this event, the period beginning on
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the first day of the last old Plan Year and ending on the day before the first
day of the first new Plan Year shall be treated as a short Plan Year for
purposes of determining Highly Compensated Employees, performing the
Nondiscrimination Tests set forth in Section 4A, and applying the Top-Heavy
provisions of Section 7A. However, Service will be credited in accordance with
the provisions of Section 2A.8.
1.52 Prevailing Wage Law. The term Prevailing Wage Law means any
statute or ordinance that requires the Employer to pay its Employees working on
public contracts at wage rates not less than those determined pursuant to that
statute classes of workers in the geographical area where the contract is
performed, including the Davis-Bacon Act and similar Federal, state, or
municipal prevailing wage statutes.
1.53 Prior Employer Contributions. The term Prior Employer
Contributions means contributions made by the Employer prior to the date
indicated on the Adoption Agreement.
1.54 Prior Required Employee Contributions. The term Prior Required
Employee Contributions means Employee post-tax contributions that the Employer
required as either a condition of participation, or for receiving an Employer
contribution, prior to the date indicated on the Adoption Agreement.
1.55 Prior Voluntary Employee Contributions. The term Prior Voluntary
Employee Contributions means post-tax contributions made voluntarily by an
Employee prior to the date indicated on the Adoption Agreement.
1.56 QDRO. The term QDRO means a Qualified Domestic Relations Order
as determined in accordance with Code section 414(p) and regulations thereunder.
1.57 Qualified Matching Contributions. The term Qualified Matching
Contributions means Matching Contributions which are subject to the distribution
and nonforfeitability requirements of Code section 401(k) when made.
1.58 Qualified Nonelective Contributions. The term Qualified
Nonelective Contributions means Nonelective Contributions made by the Employer
and allocated to Participants' accounts that the Participants may not elect to
receive in cash until distributed from the Plan; that are nonforfeitable when
made; and that are distributable only in accordance with the distribution
provisions that are applicable to Elective Deferral Contributions and Qualified
Matching Contributions.
1.59 QVEC Contributions. The term QVEC Contributions means voluntary
amounts contributed by the Participant prior to January 1, 1987, which the
Participant designated in writing were eligible for a tax deduction under Code
section 219(a).
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QVEC Contributions will be maintained in a separate account,
which will be nonforfeitable (i.e., 100% vested) at all times. The account will
share in the gains and losses under the Plan in the same manner as described in
Section 5A.3 of the Plan.
1.60 Required Employee Contributions. The term Required Employee
Contributions means Employee post-tax contributions that the Employer requires
either as a condition of participation or for receipt of an Employer
contribution.
1.61 Rollover Contribution. The term Rollover Contribution means an
amount representing all or part of a distribution from a pension or profit
sharing plan meeting the requirements of Code section 401(a), which is eligible
for rollover to this Plan in accordance with the requirements set forth in Code
section 402 (including Direct Rollovers) or Code section 408(d)(3), whichever is
applicable.
1.62 Salary Deferral Agreement. The term Salary Deferral Agreement
means an agreement between a Participant and the Employer to defer receipt of a
portion of the Participant's Compensation by making Elective Deferral
Contributions to the Plan.
1.63 Self-Employed Individual. The term Self-Employed Individual
means an individual who has Earned Income for the taxable year from the trade or
business for which the Plan is established; also, an individual who would have
Earned Income but for the fact that the trade or business had no net profits for
the taxable year.
1.64 Serious Financial Hardship. The term Serious Financial Hardship
means an immediate and heavy financial need of the Participant where such
Participant lacks the available resources to meet the hardship. The Plan
Administrator shall make a determination of whether a Serious Financial Hardship
exists in accordance with the applicable provisions of Section 3E.
1.65 Shareholder-Employee. The term Shareholder-Employee means an
Employee or officer of an electing small business S corporation who owns (or is
considered as owning within the meaning of Code section 318(a)(1)), on any day
during the taxable year of such corporation, more than 5% of the outstanding
stock of the corporation.
1.66 Social Security Integration Level. The term Social Security
Integration Level means the Social Security Taxable Wage Base or such lesser
amount specified by the Employer in the Adoption Agreement. If the Social
Security Taxable Wage Base is amended, the Social Security Integration Level
will be deemed to have been amended.
1.67 Social Security Taxable Wage Base. The term Social Security
Taxable Wage Base means the contribution and benefit base in effect under
section 230 of the Social Security Act at the beginning of the Plan Year.
1.68 Sponsoring Organization. The term Sponsoring Organization means
Connecticut General Life Insurance Company, a legal reserve life insurance
company of Hartford, Connecticut.
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1.69 Spouse. The term Spouse means the lawful wife of a male
Participant, or the lawful husband of a female Participant. However, a former
Spouse will be treated as the Spouse or surviving Spouse and a current Spouse
will not be treated as the Spouse or surviving Spouse to the extent provided
under a QDRO.
1.70 Straight Life Annuity. The term Straight Life Annuity means an
annuity payable in equal installments for the life of the Participant, and that
terminates upon the Participant's death.
1.71 Termination of Employment. The term Termination of Employment
means a severance of the Employer-Employee relationship which occurs prior to a
Participant's Normal Retirement Age for any reason other than Early Retirement,
Disability, or death.
1.72 True-Up Contributions. The term True-Up Contributions means
Additional Matching Contributions made to the Plan by the Employer so that total
Matching Contributions for each Participant are calculated on an annual basis
rather than on the basis selected by the Employer in the Adoption Agreement.
1.73 Trust. The term Trust means the Trust Agreement if the Employer
specifies in the Adoption Agreement that the Plan is Trusteed. The Trust
Agreement is entered into by the Employer, the Plan Administrator and the
Trustee by completing and signing the Adoption Agreement, which Trust Agreement
forms a part of, and implements the provisions of the Plan as it applies to the
Employer. If the Employer specifies in the Adoption Agreement that the Plan is
Non-Trusteed, then the terms and provisions of this Plan relating to the Trust
shall be of no force and effect.
1.74 Trustee. The term Trustee means the trustee(s) designated by the
Employer in its Adoption Agreement, if applicable, and any successor(s) thereto.
1.75 Vested Interest. The term Vested Interest means the
nonforfeitable right to an immediate or deferred benefit on any date in the
amount which is equal to the sum of (a), (b) and (c) below:
(a) The value on that date of that portion of the
Participant's Account that is attributable to and derived from Employee
Contributions, if any;
(b) The value on that date of the portion of the
Participant's Account attributable to Elective Deferral Contributions, if any;
Qualified Nonelective Contributions, if any; QVEC Contributions, if any;
Rollover Contributions, if any; and Qualified Matching Contributions, if any;
(c) The value on that date of that portion of the
Participant's Account that is attributable to and derived from contributions
made by the Employer (and Forfeitures, if any), multiplied by his Vesting
Percentage determined on the date applicable.
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Employer contributions described in subsection (c), plus
the earnings thereon, shall be, at any relevant time, a part of the
Participant's Vested Interest equal to an amount ("X") determined by the
following formula:
X = P(AB+D)-D
For purposes of applying this formula:
P = The Participant's Vesting Percentage at the relevant time.
AB = The account balance attributable to such contributions,
plus the earnings thereon, at the relevant time.
D = The amount of any distribution.
1.76 Vesting Percentage. The term Vesting Percentage means the
Participant's nonforfeitable interest in Money Purchase Pension Contributions,
Matching Contributions, Nonelective Contributions, or Prior Employer
Contributions credited to his Participant's Account, plus any income and minus
any loss thereon. The Vesting Percentage for each such Employer contribution is
computed in accordance with one of the schedules listed below, based on Years of
Service with the Employer, as specified by the Employer in its Adoption
Agreement:
(a) 100% full and immediate;
(b) 100% after 3 Years of Service;
(c) 20% per Year of Service, 100% at 5 Years of Service;
(d) 20% after 3 Years of Service, 20% per Year of Service
thereafter, 100% at 7 Years of Service;
(e) 20% after 2 Years of Service, 20% per Year of Service
thereafter, 100% at 6 Years of Service;
(f) 100% after 5 Years of Service;
(g) 25% after 1 Year of Service, 100% after 4 Years of
Service;
(h) Other.
However, if a Participant dies prior to attaining his
Normal Retirement Age, his Vesting Percentage shall be 100%.
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1.77 Voluntary Employee Contributions. The term Voluntary Employee
Contributions means post-tax contributions made voluntarily by an Employee.
ARTICLE II - GENERAL PROVISIONS
2A. SERVICE
2A.1 Service. The term Service means active employment with the
Employer as an Employee.
2A.2 Absence from Employment. Absence from employment on account of a
leave of absence authorized by the Employer pursuant to the Employer's
established leave policy will be counted as employment with the Employer
provided that such leave of absence is of not more than two years' duration.
Absence from employment on account of active duty with the Armed Forces of the
United States will be counted as employment with the Employer. If the Employee
does not return to active employment with the Employer, his Service will be
deemed to have ceased on the date the Plan Administrator receives notice that
the Employee will not return. The Employer's leave policy shall be applied in a
uniform and nondiscriminatory manner to all Participants under similar
circumstances.
For purposes of determining an Employee's eligibility and
vesting status for periods while the Employee is absent from work for reasons
covered under the Family and Medical Leave Act, Service will be credited in
accordance with and to the extent required by the provisions of the Family and
Medical Leave Act.
If the Employer has elected in the Adoption Agreement to
determine Service based upon 1,000 Hours, then the following Sections 2A.3
through 2A.8 shall apply.
2A.3 Hour of Service. The term Hour of Service means:
(a) Each hour for which an Employee is directly or
indirectly paid, or entitled to payment, by the Employer for the performance of
duties. These hours shall be credited to the Employee for the Computation Period
or Periods, as defined in Section 2A.5, in which the duties were performed; and
(b) Each hour for which an Employee is paid or entitled to
payment, by the Employer on account of a period of time during which no duties
are performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence. No more than
501 Hours of Service will be credited under this paragraph for a single
Computation Period (whether or not the period occurs in a single Computation
Period). Hours under this paragraph will be calculated and credited pursuant to
section 2530.200b-2 of the Department of Labor regulations which are
incorporated herein by this reference; and
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(c) Each hour for which back pay, irrespective of mitigation
of damages, has been either awarded or agreed to by the Employer. The same Hours
of Service will not be credited under subsection (a) or subsection (b), as the
case may be, and under this subsection (c). These hours shall be credited to the
Employee for the Computation Period or periods to which the award or agreement
pertains rather than the Computation Period in which the award, agreement or
payment is made; and Hours of Service will be credited for employment with other
members of an affiliated service group (under Code section 414(m)), a controlled
group of corporations (under Code section 414(b)), or a group of trades or
businesses under common control (under Code section 414(c)), of which the
adopting Employer is a member, and any other entity required to be aggregated
with the Employer pursuant to Code section 414(o).
Hours of Service will also be credited for any
individual considered an Employee for purposes of this Plan under Code sections
414(n) or 414(o).
Solely for purposes of determining whether a 1-Year
Break-in-Service, as defined in Section 2A.4, for participation and vesting
purposes has occurred in a Computation Period, an individual who is absent from
work for maternity or paternity reasons shall receive credit for the Hours of
Service which would otherwise have been credited to such individual but for such
absence, or in any case in which such hours cannot be determined, eight (8)
Hours of Service per day of such absence. For purposes of this paragraph, an
absence from work for maternity or paternity reasons means an absence (1) by
reason of the pregnancy of the individual, (2) by reason of a birth of a child
of the individual, (3) by reason of the placement of a child with the individual
in connection with the adoption of such child by such individual, or (4) for
purposes of caring for such child for a period beginning immediately following
such birth or placement. The Hours of Service credited under this paragraph
shall be credited (1) in the Computation Period in which the absence begins if
the crediting is necessary to prevent a Break-in-Service in that period, or (2)
in all other cases, in the following Computation Period.
Service shall be determined on the basis of the method
selected in the Adoption Agreement.
2A.4 1-Year Break-in-Service. The term 1-Year Break-in-Service means
any Computation Period during which an Employee fails to complete more than 500
Hours of Service.
2A.5 Year(s) of Service. The term Year(s) of Service means a
12-consecutive month period ("Computation Period") during which an Employee has
completed at least 1,000 Hours of Service.
(a) Eligibility Computation Period. For purposes of
determining Years of Service and Breaks-in-Service for eligibility, the
12-consecutive month period shall begin with the date on which the Employee
first performs an Hour of Service for the Employer and, where additional periods
are necessary, succeeding anniversaries of his employment commencement date. The
employment commencement date is the date on which the Employee first performs an
Hour of Service for the Employer maintaining the Plan.
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<PAGE> 23
(b) Vesting Computation Period. As elected by the Employer
in the Adoption Agreement, for computing Years of Service and Breaks-in-Service
for vesting, the 12-consecutive month period:
(1) Shall be the Plan Year; or
(2) Shall begin with the date on which the Employee
first performs an Hour of Service for the Employer and, where additional periods
are necessary, succeeding anniversaries of that date.
However, active participation as of the last day
of the Plan Year is not required in order for a Participant to be credited with
a Year of Service for vesting purposes.
(c) Contribution Computation Period. If the Employer
specifies an annual Contribution Period in its Adoption Agreement for the
purpose of determining a Participant's eligibility to receive a contribution,
the 12-consecutive month period shall be any Plan Year during which the
Participant is credited with at least 1,000 Hours of Service. However, when an
Employee first becomes a Participant or resumes active participation in the Plan
following a 1-Year Break-in-Service on a date other than the first day of the
Plan Year, all Hours of Service credited to the Participant during that Plan
Year, including those Hours credited prior to the date the Employee enrolls (or
reenrolls) as an Participant in the Plan shall be counted. Furthermore, the
Employer may require in its Adoption Agreement that a Participant be a
Participant as of the last day of the Plan Year in order to be eligible to
receive a contribution for a Plan Year.
(d) If in its Adoption Agreement the Employer permits Early
Retirement, the 12-consecutive month period for determining Early Retirement
shall be the Plan Year. However, active participation as of the last day of the
Plan Year is not required in order for a Participant to be credited with a Year
of Service.
Service with a predecessor organization of the Employer
shall be treated as Service with the Employer for the purposes of subsections
(a), (b) and (d) above in any case in which the Employer maintains the plan of
such predecessor organization. In addition, if elected by the Employer in the
Adoption Agreement, service with a predecessor organization of the Employer
shall be treated as Service with the Employer, even if the Employer does not
maintain the plan of such predecessor organization.
If elected in the Adoption Agreement, service with a
subsidiary or affiliate of the Employer that is not related to the Employer
under the provisions of Code sections 414(b), (c) or (m) shall be treated as
Service with the Employer for purposes of (a), (b) and (d) above.
2A.6 Determining Vesting Percentage. Vesting credit shall be given
for each Year of Service except those periods specifically excluded in the
Adoption Agreement.
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<PAGE> 24
If a Participant completes less than 1,000 Hours of Service
during a Plan Year while remaining in the service of the Employer, his Vesting
Percentage shall not be increased for such Plan Year. However, at such time as
the Participant again completes at least 1,000 Hours of Service in any
subsequent Plan Year, his Vesting Percentage shall then take into account all
Years of Service with the Employer except those specifically excluded in the
Adoption Agreement.
If an individual who ceases to be an Employee and is
subsequently rehired as an Employee enrolls (or reenrolls) in the Plan, upon his
participation (or reparticipation) his Vesting Percentage shall then take into
account all Years of Service except those specifically excluded in the Adoption
Agreement.
In the case of a Participant who has 5 consecutive 1-Year
Breaks-in-Service, all Years of Service after such Breaks-in-Service will be
disregarded for the purpose of vesting the Employer-derived account balance that
accrued before such breaks. However, both pre-break and post-break Service will
count for the purpose of vesting the Employer-derived account balance that
accrues after such Breaks-in-Service. Both accounts will share in the earnings
and losses of the fund.
In the case of a Participant who does not have 5-consecutive
1-Year Breaks-in-Service, both the pre-break and post-break Service will count
in vesting both the pre-break and post-break Employer-derived account balance.
2A.7 Excluded Years of Service for Vesting. In determining the
Vesting Percentage of an Employee, all Years of Service with the Employer(s)
maintaining the Plan shall be taken into account, except that the following
periods may be excluded, as specified by the Employer in its Adoption Agreement:
(a) Years of Service prior to the time a Participant
attained age 18;
(b) Years of Service during which the Employer did not
maintain the Plan or a predecessor plan;
(c) Years of Service during a period for which the Employee
made no Required Employee Contributions;
(d) Years of Service prior to any 1-Year Break-in-Service,
until the Employee completes one Year of Service following such 1-Year
Break-in-Service.
(e) In the case of an Employee who has no Vested Interest in
Employer contributions, Years of Service before any period of consecutive 1-Year
Breaks-in-Service if the number of such consecutive 1-Year Breaks-in-Service
equals or exceeds the greater of (i) 5, or (ii) the total number of Years of
Service before such break.
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<PAGE> 25
For the purposes of this Section, a predecessor plan
shall mean a plan of the Employer that was terminated within five years
preceding or following the Effective Date of this Plan.
2A.8 Change in Plan Years. If the Plan Year is changed, the following
special rules shall apply.
(a) Vesting Computation Periods. If the Vesting Computation
Period is the Plan Year, Years of Service and 1-Year Breaks-in-Service shall be
measured over two overlapping 12-consecutive month periods. The first such
period shall begin on the first day of the last old Plan Year and the second
such period shall begin on the first day of the first new Plan Year, thereby
creating an overlap. All Hours of Service performed during the overlap period
must be counted in both Vesting Computation Periods. A Participant who completes
at least 1,000 Hours of Service during each such period shall be credited with
two Years of Service for Vesting.
(b) Contribution Computation Periods. To determine a
Participant's eligibility to receive a contribution for a short Plan Year, the
1,000 Hours of Service requirement shall be prorated by multiplying by a
fraction, the numerator of which is the number of full months in the short Plan
Year and the denominator of which is 12.
If the Employer has elected in the Adoption Agreement to
determine Service based upon Elapsed Time, then the following Sections 2A.9 and
2A.10 shall apply.
2A.9 Elapsed Time. If the Employer has selected an eligibility
requirement in the Adoption Agreement that is or includes a fractional Year(s)
of Service requirement, the provisions of this Section shall apply.
(a) For purposes of determining an Employee's initial or
continued eligibility to participate in the Plan, or the Participant's Vested
Interest in Employer contributions, an Employee will receive credit for the
aggregate of all time period(s) commencing with the Employee's first day of
employment or reemployment and ending on the date a Break-in-Service (as defined
in this Section) begins. The first day of employment or reemployment is the
first day the Employee performs an Hour of Service. An Employee will also
receive credit for any Period of Severance of less than 12-consecutive months.
Fractional periods of a year will be expressed in terms of days.
(b) For purposes of this Section, "Hour of Service" shall
mean each hour for which an Employee is paid or entitled to payment for the
performance of duties for the Employer.
(c) For purposes of this Section, a "Break-in-Service" is a
Period of Severance of at least 12 consecutive months.
(d) A "Period of Severance" is a continuous period of time
during which the Employee is not employed by the Employer. Such period begins on
the date the Employee retires,
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<PAGE> 26
quits or is discharged, or if earlier, the 12-month anniversary of the date on
which the Employee was otherwise first absent from Service.
(e) In the case of an individual who is absent from work for
maternity or paternity reasons, the 12-consecutive month period beginning on the
first anniversary of the first day of such absence shall not constitute a
Break-in-Service. For purposes of this paragraph, an absence from work for
maternity or paternity reasons means an absence (1) by reason of the pregnancy
of the individual, (2) by reason of the birth of a child of the individual, (3)
by reason of the placement of a child with the individual in connection with the
adoption of such child by such individual, or (4) for purposes of caring for
such child for a period beginning immediately following such birth or placement.
Each Employee will share in Employer contributions for
the period beginning on the date the Employee commences participation under the
Plan and ending on the date on which such Employee severs employment with the
Employer or is no longer a member of an eligible class of Employees.
(f) If the Employer is a member of an affiliated service
group (under Code section 414(m)), a controlled group of corporations (under
Code section 414(b)), a group of trades or businesses under common control
(under Code section 414(c)) or any other entity required to be aggregated with
the Employer pursuant to Code section 414(o), Service will be credited for any
employment for any period of time for any other member of such group. Service
will also be credited for any individual required under Code section 414(n) or
Code section 414(o) to be considered an Employee of any Employer aggregated
under Code sections 414(b), (c), or (m) of such group.
2A.10 Excluded Periods of Service for Vesting. In determining the
Vesting Percentage of an Employee, all Periods of Service with the Employer(s)
maintaining the Plan shall be taken into account, except that the following
periods may be excluded, as specified by the Employer in its Adoption Agreement:
(a) Periods of Service prior to the time a Participant
attained age 18;
(b) Periods of Service during which the Employer did not
maintain the Plan or a predecessor plan;
(c) Periods of Service during which the Employee made no
Required Employee Contributions;
(d) Periods of Service prior to any one-year Period of
Severance, until the Employee completes a one-year period of Service following
such Period of Severance;
(e) In the case of an Employee who has no Vested Interest in
Employer contributions, Periods of Service before any Period of Severance if the
number of consecutive one-
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<PAGE> 27
year Periods of Severance equals or exceeds the greater of (i) 5, or (ii) the
total number of one-year Periods of Service before such Period of Severance.
For the purposes of this Section, a predecessor plan
shall mean a plan of the Employer that was terminated within five years
preceding or following the Effective Date of this Plan.
2B. ELIGIBILITY, ENROLLMENT AND PARTICIPATION
2B.1 Eligibility. Each Employee shall be eligible to participate in
the Plan and receive an appropriate allocation of Employer contributions as of
the Entry Date following the day he meets the following requirements, if any,
specified by the Employer in its Adoption Agreement, relating to:
(a) Required service;
(b) Minimum attained age;
(c) Job class requirements.
In addition to the eligibility conditions stated above, the
Employer may specify in the Adoption Agreement certain groups of Employees who
are not eligible to participate in the Plan.
Notwithstanding the foregoing, if the Employer's Plan as set
forth herein replaces or amends a preceding plan, then those Employees
participating under the Plan as written prior to such replacement or amendment
shall be eligible to be Participants hereunder without regard to length of
Service or minimum attained age otherwise required herein.
2B.2 Enrollment. Each eligible Employee may enroll as of his Entry
Date by completing and delivering to the Plan Administrator an enrollment form
and, if applicable, a payroll deduction authorization and/or a Salary Deferral
Agreement.
2B.3 Reemployed Participant. In the case of an individual who ceases
to be an Employee and is subsequently rehired as an Employee, the following
provisions shall apply in determining eligibility to again participate in the
Plan:
(a) If the Employee had met the eligibility requirements as
specified in Section 2B.1, such Employee will become a Participant in the Plan
in accordance with Section 2B.2 as of the date he is reemployed as an Employee.
(b) If the Employee had not formerly met the eligibility
requirements specified in Section 2B.1, such Employee will become a Participant
in the Plan after meeting the requirements of Section 2B.1 in accordance with
Section 2B.2.
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2B.4 Eligible Class. If a Participant becomes ineligible to
participate because he is no longer a member of an eligible class of Employees,
such Employee shall participate immediately upon his return to an eligible class
of Employees. If such Participant incurs a Break-in-Service, eligibility will be
determined under the Break-in-Service rules of the Plan.
If an Employee who is not a member of the eligible class of
Employees becomes a member of the eligible class, such Employee shall
participate immediately if such Employee has satisfied the minimum age and
Service requirements and would have previously become a Participant had he been
in the eligible class. If such Participant incurs a Break-in-Service,
eligibility will be determined under the Break-in-Service rules of the Plan.
2B.5 Waiver of Participation. Notwithstanding any provision of the
Plan to the contrary, if Required Employee Contributions are elected by the
Employer in the Adoption Agreement, any Employee in accordance with the rules of
the Plan may decline to become a Participant or cease to be a Participant by
filing a written waiver of participation with the Plan Administrator in the
manner prescribed. Such waiver must be filed prior to the date such Employee is
eligible to become a Participant, or in the case of a current Participant, in
the last month of the Plan Year immediately preceding the Plan Year for which he
wishes to cease being a Participant.
Any Employee who files such a waiver shall not become a
Participant, or if a current Participant, shall elect to cease to be such as of
the first day of the succeeding Plan Year; and such Employee shall not receive
any additional Compensation or other sums by reason of his waiver of
participation.
Any such waiver may be rescinded by an Employee who is not a
Partner effective on the first day of the first Plan Year following one or more
Plan Years commencing after the filing of such waiver in which he was not a
Participant, in which event he shall become a Participant, or again become a
Participant, as the case may be, effective as of such date. A Partner may make a
one-time irrevocable waiver of participation upon the later of his commencement
of employment with the Employer or the date he is first eligible to participate
in the Plan.
No Employee who is eligible to participate in a standardized
plan may waive participation or voluntarily reduce his or her Compensation for
purposes of this Plan.
2B.6 Trades or Businesses Controlled by Owner-Employees. If this Plan
provides contributions or benefits for one or more Owner-Employees who control
both the business for which this Plan is established and one or more other
trades or businesses, this Plan and any plans established for other trades or
businesses must, when looked at as a single plan, satisfy Code sections 401(a)
and (d) for the Employees of this and all other trades or businesses. If the
Plan provides contributions or benefits for one or more Owner-Employees who
control one or more other trades or businesses, the employees of the other
trades or businesses must be included in a plan which satisfies Code sections
401(a) and (d) and which provides contributions and benefits not less favorable
than those provided for Owner-Employees under this Plan.
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<PAGE> 29
If an individual is covered as an Owner-Employee under the plans
of two or more trades or businesses which he does not control and the individual
controls a trade or business, then the contributions or benefits of the
Employees under the plan of the trades or businesses which he does control must
be as favorable as those provided for him under the most favorable plan of the
trade or business which he does not control.
For purposes of the preceding paragraphs, an Owner-Employee or
two or more Owner-Employees will be considered to control a trade or business if
the Owner-Employee or two or more Owner-Employees together:
(1) own the entire interest in an unincorporated trade or
business, or
(2) in the case of a partnership, own more than 50 percent
of either the capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee or two
or more Owner-Employees shall be treated as owning any interest in a Partnership
that is owned, directly or indirectly, by a Partnership which such
Owner-Employee or such two or more Owner-Employees are considered to control
within the meaning of the preceding sentence.
2C. CONTRIBUTIONS AND ALLOCATIONS
2C.1 Profit Sharing/Thrift Plan with 401(k) Feature.
(a) Contributions - Employer. For each Plan Year, as
specified in the Adoption Agreement, the Employer shall make one or more of the
following contributions.
(1) Elective Deferral Contributions.
(2) Matching Contributions.
(3) Nonelective Contributions.
(b) Contributions - Participant. For each Plan Year, as
specified in the Adoption Agreement, each Participant may make periodic Required
Employee Contributions or Voluntary Employee Contributions.
For Plans that contain a CODA, a Participant may elect
to make a Voluntary Employee Contribution in a lump sum. Such lump sum Voluntary
Employee Contribution may be made (1) as of the Effective Date, or (2) as
elected by the Employer in the Adoption Agreement. Voluntary Employee
Contributions shall be subject to the terms of Section 4B.
(c) Fail-Safe Contribution. The Employer reserves the right
to make a discretionary Nonelective Contribution to the Plan for any Plan Year,
if the Employer determines
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<PAGE> 30
that such a contribution is necessary to ensure the Actual Deferral Percentage
test or the Actual Contribution Percentage test will be satisfied for that Plan
Year. Such amount shall be designated by the Employer at the time of
contribution as a Qualified Nonelective Contribution and shall be known as a
Fail-Safe Contribution.
The Fail-Safe Contribution shall be made on behalf of
all eligible non-Highly Compensated Employees who are Participants and who are
considered under the Actual Deferral Percentage test or, if applicable, the
Actual Contribution Percentage test, and shall be allocated to the Participant's
Account of each such Participant in an amount equal to a fixed percentage of
such Participant's Compensation. The fixed percentage shall be equal to the
minimum fixed percentage necessary to be contributed by the Employer on behalf
of each eligible non-Highly Compensated Employee who is a Participant so that
the Actual Deferral Percentage test or, if applicable, the Actual Contribution
Percentage test, is satisfied.
(d) Contributions - Changes. For each Plan Year, a
Participant may change the amount of his Required Employee Contributions,
Voluntary Employee Contributions, or Elective Deferral Contributions as often as
the Plan Administrator allows (on a consistent and nondiscriminatory basis), on
certain dates prescribed by the Plan Administrator.
(e) Contributions - Timing.
(1) Elective Deferral Contributions shall be paid by
the Employer to the Trust or the Insurance Company, as elected by the Employer
in the Adoption Agreement, but never later than 90 days following the date of
deferral.
(2) Matching Contributions made on other than an
annual basis shall be paid to the Trust or Insurance Company, as elected by the
Employer in the Adoption Agreement. Matching Contributions, including Additional
Matching Contributions, made on an annual basis shall be paid to the Trust or
the Insurance Company, as applicable, at the end of the Plan Year, or as soon as
possible on or after the last day of such Plan Year, but in no event later than
the date prescribed by law for filing the Employer's income tax return,
including any extension thereof. To the extent that Matching Contributions are
used to purchase Life Insurance Policies, then such contributions for any Plan
Year may be paid to the Trust when premiums for such Policies are due during the
Plan Year.
(3) Nonelective Contributions made on other than an
annual basis shall be paid to the Trust or Insurance Company, as applicable, as
elected by the Employer in the Adoption Agreement. Nonelective Contributions
made on an annual basis shall be paid to the Trust or the Insurance Company, as
applicable, at the end of the Plan Year, or as soon as possible on or after the
last day of such Plan Year, but in any event not later than the date prescribed
by law for filing the Employer's income tax return, including any extension
thereof. To the extent that Nonelective Contributions are used to purchase Life
Insurance Policies, then such contributions for any Plan Year may be paid to the
Trust when premiums for such Policies are due during the Plan Year.
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<PAGE> 31
(4) Employee Contributions shall be transferred by
the Employer to the Trust or the Insurance Company, as elected by the Employer
in the Adoption Agreement, but never later than 90 days following the date such
contributions are made by the Employee.
(5) The Fail-Safe Contribution for any Plan Year as
determined above shall be paid to the Insurance Company at the end of the Plan
Year, or as soon as possible on or after the last day of such Plan Year, but in
no event later than the date which is prescribed by law for filing the
Employer's income tax return, including any extensions thereof.
(f) Contributions - Allocations. The allocation of
Nonelective Contributions shall be made in accordance with (1), (2), (3) or (4)
below, as specified by the Employer in the Adoption Agreement.
(1) Formula A: Compensation Ratio - Not Integrated
with Social Security. The allocation to each Participant shall be made in the
proportion that the Compensation paid to each Participant eligible to receive an
allocation bears to the Compensation paid to all Participants eligible to
receive an allocation.
(2) Formula B: Integrated with Social Security -
Step Rate Method.
Base Contribution: An amount equal to a
percentage (as specified in the Adoption Agreement) of the Compensation of each
Participant up to the Social Security Integration Level;
Excess Contribution: In addition, an amount
equal to a percentage (as specified in the Adoption Agreement) of the
Participant's Compensation which is in excess of the Social Security Integration
Level, subject to the Limitations on Allocations in accordance with Section 4B.
This Excess Contribution percentage shall not exceed the lesser of:
(A) twice the Base Contribution or
(B) the Base Contribution plus the greater
of:
(i) the old age insurance portion of
the Old Age Survivor Disability (OASDI) tax rate; or
(ii) 5.7%.
If the Employer has elected in the Adoption
Agreement to use a Social Security Integration Level that in any Plan Year is
the greater of $10,000 or 20% but less than 100% of the Social Security Taxable
Wage Base, then the 5.7% limitation specified in 2C.1(f)(2)(B)(ii) shall be
adjusted in accordance with the following table:
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<PAGE> 32
<TABLE>
<CAPTION>
IF THE SOCIAL SECURITY INTEGRATION LEVEL
- ------------------------------------------------------------ ADJUST
IS MORE THAN BUT NOT MORE THAN 5.7% TO
------------ ----------------- -------
<S> <C>
the greater of $10,000 or 20% 80% of the Social Security 4.3%
of the Social Security Taxable Taxable Wage Base
Wage Base
80% of the Social Security 100% of the Social Security 5.4%
Taxable Wage Base Taxable Wage Base
</TABLE>
In the case of any Participant who has exceeded
the Cumulative Permitted Disparity Limit described in Section 2C.1(g),
Nonelective Contributions shall be allocated in an amount equal to the Excess
Contribution percentage of two times such Participant's total Compensation for
the Plan Year.
Any remaining Nonelective Contributions or
Forfeitures will be allocated to each Participant's Account in the ratio that
each Participant's total Compensation for the Plan Year bears to all
Participants' total Compensation for that Plan Year.
(3) Formula B: Integrated with Social Security -
Maximum Disparity Method.
Subject to the Limitations on Allocations
specified in Section 4B, for each Plan Year the allocation to each Participant
shall be made in accordance with the following:
(A) An amount equal to 5.7% of the sum of
each Participant's total Compensation plus Compensation that is in excess of the
Social Security Integration Level shall be allocated to each Participant's
Account. If the Employer does not contribute such amount for all Participants,
an amount shall be allocated to each Participant's Account equal to the same
proportion that each Participant's total Compensation plus Compensation that is
in excess of the Social Security Integration Level bears to the total
Compensation plus Compensation in excess of the Social Security Integration
Level of all Participants in the Plan. In the case of any Participant who has
exceeded the Cumulative Permitted Disparity Limit described in Section 2C.1(g),
two times such Participant's total Compensation for the Plan Year will be taken
into account.
If the Employer has elected in the
Adoption Agreement to use a Social Security Integration Level that in any Plan
Year is the greater of $10,000 or 20% but less than 100% of the Social Security
Taxable Wage Base, then the 5.7% limitation specified in this subsection shall
be adjusted in accordance with the following table:
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<PAGE> 33
<TABLE>
<CAPTION>
IF THE SOCIAL SECURITY INTEGRATION LEVEL
- ------------------------------------------------------------ ADJUST
IS MORE THAN BUT NOT MORE THAN 5.7% TO
------------ ----------------- -------
<S> <C>
the greater of $10,000 or 20% 80% of the Social Security 4.3%
of the Social Security Taxable Taxable Wage Base
Wage Base
80% of the Social Security 100% of the Social Security 5.4%
Taxable Wage Base Taxable Wage Base
</TABLE>
(B) The balance of the Nonelective
Contribution (if any) shall be allocated to the Participant's Account in the
proportion that each Participant's Compensation bears to the total Compensation
of all Participants.
(4) Formula C: Flat Dollar Amount.
The allocation to each Participant shall be a
flat dollar amount as elected by the Employer in the Adoption Agreement. Formula
C may not be elected under a standardized plan.
(g) Allocation Requirements.
Employer contributions shall be allocated to the
accounts of Participants in accordance with the allocation requirement as
specified by the Employer in its Adoption Agreement. If the Employer has adopted
a standardized plan, the allocation of any nonannual contribution made by the
Employer shall be made to each Participant who is a Participant on any day of
the Contribution Period regardless of Hours of Service.
Annual Overall Permitted Disparity Limit.
Notwithstanding the preceding paragraph, for any Plan Year this Plan benefits
any Participant who benefits under another qualified plan or simplified employee
pension plan, as defined in Code section 408(k), maintained by the Employer that
provides for permitted disparity (or imputes disparity), Employer contributions
and Forfeitures will be allocated to the account of each Participant who either
completes more than 500 Hours of Service during the Plan Year or who is employed
as of the last day of the Plan Year in the ratio that such Participant's total
Compensation bears to the total Compensation of all Participants.
Cumulative Permitted Disparity Limit. Effective for Plan
Years beginning on or after January 1, 1995, the Cumulative Permitted Disparity
Limit for a Participant is 35 total cumulative permitted disparity years. Total
cumulative permitted years mean the number of years credited to the Participant
for allocation or accrual purposes under this Plan, any other qualified plan or
simplified employee pension plan (whether or not terminated) ever maintained by
the Employer. For purposes of determining the Participant's Cumulative Permitted
Disparity Limit, all years ending in the same calendar year are treated as the
same year. If the Participant has not benefitted under a
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<PAGE> 34
defined benefit or target benefit plan for any year beginning on or after
January 1, 1994, the Participant has no Cumulative Permitted Disparity Limit.
(h) Forfeitures. Forfeitures will be used in the manner
elected in the Adoption Agreement as follows:
(1) To reduce Employer contributions or pay Plan
expenses; or
(2) Allocated in accordance with the allocation
formula elected in the Adoption Agreement; or
(3) First, to reduce Employer contributions or pay
Plan expenses, with any remaining Forfeitures allocated in accordance with the
allocation formula elected in the Adoption Agreement.
(i) Expenses. The Employer may contribute to the Plan the
amount necessary to pay any reasonable expenses of administering the Plan. In
lieu of the Employer contributing the amount necessary to pay such charges,
these expenses may be paid from Plan assets.
(j) Special Rules - Elective Deferral Contributions.
(1) Each Participant may elect to defer his
Compensation in an amount specified in the Adoption Agreement, subject to the
limitations of this Section. A Salary Deferral Agreement (or modification of an
earlier Salary Deferral Agreement) may not be made with respect to Compensation
which is currently available on or before the date the Participant executed such
election, or if later, the later of the date the Employer adopts this CODA, or
the date such arrangement first becomes effective. Any elections made pursuant
to this Section shall become effective as soon as administratively feasible.
(2) If elected by the Employer in the Adoption
Agreement, each Participant may elect to defer and have allocated for a Plan
Year all or a portion of any cash bonus paid during the Plan Year. A deferral
election may not be made with respect to cash bonuses which are currently
available on or before the date the Participant executed such election.
(3) Elective Deferral Contributions will be
allocated to the Participant's Account and shall be 100 percent vested and
nonforfeitable at all times.
(4) During any taxable year, no Participant shall be
permitted to have Elective Deferral Contributions made under this Plan, or any
other qualified plan maintained by the Employer, in excess of the dollar
limitation contained in Code section 402(g) in effect at the beginning of such
taxable year. If a Participant takes a withdrawal of Elective Deferral
Contributions due to a Serious Financial Hardship, as provided in Section 3E.5,
his Elective Deferral Contributions for his taxable year immediately following
the taxable year of such distribution may
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<PAGE> 35
not exceed the Code section 402(g) limit for such taxable year less the amount
of Elective Deferral Contributions made for the Participant in the taxable year
of the distribution.
(5) Elective Deferral Contributions that are not in
excess of the limits described in subsection (4) above shall be subject to the
Limitations on Allocations in accordance with Section 4B.
Elective Deferral Contributions that are in
excess of the limits described in (4) above shall also be subject to the Section
4B limitations, as further provided in Section 4C.2.
(6) An Employee's eligibility to make Elective
Deferral Contributions under a CODA may not be conditioned upon the completion
of more than one (1) Year-of-Service or the attainment of more than age
twenty-one (21).
(7) A Participant may modify the amount of Elective
Deferral Contributions such Participant makes to the Plan as often as the Plan
Administrator allows, as specified in the Adoption Agreement, but in no event
not less frequently than once per calendar year. Such modification may be made
by filing a written notice with the Plan Administrator within the time period
prescribed by the Plan Administrator.
(k) Suspension of Contributions.
(1) Elective Deferral Contributions. The following
provisions shall apply with respect to suspension of Elective Deferral
Contributions.
(A) Voluntary Suspension. A Participant may
elect to suspend his Salary Deferral Agreement for Elective Deferral
Contributions by filing a written notice thereof with the Plan Administrator.
Such Contributions shall be suspended on the date specified in such notice,
which date must be at least 15 days after such notice is filed. The notice shall
specify the period for which such suspension shall be effective.
(B) Suspension for Leave. A Participant who
is absent from employment on account of an authorized unpaid leave of absence or
military leave shall have his Salary Deferral Agreement suspended during such
leave. Such suspension of contributions shall be effective on the date payment
of Compensation by the Employer to him ceases, and shall remain in effect until
payment of Compensation resumes.
(C) Withdrawal Suspension. A Participant who
elects a withdrawal in accordance with Section 3E may have his Elective Deferral
Contributions suspended on the date such election becomes effective. Such
suspension shall remain in effect for the number of months specified therein.
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<PAGE> 36
(D) Non-Elective Suspension. A Participant
who ceases to meet the eligibility requirements as specified in Section 2B.1 but
who remains in the employ of the Employer shall have his Elective Deferral
Contributions suspended, effective as of the date he ceases to meet the
eligibility requirements. Such suspension shall remain in effect until he again
meets such eligibility requirements.
The Participant may elect to reactivate
his Salary Deferral Agreement for Elective Deferral Contributions by filing a
written notice thereof with the Plan Administrator. The Salary Deferral
Agreement shall be reactivated following the expiration of the suspension period
described above.
(2) Required Employee Contributions. The following
provisions shall apply with respect to suspension of Required Employee
Contributions by Participants. In the event that a Participant suspends his
Required Employee Contributions, he shall automatically have his Voluntary
Employee Contributions suspended for the same period of time.
(A) Voluntary Suspension. A Participant may
elect to suspend his payroll deduction authorization for his Required Employee
Contributions by filing a written notice thereof with the Plan Administrator.
Such notice shall be effective, and his applicable contributions shall be
suspended, on the date specified in such notice, which date must be at least 15
days after such notice is filed. The notice shall specify the period for which
such suspension shall be effective. Such period must be a minimum of one month
and may extend indefinitely.
(B) Suspension for Leave. A Participant who
is absent from employment on account of an authorized unpaid leave of absence or
military leave shall have his payroll deduction authorization for Required
Employee Contributions suspended during such leave. Such suspension of
contributions shall be effective on the date payment of Compensation by the
Employer to him ceases, and shall remain in effect until payment of Compensation
resumes.
(C) Withdrawal Suspension. A Participant who
elects a withdrawal in accordance with Section 3E may have his Required Employee
Contributions suspended on the date such election becomes effective. Such
suspension shall remain in effect for the number of months specified under the
provisions of Section 3E.
(D) Involuntary Suspension. A Participant
who ceases to meet the eligibility requirements as specified in Section 2B.1 but
who remains in the employ of the Employer shall have his Required Employee
Contributions suspended, effective as of the date he ceases to meet the
eligibility requirements. Such suspension shall remain in effect until he again
meets such eligibility requirements.
The Participant may elect to reactivate
his payroll deduction authorization by filing a written notice thereof with the
Plan Administrator. The payroll deduction authorization shall be reactivated
following the expiration of the suspension period described above.
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(3) Voluntary Employee Contributions. The following
provisions apply with respect to suspension of Voluntary Employee Contributions
by Participants.
