<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1999
Registration No. 333-86927
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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SOMERA COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 5065 77-0521878
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
5383 Hollister Avenue
Santa Barbara, California 93111
(805) 681-3322
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
DAN FIRESTONE
Chief Executive Officer
Somera Communications, Inc.
5383 Hollister Avenue
Santa Barbara, California 93111
(805) 681-3322
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Jeffrey D. Saper, Esq. Patrick A. Pohlen, Esq.
Richard Jay Silverstein, Esq. COOLEY GODWARD LLP
Craig N. Lang, Esq. 5 Palo Alto Square
WILSON SONSINI GOODRICH & ROSATI 3000 El Camino Real
Professional Corporation Palo Alto, CA 94306
650 Page Mill Road (650) 843-5000
Palo Alto, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed
Proposed Maximum
Maximum Aggregate
Title of Each Class of Amount to be Offering Price Offering Amount of
Securities Registered registered(1) per Share(2) Price(1)(2) Registration Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value.................. 9,775,000 $13.00 $127,075,000 $35,327(3)
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</TABLE>
(1) Includes shares that the underwriters have the option to purchase solely
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended solely for the purpose of computing the amount of the registration
fee.
(3) Includes $31,970 previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. 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 offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 15, 1999
PROSPECTUS
8,500,000 Shares
[LOGO OF SOMERA]
Common Stock
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This is our initial public offering of shares of common stock. We are
offering 8,500,000 shares. No public market currently exists for our shares.
We propose to list our common stock on the Nasdaq National Market under the
symbol "SMRA." Anticipated price range of $11.00 to $13.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 6.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to Somera Communications................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 1,275,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
- --------------------------------------------------------------------------------
Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Thomas Weisel Partners LLC
, 1999
<PAGE>
[INSIDE FRONT COVER ARTWORK]
In the center of the front inside cover on the right half of the page, a box
with the following text appears: "Somera provides telecommunications carriers
innovative infrastructure equipment and service offerings through our teams of
sales and procurement professionals. We work with individual carriers to
identify and address their specific telecommunications infrastructure needs."
[Photographs representing several Somera employees appear on the inside front
cover. In the background of the inside front cover appears a photograph of the
Somera executive office building.]
<PAGE>
In center of page, an oval containing the words "Somera Your Telecom Equipment
Resource Helping Carriers Keep Their Competitive Edge" containing the company
logo. The following words appear around the oval in the center of the page, in
a clockwise manner: "Equipment Supply," "Materials Management," "Asset
Recovery" and "Value-added Services".
In each of the four corners of the inside front gatefold, a circle icon with
arrows pointing into and out of the oval in the center of the page. The four
circle icons have the following captions: "Local Exchange Carrier," "Wireless
Carrier," "Competitive Local Exchange Carrier" and "Long Distance Carrier",
which are four types of customers to which Somera sells telecommunications
equipment. Each of these circle icons contains a representation of a network
for each of these customer types. For example, the "Wireless Carrier" circle
icon contains a representation of a network with the following icons linked
together within this circle: "Tower," "Base Station," "Switch Network," "PSTN"
and "Operations Management."
On the left side of the inside front gatefold, under the "Local Exchange
Carrier" icon, a heading entitled "Rapid Responsiveness to Dynamic Carrier
Needs" appears, with the following bulleted text below it: "More than 75
skilled sales and service professionals focused on specific carrier market
segments," "Work closely with carriers to identify and address infrastructure
equipment needs" and "Offer timely information via our relationship management
database." In the middle of the inside front gatefold in the bottom half of the
page, under the oval in the center of the page, a heading entitled "Flexible
Asset Recovery Programs" appears, with the following bulleted text below it:
"Consignment and customized programs," "Enabling carriers to expand, upgrade
and maintain installed networks cost-effectively" and "Recapture investment in
de-installed equipment."
In the middle of the inside front gatefold in the top half of the page, above
the oval in the center of the page, a heading entitled "Broad Multi-vendor
Equipment Offering" appears, with the following bulleted text below it: "New
and de-installed infrastructure equipment," "Switching, transmission, access,
wireless, microwave and power equipment" and "Over 250 different
manufacturers." On the right side of the inside front gatefold, under the
"Wireless Carrier" icon, a heading entitled "Value-added Materials Management
Services" appears, with the following bulleted text below it: "Technical,
materials management and other network deployment services," "Simplify
carriers' equipment inventory management" and "Enable carriers to focus on core
competencies".
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 6
Use of Proceeds......................... 16
Dividend Policy......................... 16
Capitalization.......................... 17
Dilution................................ 19
Selected Financial Data................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 23
Business................................ 34
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management........................ 46
Certain Transactions.............. 55
Principal Stockholders............ 57
Description of Capital Stock...... 59
Shares Available for Future Sale.. 62
Underwriting...................... 64
Legal Matters..................... 67
Experts........................... 67
Available Information............. 68
Index to Financial Statements..... F-1
</TABLE>
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ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information that is different from
that contained in this prospectus. We are offering to sell shares of common
stock and seeking offers to buy shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the common stock.
Until 1999, all dealers that buy, sell or trade the 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 underwriters and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and our financial statements and related notes appearing elsewhere in this
prospectus.
We provide telecommunications carriers with a broad range of infrastructure
equipment and related services designed to meet their specific and changing
equipment needs. We offer our customers a unique combination of new and de-
installed equipment from a variety of manufacturers, allowing them to make
multi-vendor purchases from a single, cost-effective source. De-installed
equipment consists primarily of equipment professionally removed from a
carrier's existing telecommunications network. Following removal, de-installed
equipment is shipped to our distribution facility where we test and refurbish
this equipment as necessary. To further address our customers' dynamic
equipment needs, we offer a suite of customized, value-added services,
including asset recovery, inventory management, technical support and other
ancillary services. We sell equipment to over 750 customers which are located
primarily in the United States. Customers from whom we recognized at least $2.0
million in net revenue for the twelve months ended September 30, 1999 include
leading carriers such as ALLTEL Corporation, AT&T Corporation, GTE Corporation,
Liberty Cellular, U.S. Cellular Corp., Vodafone AirTouch plc. and Western
Wireless. For the twelve months ended September 30, 1999, we had net revenue of
$107.9 million, gross profit of $39.0 million and net income of $22.5 million
and our net revenue consisted of sales of approximately 30% of new equipment
and 70% of de-installed equipment.
The telecommunications infrastructure equipment market has experienced
tremendous growth in recent years. Dataquest projects that worldwide sales of
telecommunications infrastructure equipment will grow from $180 billion in 1998
to $230 billion in 2002. Telecommunications carriers are facing a number of
challenges, including increased competition, the need to rapidly expand service
offerings, increased demand for communications services and technology
advancements. These challenges are having a significant impact on carriers'
equipment and service needs. Carriers have invested hundreds of billions of
dollars in telecommunications network infrastructure. To maximize the value of
their investments, carriers are expanding and upgrading their existing networks
and utilizing existing and new technologies and equipment from multiple
vendors. In addition, carriers are seeking cost-effective ways to expand and
maintain existing elements of their networks based on mature technologies. A
significant portion of the equipment replaced by carriers is suitable for
redeployment in other parts of a carrier's network. While historically carriers
may have scrapped used equipment or let it remain idle, competitive factors
increasingly require carriers to recapture a portion of their original
investment. As they attempt to respond to their changing equipment and service
needs, carriers are discovering that traditional equipment suppliers, including
original equipment manufacturers, or OEMs, distributors and niche secondary
market dealers are unable to fulfill their complex and changing equipment
needs.
Our innovative equipment and service offerings are delivered through our team
of more than 75 sales and procurement professionals, who work individually with
carriers to
1
<PAGE>
understand, anticipate and meet their ongoing equipment requirements. Our sales
teams utilize our relationship management database, our selective inventory and
our distribution center to provide our customers with rapidly deployable
equipment solutions.
The key benefits of our solution include:
.Broad Multi-vendor Equipment Offering. We provide customers with an
effective alternative to traditional telecommunications equipment supply
channels by offering a broad range of new and de-installed equipment that
includes switching, transmission, access, wireless, microwave and power
products from a variety of manufacturers.
.Rapid Responsiveness to Dynamic Customer Needs. We provide carriers with
convenient access to our skilled and dedicated sales and service
professionals who are capable of quickly identifying and responding to
their diverse equipment needs by using our relationship management
database and maintaining selective inventory.
.Flexible Asset Recovery Programs. We provide innovative and effective
asset recovery programs that enable carriers to cost-effectively build,
upgrade and maintain their networks and to recapture value from their de-
installed equipment.
.Simplified, Value-added Materials Management Services. We provide carriers
with a full range of value-added services, including technical, materials
management and other network deployment services that simplifies the
management of their equipment inventory and allows them to focus more on
their core business.
Our objective is to be the premier provider of telecommunications
infrastructure equipment and related services to carriers worldwide. Key
elements of our strategy include:
.Expanding our penetration of the telecommunications carrier market;
.Expanding our product lines and service capabilities;
.Increasing our penetration into the regional bell operating companies, or
RBOCs;
.Pursuing opportunities for international growth; and
.Pursuing selective acquisitions.
----------------
All trademarks or service marks appearing in this prospectus are the property
of their respective holders.
References in this prospectus to "Somera Communications," "we," "our," and
"us" refer to Somera Communications, Inc. and our predecessor, Somera
Communications, LLC, unless the context otherwise requires. Somera
Communications, LLC was formed in California on July 27, 1995. Somera
Communications, Inc. was incorporated as a Delaware corporation in August 1999.
The unit holders of Somera Communications, LLC will exchange all of their
outstanding units for shares of common stock of, and Somera Communications, LLC
will be succeeded by, Somera Communications, Inc. prior to this offering. Our
principal executive offices are located at 5383 Hollister Avenue, Santa
Barbara, California 93111. Our telephone number is (805) 681-3322. Our web site
address is www.somera.com. Information contained on our web site does not
constitute part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Somera
Communications.................... 8,500,000 shares
Common stock outstanding after the
offering.......................... 46,562,500 shares
Use of proceeds.................... We intend to use the net proceeds of this
offering to repay outstanding bank
indebtedness, for capital expenditures and
for general corporate purposes, including
working capital. See "Use of Proceeds."