(A) Voluntary Suspension. A Participant may
elect to suspend his payroll deduction authorization for his Voluntary Employee
Contributions by filing a written notice thereof with the Plan Administrator.
Such notice shall be effective, and his applicable contributions shall be
suspended, on the date specified in such contributions shall be suspended, on
the date specified in such notice, which date must be at least 15 days after
such notice is filed. The notice shall specify the period for which such
suspension shall be effective.
(B) Suspension for Leave. A Participant who
is absent from employment on account of an authorized unpaid leave of absence or
military leave shall have his payroll deduction order for Voluntary Employee
Contributions suspended during such leave. Such suspension of contributions
shall be effective on the date payment of Compensation by the Employer to him
ceases, and shall remain in effect until payment of Compensation resumes.
(C) Withdrawal Suspension. A Participant who
elects a withdrawal in accordance with Section 3E may have his Voluntary
Employee Contributions suspended on the date such election becomes effective.
Such suspension shall remain in effect for the number of months specified
therein.
(D) Involuntary Suspension. A Participant
who ceases to meet the eligibility requirements as specified in Section 2B.1 but
who remains in the employ of the Employer shall have his Voluntary Employee
Contributions suspended, effective as of the date he ceases to meet the
eligibility requirements. Such suspension shall remain in effect until he again
meets such eligibility requirements.
The Participant may elect to reactivate
his payroll deduction authorization by filing a written notice thereof with the
Plan Administrator. The payroll deduction authorization shall be reactivated
following the expiration of the suspension period described above.
2C.2 Money Purchase Pension Plan.
(a) Contributions - Employer. As specified in the Adoption
Agreement, the Employer shall contribute an amount equal to a fixed percentage
of each Participant's Compensation, a flat dollar amount, or an amount
integrated with Social Security in accordance with (1), (2) or (3) below:
(1) Formula A: Not Integrated with Social Security.
An amount equal to a percentage from 1% to 25% of the Compensation of each
Participant, as elected by the Employer in the Adoption Agreement, subject to
the Limitations on Allocations in accordance with Section 4B.
(2) Formula B: Flat Dollar Amount. An amount, as
elected by the Employer in the Adoption Agreement. Formula B may not be elected
under a standardized plan.
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(3) Formula C: Integrated with Social Security.
Base Contribution: An amount equal to a
percentage (as specified in tile Adoption Agreement) of Compensation of each
Participant up to the Social Security Integration Level;
Excess Contribution: In addition, an amount
equal to a percentage (as specified in the Adoption Agreement) of the
Participant's Compensation which is in excess of the Social Security Integration
Level, subject to the Limitations on Allocations in accordance with Section 4B.
This Excess Contribution percentage shall not exceed the lesser of:
(A) twice the Base Contribution or
(B) the Base Contribution plus the greater
of:
(i) old age insurance portion of the
Old Age Survivor Disability (OASDI) tax rate; or
(ii) 5.7%.
If the Employer has elected in the Adoption
Agreement to use a Social Security Integration Level that in any Plan Year is
the greater of $10,000 or 20% but less than 100% of the Social Security Taxable
Wage Base, then the 5.7% limitation specified in 2C.2(a)(3)(B)(ii) shall be
adjusted in accordance with the following table:
<TABLE>
<CAPTION>
IF THE SOCIAL SECURITY INTEGRATION LEVEL
- ------------------------------------------------------------ ADJUST
IS MORE THAN BUT NOT MORE THAN 5.7% TO
------------ ----------------- -------
<S> <C>
the greater of $10,000 or 20% 80% of the Social Security 4.3%
of the Social Security Taxable Taxable Wage Base
Wage Base
80% of the Social Security 100% of the Social Security 5.4%
Taxable Wage Base Taxable Wage Base
</TABLE>
However, in the case of any Participant who has exceeded the Cumulative
Permitted Disparity Limit described below, the Employer will contribute for each
Participant who either completes more than 500 Hours of Service during the Plan
Year or is employed on the last day of the Plan Year, an amount equal to the
Excess Contribution percentage multiplied by the Participant's total
Compensation.
Annual Overall Permitted Disparity Limit.
Notwithstanding the preceding provisions of this Section 2C.2(a), for any Plan
Year this Plan benefits any Participant who benefits under another qualified
plan or simplified employee pension plan, as defined in Code
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section 408(k), maintained by the Employer that provides for permitted disparity
(or imputes disparity), Employer contributions and Forfeitures will be allocated
to the account of each Participant who either completes more than 500 Hours of
Service during the Plan Year or who is employed as of the last day of the Plan
Year in the ratio that such Participant's total Compensation bears to the total
Compensation of all Participants.
Cumulative Permitted Disparity Limit. Effective
for Plan Years beginning on or after January 1, 1995, the Cumulative Permitted
Disparity Limit for a Participant is 35 total cumulative permitted disparity
years. Total cumulative permitted years mean the number of years credited to the
Participant for allocation or accrual purposes under this Plan, any other
qualified plan or simplified employee pension plan (whether or not terminated)
ever maintained by the Employer. For purposes of determining the Participant's
Cumulative Permitted Disparity Limit, all years ending in the same calendar year
are treated as the same year. If the Participant has not benefitted under a
defined benefit or target benefit plan for any year beginning on or after
January 1, 1994, the Participant has no Cumulative Permitted Disparity Limit.
(b) Contributions - Participant. The Plan Administrator will
not accept Required Employee Contributions or Voluntary Employee Contributions
that are made for Plan Years beginning after the Plan Year in which this
document is being adopted by the Employer. Required Employee Contributions and
Voluntary Employee Contributions for Plan Years beginning after December 31,
1986, but before the Plan Year in which this document is adopted, will be
limited so as to meet the nondiscrimination test of Code section 401(m) as
provided in Section 4A.4.
(c) Contributions - Timing. Contributions made on other than
an annual basis shall be paid to the Trust or Insurance Company, as applicable,
not less frequently than monthly or every four weeks. Contributions made on an
annual basis shall be paid to the Trust or the Insurance Company, as applicable,
at the end of the Plan Year, or as soon as possible on or after the last day of
such Plan Year, but in any event not later than the date prescribed by law for
filing the Employer's income tax return, including any extension thereof. To the
extent that contributions are used to purchase Life Insurance Policies, such
contributions for any Plan Year may be paid to the Trust when premiums for such
Policies are due during the Plan Year.
(d) Contributions - Allocation. Employer Contributions shall
be allocated to the Participants' Account in accordance with the allocation
requirements as specified by the Employer in the Adoption Agreement. If the
Employer has adopted a standardized plan, the allocation of any nonannual
contribution made by the Employer shall be made for each Participant who is a
Participant on any day of the Contribution Period regardless of Hours of
Service.
(e) Forfeitures. Forfeitures will be used in the manner
elected in the Adoption Agreement as follows:
(1) To reduce Employer contributions or pay Plan
expenses; or
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(2) Allocated in the same manner elected in the
Adoption Agreement for the allocation of Employer contributions; or
(3) First, to reduce Employer contributions or pay
Plan expenses, with any remaining Forfeitures allocated in the same manner
elected in the Adoption Agreement for the allocation of Employer contributions.
(f) Expenses. The Employer may contribute to the Plan the
amount necessary to pay any applicable expense charges and administration
charges. In lieu of the Employer contributing the amount necessary to pay such
charges, these expenses may be paid from Plan assets.
2C.3 Rollover Contributions. If elected by the Employer in the
Adoption Agreement, and without regard to the limitations imposed under Section
4B, the Plan may receive Rollover Contributions on behalf of an Employee, if the
Employee is so entitled under Code sections 402(c), 403(a)(4), or 408(d)(3)(A).
Contributions may be rolled over either directly or indirectly, in the form of
cash, and may be all or a portion of the funds eligible for rollover. Receipt of
Rollover Contributions shall be subject to the approval of the Plan
Administrator. Before approving the receipt of a Rollover Contribution, the Plan
Administrator may request any documents or other information from an Employee or
opinions of counsel which the Plan Administrator deems necessary to establish
that such amount is a Rollover Contribution.
If Rollover Contributions are elected by the Employer in the
Adoption Agreement, they may be received from an Employee who is not otherwise
eligible to participate in the Plan. Rollover Contributions may be withdrawn by
such Employee pursuant to the provisions of the Adoption Agreement and Section
3E. In addition, such Employee may direct the investment and transfer of amounts
in his Participant's Account pursuant to the terms of Section 5A. Upon
Termination of Employment, such Employee shall be entitled to a distribution of
his Participant's Account.
2C.4 Contributions Subject to Davis-Bacon Act. If the Employer
designates under the Adoption Agreement that Employer contributions are to be
made in different amounts for different contracts subject to the Davis-Bacon Act
or other Prevailing Wage Law, the Employer shall file with the Plan
Administrator an irrevocable written designation for each Prevailing Wage Law
project, stating the hourly contribution rate to be contributed to the Plan by
the Employer for each class of Employees working on the project in order to
comply with the Prevailing Wage Law applicable to the project. The contribution
rate designation shall be irrevocable with respect to work on that project,
although the hourly contribution rate may be increased prospectively by the
filing of a new written contribution rate designation with the Plan
Administrator.
2C.5 QVEC Contributions. The Plan Administrator will not accept QVEC
Contributions which are made for a taxable year beginning after December 31,
1986. Contributions made prior to that date will be maintained in a separate
account that will be nonforfeitable at all times. The account will share in the
gains and losses under the Plan in the same manner as described in Section 5A.3
of the Plan. No part of the QVEC Contributions portion of the Participant's
Account
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<PAGE> 41
will be used to purchase Life Insurance Policies. No part of the QVEC
Contributions portion of the Participant's Account will be available for loans.
Subject to Section 3C, Joint and Survivor Annuity Requirements (if applicable),
the Participant may withdraw any part of his QVEC Contributions by making a
written application to the Plan Administrator.
ARTICLE III - DISTRIBUTIONS
3A. TIMING AND FORM OF BENEFITS
3A.1 Payment of Benefits. The rules and procedures for electing the
timing and form of distribution effective for each Participant or Beneficiary
shall be formulated and administered by the Plan Administrator in a consistent
manner for all Participants in similar circumstances. For money purchase and
target benefit plans, the normal form of distribution shall be a Life Annuity.
For a profit sharing plan, the normal form of distribution shall be cash. For
any plan, the distribution shall be made within an administratively reasonable
time following the date the application for distribution is filed with the Plan
Administrator.
If elected by the Employer in the Adoption Agreement, a
Participant, or his Beneficiary as the case may be, may elect to receive
distribution of all or a portion of his Vested Interest in one or a combination
of the following forms of payment:
(a) Single sum cash payment;
(b) Life Annuity;
(c) Installment Payments (i.e., a series of periodic
single-sum cash payments over time, with no life contingency);
(d) Installment Refund Annuity (i.e., an Annuity that
provides for fixed monthly payments for a period certain of not less than 3 nor
more than 15 years. If a Participant dies before the period certain expires, the
Annuity will be paid to the Participant's Beneficiary for the remainder of the
period certain. The period certain shall be chosen by the Participant at the
time the Annuity is purchased with the Participant's Vested Interest. The
Installment Refund Annuity is not a Life Annuity and in no event shall the
period certain extend to a period which equals or exceeds the life expectancy of
the Participant);
(e) Employer stock, to the extent the Participant is
invested therein.
All distributions are subject to the provisions of
Section 3C, Joint and Survivor Annuity Requirements.
If the value of a Participant's Vested Interest has
never exceeded $3,500 at anytime, the Employer shall indicate in the Adoption
Agreement whether a distribution shall be made in the form of a single sum cash
payment upon such Participant's Termination of Employment
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<PAGE> 42
and may not be deferred or the Participant may elect to defer distribution until
the April 1 following the calendar year in which he reaches age 70-1/2. If the
Employer permits Participants to defer such distributions, failure to make an
election will be deemed to be an election to defer to the April 1 following the
calendar year in which the Participant reaches age 70-1/2.
If the Participant's Vested Interest exceeds (or at the
time of any prior distribution exceeded) $3,500, and such amount is immediately
distributable, the Participant and the Participant's Spouse, if required (or
where either the Participant or the Spouse has died, the survivor) must consent
to any distribution of such account balance. The consent of the Participant and
the Participant's Spouse, if required, shall be obtained in writing within the
90-day period ending on the Annuity Starting Date. The "Annuity Starting Date"
is the first day of the first period for which an amount is paid as an Annuity
or any other form.
An account balance is considered immediately
distributable if any part of the account balance could be distributed to the
Participant (or surviving Spouse) before the Participant attains (or would have
attained if not deceased) the later of Normal Retirement Age or age 62.
Instead of consenting to a distribution, the Participant
may elect to defer the distribution until the April 1 following the calendar
year in which he reaches age 70-1/2. Failure to make an election will be deemed
to be an election to defer to the April 1 following the calendar year in which
he reaches age 70-1/2.
The Plan Administrator shall notify the Participant and
the Participant's Spouse of the right to defer any distribution. Such
notification shall include a general description of the material features and an
explanation of the relative values of the optional forms of benefit available
under the Plan in a manner that would satisfy the notice requirements of Code
section 417(a)(3), and shall be provided no less than 30 days and no more than
90 days prior to the Annuity Starting Date.
If the distribution is one to which Code sections
401(a)(11) and 417 do not apply, such distribution may commence less than 30
days after the notice required under Code regulation section 1.411(a)-11(c) is
given, provided that:
(a) The Plan Administrator clearly informs the Participant
that the Participant has a right to a period of at least 30 days after receiving
the notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option); and
(b) The Participant, after receiving the notice,
affirmatively elects a distribution.
Notwithstanding the foregoing, only the Participant need
consent to the commencement of a distribution in the form of a Qualified Joint
and Survivor Annuity while the account balance is immediately distributable.
Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is
not required with respect to the Participant pursuant to Section 3C.6 of the
Plan, only the Participant need consent to the distribution of an account
balance that is
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immediately distributable. Neither the consent of the Participant nor the
Participant's Spouse shall be required to the extent that a distribution is
required to satisfy Code section 401(a)(9) or section 415. In addition, upon
termination of this Plan, if the Plan does not offer an annuity option
(purchased from a commercial provider) and if the Employer or any entity within
the same controlled group as the Employer does not maintain another defined
contribution plan (other than an employee stock ownership plan as defined in
Code section 4975(e)(7)), the Participant's account balance will, without the
Participant's consent, be distributed to the Participant. However, if any entity
within the same controlled group as the Employer maintains another defined
contribution plan (other than an employee stock ownership plan as defined in
Code section 4975(e)(7), then the Participant's account balance will be
transferred without the Participant's consent to the other plan if the
Participant does not consent to an immediate distribution.
For purposes of determining the applicability of the
foregoing consent requirements to distributions made before the first day of the
first Plan Year beginning after December 31, 1988, the Participant's vested
account balance shall not include amounts attributable to QVEC Contributions
made between December 31, 1981 and January 1, 1987, plus gains and minus losses
thereon ("accumulated QVEC Contributions").
The terms of any annuity contract purchased and
distributed by the Plan to a Participant or Spouse shall comply with the
requirements of this Plan.
A Participant who terminates employment and does not
consent to an immediate distribution shall have his distribution deferred. Such
a distribution shall commence no later than the April 1 following the date the
Participant attains age of 70-1/2. Loans may not be initiated for Participants
covered by this paragraph except if, after his Termination of Employment, the
Participant is still a party-in-interest (as defined in ERISA). A Participant
who continues to maintain an account balance under the Plan may elect to
withdraw an amount which is equal to any whole percentage (not to exceed 100%)
from his Participant's Account. Such an election shall be made in accordance
with Section 3E. Such Participant as described herein shall have the authority
to direct the transfer of his Vested Interest in accordance with Section 5A.2.
The election to defer distribution may be revoked at any time by submitting a
written request to the Plan Administrator. Any Forfeiture attributable to
withdrawals shall be subject to the requirements of Sections 3D.1 and 3E.8 of
the Plan. A Participant whose Termination of Employment is on or after his Early
Retirement Date may elect to defer the distribution subject to the requirements
of Section 3B.
3A.2 Commencement of Benefits. Unless the Participant elects
otherwise, distribution of benefits will begin no later than the 60th day after
the latest of the close of the Plan Year in which:
(a) The Participant attains age 65 (or Normal Retirement
Age, if earlier);
(b) The 10th anniversary of the year in which the
Participant commenced participation in the Plan occurs; or,
(c) The Participant terminates Service with the Employer.
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<PAGE> 44
Notwithstanding the foregoing, the failure of a
Participant and Spouse to consent to a distribution, if required, while a
benefit is immediately distributable within the meaning of Section 3A.1 of the
Plan, shall be deemed to be an election to defer distribution to the date the
Participant attains age 70-1/2.
However, in no event shall distribution of that portion
of a Participant's Account attributable to Elective Deferral Contributions,
Qualified Matching Contributions, and Qualified Nonelective Contributions be
made prior to the earliest of the Participant's Retirement, death, Disability,
separation from Service, attainment of age 59-1/2, or, with respect to Elective
Deferral Contributions only, due to Serious Financial Hardship, unless such
distribution is made on account of:
(a) The Employer's sale, to an unrelated entity, of its
interest in a subsidiary (within the meaning of Code section 409(d)(3)), where
the Employer continues to maintain this Plan and the Participant continues
employment with the subsidiary; or
(b) The Employer's sale, to an unrelated corporation, of
substantially all assets (within the meaning of Code section 409(d)(2)) used in
its trade or business, where the Employer continues to maintain this Plan and
the Participant continues employment with the employer acquiring such assets; or
(c) The termination of the Plan, as provided in Section 7B,
without the establishment of another defined contribution plan, other than an
employee stock ownership plan (as defined in Code sections 4975(e) or 409) or a
simplified employee pension plan as defined in Code section 408(k).
All distributions that may be made in accordance with
one or more of the preceding distributable events are subject to the spousal and
Participant consent requirements (if applicable) of Code sections 401(a)(11) and
417. In addition, distributions made after March 31, 1988, which are triggered
by any of the events described in the immediately preceding paragraphs (a), (b),
or (c), must be made in a lump sum.
3A.3 From Life Insurance Policies. The Trustee shall arrange with the
Insurance Company any distribution due to any Participant during his lifetime
from any Life Insurance Policy or Policies on his life. The manner of
distribution shall be a transfer of the values of said Policy or Policies to the
Participant's Account for distribution as a portion thereof in accordance with
this Section.
Subject to Section 3c, Joint and Survivor Annuity Requirements,
the Policies on a participant's life will be converted to cash or an Annuity or
distributed to the Participant upon commencement of benefits.
In the event of any conflict between the terms of this Plan and
the terms of any Life Insurance Policy purchased hereunder, the Plan provisions
shall control.
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<PAGE> 45
3A.4 Nontransferable. Any Annuity Contract distributed herefrom must
be nontransferable.
3A.5 Alternate Payee Special Distribution. Distributions pursuant to
Section 5D.8 may be made without regard to the age or employment status of the
Participant.
3B. MINIMUM DISTRIBUTION REQUIREMENTS
3B.1 Definitions.
(a) Applicable Life Expectancy. The term Applicable Life
Expectancy means the Life Expectancy (or joint and last survivor expectancy)
calculated using the attained age of the Participant (or Designated Beneficiary)
as of the Participant's (or Designated Beneficiary's) birthday in the applicable
calendar year reduced by one for each calendar year which has elapsed since the
date Life Expectancy was first calculated. If Life Expectancy is being
recalculated, the Applicable Life Expectancy shall be the Life Expectancy so
recalculated. The applicable calendar year shall be the first Distribution
Calendar Year, and if Life Expectancy is being recalculated, such succeeding
calendar year.
(b) Designated Beneficiary. The term Designated Beneficiary
means the individual who is designated as the Beneficiary under the Plan in
accordance with Code section 401(a)(9) and the regulations thereunder. If a
Participant's Beneficiary, as determined in accordance with Section 1.8, is his
estate, such Participant shall be treated as having no Designated Beneficiary.
(c) Distribution Calendar Year. The term Distribution
Calendar Year means a calendar year for which a minimum distribution is
required. For distributions beginning before the Participant's death, the first
Distribution Calendar Year is the calendar year immediately preceding the
calendar year which contains the Participant's Required Beginning Date. For
distributions beginning after the Participant's death, the first Distribution
Calendar Year is the calendar year in which distributions are required to begin
pursuant to Section 3B.3 below.
(d) 5-Percent Owner. For purposes of this Section, the term
5-Percent Owner means a 5-percent owner as defined in Code section 416(i)
(determined in accordance with section 416 but without regard to whether the
Plan is Top-Heavy) at any time during the Plan Year ending with or within the
calendar year in which such Employee attains age 66-1/2 or any later Plan Year.
(e) Life Expectancy. The term Life Expectancy means life
expectancy and joint and last survivor expectancy as computed by use of the
expected return multiples in Tables V and VI of section 1.72-9 of the Income Tax
Regulations.
Unless otherwise elected by the Participant (or Spouse,
in the case of distributions described in Section 3B.3(b)(2)) by the time
distributions are required to begin, Life
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<PAGE> 46
Expectancies shall be recalculated annually. Such election shall be irrevocable
as to the Participant (or Spouse) and shall apply to all subsequent years. The
Life Expectancy of a non-Spouse Beneficiary may not be recalculated.
(f) Participant's Benefit. The term Participant's Benefit
means:
(1) The Participant's Vested Interest as of the last
valuation date in the calendar year immediately preceding the Distribution
Calendar Year ("Valuation Calendar Year") increased by the amount of any
contributions or Forfeitures allocated to the Participant's Account as of dates
in the Valuation Calendar Year after the valuation date and decreased by
distributions made in the Valuation Calendar Year after the valuation date.
(2) Exception for second Distribution Calendar Year.
For purposes of paragraph (1) above, if any portion of the minimum distribution
for the first Distribution Calendar Year is made in the second Distribution
Calendar Year on or before the Required Beginning Date, the amount of the
minimum distribution made in the second Distribution Calendar Year shall be
treated as if it had been made in the immediately preceding Distribution
Calendar Year.
(g) Required Beginning Date. The term Required Beginning
Date means:
(1) General Rule. The first Required Beginning Date
of a Participant is the first day of April of the calendar year following the
calendar year in which the Participant attains age 70-1/2.
(2) Transitional Rules. The Required Beginning Date
of a Participant who attains age 70-1/2 before January 1, 1988, shall be
determined in accordance with (A) or (B) below:
(A) Non-5-Percent Owners. The Required
Beginning Date of a Participant who is not a 5-Percent Owner is the first day of
April of the calendar year following the calendar year in which the later of
retirement or attainment of age 70-1/2 occurs.
(B) 5-Percent Owners. The Required Beginning
Date of a Participant who is a 5-Percent Owner during any year beginning after
December 31, 1979 is the first day of April following the later of:
(i) The calendar year in which the
Participant attains age
(ii) The earlier of the calendar year
which ends with or within the Plan Year in which the Participant becomes a
5-Percent Owner, or the calendar year in which the Participant retires.
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The Required Beginning Date of a
Participant who is not a 5-Percent Owner who attained age 70-1/2 during 1988 and
who has not retired as of January 1, 1989 is April 1, 1990.
(3) Once distributions have begun to a 5-Percent Owner under
this Section, they must continue to be distributed, even if the Participant
ceases to be a 5-Percent Owner in a later year.
3B.2 Distribution Requirements.
(a) Except as otherwise provided in Section 3C, joint and
Survivor Annuity Requirements, the requirements of this Section 3B shall apply
to any distribution of a Participant's Accrued Benefit and will take precedence
over any inconsistent provisions of this Plan. Unless otherwise specified, the
provisions of this Section apply to calendar years beginning after December 31,
1984.
(b) All distributions required under this Section 3B shall
be determined and made in accordance with regulations under section 401(a)(9),
including the minimum distribution incidental benefit requirement of regulations
section 1.401(a)(9)-2.
A Participant's entire Vested Interest must be
distributed or begin to be distributed no later than the Participant's Required
Beginning Date.
(c) Limits on Distribution Periods. As of the first
Distribution Calendar Year, distributions, if not made in a single sum, may only
be made over one of the following periods (or a combination thereof):
(1) The life of the Participant;
(2) The life of the Participant and a Designated
Beneficiary;
(3) A period certain not extending beyond the Life
Expectancy of the Participant; or
(4) A period certain not extending beyond the joint
and last survivor expectancy of the Participant and a Designated Beneficiary.
(d) Determination of amount to be distributed each year. If
the Participant's Vested Interest is to be distributed in other than a single
sum, the following minimum distribution rules shall apply on or after the
Required Beginning Date:
(1) If the Participant's entire Vested Interest is
to be distributed over (1) a period not extending beyond the Life Expectancy of
the Participant or the joint life and last survivor expectancy of the
Participant and the Participant's Designated Beneficiary or (2) a period not
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extending beyond the Life Expectancy of the Designated Beneficiary, the amount
required to be distributed for each calendar year, beginning with distributions
for the first Distribution Calendar Year, must at least equal the quotient
obtained by dividing the Participant's benefit by the Applicable Life
Expectancy.
(2) For calendar years beginning before January 1,
1989, if the Participant's Spouse is not the Designated Beneficiary, the method
of distribution selected must assure that at least 50% of the present value of
the amount available for distribution is paid within the Life Expectancy of the
Participant.
(3) For calendar years beginning after December 31,
1988, the amount to be distributed each year, beginning with distributions for
the first Distribution Calendar Year, shall not be less than the quotient
obtained by dividing the Participant's benefit by the lesser of (1) the
Applicable Life Expectancy or (2) if the Participant's Spouse is not the
Designated Beneficiary, the applicable divisor determined from the table set
forth in regulations section 1.401(a)(9)-2, Q&A-4. Distributions after the death
of the Participant shall be distributed using the Applicable Life Expectancy in
Section 3B.2(d)(1) above, as the relevant divisor without regard to regulations
section 1.401(a)(9)-2.
(4) The minimum distribution required for the
Participant's first Distribution Calendar Year must be made on or before the
Participant's Required Beginning Date. The minimum distribution for other
calendar years, including the minimum distribution for the Distribution Calendar
Year in which the Employee's Required Beginning Date occurs, must be made on or
before December 31 of that Distribution Calendar Year.
(e) Other Forms. If the Participant's benefit is distributed
in the form of an Annuity purchased from an Insurance Company, distributions
thereunder shall be made in accordance with the requirements of Code section
401(a)(9) and the regulations thereunder.
3B.3 Death Distribution Provisions. Upon the death of the
Participant, the following distribution provisions shall take effect:
(a) Distributions Beginning Before Death. If the Participant
dies after distribution of his entire Vested Interest has begun, the remaining
portion of such entire Vested Interest will continue to be distributed at least
as rapidly as under the method of distribution being used prior to the
Participant's death.
(b) Distributions Beginning After Death. If the Participant
dies before distribution of his entire Vested Interest begins, distribution of
the Participant's entire Vested Interest shall be completed by December 31 of
the calendar year containing the fifth anniversary of the Participant's death
except to the extent that an election is made to receive distributions in
accordance with (1) or (2) below:
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(1) If any portion of the Participant's entire
Vested Interest is payable to a Designated Beneficiary, distributions may be
made over the Life Expectancy of the Designated Beneficiary commencing on or
before December 31 of the calendar year immediately following the calendar year
in which the Participant died;
(2) If the Designated Beneficiary is the
Participant's surviving Spouse, the date distributions are required to begin in
accordance with (1) above shall not be earlier than the later of (i) December 31
of the calendar year immediately following the calendar year in which the
Participant died and (ii) December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made an election
pursuant to this Section 3B.3(b) by the time of his or her death, the
Participant's Designated Beneficiary must elect the method of distribution no
later than the earlier of (1) December 31 of the calendar year in which
distributions would be required to begin under this Section, or (2) December 31
of the calendar year which contains the fifth anniversary of the Participant's
date of death. If the Participant has no Designated Beneficiary, or if the
Designated Beneficiary does not elect a method of distribution, distribution of
the Participant's entire Vested Interest must be completed by December 31 of the
calendar year containing the fifth anniversary of the Participant's death and
will be paid in the form of a single sum cash payment.
(c) For purposes of Section 3B.3(b) above, if the surviving
Spouse dies after the Participant, but before payments to such Spouse begin, the
provisions of this Section, with the exception of paragraph (b)(2) therein,
shall be applied as if the surviving Spouse were the Participant.
(d) For purposes of this Section, distribution of a
Participant's entire Vested Interest pursuant to Section 3B.3(b) is considered
to begin on the Participant's Required Beginning Date (or, if paragraph (c)
above is applicable, the date distribution is required to begin to the Surviving
Spouse). If distribution in the form of an Annuity irrevocably commences to the
Participant before the Required Beginning Date, the date distribution is
considered to begin is the date distribution actually commences.
3B.4 Transitional Rule.
(a) Notwithstanding the other requirements of this Section
3B and subject to the requirements of Section 3C, Joint and Survivor Annuity
Requirements, distribution on behalf of any Employee, including a 5-Percent
Owner, may be made in accordance with all of the following requirements
(regardless of when such distribution commences):
(1) The distribution by the Plan is one which would
not have disqualified such Plan under Code section 401(a)(9) as in effect prior
to amendment by the Deficit Reduction Act of 1984.
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(2) The distribution is in accordance with a method
of distribution designated by the Employee whose entire Vested Interest in the
Plan is being distributed or, if the Employee is deceased, by a Beneficiary of
such Employee.
(3) Such designation was in writing, was signed by
the Employee or the Beneficiary, and was made before January 1, 1984.
(4) The Employee had accrued a benefit under the
Plan as of December 31, 1983.
(5) The method of distribution designated by the
Employee or the Beneficiary specifies the time at which distribution will
commence, the period over which distributions will be made, and in the case of
any distribution upon the Employee's death, the Beneficiaries of the Employee
listed in order of priority.
(b) A distribution upon death will not be covered by this
transitional rule unless the information in the designation contains the
required information described above with respect to the distribution to be made
upon the death of the Employee.
(c) For any distribution that commences before January 1,
1984, but continues after December 31, 1983, the Employee or the Beneficiary, to
whom such distribution is being made, will be presumed to have designated the
method of distribution under which the distribution is being made if the method
of distribution was specified in writing and the distribution satisfies the
requirements in subsections (a)(1) and (5).
(d) If a designation is revoked, any subsequent distribution
must satisfy the requirements of Code section 401(a)(9) and related regulations.
If a designation is revoked subsequent to the date distributions are required to
begin, the Plan must distribute by the end of the calendar year following the
calendar year in which the revocation occurs the total amount not yet
distributed which would have been required to have been distributed to satisfy
Code section 401(a)(9) and related regulations, except for the TEFRA section
242(b)(2) election. For calendar years beginning after December 31, 1988, such
distributions must meet the minimum distribution incidental benefit requirements
in regulations section 1.401(a)(9)-2. Any changes in the designation will be
considered to be a revocation of the designation. However, the mere substitution
or addition of another Beneficiary (one not named in the designation) under the
designation will not be considered to be a revocation of the designation, so
long as such substitution or addition does not alter the period over which
distributions are to be made under the designation, directly or indirectly (for
example, by altering the relevant measuring life). In the case in which an
amount is transferred or rolled from one plan to another plan, the rules in Q&A
J-2 and Q&A J-3 shall apply.
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3C. JOINT AND SURVIVOR ANNUITY REQUIREMENTS
3C.1 Applicability. Except as provided in Section 3C.6, the
provisions of this Section 3C shall apply to any Participant who is credited
with at least one Hour of Service with the Employer on or after August 23, 1984,
and such other Participants as provided in Section 3C.7.
3C.2 Definitions. The following definitions shall apply to this
Section 3C.
(a) Earliest Retirement Age. The term Earliest Retirement
Age means the earliest date on which, under the Plan, the Participant could
elect to receive retirement benefits.
(b) Election Period. The term Election Period means the
period which begins on the first day of the Plan Year in which the Participant
attains age 35 and ends on the date of the Participant's death. If a Participant
separates from service prior to the first day of the Plan Year in which he
attains age 35, with respect to the Vested Account Balance as of the date of
separation, the election period shall begin on the date of separation.
Pre-age 35 waiver: A Participant who will not yet attain
age 35 as of the end of any current Plan Year may make a special Qualified
Election to waive the Qualified Preretirement Survivor Annuity for the period
beginning on the date of such election and ending on the first day of the Plan
Year in which the Participant will attain age 35. Such election shall not be
valid unless the Participant receives a written explanation of the Qualified
Preretirement Survivor Annuity in such terms as are comparable to the
explanation required under Section 3C.5(a). Except as provided in Section 3C.6,
Qualified Preretirement Survivor coverage will be automatically reinstated as of
the first day of the Plan Year in which the Participant attains age 35. Any new
waiver on or after such date shall be subject to the full requirements of this
Section 3C.
(c) Qualified Election. The term Qualified Election means a
waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement
Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity or a
Qualified Preretirement Survivor Annuity shall not be effective unless: (a) the
Participant's Spouse consents in writing to the election; (b) the election
designates a specific Beneficiary, including any class of beneficiaries or any
contingent beneficiaries, which may not be changed without spousal consent (or
the Spouse expressly permits designations by the Participant without any further
spousal consent); (c) the Spouse's consent acknowledges the effect of the
election; and (d) the Spouse's consent is witnessed by a Plan representative or
notary public.
Additionally, a Participant's waiver of the Qualified
Joint and Survivor Annuity shall not be effective unless the election designates
a form of benefit payment which may not be changed without spousal consent (or
the Spouse expressly permits designations by the Participant without any further
spousal consent). If it is established to the satisfaction of a Plan
representative that there is no Spouse or that the Spouse cannot be located, a
waiver will be deemed a Qualified Election.
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Any consent by a Spouse obtained under this provision
(or establishment that the consent of a Spouse may not be obtained) shall be
effective only with respect to such Spouse. A consent that permits designations
by the Participant without any requirement of further consent by such Spouse
must acknowledge that the Spouse has the right to limit consent to a specific
Beneficiary, and a specific form of benefit where applicable, and that the
Spouse voluntarily elects to relinquish either or both of such rights. A
revocation of a prior waiver may be made by a Participant without the consent of
the Spouse at any time before the commencement of benefits. The number of
revocations shall not be limited. No consent obtained under this provision shall
be valid unless the Participant has received notice as provided in Section 3C.5
below.
(d) Qualified Joint and Survivor Annuity. The term Qualified
Joint and Survivor Annuity means an immediate Annuity for the life of the
Participant with a survivor Annuity for the life of the Spouse which is not less
than 50 percent and not more than 100 percent of the amount of the Annuity which
is payable during the joint lives of the Participant and the Spouse and which is
the amount of benefit which can be purchased with the Participant's Vested
Account Balance. The percentage of the survivor annuity binder the Plan shall be
50 percent (unless a different percentage is elected by the Participant).
(e) Vested Account Balance. The term Vested Account Balance
means the aggregate value of the Participant's vested account balances derived
from contributions made by both the Participant and Employer, whether vested
before or upon death, including the proceeds of insurance contracts, if any, on
the Participant's life and Rollover Contributions. The provisions of this
Section 3C shall apply to a Participant who is vested in amounts attributable to
Employer contributions, Employee Contributions (or both) made under this Plan at
the time of death or distribution.
3C.3 Qualified Joint and Survivor Annuity. Unless an optional form of
benefit is selected pursuant to a Qualified Election within the 90-day period
ending on the Annuity Starting Date, a married Participant's Vested Account
Balance will be paid in the form of a Qualified Joint and Survivor Annuity and
an unmarried Participant's Vested Account Balance will be paid in the form of a
Life Annuity. The Participant may elect to have such Annuity distributed upon
attainment of the Earliest Retirement Age under the Plan.
3C.4 Qualified Preretirement Survivor Annuity. Unless an optional
form of benefit has been selected within the Election Period pursuant to a
Qualified Election, if a Participant dies before the Annuity Starting Date, then
no less than 50 percent (or 100 percent if so elected in the Adoption Agreement)
of the Participant's Vested Account Balance shall be applied toward the purchase
of an Annuity for the life of the surviving Spouse. If less than 100 percent is
selected, then the remaining portion of the Vested Account Balance shall be paid
to the Participant's Beneficiary. If less than 100 percent of the Vested Account
Balance is paid to the surviving Spouse, the amount of Employee Contributions
allocated to the surviving Spouse will be in the same proportion as the Employee
Contributions bears to the total Vested Account Balance of the Participant. The
surviving Spouse may elect to have such Annuity distributed within a reasonable
period after the Participant's death.
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3C.5 Notice Requirements.
(a) In the case of a Qualified Joint and Survivor Annuity,
the Plan Administrator shall no less than 30 days and no more than 90 days prior
to the Annuity Starting Date provide each Participant with a written explanation
of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii)
the Participant's right to make and the effect of an election to waive the
Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a
Participant's Spouse; and (iv) the right to make, and the effect of, a
revocation of a previous election to waive the Qualified Joint and Survivor
Annuity.
(b) In the case of a Qualified Preretirement Survivor
Annuity, the Plan Administrator shall provide each Participant within the
applicable period (described in subsection (c) below) for such Participant a
written explanation of the Qualified Preretirement Survivor Annuity in such
terms and in such manner as would be comparable to the explanation provided for
meeting the requirements of Section 3C.5(a) applicable to a Qualified Joint and
Survivor Annuity.
(c) The "applicable period" for a Participant is whichever
of the following periods ends last: (i) the period beginning with the first day
of the Plan Year in which the Participant attains age 32 and ending with the
close of the Plan Year preceding the Plan Year in which the Participant attains
age 35; (ii) a reasonable period, ending after the individual becomes a
Participant; (iii) a reasonable period ending after the Qualified Joint and
Survivor Annuity is no longer fully subsidized; (iv) a reasonable period ending
after this Section 3C first applies to the Participant. Notwithstanding the
foregoing, notice must be provided within a reasonable period ending after
separation from Service before attaining age 35.
For purposes of applying the preceding paragraph, a
reasonable period ending after the enumerated events described in (ii), (iii)
and (iv) is the end of the two-year period beginning one year prior to the date
the applicable event occurs, and ending one year after that date. In the case of
a participant who separates from Service before the Plan Year in which he
attains age 35, notice shall be provided within the two-year period beginning
one year prior to separation and ending one year after separation. If such a
Participant thereafter returns to employment with the Employer, the applicable
period for such Participant shall be redetermined.
(d) Notwithstanding the other requirements of this Section,
the respective notices prescribed by this Section need not be given to a
Participant if (1) the Plan "fully subsidizes" the costs of a Qualified Joint
and Survivor Annuity or Qualified Preretirement Survivor Annuity, and (2) the
Plan does not allow the Participant to waive the Qualified Joint and Survivor
Annuity or Qualified Preretirement Survivor Annuity and does not allow a married
Participant to designate a nonspouse Beneficiary. For purposes of this Section
3C.5(d), a Plan fully subsidizes the costs of a benefit if no increase in cost
or decrease in benefits to the Participant may result from the Participant's
failure to elect another benefit.
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3C.6 Safe Harbor Rules.
(a) This Section shall apply to a Participant in a profit
sharing plan, and to any distribution made on or after the first day of the
first Plan Year beginning after December 31, 1988, from or under a separate
account attributable solely to accumulated QVEC Contributions (as described in
Section 3A.1), and maintained on behalf of a Participant in a money purchase
pension plan (including a target benefit plan), if the following conditions are
met: (1) the Participant does not or cannot elect payments in the form of a Life
Annuity; and (2) on the death of a Participant, the Participant's Vested Account
Balance will be paid to the Participant's surviving Spouse, but if there is no
surviving Spouse, or if the surviving Spouse has consented in a manner
conforming to a Qualified Election, then to the Participant's designated
Beneficiary.
(b) The surviving Spouse may elect to have distribution of
the Vested Account Balance commence within the 90-day period following the date
of the Participant's death. The account balance shall be adjusted for gains or
losses occurring after the Participant's death in accordance with the provisions
of the Plan governing the adjustment of account balances for other types of
distributions.
(c) The Participant may waive the spousal death benefit
described in this Section 3C.6 at any time provided that no such waiver shall be
effective unless it satisfies the conditions of Section 3C.2(c) (other than the
notification requirement referred to therein) that would apply to the
Participant's waiver of the Qualified Preretirement Survivor Annuity.
(d) If this Section 3C.6 is operative, then the other
provisions of this Section 3C, other than Section 3C.7, shall be inoperative.
This Section 3C.6 shall not be operative with respect to
a Participant in a profit sharing plan if the plan is a direct or indirect
transferee of a defined benefit plan, money purchase plan, a target benefit
plan, stock bonus, or profit sharing plan that is subject to the survivor
annuity requirements of Code sections 401(a)(11) and 417.
(e) For purposes of this Section 3C.6, the term Vested
Account Balance shall mean, in the case of a money purchase pension plan or a
target benefit plan, the Participant's separate account balance attributable
solely to accumulated QVEC Contributions (as described in Section 3A.1). In the
case of a profit sharing plan, the term Vested Account Balance shall have the
same meaning as provided in Section 3C.2(e).
3C.7 Transitional Rules.
(a) Any living Participant not receiving benefits on August
23, 1984, who would otherwise not receive the benefits prescribed by the
previous Sections of this Section 3C must be given the opportunity to elect to
have the prior Sections of this Section 3C apply if such Participant is credited
with at least one Hour of Service under this Plan or a predecessor plan in a
Plan Year
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beginning on or after January 1, 1976, and such Participant had at least 10
years of vesting Service when he separated from Service.
(b) Any living Participant not receiving benefits on August
23, 1984, who was credited with at least one Hour of Service under this Plan or
a predecessor plan on or after September 2, 1974, and who is not otherwise
credited with any Service in a Plan Year beginning on or after January 1, 1976,
must be given the opportunity to have his benefits paid in accordance with
Section 3C.7(d).
(c) The respective opportunities to elect (as described in
Sections 3C.7(a) and 3C.7(b) above) must be afforded to the appropriate
Participants during the period commencing on August 23, 1984, and ending on the
date benefits would otherwise commence to said Participants.
(d) Any Participant who has elected pursuant to Section
3C.7(b), and any Participant who does not elect under Section 3C.7(a), or who
meets the requirements of Section 3C.7(a), except that such Participant does not
have at least 10 years of vesting Service when he separates from Service, shall
have his benefits distributed in accordance with all of the following
requirements if benefits would have been payable in the form of a Life Annuity:
(1) Automatic Joint and Survivor Annuity. If
benefits in the form of a Life Annuity become payable to a married Participant
who:
(A) Begins to receive payments under the
Plan on or after Normal Retirement Age; or
(B) Dies on or after Normal Retirement Age
while still working for the Employer; or
(C) Begins to receive payments on or after
the Qualified Early Retirement Age; or
(D) Separates from Service on or after
attaining Normal Retirement Age (or the Qualified Early Retirement Age) and
after satisfying the eligibility requirements for the payment of benefits under
the Plan and thereafter dies before beginning to receive such benefits;
then such benefits will be received under this
Plan in the form of a Qualified Joint and Survivor Annuity, unless the
Participant has elected otherwise during the Election Period. The Election
Period must begin at least 6 months before the Participant attains Qualified
Early Retirement Age and end not more than 90 days before the commencement of
benefits. Any election hereunder will be in writing and may be changed by the
Participant at any time.