Dividend policy.................... We do not intend to pay dividends on our
common stock. We plan to retain earnings
for use in the operation of our business
and to fund future growth.
Proposed Nasdaq National Market
symbol............................ "SMRA"
</TABLE>
In addition to the 46,562,500 shares of common stock to be outstanding after
the offering, we may issue additional shares of common stock under the
following plans and arrangements:
. 6,750,000 shares issuable under our 1999 Stock Option Plan, consisting
of:
. 1,490,093 Somera Communications, LLC units underlying outstanding
options at a weighted average exercise price of $8.09 per share, none
of which were exercisable as of September 30, 1999, and which will be
converted into options to purchase an equivalent number of shares under
our 1999 Stock Option Plan; and
. 5,259,907 shares available for future grants;
. 207,655 Somera Communications, LLC units issuable upon exercise of
outstanding warrants at a weighted average exercise price of $8.07 per
share, which were fully exercisable as of September 30, 1999, and which
will be converted into warrants exercisable for an equivalent number of
shares of our common stock;
. 300,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 300,000 shares available for issuance under our 1999 Director Option
Plan.
----------------
Unless otherwise indicated, all information in this prospectus:
. Reflects a 3 for 2 split of the Class A units and Class B units of Somera
Communications, LLC, a California limited liability company;
. Reflects the exchange of all of the Class A units and Class B units of
Somera Communications, LLC, for shares of common stock of Somera
Communications, Inc., a Delaware corporation, prior to this offering;
. Reflects the assumption of the operations, assets, liabilities and
commitments of Somera Communications, LLC by Somera Communications, Inc.
prior to this offering;
. Assumes the filing of our amended and restated certificate of
incorporation, which, among other things, will authorize 200 million
shares of common stock and 20 million shares of undesignated preferred
stock; and
. Assumes no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Financial Data
The following table summarizes the financial data of our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Nine Months Ended
Year Ended December 31, Ended June 30, September 30,
----------------------- --------------- -----------------------
1996 1997 1998 1998 1999 1998 1999
------- ------- ------- ------- ------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Net revenue............. $10,149 $34,603 $72,186 $34,417 $52,834 $51,271 $87,034
Cost of net revenue..... 5,532 20,587 43,132 21,037 34,023 30,890 56,678
------- ------- ------- ------- ------- ------- -------
Gross profit............ 4,617 14,016 29,054 13,380 18,811 20,381 30,356
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... 780 2,593 5,747 2,394 4,385 3,895 7,238
General and
administrative....... 696 1,648 3,939 1,326 2,999 2,922 5,085
Stock-based
compensation......... -- -- -- -- 193 -- 652
------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,476 4,241 9,686 3,720 7,577 6,817 12,975
------- ------- ------- ------- ------- ------- -------
Income from operations.. 3,141 9,775 19,368 9,660 11,234 13,564 17,381
Interest expense, net... 18 82 187 75 144 117 656
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,123 $ 9,693 $19,181 $ 9,585 $11,090 $13,447 $16,725
======= ======= ======= ======= ======= ======= =======
Net income per share--
basic(1)............... $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $0.35 $0.44
------- ------- ------- ------- ------- ------- -------
Weighted average
shares--basic.......... 37,500 38,052 38,063 38,063 38,063 38,063 38,063
------- ------- ------- ------- ------- ------- -------
Net income per share--
diluted(1)............. $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $0.35 $0.44
------- ------- ------- ------- ------- ------- -------
Weighted average
shares--diluted........ 37,500 38,052 38,063 38,063 38,069 38,063 38,115
------- ------- ------- ------- ------- ------- -------
</TABLE>
- -------
(1) See Note 2 of notes to the financial statements for an explanation of the
calculation of net income per unit--basic and diluted. Net income per
share--basic and diluted has been stated above assuming a one-for-one
exchange of the units of Somera Communications, LLC for shares of our
common stock.
4
<PAGE>
The following data provides a summary of our unaudited balance sheet at
September 30, 1999. The pro-forma column gives effect to:
. the exchange on a one for one basis of all the units of Somera
Communications, LLC for shares of Somera Communications, Inc.; and
. the creation of a deferred tax asset of approximately $17.0 million as
a result of the change in tax status from a limited liability company
to a "C" corporation.
The as adjusted column reflects the sale of 8,500,000 shares of common stock in
this offering at an assumed initial public offering price of $12.00 per share
after deducting the estimated underwriting discount and offering expenses
payable by us. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro-forma
Actual Pro-forma As Adjusted
-------- --------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital.............................. $ 7,417 $ 7,417 $51,177
Deferred tax asset........................... -- 17,000 17,000
Total assets................................. 29,432 46,432 83,757
Term debt.................................... 48,900 48,900 --
Mandatorily redeemable Class B units......... 51,750 -- --
Total members' deficit/Stockholders' equity
(deficit)................................... (91,531) (22,781) 69,879
</TABLE>
Commencing with 1997, our fiscal years are on a 52 and 53 week basis. For
presentation purposes we are using a calendar quarter and calendar year end
convention. Our fiscal year 1997 ended on December 28, 1997 and our fiscal year
1998 ended on January 3, 1999. The six month periods presented ended on
June 28, 1998 and July 4, 1999 and the nine month periods presented ended on
September 27, 1998 and October 3, 1999.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before buying shares
in this offering. If any of the following risks actually occur, our business
could be harmed, the trading price of our common stock could decline and you
could lose all or part of your investment. You should also refer to other
information contained in this prospectus, including our financial statements
and related notes.
Our operating results are likely to fluctuate in future periods, which might
lead to reduced prices for our stock.
Our annual or quarterly operating results are difficult to predict and are
likely to fluctuate significantly in the future as a result of numerous
factors, many of which are outside of our control. If our annual quarterly
operating results do not meet the expectations of securities analysts and
investors, the trading price of our stock could significantly decline. Factors
that could impact our operating results include:
. the rate, timing and volume of orders for the telecommunications
infrastructure equipment we sell;
. the rate at which telecommunications carriers de-install their equipment;
. decreases in our selling prices due to competition in the secondary
market;
. our ability to obtain products cost-effectively from original equipment
manufacturers, or OEMs, distributors, carriers and other secondary
sources of telecommunications equipment;
. our ability to provide equipment and service offerings on a timely basis
to satisfy customer demand;
. variations in customer purchasing patterns due to seasonality and other
factors;
. write-offs due to inventory defects or obsolescence;
. the sales cycle for equipment we sell, which can be relatively lengthy;
. delays in the commencement of our operations in new market segments and
geographic regions; and
. costs relating to possible acquisitions and integration of new
businesses.
Our business depends upon our ability to match third party de-installed
equipment supply with carrier demand for this equipment and failure to do so
could reduce our net revenue.
Our success depends on our continued ability to match the equipment needs of
telecommunications carriers with the supply of de-installed equipment available
in the secondary market. We depend upon maintaining business relationships with
third parties who can provide us with de-installed equipment and information on
available de-installed equipment. Failure to effectively manage these
relationships and match the needs of our customers with available supply of de-
installed equipment could damage our ability to generate net revenue. In the
event carriers decrease the rate at which they de-install their networks, or
choose not to de-install their networks at all, it would be more difficult for
us to locate this equipment, which could negatively impact our net revenue.
6
<PAGE>
A downturn in the telecommunications industry or an industry trend toward
reducing or delaying additional equipment purchases due to cost-cutting
pressures could reduce demand for our products.
We rely significantly upon customers concentrated in the telecommunications
industry as a source of net revenue and de-installed equipment inventory. We
believe that a downturn in the telecommunications industry in general or
decreased carrier operating performance could result in reduced sales to our
customers and postpone network upgrades. These reduced sales could negatively
impact our ability to generate revenue and delayed projects could impair our
ability to obtain de-installed telecommunications equipment.
The market for supplying equipment to telecommunications carriers is
competitive, and if we cannot compete effectively, our net revenue and gross
margins might decline.
Competition among companies who supply equipment to telecommunications
carriers is intense. We currently face competition primarily from three
sources: OEMs, distributors and secondary market dealers who sell new and de-
installed telecommunications infrastructure equipment. If we are unable to
compete effectively against our current or future competitors, we may have to
lower our selling prices and may experience reduced gross margins and loss of
market share, either of which could harm our business.
Competition is likely to increase as new companies enter this market, as
current competitors expand their products and services or as our competitors
consolidate. Increased competition in the secondary market for
telecommunications equipment could also heighten demand for the limited supply
of de-installed equipment which would lead to increased prices for, and reduce
the availability of, this equipment. Any increase in these prices could
significantly impact our ability to maintain our gross margins.
We do not have many formal relationships with suppliers of telecommunications
equipment and may not have access to adequate product supply.
Historically, 70% or more of our annual net revenue has been generated from
the sale of de-installed telecommunications equipment. Typically, we do not
have supply contracts to obtain this equipment and are dependent on the de-
installation of equipment by carriers to provide us with much of the equipment
we sell. Our ability to buy de-installed equipment from carriers is dependent
on our relationships with them. If we fail to develop and maintain these
business relationships with carriers or they are unwilling to sell de-installed
equipment to us, our ability to sell de-installed equipment will suffer.
Our customer base is concentrated and the loss of one or more of our key
customers would have a negative impact on our net revenue.
Historically, a significant portion of our sales have been to relatively few
customers. Sales to our ten largest customers accounted for 43.8% of our net
revenue in 1998, 42.2% of our net revenue in 1997, and 35.4% of our net revenue
in 1996. In the nine months ended September 30, 1999, sales to our ten largest
customers accounted for 33.4 % of our net revenue. In the first nine months of
1999, no single customer accounted for over 10% of our
7
<PAGE>
net revenue. In 1998, ALLTEL Corporation accounted for 10.2% of our net
revenue, in 1997, Vodafone AirTouch plc accounted for 10.1% of our net revenue,
and in 1996, ALLTEL Corporation accounted for 11.4% of our net revenue. In
addition, substantially all of our sales are made on a purchase order basis,
and no customer has entered into a long-term purchasing agreement with us. As a
result, we cannot be certain that our current customers will continue to
purchase from us. The loss of, or any reduction in orders from, a significant
customer would have a negative impact on our net revenue.
We may be forced to reduce the sales prices for the equipment we sell, which
may impair our ability to maintain our gross margins.
In the future we expect to reduce prices in response to competition and to
generate increased sales volume. If manufacturers reduce the prices of new
telecommunications equipment we may be required to further reduce the price of
the new and de-installed equipment we sell. If we are forced to reduce our
prices or are unable to shift the sales mix towards higher margin equipment
sales, we will not be able to maintain current gross margins.
The market for de-installed telecommunications equipment is relatively new and
it is unclear whether our equipment and service offerings and our business will
achieve long-term market acceptance.
The market for de-installed telecommunications equipment is relatively new
and evolving, and we are not certain that our potential customers will adopt
and deploy de-installed telecommunications equipment in their networks. For
example, with respect to de-installed equipment that includes a significant
software component, potential customers may be unable to obtain a license or
sublicense for the software. Even if they do purchase de-installed equipment,
our potential customers may not choose to purchase de-installed equipment from
us for a variety of reasons. Our customers may also redeploy their displaced
equipment within their own networks which would eliminate their need for our
equipment and service offerings. These internal solutions would also limit the
supply of de-installed equipment available for us to purchase, which would
limit the development of this market.
We may fail to continue to attract, develop and retain key management and sales
personnel, which could negatively impact our operating results.
We depend on the performance of our executive officers and other key
employees. The loss of any member of our senior management, in particular, Dan
Firestone, our chief executive officer, or other key employees could negatively
impact our operating results and our ability to execute our business strategy.
In addition, we depend on our sales professionals to serve customers in each of
our markets. The loss of any of our sales professionals could significantly
disrupt our relationships with our customers. We do not have "key person" life
insurance policies on any of our employees except for Dan Firestone.
8
<PAGE>
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in the
telecommunications equipment industry is intense. Additionally, we depend on
our ability to train and develop skilled sales people and an inability to do so
would significantly harm our growth prospects and operating performance. We
have experienced, and we expect to continue to experience difficulty in hiring
and retaining highly skilled employees.
Our business may suffer if we are not successful in our efforts to keep up with
a rapidly changing market.
The market for the equipment and services we sell is characterized by
technological changes, evolving industry standards, changing customer needs and
frequent new equipment and service introductions. Our future success in
addressing the needs of our customers will depend, in part, on our ability to
timely and cost-effectively:
. respond to emerging industry standards and other technological changes;
. develop our internal technical capabilities and expertise;
. broaden our equipment and service offerings; and
. adapt our services to new technologies as they emerge.
Our failure in any of these areas could harm our business. Moreover, any
increased emphasis on software solutions as opposed to equipment solutions
could limit the availability of de-installed equipment, decrease customer
demand for the equipment we sell, or cause the equipment we sell to become
obsolete.
The lifecycles of telecommunications infrastructure equipment may become
shorter, which would decrease the supply of, and carrier demand for, de-
installed equipment.
Our sales of de-installed equipment depend upon carrier utilization of
existing telecommunications network technology. If the lifecycle of equipment
comprising carrier networks is significantly shortened for any reason,
including technology advancements, the installed base of any particular model
would be limited. This limited installed base would reduce the supply of, and
demand for, de-installed equipment which could decrease our net revenue.
Many of our customers are telecommunications carriers that may at any time
reduce or discontinue their purchases of the equipment we sell to them.
If our customers choose to defer or curtail their capital spending programs,
it could have a negative impact on our sales to those telecommunications
carriers, which would harm our business. A significant portion of our customers
are emerging telecommunications carriers who compete against existing telephone
companies. These new participants only recently began to enter these markets,
and many of these carriers are still building their networks and rolling out
their services. They require substantial capital for the development,
construction and expansion of their networks and the introduction of their
services. If emerging carriers fail to acquire and retain customers or are
unsuccessful in raising needed funds or responding to any other trends, such as
price reductions for their services or
9
<PAGE>
diminished demand for telecommunications services in general, then they could
be forced to reduce their capital spending programs.
If we fail to implement our strategy of purchasing equipment from and selling
equipment to regional bell operating companies, our growth will suffer.
One of our strategies is to develop and expand our relationships with
regional bell operating companies, or RBOCs. We believe the RBOCs could provide
us with a significant source of additional net revenue. In addition, we believe
the RBOCs could provide us with a large supply of de-installed equipment. We
cannot assure you that we will be successful in implementing this strategy.
RBOCs may not choose to sell de-installed equipment to us or may not elect to
purchase this equipment from us. RBOCs may instead develop those capabilities
internally or elect to compete with us and resell de-installed equipment to our
customers or prospective customers. If we fail to successfully develop our
relationships with RBOCs or if RBOCs elect to compete with us, our growth could
suffer.
If we do not expand our international operations our growth could suffer.
We intend to continue expanding our business in international markets. This
expansion will require significant management attention and financial resources
to develop a successful international business, including sales, procurement
and support channels. We may not be able to maintain or increase international
market demand for the equipment we sell, and therefore we might not be able to
expand our international operations. We currently have limited experience
providing equipment outside the United States. Sales to customers outside of
the United States accounted for 10.7% of our net revenue in the nine months
ended September 30, 1999 and 19.7% of our net revenue in the year ended
December 31, 1998.
We may fail to engage in selective acquisitions which could limit our future
growth.
One of our strategies for growth is to engage in selective acquisitions. Our
ability to conduct such acquisitions may be limited by our ability to identify
potential acquisition candidates and obtain necessary financing. In the event
we are unable to identify and take advantage of these opportunities, we may
experience difficulties in growing our business.
If we do engage in selective acquisitions, we may experience difficulty
assimilating the operations or personnel of the acquired companies, which could
threaten our future growth.
If we make acquisitions, we could have difficulty assimilating or retaining
the acquired companies' personnel or integrating their operations, equipment or
services into our organization. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Moreover, our profitability may suffer because of acquisition-related costs or
amortization of acquired goodwill and other intangible assets. Furthermore, we
may have to incur debt or issue equity securities in any future acquisitions.
The issuance of equity securities would be dilutive to our existing
stockholders.
10
<PAGE>
Failure to manage our rapid growth effectively could harm our results of
operations.
Since we began commercial operations in July 1995, we have experienced rapid
growth and expansion that is straining our resources. In the twelve months
ended September 30, 1999, the number of our employees increased from 72 to 128.
Continued growth could place a further strain on our management, operational
and financial resources. Our inability to manage growth effectively could harm
our business. We are in the process of upgrading our internal control and
information systems. We may not be able to install adequate control systems in
an efficient and timely manner, and our current or planned operational systems,
procedures and controls may not be adequate to support our future operations.
Delays in the implementation of new systems or operational disruptions when we
transition to new systems would impair our ability to accurately forecast sales
demand, manage our equipment inventory and record and report financial and
management information on a timely and accurate basis.
Several key members of our management team have only recently joined us and if
they are not successfully integrated into our business or fail to work together
as a management team, our business will suffer.
Several key members of our management team have joined us since May 1, 1999,
including Gary Owen, our chief financial officer and Jeffrey Miller, our
executive vice president of sales and marketing. Additionally, we intend to
hire other key personnel, including a vice president of operations. If we
cannot effectively integrate these employees into our business, or if they
cannot work together as a management team to enable us to implement our
business strategy, our business will suffer.
Defects in the equipment we sell may seriously harm our credibility and our
business.
Telecommunications carriers require a strict level of quality and reliability
from telecommunications equipment suppliers. Telecommunications equipment is
inherently complex and can contain undetected software or hardware errors. If
we deliver telecommunications equipment with undetected material defects, our
reputation, credibility and equipment sales could suffer. Moreover, because the
equipment we sell is integrated into our customers' networks, it can be
difficult to identify the source of a problem should one occur. The occurrence
of such defects, errors or failures could also result in delays in
installation, product returns, product liability and warranty claims and other
losses to us or our customers. In some of our contracts, we have agreed to
indemnify our customers against liabilities arising from defects in the
equipment we sell to them. Furthermore, we supply most of our customers with
guarantees that cover the equipment we offer. While we may carry insurance
policies covering these possible liabilities, these policies may not provide
sufficient protection should a claim be asserted. A material product liability
claim, whether successful or not, could be costly, damage our reputation and
distract key personnel, any of which could harm our business.
11
<PAGE>
Our strategy to outsource services could impair our ability to deliver our
equipment on a timely basis.
Currently, we depend on third parties for a variety of equipment-related
services, including engineering, repair, transportation, testing, installation
and de-installation. This outsourcing strategy involves risks to our business,
including reduced control over delivery schedules, quality and costs and the
potential absence of adequate capacity. In the event that any significant
subcontractor were to become unable or unwilling to continue to perform their
required services, we would have to identify and qualify acceptable
replacements. This process could be lengthy, and we cannot be sure that
additional sources of third party services would be available to us on a timely
basis, or at all.
Our quarterly net revenue may be negatively impacted by the seasonal purchasing
patterns of our customers.
Our quarterly net revenue may be subject to the seasonal purchasing patterns
of our customers. Historically, net revenue in the third quarter has been
typically lower than that of the second quarter of that year. For example, our
net revenue decreased in the quarter ended September 30, 1998 compared to our
net revenue for the quarter ended June 30, 1998. We believe this trend may
occur as a result of our customers' annual budgetary, procurement and sales
cycles.
Our ability to meet customer demand and the growth of our net revenue could be
harmed if we are unable to manage our inventory needs accurately.
To meet customer demand in the future, we believe it is necessary to maintain
or increase some levels of inventory. Failure to maintain adequate inventory
levels in these products could hurt our ability to make sales to our customers.