(2) Election of Early Survivor Annuity. A
Participant who is employed after attaining the Qualified Early Retirement Age
will be given the opportunity to elect, during the
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Election Period, to have a survivor Annuity payable on death. If the Participant
elects the survivor Annuity, payments under such Annuity must not be less than
the payments which would have been made to the Spouse under the Qualified Joint
and Survivor Annuity if the Participant had retired on the day before his or her
death. Any election under this provision will be in writing and may be changed
by the Participant at any time. The Election Period begins on the later of (1)
the 90th day before the Participant attains the Qualified Early Retirement Age,
or (2) the date on which participation begins, and ends on the date the
Participant terminates employment.
(3) For purposes of this Section 3C.7(d):
(A) Qualified Early Retirement Age is the
latest of:
(i) The earliest date, under the
Plan, on which the Participant may elect to receive retirement benefits;
(ii) The first day of the 120th month
beginning before the Participant reaches Normal Retirement Age; or
(iii) The date the Participant begins
participation.
(B) Qualified Joint and Survivor Annuity is
an Annuity for the life of the Participant with a survivor Annuity for the life
of the Spouse as described in Section 3C.2(d).
3D. TERMINATION OF EMPLOYMENT
3D.1 Distribution. A Participant who terminates employment shall be
entitled to receive a distribution of his entire Vested Interest. Such
distribution shall be further subject to the terms and conditions of Section 3C.
The method used, as elected by the Employer in the Adoption Agreement, is one of
the following:
(a) Immediate (Cash-Out Method). If at the time of his
Termination of Employment the Participant is not 100% vested and does not take a
distribution from the portion of his Vested Interest that is attributable to
contributions made by the Employer, the non-vested portion of his Participant's
Account will become a Forfeiture upon the date such terminated Participant
incurs 5 consecutive 1-Year Breaks-in-Service.
However, if at the time of his Termination of Employment
the Participant is not 100% vested and does take a distribution from the portion
of his Vested Interest that is attributable to contributions made by the
Employer, or if the Participant is 0% vested, the non-vested portion of his
Participant's Account will become a Forfeiture immediately upon the
Participant's Termination of Employment date.
If a Participant whose non-vested portion of his
Participant's Account became a Forfeiture in accordance with the terms of the
preceding paragraph is later rehired by the Employer
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and re-enrolls in the Plan before incurring 5 consecutive 1-Year
Breaks-in-Service, then the amount of the Forfeiture shall be restored to the
Participant's Account by the Employer in accordance with the repayment provision
elected by the Employer in the Adoption Agreement and described in Section 3D.2.
(b) 1-Year Break-in-Service (Cash-Out Method). If at the
time of his Termination of Employment the Participant is not 100% vested and
does not take a distribution from the portion of his Vested Interest that is
attributable to contributions made by the Employer, the non-vested portion of
his Participant's Account will become a Forfeiture upon the date such terminated
Participant incurs 5 consecutive 1-Year Breaks-in-Service.
However, if at the time of his Termination of Employment
the Participant is not 100% vested and does take a distribution from the portion
of his Vested Interest that is attributable to contributions made by the
Employer, or if the Participant is 0% vested, the non-vested portion of his
Participant's Account will become a Forfeiture upon the date such terminated
Participant incurs a 1-Year Break-in-Service.
If a terminated Participant, whose non-vested portion of
his Participant's Account became a Forfeiture in accordance with the terms of
the preceding paragraph, is later rehired by the Employer and re-enrolls in the
Plan before incurring 5 consecutive 1-Year Breaks-in-Service, then the amount of
the Forfeiture shall be restored to the Participant's Account by the Employer in
accordance with the repayment provision elected by the Employer in the Adoption
Agreement and described in Section 3D.2.
(c) 5 Consecutive 1-Year Breaks-in-Service. If at the time
of his Termination of Employment the Participant is not 100% vested, the
non-vested portion of his Participant's Account will become a Forfeiture upon
the date the terminated Participant incurs 5 consecutive 1-Year
Breaks-in-Service.
3D.2 Repayment of Prior Distribution. If a terminated Participant is
later rehired by the Employer and re-enrolls in the Plan, the following Optional
Payback or Required Payback provisions, as elected by the Employer in the
Adoption Agreement, will apply:
(a) Optional Payback:
(1) If the Participant was 0% vested at his
Termination of Employment and did not incur 5 consecutive 1-Year
Breaks-in-Service after such date, the amount which became a Forfeiture, if any,
shall be restored by the Employer at the time such Participant re-enrolls in the
Plan.
(2) If the Participant was vested but not 100%
vested at his Termination of Employment and did not incur 5 consecutive 1-Year
Breaks-in-Service after such date, the amount which became a Forfeiture, if any,
shall be restored by the Employer at the time such Participant re-enrolls in the
Plan. In addition, the Participant may repay the full amount of the distribution
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attributable to Employer contributions, if any, made at his Termination of
Employment. Such repayment of Employer contributions, however, must be made
before the Participant has incurred 5 consecutive 1-Year Breaks-in-Service
following the date he received the distribution or five years after the
Participant is rehired by the Employer, whichever is earlier.
(3) If the Participant had incurred 5 consecutive
1-Year Breaks-in-Service after his termination of Employment, the amount of the
Participant's Account that became a Forfeiture shall remain a Forfeiture and
such Participant shall be prohibited from repaying a distribution made at his
Termination of Employment.
(b) Required Payback:
(1) If the Participant was 0% vested at his
Termination of Employment and did not incur 5 consecutive 1-Year
Breaks-in-Service after such date, the amount which became a Forfeiture, if any,
shall be restored by the Employer at the time such Participant re-enrolls in the
Plan.
(2) If the Participant was vested but not 100%
vested at his Termination of Employment and did not incur 5 consecutive 1-Year
Breaks-in-Service after such date, the Participant shall be required to repay
the full amount of the distribution attributable to Employer contributions, if
any, made at his Termination of Employment. Such repayment of Employer
contributions, however, must be made before the Participant has incurred 5
consecutive 1-Year Breaks-in-Service following the date he received the
distribution or five years after the Participant is rehired by the Employer,
whichever is earlier.
When the Participant makes such repayment, the
amount which became a Forfeiture, if any, shall be restored by the Employer at
the same time such repayment is made. However, if the Participant does not repay
the distribution made in accordance with this Section 3D within the period of
time specified above, that Forfeiture shall remain a Forfeiture.
(3) If the Participant had incurred 4 consecutive
1-Year Breaks-in-Service after his Termination of Employment, the amount of the
Participant's Account that became a Forfeiture shall remain a Forfeiture and
such Participant shall be prohibited from repaying the distribution made at his
Termination of Employment.
3D.3 Life Insurance Policy. If all or any portion of the value of any
Life Insurance Policy on the Participant's life will become a Forfeiture, the
Participant shall have the right to buy such policy from the Trustee for the
then value of such policy less the value of any Vested Interest therein, within
30 days after written notice from the Trustee is mailed to his last known
address.
3D.4 No Further Rights or Interest. A Participant shall have no
further interest in or any rights to any portion of his Participant's Account
that becomes a Forfeiture due to his Termination of Employment once the
Participant incurs 5 consecutive 1-Year Breaks-in-Service in accordance with
Section 2A.4.
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3D.5 Forfeiture. Any Forfeiture arising in accordance with the
provisions of Section 3D.1 shall be treated as follows:
Any amount of Forfeitures shall be used in accordance with (a),
(b), or (c) below, in the manner set forth in Section 2C.
(a) Employer Credit. Forfeitures shall be used by the
Employer to reduce and in lieu of the Employer contribution next due under
Section 2C, or to pay Plan expenses, at the earliest opportunity after such
Forfeiture becomes available.
(b) Reallocation. Forfeitures shall be allocated in
accordance with the allocation formula of the contributions from which they
arose.
(c) Employer Credit and Reallocation of Remainder.
Forfeitures shall first be used to reduce and in lieu of the Employer
contribution next due under Section 2C, or to pay Plan expenses, at the earliest
opportunity after such Forfeiture becomes available. Any Forfeitures remaining
following use as an Employer credit shall be allocated in accordance with the
allocation formula of the contributions from which they arose.
Notwithstanding anything above to the contrary, if
Forfeitures are generated immediately or upon the occurrence of a 1-Year
Break-in-Service, and a former Participant returns to employment with the
Employer after Forfeitures are generated but prior to the occurrence of 5
consecutive 1-Year Breaks-in-Service, Forfeitures, if any, will first be used to
make whole the nonvested account of such Participant, equal to the value of the
nonvested account at the time the Participant terminated employment with the
Employer in accordance with the applicable provisions of Section 3D.2. In the
event that the available Forfeitures are not sufficient to make whole the
nonvested account, the Employer will make an additional contribution sufficient
to make the nonvested account whole.
3D.6 Lost Participant. If a benefit is forfeited because the
Participant or Beneficiary cannot be found, as discussed in Section 5D.7, such
benefit will be reinstated if a claim is made by the Participant or Beneficiary.
3D.7 Deferral of Distribution. If elected by the Employer, and as
discussed in Section 3A.1, a Participant who terminates employment and does not
consent to an immediate distribution shall have his distribution deferred (and
may be responsible for all fees and expenses associated with maintaining his
account in a deferred status).
3E. WITHDRAWALS
3E.1 Withdrawal - Employee Contributions.
(a) Required Employee Contributions. If the Employer has
elected in its Adoption Agreement to allow for a withdrawal of Required Employee
Contributions and earnings
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thereon, then a Participant may elect to withdraw from his Participant's Account
an amount equal to any whole percentage (not exceeding 100%) of his entire
Vested Interest in his Participant's Account attributable to Required Employee
Contributions plus any income and minus any loss thereon. On the date the
election becomes effective, the Participant shall be suspended from making any
further contributions to the Plan, and from having any Matching Contributions
made on his behalf for a period, as elected by the Employer in its Adoption
Agreement.
(b) Voluntary Employee Contributions. If the Employer has
elected in its Adoption Agreement to allow for withdrawal of Voluntary Employee
Contributions and earnings thereon, then a Participant may elect to withdraw
from his Participant's Account an amount which is equal to any whole percentage
(not exceeding 100%) of the entire Vested Interest in his Participant's Account
attributable to Voluntary Employee Contributions plus any income and minus any
loss thereon.
(c) Prior Required Employee Contributions. If the Employer
has elected in its Adoption Agreement to allow for a withdrawal of Prior
Required Employee Contributions and earnings thereon, then a Participant may
elect to withdraw from his Participant's Account an amount equal to any whole
percentage (not exceeding 100%) of his entire Vested Interest in his
Participant's Account attributable to Prior Required Employee Contributions plus
any income and minus any loss thereon.
(d) Prior Voluntary Employee Contributions. If the Employer
has elected in its Adoption Agreement to allow for withdrawal of Prior Voluntary
Employee Contributions and earnings thereon, then a Participant may elect to
withdraw from his Participant's Account an amount which is equal to any whole
percentage (not exceeding 100%) of the entire Vested Interest in his
Participant's Account attributable to Prior Voluntary Employee Contributions
plus any income and minus any loss thereon.
If a Participant elects a withdrawal under the provisions of
this Section, he may not elect another withdrawal under this Section for an
additional period specified by the Employer in its Adoption Agreement.
The Participant shall notify the Plan Administrator in writing
of his election to make a withdrawal under this Section. Any such election shall
be effective as of the date specified in such notice, which date must be at
least 15 days after notice is filed.
No Forfeitures will occur solely as a result of an Employee's
withdrawal of Employee Contributions.
3E.2 Withdrawal - Elective Deferral Contributions. If the Participant
has attained age 59-1/2, and if selected by the Employer in its Adoption
Agreement, the Participant may elect to withdraw from his Participant's Account
an amount which is equal to any whole percentage (not exceeding 100%) of his
Vested Interest in his Participant's Account attributable to his Elective
Deferral Contributions and earnings thereon.
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The Participant shall notify the Plan Administrator in writing
of his election to make a withdrawal under this Section. Any such election shall
be effective as of the date specified in such notice, which date must be at
least 15 days after notice is filed.
3E.3 Withdrawal - Employer Contributions. If the Employer has
specified in its Adoption Agreement that withdrawals of Matching Contributions,
Nonelective Contributions, or Prior Employer Contributions, if applicable, are
permitted, a Participant, who has been a Participant for at least 60 consecutive
months, may elect to withdraw from his Participant's Account an amount equal to
a whole percentage (not to exceed 100%) of his Vested Interest in his
Participant's Account attributable to Matching Contributions (and reallocated
Forfeitures, if applicable), Nonelective Contributions, (and reallocated
Forfeitures, if applicable), or Prior Employer Contributions (and reallocated
Forfeitures, if applicable), along with earnings. On the date the election
becomes effective, the Participant may be suspended from making Employee
Contributions and Elective Deferral Contributions, if any, and from having
Employer contributions made on his behalf for a period of time, as selected by
the Employer in its Adoption Agreement. In lieu of or in addition to the
60-months of participation requirement, the Employer may specify in the Adoption
Agreement that withdrawal of Employer contributions, to the extent vested, shall
be available upon or following the attainment of age 59-1/2.
In the event a Participant's suspension period occurs during a
year (or years) when no Employer contributions are made, such suspension shall
be taken into account when the next Employer contribution(s) is made.
The Participant shall notify the Plan Administrator in writing
of his election to make a withdrawal under this Section. Any such election shall
be effective as of the date specified in such notice, which date must be at
least 15 days after notice is filed.
3E.4 Withdrawal for Serious Financial Hardship of Contributions Other
than Elective Deferral Contributions. Except as provided in Sections 7B.1 and
7B.7(e), if the Plan is a profit sharing plan or a thrift plan, and if the
Employer has elected in its Adoption Agreement to permit withdrawals due to the
occurrence of events that constitute Serious Financial Hardships to a
Participant, such Participant may withdraw all or a portion of his Vested
Interest (excluding Elective Deferral Contributions, Qualified Nonelective
Contributions, Qualified Matching Contributions, and earnings on these
contributions). Such Serious Financial Hardship must be shown by positive
evidence submitted to the Plan Administrator that the hardship is of sufficient
magnitude to impair the Participant's financial security. Withdrawals shall be
determined in a consistent and nondiscriminatory manner, and shall not affect
the Participant's rights under the Plan to make additional withdrawals or to
continue to be a Participant.
3E.5 Withdrawal for Serious Financial Hardship of Elective Deferral
Contributions. If the Employer has selected in its Adoption Agreement, a
distribution may be made on account of Serious Financial Hardship if
subparagraphs (a) and (b) of this Section are satisfied. The funds available for
withdrawal shall be the portion of a Participant's Account attributable to
Elective Deferral Contributions, including any earnings credited to such
contributions as of the end of the last Plan
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Year ending before July 1, 1989 ("pre-1989 earnings"), and if applicable,
Qualified Matching Contributions credited to the Participant's Account as of the
end of the last Plan Year ending before July 1, 1989, Qualified Nonelective
Contributions credited to the Participant's Account as of the end of the last
Plan Year ending before July 1, 1989, and any pre-1989 earnings attributable to
Qualified Matching Contributions, or Qualified Nonelective Contributions.
Qualified Matching Contributions credited to the Participant's Account after the
end of the last Plan Year ending before July 1, 1989, Qualified Nonelective
Contributions credited to the Participant's Account after the end of the last
Plan Year ending before July 1, 1989, and earnings on Elective Deferral
Contributions, Qualified Matching Contributions, and Qualified Nonelective
Contributions credited after the end of the last Plan Year ending before July 1,
1989 shall not be eligible for withdrawal under this Section. For purposes of
this Section, a distribution may be made on account of a hardship only if the
distribution is made on account of an immediate and heavy financial need of the
Employee where such Employee lacks other available resources.
(a) The following are the only financial needs considered
immediate and heavy for purposes of this Section:
(i) Expenses for medical care described in Code
section 213(d) previously incurred by the Employee, the Employee's Spouse, or
any dependents of the Employee (as defined in Code section 152) or necessary for
these persons to obtain medical care described in Code section 213(d);
(ii) Costs directly related to the purchase of a
principal residence for the Employee (excluding mortgage payments);
(iii) Payments necessary to prevent the eviction of
the Employee from the Employee's principal residence or foreclosure on the
mortgage on that residence; or
(iv) Tuition payments, related educational fees and
amounts distributed for the payment of room-and-board expenses for the next 12
months of post-secondary education for the Employee, his or her Spouse, or any
of his or her dependents.
(b) To the extent the amount of distribution requested does
not exceed the amount required to relieve the Participant's financial need, such
distribution will be considered as necessary to satisfy an immediate and heavy
financial need of the Employee only if:
(i) The Employee has obtained all distributions,
other than hardship distributions, and all nontaxable loans under all plans
maintained by the Employer;
(ii) All plans maintained by the Employer provide
that the Employee's Elective Deferral Contributions and if applicable, Employee
Contributions, will be suspended for 12 months after the receipt of the hardship
distribution;
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(iii) The distribution is not in excess of the amount
of the immediate and heavy financial need (including amounts necessary to pay
any federal, state, or local income taxes or penalties reasonably anticipated to
result from the distribution); and
(iv) All plans maintained by the Employer provide
that the Employee may not make Elective Deferral Contributions for the
Employee's taxable year immediately following the taxable year of the hardship
distribution in excess of the applicable limit under Code section 402(g) for
such taxable year less the amount of such Employee's Elective Deferral
Contributions for the taxable year of the hardship distribution.
3E.6 Withdrawal - QVEC Contributions and Rollover Contributions. If
selected by the Employer in its Adoption Agreement, a Participant may elect to
withdraw from his Participant's Account as often during each Plan Year as
elected by the Employer in the Adoption Agreement, any amount up to 100% of his
entire Vested Interest in his Participant's Account attributable to his QVEC
Contributions or Rollover Contributions along with earnings thereon.
The Participant shall notify the Plan Administrator in writing
of his election to make a withdrawal under this Section. Any such election shall
be effective as of the date specified in such notice, which date must be at
least 15 days after notice is filed.
3E.7 Notification. The Participant shall notify the Plan
Administrator in writing of his election to make a withdrawal under Section 3E.
Any such election shall be effective as of the date specified in such notice,
which date must be at least 15 days after such notice is filed. Payment of the
withdrawal shall be subject to the terms and conditions of Section 3A. All
withdrawals made under the provisions of Section 3E shall be subject to the
spousal consent requirements of Section 3C, as applicable.
3E.8 Vesting Continuation. In the event a partially vested
Participant takes a withdrawal of less than 100% of his Vested Interest in
accordance with Section 3E.3 or 3E.4 or 3E.5, the remaining portion of his
Participant's Account attributable to Employer contributions shall vest
according to the formula as set forth in Section 1.75.
3E.9 Withdrawal - Participant's Employer Stock Account. The ability
of a Participant who is subject to the reporting requirements of section 16(a)
of the Securities Exchange Act of 1934 (the "Act") to make withdrawals or
investment changes involving the Participant's Employer Stock Account may be
restricted by the Plan Administrator to comply with the rules under section
16(b) of the Act.
3E.10 Withdrawal by Terminated Participants. Terminated Participants
who have deferred distribution of their benefit may make withdrawals from the
Plan in the same manner as selected by the Employer in its Adoption Agreement
for withdrawals preceding termination.
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3F. DIRECT ROLLOVERS
3F.1 Definitions.
(a) Direct Rollover. The term Direct Rollover means a
payment by the Plan to the Eligible Retirement Plan specified by the
Distributee.
(b) Distributee. The term Distributee means an Employee or
former Employee. In addition, the Employee's or former Employee's surviving
Spouse and the Employee's or former Employee's Spouse who is the Alternate Payee
under a QDRO, are Distributees with regard to the interest of the Spouse or
former Spouse.
(c) Eligible Retirement Plan. The term Eligible Retirement
Plan means an individual retirement account described in Code section 408(a), an
individual retirement annuity described in Code section 408(b), an annuity plan
described in Code section 403(a), or a qualified plan described in Code section
401(a), that accepts the Distributee's Eligible Rollover Distribution. However,
in the case of an Eligible Rollover Distribution to the surviving Spouse, an
Eligible Retirement Plan is an individual retirement account or an individual
retirement annuity.
(d) Eligible Rollover Distribution. The term Eligible
Rollover Distribution means any distribution of all or any portion of the
balance to the credit of the Distributee, except that an Eligible Rollover
Distribution does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or Life Expectancy) of the Distributee or the joint lives (or
joint life expectancies) of the Distributee and the Distributee's designated
Beneficiary, or for a specified period of ten years or more; any distribution to
the extent such distribution is required under Code section 401(a)(9); and the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities); and any other distribution(s) that is reasonably expected
to total less than $200 during a "year."
3F.2 Direct Rollovers. This Section applies to distributions made on
or after January 1, 1993. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a Distributee's election under this Section,
a Distributee may elect, at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an Eligible Rollover Distribution that is
equal to at least $500 paid directly to an Eligible Retirement Plan specified by
the Distributee in a Direct Rollover.
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ARTICLE IV - LEGAL LIMITATIONS ON CONTRIBUTIONS
4A. NONDISCRIMINATION TESTS
4A.1 Definitions.
(a) Actual Contribution Percentage. The term Actual
Contribution Percentage (ACP) means the average of the Actual Contribution
Ratios of the Eligible Participants in a group.
(b) Actual Contribution Ratio. The term Actual Contribution
Ratio means the ratio (expressed as a percentage) of a Participant's
Contribution Percentage Amounts to that Participant's Compensation for the Plan
Year (whether or not the Employee was a Participant for the entire Plan Year).
(c) Actual Deferral Percentage. The term Actual Deferral
Percentage (ADP) means the average of the Actual Deferral Ratios for a specified
group of Participants.
(d) Actual Deferral Ratio. The term Actual Deferral Ratio
means the ratio (expressed as a percentage) of a Participant's Deferral
Percentage Amounts to that Participant's Compensation for such Plan Year. The
Actual Deferral Ratio for an Employee who is eligible to be a Participant but
fails to make Elective Deferral Contributions shall be zero.
(e) Aggregate Limit. The term Aggregate Limit means the sum
of: (i) 125 percent of the greater of the ADP of the non-Highly Compensated
Employees for the Plan Year or the ACP of non-Highly Compensated Employees under
the plan subject to Code section 401(m) for the Plan Year beginning with or
within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the
lesser of such ADP or ACP. "Lesser" is substituted for "greater" in "(i),"
above, and "greater" is substituted for "lesser" after "two plus the" in "(ii)"
if it would result in a larger Aggregate Limit.
(f) Contribution Percentage Amounts. The term Contribution
Percentage Amounts means the sum of the Employee Contributions, Matching
Contributions, Qualified Matching Contributions (to the extent not taken into
account for purposes of the ADP test) and Qualified Nonelective Contributions
(to the extent not taken into account for purposes of the ADP test) made under
the Plan on behalf of the Participant for the Plan Year. Such Contribution
Percentage Amounts shall not include Matching Contributions that are forfeited
either to correct Excess Aggregate Contributions or because the contributions to
which they relate are Excess Elective Deferral Contributions, Excess
Contributions, or Excess Aggregate Contributions. The Employer may elect to use
Elective Deferrals in the Contribution Percentage Amounts as long as the ADP
test (as described in Section 4A.2) is met before the Elective Deferrals are
used in the ACP test (as described in Section 4A.4) and the ADP test continues
to be met following the exclusion of those Elective Deferrals that are used to
meet the ACP test.
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(g) Deferral Percentage Amounts. The term Deferral
Percentage Amounts means any Elective Deferral Contributions made pursuant to
the Participant's deferral election, including Excess Elective Deferral
Contributions of Highly Compensated Employees, but excluding Elective Deferral
Contributions that are taken into account in the ACP test (provided the ADP test
is satisfied both with and without exclusion of these Elective Deferral
Contributions). In addition, the Employer may choose to make Qualified
Nonelective Contributions and Qualified Matching Contributions.
(h) Eligible Participant. The term Eligible Participant
means any Employee who is eligible to make an Employee Contribution or Elective
Deferral Contribution (if the Employer takes such contributions into account in
the calculation of the Actual Contribution Ratio), or to receive a Matching
Contribution (including Forfeitures) or a Qualified Matching Contribution. If an
Employee Contribution is required as a condition of participation in the Plan,
any Employee who would be a Participant in the Plan if such Employee made the
Required Employee Contribution shall be treated as an Eligible Participant on
behalf of whom no Employee Contributions are made.
If the Employer has elected in its Adoption Agreement to provide for Elective
Deferral Contributions, then Sections 4A.2 through 4A.5 shall apply.
4A.2 Actual Deferral Percentage Test. The ADP for Participants who
are Highly Compensated Employees for each Plan Year and the ADP for Participants
who are non-Highly Compensated Employees for the same Plan Year must satisfy one
of the following tests:
(a) The ADP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the ADP for Participants who are
non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or
(b) The ADP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the ADP for Participants who are
non-Highly Compensated Employees for the same Plan Year multiplied by 2.0,
provided that the ADP for Participants who are Highly Compensated Employees does
not exceed the ADP for Participants who are non-Highly Compensated Employees by
more than two (2) percentage points.
4A.3 Special Rules - ADP Test.
(a) The ADP for any Participant who is a Highly Compensated
Employee for the Plan Year and who is eligible to have Elective Deferral
Contributions (and Qualified Nonelective Contributions or Qualified Matching
Contributions, or both, if treated as Elective Deferrals for purposes of the ADP
test) allocated to his accounts under two or more CODAs maintained by the
Employer, shall be determined as if such Elective Deferral Contributions (and,
if applicable, such Qualified Nonelective Contributions or Qualified Matching
Contributions, or both) were made under a single CODA. If a Highly Compensated
Employee participates in two or more CODAs that have different Plan Years, such
CODAs are treated as a single CODA with respect to the Plan Years ending with or
within the same calendar year. Notwithstanding the foregoing, certain plans
shall be treated as separate if mandatorily disaggregated under regulations
under Code section 401(k).
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(b) If this Plan satisfies the requirements of Code sections
401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or
if one or more other plans satisfy the requirements of such Code sections only
if aggregated with this Plan, then this Section shall be applied by determining
the ADP of Employees as if all such plans were a single plan. For Plan Years
beginning after December 31, 1989, plans may be aggregated in order to satisfy
Code section 401(k) only if they have the same Plan Year.
(c) If a Highly Compensated Employee is subject to the
family aggregation rules of section 414(q)(6) because that Participant is either
a 5-percent owner or one of the top 10 Highly Compensated Employees, the
combined Actual Deferral Ratio for the family group (which is treated as one
Highly Compensated Employee) must be determined by combining the Elective
Deferral Contributions (and Qualified Nonelective Contributions or Qualified
Matching Contributions, or both, if treated as Elective Deferral Contributions
for purposes of the ADP test), and Compensation for the Plan Year of all the
family members (as defined in section 414(q)(6)). Such family members shall be
disregarded as separate Employees in determining the ADP for both Highly
Compensated Employees and non-Highly Compensated Employees.
(d) For purposes of determining the ADP test, Elective
Deferral Contributions, Qualified Nonelective Contributions and Qualified
Matching Contributions must be made before the last day of the 12-month period
immediately following the Plan Year to which such contributions relate.
(e) The Employer shall maintain records sufficient to
demonstrate satisfaction of the ADP test and the amount of Qualified Nonelective
Contributions or Qualified Matching Contributions, or both, used in such test.
(f) The determination and treatment of the Deferral
Percentage Amounts of any Participant shall satisfy such other requirements as
may be prescribed by the Secretary of the Treasury.
(g) If the Employer determines before the end of the Plan
Year that the Plan may not satisfy the ADP test for the Plan Year, the Employer
may require that the amounts of Elective Deferral Contributions being allocated
to the accounts of Highly Compensated Employees be reduced to the extent
necessary to prevent Excess Contributions from being made to the Plan.
Although the Employer may reduce the amounts of Elective
Deferral Contributions that may be allocated to the Participant's Accounts of
Highly Compensated Employees, the affected Employees shall continue to
participate in the Plan. When the situation that resulted in the reduction of
Elective Deferral Contributions ceases to exist, the Employer shall reinstate
the amounts of Elective Deferral Contributions elected by the affected
Participants in their Salary Deferral Agreement to the fullest extent possible.
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If the Employer has elected in its Adoption Agreement, to provide for Employee
Contributions and/or Matching Contributions required to be tested under Code
section 401(m), then Sections 4A.4 and 4A.5 shall apply.
4A.4 Actual Contribution Percentage Test. The ACP for Participants
who are Highly Compensated Employees for each Plan Year and the ACP for
Participants who are non-Highly Compensated Employees for the same Plan Year
must satisfy one of the following tests:
(a) The ACP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the ACP for Participants who are
non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or
(b) The ACP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the ACP for Participants who are
non-Highly Compensated Employees for the same Plan Year multiplied by two (2),
provided that the ACP for Participants who are Highly Compensated Employees does
not exceed the ACP for Participants who are non-Highly Compensated Employees by
more than two (2) percentage points.
4A.5 Special Rules - ADP/ACP Tests.
(a) Multiple Use: If one or more Highly Compensated
Employees participates in both a CODA and a plan subject to the ACP test
maintained by the Employer, and the sum of the ADP and ACP of those Highly
Compensated Employees subject to either or both tests exceeds the Aggregate
Limit, then the ACP of those Highly Compensated Employees who also participate
in a CODA will be reduced (beginning with such Highly Compensated Employee whose
Actual Contribution Ratio is the highest) so that the limit is not exceeded. The
amount by which each Highly Compensated Employee's Contribution Percentage
Amounts are reduced shall be treated as an Excess Aggregate Contribution. The
ADP and ACP of the Highly Compensated Employees are determined after any
corrections required to meet the ADP and ACP tests. Multiple use does not occur
if both the ADP and ACP of the Highly Compensated Employees does not exceed 1.25
multiplied by the ADP and ACP of the non-Highly Compensated Employees.
(b) For purposes of this Section, the Actual Contribution
Ratio for any Participant who is a Highly Compensated Employee and who is
eligible to have Contribution Percentage Amounts allocated to his account under
two or more plans described in Code section 401(a), or CODAs that are maintained
by the Employer, shall be determined as if the total of such Contribution
Percentage Amounts was made under each plan. If a Highly Compensated Employee
participates in two or more CODAs that have different Plan Years, all CODAs
ending with or within the same calendar year are treated as a single CODA.
Notwithstanding the foregoing, certain plans shall be treated as separate if
mandatorily disaggregated under regulations under Code section 401(m).
(c) If this Plan satisfies the requirements of Code sections
401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or
if one or more other plans satisfy the requirements of such sections of the Code
only if aggregated with this Plan, then this Section shall be
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applied by determining the Actual Contribution Ratio of Employees as if all such
plans were a single plan. For Plan Years beginning after December 31, 1989,
plans may be aggregated in order to satisfy Code section 401(m) only if they
have the same Plan Year.
(d) For purposes of determining the Actual Contribution
Ratio of a Participant who is a 5-percent owner or one of the Top 10 Highly
Compensated Employees, the Contribution Percentage Amounts and Compensation for
such Participant shall include the Contribution Percentage Amounts and
Compensation for the Plan Year of family members (as defined in Code section
414(q)(6)). Such family members shall be disregarded as separate Employees in
determining the ACP for Highly Compensated Employees and non-Highly Compensated
Employees.
(e) For purposes of determining the ACP test, Employee
Contributions are considered to have been made in the Plan Year in which
contributed to the Plan. Qualified Matching Contributions and Qualified
Nonelective Contributions are considered made for a Plan Year if made no later
than the end of the 12-month period beginning on the day after the close of the
Plan Year.
(f) The Employer shall maintain records sufficient to
demonstrate satisfaction of the ACP test and the amount of Qualified Nonelective
Contributions or Qualified Matching Contributions, or both, used in such test.
(g) The determination and treatment of the Contribution
Percentage Amounts of any Participant shall satisfy such other requirements as
may be prescribed by the Secretary of the Treasury.
4B. LIMITATIONS ON ALLOCATIONS
4B.1 Definitions. The following definitions apply for purposes of
Section 4B.
(a) Annual Additions. The term Annual Additions means the
sum of the following amounts credited to a Participant's Account for the
Limitation Year:
(1) All contributions made by the Employer which
shall include:
Elective Deferral Contributions;
Money Purchase Pension Contributions;
Matching Contributions;
Nonelective Contributions;
Qualified Nonelective Contributions;
Qualified Matching Contributions;
Prior Employer Contributions;
(2) Employee Contributions;
(3) Forfeitures; and
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(4) Amounts allocated after March 31, 1984 to an
individual medical account, as defined in Code section 415(l)(2), which is part
of a pension or annuity plan maintained by the Employer, are treated as Annual
Additions to a defined contribution plan. Also, amounts derived from
contributions paid or accrued after December 31, 1985 in taxable years ending
after such date, which are attributable to post-retirement medical benefits
allocated to the separate account of a Key Employee as defined in Code section
419A(d)(3), under a welfare benefit fund as defined in Code section 419(e),
maintained by the Employer, are treated as Annual Additions to a defined
contribution plan; and
(5) Allocations under a simplified employee pension
plan.
For this purpose, any Excess Annual Additions applied
under Sections 4C.3 or 4B.5(f) in the Limitation Year to reduce Employer
contributions will be considered Annual Additions for such Limitation Year.
(b) Compensation. As elected by the Employer in the Adoption
Agreement, the term Compensation means all of a Participant's:
(1) Wages, Tips, and Other Compensation Box on Form
W-2. (Information required to be reported under Code sections 6041, 6051 and
6052). Wages within the meaning of Code section 3401(a) and all other payments
of compensation to an Employee by the Employer (in the course of the Employer's
trade or business) for which the Employer is required to furnish the Employee a
written statement under Code sections 6041(d), 6051(a)(3), and 6052.
Compensation must be determined without regard to any rules under Code section
3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the exception for
agricultural labor in Code section 3401(a)(2)).
(2) Section 3401(a) Wages. Wages as defined in Code
section 3401(a) for the purposes of income tax withholding at the source but
determined without regard to any rules that limit the remuneration included in
wages based on the nature or location of the employment or the services
performed (such as the exception for agricultural labor in Code section
3401(a)(2)).
(3) 415 Safe-Harbor Compensation. Wages, salaries,
and fees for professional services and other amounts received (without regard to
whether or not an amount is paid in cash) for personal services actually
rendered in the course of employment with the Employer maintaining the Plan to
the extent that the amounts are includable in gross income (including, but not
limited to, commissions paid salesmen, compensation for services on the basis of
a percentage of profits, commissions on insurance premiums, tips, bonuses,
fringe benefits, and reimbursements or other expense allowances under a
nonaccountable plan as described in Code section 1.62-2(c)), and excluding the
following:
(A) Employer contributions to a plan of
deferred compensation which are not includable in the Employee's gross income
for the taxable year in which contributed,
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or Employer contributions under a simplified employee pension plan to the extent
such contributions are deductible by the Employee, or any distributions from a
plan of deferred compensation;
(B) Amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
(C) Amounts realized from the sale, exchange
or other disposition of stock acquired under a qualified stock option; and
(D) Other amounts which received special tax
benefits, or contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract described in
Code section 403(b) (whether or not the contributions are actually excludable
from the gross income of the Employee).
For any Self-Employed Individual, Compensation means
Earned Income.
For Limitation Years beginning after December 31, 1991,
for purposes of applying the limitations of this Section 4B, Compensation for a
Limitation Year is the Compensation actually paid or includable in gross income
during such Limitation Year.
Notwithstanding the preceding sentence, Compensation for
a Participant in a defined contribution plan who is permanently and totally
disabled (as defined in Code section 22(e)(3)) is the Compensation such
Participant would have received for the Limitation Year if the Participant had
been paid at the rate of Compensation paid immediately before becoming
permanently and totally disabled; such imputed Compensation for the disabled
Participant may be taken into account only if the Participant is not a Highly
Compensated Employee and contributions made on behalf of such Participant are
nonforfeitable when made.
(c) Defined Benefit Fraction. The term Defined Benefit
Fraction means a fraction, the numerator of which is the sum of the
Participant's Projected Annual Benefits under all the defined benefit plans
(whether or not terminated) maintained by the Employer, and the denominator of
which is the lesser of 125 percent of the dollar limitation determined for the
Limitation Year under Code sections 415(b) and (d), or 140 percent of the
Highest Average Compensation including any adjustments under Code section
415(b).
Notwithstanding the above, if the Participant was a
Participant as of the first day of the Limitation Year beginning after December
31, 1986 in one or more defined benefit plans maintained by the Employer which
were in existence on May 6, 1986, the denominator of this fraction will not be
less than 125 percent of the sum of the annual benefits under such plans which
the Participant had accrued as of the later of the close of the last Limitation
Year beginning before January 1, 1987, disregarding any changes in the terms and
conditions of the Plan after May 5, 1986. The preceding sentence applies only if
the defined benefit plans individually and in the aggregate
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satisfied the requirements of Code section 415 for all Limitation Years
beginning before January 1, 1987.
Notwithstanding the foregoing, for any Top-Heavy Plan
Year, 100 shall be substituted for 125 unless the extra minimum allocation is
being made pursuant to the Employer's election in the Adoption Agreement.
However, for any Plan Year in which this Plan is a Super Top-Heavy Plan, 100
shall be substituted for 125 in any event.
(d) Defined Contribution Dollar Limitation. The term Defined
Contribution Dollar Limitation means $30,000 or if greater, one-fourth of the
defined benefit dollar limitation set forth in Code section 415(b)(1) as in
effect for the Limitation Year.
(e) Defined Contribution Fraction. The term Defined
Contribution Fraction means a fraction, the numerator of which is the sum of the
Annual Additions to the Participant's accounts under all the defined
contribution plans (whether or not terminated) maintained by the Employer for
the current and all prior Limitation Years (including the Annual Additions
attributable to the Participant's nondeductible employee contributions to all
defined benefit plans, whether or not terminated, maintained by the Employer,
and the Annual Additions attributable to all welfare benefit funds, as defined
in Code section 419(e), individual medical accounts, as defined in Code section
415(l)(2), and simplified employee pension plans, as defined in Code section
408(k), maintained by the Employer), and the denominator of which is the sum of
the maximum aggregate amounts for the current and all prior Limitation Years of
service with the Employer (regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate amount in any Limitation Year
is the lesser of 125 percent of the dollar limitation determined under Code
sections 415(b) and (d) in effect under Code section 415(c)(1)(A) or 35 percent
of the Participant's Compensation for such year.
If the Employee was a Participant as of the end of the
first day of the first Limitation Year beginning after December 31, 1986, in one
or more defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be adjusted if the
sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0
under the terms of this Plan. Under the adjustment, an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0 times (2) the
denominator of this fraction, will be permanently subtracted from the numerator
of this fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last Limitation Year beginning before January
1, 1987, and disregarding any changes in the terms and conditions of the Plan
made after May 5, 1986, but using the section 415 limitation applicable to the
first Limitation Year beginning on or after January 1, 1987.
Notwithstanding the foregoing, for any Top-Heavy Plan
Year, 100 shall be substituted for 125 unless the extra minimum allocation is
being made pursuant to the Employer's election in the Adoption Agreement.
However, for any Plan Year in which this Plan is a Super Top-Heavy Plan, 100
shall be substituted for 125 in any event.
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The Annual Additions for any Limitation Year beginning
before January 1, 1987 shall not be recomputed to treat all Employee
Contributions as Annual Additions.
(f) Employer. For purposes of this Section 4B, the term
Employer means the Employer that adopts this Plan, and all members of a
controlled group of corporations (as defined in Code section 414(b) as modified
by section 415(h)), a group of commonly controlled trades or businesses (as
defined in Code section 414(c) as modified by section 415(h)) or affiliated
service groups (as defined in Code section 414(m)) of which the adopting
Employer is a part and any other entity required to be aggregated with the
Employer pursuant to regulations under Code section 414(o).
(g) Highest Average Compensation. The term Highest Average
Compensation means the average Compensation for the three consecutive Years of
Service with the Employer that produces the highest average. A Year of Service
with the Employer is the 12-consecutive month period defined in Section 2A.5.
(h) Limitation Year. The term Limitation Year means a
calendar year, or the 12-consecutive month period elected by the Employer in the
Limitation Year section of the Adoption Agreement. All qualified plans
maintained by the Employer must use the same Limitation Year. If the Limitation
Year is amended to a different 12-consecutive month period, the new Limitation
Year must begin on a date within the Limitation Year in which the amendment is
made.
(i) Master or Prototype Plan. The term Master or Prototype
Plan means a plan the form of which is the subject of a favorable opinion letter
from the national office of the Internal Revenue Service.
(j) Maximum Permissible Amount. The term Maximum Permissible
Amount means the maximum Annual Additions that may be contributed or allocated
to a Participant's Account under the Plan for any Limitation Year, which shall
not exceed the lesser of:
(1) The Defined Contribution Dollar Limitation, or
(2) 25 percent of the Participant's Compensation for
the Limitation Year.
The Compensation limitation referred to in (2) above,
shall not apply to any contribution for medical benefits (within the meaning of
Code section 401(h) or 419A(f)(2)) which is otherwise treated as Annual
Additions under Code sections 415(l)(1) or 419A(d)(2).
If a short Limitation Year is created because of an
amendment changing the Limitation Year to a different 12-consecutive month
period, the Maximum Permissible Amount will not exceed the Defined Contribution
Dollar Limitation multiplied by the following fraction:
<TABLE>
<CAPTION>
Number of months in the short Limitation Year
---------------------------------------------
<S> <C>
12
</TABLE>
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(k) Projected Annual Benefit. The term Projected Annual
Benefit means the annual retirement benefit (adjusted to an actuarially
equivalent Straight Life Annuity if such benefit is expressed in a form other
than a Straight Life Annuity or Qualified Joint and Survivor Annuity) to which
the Participant would be entitled under the terms of the Plan assuming:
(1) The Participant will continue employment until
Normal Retirement Age under the Plan (or current age, if later); and
(2) The Participant's Compensation for the current
Limitation Year and all other relevant factors used to determine benefits under
the Plan will remain constant for all future Limitation Years.