In the past, we have experienced inventory shortfalls, and we cannot be certain
that we will not experience shortfalls again in the future, which could harm
our reputation and our business. Further, rapid technology advancement could
make our existing inventory obsolete and cause us to incur losses. In addition,
if our forecasts lead to an accumulation of inventories that are not sold in a
timely manner, our business could suffer.
Our failure and the failure of our suppliers and customers to be year 2000
compliant could harm our business by making it more difficult for us to
communicate effectively with our customers and suppliers and by causing the
equipment we sell to fail.
Many currently installed computer systems and software products are not
capable of distinguishing 21st century dates from 20th century dates. As a
result, beginning on January 1, 2000, computer systems and software used by
many companies and organizations in a wide variety of industries, including
telecommunications, technology, transportation, utilities and finance, could
likely produce erroneous results or fail unless they have been modified or
upgraded to process date information correctly. These computer systems and
software failures could make it more difficult for us to communicate
effectively with our suppliers and customers. In addition, we face the
possibility that the equipment we sell will fail due to processing errors
caused by inaccurate calculations with respect to the year 2000.
12
<PAGE>
The corruption or interruption of key software systems we use could cause our
business to suffer if it delays or restricts our ability to meet our customers'
needs.
We rely on the integrity of key software and systems. Specifically we rely on
our relationship management database which tracks information on currently or
potentially available de-installed equipment. This software and these systems
may be vulnerable to harmful applications, computer viruses and other forms of
corruption and interruption. In the event our software or systems are affected
by any form of corruption or interruption, it could delay or restrict our
ability to meet our customers' needs, which could harm our reputation or
business.
If we are unable to meet our additional capital needs in the future, we may not
be able to execute our business growth strategy.
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering and financing available under our revolving
loan facility, will be sufficient to meet our anticipated working capital and
capital expenditure requirements for at least the next 12 months. However, our
resources may not be sufficient to satisfy these requirements. We may need to
raise additional funds through public or private debt or equity financings to:
.take advantage of business opportunities, including more rapid
international expansion or acquisitions of complementary businesses;
.develop and maintain higher inventory levels;
.gain access to new product lines;
.develop new services; or
.respond to competitive pressures.
Any additional financing we may need might not be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our business could suffer if the inability to
raise this funding threatens our ability to execute our business growth
strategy. Moreover, if additional funds are raised through the issuance of
equity securities, the percentage of ownership of our current stockholders will
be reduced. Newly issued equity securities may have rights, preferences and
privileges senior to those of investors in our common stock. In addition, the
terms of any debt could impose restrictions on our operations.
Our facilities could be vulnerable to damage from earthquakes and other natural
disasters.
Our facilities are located on or near known earthquake fault zones and are
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. If a disaster occurs, our
ability to test and ship the equipment we sell would be seriously, if not
completely, impaired, and our inventory could be damaged or destroyed, which
would seriously harm our business. We cannot be sure that the insurance we
maintain against fires, floods, earthquakes and general business interruptions
will be adequate to cover our losses in any particular case.
13
<PAGE>
You might not be able to sell your stock if an active public market does not
develop for our stock.
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after the offering. If a market for our common stock does not develop or is not
sustained, it may be difficult for you to sell your shares of common stock at a
price that is attractive to you, or at all. The initial public offering price
of the common stock will be determined through negotiations between the
representatives of the underwriters and us and may not be representative of the
price that will prevail in the open market.
The price of our common stock may be volatile and subject to wide fluctuations,
which may limit your ability to resell your shares at or above the initial
public offering price.
The trading price of our common stock may be volatile. The stock prices of
technology and telecommunications-related companies have experienced extreme
volatility that often has been unrelated to the operating performance of these
particular companies. Fluctuations may adversely affect the trading price of
our common stock, regardless of our actual operating performance. In addition,
you may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
.our ability to meet growth, revenue and earnings expectations;
.industry announcements regarding technological innovations or strategic
relationships; and
.conditions affecting the telecommunications industry generally.
Provisions in our charter documents might deter acquisition bids for us.
There are provisions in our charter documents and other provisions under
Delaware law that could make it more difficult for a third party to acquire us,
even if doing so would benefit our stockholders. See "Description of Capital
Stock -- Delaware Anti-takeover Law and Certain Charter and Bylaw Provisions"
for further discussion of the specific provisions in our charter documents that
may delay or prevent a change in our control.
Our officers and directors exert substantial influence over us, and may make
future business decisions with which some of our stockholders might disagree.
We anticipate that our executive officers, our directors and entities
affiliated with them will beneficially own an aggregate of approximately 69.6%
of our outstanding common stock following the completion of this offering. As a
result, these stockholders will be able to exercise substantial influence over
all matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in our control.
14
<PAGE>
Management could invest or spend the proceeds of this offering not being used
to repay debt in ways with which the stockholders might not agree.
We intend to use a significant portion of the net proceeds of this offering
to repay our debt rather than build our business. In addition, we have no
specific allocations for any other net proceeds of this offering that are not
being used to repay debt other than a portion for capital expenditures.
Consequently, management will retain a significant amount of discretion over
the application of these proceeds. Because of the number and variability of
factors that will determine our use of these proceeds, how we spend the
proceeds may vary substantially from our current intentions.
You will incur immediate and substantial dilution.
The initial public offering price is substantially higher than the pro-forma
net tangible book value (deficit) per share of the outstanding common stock. As
a result, investors purchasing common stock in this offering will incur
immediate and substantial dilution in the amount of $10.50 per share. Investors
will incur additional dilution upon the exercise of outstanding stock options
and warrants. See "Dilution."
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control. All
statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect",
"project" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such
identifying words. All forward-looking statements speak only as of the date of
this prospectus. You should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by the forward-looking statements we make in this
prospectus are reasonable, we can give no assurance that these plans,
intentions or expectations will be achieved. We disclose important factors that
could cause our actual results to differ materially from our expectations under
"Risks Factors" and elsewhere in this prospectus. These cautionary statements
qualify all forward-looking statements attributable to us or persons acting on
our behalf.
15
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately $93.8
million, or $108.0 million if the underwriters exercise their over-allotment
option in full, at an assumed initial public offering price of $12.00 per share
and after deducting the underwriting discount and estimated offering expenses.
We intend to use $50.0 million of the proceeds from the offering to repay the
entire outstanding amount of our term loan facility. We also intend to use a
portion of the proceeds to repay the entire outstanding amount drawn under our
revolving loan facility, which is approximately $6.4 million as of September
30, 1999. These loans, as of September 30, 1999, have an interest rate of 8.9%
on an outstanding amount of $3.5 million, and 9.5% for the remaining
outstanding amount of $2.9 million of the loan, and have a maturity date of
August 31, 2004. For additional information please see "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources." The proceeds from our term loan facility were used to make
a distribution to our members of $48.5 million in September 1999. We currently
intend to use approximately $2.0 million of the proceeds for capital
expenditures however there are currently no specific projects identified and we
expect to use the remaining proceeds for general corporate purposes, including
working capital. As of the date of this prospectus, we cannot specify the
particular uses for the general corporate purposes of our proceeds.
Accordingly, our management will have broad discretion in the application of
the net proceeds.
We intend to invest the remainder of the net proceeds in short-term, interest
bearing, investment grade marketable securities.
DIVIDEND POLICY
While we do not plan to pay dividends, any future determination to pay
dividends will be at the discretion of the board of directors and will depend
upon our financial condition, operating results, capital requirements and other
factors the board of directors deems relevant. We plan to retain earnings for
use in the operation of our business and to fund future growth.
From July 1995 to September 1999, we operated in the form of a limited
liability company and income was taxed directly to our equity members. During
this time, we made regular quarterly distributions to our members based on our
funds available for distribution. In 1996, we made quarterly distributions in
an annual aggregate amount of $0.06 per unit to our members. In 1997, we made
quarterly distributions in an annual aggregate amount of $0.20 per unit to our
members. In 1998, we made quarterly distributions in an annual aggregate amount
of $0.43 per unit to our members. In the period beginning January 1, 1999
through September, 1999, which includes the distribution of the proceeds of our
term loan facility, we made quarterly distributions in an aggregate amount of
$1.68 per unit to our members. See "Certain Transactions" for additional
information regarding this term loan facility.
16
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
September 30, 1999. Our capitalization is presented:
. on an actual basis;
. on a pro forma basis to reflect:
. the exchange on a one for one basis of all the units of Somera
Communications, LLC for common shares of Somera Communications, Inc.;
and
. the creation of a deferred tax asset of approximately $17.0 million as
a result of the change in tax status from a limited liability company
to a "C" corporation.
. on a pro forma as adjusted basis to reflect:
. the sale of 8,500,000 shares of common stock at an assumed initial
public offering price of $12.00 per share in this offering, less
underwriting discounts and commissions and estimated offering
expenses; and
. the application of the net proceeds by us from the offering, including
the repayment of the $50.0 million term loan from a syndicate of
financial institutions led by Fleet National Bank.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro-forma
Actual Pro-forma As Adjusted
-------- --------- -----------
(in thousands, except per
share data)
<S> <C> <C> <C>
Borrowing under revolving credit facility... $ 6,435 $ 6,435 --
Capital lease obligation--current portion 255 255 255
-------- ------- -------
Total short-term debt..................... 6,690 6,690 255
-------- ------- -------
Capital lease obligations................... 575 575 575
-------- ------- -------
Term loan facility.......................... 48,900 48,900 --
-------- ------- -------
Mandatorily redeemable Class B units; 14,070
units actual, no units pro-forma and pro-
forma as adjusted:......................... 51,750 -- --
-------- ------- -------
Members' deficit/stockholders' equity
(deficit):
Class A 23,993 units actual, no units pro-
forma and pro-forma as adjusted.......... (79,658) -- --
Class B................................... (11,165) -- --
Common stock, $0.001 par value;
Authorized 200,000 shares; issued 38,603
shares
pro-forma and 48,563 shares pro-forma as
adjusted................................. -- 38 47
Additional paid in capital ................. -- (39,111) 54,640
Retained Earnings........................... -- 17,000 15,900
Unearned Stock based compensation........... (708) (708) (708)
-------- ------- -------
Total members' deficit/stockholders'
equity (deficit)......................... (91,531) (22,781) 69,879
-------- ------- -------
Total capitalization..................... $ 9,694 $26,694 $70,454
======== ======= =======
</TABLE>
17
<PAGE>
We expect there to be 48,562,500 shares outstanding after the offering. In
addition to the shares of common stock to be outstanding after the offering, we
may issue additional shares of common stock under the following plans and
arrangements:
.6,750,000 shares issuable under our 1999 Stock Option Plan, consisting of:
. 1,490,093 Somera Communications, LLC units underlying outstanding
options at a weighted average exercise price of $8.09 per share, none
of which were exercisable as of September 30, 1999, and which will be
converted into options to purchase an equivalent number of shares under
our 1999 Stock Option Plan; and
. 5,259,907 shares available for future grants;
.207,655 Somera Communications, LLC units issuable upon exercise of
outstanding warrants at a weighted average exercise price of $8.07 per
share, which were fully exercisable as of September 30, 1999, and which
will be converted into warrants exercisable for an equivalent number of
shares of our common stock;
.300,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
.300,000 shares available for issuance under our 1999 Director Option Plan.
18
<PAGE>
DILUTION
Our pro-forma net tangible book value (deficit) as of September 30, 1999 was
($22.8) million or ($0.60) per share. Pro-forma net tangible book value
(deficit) per share is determined by dividing the pro-forma number of
38,062,500 outstanding shares of common stock into our pro-forma (deficit),
which is our pro-forma total tangible assets less total liabilities. After
giving effect to the receipt of the estimated net proceeds from this offering,
based upon an assumed initial public offering price of $12.00 per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses, our pro-forma as adjusted net tangible book value
(deficit) as of September 30, 1999 would have been approximately $69.9 million,
or $1.50 per share. This represents an immediate increase in pro-forma net
tangible book value (deficit) of $2.10 per share to existing stockholders and
an immediate dilution of $10.50 per share to new investors purchasing shares at
an assumed initial public offering price of $12.00 per share, initial public
offering price. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $12.00
Pro-forma net tangible book value (deficit) per share as of
September 30, 1999........................................ $(0.60)
Increase per share attributable to new investors........... 2.10
------
Pro-forma net tangible book value (deficit) per share after
offering.................................................... 1.50
------
Dilution per share to new investors.......................... $10.50
======
</TABLE>
The following table summarizes as of September 30, 1999, on the pro-forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by new investors before deducting the estimated underwriting
discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 38,062,500 81.7% $ 52,261,000 33.9% $1.37
New investors................. 8,500,000 18.3 102,000,000 66.1 12.00
---------- ---- ------------ ---- -----
Total..................... 46,562,500 100% $154,261,000 100% $3.31
========== ==== ============ ==== =====
</TABLE>
We expect to have 46,562,500 shares outstanding after the offering. In
addition to the shares of common stock to be outstanding after the offering, we
may issue additional shares of common stock under the following plans and
arrangements:
. 6,750,000 shares issuable under our 1999 Stock Option Plan, consisting
of:
. 1,490,093 Somera Communications, LLC units underlying outstanding
options at a weighted average exercise price of $8.09 per share, none
of which were exercisable as of September 30, 1999, and which will be
converted into options to purchase an equivalent number of shares under
our 1999 Stock Option Plan; and
19
<PAGE>
. 5,259,907 shares available for future grants;
.207,655 Somera Communications, LLC units issuable upon exercise of
outstanding warrants at a weighted average exercise price of $8.07 per
share, which were fully exercisable as of September 30, 1999, and which
will be converted into warrants exercisable for an equivalent number of
shares of our common stock;
. 300,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 300,000 shares available for issuance under our 1999 Director Option
Plan.
To the extent that any of these options or warrants are exercised or shares
are issued, there will be further dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data with our financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The statements of operations for the years ended December 31, 1996,
1997 and 1998, and the six months ended June 30, 1999, and the balance sheet
data at December 31, 1997, and 1998, and June 30, 1999, are derived from our
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this prospectus. The statement
of operations for the six months ended June 30, 1998 and nine months ended
September 30, 1998 and 1999 and the balance sheet data at September 30, 1999 is
derived from our unaudited financial statements included elsewhere in this
prospectus. The balance sheet data at December 31, 1996 is derived from our
audited financial statements that are not included in this prospectus. The
unaudited financial statements have been prepared on substantially the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the balance sheet and results of operations for the
periods. Historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
Years Ended Six Months Ended Nine Months Ended
December 31, June 30, September 30,
----------------------- ------------------- -----------------------
1996 1997 1998 1998 1999 1998 1999
------- ------- ------- ----------- ------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations:
Net revenue............. $10,149 $34,603 $72,186 $34,417 $52,834 $51,271 $87,034
Cost of net revenue..... 5,532 20,587 43,132 21,037 34,023 30,890 56,678
------- ------- ------- ------- ------- ------- -------
Gross profit............ 4,617 14,016 29,054 13,380 18,811 20,381 30,356
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 780 2,593 5,747 2,394 4,385 3,895 7,238
General and
administrative........ 696 1,648 3,939 1,326 2,999 2,922 5,085
Stock-based
compensation.......... -- -- -- -- 193 -- 652
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,476 4,241 9,686 3,720 7,577 6,817 12,975
------- ------- ------- ------- ------- ------- -------
Income from operations.. 3,141 9,775 19,368 9,660 11,234 13,564 17,381
Interest expense, net... 18 82 187 75 144 117 656
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,123 $ 9,693 $19,181 $ 9,585 $11,090 $13,447 $16,725
======= ======= ======= ======= ======= ======= =======
Net income per share--
basic(1)............... $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
------- ------- ------- ------- ------- ------- -------
Weighted average
shares--basic.......... 37,500 38,052 38,063 38,063 38,063 38,063 38,063
------- ------- ------- ------- ------- ------- -------
Net income per share--
diluted(1)............. $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
------- ------- ------- ------- ------- ------- -------
Weighted average
shares--diluted........ 37,500 38,052 38,063 38,063 38,069 38,063 38,115
------- ------- ------- ------- ------- ------- -------
</TABLE>
- --------
(1) See note 2 of Notes to the financial statements for an explanation of the
calculation of net income per unit--basic and diluted. Net income per
share--basic and diluted has been stated above assuming a one for one
exchange of the units of Somera Communications, LLC for shares of our
common stock.
21
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------- June 30, September 30,
1996 1997 1998 1999 1999
------ ------ -------- -------- -------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital........... $1,797 $4,602 $ 9,482 $ 9,975 $ 7,417
Total assets.............. 3,882 9,281 17,009 27,202 29,432
Notes payable--net of
current portion.......... 662 638 1,838 1,957 --
Mandatorily redeemable
Class B units............ -- -- 51,750 51,750 51,750
Capital lease obligation--
net of current portion... -- -- -- 541 575
Members' capital
(deficit)................ 1,251 3,787 (45,136) (42,765) (91,531)
</TABLE>
Commencing with 1997 our fiscal years are on a 52 and 53 week basis. For
presentation purposes we are using a calendar quarter and calendar year end
convention. Our fiscal years 1997 and 1998 ended on December 28, 1997 and
January 3, 1999. The six month periods presented ended on June 28, 1998 and
July 4, 1999 and the nine month periods presented ended on September 27, 1998
and October 3, 1999.
From our inception in July 1995 to December 31, 1995, we were engaged
principally in the commencement of our business operations and recorded
approximately $240,000 of net revenue from product shipments, $122,000 of cost
of net revenue and $61,000 of operating expenses during that period.
Accordingly, as such amounts are not significant, the results for the period
from our inception to December 31, 1995 have not been presented in the tables
above.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the financial statements and related notes
appearing elsewhere in this prospectus. Our actual results could differ
materially from the results contemplated by these forward-looking statements as
a result of factors, including those discussed previously, under "Risk Factors"
or in other parts of in this prospectus.
Overview
We provide telecommunications carriers with a broad range of infrastructure
equipment and related services designed to meet their specific and changing
equipment needs. We generate revenue from sales of new and de-installed
telecommunications infrastructure equipment. Our customers include incumbent
local exchange carriers, long distance carriers, wireless carriers and
competitive local exchange carriers. Incumbent local exchange carriers, or
ILECs, provided local telephone service on an exclusive basis prior to
deregulation. Since deregulation, competitive local exchange carriers, or
CLECs, have competed with ILECs to provide local telecommunications service. We
do not manufacture any of the equipment we sell.
We purchase de-installed equipment primarily from telecommunications
carriers, many of whom are also our customers. We purchase the new equipment we
sell primarily from OEMs and distributors. By using our relationship management
database to track carriers' de-installed equipment we are able to offer our
customers a broad range of equipment. We generally have not entered into long-
term contracts or distribution arrangements with our suppliers, and if we fail
to develop and maintain our relationships with our suppliers, our business will
suffer.
Historically, 70% or more of our annual net revenue has been generated from
the sale of de-installed equipment. We market and sell this equipment through
our industry focused sales teams. A majority of our sales to date have been to
customers located in the United States. Sales to customers outside of the
United States accounted for 10.7% of our net revenue in the nine months ended
September 30, 1999, 19.7% of our net revenue in 1998, 16.5% of our net revenue
in 1997 and 6.8% of our net revenue in 1996. We expect sales to carriers in the
United States to continue to account for the majority of our net revenue for
the foreseeable future. Currently, all of our equipment sales are denominated
in U.S. dollars.
In the first nine months of 1999, no single customer accounted for more than
10% of our net revenue. In 1998, ALLTEL Corporation accounted for 10.2% of our
net revenue, in 1997, Vodafone AirTouch plc accounted for 10.1% of our net
revenue and in 1996, ALLTEL Corporation accounted for 11.4% of our net revenue.