4B.2 Basic Limitation. If the Participant does not participate in,
and has never participated in another qualified plan or welfare benefit fund
maintained by the Employer, as defined in Code section 419(e), or an individual
medical account, as defined in Code section 415(l)(2), maintained by the
Employer, or a simplified employee pension, as defined in Code section 408(k),
maintained by the Employer, which provides Annual Additions as defined in
Section 4B.1(a), the amount of Annual Additions which may be credited to the
Participant's Account for any Limitation Year will not exceed the lesser of the
Maximum Permissible Amount or any other limitation contained in this Plan. If
the Employer contributions that would otherwise be contributed or allocated to
the Participant's Account would cause the Annual Additions for the Limitation
Year to exceed the Maximum Permissible Amount, the amount contributed or
allocated will be reduced so that the Annual Additions for the Limitation Year
will equal the Maximum Permissible Amount.
4B.3 Estimated Maximum Permissible Amount. Prior to determining the
Participant's actual Compensation for the Limitation Year, the Employer may
determine the Maximum Permissible Amount for a Participant on the basis of a
reasonable estimation of the Participant's Compensation for the Limitation Year,
uniformly determined for all Participants similarly situated.
4B.4 Actual Maximum Permissible Amount. As soon as administratively
feasible after the end of the Limitation Year, the Maximum Permissible Amount
for the Limitation Year will be determined on the basis of the Participant's
actual Compensation for the Limitation Year.
4B.5 Participants Covered by Another Prototype Defined Contribution
Plan.
(a) This Section applies if, in addition to this Plan, the
Participant is covered under another qualified Master or Prototype defined
contribution Plan maintained by the Employer, or a welfare benefit fund, as
defined in Code section 419(e), maintained by the Employer, or an individual
medical account as defined in Code section 415(l)(2), maintained by the
Employer, or a simplified employee pension plan, as defined in Code section
408(k), that provides Annual Additions as defined in Section 4B.1(a), during any
Limitation Year. The Annual Additions which may be credited to a Participant's
Account under this Plan for any such Limitation Year will not exceed the Maximum
Permissible Amount reduced by the Annual Additions credited to a Participant's
account under the other qualified Master and Prototype defined contribution
Plans,
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welfare benefit funds, individual medical accounts, and simplified employee
pension plans for the same Limitation Year. If the Annual Additions with respect
to the Participant under other qualified Master and Prototype defined
contribution Plans, welfare benefit funds, individual medical accounts, and
simplified employee pension plans maintained by the Employer are less than the
Maximum Permissible Amount and the Employer contributions that would otherwise
be contributed or allocated to the Participant's Account under this Plan would
cause the Annual Additions for the Limitation Year to exceed this limitation,
the amount contributed or allocated will be reduced so that the Annual Additions
under all such plans and funds for the Limitation Year will equal the Maximum
Permissible Amount. If the Annual Additions with respect to the Participant
under such other qualified master and prototype defined contribution plans,
welfare benefit funds, individual medical accounts, and simplified employee
pension plans, in the aggregate are equal to or greater than the Maximum
Permissible Amount, no amount will be contributed or allocated to the
Participant's Account under this Plan for the Limitation Year.
(b) Prior to determining the Participant's actual
Compensation for the Limitation Year, the Employer may determine the estimated
Maximum Permissible Amount for a Participant in the manner described in Section
4B.3.
(c) As soon as is administratively feasible after the end of
the Limitation Year, the Maximum Permissible Amount for the Limitation Year will
be determined on the basis of the Participant's actual Compensation for the
Limitation Year.
(d) If, pursuant to Section 4B.5(c), or as a result of the
allocation of Forfeitures, a Participant's Annual Additions under this Plan and
such other plans would result in Excess Annual Additions as defined in Section
4C.1(b) for a Limitation Year, the Excess Annual Additions will be deemed to
consist of the Annual Additions last allocated, except that Annual Additions
attributable to a simplified employee pension plan will be deemed to have been
allocated first, followed by Annual Additions to a welfare benefit fund or
individual medical account, regardless of the actual allocation date.
(e) If Excess Annual Additions were allocated to a
Participant on an allocation date of this Plan which coincides with an
allocation date of another plan, the Excess Annual Additions attributed to this
Plan will be the product of:
(1) The total Excess Annual Additions allocated as
of such date, multiplied by
(2) The ratio of (i) the Annual Additions allocated
to the Participant for the Limitation Year as of such date under this Plan to
(ii) the total Annual Additions allocated to the Participant for the Limitation
Year as of such date under this and all the other qualified Master or Prototype
defined contribution Plans.
(f) Any Excess Annual Additions attributed to this Plan will
be disposed of in the manner described in Section 4C.3.
\
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4B.6 Participants Covered by Non-Prototype Defined Contribution Plan.
If the Participant is covered under another qualified defined contribution plan
maintained by the Employer which is not a Master or Prototype Plan, Annual
Additions which may be credited to the Participant's Account under this Plan for
any Limitation Year will be limited in accordance with Section 4B.5 as though
the other plan were a Master or Prototype Plan, unless the Employer provides
other limitations in the Limitations on Allocations section of the Adoption
Agreement.
4B.7 Participants Covered by Defined Benefit Plan. If the Employer
maintains, or at any time maintained, a qualified defined benefit plan covering
any Participant in this Plan, the sum of the Participant's Defined Benefit Plan
Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any
Limitation Year. The Annual Additions which may be credited to the Participant's
Account under this Plan for any Limitation Year will be limited in accordance
with the Limitations on Allocations section of the Adoption Agreement.
4C. TREATMENT OF EXCESSES
4C.1 Definitions.
(a) Excess Aggregate Contributions. The term Excess
Aggregate Contributions means, with respect to any Plan Year, the excess of:
(1) The aggregate Contribution Percentage Amounts
taken into account in computing the ACP of Highly Compensated Employees for such
Plan Year, over
(2) The maximum Contribution Percentage Amounts
permitted by the ACP test (determined by reducing the Contribution Percentage
Amounts made on behalf of Highly Compensated Employees in order of their Actual
Contribution Ratios beginning with the highest of such ratios). Such
determination shall be made after first determining Excess Elective Deferral
Contributions, pursuant to Section 4C.2(a) and then determining Excess
Contributions pursuant to Section 4C.4.
(b) Excess Annual Additions. The term Excess Annual
Additions means the excess of the Participant's Annual Additions for the
Limitation Year over the Maximum Permissible Amount.
(c) Excess Contributions. The term Excess Contributions
means, with respect to any Plan Year, the excess of:
(1) The aggregate Deferral Percentage Amounts taken
into account in computing the ADP of Highly Compensated Employees for such Plan
Year, over
(2) The maximum Deferral Percentage Amounts
permitted by the ADP test (determined by reducing the Deferral Percentage
Amounts made on behalf of Highly
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Compensated Employees in order of their Actual Deferral Ratios, beginning with
the highest of such ratios).
(d) Excess Elective Deferral Contributions. The term Excess
Elective Deferral Contributions means those Elective Deferral Contributions that
are includable in a Participant's gross income under Code section 402(g) to the
extent such Participant's Elective Deferral Contributions for a taxable year
exceed the dollar limitation under such Code section. Excess Elective Deferral
Contributions shall be treated as Annual Additions under the Plan pursuant to
Section 4B, unless such amounts are distributed in accordance with the
provisions of Section 4C.2(a), below.
4C.2 Excess Elective Deferral Contributions.
(a) In the event that Elective Deferral Contributions made
during a calendar year exceed the limit specified in Section 2C.1(j)(4), then
the Excess Elective Deferral Contributions, plus any income and minus any loss
allocable thereto, shall be distributed to the Participant by the April 15
following the calendar year in which such amount was contributed, provided that
the Participant notifies the Plan Administrator no later than 30 days in advance
of his intent to withdraw such Excess Elective Deferral Contributions, or is
deemed to notify the Plan Administrator. A Participant is deemed to notify the
Plan Administrator of any Excess Elective Deferral Contributions that arise by
taking into account only those Elective Deferrals made to this Plan and any
other plans of this Employer. The spousal consent provisions of Section 3C shall
not apply to any distribution of Excess Elective Deferral Contributions.
(b) Excess Elective Deferral Contributions shall be adjusted
for any income or loss for the Employee's tax year. The income or loss allocable
to excess Elective Deferral Contributions is an amount determined by multiplying
the sum of the income or loss allocable to the Participant's Elective Deferral
Contribution account for the taxable year by a fraction, the numerator of which
is such Participant's Excess Elective Deferral Contributions for the taxable
year, and the denominator of which is equal to the sum of the Participant's
Account balance attributable to Elective Deferral Contributions as of the
beginning of the taxable year plus the Participant's Elective Deferral
Contributions for the taxable year. Income for the gap period (the period from
the end of the taxable year to the date of distribution) shall not be allocated
to Excess Elective Deferral Contributions.
(c) Matching Contributions, as defined in Section 1.35, that
are attributable to Excess Elective Deferral Contributions shall be forfeited,
and as such, shall be applied to reduce Employer contributions or pay Plan
expenses.
4C.3 Excess Annual Additions. If, pursuant to Section 4B.4 or as a
result of the allocation of Forfeitures, there are Excess Annual Additions, the
excess will be disposed of using any of the following methods:
(a) Employee Contributions or Elective Deferral
Contributions or both, to the extent they would reduce the Excess Annual
Additions, will be returned to the Participant. The
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Contributions returned in accordance with the preceding shall include any gains
or losses attributable to such Contributions.
Employee Contributions so returned will be disregarded
with respect to the ACP test. Elective Deferral Contributions so returned will
be disregarded with respect to the Elective Deferral limitation described in
Section 2C.1(j)(4) of the Plan and the ADP test.
(b) If, after the application of paragraph (a), Excess
Annual Additions still exist and the Participant is covered by the Plan at the
end of the Limitation Year, the Excess Annual Additions in the Participant's
Account, other than Employee Contributions and Elective Deferral Contributions,
will be used to reduce Employer contributions (including any allocation of
Forfeitures) for such Participant in the next Limitation Year, and each
succeeding Limitation Year, if necessary.
(c) If, after the application of paragraph (a), Excess
Annual Additions still exist and the Participant is not covered by the Plan at
the end of a Limitation Year, the Excess Annual Additions will be held
unallocated in a suspense account. The suspense account will be applied to
reduce future Employer contributions (including allocation of any Forfeiture)
for all remaining Participants in the next Limitation Year, and each succeeding
Limitation Year if necessary.
(d) If a suspense account is in existence at any time during
the Limitation Year pursuant to this Section, it will not participate in the
allocation of the Trust or Insurance Company's gains and losses. If a suspense
account is in existence at any time during a particular Limitation Year, all
amounts in the suspense account must be allocated and reallocated to the
Participants' Account before any Employer or Employee Contributions may be made
to the Plan for that Limitation Year. Except as provided in Section 4C.3(a),
Excess Annual Additions may not be distributed to Participants or former
Participants.
4C.4 Excess Contributions.
(a) Notwithstanding any other provision of this Plan, Excess
Contributions, plus any income and minus any loss allocable thereto, shall be
distributed no later than the last day of each Plan Year to Participants to
whose Participants' Accounts such Excess Contributions were allocated for the
preceding Plan Year. If such excess amounts are distributed more than 2-1/2
months after the last day of the Plan Year in which such excess amounts arose, a
ten percent excise tax will be imposed on the Employer maintaining the Plan with
respect to such amounts.
Such distributions shall be made to Highly Compensated
Employees on the basis of the respective portions of the Excess Contributions
attributable to each of such Employees.
The distribution of Excess Contributions made to the
family members of a family group that was combined for purposes of determining a
Highly Compensated Employee's Actual Deferral Ratio shall be allocated among the
family members in proportion to the Deferral Percentage Amounts (including any
amounts required to be taken into account under Sections
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4A.3(a) and (b) of the Plan) of each family member that is combined to determine
the Actual Deferral Ratio.
(b) Excess Contributions shall be treated as Annual
Additions, as defined in Section 4B.1, under the Plan in the Limitation Year in
which they arose.
(c) Excess Contributions shall be adjusted for any income or
loss for the Plan Year. The income or loss allocable to Excess Contributions is
an amount determined by multiplying the sum of the income or loss allocable to
the Participant's Account for Deferral Percentage Amounts for the Plan Year, by
a fraction, the numerator of which is such Participant's Excess Contributions
for the Plan Year and the denominator of which is equal to the sum of the
Participant's Account balance attributable to Deferral Percentage Amounts as of
the beginning of the Plan Year plus the Participant's Deferral Percentage
Amounts for the Plan Year. Income for the gap period (the period from the end of
the Plan Year to the date of distribution) shall not be allocated to Excess
Contributions.
(d) Excess Contributions shall be distributed from the
Participant's Account for Elective Contributions and Qualified Matching
Contributions (if applicable) in proportion to the Participant's Elective
Deferral Contributions and Qualified Matching Contributions (to the extent used
in the ADP test) for the Plan Year. Excess Contributions shall be distributed
from the Participant's Qualified Nonelective Contribution Account only to the
extent that such Excess Contributions exceed the balance in the Participant's
Account for Elective Contributions and Qualified Matching Contributions.
(e) Matching Contributions, as defined in Section 1.35, that
are attributable to Excess Contributions, shall be forfeited, and as such, shall
be applied to reduce Employer contributions or pay Plan expenses.
4C.5 Excess Aggregate Contributions.
(a) Notwithstanding any other provision of this Plan, Excess
Aggregate Contributions, plus any income and minus any loss allocable thereto,
shall be forfeited, if forfeitable, or if not forfeitable, distributed no later
than the last day of each Plan Year to Participants to whose Participants'
Accounts such Excess Aggregate Contributions were allocated for the preceding
Plan Year. If such Excess Aggregate Contributions are distributed more than
2-1/2 months after the last day of the Plan Year in which such excess amounts
arose, a ten percent excise tax will be imposed on the Employer maintaining the
Plan with respect to those amounts.
The distribution of Excess Aggregate Contributions made
to the family members of a family group that was combined for purposes of
determining a Highly Compensated Employee's Actual Contribution Ratio shall be
allocated among the family members in proportion to the Contribution Percentage
Amounts (including any amounts required to be taken into account under Sections
4A.5(a) and (b) of the Plan) of each family member that is combined to determine
the Actual Contribution Ratio.
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(b) Excess Aggregate Contributions shall be treated as
Annual Additions, as defined in Section 4B.1, in the Limitation Year in which
they arose.
(c) Excess Aggregate Contributions shall be adjusted for any
income or loss for the Plan Year. The income or loss allocable to Excess
Aggregate Contributions is an amount determined by multiplying the sum of the
income or loss allocable to the Participant's Account for Contribution
Percentage Amounts for the Plan Year by a fraction, the numerator of which is
such Participant's Excess Aggregate Contributions for the Plan Year, and the
denominator of which is equal to the sum of the Participant's Account balance
attributable to Contribution Percentage Amounts as of the beginning of the Plan
Year plus the Participant's Contribution Percentage Amounts for the Plan Year.
Income for the gap period (the period from the end of the Plan Year to the date
of distribution) shall not be allocated to Excess Aggregate Contributions.
(d) Excess Aggregate Contributions shall be forfeited, if
forfeitable, or distributed on a pro-rata basis from the Participant's Account
for Employee Contributions, Matching Contributions, and Qualified Matching
Contributions (and, if applicable, the Participant's Qualified Nonelective
Contributions or Elective Deferral Contributions, or both).
(e) Forfeitures of Excess Aggregate Contributions shall be
applied to reduce Employer contributions or pay Plan expenses.
(f) Matching Contributions as defined in Section 1.35 that
are attributable to Excess Aggregate Contributions shall be forfeited, and as
such, shall be applied to reduce Employer contributions or pay Plan expenses.
ARTICLE V - PARTICIPANT PROVISIONS
5A. ANNUITY CONTRACT AND PARTICIPANT'S ACCOUNT
5A.1 Participant's Account. A Participant's Account shall be
maintained on behalf of each Participant until such Account is distributed in
accordance with the terms of this Plan.
Each Participant shall have the exclusive authority to direct
the investment of Employee Contributions, Elective Deferral Contributions, QVEC
Contributions and Rollover Contributions, if applicable, from among the
investment options selected by the Employer.
If selected by the Employer in its Adoption Agreement, the
Participant, Beneficiary and/or Alternate Payee additionally shall have the
exclusive authority to direct the investment of contributions made by the
Employer from among the investment choices selected by the Employer.
5A.2 Investment Transfers. Each Participant, Beneficiary, and/or
Alternate Payee shall have the exclusive authority to direct the transfer of
amounts between the investment funds designated by the Employer attributable to
his Employee Contributions, Elective Deferral Contributions, QVEC Contributions
and Rollover Contributions, if applicable.
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If the Employer selects in its Adoption Agreement to grant the
Participant exclusive authority to direct the investment of contributions made
by the Employer, the Participant, Beneficiary, and/or Alternate Payee shall also
have the exclusive authority to transfer contributions made by the Employer from
among the investment choices selected by the Employer.
The transfer of amounts between investment funds shall be
subject to the rules of the investment funds in which the Participant's Account
is invested or is to be invested.
The Plan Administrator or the Participant, Beneficiary, and/or
Alternate Payee as the case may be, may change such amounts as often as the Plan
Administrator may allow in accordance with the terms of the investment funds in
which the Participant's Account is being invested.
The ability of a Participant who is subject to the reporting
requirements of section 16(a) of the Securities and Exchange Act of 1934 (the
"Act") to make withdrawals or investment changes involving the Participant's
Employer Stock Account may be restricted by the Plan Administrator to comply
with rules under section 16(b) of the Act.
5A.3 Participant's Account Valuation. A Participant's Account shall
be maintained on behalf of each Participant until such Account is distributed in
accordance with the terms of this Plan. At least once per year, as of the last
day of the Plan Year, each Participant's Account shall be adjusted, in the ratio
that the Participant's Account balance bears to all account balances invested
into the same investment vehicle, for any earnings, gains, losses,
contributions, withdrawals, expenses, and loans attributable to such Plan Year,
in order to obtain a new valuation of the Participant's Account. The assets of
the Plan will be valued annually at fair market value as of the last day of each
Plan Year.
5B. LIFE INSURANCE POLICIES
5B.1 Optional Purchase of Life Insurance. If the Employer in its
Adoption Agreement shall permit the purchase of life insurance on the lives of
some or all Participants hereunder, each eligible Participant may elect that a
portion of the Contribution made on his behalf shall be applied to the purchase
of a Life Insurance Policy or Policies on his life. The application for each
Policy shall be signed by the Participant and by the Trustee and shall conform
to the requirements of the Insurance Company, including any requested evidence
of insurability, and the requirements of this Section. All Life Insurance
Policies shall be issued so as to permit a common billing date. Any Policy on
the life of a Participant who can qualify for waiver of premium thereunder and
participant account contribution disability benefits thereunder may include such
benefits if applied for by the Participant. The Plan Administrator may adopt
reasonable rules regarding the purchase of Life Insurance Policies provided such
rules are administered in a consistent and nondiscriminatory manner. No
application shall be made hereunder for any Life Insurance Policy on the life of
a Participant acceptable to the Insurance Company at standard premium rates for
a face amount of less that $1,000 for the first, or any additional Policy issued
on the Participant's life.
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5B.2 Premiums on Life Insurance Policies. The premiums on all Life
Insurance Policies on the life of a Participant shall be paid from the portion
of his Participant's Account attributable to contributions made by the Employer,
to the extent sufficient therefor, otherwise in one of the following manners:
(a) By a loan against the Participant's Policy or Policies,
under the automatic premium loan provision thereof, or
(b) By payment out of his Participant's Account.
If the Participant is not acceptable to the Insurance Company as
a standard risk at standard rates, a Policy with the same premium but a lesser
death benefit may be purchased.
5B.3 Limitations on Premiums. In no case shall the cumulative total
premiums paid on all Policies held on the life of a Participant hereunder exceed
an amount equal to the applicable percentage set forth below of all
Contributions (other than Employee Contributions) and Forfeitures theretofore
allocated or currently due on his behalf:
(a) 49% in the case of ordinary life insurance or similar
policies.
(b) 25% in the case of term insurance policies or a
combination of policies, with premiums on ordinary life insurance or similar
policies being given half weight.
If such cumulative total premiums would otherwise exceed this
amount, the necessary steps to avoid this result shall be taken by reduction of
the Participant's life insurance coverage by changing all or a portion of his
coverage to paid-up life insurance or by selling the excess portion to the
Participant.
5B.4 Disposal. A Participant who no longer wishes to have any part of
his allocable share of Contributions used to pay the premiums for any Life
Insurance Policy or Policies may withdraw a prior election by written notice to
the Trustee to that effect. Any Policy shall be disposed of in accordance with
its provisions as the Trustee shall direct.
5B.5 Rights under Policies. Each Policy shall provide that the
Trustee shall have the right to receive any or all payments that may be due
during the Participant's lifetime. Any death benefit shall be payable directly
to the Beneficiary named in the Policy and the Participant shall have the right,
subject to the terms of Section 3C, either directly or through the Trustee, to
change the Beneficiary from time to time and to elect settlement options under
the policy for the benefit of the Beneficiary. The Trustee shall have the right
to exercise all other options and privileges contained in the policy and shall
exercise such rights and privileges in a manner consistent with the terms of the
Plan.
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5B.6 Loans. No loans shall be made against any of the Policies
hereunder either from the Insurance Company or any other source unless such
loans are made in order to pay amounts then due as premiums thereon.
5B.7 Conditions of Coverage. Except as may be otherwise provided in
any conditional or binding receipt issued by the Insurance Company, there shall
be no coverage and no death benefit payable under any Policy to be purchased
from the Insurance Company until such Policy shall have been delivered and the
premium therefor shall have been paid to the Insurance Company as a premium for
that Policy. Neither the Employer nor the Trustee shall have any responsibility
as to the effectiveness of any Life Insurance Policy purchased from the
Insurance Company hereunder nor be under any liability or obligation to pay any
amount to any Participant or his Beneficiary by reason of any failure or refusal
by the Insurance Company to make such payment.
5B.8 Policy Not Yet in Force. If at the death of any Participant, the
Trustee shall be holding any amount intended for the purchase of any Life
Insurance Policy on the Participant's life, but coverage under such Policy shall
not yet be in force, the Trustee shall credit such amount to the Participant's
Account to be disposed of as a portion thereof.
5B.9 Value of Policy. The value of any Policy on the life of a living
Participant for any purpose under this Plan shall be that amount which the
Insurance Company would pay upon surrender of such Policy in accordance with its
usual rules and practices.
5B.10 Dividends. If dividends are allowed on any Life Insurance
Policy, they shall be used to provide additional benefits under the Policy.
5B.11 Distribution. No life insurance protection shall continue in
force under the Plan subsequent to a Participant's retirement or Termination of
Employment, whichever occurs first. As of such date, any Life Insurance Policy
shall be distributed to the Participant in accordance with its terms and the
terms of Section 3C.3.
5B.12 Application. The Trustee, if the Plan is trusteed, or custodian,
if the Plan has a custodial account, shall apply for and will be the owner of
any Life Insurance Policy purchased under the terms of this Plan. The Life
Insurance Policy(ies) must provide that proceeds will be payable to the Trustee
(or custodian, if applicable). However, the Trustee (or custodian) shall be
required to pay over all proceeds of the Life Insurance Policy(ies) to the
Participant's designated Beneficiary in accordance with the distribution
provisions of this Plan. A Participant's Spouse will be the designated
Beneficiary of the proceeds in all circumstances unless a Qualified Election has
been made in accordance with Section 3C.2(c), Joint and Survivor Annuity
Requirements, if applicable. Under no circumstances shall the Trust (or
custodial account) retain any part of the proceeds.
In the event of any conflict between the provisions of this Plan
and any Life Insurance Policies or annuity contracts issued pursuant to the
Plan, the Plan provisions shall control.
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5C. LOANS
5C.1 Loans to Participants. If the Employer has specified in its
Adoption Agreement that loans are permitted, then the Plan Administrator may
make a bona fide loan to a Participant, in an amount which, when added to the
outstanding balance of all other loans to the Participant from all qualified
plans of the Employer, does not exceed the lesser of $50,000 reduced by the
excess of the Participant's highest outstanding loan balance during the 12
months preceding the date on which the loan is made over the outstanding loan
balance on the date the new loan is made, or 50% of the Participant's Vested
Interest in his Participant's Account excluding amounts attributable to QVEC
Contributions. Notwithstanding any provision in this paragraph to the contrary,
loans may not exceed a Participant's Vested Interest attributable to such
contributions.
In the event of default, foreclosure on the note and attachment
of security will not occur until a distributable event occurs in the Plan.
No loans will be made to any Shareholder-Employee or
Owner-Employee or to family members of Shareholder-Employees or Owner-Employees,
as defined in Code section 267(c)(4).
The loan shall be made under such terms, security interest, and
conditions as the Plan Administrator deems appropriate, provided, however, that:
(a) Loans shall be made available to all Participants and
parties-in-interest (as defined in ERISA and including Employees and
Beneficiaries), on a reasonably equivalent basis.
(b) Loans shall not be made available to Highly Compensated
Employees on a basis greater than the basis made available to other Employees.
(c) Loans must bear a reasonable rate of interest.
(d) Loans are adequately secured.
(e) Unless the provisions of Section 3C.6 apply to a
Participant, loans may be made only after a Participant obtains the consent of
his Spouse, if any, to use his Participant's Account as security for the loan.
Spousal consent shall be obtained no earlier than the beginning of the 90-day
period that ends on the date on which the loan is to be so secured. The consent
must be in writing, must acknowledge the effect of the loan, and must be
witnessed by a Plan representative or notary public. Such consent shall
thereafter be binding with respect to the consenting Spouse or any subsequent
Spouse with respect to that loan. A new consent shall be required if the
Participant's Account is used for renegotiation, extension, renewal or other
revision of the loan.
(f) Loans must be made in accordance with and subject to all
of the provisions of this Section SC.
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If a valid spousal consent has been obtained in
accordance with (e), then, notwithstanding any other provision of this Plan, the
portion of the Participant's Vested Interest used as a security interest held by
the Plan by reason of a loan outstanding to the Participant shall be taken into
account for purposes of determining the amount of the account balance payable at
the time of death or distribution, but only if the reduction is used as
repayment of the loan. If less than 100% of the Participant's Vested Interest in
his Participant's Account (determined without regard to the preceding sentence)
is payable to the surviving Spouse, then the Participant's Account shall be
adjusted by first reducing the Vested Interest by the amount of the security
used as repayment of the loan, and then determining the benefit payable to the
surviving Spouse.
5C.2 Loan Procedures. The Plan Administrator shall establish a
written set of procedures, set forth in the summary plan description or any
other established set of procedures, which becomes a part of such Plan by which
all loans will be administered. Such rules, which are incorporated herein by
reference, will include, but not be limited to the following:
(a) The person or persons authorized to administer the loan
program, identified by name or position;
(b) The loan application procedure;
(c) The basis for approving or denying loans;
(d) Any limits on the types of loans permitted;
(e) The procedure for determining a "reasonable" interest
rate;
(f) Acceptable collateral;
(g) Default conditions; and
(h) Steps which will be taken to preserve Plan assets in the
event of default.
5D. PARTICIPANTS' RIGHTS
5D.1 General Rights of Participants and Beneficiaries. The Plan is
established and the Plan or Trust assets are held for the exclusive purpose of
providing benefits for such Employees and their Beneficiaries as have qualified
to participate under the terms of the Plan.
5D.2 Filing a Claim for Benefits. A Participant or Beneficiary, or
the Employer acting in his behalf, shall notify the Plan Administrator of a
claim of benefits under the Plan. Such request shall be in writing to the Plan
Administrator and shall set forth the basis of such claim and shall authorize
the Plan Administrator to conduct such examinations as may be necessary to
determine the validity of the claim and to take such steps as may be necessary
to facilitate the payment of any benefits to which the Participant or
Beneficiary may be entitled under the terms of the Plan.
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5D.3 Denial of Claim. Whenever a claim for benefits by any
Participant or Beneficiary has been denied by a Plan Administrator, a written
notice, prepared in a manner calculated to be understood by the Participant,
must be provided, setting forth (1) the specific reasons for the denial; (2) the
specific reference to pertinent Plan provisions on which the denial is based;
(3) a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary; and (4) an explanation of the Plan's claim review
procedure.
5D.4 Remedies Available to Participants. A Participant or Beneficiary
(1) may request a review by a Named Fiduciary, other than the Plan
Administrator, upon written application to the Plan; (2) may review pertinent
Plan documents; and (3) may submit issues and comments in writing to a Named
Fiduciary. A Participant or Beneficiary shall have 60 days after receipt by the
claimant of written notification of a denial of a claim to request a review of a
denied claim.
A decision by a Named Fiduciary shall be made promptly and not
later than 60 days after the Named Fiduciary's receipt of a request for review,
unless special circumstances require an extension of the time for processing in
which case a decision shall be rendered as soon as possible, but not later than
120 days after receipt of a request for review. The decision on review by a
Named Fiduciary shall be in writing and shall include specific reasons for the
decision, written in a manner calculated to be understood by the claimant, and
specific references to the pertinent Plan provisions on which the decision is
based.
A Participant or Beneficiary shall be entitled, either in his
own name or in conjunction with any other interested parties, to bring such
actions in law or equity or to undertake such administrative actions or to seek
such relief as may be necessary or appropriate to compel the disclosure of any
required information, to enforce or protect his rights, to recover present
benefits due to him or to clarify his rights to future benefits under the Plan.
5D.5 Limitation of Rights. Participation hereunder shall not grant
any Participant the right to be retained in the Service of the Employer or any
other rights or interest in the Plan or Trust fund other than those specifically
herein set forth.
5D.6 100% Vested Contributions. Each Participant, regardless of his
length of Service with the Employer, shall be fully vested (100%) at all times
in any portion of his Participant's Account attributable to the following
contributions, as applicable:
(a) Employee Contributions and earnings thereon;
(b) Elective Deferral Contributions and earnings thereon;
(c) Qualified Matching Contributions and earnings thereon;
(d) Qualified Nonelective Contributions and earnings
thereon;
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(e) Rollover Contributions and earnings thereon;
(f) QVEC Contributions and earnings thereon.
5D.7 Reinstatement of Benefit. In the event any portion of a benefit
which is payable to a Participant or a Beneficiary shall remain unpaid on
account of the inability of the Plan Administrator, after diligent effort, to
locate such Participant or Beneficiary, the amount so distributable shall be
treated as a Forfeiture under Section 3D. If a claim is made by the Participant
or Beneficiary for any benefit forfeited under this Section, such benefit must
be reinstated by the Employer.
5D.8 Non-Alienation. It is a condition of the Plan, and all rights of
each Participant shall be subject thereto, that no right or interest of any
Participant in the Plan shall be assignable or transferable in whole or in part,
either directly or by operation of law or otherwise, including, but without
limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in
any other manner, and no right or interest of any Participant in the Plan shall
be liable for or subject to any obligation or liability of such Participant. The
preceding sentence shall not preclude the enforcement of a federal tax levy made
pursuant to Code section 6331 or the collection by the United States on a
judgement resulting from an unpaid tax assessment.
The preceding paragraph shall also apply to the creation,
assignment, or recognition of a right to any benefit payable with respect to a
Participant pursuant to a domestic relations order, unless such order is
determined to be a QDRO. A domestic relations order entered before January 1,
1985 will be treated as a QDRO if payment of benefits pursuant to the order has
commenced as of such date, and may be treated as a QDRO if payment of benefits
has not commenced as of such date, even though the order does not satisfy the
requirements of Code section 414(p).
ARTICLE VI - OVERSEER PROVISIONS
6A. FIDUCIARY DUTIES AND RESPONSIBILITIES
6A.1 General Fiduciary Standard of Conduct. Each Fiduciary of the
Plan shall discharge his duties hereunder solely in the interest of the
Participants and their Beneficiaries and for the exclusive purpose of providing
benefits to Participants and their Beneficiaries and defraying reasonable
expenses of administering the Plan. Each Fiduciary shall act with the care,
skill, prudence and diligence under the circumstances that a prudent man acting
in a like capacity and familiar with such matters would use in conducting an
enterprise of like character and with like aims, in accordance with the
documents and instruments governing this Plan, insofar as such documents and
instruments are consistent with this standard.
6A.2 Service in Multiple Capacities. Any Person or group of Persons
may serve in more than one Fiduciary capacity with respect to this Plan,
specifically including service both as Trustee and Plan Administrator.
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6A.3 Limitations on Fiduciary Liability. Nothing in this Plan shall
be construed to prevent any Fiduciary from receiving any benefit to which he may
be entitled as a Participant or Beneficiary in this Plan, so long as the benefit
is computed and paid on a basis which is consistent with the terms of this Plan
as applied to all other Participants and Beneficiaries. Nor shall this Plan be
interpreted to prevent any Fiduciary from receiving any reasonable compensation
for services rendered, or for the reimbursement of expenses properly and
actually incurred in the performance of his duties with the Plan; except that no
Person so serving who already receives full-time pay from an Employer shall
receive compensation from this Plan, except for reimbursement of expenses
properly and actually incurred.
6A.4 Investment Manager. If an Investment Manager has been appointed
pursuant to Section 6B.7 of this Plan, he is required to acknowledge in writing
that he has undertaken a Fiduciary responsibility with respect to the Plan. The
Insurance Company's liability as a Fiduciary is limited to that arising from its
management of any assets of the Plan held by the Insurance Company in its
separate accounts.
6B. THE PLAN ADMINISTRATOR
6B.1 Designation and Acceptance. The Employer shall designate a
Person or Persons to serve as Plan Administrator under the Plan and such
Persons, by joining in the execution of the Adoption Agreement, accepts such
appointment and agrees to act in accordance with the terms of the Plan.
6B.2 Duties and Responsibility. The Plan Administrator shall
administer the Plan for the exclusive benefit of the Participants and their
Beneficiaries in a nondiscriminatory manner subject to the specific terms of the
Plan. The Plan Administrator shall perform all such duties as are necessary to
operate, administer, and manage the Plan in accordance with the terms thereof.
This shall include notification to the Insurance Company of any adjustment made
to a Participant's Account as a result of Excess Annual Additions as defined in
Section 4C.1(b).
The Plan Administrator shall comply with the regulatory
provisions of ERISA and shall furnish to each Participant (a) a summary plan
description, (b) upon written request, a statement of his total benefits accrued
and his vested benefits if any and (c) the information necessary to elect the
benefits available under the Plan. The Plan Administrator shall also file the
appropriate annual reports and any other data which may be required by
appropriate regulatory agencies.
Furthermore, the Plan Administrator shall take the necessary
steps to notify the appropriate interested parties whenever an application is
made to the Secretary of the Treasury for a determination letter in accordance
with Code section 7476 as amended.
6B.3 Special Duties. If the Employer that adopts this Plan is not the
Plan Administrator, and the Plan provides for either Employee Contributions or
Matching Contributions to be made, the Plan Administrator shall:
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(a) Maintain records that enable it to monitor the adopting
Employer's compliance with the requirements of Code section 401(m);
(b) Perform the ACP test, as described in Section 4A.4, for
the Employer on an annual basis; and
(c) Notify the Employer if it is required to correct Excess
Aggregate Contributions.
6B.4 Expenses and Compensation. The expenses necessary to administer
the Plan shall be taken from Participants' Accounts unless paid by the Employer,
including but not limited to those involved in retaining necessary professional
assistance from an attorney, an accountant, an actuary, or an investment
advisor. Nothing shall prevent the Plan Administrator from receiving reasonable
compensation for services rendered in administering this Plan, provided the Plan
Administrator is not a full-time Employee of any Employer adopting this Plan.
6B.5 Information from Employer. To enable the Plan Administrator to
perform his functions, the Employer shall supply full and timely information to
the Plan Administrator on all matters relating to this Plan as the Plan
Administrator may require.
6B.6 Administrative Committee; Multiple Signatures. In the event that
more than one Person has been duly nominated to serve on the Administrative
Committee and has signified in writing the acceptance of such designation, the
signature(s) of one or more Persons may be accepted by an interested party as
conclusive evidence that the Administrative Committee has duly authorized the
action therein set forth and as representing the will of and binding upon the
whole Administrative Committee. No Person receiving such documents or written
instructions and acting in good faith and in reliance thereon shall be obliged
to ascertain the validity of such action under the terms of this Plan. The
Administrative Committee shall act by a majority of its members at the time in
office, and such action may be taken either by a vote at a meeting or in writing
without a meeting.
6B.7 Resignation and Removal; Appointment of Successor. The Plan
Administrator, or any member of the Administrative Committee, may resign at any
time by delivering to the Employer a written notice of resignation, to take
effect at a date specified therein, which shall not be less than 30 days after
the delivery thereof, unless such notice shall be waived.
The Plan Administrator may be removed with or without cause by
the Employer by delivery of written notice of removal, to take effect at a date
specified therein, which shall be not less than thirty (30) days after delivery
thereof, unless such notice shall be waived.
The Employer, upon receipt of or giving notice of the
resignation or removal of the Plan Administrator, shall promptly designate a
successor Plan Administrator who must signify acceptance of this position in
writing. In the event no successor is appointed, the Board of Directors of the
Employer will function as the Administrative Committee until a new Plan
Administrator has been appointed and has accepted such appointment.
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6B.8 Investment Manager. The Plan Administrator may appoint, in
writing, an Investment Manager or Managers to whom is delegated the authority to
manage, acquire, invest or dispose of all or any part of the Plan or Trust
assets. With regard to the assets entrusted to his care, the Investment Manager
shall provide written instructions and directions to the Employer or Trustee, as
applicable, who shall in turn be entitled to rely upon such written direction.
This appointment and delegation shall be evidenced by a signed written
agreement.
6B.9 Delegation of Duties. The Plan Administrator shall have the
power, to the extent permitted by law, to delegate the performance of such
Fiduciary and non-Fiduciary duties, responsibilities and functions as the Plan
Administrator shall deem advisable for the proper management and administration
of the Plan in the best interests of the Participants and their Beneficiaries.
6C. TRUST AGREEMENT
This agreement entered into by and among the Employer, the Plan Administrator
and the Trustee pursuant to the Adoption Agreement completed and signed by the
Employer, the Plan Administrator and Trustee, hereby establishes the Trust with
the following provisions to form a part of and implement the provisions of the
Plan:
6C.1 Creation and Acceptance of Trust. The Trustee, by joining in the
execution of the Adoption Agreement, accepts the Trust hereby created and agrees
to act in accordance with the express terms and conditions herein stated.
6C.2 Trustee Capacity; Co-Trustees. The Trustee may be a Bank, Trust
Company or other corporation possessing trust powers under applicable State or
Federal law or one or more individuals or any combination thereof.
When two or more persons serve as Trustee, they are specifically
authorized, by a written agreement between themselves, to allocate specific
responsibilities, obligations or duties among themselves. An original copy of
such written agreement is to be delivered to the Plan Administrator.
6C.3 Resignation and Removal; Appointment of Successor Trustee. Any
Trustee may resign at any time by delivering to the Plan Administrator a written
notice of resignation, to take effect at a date specified therein, which shall
not be less than 30 days after the delivery thereof, unless such notice shall be
waived.
The Trustee may be removed with or without cause by the Board of
Directors by delivery of a written notice of removal, to take effect at a date
specified therein, which shall not be less than 30 days after delivery thereof,
unless such notice shall be waived.
In the case of the resignation or removal of a Trustee, the
Trustee shall have the right to a settlement of its account, which may be made,
at the option of the Trustee, either (1) by judicial
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settlement in an action instituted by the Trustee in a court of competent
jurisdiction, or (2) by written agreement of settlement between the Trustee and
the Plan Administrator.
Upon such settlement, all right, title and interest of such
Trustee in the assets of the Trust and all rights and privileges under this
Agreement theretofore vested in such Trustee shall vest in the successor
Trustee, and thereupon all future liability of such Trustee shall terminate;
provided, however, that the Trustee shall execute, acknowledge and deliver all
documents and written instruments which are necessary to transfer and convey the
right, title and interest in the Trust assets, and all rights and privileges to
the successor Trustee.
The Board of Directors, upon receipt of notice of the
resignation or removal of the Trustee, shall promptly designate a successor
Trustee, whose appointment is subject to acceptance of this Trust in writing and
shall notify the Insurance Company in writing of such successor Trustee.
6C.4 Taxes, Expenses and Compensation of Trustee. The Trustee shall
deduct from and charge against the Trust fund any taxes paid by it which may be
imposed upon the Trust fund or the income thereof or which the Trustee is
required to pay with respect to the interest of any person therein.
The Employer shall pay the Trustee annually its expenses in
administering the Trust and a reasonable compensation for its service as Trustee
hereunder if the Trustee is not an Employee of the Plan, at a rate to be agreed
upon from time to time. The reasonable compensation shall include that for any
extraordinary services.
6C.5 Trustee Entitled to Consultation. The Trustee shall be entitled
to advice of counsel, which may be counsel for the Plan or the Employer, in any
case in which the Trustee shall deem such advice necessary. With the exception
of those powers and duties specifically allocated to the Trustee by the express
terms of this Plan, it shall not be the responsibility of the Trustee to
interpret the terms of the Plan or Trust and the Trustee may request, and is
entitled to receive guidance and written direction from the Plan Administrator
on any point requiring construction or interpretation of the Plan documents.
6C.6 Rights, Powers and Duties of Trustee. The Trustee shall have the
following rights, powers, and duties:
(a) The Trustee shall be responsible for the safekeeping and
administering of the assets of this Plan and Trust in accordance with the
provisions of this Agreement and any amendments thereto. The duties of the
Trustee under this Agreement shall be determined solely by the express
provisions of this Agreement and no other further duties or responsibilities
shall be implied. Subject to the terms of this Plan and Trust, the Trustee shall
be fully protected and shall incur no liability in acting in, reliance upon the
written instructions or directions of the Plan Administrator or a duly
designated Investment Manager or any other Named Fiduciary.
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(b) The Trustee shall have all powers necessary or
convenient for the orderly and efficient performance of its duties hereunder,
including but not limited to those specified in this Section. The Trustee may
appoint one or more administrative agents or contract for the performance of
such administrative and service functions as it may deem necessary for the
effective installation and operation of the Plan and Trust.
(c) The Trustee shall have the power to collect and receive
any and all monies and other property due hereunder and to give full discharge
and acquittance therefor; to settle, compromise or submit to arbitration any
claims, debts or damages due or owing to or from the Trust; to commence or
defend suits or legal proceedings wherever, in its judgment, any interest of the
Trust requires it; and to represent the Trust in all suits or legal proceedings
in any court of law or equity or before any other body or tribunal. It shall
have the power generally to do all acts, whether or not expressly authorized,
which the Trustee in the exercise of its Fiduciary responsibility may deem
necessary or desirable for the protection of the Trust and the assets thereof.