In the nine months ended September 30, 1999, and in the years ended December
31, 1998, 1997 and 1996, no suppliers accounted for more than 10% of our
equipment purchases.
23
<PAGE>
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
procurement and testing of products without having received advance purchase
commitments from customers. We anticipate that our operating results for any
given period will continue to be dependent, to a significant extent, on
purchase orders. These purchase orders can be delayed or canceled by our
customers without penalty. Additionally, as telecommunications equipment
supplier competition increases, we may need to lower our selling prices or pay
more for the equipment we procure. Consequently, our gross margins may decrease
over time. We generally recognize revenue, net of estimated provisions for
returns and warranty obligations where significant, when we ship equipment to
our customers.
The market for telecommunications equipment is characterized by intense
competition. We believe that our ability to remain competitive depends on
enhancing the existing service levels we provide to our customers, acquiring
access to a broader selection of equipment, developing new customer
relationships and expanding our existing customer penetration levels. Failure
to accomplish these goals could harm our growth prospects and operating
results.
Corporate History
We were organized as a California limited liability company, or LLC, and
commenced operations in July 1995. In July 1998, we undertook a
recapitalization in which outside investors purchased Class B units
representing approximately 37.0% of Somera Communications, LLC for $51.8
million. These Class B units have significant rights and preferences over our
Class A units, including liquidation preferences, redemption rights under
specific circumstances at the option of the holder, and the right of one of
those Class B investors to elect two members to the board of managers of Somera
Communications, LLC. These rights will lapse upon the exchange of the
outstanding limited liability company units for our common stock. We used all
of the proceeds from the sale of the Class B units to repurchase a portion of
the outstanding units from a number of our initial unit holders.
In August 1999, we entered into a credit agreement with a syndicate of
financial institutions led by Fleet National Bank. The credit facility consists
of a term loan facility for $50.0 million and a revolving loan facility for up
to $15.0 million. As of September 30, 1999, $50.0 million in principal was
outstanding under the term loan. Of this $50.0 million, $48.5 million had been
distributed to the unit holders of Somera Communications, LLC, who will become
our stockholders after the exchange of their units prior to this offering. As
of September 30, 1999, $6.4 million had been drawn under the revolving loan
facility. For more information on the Fleet National Bank credit facility,
please see "Certain Transactions."
Prior to the consummation of this offering, we will exchange shares of our
common stock for all of the outstanding units of Somera Communications, LLC and
subsequently assume the operations, assets and liabilities of the limited
liability company.
24
<PAGE>
Results of Operations
Nine Months Ended September 30, 1999 and 1998
Net Revenue. Net revenue consists of sales of new and de-installed
telecommunications equipment, including switching, transmission, access,
wireless, microwave and power products. Net revenue increased to $87.0 million
in the nine months ended September 30, 1999 from $51.3 million in the nine
months ended September 30, 1998. The increase in net revenue was driven by
greater customer demand for our equipment in general, our expansion in United
States markets and growth in significant customer accounts. Net revenue
attributable to new equipment sales increased to $26.7 million in the nine
months ended September 30, 1999 from $11.6 million in the nine months ended
September 30, 1998. The increase in net revenue attributable to new equipment
sales was due to greater customer demand for new telecommunications equipment
and our offering a broader variety of new equipment to customers. Net revenue
attributable to de-installed equipment sales increased to $60.3 million in the
nine months ended September 30, 1999 from $39.7 million in the nine months
ended September 30, 1998. The increase in net revenue attributable to de-
installed equipment sales was due to greater demand among our customers in
connection with the build out and servicing of their existing networks.
Cost of Net Revenue. Substantially all of our cost of net revenue consists of
the costs of the equipment we purchase from third party sources. Cost of net
revenue increased to $56.7 million in the nine months ended September 30, 1999
from $30.9 million in the nine months ended September 30, 1998. The increase in
cost of net revenue during this period is primarily attributable to increases
in our volume of new and de-installed equipment sales. Gross profit as a
percentage of net revenue, or gross margin, declined to 34.9% in the nine
months ended September 30, 1999 from 39.8% in the nine months ended September
30, 1998. The decline in gross margins was primarily due to an increase in the
proportion of new equipment we sold, which generally has lower gross margins
than de-installed equipment, fluctuations in the prices of a number of our
purchase transactions, and increased competition in the procurement of de-
installed equipment generally.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and benefits for sales, marketing and procurement
employees as well as costs associated with advertising and promotions. A
majority of our sales and marketing expenses are incurred in connection with
establishing and maintaining long-term relationships with a variety of
carriers. Sales and marketing expenses increased to $7.2 million in the nine
months ended September 30, 1999 from $3.9 million in the nine months ended
September 30, 1998. This increase was due to higher absolute commission
expenses consistent with increased gross profit upon which our sales
commissions are based, as well as the hiring of additional sales and
procurement personnel, including a new executive vice president of sales and
marketing. We expect that our sales and marketing expenses will continue to
increase as we expand our product and service offerings, increase our hiring of
additional sales personnel and pay commissions consistent with increased gross
profit, although such expenses may vary as a percentage of net revenue.
25
<PAGE>
General and Administrative. General and administrative expenses consist
principally of salary and benefit costs for executive and administrative
personnel, as well as legal, accounting and other professional fees. General
and administrative expenses increased to $5.1 million in the nine months ended
September 30, 1999 from $2.9 million in the nine months ended September 30,
1998. This increase was due primarily to the increase in employees resulting
from the expansion of our operations, as well as recruitment costs. We expect
that general and administrative expenses will increase in the future as we
expand our operations, although such expenses may vary as a percentage of net
revenue.
Stock-based Compensation. The stock-based compensation charges relate to
warrants for common stock granted in exchange for services and options granted
to officers and a director in the nine months ended September 30, 1999. The
warrants, which were fully vested at the date of grant, entitle the holders to
purchase up to 207,655 shares of common stock and resulted in a one-time charge
of approximately $530,000 in the nine months ended September 30, 1999. In July
1999, we issued stock options to two officers and one outside director
resulting in unearned stock-based compensation of $830,000 which will be
amortized over the vesting period, generally four years, of the underlying
options. Amortization of the stock option charge during the nine months ended
September 30, 1999 amounted to $122,000. The remaining charge will be amortized
to net income as follows: $122,000 for the remainder of 1999, $367,000 in 2000,
$148,000 in 2001, $63,000 in 2002 and $8,000 in 2003. There was no stock-based
compensation charge in the nine months ended September 30, 1998.
Interest Expense, Net. Interest expense, net consists of interest expense
associated with debt obligations offset by interest income earned on cash and
cash equivalent balances. Interest expense, net increased to $656,000 in the
nine months ended September 30, 1999 from $117,000 in the nine months ended
September 30, 1998. This increase was due to a higher level of outstanding
principal to satisfy greater working capital needs and to service the term loan
facility.
Years Ended 1998, 1997 and 1996
Net Revenue. Net revenue increased to $72.2 million in 1998 from $34.6
million in 1997 and $10.1 million in 1996. The increase in net revenue from
1997 to 1998 was due to significant increases of sales in both the United
States and Latin American markets, an increase in sales of new equipment and
the growth of several customer accounts. The increase in net revenue from 1996
to 1997 was primarily due to significant increases in sales of de-installed
equipment. Net revenue attributable to new equipment sales increased to $17.1
million in 1998 from $3.1 million in 1997. We had no revenue attributable to
new equipment sales in 1996. The increase in net revenue attributable to new
equipment sales from 1997 to 1998 was due to significant increases in existing
customer demand for new equipment. The increase in net revenue attributable to
new equipment sales from 1996 to 1997 was due to our initiation of sales of new
equipment in response to customer demand. Net revenue attributable to de-
installed equipment sales increased to $55.1 million in 1998 from $31.7 million
in 1997 and $10.1 million in 1996. The increase in net revenue attributable to
de-installed equipment sales from 1997 to 1998 was due to increased customer
demand for de-installed equipment in connection with the buildout and servicing
of
26
<PAGE>
existing networks and a broader offering of de-installed equipment. The
increase in net revenue attributable to de-installed equipment sales from 1996
to 1997 was due to significant increases in customer demand in general.
Cost of Net Revenue. Cost of net revenue increased to $43.1 million in 1998
from $20.6 million in 1997 and $5.5 million in 1996. Substantially all of the
increase in cost of net revenue for each of these periods was due to the
increase in procurement costs associated with increased sales of this
equipment. The gross margin decreased to 40.2% in 1998, from 40.5% in 1997 and
45.5% in 1996. The relatively stable gross margin levels between 1998 and 1997
were due to increased volumes of sales of higher margin de-installed equipment
in 1998, offsetting an increased portion of lower margin new equipment sales in
the same period. The decrease in gross margin in 1997 and 1996 was due to a
change in sales mix to include more new equipment which has lower gross margins
than de-installed equipment, and an increase in the cost of procuring de-
installed equipment due to greater secondary market competition.
Sales and Marketing. Sales and marketing expenses increased to $5.7 million
in 1998 from $2.6 million in 1997 and $780,000 in 1996. The increases for each
of these periods were primarily due to the addition of sales and procurement
personnel, including sales managers, higher absolute commission expenses
consistent with increased gross profit and increased marketing efforts.
General and Administrative. General and administrative expenses increased to
$3.9 million in 1998 from $1.6 million in 1997 and $696,000 in 1996. The
increase from 1998 compared with 1997 was due to a significant increase in
headcount resulting from the expansion of our operations, and due to
approximately $700,000 in financing costs attributable to our recapitalization
in July 1998. The increase from 1997 compared with 1996 was due primarily to
the increase in salaries and benefits payable to executive and administrative
employees resulting from the expansion of our operations.
Interest Expense, Net. Interest expense, net increased to $187,000 in 1998,
from $82,000 in 1997, and $18,000 in 1996. The increases for those periods were
due to higher borrowing levels necessary to fund our working capital
requirements.
27
<PAGE>
Quarterly Results of Operations
The following tables set forth unaudited statement of operations data for
each of the eight quarters in the period ended September 30, 1999, as well as
the percentage of our net revenue represented by each item. In our opinion,
this unaudited information has been prepared on the same basis as the annual
financial statements. This information includes all adjustments (consisting
only of normal recurring adjustments) necessary for fair presentation when read
in conjunction with the financial statements and related notes included
elsewhere in this prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
Dec. June Sept. Dec, June Sept.
31, March 31, 30, 30, 31, March 31, 30, 30,
1997 1998 1998 1998 1998 1999 1999 1999
------- --------- ------- ------- ------- --------- ------- -------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $12,257 $14,258 $20,159 $16,854 $20,915 $23,248 $29,586 $34,200
Cost of net revenue..... 7,478 8,688 12,349 9,853 12,242 14,609 19,414 22,655
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 4,779 5,570 7,810 7,001 8,673 8,639 10,172 11,545
Operating expenses:
Sales and marketing... 864 990 1,404 1,501 1,853 1,967 2,418 2,853
General and
administrative....... 543 525 801 1,596 1,016 1,420 1,579 2,086
Stock-based
compensation......... -- -- -- -- -- -- 193 459
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,407 1,515 2,205 3,097 2,869 3,387 4,190 5,398
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 3,372 4,055 5,605 3,904 5,804 5,252 5,982 6,147
Interest expense, net... 18 18 57 42 70 59 85 512
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,354 $ 4,037 $ 5,548 $ 3,862 $ 5,734 $ 5,193 $ 5,897 $ 5,635
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of
Net Revenue:
Net revenue............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue..... 61.0 60.9 61.3 58.5 58.5 62.8 65.6 66.2
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 39.0 39.1 38.7 41.5 41.5 37.2 34.4 33.8
Operating expenses:
Sales and marketing... 7.1 7.0 6.9 8.9 8.9 8.5 8.2 8.3
General and
administrative....... 4.4 3.7 4.0 9.4 4.8 6.1 5.3 6.1
Stock-based
compensation......... -- -- -- -- -- -- 0.7 1.4
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 11.5 10.7 10.9 18.3 13.7 14.6 14.2 15.8
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 27.5 28.4 27.8 23.2 27.8 22.6 20.2 18.0
Interest expense, net... 0.1 0.1 0.3 0.3 0.4 0.3 0.3 1.5
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 27.4% 28.3% 27.5% 22.9% 27.4% 22.3% 19.9% 16.5%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
28
<PAGE>
Our net revenue increased in each quarter compared to the same quarter in the
prior year due primarily to increased levels of customer demand for the
equipment we sell in general. Our gross margins declined over the period from
39.0% in the quarter ended December 31, 1997 to 33.8% in the quarter ended
September 30, 1999 due largely to an increase in our percentage of sales of new
products which have lower gross margins than de-installed products. Sales and
marketing expenses have increased in absolute dollars for every quarter since
September 30, 1997 reflecting greater commissions paid on increased gross
profit, the addition of sales personnel and intensified marketing efforts.
General and administrative expenses increased almost every quarter due to the
increase in personnel costs and professional fees required to support our
growth. In the quarter ended September 30, 1998, general and administrative
expenses included approximately $700,000 in costs associated with the July 1998
recapitalization.
Historically, our net revenue and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and could
fluctuate significantly from quarter to quarter and from year to year in the
future. Causes of such fluctuations may include the rate and timing of
customers' orders for the equipment we sell, the rate at which
telecommunications carriers de-install equipment, decreases in the prices of
the equipment we sell due to increased secondary market competition, our
ability to locate and obtain equipment, our ability to deploy equipment on a
timely basis, seasonal variations in customer purchasing, write-offs due to
inventory defects and obsolescence, the potentially long sales cycle for our
equipment, delays in the commencement of operations in new markets, costs
relating to possible acquisitions, and general economic conditions and
conditions specific to the telecommunications industry. Historically, we have
seen that our net revenue is subject to seasonal fluctuations because our
customers typically purchase less telecommunications equipment during the third
calendar quarter of each year due to the annual nature of budgetary,
procurement and sales cycles. Significant quarterly fluctuations in our net
revenue will cause significant fluctuations in our cash flows and working
capital.
Liquidity and Capital Resources
Since inception in July 1995, we have financed our operations primarily
through cash flows from operations. Net cash generated by operating activities
was $11.3 million in the nine months ended September 30, 1999, $14.9 million in
1998, $8.0 million in 1997 and $1.8 million in 1996. Substantially all of the
cash generated by operating activities was distributed to the members of Somera
Communications, LLC. In July 1998, we used $51.8 million from the sale of Class
B units to outside investors to repurchase outstanding units from a number of
our initial unit holders.
On August 31, 1999, we entered into a credit agreement with a syndicate of
financial institutions led by Fleet National Bank. The credit agreement
provides for a term loan facility and a revolving loan facility. The term loan
facility was for an aggregate principal amount of $50.0 million. The revolving
loan facility allows us to borrow $15.0 million, with a $5.0 million sublimit
for the issuance of letters of credit. The obligations under the term loan
facility and the revolving loan facility are secured by a first priority lien
on all our tangible and intangible assets. We may prepay loans under the term
loan facility and
29
<PAGE>
revolving loan facility at any time upon prior notice to the lenders. As of
September 30, 1999, $50.0 million was outstanding under the term loan facility
and $6.4 million had been drawn under the revolving loan facility. The proceeds
of our term loan facility were used to make a distribution to the members of
Somera Communications, LLC of $48.5 million in September 1999 and the remaining
$1.5 million was used to pay off a portion of outstanding balances on notes
payable. Additionally, approximately $1.5 million of our revolving loan
facility was used to pay off the current portion of the notes payable. The
remaining amount of notes payable, approximately $500,000 was satisfied from
available cash. Subject to certain voluntary or mandatory reductions by the
Company of the revolving loan facility commitment, the revolving loan facility
will be available for borrowing until August 31, 2004. At our option, loans
under each of the facilities shall bear interest at the prime rate plus an
applicable margin or LIBOR, plus an applicable margin. The applicable margin
with respect to prime rate loans shall be between 0.25% and 1.25% based upon
our debt to earnings ratio. The applicable margin with respect to LIBOR loans
shall be between 1.75% and 2.75% based upon our debt to earnings ratio. We
expect to repay and retire the outstanding balance of the term loan facility
and repay the outstanding balance of the revolving loan facility with the
proceeds of the offering.
As of September 30, 1999, we had approximately $195,000 in cash and cash
equivalents. In addition, we had a credit facility to borrow up to $15.0
million. As of September 30, 1999, we had an outstanding book balance under
this line of credit of $6.4 million. We do not currently plan to pay dividends,
but rather to retain earnings for use in the operation of our business and to
fund future growth.
We anticipate significant increases in working capital in the future
primarily as a result of increased sales of equipment and higher relative
levels of inventory. We will also continue to expend significant amounts of
capital on property and equipment related to the expansion of our corporate
headquarters, distribution center and equipment testing infrastructure to
support our growth.
We believe that cash and cash equivalents, net proceeds from this offering
and anticipated cash flow from operations will be sufficient to fund our
working capital and capital expenditure requirements for at least the next 12
months. We intend to use a portion of the net proceeds of the offering to repay
$50.0 million of the term loan facility and $6.4 million of the revolving loan
facility. Following this offering we anticipate that we will be able to borrow
up to $15.0 million under our revolving loan facility. We have budgeted
$2.0 million of the net proceeds in connection with capital expenditures
however, there are currently no specific projects identified.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept, store or report only two digit entries in date code fields. Beginning
in the year 2000, these date code fields will need to be enabled to distinguish
21st century dates from 20th century dates. As a result, computer systems and
software used by many companies, including us, our vendors and our customers,
will need to be upgraded to comply with these year 2000
30
<PAGE>
requirements. We could be impacted by year 2000 issues occurring in our own
infrastructure or the infrastructure of our suppliers, customers, vendors and
financial service organizations. These year 2000 issues could include
information errors and significant information system failures. Any disruption
in our operations as a result of year 2000 issues could harm our business.
Our State of Readiness
Overview. To address year 2000 readiness, we are implementing a corporate
program to coordinate efforts across all business functions, including
addressing risks associated with business partners and other third-party
relationships. Our internal year 2000 readiness program is divided into four
program areas: internal systems and technology compliance, product compliance,
facilities and safety compliance and supplier and business partner compliance.
We have substantially completed the assessment phase for all areas. We expect
to complete our corrective actions during the fourth quarter of 1999. There can
be no assurance that we will be able to complete corrective action for all four
phases in a timely manner, if at all, or that the process will adequately
address the year 2000 issue.
Internal Systems and Technology Compliance
Core IT Systems. In August 1999, we completed the implementation of the J.D.
Edwards distribution and financial system, which covers most of the major
functional areas of our business. This system is designed to further automate
our business processes and incorporates the Julian dating format to correctly
interpret dates in the year 2000 and beyond. Further, this system, in all
material respects meets the criteria of "A Definition of Year 2000 Conformity
Requirements," published by the British Standards Institute.
Other Information Technology Systems. Our other information technology
systems include telephone and comparable systems and other application
software. We have replaced, upgraded or plan to replace or upgrade those
systems that we assessed as not year 2000 compliant. All system compliance
projects are expected to be completed during the fourth quarter of 1999.
Product Compliance
We do not design or manufacture any products we sell. We purchase all of our
equipment from OEMs, distributors and other third parties. Under our purchase
agreements with OEMs, equipment provided under these agreements will be year
2000 compliant. On purchases from distributors and other third parties, we
attempt to assess the state of compliance of the equipment, however, there can
be no assurance that this can be accurately determined.
Facilities and Safety Compliance
Our facilities and safety technology systems include building systems such as
heating, cooling, fire, sprinkler and security systems. We are working with our
landlords to identify and resolve any year 2000 compliance issues in these
systems.