(d) The Trustee shall make application to the Insurance
Company for the Annuity Contract required hereunder and shall take all necessary
steps to obtain any Life Insurance Policies elected on the lives of Participants
hereunder. In applying for the Annuity Contract, the Trustee may indicate that,
unless it directs the Insurance Company otherwise, it shall be entitled to
receive all cash payments for further distribution to Participants and
Beneficiaries.
(e) The Trustee may temporarily hold cash balances and shall
be entitled to deposit any such funds received in a bank account or bank
accounts in the name of the Trust in any bank or banks selected by the Trustee,
including the banking department of the Trustee, pending disposition of such
funds in accordance with the Trust. Any such deposit may be made with or without
interest.
(f) The Trustee shall obtain and deal with any Life
Insurance Policies or other assets of this Trust held or received under this
Plan only in accordance with the written directions from the Plan Administrator.
The Trustee shall be under no duty to determine any facts or the propriety of
any action taken or omitted by it in good faith pursuant to instructions from
the Plan Administrator.
(g) All contributions made to the Trust fund under this Plan
shall be paid by the Trustee to the Insurance Company under the Annuity Contract
within 30 days after the date such contributions were due under the Plan.
However, in lieu of holding any contributions made to the Trust fund, the
Trustee may direct that all such contributions be made directly to the Insurance
Company under the Annuity Contract or any Life Insurance Policy. The Employer
shall keep the Trustee informed of all contributions made directly to the
Insurance Company in accordance with the Trustee's instructions.
(h) If the whole or any part of the Trust shall become
liable for the payment of any estate, inheritance, income or other tax which the
Trustee shall be required to pay, the Trustee shall have full power and
authority to pay such tax out of, any monies or other property in its hands for
the
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account of the person whose interest hereunder is so liable. Prior to making any
payment, the Trustee may require such releases or other documents from any
lawful taxing authority as it shall deem necessary. The Trustee shall not be
liable for any nonpayment of tax when it distributes an interest hereunder on
instructions from the Plan Administrator.
(i) The Trustee shall keep a full, accurate and detailed
record of all transactions of the Trust which the Plan Administrator shall have
the right to examine at any time during the Trustee's regular business hours.
Following the close of the fiscal year of the Trust, or as soon as practical
thereafter, the Trustee shall furnish the Plan Administrator with a statement of
account. This account shall set forth all receipts, disbursements and other
transactions effected by the Trustee during said year.
The Plan Administrator shall promptly notify the Trustee
in writing of its approval or disapproval of the account. The Plan
Administrator's failure to disapprove the account within 60 days after receipt
shall be considered an approval. The approval by the Plan Administrator shall be
binding as to all matters embraced in any statement to the same extent as if the
account of the Trustee had been settled by judgment or decree of a court of
competent jurisdiction under which the Trustee, Plan Administrator, Employer and
all persons having or claiming any interest in the Trust were parties; provided,
however, that the Trustee may have its account judicially settled if it so
desires.
(j) If, at any time, there shall be a dispute as to the
person to whom payment or delivery of monies or property should be made by the
Trustee, or regarding any action to be taken by the Trustee, the Trustee may
postpone such payment, delivery or action, retaining the funds or property
involved, until such dispute shall have been resolved in a court of competent
jurisdiction or the Trustee shall have been indemnified to its satisfaction or
until it has received written direction from the Plan Administrator.
(k) Anything in this instrument to the contrary
notwithstanding, it shall be understood that the Trustee shall have no duty or
responsibility with respect to the determination of matters pertaining to the
eligibility of any Employee to become or remain a Participant hereunder, the
amount of benefit to which any Participant or Beneficiary shall be entitled
hereunder, all such responsibilities being vested in the Plan Administrator. The
Trustee shall have no duty to collect any contribution from the Employer and
shall not be concerned with the amount of any contribution nor the application
of any contribution formula.
6C.7 Evidence of Trustee Action. In the event that the Trustee
comprises two or more Trustees, then those Trustees may designate one such
Trustee to transmit all decisions of the Trustee and to sign all necessary
notices and other reports on behalf of the Trustee. All notices and other
reports bearing the signature of the individual Trustee so designated shall be
deemed to bear the signatures of all the individual Trustees and all parties
dealing with the Trustee are entitled to rely on any such notices and other
reports as authentic and as representing the action of the Trustee.
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6C.8 Investment Policy. This Plan has been established for the sole
purpose of providing benefits to the Participants and their Beneficiaries. In
determining its investments hereunder, the Trustee shall take account of the
advice provided by the Plan Administrator as to funding policy and the short and
long-range needs of the Plan based on the evident and probable requirements of
the Plan as to the time benefits shall be payable and the requirements therefor.
6C.9 Period of the Trust. If it shall be determined that the
applicable State law requires a limitation on the period during which the
Employer's Trust shall continue, then such Trust shall not continue for a period
longer than 21 years following the death of the last of those Participants
including future Participants who are living at the Effective Date hereof. At
least 180 days prior to the end of the twenty-first year as described in the
first sentence of this Section the Employer, the Plan Administrator and the
Trustee shall provide for the establishment of a successor trust and transfer of
Plan assets to the Trustee. If applicable State law requires no such limitation,
then this Section shall not be operative.
6D. THE INSURANCE COMPANY
6D.1 Duties and Responsibilities. The Insurance Company shall issue
the Annuity Contract and any Policies hereunder and thereby assumes all the
duties and responsibilities set forth therein. The terms of the Annuity Contract
may be changed as provided therein without amending this Plan, provided such
changes shall conform (1) to the requirements for qualification under Code
section 401(a), as amended from time to time and (2) to ERISA, as amended from
time to time.
6D.2 Relation to Employer, Plan Administrator and Participants. The
Insurance Company may receive the statement of the Plan Administrator or, if the
Plan Administrator so designates, the Employer or the Trustee, as conclusive
evidence of any of the matters decided in the Plan, and the Insurance Company
shall be fully protected in taking or permitting any action on the basis thereof
and shall incur no liability or responsibility for so doing. The Insurance
Company shall not be required to look into the terms of the Plan, to question
any action by the Employer or the Plan Administrator or any Participant nor to
determine that such action is properly taken under the Plan. The Insurance
Company shall be fully discharged from any and all liability with respect to any
payment to any Participant hereunder in accordance with the terms of the Annuity
Contract or of any Policies under the Plan. The Insurance Company shall not be
required to take any action contrary to its normal rules and practices.
6D.3 Relation to Trustee. The Insurance Company shall not be required
to look into the terms of the Plan or question any action of the Trustee, and
the Insurance Company shall not be responsible for seeing that any action of the
Trustee is authorized by the terms hereof. The Insurance Company shall be under
no obligation to take notice of any change in Trustee until evidence of such
change satisfactory to the Insurance Company shall have been given to the
Insurance Company in writing at its home office.
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6E. ADOPTING EMPLOYER
6E.1 Election to Become Adopting Employer. With the consent of the
Employer and Trustee, if any, any employer, which along with the Employer is
included in a group of employers which constitute a controlled group of
corporations (as defined in Code section 414(b)) or which constitutes trade or
businesses (whether or not incorporated) which are under common control (as
defined in section 414(c)) or which constitutes an affiliated service group as
defined in section 414(m) and is identified as an Adopting Employer in the
Adoption Agreement, may adopt this Plan and all of its provisions.
6E.2 Definition. Any employer eligible to adopt this Plan under the
provisions of Section 6E.1 and which adopts this Plan and all of its provisions,
shall be known as an Adopting Employer and shall be included within the term
Employer, as defined in Section 1.24.
6E.3 Effective Date of Plan. The effective date of the Plan for an
Adopting Employer on other than the date specified in the Adoption Agreement
shall be the first day of the Plan Year in which such Adopting Employer adopts
this Plan.
6E.4 Forfeitures. Forfeitures of any nonvested portion of a
Participant's Account, as selected by the Employer in the Adoption Agreement,
shall be allocated only to other Participants who are employed by the Adopting
Employer who made the contributions to such Participant's Account, or shall be
used as a credit only for such Adopting Employer.
6E.5 Contributions. All contributions made by an Adopting Employer
shall be determined separately by each Adopting Employer and shall be paid to
and held by the Plan for the exclusive benefit of the Employees of such Adopting
Employer and the Beneficiaries of such Employees, subject to all the terms and
conditions of this Plan. The Plan Administrator shall keep separate books and
records concerning the affairs of each Adopting Employer and as to the accounts
and credits of the Employees of each Adopting Employer.
6E.6 Expenses. Subject to Section 6B.3, the expenses necessary to
administer the Plan of any Adopting Employer shall be taken from accounts of
Participants who are Employees of such Adopting Employer unless paid for by such
Adopting Employer. The expenses necessary to administer the Plan for each
Adopting Employer shall be determined by the ratio of the value of all
Participants' Accounts of such Adopting Employers to the total value of all
Participants' Accounts of each Adopting Employer.
6E.7 Substitution of Plans. Subject to the provisions of Section 7C,
any Adopting Employer shall be permitted to withdraw from its participation in
this Plan. The consent of the Employer or any other Adopting Employer shall not
be required.
6E.8 Termination of Plans. If any Adopting Employer elects to
terminate its Plan pursuant to Sections 7B.4, 7B.5 and 7B.6, such termination
shall in no way affect the Plan of any other Adopting Employer.
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6E.9 Amendment. Amendment of this Plan by the Employer or any
Adopting Employer shall only be by the written consent of the Employer and each
and every Adopting Employer and with the consent of the Trustee, if any, where
such consent is necessary in accordance with the terms of this Plan.
6E.10 Plan Administrator's Authority. The Plan Administrator shall
have authority to make any and all necessary rules or regulations, binding upon
all Adopting Employers and all Participants, to effectuate the purpose of this
Section 6E.
ARTICLE VII - SPECIAL CIRCUMSTANCES WHICH MAY AFFECT THE PLAN
7A. TOP-HEAVY PROVISIONS
7A.1 Definitions.
(a) Annual Compensation. The term Annual Compensation means
Compensation as defined in the Compensation section of the Adoption Agreement,
but including amounts contributed by the Employer pursuant to a salary reduction
agreement which are excludable from the Employee's gross income under Code
section 125, section 402(e)(3), section 402(h)(1)(B) or section 403(b).
(b) Determination Date. The term Determination Date means
for any Plan Year subsequent to the first Plan Year, the last day of the
preceding Plan Year. For the first Plan Year of the Plan, it means the last day
of that year.
(c) Determination Period. The term Determination Period
means the Plan Year containing the Determination Date and the four preceding
Plan Years.
(d) Key Employee. The term Key Employee means any Employee
or former Employee (and the Beneficiaries of such Employee) who at any time
during the Determination Period was:
(1) An officer of the Employer if such individual's
Annual Compensation exceeds 50 percent of the dollar limitation under Code
section 415(b)(1)(A); or
(2) An owner (or considered an owner under Code
section 318) of one of the ten largest interests in the Employer if such
individual's Annual Compensation exceeds 100 percent of the dollar limitation
under Code section 415(c)(1)(A); or
(3) A 5-percent owner of the Employer; or
(4) A 1-percent owner of the Employer who has Annual
Compensation of more than $150,000.
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The determination of who is a Key Employee will be made
in accordance with Code section 416(I)(1) and related regulations.
(e) Permissive Aggregation Group. The term Permissive
Aggregation Group means the Required Aggregation Group of plans plus any other
plan or plans of the Employer which, when considered as a group with the
Required Aggregation Group, would continue to satisfy the requirements of Code
sections 401(a)(4) and 410.
(f) Present Value. Present Value shall be based only on the
interest and mortality rates specified in the Adoption Agreement.
(g) Required Aggregation Group. The term Required
Aggregation Group means (1) each qualified plan of the Employer in which at
least one Key Employee participates or participated at any time during the
Determination Period (regardless of whether the plan has terminated), and (2)
any other qualified plan of the Employer which enables a plan described in (1)
to meet the requirements of Code sections 401(a)(4) or 410.
(h) Top-Heavy Plan. For any Plan Year beginning after
December 31, 1983, this Plan is Top-Heavy if any of the following conditions
exists:
(1) If the Top-Heavy Ratio for this Plan exceeds 60
percent and this Plan is not part of any Required Aggregation Group or
Permissive Aggregation Group of plans.
(2) If this Plan is a part of a Required Aggregation
Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy
Ratio for the group of plans exceeds 60 percent.
(3) If this Plan is a part of a Required Aggregation
Group and part of a Permissive Aggregation Group of plans and the Top-Heavy
Ratio for the Permissive Aggregation Group exceeds 60 percent.
(i) Top-Heavy Ratio. The term Top-Heavy Ratio means:
(1) If the Employer maintains one or more defined
contribution plans (including any simplified employee pension plan) and the
Employer has not maintained any defined benefit plan which during the 5-year
period ending on the Determination Date(s) has or has had accrued benefits, the
Top-Heavy Ratio for this Plan alone or for the Required or Permissive
Aggregation Group, as appropriate, is a fraction, the numerator of which is the
sum of the account balances of all Key Employees as of the Determination Date(s)
(including any part of any account balance distributed in the 5-year period
ending on the Determination Date(s)), and the denominator of which is the sum of
all account balances (including any part of any account balance distributed in
the 5-year period ending on the Determination Date(s)), both computed in
accordance with Code section 416 and related regulations. Both the numerator and
denominator of the Top-Heavy Ratio
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are increased to reflect any contribution not actually made as of the
Determination Date, but which is required to be taken into account on that date
under Code section 416 and related regulations.
(2) If the Employer maintains one or more defined
contribution plans (including any simplified employee pension plans as defined
in Code section 408(k)) and the Employer maintains or has maintained one or more
defined benefit plans, which during the 5-year period ending on the
Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio
for any Required or Permissive Aggregation Group as appropriate is a fraction,
the numerator of which is the sum of account balances under the aggregated
defined contribution plan or plans for all Key Employees, determined in
accordance with (1) above, and the Present Value of accrued benefits under the
aggregated defined benefit plan or plans for all Key Employees as of the
Determination Date(s), and the denominator of which is the sum of the account
balances under the aggregated defined contribution plan or plans for all
Participants, determined in accordance with (1) above, and the Present Value of
accrued benefits under the defined benefit plan or plans for all Participants as
of the Determination Date(s), all determined in accordance with Code section 416
and related regulations. The accrued benefits under a defined benefit plan in
both the numerator and denominator of the Top-Heavy Ratio are increased for any
distribution of an accrued benefit made in the 5-year period ending on the
Determination Date.
(3) For purposes of (1) and (2) above, the value of
account balances and the Present Value of accrued benefits will be determined as
of the most recent Valuation Date that falls within or ends with the 12-month
period ending on the Determination Date, except as provided in Code section 416
and the regulations thereunder for the first and second plan years of a defined
benefit plan. The account balances and accrued benefits of a Participant (1) who
is not a Key Employee but who was a Key Employee in a prior year, or (ii) who
has not been credited with at least one Hour of Service with any Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date shall be disregarded. The calculation of the Top-Heavy Ratio,
and the extent to which distributions, rollovers, and transfers are taken into
account, will be made in accordance with Code section 416 and the regulations
thereunder. QVEC Contributions will not be taken into account for purposes of
computing the Top-Heavy Ratio. When aggregating plans, the value of account
balances and accrued benefits will be calculated with reference to the
Determination Dates that fall within the same calendar year. The accrued benefit
of a Participant other than a Key Employee shall be determined under (a) the
method, if any, that uniformly applies for accrual purposes under all defined
benefit plans maintained by the Employer, or (b) if there is no such method, as
if such benefit accrued not more rapidly than the slowest accrual rate permitted
under the fractional rule of Code section 411(b)(1)(C).
(j) Valuation Date. The term Valuation Date means the date
specified in the Top-Heavy Provisions section of the Adoption Agreement as of
which account balances or accrued benefit are valued for purposes of calculating
the Top-Heavy Ratio.
7A.2 Minimum Allocation. For any Plan Year in which the Plan is
Top-Heavy, the following will apply:
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(a) Except as otherwise provided in (c) and (d) below, the
Employer contributions and Forfeitures allocated on behalf of any Participant
who is not a Key Employee shall not be less than the lesser of three percent of
such Participant's Compensation or in the case where the Employer has no defined
benefit plan which designates this Plan to satisfy Code section 401, the largest
percentage of Employer contributions and Forfeitures, as limited by Code section
401(a)(17), allocated on behalf of any Key Employee for that year. The Minimum
Allocation is determined without regard to any Social Security contribution.
This Minimum Allocation shall be made even though, under other Plan provisions,
the Participant would not otherwise be entitled to receive an allocation, or
would have received a lesser allocation for the year because of (1) the
Participant's failure to complete 1,000 Hours of Service (or any equivalent
provided in the Plan), or (2) the Participant's failure to make Required
Employee Contributions to the Plan, or (3) Compensation less than a stated
amount.
(b) For purposes of computing the Minimum Allocation,
Compensation shall mean Compensation as defined in the Compensation section of
the Adoption Agreement as limited by Code section 401(a)(17).
Notwithstanding the above, if elected by the Employer in
the Adoption Agreement, Compensation shall include any amount which is
contributed by the Employer pursuant to a salary reduction agreement and which
is not includable in the Employee's gross income under Code sections 125,
401(a)(8), 402(h) or 403(b).
(c) The provision in (a) above shall not apply to any
Participant who was not employed by the Employer on the last day of the Plan
Year.
(d) The provision in (a) above shall not apply to any
Participant to the extent the Participant is covered under any other plan or
plans of the Employer and the Employer has provided in the Top-Heavy Provisions
section of the Adoption Agreement that the Minimum Allocation or benefit
requirement applicable to Top-Heavy plans will be met in the other plan or
plans.
(e) The Minimum Allocation required (to the extent required to be
nonforfeitable under Code section 416(b)) may not be forfeited under Code
sections 411(a)(3)(B) or 411(a)(3)(D).
(f) Neither Elective Deferral Contributions nor Matching
Contributions may be taken into account for the purpose of satisfying this
Minimum Allocation Requirement.
7A.3 Minimum Vesting Schedule. For any Plan Year in which this Plan
is Top-Heavy, one of the minimum vesting schedules as elected by the Employer in
the Adoption Agreement will automatically apply to the Plan. The minimum vesting
schedule applies to all benefits within the meaning of Code section 411(a)(7)
except those attributable to Employee Contributions, Elective Deferral
Contributions, QVEC Contributions and Rollover Contributions including benefits
accrued before the effective date of Code section 416 and benefits accrued
before the Plan became Top-Heavy. Further, no decrease in a Participant's
nonforfeitable percentage may occur in the event the Plan's status as Top-Heavy
changes for any Plan Year. However, this Section does not apply to the
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account balances of any Employee who does not have an Hour of Service after the
Plan has initially become Top-Heavy. Such Employee's account balance
attributable to Employer contributions and Forfeitures will be determined
without regard to this Section.
7B. AMENDMENT, TERMINATION OR MERGER OF THE PLAN
7B.1 Amendment of Elections under Adoption Agreement by Employer. The
party elected by the Employer in the Adoption Agreement shall have the right
from time to time to change the elections under its Adoption Agreement in a
manner consistent with the Plan, provided that such amendment or modification
shall be in accordance with the Board of Director's resolution, if applicable,
that describes the amendment procedure and provided further that the written
amendment or modification is signed by the party elected by the Employer in the
Adoption Agreement. The amendment must be accepted by the Sponsoring
Organization. Upon any such change in the Elections under the Adoption
Agreement, the Plan Administrator, the Trustee and the Sponsoring Organization
shall be furnished a copy thereof. If the Plan's vesting schedule is amended, or
the Plan is amended in any way that directly or indirectly affects the
computation of the Participant's nonforfeitable percentage or if the Plan is
deemed amended by an automatic change to a top-heavy vesting schedule, each
Participant with at least 3 years of Service with the Employer may elect, in
writing, within a reasonable period after the adoption of the amendment or
change, to have the nonforfeitable Percentage computed under the Plan without
regard to such amendment or change. For Participants who do not have at least 1
Hour of Service in any Plan Year beginning after December 31, 1988, the
preceding sentence shall be applied by substituting "5 years of Service" for "3
years of Service" where such language appears.
The period during which the election must be made by the
Participant shall begin no later than the date the Plan amendment is adopted and
end no later than after the latest of the following dates:
(a) The date which is 60 days after the day the amendment is
adopted;
(b) The date which is 60 days after the day the amendment
becomes effective; or
(c) The date which is 60 days after the day the Participant
is issued written notice of the amendment by the Employer or Plan Administrator.
Such written election by a Participant shall be made to the Plan
Administrator, who shall then give written notice to the Insurance Company.
No amendment to the Plan shall be effective to the extent that
it has the effect of decreasing a Participant's Accrued Benefit. Notwithstanding
the preceding sentence, a Participant's Account balance may be reduced to the
extent permitted under Code section 412(c)(8). For purposes of this paragraph, a
Plan amendment which has the effect of decreasing a Participant's Account
balance or eliminating an optional form of benefit, with respect to benefits
attributable to service before the amendment, shall be treated as reducing an
Accrued Benefit. Furthermore, if the vesting
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schedule of a Plan is amended, in the case of an Employee who is a Participant
as of the later of the date such amendment is adopted or the date it becomes
effective, the nonforfeitable percentage (determined as of such date) of such
Employee's Employer-Derived Accrued Benefit will not be less than the percentage
computed under the Plan without regard to such amendment.
In the event of an amendment to a money purchase pension plan
(including a target benefit plan) to convert it to a profit sharing plan
(including a thrift plan or plan with a 401(k) feature), the resulting plan
shall separately account in each affected Participant's Account for amounts
attributable to coverage under the money purchase plan, including future
earnings on such amounts. On and after the date of such amendment, these money
purchase plan amounts shall remain subject to the money purchase plan
restrictions on distribution.
The Employer may (1) change the choice of options in the
Adoption Agreement, (2) add overriding language in the Adoption Agreement when
such language is necessary to satisfy Code sections 415 or 416 because of the
required aggregation of multiple plans, and (3) add certain model amendments
published by the Internal Revenue Service which specifically provide that their
adoption will not cause the Plan to be treated as individually designed. An
Employer that amends the Plan for any other reason, including a waiver of the
minimum funding requirements under Code section 412(d), will no longer
participate in this prototype plan and will be considered to have an
individually designed plan.
7B.2 Amendment of Plan, Trust, and Form of Adoption Agreement. The
Sponsoring Organization may amend this Plan and Trust, and the form of the
Adoption Agreement, and the Employer in adopting this Plan and the Plan
Administrator and the Trustee in accepting appointment as Plan Administrator and
as Trustee, shall be deemed to have consented to any such amendment by executing
the Adoption Agreement, provided that the written consent of the Trustee and the
Plan Administrator to any change affecting their duties or responsibilities
shall first be obtained. Upon any such amendment by the Sponsoring Organization,
the Plan Administrator, the Employer and the Trustee shall be furnished with a
copy thereof.
7B.3 Conditions of Amendment. Neither the Sponsoring Organization nor
the Employer shall make any amendment which would cause the Plan to lose its
status as a qualified plan within the meaning of Code section 401(a).
7B.4 Termination of the Plan. The Employer intends to continue the
Plan indefinitely for the benefit of its Employees, but reserves the right to
terminate the Plan at any time by resolution of its Board of Directors. Upon
such termination, the liability of the Employer to make Employer contributions
hereunder shall terminate. The Plan shall terminate automatically upon complete
discontinuance of Employer contributions hereunder, if the Plan is a profit
sharing plan or a thrift plan.
7B.5 Full Vesting. Upon the termination or partial termination of the
Plan, or upon complete discontinuance of Employer contributions, the rights of
all affected Participants in and to the amounts credited to each such
Participant's Account and to any Policies on each Participant's life
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shall be 100% vested and nonforfeitable. Thereupon, each Participant shall
receive a total distribution of his Participant's Account (including any amounts
in the Forfeiture Account allocated in accordance with Section 7B.6) in
accordance with the terms and conditions of Section 2A. If the Plan terminates,
the assets will be distributed from the Trust as soon as administratively
feasible.
7B.6 Application of Forfeitures. Upon the termination of the Plan,
any amount in the Forfeiture account which has not been applied as of such
termination to reduce the Employer contribution, or has not been allocated as of
such termination, shall be credited on a pro-rata basis to each Participant's
Account in the same manner as the last Employer contribution made under the
Plan.
7B.7 Merger with Other Plan. In the case of any merger with or
transfer of assets or liabilities to any other qualified plan after September 2,
1974:
(a) The sum of the account balances in each plan shall equal
the fair market value (determined as of the date of the merger or transfer as if
the plan had then terminated) of the entire plan assets.
(b) The assets or liabilities of each plan shall be combined
to form the assets of the plan as merged (or transferred), and each Participant
in the plan merged (or transferred) shall have an account balance equal to the
sum of the account balances the Participant had in the plans immediately prior
to the merger (or transfer).
(c) Immediately after the merger (or transfer), each
Participant in the plan merged (or transferred) shall have an account balance
equal to the sum of the account balances the Participant had in the plans
immediately prior to the merger (or transfer).
(d) Immediately after the merger (or transfer), each
Participant in the plan merged (or transferred) shall be entitled to the same
optional benefit forms as they were entitled to immediately prior to the merger
(or transfer).
(e) In the event of a merger (or transfer) of a money
purchase pension plan (including a target benefit plan) and a profit sharing
plan (including a thrift plan or plan with a 401(k) feature), the resulting plan
shall separately account in each affected Participant's Account for amounts
attributable to coverage under the money purchase plan, including future
earnings on such amounts. On and after the date of such merger (or transfer),
these money purchase plan amounts shall remain subject to the money purchase
plan restrictions on distribution.
7B.8 Transfer from Other Plans. If elected in the Adoption Agreement,
the Employer may cause all or any of the assets held in another qualified
pension or profit sharing plan meeting the requirements of Code section 401(a)
to be transferred to the Plan pursuant to a merger or consolidation of this Plan
with such other plan or for any other allowable purpose. Upon receipt of such
assets, the Plan shall separately account for such amounts in each affected
Participant's
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Account. Such transfer shall be made without regard to the Limitations on
Allocations imposed in Section 4B.
7B.9 Transfer to Other Plans. Upon written direction from the
Employer, the Plan shall transfer some or all of the assets held under this Plan
to another qualified pension or profit sharing plan meeting the requirements of
Code section 401(a) and sponsored by the Employer.
7B.10 Approval by the Internal Revenue Service. Notwithstanding any
other provisions of this Plan, the Employer's adoption of this Plan is subject
to the condition precedent that the Employer's Plan shall be approved and
qualified by the Internal Revenue Service as meeting the requirements of Code
section 401(a) and, if applicable, that the Trust established hereunder shall be
entitled to exemption under the provisions of Code section 501(a). In the event
the Plan initially fails to qualify and the Internal Revenue Service issues a
final ruling that the Employer's Plan or Trust fails to so qualify as of the
Effective Date, all liability of the Employer to make further Employer
contributions hereunder shall cease. The Insurance Company, Plan Administrator,
Trustee and any other Named Fiduciary shall be notified immediately by the
Employer, in writing, of such failure to qualify. Upon such notification, the
value of the Participants' Accounts, including the then value of any Life
Insurance Policies, shall be distributed in cash subject to the terms and
conditions of Section 5B. That portion of such distribution which is
attributable to Participant's Employee Contributions, if any, shall be paid to
the Participant, and the balance of such distribution shall be paid to the
Employer. Upon the death of any Participant prior to the actual surrender of a
Life Insurance Policy or Policies on his life, the death benefit shall be
payable to the Participant's Beneficiary.
If the Employer's Plan fails to attain or retain qualification,
such Plan will no longer participate in this prototype plan and will be
considered an individually designed plan.
7B.11 Subsequent Unfavorable Determination. If the Employer is
notified subsequent to initial favorable qualification that the Plan is no
longer qualified within the meaning of Code section 401(a) or, if applicable,
that the Trust is no longer entitled to exemption under the provisions of Code
section 501(a), and if the Employer shall fail within a reasonable time to make
any necessary changes in order that the Plan shall so qualify, the Participants'
Accounts, including any Life Insurance Policies or the values thereof, shall be
fully vested and nonforfeitable and shall be disposed of in the manner set forth
in Sections 7B.5 and 7B.6 above.
7C. SUBSTITUTION OF PLANS
7C.1 Substitution of Plans. Subject to the provisions of Section
7B.7, the Employer may substitute an individually designed plan or a master or
another prototype plan for this Plan without terminating this Plan as embodied
herein, and this shall be deemed to constitute an amendment and restatement in
its entirety of this Plan as heretofore adopted by the Employer; provided,
however that the Employer shall have certified to the Insurance Company and the
Trustee, if applicable, that this Plan is being continued on a restated basis
which meets the requirements of Code section 401(a) and ERISA.
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Any such changes shall be subject to the provisions of Sections
7B.1 and 7B.2 of the Plan.
7C.2 Transfer of Assets. Upon 90 days' written notification from the
Employer and the Trustee (unless the Insurance Company shall accept a shorter
period of notification) that a different plan meeting the requirements set forth
in Section 7C.1 above has been executed and entered into by the Plan
Administrator and the Employer, and after the Insurance Company and the Trustee
have been furnished the Employer's certification in writing that the Employer
intends to continue the Plan as a qualified plan under Code section 401(a) and
ERISA, the Insurance Company shall transfer the value of all Participants'
Accounts under the Annuity Contract to the Trustee or such person or persons as
may be entitled to receive the same, in accordance with the terms of the Annuity
Contract. The Trustee shall likewise make a similar transfer, including all Life
Insurance Policies, or the values thereof, to such person or persons as may be
entitled to receive same. The Insurance Company and the Trustee may rely fully
on the representations or directions of the Employer with respect to any such
transfer and shall be fully protected and discharged with respect to any such
transfer made in accordance with such representations, instructions, or
directions.
7C.3 Substitution for Pre-Existing Master or Prototype Plan. This
Plan is designed:
(a) For adoption by an Employer not previously covered under
a master or prototype plan sponsored by Connecticut General Life Insurance
Company; or
(b) For adoption by an Employer in substitution for a
pre-existing master or prototype plan sponsored by Connecticut General Life
Insurance Company.
If this Plan is adopted in substitution for such a pre-existing
master or prototype plan, it shall be deemed to amend the Employer's prior Plan
in its entirety effective as of the date specified in the Employer's Adoption
Agreement. The Employer's Plan as so amended shall continue in full force and
effect and no termination thereof shall be deemed to have occurred.
7C.4 Partial Substitution or Partial Transfer of the Plan or Assets.
In the event this Plan is adopted as the result of a partial substitution or
partial transfer of the Plan or the assets under the prior Plan as a result of a
merger, spinoff, consolidation or any other allowable purpose, the Plan and all
transactions allowable under it are subject to the rules established by the
Employer to address the orderly transition of the Plan or assets.
ARTICLE VIII - MISCELLANEOUS
8.1 Nonreversion. This Plan has been adopted by the Employer for the
exclusive benefit of the Participants and their Beneficiaries. Except as
otherwise provided in Section 7B.10 and Section 8.6, under no circumstances
shall any funds contributed hereunder at any time revert to or be used by the
Employer, nor shall any such funds or assets of any kind be used other than for
the benefit of the Participants or their Beneficiaries.
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<PAGE> 105
8.2 Gender and Number. When necessary to the meaning hereof, and
except when otherwise indicated by the context, either the masculine or the
neuter pronoun shall be deemed to include the masculine, the feminine, and the
neuter, and the singular shall be deemed to include the plural.
8.3 Reference to the Internal Revenue Code and ERISA. Any reference
herein to any section of the Internal Revenue Code, ERISA, or to any other
statute or law shall be deemed to include any successor law of similar import.
8.4 Governing Law. The Plan and Trust, if applicable, shall be
governed and construed in accordance with the laws of the state where the
Employer or Trustee has its principal office in the United States.
8.5 Compliance with the Internal Revenue Code and ERISA. This Plan
is intended to comply with all requirements for qualification under the Internal
Revenue Code and ERISA, and if any provision hereof is subject to more than one
interpretation or any term used herein is subject to more than one construction,
such ambiguity shall be resolved in favor of that interpretation or construction
which is consistent with the Plan being so qualified. If any provision of the
Plan is held invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provisions, and this Plan shall be construed and enforced
as if such provision had not been included.
8.6 Contribution Recapture. Notwithstanding any other provisions of
this Plan, (1) in the case of a contribution which is made by an Employer by a
mistake of fact, Section 8.1 shall not prohibit the return of such contribution
to the Employer within one year after the payment of the contribution, and (2)
if a contribution is conditioned upon the deductibility of the contribution
under Code section 404, then, to the extent the deduction is disallowed, Section
8.1 shall not prohibit the return to the Employer of such contribution (to the
extent disallowed) within one year after the disallowance of the deduction. The
amount which may be returned to the Employer is the excess of (1) the amount
contributed over (2) the amount that would have been contributed had there not
occurred a mistake of fact or a mistake in determining the deduction. Earnings
attributable to the excess contribution may not be returned to the Employer, but
losses attributable thereto must reduce the amount to be so returned.
Furthermore, if the withdrawal of the amount attributable to the mistaken
contribution would cause the balance of any Participant's Account to be reduced
to less than the balance which would have been in the Participant's Account had
the mistaken amount not been contributed, then the amount to be returned to the
Employer would have to be limited so as to avoid such reduction.
In the event that the Commissioner of the Internal Revenue
determines that the Plan is not initially qualified under the Internal Revenue
Code, any contribution made incident to that initial qualification by the
Employer must be returned to the Employer within one year after the date the
initial qualification is denied, but only if the application for the
qualification is made by the time prescribed by law for filing the Employer's
return for the taxable year in which the Plan is adopted, or such later date as
the Secretary of the Treasury may prescribe.
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Notwithstanding the above, any excess or returned contribution
shall not be returned to the Employer if the Employer has taken Davis-Bacon Act
credit for such contribution. These excess or mistaken contributions shall be
paid to the Employee for whom such credit is taken.
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<PAGE> 1
EXHIBIT 10.13
INDUSTRIAL REAL ESTATE LEASE
BETWEEN
CYPRESS LAND COMPANY,
A CALIFORNIA LIMITED PARTNERSHIP
AND
NETCOM SYSTEMS, INC.,
A DELAWARE CORPORATION
for
26750 AGOURA ROAD,
CALABASAS, CALIFORNIA 91302
June 25, 1998
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TABLE OF CONTENTS
<TABLE>
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ARTICLE ONE: BASIC TERMS .................................................. 1
Section 1.1 Date of Lease ......................................... 1
Section 1.2 Landlord .............................................. 1
Section 1.3 Tenant ................................................ 1
Section 1.4 Property .............................................. 1
Section 1.5 Lease Term ............................................ 1
Section 1.6 Permitted Uses ........................................ 1
Section 1.7 Initial Security Deposit .............................. 1
Section 1.8 Rent and Other Charges Payable by Tenant .............. 2
Section 1.9 Riders ................................................ 2
ARTICLE TWO: LEASE TERMS .................................................. 2
Section 2.1 Lease of Property for Lease Term ...................... 2
Section 2.2 Holding Over .......................................... 2
Section 2.3 Option to Extend ...................................... 3
ARTICLE THREE: BASE RENT .................................................. 6
Section 3.1 Time and Manner of Payment ............................ 6
Section 3.2 Cost of Living Increases .............................. 6
Section 3.3 Security Deposit; Increases ........................... 7
Section 3.4 Termination; Advance Payments ......................... 7
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT ............................. 8
Section 4.1 Additional Rent ....................................... 8
Section 4.2 Property Taxes ........................................ 8
Section 4.3 Utilities ............................................. 10
Section 4.4 Insurance Policies..................................... 10
Section 4.5 Late Charges .......................................... 14
Section 4.6 Interest on Past Due Obligations ...................... 14
Section 4.7 Impounds for Insurance Premiums and Real
Property Taxes ........................................ 15
ARTICLE FIVE: USE OF PROPERTY ............................................. 15
Section 5.1 Permitted Uses ........................................ 15
Section 5.2 Manner of Use ......................................... 15
Section 5.3 Hazardous Materials ................................... 16
Section 5.4 Outside Storage ....................................... 22
Section 5.5 Signs and Auctions .................................... 22
Section 5.6 Indemnity ............................................. 22
Section 5.7 Landlord's Access ..................................... 22
Section 5.8 Quiet Possession ...................................... 23
Section 5.9 Future Easements and Governmental Requirements ........ 23
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS
AND ALTERATIONS .............................................. 23
Section 6.1 Existing Conditions ................................... 23
Section 6.2 Exemption of Landlord from Liability .................. 23
</TABLE>
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<TABLE>
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Section 6.3 LANDLORD'S OBLIGATIONS....................... 24
Section 6.4 TENANT'S OBLIGATIONS......................... 24
Section 6.5 ALTERATIONS, ADDITIONS, AND
IMPROVEMENTS................................. 26
Section 6.6 CONDITION UPON TERMINATION................... 26
Section 6.7 COMMON AREAS................................. 27
ARTICLE SEVEN: DAMAGE OR DESTRUCTION............................. 27
Section 7.1 DAMAGE TO PROPERTY........................... 27
Section 7.2 TEMPORARY REDUCTION OF RENT.................. 29
Section 7.3 WAIVER....................................... 29
Section 7.4 LANDLORD'S FAILURE TO REPAIR WITHIN 12
MONTHS....................................... 29
Section 7.5 REPAIR OF SHELL TO SIMILAR CONDITION......... 30
ARTICLE EIGHT: CONDEMNATION...................................... 31
ARTICLE NINE: ASSIGNMENT AND SUBLETTING......................... 31
Section 9.1 LANDLORD'S CONSENT REQUIRED.................. 31
Section 9.2 TENANT AFFILIATE............................. 32
Section 9.3 NO RELEASE OF TENANT......................... 32
Section 9.4 OFFER TO TERMINATE........................... 32
Section 9.5 LANDLORD'S CONSENT........................... 32
Section 9.6 LANDLORD'S SHARE OF PREMIUM.................. 33
Section 9.7 NO MERGER.................................... 34
ARTICLE TEN: DEFAULTS; REMEDIES................................. 34
Section 10.1 COVENANTS AND CONDITIONS..................... 34
Section 10.2 DEFAULTS..................................... 34
Section 10.3 REMEDIES..................................... 35
Section 10.4 REPAYMENT OF "FREE" RENT..................... 36
Section 10.5 CUMULATIVE REMEDIES.......................... 37
ARTICLE ELEVEN: PROTECTION OF LENDERS........................... 37
Section 11.1 SUBORDINATION................................ 37
Section 11.2 ATTORNMENT................................... 38
Section 11.3 SIGNING OF DOCUMENTS......................... 38
Section 11.4 ESTOPPEL CERTIFICATES........................ 39
Section 11.5 TENANT'S FINANCIAL CONDITION................. 39
ARTICLE TWELVE: LEGAL COSTS..................................... 40
Section 12.1 LEGAL PROCEEDINGS............................ 40
Section 12.2 LANDLORD'S CONSENT........................... 40
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS...................... 41
Section 13.1 NON-DISCRIMINATION........................... 41
Section 13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES......... 41
Section 13.3 SEVERABILITY................................. 42
Section 13.4 INTERPRETATION............................... 42
Section 13.5 INCORPORATION OF PRIOR AGREEMENTS;
MODIFICATIONS................................ 42
Section 13.6 NOTICES...................................... 42
Section 13.7 WAIVERS...................................... 42
Section 13.8 RECORDATION.................................. 43
</TABLE>
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<TABLE>
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Section 13.9 BINDING EFFECT; CHOICE OF LAW................ 43
Section 13.10 CORPORATE AUTHORITY ......................... 43
Section 13.11 FORCE MAJEURE................................ 43
Section 13.12 EXECUTION OF LEASE........................... 43
Section 13.13 SURVIVAL..................................... 43
Section 13.14 DEFINITION OF CONTRACTOR..................... 43
ARTICLE FOURTEEN: BROKERS....................................... 44
Section 14.1 No Other Brokers............................. 44
</TABLE>
Exhibit "A" - Legal Description of Property
Exhibit "B" - Shell Plans and Specifications
CONSTRUCTION RIDER
<PAGE> 5
INDUSTRIAL REAL ESTATE LEASE
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and
are to be read in conjunction with the Basic Terms.
Section 1.1 DATE OF LEASE: June 25, 1998
Section 1.2 LANDLORD: Cypress Land Company, a California limited
partnership
Address of Landlord: 2203 East Carson Street, Suite A-1, Long Beach, California
90810
Section 1.3 TENANT: Netcom Systems, Inc., a Delaware corporation
Address of Tenant: 20550 Nordhoff Street, Chatsworth, California. Tenant's
address shall be changed to the address of the Property upon the Commencement
Date of this Lease.
Section 1.4 PROPERTY: 26750 Agoura Road, Calabasas, California,
consisting of the land described on Exhibit "A" which legal description is
attached hereto, and a building and improvements (the term "Property" includes
the Tenant Improvements defined in the Construction Rider) to be constructed
pursuant to the Construction Rider attached hereto.
Section 1.5 LEASE TERM: One hundred twenty-three (123) months beginning
on the Commencement Date (as defined in the Construction Rider). If the
Commencement Date is on a day other than the first day of a month, then such
partial first monthly period shall be added to the one hundred twenty-three
(123) month period, and the Lease Term shall be one hundred twenty-three (123)
months plus such additional first fractional month.
Section 1.6 PERMITTED USES: (See Article Five) Distribution,
manufacturing, general office, sales, warehousing, storage and related uses, as
permitted by governmental laws, rules and regulations affecting the Property.
Section 1.7 INITIAL SECURITY DEPOSIT: (See Section 3.3) Seventy-five
Thousand Eighteen Dollars and Thirty Cents ($75,018.30).
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<PAGE> 6
Section 1.8 RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: Seventy-five Thousand Eighteen Dollars and Thirty Cents
($75,018.30) per month for the first thirty (30) months, as provided in Section
3.1. The initial Base Rent shall be adjusted as provided in paragraph 3.2 of the
Construction Rider. The Base Rent shall be increased on the first day of the
thirty-first (31st), sixty-first (61st), ninety-first (91st) and one hundred
twenty-first (121st) full month of the Lease Term (individually referred to as a
"Rental Adjustment Date" and collectively as "Rental Adjustment Dates") as
provided in Section 3.2 of this Lease. The Comparison Base Rent (as defined in
Paragraph 3.2(a)) shall be increased on each Rental Adjustment Date a minimum of
seven and sixty-eight one-hundredths percent (7.68%) and a maximum of eighteen
and one-half percent (18.5%).
(b) ABATED RENT: Provided that Tenant is not then in monetary default
under the terms of this Lease, the Base Rent for the first (1st), second (2nd)
and sixty-first (61st) full months of the initial Lease Term shall be forgiven.
Even though the Base Rent is forgiven under the immediate preceding sentence
for the 61st month, the Base Rent shall be increased for the 61st month as
calculated under Paragraph 1.8(a) above. Such forgiven rent shall be classified
as "Abated Rent" under Section 10.4 below.
(c) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.2);
(ii) Utilities (See Section 4.3); (iii) Insurance Premiums (See Section 4.4);
(iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.7); (v)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.9 RIDERS: The following Riders are attached to and made a part
of this Lease: Construction Rider
ARTICLE TWO: LEASE TERM
Section 2.1 LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.5 above and shall
begin on the Commencement Date and end on the date specified in Section 1.5
above, unless the Lease Term terminates under any provision of this Lease.
Section 2.2 HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of this Lease and Landlord
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<PAGE> 7
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in
effect shall be increased by fifty percent (50%).
Section 2.3 OPTION TO EXTEND.
(a) Exercise. Landlord hereby grants to Tenant one (1) option
(referred to herein as the "Option") to renew and extend the term of this Lease
for a term of five (5) years (such five-year term for the Option is referred to
herein as the "Option Term"). The Option must be exercised by written notice
("Option Notice") received by Landlord no later than six (6) months prior to
the expiration of the then current Lease Term. Furthermore, the Option shall
not be deemed to be properly exercised if Tenant is prohibited from exercising
the Option pursuant to subparagraphs (i) or (ii), below. If the Option is not
properly exercised within the Option Notice period in the manner prescribed
herein, it shall expire and be of no further force and effect. Time is of the
essence. Tenant may not revoke an election of the Option once Tenant makes an
election to exercise the Option. Provided that Tenant has properly exercised
the Option, the term of the Lease shall be extended for the Option Term (and
references in this Lease to the Lease "term" shall then include the Option
Term), and all terms, covenants and conditions of the Lease shall remain
unmodified and in full force and effect, except that the Base Rent shall be
modified as set forth in Paragraphs 2.3(b), (c) and (d), below.
(i) If Tenant is in default under any provision of this Lease
and such default remains uncured, then Tenant may not exercise the Option. The
period of time within which the Option may be exercised shall not be extended
or enlarged by reason of Tenant's inability to exercise the Option because of
Tenant's default.
(ii) The Option granted to Tenant in this Lease is personal to
Tenant and may not be exercised or assigned, voluntarily or involuntarily, by
or to any person or entity other than Tenant and any person to whom the entire
Lease is assigned under Section 9.2 where Landlord's consent to such assignment
is not required under Section 9.2. The Option herein granted to Tenant is not
assignable to any person separate and apart from this Lease.
(b) Base Rent. The Base Rent payable for the first thirty (30) months
of each Option Term shall be the greater of: (i) the Fair Rental Value (as
determined under Paragraph 2.3(c)); or (ii) the Base Rent during the last month
immediately preceding the first
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<PAGE> 8
month of the Option Term as increased by the increase in the Index as if such
last month was a Rental Adjustment Date under Paragraph 1.8(a).
(c) Fair Rental Value. For purposes of this Section 2.3, the term
"Fair Rental Value" shall mean the Fair Rental Value based upon a per square
foot basis and shall be determined as follows: After Landlord's receipt of
Tenant's election to exercise the Option, but no sooner than six (6) months
prior to the expiration of the then current Lease term, Landlord shall determine
the Fair Rental Value and provide written notice of such amount to Tenant.
Tenant shall have fifteen (15) days (the "Tenant Review Period") after receipt
of Landlord's notice of the Fair Rental Value within which to accept such rental
or to reasonably object thereto in writing. In the event that Tenant objects in
writing to Landlord within the Tenant Review Period of Landlord's determination,
then Landlord and Tenant shall attempt to agree upon such Fair Rental Value. The
failure of Tenant to so notify Landlord in writing of Tenant's objection of the
Fair Rental Value within the Tenant Review Period shall conclusively be deemed
Tenant's rejection of the Fair Rental Value determined by Landlord. If Landlord
and Tenant fail to reach agreement of the Fair Rental Value within ten (10) days
of the end of Tenant's Review Period, then each party shall place in a separate
sealed envelope its final proposed determination as to the Fair Rental Value
(which determination may be different than such party's original determination),
and such determination shall be submitted to a Qualified Appraiser for
determination. Tenant shall deliver to Landlord within ten (10) days after the
end of Tenant's Review Period a list of four (4) Qualified Appraisers, and
Landlord shall choose one (1) of such Qualified Appraisers from such list within
five (5) days of Landlord's receipt of such list. If Tenant fails to deliver
such list to Landlord within such ten (10) day period, then Landlord may deliver
a list of four (4) Qualified Appraisers to Tenant, and Tenant shall choose one
(1) of such Qualified Appraisers, or if Tenant so fails to choose a Qualified
Appraiser within five (5) days of receipt of same, then Landlord may choose such
Qualified Appraiser from such list. The Qualified Appraiser's determination
shall be limited solely to this issue of whether Landlord's or Tenant's
submitted Fair Rental Value per square foot for the Property is closest to the
actual prevailing Fair Rental Value per square foot, using the criteria
described herein (in which case Landlord's or Tenant's determination of the Fair
Rental Value chosen by the Qualified Appraiser shall be the Fair Rental Value).
Such Qualified Appraiser shall within thirty (30) days of appointment reach a
decision and shall notify Landlord and Tenant of such determination and such
determination shall be final.
(i) The term "Qualified Appraiser" for purposes of this
Paragraph 2.3(c) shall mean a professional real estate appraiser
4
<PAGE> 9
who is a Member of the Appraisal Institute (sometimes known as an "MAI"
appraiser) who shall have been active over the five (5) preceding years ending
on the date of such appointment in the appraisal of similar properties within a
five (5) mile radius of the subject Property. The cost of the Qualified
Appraiser shall be paid equally by Landlord and Tenant. If at the time of the
appointment of a Qualified Appraiser, the designation "MAI" is no longer
utilized, then a qualification for appraisers most nearly equivalent to an MAI
appraiser shall be utilized.
(ii) The criteria by which the Qualified Appraiser, and the
Landlord's and Tenant's determination, of Fair Rental Value per month shall be
as follows:
(a) Only available comparable office/research and
development building rentals closest to the date that such Option term is to
commence of equal quality to the Property within the Lost Hills Business Center
shall be used. Comparable properties shall be compared on a rentable square
footage basis, considering the age of the comparable building to the age of the
Property.
(b) Only buildings in a planned business park of at
least the same quality as the business park in which the subject Property is
located shall be used.
(c) Fair Rental Value shall be based upon the Shell
portion of the Property (as defined in the Construction Rider) and shall not
include the rental value for those Tenant Improvements installed and paid for by
the Tenant under the Construction Rider (except for improvements or upgrades of
the Building Shell and permits and governmental entitlements which may have been
included in such Tenant Improvements).
(d) The Qualified Appraiser shall consider the fact that
the Base Rent payable during the Option Term will increase pursuant to Paragraph
2.3(d), below.
(e) No credit may be given for comparable property
rentals for tenant improvement allowances, if any, given to tenants of
comparable properties.
(d) Increase. The monthly Base Rent payable for the first (1st) month
through the thirtieth (30th) month of the Option Term shall be the new monthly
Base Rent for the Option Term as determined under Paragraphs 2.3(b) and (c),
above. Such Base Rent shall be increased on the thirty-first (31st) month of
the Option Term (a "Rental Adjustment Date") as provided in Section 3.2;
provided, however, that such rent increase on each Rental Adjustment Date shall
be a minimum of seven and sixty-eight one-
5
<PAGE> 10
hundredths percent (7.68%) and a maximum of eighteen and one-half percent
(18.5%) from the Comparison Base Rent.
ARTICLE THREE: BASE RENT
Section 3.1 TIME AND MANNER OF PAYMENT. Upon execution of this Lease
(in addition to the payment of the Security Deposit under Section 3.3), Tenant
shall pay Landlord the Base Rent in the amount stated in Paragraph 1.8(a) above
which shall apply to the third full month of the Lease Term. On the first day
of the fourth full month of the Lease Term and each month thereafter, Tenant
shall pay Landlord the Base Rent, in advance, without offset, deduction or
prior demand. Additionally, on the Commencement Date the Tenant shall pay to
Landlord the initial Base Rent attributable to the first fractional month of
the Lease Term, if any. The Base Rent shall be payable at Landlord's address or
at such other place as Landlord may designate in writing.
Section 3.2 COST OF LIVING INCREASES. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") stated in Paragraph 1.8(a) above
and under Paragraph 2.3(d) in accordance with the increase in the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All
Urban Consumers (all items for the geographical Statistical Area in which the
Property is located which currently is the Los Angeles-Riverside-Orange County
statistical area on the basis of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that
the Index has increased from the date (the "Comparison Date") on which payment
of the Comparison Base Rent began through the month in which the applicable
Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of
such computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase
between those two Indices, and the new Base Rent. Any increase in the Base Rent
provided for in this Section 3.2 shall be subject to any minimum or maximum
increase, as provided for in Paragraph 1.8(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase
within ten (10) days after Landlord's written notice. If the
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format or components of the Index are materially changed after the Commencement
Date, Landlord shall substitute an index which is published by the Bureau of
Labor Statistics or similar agency and which is most nearly equivalent to the
Index in effect on the Commencement Date. The substitute index shall be used to
calculate the increase in the Base Rent unless Tenant objects to such index in
writing within fifteen (15) days after receipt of Landlord's notice. If Tenant
objects, Landlord and Tenant shall submit the selection of the substitute index
for binding arbitration in accordance with the rules and regulations of the
American Arbitration Association at its office closest to the Property. The
costs of arbitration shall be borne equally by Landlord and Tenant.
Section 3.3 SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord
a cash Security Deposit in the amount set forth in Section 1.7 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security
Deposit to its full amount within ten (10) days after Landlord's written
request. Tenant's failure to do so shall be a material default under this
Lease. If Landlord retains a portion of the Security Deposit upon the
expiration or sooner termination of this Lease, then Landlord shall apply such
retained portion of the Security Deposit to any unpaid rent or other charges
due from Tenant towards curing any defaults of Tenant or damages which Tenant
is required to pay under this Lease. No interest shall be paid on the Security
Deposit. Landlord shall not be required to keep the Security Deposit separate
from its other accounts and no trust relationship is created with respect to the
Security Deposit.
(b) If the Base Rent is increased under paragraph 3.2 of the Construction
Rider, Tenant shall deposit additional funds with Landlord sufficient to
increase the Security Deposit to an amount which equals the adjusted initial
Base Rent under paragraph 3.2 of the Construction Rider.
Section 3.4 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Property in the manner required by this Lease, Landlord shall refund
or credit to Tenant (or Tenant's successor) the unused portion of the Security
Deposit, any advance rent or other advance payments made by Tenant to Landlord,
and any amounts paid for real property taxes and other reserves which apply to
any time periods after termination or expiration of this Lease.
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ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.1 ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.2 PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvement installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.2(b) and Section 4.7
below: (i) Landlord shall provide to Tenant at least fifteen (15) days prior to
the delinquency date of such taxes a photocopy of the property tax bill; (ii)
provided that Tenant shall have received a copy of the property tax bill, such
payment shall be made by Tenant on or before the later of fifteen (15) days
after Tenant's receipt of the property tax bill or ten (10) days prior to the
delinquency date of the taxes; and (iii) prior to such date by which Tenant is
to pay such taxes, Tenant shall furnish Landlord with satisfactory evidence
that the real property taxes have been paid by Tenant. Landlord shall promptly
reimburse Tenant for any real property taxes paid by Tenant covering any period
of time prior to or after the Lease Term. If Tenant fails to pay the real
property taxes when due, Landlord may pay the taxes and Tenant shall reimburse
Landlord for the amount of such tax payment as Additional Rent.
(b) LANDLORD MAY PAY TAXES. Landlord may elect, at Landlord's sole and
absolute discretion, to pay the real property taxes (due under this Section
4.2) to the appropriate governmental authority and have Tenant pay such amount
to Landlord, by Landlord delivering evidence of such tax amount(s) (including
the tax bill from the governmental agency) to Tenant. Tenant shall pay over any
such tax amount(s) to Landlord within thirty (30) days of Landlord's delivery
of request for payment to Tenant, but not sooner than ten (10) days prior to
the date on which such taxes are due to the applicable governmental agency. If
Tenant fails to timely pay such tax amount(s) to Landlord, then such amount(s)
shall be treated as a failure of Tenant to pay Landlord a monetary amount due
under the terms of this Lease, and Tenant shall be deemed to be in default
under this Lease and shall owe Landlord such taxes plus any interest and
penalties provided for in this Lease. If Landlord elects for Tenant to
reimburse Landlord for such real property taxes under this paragraph (b) for
the first year or the last year of the Lease Term, then Tenant shall only be
obligated to reimburse Landlord for that amount of the real
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property taxes allocable to the Lease Term portion (including any applicable
Option periods).
(c) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" or "real
property taxes" means (i) any fee, license fee, license tax, business license
fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by
any taxing authority against the Property; (ii) any tax on the Landlord's right
to receive, or the receipt of, rent or income from the Property or against
Landlord's business of leasing the Property; (iii) any tax, assessment or
charge for fire protection, streets, sidewalks, road maintenance, landscaping,
refuse or other services provided to the Property by any governmental agency;
(iv) any tax imposed upon this transaction or based upon a reassessment of the
Property due to a change in law, a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) change in the property tax laws and any charge or fee
replacing any tax previously included within the definition of real property
tax. "Real property tax" does not, however, include Landlord's federal or
state income, franchise, inheritance or estate taxes. If after the Commencement
Date there is an assessment against the Property and Landlord is given the
option of paying such assessment in installments or a lump sum, then if
Landlord elects to pay such assessment in a lump sum, Tenant shall only be
obligated to pay such assessment each year in the amount as if Landlord had
made the election to pay such assessment in installments.
(d) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.2(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written consent.
(e) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
(f) APPLICATION FOR REDUCTION IN TAXES. The Tenant, at Tenant's sole cost
and expense, may protest the real property tax valuation of the Property or any
real property tax increases for
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the Property which affects Tenant's obligation hereunder before the assessment
appeals board or by judicial proceedings. Landlord agrees, at no cost or expense
to Landlord, to cooperate with Tenant in effectuating such protest or legal
proceeding. Tenant shall pay any of Landlord's legal fees in such proceeding or
preparation therefor. Tenant shall pay all such taxes or assessments claimed to
be due even if Tenant files a protest, appeal or legal proceeding relating to
such taxes, assessments or valuation. The Tenant shall pay all of the attorneys'
fees, appraisal fees and judicial proceedings and agrees to defend, indemnify
and hold the Landlord harmless regarding same.
Section 4.3 UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal, and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written consent
Section 4.4 LIABILITY POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general insurance) insuring Tenant against liability for bodily
injury, property damage (including loss of use of property) and personal injury
arising out of the operation, use or occupancy of the Property. Tenant shall
name Landlord as an additional insured under such policy, and Tenant shall be
responsible for the deductible, if any, under such policy. The initial amount of
such insurance shall be Two Million Dollars ($2,000,000) per occurrence and
shall be subject to periodic increase based upon inflation, increased liability
awards, recommendation of Landlord's professional insurance advisers and other
commercially reasonable relevant factors. The liability insurance obtained by
Tenant under this Paragraph 4.4(a) shall: (i) be primary and non-contributing;
(ii) contain cross-liability endorsements; and (iii) insure Landlord against
Tenant's performance under Section 5.6, if the matters giving rise to the
indemnity under Section 5.6 result from the acts or negligence of Tenant. The
amount and coverage of such insurance shall not limit Tenant's liability nor
relieve Tenant of any other obligation under this Lease. Landlord may also
obtain, at Landlord's cost, additional comprehensive public liability insurance
in an amount and with coverage determined by Landlord insuring Landlord against
liability arising out of the ownership, operation, use or occupancy of the
Property. The policy obtained
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by Landlord shall not be contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain at Tenant's cost policies of insurance covering loss of or
damage to the Property in the full amount of its replacement value. The
deductible amounts under such policies shall not exceed Twenty Thousand Dollars
($20,000) per occurrence (except such limitation shall not apply in the case of
earthquake insurance if same is required to be carried by Landlord's lender).
Such policy shall contain an Inflation Guard Endorsement and shall provide
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, special extended perils (all
risk), sprinkler leakage and any other perils which Landlord deems reasonably
necessary. Landlord shall have the right to obtain (and require Tenant to pay
for same) flood and earthquake insurance if required by any lender holding a
security interest in the Property. During the Lease Term, Landlord shall also
maintain a rental income insurance policy, with loss payable to Landlord, in an
amount equal to twelve (12) months' Base Rent, plus estimated real property
taxes and insurance premiums. Tenant shall be liable for the Payment of any
deductible amount under Landlord's or Tenant's insurance policies maintained
pursuant to this Paragraph 4.4(b), (except with respect to any deductible for
earthquake insurance required to be obtained by Landlord's lender under this
Paragraph 4.4(b), which Landlord and Tenant shall each pay fifty percent (50%)
of the deductible amount of such earthquake insurance). If this Lease is
terminated by Landlord under the provisions of Article Seven (and this Lease is
not terminated by Tenant) due to damage from an earthquake, then as to the
earthquake insurance described in the immediate preceding sentence for which
Tenant is responsible for fifty percent (50%) of the deductible amount, Tenant
shall not be responsible for fifty percent (50%) of such earthquake insurance
deductible amount upon the termination of this Lease (provided, however, if
Tenant elects to terminate this Lease as permitted under the terms of Article
Seven, then Tenant shall remain obligated to pay such 50% deductible amount).
Tenant shall not do or permit anything to be done which invalidates any such
insurance policies. All property insurance and rental income insurance obtained
by Landlord under this Paragraph 4.4(b) shall provide for all payments of
proceeds to be made to Landlord (and/or lender(s) designated by Landlord).
(c) PAYMENT OF PREMIUMS. Subject to Section 4.7, Tenant shall pay all
premiums (and reimburse Landlord for Landlord's payments of such premiums) for
the insurance policies described in Paragraphs 4.4(a) and (b) (whether such
insurance is obtained by Landlord or Tenant) within thirty (30) days after
billing by Landlord or where Tenant is to pay the insurance company directly
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within thirty (30) days after Tenant's receipt of a copy of the premium
statement or other evidence of the amount due. Before the Commencement Date,
Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant
is required to maintain under this Section 4.4. At least thirty (30) days prior
to the expiration of any such policy, Tenant shall deliver to Landlord a
renewal of such policy. As an alternative to providing a policy of insurance,
Tenant shall have the right to provide Landlord a certificate of insurance,
executed by an authorized officer of the insurance company, showing that the
insurance which Tenant is required to maintain under this Section 4.4 is in full
force and effect and containing such other information which Landlord
reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to give
Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if any
such policy is canceled or materially modified during the Lease Term without
Landlord's consent, or if Tenant fails to pay premiums for any insurance
policy, Landlord may obtain such insurance (or pay premiums on an existing
insurance policy), in which case Tenant shall reimburse Landlord for the cost
of such insurance and premiums within fifteen (15) days after receipt of a
statement that indicates the cost of such insurance and premiums.
(iii) Tenant may at its sole option obtain, at Tenant's sole cost and
expense, from any insurance company chosen by Tenant, a separate policy of
earthquake insurance ("Tenant's Earthquake Insurance") or other insurance
("Tenant's Special Property Insurance") in addition to the insurance required
under Paragraphs 4.4(a) and 4.4(b) which insures the Tenant Improvements and
Tenant's trade fixtures, equipment and other personal property, and Tenant may
be designated as the sole loss payee of such Tenant's earthquake Insurance and
Tenant's Special Property Insurance. The phrase "Tenant's Special Property
Insurance" specifically excludes any insurance which is required to be
maintained under Paragraphs 4.4(a) and 4.4(b). Tenant may receive such Tenant's
Earthquake Insurance and Tenant's Special Property Insurance proceeds (and
Tenant shall be required to pay all premiums and the entire deductible amount
for such Tenant's Earthquake Insurance and Tenant's Special Property Insurance
policies). As to such Tenant's Earthquake Insurance and Tenant's
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Special Property Insurance of which Tenant is the loss payee under the
immediately preceding sentence (and which is not required to be obtained by
Landlord's lender), if this Lease is terminated under the provisions of Article
Seven (as permitted thereunder) and this Lease in fact terminates, then Tenant
may keep such insurance proceeds from Tenant's Earthquake Insurance and
Tenant's Special Property Insurance. However, if Landlord is required to obtain
earthquake insurance insuring the Property by a lender holding a security
interest in the Property under Paragraph 4.4(b), above, then Tenant shall be
required to pay all of the premiums for such earthquake insurance (for the
entire Property) as required by such lender, and Landlord (or the lender as the
lender shall require) shall be designated as the loss payee of such insurance
policy, and Landlord and Tenant shall each be responsible for the payment of
fifty percent (50%) of the deductible amount of such earthquake insurance (and
such insurance shall not be classified as "Tenant's Earthquake Insurance"). If
Tenant as a loss payee or otherwise receives or is entitled to receive any
earthquake insurance proceeds on the Property including the Tenant Improvements
(whether or not such insurance is Tenant's Earthquake Insurance or is required
by Landlord's lender), then Tenant agrees to utilize such insurance proceeds to
repair and reconstruct any damage to the Property; provided, however, if this
Lease is terminated under the provisions of Article Seven, Tenant may retain
such insurance proceeds from Tenant's Earthquake Insurance and Tenant's Special
Property Insurance policies, if any, (but not any other insurance policy
required under Paragraph 4.4(a) or 4.4(b)) insuring the Tenant Improvements.
(iv) Tenant shall maintain all insurance required to be maintained
by Tenant under this Lease with companies holding a "General Policy Rating" of
A-12 or better, as set forth in the most current issue of "Best Key Rating
Guide." Tenant acknowledges that the insurance described in Paragraph 4.4(b) is
for the primary benefit of Landlord. Landlord makes no representation as to the
adequacy of such insurance to protect Landlord's or Tenant's interests.
Therefore, Tenant shall obtain any such additional property or liability
insurance which Tenant deems necessary to protect Landlord and Tenant.
(v) Notwithstanding any other provision of this Lease, unless
prohibited under any applicable insurance policies maintained, Landlord and
Tenant each hereby waive any and all rights of recovery against the other, or
against the officers, employees, agents or representatives of the other, for
loss of or damage to its property or the property of others under its control,
to the extent such loss or damage is actually reimbursed from any proceeds from
an insurance policy in force (whether or not described in this Lease) at the
time of such loss or damage. Upon obtaining the required policies of insurance,
Landlord and Tenant
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shall give notice to the insurance carriers of this mutual waiver of
subrogation.
(vi) Additionally, Tenant shall obtain at Tenant's cost casualty
insurance for Tenant's fixtures or equipment installed by Tenant on the
Property.
(vii) If Landlord obtains a blanket insurance policy covering more
than one (1) property owned by Landlord, then Landlord agrees to have the
insurance company for such blanket insurance policy allocate any insurance
deductible amount on a per property basis in order that the Property has a
separate stated deductible amount under such blanket insurance policy.
Section 4.5 LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to, processing and accounting charges and late charges which
may be imposed on Landlord by any ground lease, mortgage or trust deed
encumbering the Property. Therefore, if Landlord does not receive any rent
payment within five (5) days after Landlord's written notice to Tenant that
such rent payment is due, Tenant shall immediately pay Landlord a late charge
equal to ten percent (10%) of the overdue amount. After Landlord has given to
Tenant at any time during this Lease term two (2) written notices that rent
payments are past due, Landlord shall no longer have to give Tenant such
written notice under the immediately preceding sentence, and thereafter if
Landlord does not receive any rent payment within five (5) days after such rent
payment becomes due, Tenant shall immediately pay Landlord a late charge equal
to ten percent (10%) of the overdue amount. The parties agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment. If such late charge is not paid when due
hereunder, such failure shall be deemed a default by Tenant, and Tenant shall
(in addition to Landlord's other remedies) pay to Landlord interest (at the
rate specified in Section 4.6, but not greater than the maximum rate permitted
by law on such late charge) on such late charge from the date such late charge
is to be paid to Landlord.
Section 4.6 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest rate
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is hereby decreased to the maximum legal interest rate permitted by law.
Section 4.7 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12) month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord
may apply any funds in the impound account to any obligation then due under
this Lease. Upon the first to occur of the termination of such impound account
or the termination of this Lease, Landlord and Tenant shall reconcile the
amounts held in such impound account and shall pay such amount due to Tenant or
to Landlord (or ground lessor or lender), as the case may be.
ARTICLE FIVE: USE OF PROPERTY
Section 5.1 PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.6 above.
Section 5.2 MANNER OF USE. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
governmental regulation or order, which annoys or interferes with the rights of
any other tenants of Landlord, or which constitutes a nuisance or waste.
Subject to Landlord's duties to obtain certain permits under the Construction
Rider, Tenant shall obtain and pay for all permits required for Tenant's
occupancy of the Property. Tenant shall promptly take all actions necessary to
comply with all applicable statutes, ordinances, rules, covenants, conditions
and restrictions, regulations, orders and requirements regulating the use by
Tenant of the Property, including the Occupational Safety and Health Act.
Tenant acknowledges that this Lease and Tenant's leasehold interest under this
Lease are subordinate to any covenants, conditions and restrictions ("CC&Rs")
presently or in the future promulgated or recorded in connection with the
Property and as a requirement of any parcel map, and any amendments or
modifications thereto. Tenant agrees to comply with any such CC&Rs and to pay
any costs, assessments or charges under such CC&Rs which are charged or
assessed against the Property. Tenant agrees to execute and acknowledge any
document evidencing the subordination
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described in this paragraph, as requested by Landlord from time to time. Tenant
agrees to comply with all of the provisions of such, including but not limited
to use and maintenance of the Property, requirements of any governmental body,
including but not limited to use and maintenance of the Property, provisions
for earth berms, landscaping, parking, storage and waste removal, trucking and
load, drainage care, maintenance and repair of signs. Tenant shall be
responsible for all costs of maintenance, and any assessments or charges as
related to Tenant's Property under any CC&Rs. Notwithstanding the above
provisions of this Section 5.2, if the Shell portion of the Building (as such
capitalized terms are defined in the Construction Rider) including the parking
lot are required to be modified by the validly-organized industrial park
association formed under the CC&Rs or by another landowner in the industrial
park enforcing the CC&Rs by a judgment of a court of competent jurisdiction,
because same were not constructed in compliance with the CC&Rs as such CC&Rs
lawfully existed on the Commencement Date, then Landlord agrees to pay for any
such required modifications.
Section 5.3 HAZARDOUS MATERIALS.
(a) DEFINITIONS. As used in this Section 5.3, the following
definitions shall apply:
(i) "Environmental Laws" shall mean all federal, state and
local laws, ordinances, rules and regulations now or hereafter in force, as
amended from time to time, in any way relating to or regulating human health or
safety, or industrial hygiene or environmental conditions, or protection of the
environment, or pollution, or contamination of the air, soil, surface water or
ground water, including but not limited to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Resource Conservation and
Recovery Act, the Clean Water Act, the Hazardous Substance Account Act,
California Health and Safety Code provisions, the California Hazardous Waste
Control Law, the California Medical Waste Management Act, and the California
Porter-Cologne Water Quality Control Act.
(ii) "Hazardous Material" shall mean any substance or material
that is described as a toxic or hazardous substance, waste or material, or a
pollutant or contaminant, or words of similar import, in any of the
Environmental Laws, and includes asbestos, petroleum (including crude oil or
any fraction thereof, natural gas, natural gas liquids, liquified natural gas,
or synthetic gas useable for fuel, or any mixture thereof), petroleum products,
polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter,
medical waste, and chemicals which may cause cancer or reproductive toxicity.
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(iii) "Release" shall mean any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing into the environment.
(iv) For purposes of this Section 5.3, the activities, acts,
use, production, processing, manufacturing, generation, treatment, handling,
storage and Release by "Tenant" shall mean those of Tenant, Tenant's employees,
contractors, sublessees, customers, licensees, guests, contractors, invitees
and/or agents.
(b) COVENANT ON USE OF PROPERTY. Tenant shall not use, produce,
process, manufacture, generate, treat, handle, store or dispose of any
Hazardous Material in, on or under the Property, or use the Property for any
such purposes, or Release any Hazardous Material into any air, soil, surface
water or ground water at, on or about the Property, or permit any person using
or occupying the Property or any part thereof to do any of the foregoing, which
are in violation of any Environmental Laws. Tenant assumes the risk that
Environmental Laws may change in the future. Subject to Landlord's obligations
pursuant to Paragraph 5.3(f) below, Tenant shall comply, and shall cause all
persons using the Property or any part thereof to comply with all Environmental
Laws applicable to the Property, or the use or occupancy thereof, or any
operations or activities therein or thereon. Tenant shall obtain all permits,
licenses and approvals required by all applicable Environmental Laws for the
use and occupancy of, and all operations and activities in the Property, comply
fully with all such permits, licenses and approvals, and keep all such permits,
licenses and approvals in full force and effect. Landlord's consent in allowing
Tenant to permit or engage in any activity relating to Hazardous Material shall
not be construed to mean Landlord in any way approves of the manner in which
the Tenant is engaging in such activities, or that Landlord has determined that
such activity or manner of activity is safe.
(c) NO STORAGE TANKS. Tenant shall not install or use any storage
tanks on the Property below ground without Landlord's prior written permission.
In no event, however, shall Landlord be required to consent to the installation
or use of any storage tanks on the Property, and Landlord may refuse to allow
the installation thereof for or not for any reason.
(d) NOTICE TO LANDLORD OF PRESENCE OF HAZARDOUS MATERIAL ON PROPERTY.
In the event that any Hazardous Material is present or Released, or there is a
threatened Release of Hazardous Material on or under the Property which has
violated or which may violate an Environmental Law (or any nearby property
which can migrate into or onto the Property), or that any violation of any
Environmental Laws may have occurred at the Property, Tenant shall immediately
give notice to Landlord thereof if Tenant has knowledge thereof.
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Additionally, Tenant shall immediately furnish to Landlord copies of all
written communications received by Tenant from any person or given by Tenant to
any person concerning any past or present Release or threatened Release of
Hazardous Material in, on or under the Property (or any nearby property which
could migrate to the Property), or any past or present violation of any
Environmental Laws which may affect the Property. Landlord shall have the
right, but not the obligation, to obtain from Tenant, at any time, any
additional information reasonably requested by Landlord and available to Tenant
regarding Hazardous Material generated, produced, brought onto, used, stored,
treated or disposed of by Tenant or any other person on or above the Property,
and/or activities relating thereto, on or about the Property. Tenant shall
immediately comply with Landlord's requests.
(e) ENVIRONMENTAL REPORT AND LANDLORD'S RIGHT TO INSPECT AND AUDIT.
Landlord shall have the right, but not the obligation, to enter the Property to
investigate at any time the presence of Hazardous Material, and the compliance
with Environmental Laws, and to take all actions reasonably necessary to
remediate any threat or breach of any Environmental Laws or from any Release of
Hazardous Material on or about the Property. If Landlord has reasonable cause
to believe there has been a Release of Hazardous Materials on the Property or
by Tenant, then Tenant, at Tenant's sole expense, shall have an environmental
audit (which may, in Landlord's determination, include a Phase I and/or a Phase
II environmental report) or other appropriate investigation of the Property
conducted by a third party satisfactory to Landlord and approved by Landlord
regarding the presence of Hazardous Material and compliance with Environmental
Laws. Tenant acknowledges that any such inspections or reports undertaken by
Tenant and Landlord are solely for the protection of Landlord, and agrees that
Landlord has no duty to tenant with respect to Hazardous Material or
Environmental Laws as a result of any such inspections or reports. Landlord, at
Landlord's expense, has obtained a Phase I environmental report for the
Property dated June 5, 1998 prepared by Neblett and Associates, Inc., has
delivered a copy of such Phase I environmental report to Tenant, and Tenant has
reviewed such Phase I environmental report. Tenant shall obtain on the
termination or expiration of this Lease a Phase I environmental report at
Tenant's expense and deliver a copy of same to Landlord.
(f) REMEDIATION WORK. If any Release of Hazardous Material in, on or
under the Property occurs by any person during the term of this Lease (other
than underground migration of Hazardous Materials under the Property which
originates outside of the Property through no fault of Tenant) or by Tenant at
any time, Tenant shall immediately give notice of the condition to Landlord,
and Tenant shall promptly clean up and remove all Hazardous Material so
released and restore the Property to be in compliance
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with all Environmental Laws (the "Remediation Work"). Tenant shall comply with
the orders and directives of all persons having jurisdiction over the Property
or the Remediation Work. Landlord may review any plans and specifications for
the Remediation Work before such Remediation Work is performed. Any such plans
or specifications shall be prepared by a qualified, licensed engineer or
contractor, which Landlord shall have the right to approve (which approval
shall not be unreasonably withheld or delayed), and shall comply with all
applicable Environmental Laws, and all other laws, ordinances, rules and
regulations. Tenant shall be responsible at Tenant's sole expense to obtain all
permits, licenses and approvals for the Remediation Work and to complete the
Remediation Work diligently and in a timely manner. Tenant shall pay for all
Remediation Work, including the cost of plans, utilities, permits, fees, taxes
and insurance premiums in connection therewith. Tenant shall furnish to
Landlord promptly upon receipt, copies of all reports, studies, analysis,
investigations, contracts, correspondence, claims, complaints, pleadings and
other information and communications received or prepared by Tenant at any time
in connection with any Remediation Work. If there is underground migration of
Hazardous Materials under the Property in violation of Environmental laws which
originate outside of the Property through no fault of Tenant, and an authorized
governmental agency requires Landlord to investigate, remediate or remove such
Hazardous Materials, the Landlord, at Landlord's sole cost, agrees to comply
with such governmental order. Additionally, if Hazardous Materials (other than
Hazardous Materials contained in the building materials of the Property) exist
on the Property prior to the Commencement Date through no fault of Tenant or
Tenant's contractors which are not part of the Tenant Improvements, and an
applicable governmental agency orders that Landlord investigate, remediate or
remove such Hazardous Materials, then Landlord at Landlord's sole cost agrees
to comply with such governmental order.
(g) RIGHT TO PARTICIPATE BY LANDLORD. Landlord shall have the right, but
not the obligation, to participate in any action or proceeding relating to any
past or present Release or threatened Release of any Hazardous Material in, on
or under the Property, or any past or present violation of any Environmental
Laws at the Property, or the necessity for or adequacy of any Remediation Work.
Tenant shall provide immediate notice upon receipt to Landlord and allow
Landlord to participate in any negotiations or discussions with any federal,
state or local governmental agency, including environmental, occupational or
public health and safety agencies with regard to Hazardous Material or any
Environmental Laws, including all settlement or discussions regarding abatement
or Remediation Work.
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(h) BURDEN OF PROOF. The burden of proof under this Section regarding
establishment of a date upon which a Hazardous Material was or was not placed
or appeared or did not appear in, on or under the Property shall be upon the
Tenant.
(i) REQUIRED INSURANCE. In the event that Tenant is required to obtain a
permit or other governmental authorization to use Hazardous Materials, and
Tenant shall permit Hazardous Material upon the Property or engage in
activities relating to Hazardous Material on, about or above the Property, then
unless such insurance is not available at commercially reasonable rates as a
result of Hazardous Materials existing on the Property as of the Commencement
Date through no fault of Tenant or Tenant's contractor, Tenant shall, at
Tenant's expense, procure and maintain insurance coverage insuring Tenant and
Landlord against any and all liability arising from such Hazardous Material or
activities relating thereto. Tenant shall duly provide Landlord with a
certificate of such insurance coverage, in such amounts and from such carriers
as Landlord shall require.
(j) INDEMNIFICATION BY TENANT. Tenant shall indemnify, reimburse, defend
and hold harmless Landlord (and its employees, partners, agents, affiliates,
successors, lenders and representatives) against all claims, demands,
liabilities, losses, damages, costs and expenses in any way arising from,
relating to, or connected with: (i) the use, generation, manufacture, storage,
disposal, handling, or Release or threatened Release of any Hazardous Material
in, on or under the Property by any person during the term of this Lease or by
Tenant at any time; (ii) any violation of Environmental Laws at the Property by
any person during the term of this Lease or by Tenant at any time; (iii) any
breach of any duty to perform Remediation Work required of Tenant under this
Section 5.3; and/or (iv) any breach of any covenant, representation or warranty
made by Tenant hereunder, or any failure of Tenant to perform any of Tenant's
covenant's or obligation in accordance with this Section. Tenant's duties to
indemnify Landlord under this Paragraph 5.3(j) shall not apply to any
underground migration of Hazardous Materials under the Property which originate
outside of the Property through no fault of Tenant. The indemnification
hereunder shall include all expenses of investigation and monitoring, costs of
containment, abatement, removal, repair, clean up, restoration and remedial
work, penalties and fines, reasonable attorneys' fees and disbursements and
other response costs. The indemnification hereunder shall also include any lost
rental amounts and other damages because of the release of Hazardous Material,
violation of Environmental Laws, or because such Hazardous Material must be
remediated from the Property. If Tenant fails to perform any obligation of
Tenant in accordance with this Section, Landlord shall have the right, but not
the obligation, to perform such obligation on behalf of Tenant. Tenant
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shall, on demand, pay to Landlord all sums expended by Landlord in the
performance of any such obligations of Tenant, together with interest thereon
after such demand at the maximum rate of interest then provided by law. The
term "attorneys' fees" under this Section shall mean reasonable fees charged
by the attorneys in question based upon such attorneys' then prevailing hourly
rates as opposed to any statutory presumption specified by any statute then in
effect in the State of California.
(k) LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord represents and
warrants to the best of Landlord's actual knowledge on the date hereof that:
(i) on the Commencement Date there are no Hazardous Materials present on the
Property or in the soil or ground water which are in violation of Environmental
Laws existing on the Commencement Date for which Landlord is required to
remediate same; (ii) on the Commencement Date there are no underground storage
tanks or asbestos-containing building materials present on the Property in
violation of Environmental Laws existing on the Commencement Date which require
Landlord's remediation of same; and (iii) on the date hereof Landlord has
received no written notice of any action, proceeding or claim which is pending
or threatened against Landlord concerning the Property's violation of any
Environmental Laws. If Landlord should violate any of the representations or
warranties of Landlord under this paragraph (k), then Tenant's sole remedy
shall be to require Landlord to correct such violation of Environmental Laws if
such correction is required by a governmental agency, and Landlord shall not be
liable for any consequential damage to any person, property or business. The
above representations and warranties of Landlord under this paragraph (k) shall
not apply to any of the Tenant Improvements installed by Tenant or Tenant's
contractors, any Hazardous Material brought onto the Property by Tenant or
Tenant's contractors, or any violation of any Environmental Laws caused by
Tenant or Tenant's contractors.
(l) SURVIVABILITY. All representations, warranties and indemnifications
under this Section shall survive the termination of the Lease. Tenant waives
the right to assert any statute of limitations as a bar to the enforcement of
this Section or to any action brought to enforce the provisions of this Section.
(m) REMEDIES CUMULATIVE. This Section shall not affect, impair or waive
any rights or remedies of Landlord or any obligations of Tenant with respect to
Hazardous Materials imposed or created by Environmental Laws (including
Landlord's rights of reimbursement or contribution under Environmental Laws).
The remedies in this Section are cumulative and in addition to all remedies
provided by law.
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Section 5.4. OUTSIDE STORAGE. In addition to any other provision specified
in this Lease or as required by any law, rule or regulation, Tenant agrees to
not have any outside storage of inventory or materials (other than for
designated trash areas in compliance with all laws) and to keep the exterior of
the Property free from debris.
Section 5.5. SIGNS AND AUCTIONS. Tenant may place signs on the Property
subject to Landlord's prior written consent, which consent shall not be
unreasonably withheld. All signs shall comply with all federal, state and local
laws, rules and regulations. Landlord reserves the right to approve the size,
type and appearance of any sign. Landlord may require that any sign be
installed only by companies approved by Landlord, and such approval shall not
be unreasonably withheld or delayed. Tenant shall pay all costs for the
construction and maintenance of any signs. Tenant shall not conduct or permit
any auctions or sheriff's sales at the Property. Landlord agrees during the
Lease Term to not place any "For Sale" signs on the Property.
Section 5.6. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property;
(c) any breach or default in the performance of Tenant's obligations under this
Lease; (d) any misrepresentation or breach of warranty by Tenant under this
Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord
against any such cost, claim or liability at Tenant's expense with counsel
reasonably acceptable to Landlord or, at Landlord's election, Tenant shall
reimburse Landlord for any reasonable legal fees or costs incurred by Landlord
in connection with any such claim. As a material part of the consideration to
Landlord, Tenant assumes all risk of damage to property or injury to persons in
or about the Property arising from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, except for claims for Landlord's or
Landlord's employees' or contractors' willful misconduct or negligence prior to
the Commencement Date which occur during the construction of the Building. As
used in this Section, the term "Tenant" shall include Tenant's employees,
agents, contractors and invitees, if applicable.
Section 5.7. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or during the last twelve (12) months of the Lease Term (and at any
time if Tenant should then be in default) tenants or other parties; to do any
other act or to inspect and conduct tests in order to monitor Tenant's
compliance with all applicable Environmental Laws and all laws governing the
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presence and use of Hazardous Material; or for any other purpose Landlord
reasonably deems necessary. Landlord shall give Tenant at least twenty-four
(24) hours prior notice to such entry, except in the case of an emergency.
Tenant shall have the right to accompany Landlord at all times during
Landlord's entry onto the Property (except in the case of an emergency).
Landlord may place customary "For Lease" signs (but not "For Sale" signs) on
the Property during the last twelve (12) months of the Lease Term (and at any
time should the Tenant then be in default).
Section 5.8 QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
Section 5.9 FUTURE EASEMENTS AND GOVERNMENTAL REQUIREMENTS. Tenant
agrees that Tenant shall cooperate with Landlord in granting any easements and
executing any covenants, conditions or restrictions which may be required by
any governmental agency or utility for the Property, or which Landlord may
otherwise require, provided that such easement, condition or restriction does
not materially interfere with Tenant's use of the Property.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.1 EXISTING CONDITIONS. Subject to the Construction Rider,
Tenant accepts the Property in its current condition, subject to all recorded
matters, laws, ordinances, and governmental regulations and orders. Except as
provided in the Construction Rider, Tenant acknowledges that neither Landlord
nor any agent of Landlord has made any representation as to the condition of
the Property or the suitability of the Property for Tenant's intended use.
Tenant agrees that Tenant assumes responsibility for the adequacy and capacity
of the Property's mechanical and electrical systems; use of the Property for
Tenant's proposed purposes; and the laws, rules and regulations of federal,
state and local governmental bodies affecting the Property, including parking
requirements for any of Tenant's present or proposed uses of the Property.
Tenant is relying upon Tenant's own investigation, and neither Landlord nor any
agent of Landlord has made any representations or warranties to Tenant
regarding the items stated in the preceding sentence.
Section 6.2 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
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whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or
other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or from other sources or places; or (d) any act or
omission of any other tenant of Landlord. Landlord shall not be liable for any
such damage or injury even though the cause of or the means of repairing such
damage or injury are not accessible to Tenant.
Section 6.3 LANDLORD'S OBLIGATIONS. This Section 6.3 is subject to the
provisions of Article Seven (Damage or Destruction), Article Eight
(Condemnation), and paragraph 4 of the Construction Rider (Landlord's
Warranty). Landlord has absolutely no responsibility to repair, maintain or
replace any portion of the Property at any time, except as follows. Landlord
agrees to repair, maintain and as required replace the structural elements of
the Building walls, the structural elements of the roof (specifically excluding
the roof membrane and any other parts of the roof), the foundation of the
Building, any interior structural support columns, and the structural portion
of the mezzanine deck. If any of the structural elements of the Building walls,
the structural elements of the roof (specifically excluding the roof membrane
and any other parts of the roof), the foundation of the Building, any interior
structural support columns, or any structural portion of the mezzanine deck is
required to be modified because of changes to governmental laws, rules or
regulations after the Commencement Date (and such foundation or structural
items are not allowed by the applicable governmental agency to remain
unmodified), then Landlord agrees to pay the cost of such changes. Landlord's
obligation under this Section 6.3 shall solely be to repair or replace same as
may be required, and Landlord shall not be liable for any consequential damages
to any person, property or business of Tenant. Landlord shall not be
responsible (and tenant shall be responsible) for any damage to the structural
portion of the building, roof or columns caused by Tenant's acts or negligence
or those of Tenant's employees, contractors, customers or invitees. Tenant
waives the benefit of any present or future law which might give Tenant the
right to repair the Property at Landlord's expense.
Section 6.4 TENANT'S OBLIGATIONS.
(a) TENANT. Except as provided in Section 6.3 (Landlord's Obligations),
Article Seven (Damage or Destruction), Article Eight (Condemnation), and
paragraph 4 of the Construction Rider (Landlord's Warranty), Tenant shall keep
all portions of the Property (including but not limited to nonstructural, roof
membrane and nonstructural portions of the roof, interior, systems, Tenant
Improvements and equipment) in good order, condition and repair and maintain
same (including interior repainting and refinishing, as
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needed and any changes or repairs required by changes to governmental laws,
rules or regulations effective after the Commencement Date). If any portion of
the Property or any system or equipment in the Property which Tenant is
obligated to repair cannot be fully repaired or restored, Tenant shall promptly
replace such portion of the Property or system or equipment in the Property,
regardless of whether the benefit of such replacement extends beyond the Lease
Term. Tenant shall maintain a preventive maintenance contract providing for the
regular inspection and maintenance of the heating and air conditioning system by
a licensed heating and air conditioning contractor. In carrying out Tenant's
obligations under this Paragraph 6.4(a), Tenant may utilize any insurance
proceeds paid under an insurance policy under Section 4.4 to Landlord or Tenant
which is then available for the repair of such portion of the Property and,
additionally, Landlord shall cooperate with Tenant in enforcing any warranties
regarding the Property as described in paragraph 4.1 of the Construction Rider.
If any part of the Property is damaged by any act or omission of Tenant, Tenant
shall either repair the damaged part of the Property or pay Landlord the cost of
repairing or replacing such damaged property, even if Landlord would otherwise
be obligated to pay the cost of maintaining or repairing such property. Landlord
shall have the right, in Landlord's discretion, to require Tenant to utilize
maintenance and landscape companies and contractors approved by Landlord to keep
in good order, condition and repair the Property, including, but not limited to,
the painting of the exterior and interior of any improvements on the Property,
the repair and maintenance of the parking areas, landscaping of the Property,
and the maintenance of the roof, all at periodic intervals. Specifically, under
the immediate preceding sentence, Landlord may require Tenant to utilize
Landlord's chosen landscapers (provided the cost of same is competitive for the
area for the same quality) in order to keep the landscaping in first-class
condition and may have such landscapers bill Tenant directly or Landlord may
bill Tenant for such landscapers. Any such costs and expenses done or paid for
by Landlord shall be paid and reimbursed by Tenant to Landlord directly or upon
billing by the Landlord, and shall be treated as monetary amounts due under the
terms of the Lease. It is the intention of Landlord and Tenant that at all times
Tenant shall maintain the portions of the Property which Tenant is obligated to
maintain in an attractive, first-class, and fully operative condition.
(b) TENANT'S FAILURE. Tenant shall fulfill all of Tenant's obligations
under this Section 6.4 at Tenant's sole expense. If Tenant fails to maintain,
repair or replace the Property as required by this Section 6.4, Landlord may,
upon ten (10) days' prior notice to Tenant (except that no notice shall be
required in the case of any emergency), enter the Property and perform such
maintenance or repair (including replacement, as needed) on behalf
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of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred
in performing such maintenance or repair immediately upon demand.
Section 6.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) NO ALTERATIONS WITHOUT LANDLORD'S CONSENT. Tenant shall not make any
alterations, additions, or improvements to the Property without Landlord's
prior written consent, except for non-structural alterations which do not
exceed Twenty-Five Thousand Dollars ($25,000) per calendar year and which are
not visible from the outside of any building of which the Property is part.
Landlord shall not unreasonably withhold or delay Landlord's consent under the
immediately preceding sentence. Landlord may require Tenant to provide
demolition and/or lien and completion bonds in forms and amounts satisfactory
to Landlord. Tenant shall promptly remove any alterations, additions, or
improvements constructed in violation of this Paragraph 6.5(a) upon Landlord's
written request. All alterations, additions, and improvements shall be done in
a good and workmanlike manner, in conformity with all applicable laws and
regulations, and by a contractor approved by Landlord. Upon completion of any
such work, Tenant shall provide Landlord with "as built" plans, copies of all
construction contracts, and proof of payment for all labor and materials.
(b) PAYMENT REQUIRED. Tenant shall pay when due all claims for labor and
material furnished to the Property. Tenant shall give Landlord at least twenty
(20) days' prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord may
elect to record and post notices of non-responsibility on the Property.
Section 6.6 CONDITION UPON TERMINATION. Upon the termination of this
Lease, Tenant shall surrender the Property (including the Tenant Improvements)
to Landlord, broom clean and in the same condition as received except for
ordinary wear and tear which Tenant was not otherwise obligated to remedy under
any provision of this Lease. However, Tenant shall not be obligated to repair
any damage which Landlord is required to repair under Article Seven (Damage or
Destruction), and this Section 6.6 is subject to Article Seven. In addition,
Landlord may require Tenant to remove any alterations, additions or improvements
made without Landlord's written consent, except for the Tenant Improvements
constructed pursuant to the Construction Rider and alterations made in
compliance with the first sentence of Section 6.5, prior to the expiration of
this Lease and to restore the Property to its prior condition, all at Tenant's
expense. All alterations, additions, Tenant Improvements, and other improvements
which Landlord has not required Tenant to remove shall become Landlord's
property and shall be surrendered to Landlord upon the expiration or earlier
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termination of this Lease, except that Tenant may remove any of Tenant's
machinery or equipment (which are not Tenant Improvements) which can be removed
without material damage to the Property. Tenant shall repair, at Tenant's
expense, any damage to the Property caused by the removal of any such machinery
or equipment. In no event, however, shall Tenant remove any of the following
materials or equipment (which shall be deemed Landlord's property) without
Landlord's prior written consent: the Tenant Improvements (as defined in the
Construction Rider); any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations. Notwithstanding the above, upon the
termination of this Lease, Tenant shall remove Tenant's signs from the
Property, at Tenant's expense, and repair any damage caused by such removal.
Section 6.7 COMMON AREAS. Subject to Section 5.2, Tenant shall pay
monthly, in advance, any common area maintenance and repair costs, assessments
and charges for the Property under any CC&Rs (defined in Section 5.2). Tenant
shall also comply with any CC&Rs respecting the management, care and safety of
the common areas of the industrial park and grounds of which the Property is a
part, including parking areas, landscape areas, walkways and other areas
provided for the common use and convenience of other occupants of the
industrial park of which the Property is a part.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.1 DAMAGE TO PROPERTY.
(a) INSURED LOSS. Tenant shall notify Landlord in writing immediately
upon the occurrence of any damage to the Property. If there is damage to the
Property caused by a casualty and the proceeds received by Landlord from the
insurance policies maintained under Paragraph 4.4(b) (where Landlord or
Landlord's lender is the loss payee) plus any deductible amount required to be
paid by Landlord and/or Tenant are sufficient to pay for the necessary repairs
to the Property, this Lease shall remain in effect and Landlord shall repair
the damage to the Property within twelve (12) months of the occurrence of same,
and Tenant shall pay to Landlord any deductible amounts under any insurance
policies (subject to subparagraph 4.4(d)(iii)).
(b) INSURANCE PROCEEDS ARE NOT SUFFICIENT. If there is damage to the
Property caused by a casualty, and if the insurance proceeds received by
Landlord plus any deductible amount required to be paid by Landlord and/or
Tenant are not sufficient to pay the
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entire cost of repair, or if the cause of the damage is not covered by the
insurance policies which are maintained under Paragraph 4.4(b) where Landlord or
Landlord's lender is the loss payee, then Landlord may elect either to: (i)
repair the damage to the Shell (but not the Tenant Improvements) as soon as
reasonably possible, in which case this Lease shall remain in full force and
effect, and Tenant shall repair at Tenant's cost the Tenant Improvements; or
(ii) terminate this Lease as of the date the damage occurred. If Landlord elects
to repair the damage to the Shell under the immediately preceding sentence, then
Landlord shall make available to Tenant (or Landlord shall utilize same or
establish a construction draw account) all insurance proceeds which Landlord
receives which are designated by the insurance company for the construction of
the Tenant Improvements (and not the Shell) and which are not subject to
Landlord's lender's other requirements. If under the immediately preceding
sentence Landlord's lender should require that the insurance proceeds otherwise
designated for the Tenant Improvements (and not the Shell) be used to pay
amounts of Landlord's debt to such lender secured by the Property, then Landlord
agrees to make available to Tenant for repairing the Tenant Improvements (or
establish a construction draw account) an amount equal to such insurance proceed
which Landlord's lender has so utilized to make payments on such loan. Landlord
shall notify Tenant within thirty (30) days after receipt of notice of the
occurrence of the damage whether Landlord elects to repair the damage to the
Shell or terminate the Lease. If Landlord elects to repair the damage to the
Shell, Landlord shall repair such damage to the Shell within twelve (12) months
of Landlord's receipt of notice of such damage, and Tenant shall pay Landlord
the "deductible amount" (if any) under any insurance policies (subject to
Paragraph 4.4(b)) and, if damage was due to an act, omission or negligence of
Tenant, or Tenant's customers, licensees, visitors, employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord (and this Lease may not be
terminated by Tenant under Section 7.4). If Landlord elects to terminate this
Lease, Tenant may elect by written notice to continue this Lease in full force
and effect, in which case Tenant shall repair any damage to the entire Property
and any building in which the Property is located (including both the Shell and
the Tenant Improvements), and Tenant shall pay the cost of such repairs (if
there is earthquake insurance required by landlord's lender on the Shell and the
Tenant Improvements, then Landlord and Tenant shall each pay 50% of any
deductible amount under such earthquake insurance policy), Landlord shall
deliver to Tenant any insurance proceeds (or establish an account for
construction draws) received by Landlord for the damage repaired by Tenant.
Tenant shall give Landlord written notice of such election within ten (10) days
after receiving Landlord's termination notice. If under this Paragraph 7.1(b)
Landlord elects to terminate this Lease and Tenant does not elect to continue
this
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Lease, and if Landlord's lender is not a loss payee on such insurance, then any
Tenant's Earthquake Insurance proceeds (for policies under subparagraph
4.4(b)(iii) solely obtained by Tenant for the Tenant Improvements and not the
Shell), as specifically stated on the policy allocable to the Tenant
Improvements and which proceeds are received by Tenant, may be retained by
Tenant.
(c) SUBSTANTIAL DAMAGE DURING LAST TWELVE MONTHS. If the damage by a
casualty to the Shell portion of the Property is substantial (i.e., greater than
50% of the area of the Building is damaged) and occurs during the last twelve
(12) months of the Lease Term (including any options to extend the Lease Term
which are then exercised) and such damage will require more than ninety (90)
days to repair, either Landlord or Tenant may elect to terminate this Lease as
of the date the damage occurred. Either party shall give written notification to
the non-terminating party of such election within thirty (30) days after the
terminating party's actual receipt of written notice of the occurrence of the
damage. In the event of any termination of this Lease under this paragraph (c),
Landlord (or Landlord's lender, as the case may be) shall have the right to
retain all of the insurance proceeds for insurance policies obtained under
Paragraph 4.4(b).
Section 7.2 TEMPORARY REDUCTION OF RENT. If the Property is destroyed or
damaged and Landlord or Tenant repairs or restores the Property pursuant to the
provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced, but in an amount not to
exceed the amount of the proceeds of rental continuation insurance received by
Landlord covering such period of time. Except for such possible reduction in
Base Rent, insurance premiums and real property taxes, Tenant shall not be
entitled to any compensation, reduction, or reimbursement from Landlord as a
result of any damage, destruction, repair, or restoration of or to the Property.
Section 7.3 WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Sections 7.1, 7.2, 7.4 and 7.5 shall govern the
rights and obligations of Landlord and Tenant in the event of any casualty
damage to the Property.
Section 7.4 LANDLORD'S FAILURE TO REPAIR WITHIN 12 MONTHS. If under
Paragraphs 7.1(a) or 7.1(b) Landlord fails to fulfill Landlord's obligations to
repair the Shell portion of the Building (specifically excluding the Tenant
Improvements) as required thereunder within twelve (12) months of the date that
Landlord receives written notice of such damage, then Tenant's sole remedy
against Landlord for such failure shall be to elect by written
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notice to Landlord within thirty (30) days of the termination of the twelve (12)
month period to terminate this Lease. Tenant shall also have the right to
terminate the Lease if Landlord's then designated architect states in writing
that it will take Landlord more than twelve (12) months from the date that
Landlord receives written notice of such damage to fulfill Landlord's
obligations to repair the Shell portion of the Building. In the event of such
written election by Tenant to terminate under this Section 7.4, Landlord shall
pay to Tenant an amount equal to the Tenant's cost of the Tenant Improvements
(which cost shall be agreed to by Landlord and Tenant under paragraph 3.3 of the
Construction Rider) multiplied times a fraction of which the numerator is the
number (if any) of remaining months in the initial Lease Term, and the
denominator is one hundred twenty-three (123). Tenant's right to terminate the
Lease under this Article Seven for Landlord's failure to repair the Property
within twelve (12) months shall only apply to Landlord's failure to repair the
Shell, and shall not apply to Landlord's failure to repair the Tenant
Improvements within such twelve (12) month period. Any duty of Landlord to
construct or repair the Tenant Improvements as part of the Property under this
Article Seven shall only require Landlord to use Landlord's reasonable efforts
to complete such repairs within such specified period of time, and Tenant shall
not have any right to terminate this Lease regarding any such failure.
Section 7.5 REPAIR OF SHELL TO SIMILAR CONDITION. If, pursuant to
Paragraphs 7.1(a) or (b), Landlord because of a casualty is obligated or elects
to repair and restore the Shell and/or the Tenant Improvements, Landlord shall
repair and restore the Shell and/or Tenant Improvements, as required under such
paragraphs to the extent of available insurance proceeds, to substantially the
same condition (or better condition) which the Shell and/or Tenant Improvements
existed immediately prior to the casualty damage, subject to any changes that
might be required to the design, repair or restoration of the Shell and/or
Tenant Improvements under any laws, rules or regulations, including but not
limited to any zoning or similar laws. Similarly, if, pursuant to Paragraphs
7.1(a) or (b), Tenant because of a casualty is obligated or elects to repair and
restore the Tenant Improvements and/or the Shell, Tenant shall repair and
restore the Tenant Improvements and/or the Shell to substantially the same
condition (or better condition) which the Tenant Improvements and/or the Shell
existed immediately prior to the damage, subject to any changes that might be
required to the design, repair or restoration of the Tenant Improvements and/or
the Shell under any laws, rules or regulations, including but not limited to any
zoning or similar laws.
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ARTICLE EIGHT: CONDEMNATION
If all or any portion of the building portion of the Property (but not the
land) is taken under the power of eminent domain or sold under the threat of
that power (all of which are called "Condemnation"), this Lease shall terminate
as to the part taken or sold on the date the condemning authority takes title
or possession, whichever occurs first. If more than sixty percent (60%) of the
floor area of the building which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent shall be reduced in proportion to the reduction
in the floor area of the Property. Any Condemnation award or payment shall be
distributed to Landlord for compensation for reduction in the value of the
leasehold, the taking of the fee, or otherwise. Any Condemnation award or
payment shall be paid to Landlord (with the exception that any Condemnation
award which is specifically designated by the governmental agency for the taking
of the Tenant Improvements, Tenant's moving expenses and trade fixtures shall be
paid to Tenant as long as such award does not diminish any award that would
otherwise have been paid to Landlord). If this Lease is not terminated, Landlord
shall repair any damage to the Property caused by the Condemnation, except that
Landlord shall not be obligated to repair any damage for which Tenant has been
reimbursed by the condemning authority (and Tenant shall use any Condemnation
award paid to Tenant for the repair of the Tenant Improvements). If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.1 LANDLORD'S CONSENT REQUIRED. No portion of the Property or of
Tenant's interest in this Lease may be acquired by any other person or entity,
whether by sale, assignment, mortgage, sublease, transfer, operation of law, or
act of Tenant, without Landlord's prior written consent, except as provided in
Section 9.2 below. Landlord has the right to grant or withhold its consent as
provided in Section 9.5 below. Any attempted transfer without consent shall be
void and shall constitute a non-curable breach of this Lease.
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Section 9.2 TENANT AFFILIATE. Tenant may assign this Lease or sublease the
Property, without Landlord's consent, to any corporation which controls, is
controlled by, or is under common control with Tenant ("Tenant's Affiliate").
In such case, any Tenant's Affiliate shall assume in writing all of Tenant's
obligations under this Lease. Tenant may merge its entire business into another
corporation or sell all of its assets to another corporation without Landlord's
consent under this Article Nine provided that Tenant provides Landlord written
notice of the name of such acquiring corporation and the description of such
transfer prior to closing such transaction. Nothing under this Section 9.2
shall release Tenant from having continuing liability under the terms of this
Lease or waive any other required Landlord's consent to any other future
transfers of the Tenant's leasehold interest under this Lease.
Section 9.3 NO RELEASE OF TENANT. No transfer permitted by this Article
Nine (even if to Tenant's Affiliate), whether with or without Landlord's
consent, shall release Tenant or change Tenant's primary liability to pay the
rent and to perform all other obligations of Tenant under this Lease.
Landlord's acceptance of rent from any other person is not a waiver of any
provision of this Article Nine. Consent to one transfer is not a consent to any
subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord
may proceed directly against Tenant without pursuing remedies against the
transferee. Landlord may consent to subsequent assignments or modifications of
this Lease by Tenant's transferee, without notifying Tenant or obtaining its
consent. Such action shall not relieve Tenant's liability under this Lease.
Section 9.4 OFFER TO TERMINATE. Subject to Section 9.2, if Tenant desires
to assign the Lease or sublease the Property, Tenant shall have the right, at
Tenant's sole option, to offer, in writing, to terminate the Lease as of a date
specified in the offer. If Landlord elects in writing to accept the offer to
terminate within twenty (20) days after notice of the offer the Lease shall
terminate as of the date specified and all the terms and provisions of the
Lease governing termination shall apply. If Landlord does not so elect in
writing, the Lease shall continue in effect until otherwise terminated under
this Lease and the provisions of Section 9.5 with respect to any proposed
transfer shall continue to apply.
Section 9.5 LANDLORD'S CONSENT. Tenant's request for consent to any
transfer described in Section 9.1 shall set forth in writing the details of the
proposed transfer, including the name, business and financial condition of the
prospective transferee, type of the prospective transferee including, but not
limited to, the use of Hazardous Material, financial details of the proposed
transfer (e.g., the term of and the rent and security deposit
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payable under any proposed assignment or sublease), and any other information
Landlord reasonably deems relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors:
(1) the business of the proposed assignee or subtenant and the proposed use of
the Property including, but not limited to, the use of any Hazardous Material;
(ii) the net worth and financial reputation of the proposed assignee or
subtenant; and (iii) the prospective assignee's or sublessee's compliance with
all of the obligations under the Lease.
Section 9.6 LANDLORD'S SHARE OF PREMIUM. If Tenant assigns or subleases
the Property or any portion thereof (except in the case of transfers to a
Tenant Affiliate or a merger or sale of Tenant's entire business as described in
Section 9.2), the following provisions shall apply:
(i) Tenant shall pay to Landlord as additional rent under the Lease
the Applicable Percentage of the Profit (defined below) on such transaction as
and when received by Tenant (or to Landlord directly if Landlord gives written
notice that Landlord's share of such Profit shall be paid by the assignee or
subtenant to Landlord directly). The "Profit" means all amounts paid to Tenant
for such assignment or sublease, including "key" money, monthly rent in excess
of the monthly rent payable under the Lease and all fees and other
consideration paid for the assignment or sublease, including fees under any
collateral agreements less: (a) brokerage commissions paid for such sublease or
assignment paid to third-party licensed brokers; (b) attorneys' fees paid by
Tenant in connection with such sublease or assignment up to a Three Thousand
Dollar ($3,000) maximum amount; and (c) after considering any free rent
amortized without interest over the sublease or assignment term. The Profit in
the case of a sublease of less than all the Property is the rent allocable to
the subleased space as a percentage on a square footage basis. The "Profit"
shall not include amounts paid to Tenant by the assignee or sublessee for the
Tenant's out-of-pocket costs incurred by Tenant (and then actually reimbursed
by Tenant to Landlord or paid by Tenant directly to the governmental authority,
insurance company or repair contractor, as the case may be) for the normal and
regular maintenance, repair and replacement of the Property and real estate
taxes and insurance premiums which are paid directly by Tenant. The "Applicable
Percentage" of Profits paid for the first sixty (60) months of the Lease Term
shall be twenty percent (20%), and for any period of the Lease thereafter
(including option terms) shall be forty percent (40%). If the Profit is in the
form of increased rent, then the amount of the Applicable Percentage for each
portion of the Profit shall be based upon when each such portion of the Profit
is to be paid under the sublease or assignment; with the exception that if a
lump sum amount or "key" money is paid covering a period more than one month,
such amount shall be spread pro rata (without
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interest) over the term of the sublease or remaining term of the assigned
Lease, as the case may be, to determine when each portion of the Profit is to
be received for purposes of determining the Applicable Percentage.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and Landlord
may inspect from time to time Tenant's books and records to verify the accuracy
of such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt of
landlord's share of the Profit shall not be a consent to any further assignment
or subletting. The breach of Tenant's obligation under this Section 9.6 shall
be a material default of the Lease.
Section 9.7 NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease, or the
termination of this Lease in any other manner. In any event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.1 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.2 DEFAULTS. Tenant shall be in default under this Lease:
(a) VACATION. If Tenant's vacation of the Property results or will result
in the cancellation of any insurance described in Section 4.4 and Tenant fails
to have such insurance corrected within five (5) days after Tenant receives
notice from Landlord or any insurance company of such cancellation or intention
to cancel (Tenant's vacation of the Property shall also be a default unless
Tenant continues to provide a regular security service in order to protect the
Property);
(b) FAILURE TO PAY. If Tenant fails to pay rent or any other charge or
amount when due;
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(c) NONPERFORMANCE. If Tenant fails to perform any of Tenant's
non-monetary obligations under this Lease for a period of thirty (30) days
after written notice from Landlord; provided that if more than thirty (30) days
are required to complete such performance, Tenant shall not be in default if
Tenant commences such performance within the thirty (30) day period and
thereafter diligently pursues its completion. The notice required by this
paragraph is intended to satisfy any and all notice requirements imposed by law
on Landlord and is not in addition to any such requirement.
(d) GENERAL ASSIGNMENT AND BANKRUPTCY. (i) If Tenant makes a general
assignment or general arrangement for the benefit of creditors; (ii) if a
petition for adjudication of bankruptcy or for reorganization or rearrangement
is filed by or against Tenant and is not dismissed within thirty (30) days;
(iii) if a trustee or receiver is appointed to take possession of substantially
all of Tenant's assets located at the Property or of Tenant's interest in this
Lease and possession is not restored to Tenant within thirty (30) days; or (iv)
if substantially all of Tenant's assets located at the Property or of tenant's
interest in this Lease is subjected to attachment, execution or other judicial
seizure which is not discharged within thirty (30) days. If a court of
competent jurisdiction determines that any of the acts described in this
paragraph (d) is not a default under this Lease, and a trustee is appointed to
take possession (or if Tenant remains a debtor in possession) and such trustee
or Tenant transfers Tenant's interest hereunder, then Landlord shall receive,
as Additional Rent, the excess, if any, of the rent (or any other
consideration) paid in connection with such assignment or sublease over the
rent payable by Tenant under this Lease.
Section 10.3 REMEDIES. On the occurrence of any default by Tenant,
Landlord may, at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(a) TYPES OF REMEDIES. Terminate Tenant's right to possession of the
Property by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Property to Landlord. In
such event, Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default, including: (i) the worth at
the time of the award of the unpaid Base Rent, Additional Rent and other
charges which Landlord had earned at the time of the termination; (ii) the
worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which Landlord would have earned after
termination until the time of the award exceeds the amount of such rental loss
that Tenant proves Landlord could have reasonably avoided; (iii) the worth at
the time
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of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Tenant would have paid for the balance of the Lease Term
after the time of the award exceeds the amount of such rental loss that Tenant
proves Landlord could have reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses Landlord incurs in maintaining or
preserving the Property after such default, the cost of recovering possession of
the Property, expenses of reletting, including necessary renovation or
alteration of the Property, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of fifteen percent (15%) per
annum, or such lesser amount as may then be the maximum lawful rate. AS used in
subpart (iii) above, the "worth at the time of the award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%). If Tenant has
abandoned the Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the amount specified in
this Paragraph 10.3(a), or (ii) proceeding under Paragraph 10.3(b).
(b) MAINTAIN TENANT'S RIGHT OF POSSESSION. Maintain Tenant's right to
possession (in California under California Civil Code Section 1951.4, as
amended, or its successor provision), in which case this Lease shall continue in
effect whether or not Tenant has abandoned the Property. In such event, Landlord
shall be entitled to enforce all of Landlord's rights and remedies under this
Lease, including the right to recover the rent as it becomes due. Landlord and
Tenant agree that the limitations on assignment and subletting contained in
Article Nine of this Lease are reasonable. Landlord and Tenant specifically
agree that Landlord's acts, if any, of maintenance or preservation, and
Landlord's efforts to relet Property, or the appointment of a receiver to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(c) OTHER REMEDIES. Pursue any other remedy now or hereafter
available to Landlord under the laws or judicial decisions of the state in
which the Property is located.
Section 10.4 REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent,
"forgiven" rent or other rent concession, such postponed or "free" rent is
called the "Abated Rent". Tenant shall be credited with having paid all of the
Abated Rent on
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the expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition
required by this Lease. Tenant acknowledges that its right to receive credit
for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and
punctual performance of its obligations under this Lease. If Tenant defaults
and does not cure within any applicable grace period, the Abated Rent shall
immediately become due and payable in full, and this Lease shall be enforced as
if there were no such rent abatement or other rent concession; and in such case
the Abated Rent shall be calculated based on the full initial rent payable
under this Lease increased as if there had never been such Abated Rent.
Section 10.5 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.1 SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded, provided that Tenant's right of quiet enjoyment under
this Lease shall not be disturbed if Tenant is not in default. Tenant shall
cooperate with Landlord and any lender which is acquiring a security interest in
the Property or the Lease provided that Tenant's obligations under this Lease
shall not be increased in any material way or Tenant's rights under this Lease
diminished in any material way. Provided that such lender executes in favor of
Tenant an agreement not to disturb Tenant's right of quiet enjoyment under this
Lease so long as Tenant is not in default and performs Tenant's obligations
under this Lease, and provided that Tenant's obligations under this Lease shall
not be increased in any material way or rights diminished in any material way
(the performance of ministerial acts by Tenant such as the required giving of
notices or giving Landlord's lender the right to cure a Landlord default within
a reasonable period of time shall not be deemed material), Tenant shall execute
such further documents and assurances as such lender may require including, but
not limited to, subordination and attornment agreements. Tenant's right to quiet
possession of the Property during the Lease Term and rights under this Lease
shall not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or
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mortgagee elects to have this Lease prior to the lien of its ground lease, deed
of trust or mortgage and gives written notice thereof to Tenant, this Lease
shall be deemed prior to such ground lease, deed of trust or mortgage whether
this Lease is dated prior or subsequent to the date of said ground Lease, deed
of trust or mortgage or the date of recording thereof. Landlord represents to
Tenant (but to no other person) that as of the date of this Lease there are no
mortgages, deeds of trust or ground leases which are currently recorded against
the Property. Nothing herein is intended to or shall prevent Landlord from
encumbering the Property or placing a mortgage, deed of trust or ground lease
on the Property after the date of this Lease. Notwithstanding anything to the
contrary in this Section 11.1, Tenant's obligation to subordinate this Lease to
a ground lease, mortgage or deed of trust, or to sign any document(s) so
subordinating this Lease, shall be conditioned upon Tenant's receipt of a
nondisturbance agreement from the ground lessor, mortgagee or deed of trust
beneficiary which provides that in the event of a foreclosure or a deed in lieu
of foreclosure such ground lessor, mortgagee or beneficiary, as the case may
be, will recognize all of Tenant's rights under this Lease and that this Lease
will not be terminated (except under the terms of this Lease) so long as Tenant
is not in default under the terms of this Lease and performs all of Tenant's
obligations and duties under the terms of this Lease. Any nondisturbance
agreement under the immediately preceding sentence may provide that this Lease
is subordinated and that Tenant attorns to such ground lessor, mortgagee or
beneficiary and may require Tenant to perform such acts as giving notices to
Landlord's lender and give Landlord's lender the right to cure a Landlord
default within a reasonable period of time, plus additional items that are
commercially reasonable.
Section 11.2 ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such
attornment or subordination or agreement to do so, provided that Tenant's
obligations under this Lease shall not be increased in any material way or
Tenant's rights under this Lease diminished in any material way.
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Section 11.4 Estoppel Certificates.
(a) REQUIREMENTS. Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement certifying: (i) that
none of the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease has not
been canceled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other representations or information with respect to
Tenant or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may reasonably require. Tenant shall
deliver such statement to Landlord within ten (10) days after Landlord's
request. Landlord may give any such statement by Tenant to any prospective
purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may
rely conclusively upon such statement as true and correct.
(b) TENANT'S NONDELIVERY. If Tenant does not deliver such statement to
Landlord within such ten (10) day period, Landlord, and any prospective
purchaser or encumbrancer, may conclusively presume and rely upon the following
facts: (i) that the terms and provisions of this Lease have not been changed
except as otherwise represented by Landlord; (ii) that this Lease has not been
canceled or terminated except as otherwise represented by Landlord; (iii) that
not more than one month's Base Rent or other charges have been paid in advance;
and (iv) that Landlord is not in default under the Lease. In such event, Tenant
shall be estopped from denying the truth or such facts.
Section 11.5 TENANT'S FINANCIAL CONDITION. Within ten (10) days
after written request from Landlord in connection with Landlord's sale or
financing of the Property, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property. If
Tenant is a company whose stock is registered and traded on a national exchange
so that Tenant's financial statements are publicly available on at least a
quarterly basis, then if Tenant delivers such annual and quarterly financial
statements to Landlord as Landlord shall request, same shall be deemed to
satisfy Tenant's obligations to deliver financial statements under this Section
11.5. Tenant represents and warrants to Landlord that each such financial
statement is a true and accurate statement as of the date of such statement. If
Tenant is not a company whose stock is registered and traded on a national
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exchange, all financial statements shall be deemed confidential and shall be
used only for the purposes set forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.1 LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall reimburse
the other party (the "Nondefaulting Party") upon demand for any legal fees and
costs that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.2 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
Tenant's obligation under this Section 12.2 shall be limited to Two Thousand
Dollars ($2,000) per transaction. The $2,000 amount under the immediately
preceding sentence shall be increased each year in proportion to the increase in
the Index as described in Section 3.2.
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ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.1 NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) "LANDLORD". As used in this Lease, the term "Landlord" means only the
current owner or owners of the fee title to the Property or the leasehold
estate under a ground lease of the Property at the time of question. Each
Landlord is obligated to perform the obligations of Landlord under this Lease
only during the time such Landlord has title to the fee interest in the
Property. Any Landlord who transfers its title or interest in the Property is
relieved of all liability with respect to the obligations of Landlord under
this Lease to be performed on or after the date of transfer. However, each
Landlord shall deliver to its transferee all funds that Tenant previously paid
if such funds have not yet been applied under the terms of this Lease.
Notwithstanding the above provisions of this Paragraph 13.2(a) and Paragraph
13.2(c), if Cypress Land Company transfers its interest in the Property,
Cypress Land Company shall remain obligated (if Cypress Land Company's
transferee fails to perform): (i) to construct the Shell portion of the
Building as described in the Construction Rider; (ii) to perform Landlord's
warranty (if such warranty period has not then expired) under paragraph 4.2 of
the Construction Rider; and (iii) to repair the Shell under Article Seven if
there has been a casualty loss and the required repairs under such Article
Seven by Cypress Land Company have not yet been completed at the time of such
transfer.
(b) NOTICE. Tenant shall give written notice of any failure by Landlord
to perform any of its obligations under this Lease to Landlord and to any
ground lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure,
Landlord shall not be in default if such cure is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
(c) LIABILITY. Notwithstanding any term or provision herein to the
contrary but subject to Paragraph 13.2(a), the liability of
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Landlord for the performance of its duties and obligations under this Lease is
limited to Landlord's interest in the Property, and neither the Landlord nor its
partners, shareholders, officers or other principals shall have any personal
liability under this Lease.
Section 13.3 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.4 INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.5 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.6 NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered, delivered by next day
delivery by a recognized overnight mail delivery service, or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.3 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.2 above. All notices shall be effective upon
delivery. It shall be presumed that a notice has been delivered if the
delivering party receives a receipt or written acknowledgement from the delivery
service that such notice was delivered. Either party may change its notice
address upon written notice to the other party.
Section 13.7 WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement
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on a payment check from Tenant or in a letter accompanying a payment check shall
be binding on Landlord. Landlord may, with or without notice to Tenant,
negotiate such check without being bound to the conditions of such statement.
Section 13.8 RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. Landlord may require that a "Short Form"
memorandum of this Lease be executed by both parties and be recorded.
Section 13.9 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state of California shall govern this
Lease.
Section 13.10 CORPORATE AUTHORITY. Each person signing this Lease on
behalf of Tenant represents and warrants that he has full authority to do so and
that this Lease binds the corporation. On the date this Lease is signed, Tenant
shall deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord.
Section 13.11 FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.12 EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed an offer to lease and shall not be binding upon
either party until executed and delivered by both parties.
Section 13.13 SURVIVAL. All representations and warranties of Landlord and
Tenant shall survive the termination of this Lease.
Section 13.14 DEFINITION OF CONTRACTOR. If Tenant utilizes the same
contractor to construct the Tenant Improvements (as defined in the Construction
Rider) that Landlord has utilized to construct the Shell, then any reference to
Tenant's "contractor" under this Lease shall include such contractor, and any
acts or
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<PAGE> 48
negligence of such contractor in constructing the Tenant Improvements shall not
be attributed to the Landlord.
ARTICLE FOURTEEN: BROKERS
Section 14.1 NO OTHER BROKERS. Tenant represents and warrants to
Landlord that the only agents, brokers, finders or other parties with whom
Tenant has dealt who are or may be entitled to any commission or fee with
respect to this Lease or the Property are The Seeley Company and Delphi
Business Properties.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on June 30th, 1998 Cypress Land Company, a
at 2203 E. Carson St., Ste A-1 California limited partnership
Long Beach, CA 90810
By: Harvico, Inc., a California
Corporation, General
Partner
By: /s/ BRIAN L. HARVEY
-------------------------
Brian L. Harvey,
President
"TENANT"
Signed on 6/25, 1998 Netcom Systems, Inc.
at 20550 Nordhoff St. a Delaware Corporation
Chatsworth, CA 91311
By: /s/ WARREN B. PHELPS
-----------------------------
Warren B. Phelps, President
By: /s/ DWIGHT OLSON
-----------------------------
Dwight Olson, Vice President
44
<PAGE> 49
EXHIBIT "A"
LEGAL DESCRIPTION OF PROPERTY
LOT 6 OF TRACT 32952, IN THE CITY OF CALABASAS, COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA, AS PER MAP RECORDED IN BOOK 1081 PAGES 30 TO 34, INCLUSIVE, OF
MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
<PAGE> 50
EXHIBIT "B"
SHELL PLANS AND SPECIFICATIONS
1. Building is to be constructed to Landlord's normal construction standards
and quality of materials.
2. The electrical service shall be supplied by a 2400 amp single panel.
3. At least two dock doors.
4. Elevator pit for mezzanine area (Tenant shall be responsible for the
construction of the elevator and elevator shaft as part of the Tenant
Improvements).
5. Plans pages: Architectural A1.0, A1.1, A1.2, A1.3, A2.1, A2.2, A2.3, A3.1,
A4.1, A4.2, A4.3, A4.4, A4.5, A4.6, A5.1, A5.2, A5.3, A5.4, A6.1, A8.1;
Structural: S1.1, S2.1, S2.2, S2.3, S2.4, S2.5, S2.6, S3.3, S3.2, S3.3, S3.4,
S4.1, S5.1, S5.2, S5.3, S5.4, S5.5, S5.6, S5.7, S5.8; Plumbing: P1.0, P1.1,
P2.1, P2.2, P2.3, P3.0; and Electrical: E1.0, E1.1, E2.1, E2.2, E2.3, E3.1,
E4.1, E4.2, prepared by Nadel Architects dated June 23, 1998 and specifications
prepared by Nadel Architects dated December 1997. These plans and specifications
may be modified after the date of the Lease in order to change the Building
elevations (including adding additional windows), changing the mezzanine area,
and changing the loading dock doors.
6. The mezzanine area of the Shell shall be constructed to a rectangular
design.
<PAGE> 51
CONSTRUCTION RIDER
TO INDUSTRIAL REAL ESTATE LEASE
DATED JUNE 25, 1998 BY AND BETWEEN
CYPRESS LAND COMPANY, A CALIFORNIA LIMITED PARTNERSHIP,
AND
NETCOM SYSTEMS, INC., A DELAWARE CORPORATION
- --------------------------------------------------------------------------------
1. DESIGN AND CONSTRUCTION OF THE BUILDING SHELL: Landlord shall construct
upon the land constituting the Property the shell ("Shell") portion of the
building ("Building") of approximately one hundred seven thousand one hundred
sixty-nine (107,169) square feet, which Shell portion of the Building includes
a second-story mezzanine area of approximately thirty-four thousand two hundred
fifty-seven (34,257) square feet, parking areas, site improvements,
landscaping, exterior drainage, landscape irrigation, gutters, exterior
lighting, walkways and driveways. The square footages under the immediately
preceding sentence are only approximate and it is anticipated that they may
change upon completion of the final modified Shell plans. Landlord shall design
and construct the Shell based upon the specifications stated on Exhibit "B",
attached hereto and incorporated herein by this reference. References to the
term "Property" in this Construction Rider shall mean both the Shell and the
Tenant Improvements (as such term is defined in Paragraph 2, below).
1.1 Plans and Specifications of Shell. Landlord and Tenant have agreed
to the plans and specifications for the construction of the Shell ("Shell Plans
and Specifications"), as described on Exhibit "B". Landlord may make changes in
the Shell Plans and Specifications as Landlord deems necessary for the
construction of the Building Shell provided such modification does not
materially interfere with the design of the Tenant Improvements or Tenant's use
of the Property (subject to subparagraph 1.1(a) below). Landlord shall submit
the Shell Plans and Specifications to the City of Calabasas for the issuance of
a building permit by the City of Calabasas for the Building Shell. If the City
of Calabasas requires changes in the Shell Plans and Specifications, then
Landlord and Tenant agree that Landlord may make the changes required by the
City of Calabasas, provided such modification does not materially interfere
with the design of the Tenant Improvements or Tenant's use of the Property
(subject to subparagraph 1.1(a) below).
(a) Modifications By the City of Calabasas. The current conditional use
permit for the Property is for ninety-eight thousand nine hundred thirty-seven
(98,937) square feet. Tenant and Landlord agree that they will use their
reasonable
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efforts to have the City of Calabasas approve the Building to be approximately
one hundred seven thousand one hundred sixty-nine (107,169) square feet.
However, if the City of Calabasas does not permit the construction of the
Building to be increased from 98,937 square feet to approximately 107,169 square
feet, then neither Landlord nor Tenant may terminate this Lease, and Landlord
may redesign the Building in order to reflect such lesser square footage amount
(which shall be at least 98,937 square feet). Additionally, Landlord may make
modifications without Tenant's consent to the design of the Shell to comply
with the conditional use permit and modifications thereof issued by the City of
Calabasas; provided that the shape of the mezzanine shall be as described in
item 6 of Exhibit "B". If Landlord modifies the design of the Shell Plans and
Specifications due to a change requested by the City of Calabasas in the
current conditional use permit governing the Property, and such modification in
the Shell Plans and Specifications results in delays in Tenant's design or
construction of the Tenant Improvements, then such delay caused by Landlord's
change to the Shell shall not be deemed a "Tenant Delay" under subparagraphs
1.3(a) or 3.1(b). Landlord shall promptly notify Tenant of any such reduction
in the square footage of the Building or modifications to the Shell required by
the City of Calabasas to comply with the conditional use permit or
modifications thereof.
1.2 Construction of the Shell. Upon obtaining the necessary permits, Landlord
shall construct at Landlord's cost the Shell in accordance with the Shell Plans
and Specifications. Subject to subparagraph 2.5(a)(i) below, Landlord shall pay
the permit fees for construction of the Shell and the utility connection
charges for the "stub in" for the electrical, sewer, water and gas to the Shell
(but not for the Tenant Improvements nor utility connection charges for the
Tenant Improvements which are in addition to the basic "stub in" costs of such
utility connections) which are required to be paid to the City of Calabasas
prior to the City of Calabasas issuing a building permit for the construction
of the Shell.
1.3 Completion Defined. This Paragraph 1.3 is subject to subparagraph 3.1(b)
below. The term "Completion" is defined as the date that the City of Calabasas
shall have approved that the Shell is substantially complete (such as by the
city issuing the final inspection or approval for the Shell, or a certificate
of occupancy for the Shell) or otherwise gives permission for the occupancy of
the Shell portion of the Building. If the City of Calabasas will not certify
that the Shell is substantially complete or fails to issue a final inspection
approval for the Shell because either: (i) the non-completeness of the Tenant
Improvements due to a Tenant Delay,
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or (ii) the non-completeness of the Shell due to the non-completeness of the
Tenant Improvements due to a Tenant Delay (such as if there is a hole in the
Building's roof for installation of the Tenant Improvements and there has been
a Tenant Delay), then it shall be deemed that there has in fact been
"Completion" of the Shell for purposes of the Lease. The date of Completion of
the Shell is referred to herein as the "Completion Date." The term "Tenant
Delay" is defined in subparagraph 1.3(a) below, subject to subparagraph 3.1(b)
below.
(a) Target Date to Complete Shell. Landlord shall use its reasonable
efforts to have the Completion of the Shell occur on or before February 1,
1999, subject to any delays caused by a Tenant Delay or by Force Majeure events
(defined in Section 13.12 of the Lease). A "Tenant Delay" shall mean any of the
following items which cause a delay in the construction of the Shell: (i)
Tenant's failure to timely comply with the time limitations or dates under
Paragraph 2.1 or 2.2, or those items and dates described in Paragraph 2.3; (ii)
Tenant requests a change order under Paragraph 2.4; (iii) there is an
installation of any Special Improvements under Paragraph 2.7; (iv) Tenant fails
to timely perform or deliver information under Paragraph 2.1 or 2.2; or (v) if
Tenant or Tenant's contractor interferes with or delays Landlord's construction
of the Shell.
(b) Landlord To Make Shell Available to Construct Tenant Improvements.
Landlord shall make available to Tenant the Shell portion of the Property on or
before October 15, 1998 (the "Tenant Improvements Start Date") in order that
Tenant or its contractors may commence construction of the Tenant Improvements
by such date. Tenant and Landlord understand that the shell may not be
completed by such Tenant Improvements Start Date. If Landlord fails to so make
available the Shell for Tenant to commence construction of the Tenant
Improvements by the Tenant Improvements Start Date, then Tenant's sole remedy
for such delay shall be as follows: for each day that Landlord delivers the
Shell to Tenant or Tenant's contractor after the Tenant Improvements Start
Date, the number of days (if any) which Tenant is being charged as a Tenant
Delay under either Paragraph 1.3 or subparagraph 3.1(b)(i) shall be reduced by
one (1) day, but not reduced more than the total number of days for which
Tenant is being charged as a Tenant Delay. Landlord's delinquency, if any, in
delivering the Property for construction of the Tenant Improvements under this
subparagraph 1.3(b) shall not offset any days under subparagraphs 3.1(b)(ii) or
(iii).
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<PAGE> 54
2. DESIGN AND CONSTRUCTION OF THE TENANT IMPROVEMENTS: Tenant shall be
responsible for and shall pay all of the costs for the design and construction
of the tenant improvements ("Tenant Improvements") as described below,
including the office areas, air conditioning and heating of the warehouse and
office areas, all restrooms, screening of all air conditioning units (roof and
ground mounted), equipment screens and signage. The Tenant Improvements shall
be constructed by Tenant, at Tenant's sole cost and expense, pursuant to the
plans and specifications, as described below. Tenant shall be responsible for
the timely completion of all plans and specifications for the Tenant
Improvements.
2.1 Schematic Tenant Improvement Plans and Specifications.
(a) Preparation. Tenant has or shall retain a space planner to
prepare at Tenant's expense (subject to subparagraph 2.3(a)(iii)) all
architectural, electrical, plumbing, heating, ventilating and air
conditioning plans for construction of the Tenant Improvements. Tenant
shall be responsible for the timely performance of its space planner in the
preparation of the Tenant Improvement plans and specifications hereunder.
Tenant shall have prepared the schematic plans and specifications showing
the basic floor plans of the Tenant Improvements ("Schematic Tenant
Improvements Plans and Specifications") to construct the Tenant
Improvements upon the Property. Tenant shall immediately deliver to
Landlord and the space planner all information that may be required to
timely complete the Schematic Tenant Improvements Plans and Specifications.
(b) Date. Tenant shall have such Schematic Tenant Improvements Plans
and Specifications prepared by June 22, 1998 (and if Tenant does not have
prepared such Schematic Tenant Improvements Plans and Specifications by
such date, then Landlord's sole remedy for such failure is to claim a
Tenant Delay under the provisions of subparagraphs 1.3(a) and 3.1(b). On
or before June 22, 1998, Tenant shall have such Schematic Tenant
Improvements Plans and Specifications delivered to Landlord for Landlord's
approval, which approval shall not be unreasonably withheld. Landlord
shall have five (5) business days from the receipt of such Schematic
Tenant Improvements Plans and Specifications to approve or disapprove. If
Landlord does not disapprove of such plans in the manner specified in this
subparagraph (b) by written notice to Tenant within such five (5) business
day period, then Landlord shall be deemed to have approved of same. If
Landlord disapproves of such plans and specifications, then Landlord and
Tenant shall, within five (5) days from the expiration of the five (5)
business day period, use their best
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<PAGE> 55
efforts to resolve such dispute. Landlord and Tenant agree to negotiate in
good faith with each other regarding any of Landlord's disapproved items
described above.
(c) Basis for Final Plans and Specifications. The Final Plans and
Specifications for the Tenant Improvements (as such term is defined in
Paragraph 2.2 below) shall be based upon the Schematic Tenant Improvements
Plans and Specifications.
2.2 Final Plans and Specifications for Tenant Improvements.
(a) Design.
(i) Tenant, by August 15, 1998, shall have prepared, at
Tenant's expense, and deliver to Landlord final plans and specifications
for the Tenant Improvements ("Final Plans and Specifications"). If
subparagraph 3.1(b) applies (where Tenant uses a Qualified Space Planner),
Landlord hereby grants to Tenant a thirty (30) day grace period to have
completed such Final Plans and Specifications, so in such event such Final
Plans and Specifications do not have to be completed until September 15,
1998 in order for Landlord to have a remedy against Tenant for Tenant's
delinquency in the preparation of such Final Plans and Specifications. If
Tenant Engages by July 1, 1998 (as defined in subparagraph 3.1(b)) H.
Hendy Associates as a Full Service Space Planner under subparagraph
3.1(b), then H. Hendy Associates shall complete such Final Plans and
Specifications as soon as possible, and there shall be no specific
required completion date for such Final Plans and Specifications.
Landlord's sole remedy should Tenant fail to have prepared such Final
Plans and Specifications by the required date shall be to assert that
there is a "Tenant Delay" under the provisions of subparagraphs 1.3(a) and
3.1(b). The Final Plans and Specifications shall be based upon the
Schematic Tenant Improvements Plans and Specifications and shall show the
final design and specifications (including, but not limited to,
architectural, electrical, plumbing, ventilating, heating and air
conditioning) of the Tenant Improvements.
(ii) Landlord, upon receipt of such Final Plans and
Specifications, shall have five (5) business days from receipt of the
Final Plans and Specifications to approve or disapprove same based upon
the foregoing. If Landlord does not disapprove of such Final Plans and
Specifications in the manner specified herein, by written notice to Tenant
within such five (5) business day period, then Landlord shall have been
deemed to have approved of same. If Landlord disapproves of the Final
Plans and Specifications, then Landlord and
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<PAGE> 56
Tenant shall use their best efforts to resolve such dispute in order to conform
such Final Plans and Specifications to the Schematic Tenant Improvements Plans
and Specifications. Landlord and Tenant agree to negotiate in good faith with
each other regarding any of Landlord's disapproved items, described above. The
Final Plans and Specifications shall supersede any prior plans concerning the
construction of the Tenant Improvements, including but not limited to, any
inconsistencies with the Schematic Tenant Improvements Plans and Specifications.
(iii) Regardless of whether Landlord approves or disapproves of any
plans or specifications, Tenant shall remain solely responsible for the design
of the Tenant Improvements and any specifications thereof, and the construction
thereof. Specifically, Tenant shall be solely responsible that the design and
construction of the Tenant Improvements conforms to Tenant's required use of the
Property and complies with all laws, rules and regulations, including, but not
limited to, all conditional use permits and building codes.
(iv) Tenant shall have the Final Plans and Specifications submitted to
the City of Calabasas for the issuance of a building permit by the City of
Calabasas. Tenant agrees to consult with Landlord in the submission of such
plans and to allow Landlord to submit such plans to the City. If the City of
Calabasas requires changes in the Final Plans and Specifications, then Landlord
and Tenant agree that the space planner (after consulting with Landlord) may
make the changes. It is understood that neither Landlord nor Landlord's
representatives or consultants have any ability to influence the actions or
timeliness of performance of the City of Calabasas, public utilities or other
governmental bodies involved with the construction of the Tenant Improvements or
the issuance of permits regarding same.
2.3 Tenant's Cooperation.
(a) Tenant's Duties.
(i) Landlord shall have the right, from time to time, to review and
provide comments to the plans and specifications for the Tenant Improvements as
they are being prepared by the space planner. Landlord may communicate with the
space planner at any time and shall have the right to have a representative
attend meetings with such space planner and Tenant regarding the preparation of
such plans and specifications.
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Tenant has designated either Dwight Olson or Gil Cabral of Tenant, as
persons who have the actual authority to make any changes to any plans and
specifications on behalf of Tenant and to give any approvals or waivers on
behalf of the Tenant regarding any plans or specifications, and to make all
decisions in connection with the construction of the Tenant Improvements, and
the Lease and Construction Rider, on behalf of the Tenant.
(ii) In order to timely prepare the plans and specifications for the
Tenant Improvements stated in Paragraph 2.1 and 2.2 above, and to construct the
Tenant Improvements in a timely manner, Tenant agrees to timely and promptly
respond to the space planner's request for information. Tenant agrees to
promptly deliver all required information to the space planner necessary to
prepare the Tenant Improvements' plans and specifications. In addition to the
specific approval dates of Tenant outlined in Paragraphs 2.1 and 2.2 above,
architects, designers and engineers will be requesting Tenant's review and
approval of plans, specifications and other items at periodic intervals. Tenant
agrees to promptly respond to all of these requests.
(iii) In order to design the Tenant Improvements, Tenant is employing
the space planner for the Tenant Improvements, and consultants for the
architectural and engineering work relating to the Tenant Improvements, which
costs for such persons shall be paid by Tenant over the space planner allowance
to be paid by Landlord under the immediate following sentence. Landlord shall
reimburse Tenant for Tenant's preliminary space planner to assist in preparing
the Schematic Tenant Improvements Plans and Specifications in an amount not to
exceed Fifteen Cents ($0.15) per square foot of the Building (which square
footage of the Building is defined in Paragraph 3.2, below).
2.4 Change Orders.
(a) Definition. For purposes of this Lease, a "change order(s)" shall
mean: (a) any requested Tenant changes, additions or alterations of the Tenant
Improvements' Final Plans and Specifications, whether such changes, additions
or alterations occur on, before or after the commencement of the construction
of the Building or Tenant Improvements; or (b) any changes to items, plans or
specifications for the Tenant Improvements previously approved by Tenant.
(i) Tenant shall pay for all costs including but not limited to any
architectural, engineering, design,
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contractor or material costs caused by such Tenant change orders (whether to
the Tenant Improvements or the Shell).
(ii) If Tenant desires a change order, then Tenant shall deliver a
written request for such change order to Landlord. Landlord's consent to any
change order shall not be unreasonably withheld.
(iii) Any change order which causes a delay in construction of the
Tenant Improvements or the Shell shall be deemed a Tenant Delay.
2.5 Construction of Tenant Improvements.
(a) Construction By Tenant. The Tenant Improvements shall be constructed
by Tenant at Tenant's sole cost and expense in conformance with the Final Plans
and Specifications. The Tenant Improvements shall be constructed by Tenant in
compliance with all federal, state, city and county laws, codes, ordinances and
regulations.
(i) Tenant shall pay all of the permit fees, costs, fees, utility
fees, charges and assessments for the construction of the Tenant Improvements
which are required to be paid to any governmental body or agency for the
construction, occupancy or use of the Tenant Improvements. Landlord shall pay
for the bridge and thoroughfare fees related to the Property ("Bridge Fee"),
which is based upon Three Dollars Ten Cents ($3.10) per square foot of Building
area, including the mezzanine area ("Current Bridge Fee"). If the Tenant
Improvements requested by Tenant cause the Bridge Fee relating to the Property
to exceed for any reason the Current Bridge Fee, then Tenant shall be
responsible for paying for the amount of such increase in the Bridge Fee for
the entire Property. Tenant shall pay for the increase in the Bridge Fee under
the immediately preceding sentence by payment of such amount to Landlord at the
time that the building permits for the Tenant Improvements are to be obtained
from the City of Calabasas (even if the City of Calabasas allows Landlord to
defer the payment of such Bridge Fee by the City of Calabasas recording a
covenant or encumbrance against the Property or receiving other contractual
promises from the Landlord to pay such Bridge Fee).
(ii) Tenant shall pay all of the costs of any space planners,
designers, architectural costs, engineering costs and construction costs of the
Tenant Improvements (except as to that amount for the preliminary space
planner's fee which Landlord has agreed to pay for under subparagraph
2.3(a)(iii) above).
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(iii) All of the Tenant Improvements shall become part of the
Property, shall be maintained and repaired by Tenant as part of the Property
under the Lease, and none of the Tenant Improvements may be removed by Tenant
upon the termination of the Lease.
(iv) Tenant shall have the right to hire a general contractor of
Tenant's choice to construct the Tenant Improvements. Landlord shall have the
right to review and approve of Tenant's choice of general contractors, which
approval shall not be unreasonably withheld. Tenant shall enter into the
contract with the general contractor. Landlord shall have the right to review
and approve such contract prior to Tenant's entering into same, which approval
shall not be unreasonably withheld; provided, however, that Landlord may not
request any changes to such general contractor's contract which would
materially cause an increase in the cost of the construction of the Tenant
Improvements, materially delay the completion of the Tenant Improvements or the
design of the Tenant Improvements. Regardless of Landlord's approvals, Tenant
shall be responsible for all of the liabilities and obligations of the Tenant
under such contract and Landlord shall have no liability or obligations
thereunder.
(v) Landlord shall use its reasonable efforts to allow Tenant to
begin construction of the Tenant Improvements as soon as possible during the
construction of the Building Shell. See subparagraph 1.3(b) for the definition
of the Tenant Improvements Start Date. Tenant agrees to have Tenant's
contractors coordinate with Landlord and Landlord's contractors, and not
interfere with same, in order that the construction of the Shell is not delayed
by the construction of the Tenant Improvements. Similarly, Landlord agrees to
have Landlord's Shell general contractor coordinate with Tenant's Tenant
Improvements general contractor (if different from the Shell general
contractor).
(vi) Tenant shall be responsible that the general contractor that
constructs the Tenant Improvements: (i) has adequate insurance, including
liability insurance, and designates Landlord as an additional insured under
such liability insurance; and (ii) has adequate workers compensation insurance.
Any costs of builder's risk insurance (whether obtained by Landlord or
otherwise) which is allocated to the Tenant Improvements shall be paid by Tenant
or reimbursed to Landlord. Landlord shall be designated as the loss payee for
such builder's risk insurance. If Landlord receives proceeds from such builder's
risk insurance which are designated by such policy for the Tenant Improvements,
then Landlord agrees to utilize such proceeds (or make such
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proceeds available to Tenant) to pay for the repair or reconstruction of the
Tenant Improvements. Tenant shall be responsible to verify that there is
adequate builder's risk and casualty insurance for the Tenant Improvements and
their construction. Landlord shall have the right (but not the obligation) to
verify with Tenant and Tenant's contractor, from time to time, that the
insurance described in this subparagraph has been obtained.
2.6 Payment for Tenant Improvements. Tenant shall pay all expenses, fees and
costs relating to the construction and design of the Tenant Improvements.
Tenant shall promptly (within 20 days of Landlord's billing) reimburse
Landlord for any amounts Landlord or Landlord's contractor expends for the
construction of those items of the Tenant Improvements which Tenant has
previously approved in writing (but it shall not be necessary that Tenant
approved in advance the amount of such item) for such item.
(a) Indemnification. Tenant shall indemnify, defend and hold Landlord
harmless (including the payment of Landlord's reasonable attorneys' fees and
costs) from any and all costs, claims or liability arising from: (a) Tenant's
construction of the Tenant Improvements on the Property; (b) the conduct of any
of Tenant's general contractor or subcontractors or other persons in connection
with the construction of the Tenant Improvements; (c) any breach or default in
the performance of Tenant's obligations under this Construction Rider; and (d)
any claims or mechanic's liens against Landlord or the Property related to the
construction of the Tenant Improvements. Tenant shall immediately pay when due
all claims for labor and materials furnished in connection with the
construction of the Tenant Improvements and agrees to immediately have removed
from the Property any mechanic's liens or notices of action if same are filed
against the Property. Tenant's duty to indemnify Landlord under this
subparagraph 2.6(a) shall not apply to the negligent or willful misconduct of
Landlord or Landlord's employees or contractors during the period of
constructing the Shell and Tenant Improvements.
(b) Letter of Credit.
(i) Because of the large amount of Tenant Improvements being
installed ion the Building, Tenant agrees to obtain a "Letter of Credit" (as
described below) prior to the commencement of construction of the Tenant
Improvements in favor of the Landlord in the aggregate amount of the cost of
the construction of the Tenant Improvements (including any permits or fees
relating to same). The amount of the Letter
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of Credit under the immediately preceding sentence shall be reasonably
determined by Landlord based upon the general contractor's cost for
construction of the Tenant Improvements and the other permits and fees relating
thereto. The Letter of Credit shall be an irrevocable unconditional Letter of
Credit in favor of the Landlord as the designated beneficiary for a stated term
of at least six (6) months in favor of Landlord as the designated beneficiary,
drawn on a major Los Angeles bank reasonably approved by Landlord. Tenant shall
deliver such original Letter of Credit to Landlord prior to the commencement of
construction of the Tenant Improvements and shall maintain such Letter of
Credit until the completion of the construction of the Tenant Improvements and
the first to occur of the following (the "Letter of Credit Termination Date"):
(i) the payment of all suppliers and contractors for the Tenant Improvements
and Landlord's receipt of final lien releases from each such supplier and
contractor (including all subcontractors and the general contractor); and (ii)
the occurrence of both of the following: (a) thirty (30) days after the
expiration of the requisite time periods to record mechanics' liens under
California law ("Lien Expiration Date") but not sooner than the Commencement
Date, and (b) no mechanic's lien, lawsuit or legal action has been filed
against the Property or Landlord regarding the construction of the Tenant
Improvements, or if a mechanic's lien shall have been filed against the
Property, such lien shall have been released or bonded against in order that
such lien is released.
(ii) Landlord may draw upon the Letter of Credit only in the
following events: (a) the Letter of Credit is not renewed on or before thirty
(30) days prior to its required renewal or expiration, (b) a lawsuit,
arbitration or other action or proceeding is filed against Landlord or the
Property regarding the construction of the Tenant Improvements by a contractor,
subcontractor or material supplier, and Tenant fails to promptly reimburse
Landlord for the costs incurred by Landlord resulting from the filing of such
lawsuit, arbitration or other action or proceeding, or (c) a mechanic's lien is
filed against the Property and the lien is not released by payment or by a
recordation of a statutory lien release bond in accordance with the requirements
of California Civil Code Section 3143 within five (5) business days after Tenant
receives notice (by service of process or otherwise) of the existence of such
mechanic's lien.
(iii) If the Letter of Credit is issued so that Landlord may draw
down on part of the Letter of Credit while the remaining portion of the Letter
of Credit remains effective, then the following provisions shall apply: (a) if
-11-
<PAGE> 62
Landlord has the right to draw upon the Letter of Credit as a result of an
event described in subparagraph 2.6(b)(ii)(b), Landlord may draw only upon that
amount necessary to pay the costs described in such subparagraph 2.6(b)ii)(b);
and (b) if Landlord has the right to draw upon the Letter of Credit as a result
of an event described in subparagraph 2.6(b)(ii)(c), then Landlord may only
draw upon that amount necessary to cause the mechanic's lien in question to be
released and to reimburse Landlord for its attorneys' fees and cost regarding
same.
(iv) If Landlord draws upon the Letter of Credit because of an event
described in subparagraph 2.6(b)(ii)(a), and Tenant subsequently replaces the
Letter of Credit in accordance with the requirements hereof, then Landlord
shall return all proceeds from the Letter of Credit held by Landlord upon the
Landlord's receipt of such replacement Letter of Credit. If Tenant fails to
provide a replacement Letter of Credit, then Landlord shall return to Tenant
all remaining Letter of Credit proceeds held by Landlord on the Letter of
Credit Termination Date after the application of such proceeds under this
subparagraph 2.6(b). All proceeds form the Letter of Credit held by Landlord
shall be placed in a separate account in Landlord's name and only used for the
purposes permitted herein.
(c) Notice of Non-responsibility and Notice of Completion. Landlord may
post a notice of non-responsibility for the construction of the Tenant
Improvements. Within five (5) days after completion of construction of the
Tenant Improvements, Tenant shall cause a Notice of Completion to be recorded
in the office of the County Recorder of Los Angeles County in accordance with
the civil code of the State of California, and Tenant shall furnish a copy
thereof to Landlord at the time of such recordation. If Tenant fails to so
record such Notice of Completion, Landlord may execute and file same on behalf
of Tenant as Tenant's agent and at Tenant's expense.
(d) Plans. At the conclusion of the construction of the Tenant
Improvements, Tenant shall cause to be delivered to Landlord a final set of
working drawings for the Tenant Improvements to reflect all of the changes to
the Tenant Improvements made during the course of construction. Such working
drawings shall include all of the design of the Tenant Improvements, mechanical
systems, plumbing and electrical, along with the specifications of the Tenant
Improvements. Although Tenant shall retain all written warranties, guaranties
and operating manuals for the Tenant Improvements,
-12-
<PAGE> 63
copies of such items shall be delivered to Landlord upon the termination
or expiration of the Lease.
2.7 Special Improvements. Prior to the Commencement Date of the Lease,
Tenant may, provided that same does not delay or in any way interfere
with Landlord's construction of the Building Shell, install (at Tenant's
sole cost and expense) telephones, computer systems, cable and special
electrical work, with the prior written approval of Landlord ("Special
Improvements"). Any work on such Special Improvements shall be solely the
responsibility of Tenant and shall be installed at Tenant's sole cost and
expense. Tenant shall indemnify and hold Landlord harmless for any damage
to person or property as a result of any installation and work on the
Special Improvements and such work shall be governed by the provisions of
Section 6.5 of the Lease.
2.8 Other Improvements or Alterations. Tenant's right to make any
alterations or additions to the Property after the Commencement Date of
the Lease shall be subject to Section 6.5 of the Lease.
3. ESTABLISHMENT OF INITIAL LEASE TERM AND INITIAL BASE RENT:
3.1 Commencement Date.
(a) If Tenant Does Not Utilize Full Service Space Planner. If
Tenant does not employ a Full Service Space Planner under the terms of
subparagraph 3.1(b), below, then the following provisions of this
subparagraph 3.1(a) shall apply. The term of the Lease under Section 1.5
of the Lease shall commence on the earlier of: (i) thirty (30) days after
the Completion Date (as the Completion Date is defined in Paragraph 1.3,
above); or (ii) the date a certificate of occupancy (either temporary or
permanent) is issued for the Tenant Improvements, a final inspection
approval is issued for the Tenant Improvements or the City of Calabasas
otherwise allows Tenant's occupancy of the Tenant Improvements. Such date
is herein referred to as the "Commencement Date" of the Lease. Landlord
and Tenant recognize that the Commencement Date of the Lease could occur
prior to the completion of construction of the Tenant Improvements.
(b) If Tenant Utilizes a Full Service Space Planner. If Tenant
on or before July 1, 1998 Engages a "Full Service Space Planner" approved
by Landlord, which approval shall not be unreasonably withheld, to
provide all of the architectural, engineering, construction supervision
and design services for the Tenant Improvements, then the term of the
Lease under Section 1.5 of the Lease shall commence on the first to occur
-13-
<PAGE> 64
of the following dates: the date a certificate of occupancy (permanent or
temporary) is issued for the Property; the date that a final inspection
approval has been issued for the Property; or the date that the City of
Calabasas otherwise allows Tenant's legal occupancy of the Property for
conducting business. Such date is herein referred to as the "Commencement Date"
of the Lease. If the provisions of this subparagraph 3.1(b) apply, then
subparagraph 3.1(a) shall not apply. Such Commencement Date under this
subparagraph 3.1(b) shall occur: (i) one (1) day earlier than the defined
Commencement Date, above, for each day that a "Tenant Delay" as defined below
causes a delay in the construction of the Tenant Improvements or the Shell;
(ii) one (1) day earlier than the defined Commencement Date, above, for each
day that Tenant's general contractor takes longer than one hundred eight (108)
days to complete construction of the Tenant Improvements from the date that
Landlord makes the Shell available to Tenant for the commencement of
construction of the Tenant Improvements; and (iii) one (1) day earlier than the
defined Commencement Date, above, for each day that the Final Plans and
Specifications are completed after September 15, 1998; except that if Tenant
Engages by July 1, 1998 H. Hendy Associates as a Full Service Space Planner,
then subparagraphs 3.1(b)(ii) and (iii) shall not apply. The following items
causing a delay in construction of the Tenant Improvements or the Shell shall
be a "Tenant Delay" under this subparagraph 3.1(b) instead of the definition of
"Tenant Delay" under subparagraph 1.3(a): Tenant's failure to timely deliver
information to, or attend meetings with, the space planner; Tenant requests a
change order under Paragraph 2.4; there is an installation of any Special
Improvements under Paragraph 2.7; or Tenant fails to timely pay the space
planner or the general contractor, except if nonpayment is due to the fact that
such space planner or general contractor is in default of its contract with
Tenant. For purposes of this subparagraph 3.1(b), the term "Full Service Space
Planner" shall mean a full service space planner who provides all
architectural, engineering, construction supervision and design services for
the Tenant Improvements on a "turn key" basis. For purposes of this
Construction Rider, Tenant "Engages" a Full Service Space Planner or H. Hendy
Associates, as the case may be, when the Tenant orally or in writing contracts
such space planner to begin the full-time design and construction services for
the Tenant Improvements and, in fact, such space planner begins such full-time
design and construction services for the Tenant Improvements by the specified
date, and Tenant by such specified date delivers to Landlord a letter signed by
such space planner so indicating such space planner's commencement of space
planning design and construction services.
-14-
<PAGE> 65
(c) Initial Lease Term. The initial Lease Term shall terminate one
hundred twenty-three (123) months after the Commencement Date (determined under
the applicable subparagraph 3.1(a) or 3.1(b)). If the Commencement Date of the
initial Lease Term is on a day other than the first day of a month, then such
first fractional month shall be added to the initial one hundred twenty-three
(123) month Lease Term.
3.2 Adjustment to Initial Base Rent Based Upon Square Footage of the Building.
On the Commencement Date, the initial monthly Base Rent under Paragraph 1.8(a)
of the Lease shall be adjusted to equal the product of the following: Square
Feet of the Building multiplied times Seventy Cents ($0.70) per square foot.
"Square Feet of the Building" shall mean the square feet of the Building
including the Square Feet of the mezzanine areas measured from the outside of
each outside wall to the outside of each outside wall (including any stairwells
or elevator shaft areas), as calculated by Landlord's architect using those
plans for which the City of Calabasas has issued a building permit for the
Shell.
3.3 Amendment to Lease. On the Commencement Date, Landlord and Tenant shall
promptly execute an amendment to the Lease confirming: (a) the Commencement
Date and termination date of the initial Lease Term; (b) the Square Feet of the
Building; (c) the initial Base Rent as calculated under Paragraph 3.2 above;
(d) the costs of the Tenant Improvements; and (e) an acknowledgment that
Landlord has complied with all of the terms of Paragraph 1, above, for purposes
of Article 7 of the Lease. Regardless of the execution of such amendment, the
Lease shall remain in full force and effect with the Commencement Date and
termination date described in Paragraph 3.1 above, and the initial Base Rent
and square feet of the Building calculated under Paragraph 3.2 above.
3.4 Tenant's Option to Terminate Lease If No Completion of Shell By Specified
Date. If Completion of construction of the Shell has not occurred by September
1, 1999, which date shall be extended one (1) day for each day that any Tenant
Delay (defined in subparagraph 1.2(a)) causes a delay in the completion of the
construction of the Shell (the "Shell Completion Termination Date") or if the
permit to construct the Building Shell is not obtained by Landlord by December
31, 1998 (the "Shell Permit Termination date"), then Tenant shall have the
option to elect to terminate this Lease by delivering written notice to
Landlord of Tenant's election to terminate this Lease. Such written option
notice of Tenant to terminate this Lease must be delivered to Landlord on or
before twenty (20) days after the Shell Completion Termination Date or the
Shell Permit Termination Date, as applicable. If the Lease is properly
terminated by Tenant under this Paragraph 3.4, then Landlord shall promptly
return to Tenant Tenant's security
-15-
<PAGE> 66
deposit and first month's rent which Tenant has previously paid to Landlord
along with the Letter of Credit, provided that all amounts for the Tenant
Improvements have been paid to date and there are no mechanics' liens
recorded against the Property relating to the Tenant Improvements. Time is
of the essence in Tenant's election to terminate this Lease under this
Paragraph 3.4 and if Tenant does not elect to terminate this Lease in
strict compliance with the terms of this Paragraph 3.4 for any reason, then
this right to terminate by Tenant shall be of no further force or effect.
If Tenant does not provide written notice to Landlord to elect to terminate
this Lease during the time periods specified in this Paragraph 3.4, then
this Lease shall be deemed to have not been terminated, and Landlord shall
continue to construct the Shell in compliance with the terms of this
Construction Rider.
3.5 Landlord's Option to Terminate the Lease if No Completion of Shell by
Specified Date. If completion of the construction of the Shell has not
occurred by September 1, 1999 due to acts of God, war, fire, flood,
earthquake or other casualty, government regulation or restrictions, or
severe weather conditions, then Landlord shall have the option to elect to
terminate the Lease by delivering written notice to Tenant of Landlord's
election to terminate the Lease. Such written option notice of Landlord to
terminate the Lease must be delivered to Tenant by September 20, 1999. If
Landlord elects to terminate the Lease, then the same provisions of
Paragraph 3.4 regarding the return of Tenant's deposits and the Letter of
Credit shall apply.
4. LANDLORD'S WARRANTY REGARDING BUILDING SHELL AND TENANT IMPROVEMENTS:
4.1 Warranty. Landlord warrants: (1) For a period of twelve (12) months
from the Commencement Date ("Warranty Period") that the Shell portion of
the Building has been constructed in a good and workmanlike manner in
compliance with then applicable laws and using new materials without
defects; and (ii) for a period of twenty-four (24) months from the
Commencement Date that the roof has been constructed in a good and
workmanlike manner, in compliance with then applicable laws, and using new
materials without defects. Landlord's warranty under this Paragraph 4 is in
addition to Landlord's obligations under Section 6.3 of the Lease for
maintenance and repair of certain structural elements, the foundation and
structural portions of the mezzanine deck. Landlord is specifically not
warranting any of the Tenant Improvements, and Tenant shall be responsible
to repair and maintain such Tenant Improvements in compliance with the
terms of this Lease. If there are contractor or material supplier
-16-
<PAGE> 1
Exhibit 10.18
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"), dated as
of May 13, 1999, is entered into among NETCOM SYSTEMS, INC., a California
corporation ("Borrower"), the lenders listed on the signature pages hereof
(collectively, the "Lenders"), and NATIONSBANK, N.A. (successor by merger to
NationsBank of Texas, N.A.), as Administrative Agent (in said capacity, the
"Administrative Agent").
BACKGROUND
A. The Borrower, the Lenders and the Administrative Agent heretofore
entered into that certain Credit Agreement, dated as of August 29, 1997 (the
"Credit Agreement"; the terms defined in the Credit Agreement and not otherwise
defined herein shall be used herein as defined in the Credit Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to make
an amendment to the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are all hereby acknowledged,
the Borrower, the Lenders and the Administrative Agent covenant and agree as
follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(a) Section 1.1 of the Credit Agreement is hereby amended by adding the
following defined terms thereto in proper alphabetical order to read as
follows:
"Cash and Cash Equivalents" means, collectively, the following
property: (i) cash (which, after the occurrence and during the continuance of
an Event of Default, shall exclude any cash proceeds of Accounts), (ii)
securities issued or directly and fully guaranteed or insured by the United
States Government or any agency or instrumentality thereof having maturities of
not more than one year from the date of acquisition, (iii) certificates of
deposit and Eurodollar 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 capital and surplus in excess of $500,000,000,
(iv) repurchase
<PAGE> 2
obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) entered into
with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper issued by any Lender of the parent
corporation of any Lender, and commercial paper rated A-2 or the equivalent
thereof by Standard & Poor's Ratings Group, a Division of McGraw-Hill,
Inc., a New York corporation, or P-2 or the equivalent thereof by Moody's
Investors Service, Inc., and in each case maturing within one year after
the date of acquisition, and (vi) a readily redeemable "money market mutual
fund" advised by a bank described in clause (iii) 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 (i) through (v)
hereof and having on the date of such Investment total assets of at least
One Hundred Million Dollars ($100,000,000.00)."
" 'Restricted Foreign Subsidiary' has the same meaning as the term
'Foreign Restricted Subsidiary'."
" 'Unencumbered Cash and Cash Equivalents' means Cash and Cash
Equivalents of the Borrower and the Restricted Subsidiaries of the Borrower
that are not subject to or covered by any Lien or any negative pledge,
escrow arrangement or other restriction on the use or disposition thereof
by the Borrower or the applicable Restricted Subsidiary of the Borrower;
provided, however, that to the extent that any of the Cash and Cash
Equivalents of the Borrower or any Restricted Subsidiaries of the Borrower
are subject to or covered by any Lien that (i) constitutes a Permitted Lien
under clause (q) or clause (r) of the definition of "Permitted Liens", and
(ii) secures only the customary and recurring service fees of the holder of
such Lien in connection with such Cash and Cash Equivalents, the portion of
such Cash and Cash Equivalents in excess of the aggregate amount of such
customary and recurring service fees for one calendar quarter (or such
longer period of time as the holder of such Lien may utilize in charging
such fees, if applicable) shall not be excluded from constituting
Unencumbered Cash and Cash Equivalents by virtue of the existence of such
Lien."
(b) The definition of "Permitted Distributions" set forth in Section 1.1
of the Credit Agreement is hereby amended by (i) adding the parenthetical clause
"(other than redemptions and dividends permitted by clause (e) of this
definition)" after the word "to" in the first line of clause (a) thereof and
(ii) adding the following after the last existing paragraph thereof:
"(e) redemptions of, and related dividends with respect to, the
NetCom Redeemable Preferred Stock if, and to the extent that,
(i) such redemptions and the payment of related dividends takes
place on or before December 31, 1999, (ii) such redemptions and
related dividends do not exceed $56,000,000 in the aggregate
amount, (iii) contemporaneously with such redemptions and the
payment of such related dividends, 100% of the
- 2 -
<PAGE> 3
Netcom Redeemable Preferred Stock is redeemed and cancelled by the
Borrower and the Borrower thereafter has no further payment
obligations in connection with such Netcom Redeemable Preferred
Stock, (iv) prior to the making and payment of any such redemptions
and related dividends, the Borrower has consummated an initial
Public Equity Offering of common stock of the Borrower and the
Borrower has received at least $65,000,000 in Net Cash Proceeds
therefrom, (v) immediately prior to, and after giving effect to,
such redemptions and the payment of such related dividends, no
Default or Event of Default exists, and (vi) at least 5 Business
Days prior to the date of making or payment (whichever is earlier)
of any such redemption or any such related dividend, the
Administrative Agent has received a Compliance Certificate from the
Borrower evidencing compliance with the requirements of clause (v)
above."
(c) The Administrative Agent and each of the Lenders hereby acknowledge
and agree that the prepayment provisions of Section 2.5(d) of the Credit
Agreement shall not apply to the Net Cash Proceeds received by the Borrower in
connection with the initial Public Equity Offering of common stock of the
Borrower contemplated by paragraph (e) of the definition of "Permitted
Distributions" in the Credit Agreement if the Borrower utilizes such Net Cash
Proceeds, or a portion thereof, to redeem and cancel 100% of the Netcom
Redeemable Preferred Stock in accordance with the provisions of such paragraph
(e).
(d) Section 7.15 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 7.15. Fiscal Year. Neither the Borrower nor any Restricted
Subsidiary of the Borrower shall change its fiscal year from December 31."
(e) Article 7 of the Credit Agreement is hereby amended by adding Section
7.19 to the end thereof to read as follows:
"Section 7.19 Minimum Liquidity. The Borrower and the Restricted
Subsidiaries of the Borrower shall, at all times after the payment of the
redemptions and related dividends with respect to the Redeemable Preferred
Stock pursuant to paragraph (e) of the definition of "Permitted
Distributions" in the Credit Agreement, on a consolidated basis, maintain
Unencumbered Cash and Cash Equivalents in an aggregate amount of at least
(i) $10,000,000 plus (ii) the aggregate outstanding principal balance of
the Revolving Credit Notes at such time."
(f) In addition to the scheduled payments of the outstanding principal
balance of the Term Loan Advances required by Section 2.8(b) of the Credit
Agreement and in addition to any
- 3 -
<PAGE> 4
other or additional payments that may be required under the Loan Documents with
respect to the Term Loan Advances, on each of the two Quarterly Dates
immediately next succeeding the consummation of the initial Public Equity
Offering of common stock of the Borrower contemplated by paragraph (e) of the
definition of "Permitted Distributions" the Borrower shall repay an additional
$5,000,000 of the outstanding principal amount of the Term Loan Advances. Such
additional principal payments by the Borrower shall be applied to the regularly
scheduled payment of the Term Loan Advances in the inverse order of their
maturity.
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit Agreement
and the other Loan Documents are true and correct in all material respects on
and as of the date hereof as if made on and as of such date (except insofar as
any such representation or warranty relates specifically to a different date
by its own terms, in which case such representation or warranty is true and
correct in all material respects as of such specified date);
(b) no event has occurred and is continuing which constitutes a Default;
(c) the Borrower has full power and authority to execute and deliver
this First Amendment and the Credit Agreement, as amended hereby, and this
First Amendment and the Credit Agreement, as amended hereby, constitute the
legal, valid and binding obligations of the Borrower enforceable in accordance
with their respective terms, except as enforceability may be limited by
applicable debtor relief laws and by general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law) and
except as rights to indemnity may be limited by federal or state securities
laws; and
(d) no authorization, approval consent, or other action by, notice to,
or filing with, any governmental authority or other Person, is required for the
execution, delivery or performance by the Borrower of this First Amendment.
3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be
effective as of May 13, 1999, subject to the following;
(a) The Administrative Agent shall have received counterparts of this
First Amendment executed by the Determining Lenders;
(b) The Administrative Agent shall have received counterparts of this
First Amendment executed by the Borrower, and
- 4 -
<PAGE> 5
(c) the Administrative Agent shall have received, in form and substance
satisfactory to the Administrative Agent and its counsel, such other documents,
certificates and instruments as the Administrative Agent shall require.
4. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as amended by this First
Amendment.
(b) The Credit Agreement, as amended by this First Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
5. COSTS, EXPENSES AND TAXES. The Borrower agrees to promptly pay all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, negotiation, execution and delivery of this
First Amendment and the other instruments and documents to be delivered
hereunder (including, but not limited to, the reasonable fees and disbursements
of Special Counsel).
6. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument.
7. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be governed
by and construed in accordance with the laws of the State of Texas and shall be
binding upon the Borrower and each Lender and their respective successors and
assigns.
8. HEADINGS. Section headings in this First Amendment are included
herein for convenience of reference only and shall not constitute a part of
this First Amendment for any other purpose.
9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as the date first above written.
NETCOM SYSTEMS, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
NATIONSBANK, N.A. (successor by merger
to NationsBank of Texas, N.A.), as
Administrative Agent, Issuing Bank and
a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
BANKBOSTON, N.A., as Documentation Agent
and a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
- 6 -
<PAGE> 1
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, a Foreign Sales Corporation.
<PAGE> 1
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
------------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,597
<SECURITIES> 14,731
<RECEIVABLES> 10,035
<ALLOWANCES> 675
<INVENTORY> 2,676
<CURRENT-ASSETS> 49,962
<PP&E> 4,915
<DEPRECIATION> 1,251
<TOTAL-ASSETS> 54,155
<CURRENT-LIABILITIES> 18,160
<BONDS> 37,500
52,579
48,518
<COMMON> 3
<OTHER-SE> (102,605)
<TOTAL-LIABILITY-AND-EQUITY> 54,155
<SALES> 73,474
<TOTAL-REVENUES> 73,474
<CGS> 15,912
<TOTAL-COSTS> 25,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 325
<INTEREST-EXPENSE> 3,545
<INCOME-PRETAX> 30,139
<INCOME-TAX> 11,557
<INCOME-CONTINUING> 18,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,582
<EPS-PRIMARY> 5.74
<EPS-DILUTED> 0.63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,970
<SECURITIES> 16,339
<RECEIVABLES> 10,640
<ALLOWANCES> 489
<INVENTORY> 3,201
<CURRENT-ASSETS> 50,684
<PP&E> 7,698
<DEPRECIATION> 1,602
<TOTAL-ASSETS> 57,264
<CURRENT-LIABILITIES> 19,635
<BONDS> 35,000
53,363
48,518
<COMMON> 3
<OTHER-SE> (99,255)
<TOTAL-LIABILITY-AND-EQUITY> 57,264
<SALES> 19,513
<TOTAL-REVENUES> 19,513
<CGS> 4,873
<TOTAL-COSTS> 7,710
<OTHER-EXPENSES> 44
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 724
<INCOME-PRETAX> 6,572
<INCOME-TAX> 2,531
<INCOME-CONTINUING> 4,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,041
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 0.13
</TABLE>