31
<PAGE>
Supplier and Business Partner Compliance
Our suppliers provide equipment and supplies used by us in the conduct of our
business. An assessment of our suppliers is underway to determinate the
potential level of business interruption we could incur if a supplier fails to
properly address the year 2000 issue. Our business partners provide our
financial, payroll and other operational services. We are requesting written
assurance of year 2000 compliance from our suppliers and business partners
whose Year 2000 compliance is important to our business. We will consider using
alternate sources in the cases where these parties will not provide written
assurances.
The Costs to Address Our Year 2000 Issues
Costs incurred in connection with the resolution of year 2000 issues to date
have consisted primarily of the purchase and implementation of our J.D. Edwards
database system and related hardware. In addition, we have incurred internal
labor costs relating to year 2000 compliance planning and assessment. As of
August 31, 1999 we have incurred capital expenditures of approximately $800,000
on year 2000 compliance and expect to incur approximately $200,000 of
additional compliance related expenditures. We do not expect additional
expenditures related to year 2000 compliance to be significant.
Our Contingency Plans
Specific contingency plans are being developed in connection with the
assessment and resolution of the risks we have identified. We have established
preliminary information technology contingency plans and we are continuing to
develop those plans for specific areas of risk associated with the year 2000
issue. We expect to finalize our contingency plans during the fourth quarter of
1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
balance sheet, and the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS 133 will be effective for
fiscal years beginning after June 15, 2000. We do not currently hold derivative
instruments or engage in hedging activities.
Qualitative and Quantitative Disclosure About Market Risk
We have reviewed the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risks
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments." We had no holdings of derivative financial
or commodity instruments at September 30, 1999.
32
<PAGE>
All of our revenue and capital spending is denominated in U.S. dollars. As of
September 30, 1999 we were exposed to interest rate risk on our then
outstanding revolving loan facility. The table below presents principal amounts
by expected maturity and the weighed average interest rates of debt obligations
which are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------
1999 2000 2001 2002 2003
----- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Revolving Loan Facility........................... 6,435 -- -- -- --
Weighed Average Interest Rate..................... 9.44% -- -- -- --
</TABLE>
We believe that the fair value of our current revolving loan facility
approximates its carrying value due to its short term nature.
33
<PAGE>
BUSINESS
Industry Background
The telecommunications infrastructure equipment market has experienced
tremendous growth in recent years. This growth has been driven primarily by
increased carrier competition, expanded service offerings, increased demand
among businesses and consumers and technology advancements. Dataquest projects
that worldwide sales of telecommunications infrastructure equipment will grow
from $180 billion in 1998 to $230 billion in 2002.
Telecommunications infrastructure equipment is purchased by a wide variety of
existing and emerging carriers, including:
.Incumbent local exchange carriers, or ILECs, which provided local
telephone service on an exclusive basis prior to deregulation, and
include independent local exchange carriers, and regional bell operating
companies, or RBOCs;
.Long distance carriers, or IXCs;
.Wireless carriers, such as cellular service providers, personal
communications service, or PCS, companies, paging operators and
specialized mobile radio operators, or SMRs, that offer wireless
communications services similar to cellular; and
.Competitive local exchange carriers, or CLECs, which compete with ILECs to
provide local telecommunications service subsequent to deregulation.
These carriers are making substantial capital expenditures on
telecommunications infrastructure equipment to build, upgrade and maintain
their networks. These networks are primarily comprised of switching,
transmission, access, wireless, microwave and power equipment.
Carrier Challenges in the Changing Telecommunications Market
Increased Carrier Competition. Global deregulation has changed the
telecommunications industry and created significant new opportunities for
carriers. For example, in the United States, where each local telephone market
was once served by a single local exchange carrier, deregulation has now
created intense competition by allowing the entry of IXCs, CLECs, wireless
carriers and local exchange carriers from other markets. Carriers are making
substantial expenditures on equipment to establish themselves in new markets.
In this increasingly competitive environment, we believe carriers will continue
to devote significant financial resources to build, upgrade and maintain their
networks.
Expanded Service Offerings. To differentiate themselves, carriers are rapidly
developing and offering to their customers innovative and more affordable
services. Examples of these services include high speed Internet access, one-
rate wireless and long distance plans and other services. To deliver these
expanded services, carriers must invest significant capital to increase their
network capacity and enhance their current networks.
Increased Demand Among Businesses and Consumers. The demand among businesses
and consumers for telecommunications services has increased dramatically in
recent years.
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As competition among carriers has resulted in lower pricing and greater
accessibility, consumers have increased their utilization of and dependence on
new services. For example, the growth in high speed data and Internet
applications, including e-mail, web browsing and e-commerce, and the increased
availability of more flexible mobile networks, such as cellular, PCS and
paging, have increased business and consumer demand for these and other new
services. To meet this demand, carriers must build, upgrade and maintain
reliable networks capable of supporting significantly greater volumes of
traffic as well as new service offerings.
Technology Advancements. Advancements in telecommunications technology enable
carriers to increase capacity, improve service quality and expand their service
offerings. To respond to increased competition and differentiate their service
offerings, carriers are purchasing and deploying new equipment and technologies
from a wide variety of manufacturers.
Impact on Carrier Equipment Needs
The foregoing challenges are fueling demand by existing and emerging carriers
for telecommunications infrastructure equipment and services. Carriers have
invested hundreds of billions of dollars in telecommunications network
infrastructure. To maximize the value of their investments, carriers are
expanding and upgrading their existing networks and utilizing existing and new
technologies and equipment from multiple vendors. In addition, carriers are
seeking cost-effective ways to expand and maintain existing network elements
based on mature technologies.
As carriers build, maintain and upgrade their telecommunications networks,
they often replace existing equipment that still has a significant useful life.
This equipment often is suitable for redeployment in other parts of a carrier's
network to increase network capacity and expand service offerings. While
historically carriers may have scrapped this equipment or let it remain idle,
competitive factors increasingly require carriers to attempt to recapture a
portion of their original investment. While carriers prefer to redeploy this
equipment within their own networks, they are often unable to do so. In cases
where redeployment cannot be achieved, they are seeking third party assistance
to regain a portion of their initial investment.
Carriers not only require large amounts of telecommunications equipment, but
they also need related value-added services to support the buildout and
expansion of their networks. In particular, emerging carriers lack many of the
human and financial resources of existing carriers and need these value-added
services as they aggressively build out their networks to take advantage of
opportunities to capture and retain customers. These emerging carriers seek
creative and cost effective ways to build out their networks through a
combination of services and new and de-installed equipment. Once they have
expanded these networks, they will have the same needs as incumbent carriers to
increasingly expand their service offerings and network coverage. This cycle of
network buildouts, upgrades, expansions and maintenance by carriers will
continue to fuel the trend of increased demand for both new and de-installed
equipment.
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Limitations of Existing Equipment Providers
To satisfy their equipment needs, carriers have traditionally purchased
equipment from original equipment manufacturers, or OEMs, distributors and
secondary market dealers. In this increasingly competitive market, many
carriers are discovering that the traditional equipment providers are unable to
fulfill their complex and changing equipment and service requirements.
OEMs. Historically, carriers have relied on OEMs for new telecommunications
infrastructure equipment. Today, some large OEMs offer a variety of products
but do not support multi-vendor product lines. In addition, while some OEMs
offer limited trade-in programs for equipment, they typically only cover
equipment they manufactured and offer relatively low valuations. OEMs are also
encountering difficulties in serving increased numbers of carriers as their
direct sales models do not scale well and are not cost effective in today's
environment. As a result, many large OEMs are moving away from the direct sales
model and relying more upon value-added equipment providers to deliver much of
their equipment.
Distributors. Telecommunications equipment distributors typically provide a
selection of new equipment from a list of specific manufacturers and serve a
product fulfillment role within defined product lines. While this high-volume,
low margin, transaction-oriented model offers a wider selection of equipment
than OEMs, it generally results in limited flexibility to address changing
carrier equipment requirements. Additionally, the lower margins associated with
distributor sales results in a sales force focused on sales volume and not on
creative, customized solutions. Distributors are not able to support the
complexities of effective trade-in, refurbishing and redeployment programs.
Secondary Market Dealers. While OEMs and distributors have limited
involvement in the growing secondary market for telecommunications equipment,
secondary market dealers specialize in this type of transaction. These dealers
buy and sell used equipment in niche markets and often serve as an outlet for
carriers' excess inventories. Generally these secondary market dealers lack the
management, operational and financial resources necessary to consistently and
effectively meet changing equipment requirements.
Emerging Requirements for Telecommunications Equipment Providers
Due to increased competition, the need to rapidly deliver expanded services,
greater demand and technology advancements, carrier demand for
telecommunications infrastructure equipment and related services has grown
significantly. In today's dynamic environment, carriers are balancing the need
to attract and retain their customers with aggressive network buildout
schedules. As a result, carriers are turning to equipment providers who offer:
.Broad selections of multi-vendor equipment and technologies available from
a single source;
.Rapid responses from flexible, knowledgeable sales and customer service
representatives;
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.Asset recovery programs that offer higher returns and greater flexibility
across a broader range of de-installed equipment.
.Technical support on a wide variety of products, including product
selection and configuration;
.Other equipment solutions including repair, installation and de-
installation; and
.Value-added materials management services including warehousing, multi-
vendor equipment packaging, which we refer to as kitting, and other
network deployment services.
The Somera Solution
We provide telecommunications carriers with a broad range of infrastructure
equipment and related services designed to meet their specific and changing
equipment needs. We offer our customers a unique combination of new and de-
installed equipment from a variety of manufacturers, allowing them to make
multi-vendor purchases from a single cost-effective source. To further address
our customers' dynamic equipment needs, we offer a suite of customized, value-
added services including asset recovery, inventory management, technical
support and other ancillary services. Our innovative equipment and service
offerings are delivered through our team of more than 75 trained sales and
procurement professionals, who work individually with customers to understand,
anticipate and meet their ongoing equipment requirements. Our sales teams
utilize our relationship management database, our selective inventory and our
distribution center to provide our customers with rapidly deployable equipment
solutions.
The key benefits of our solution include:
.Broad Multi-vendor Equipment Offering. We provide customers with an
effective alternative to traditional telecommunications equipment supply
channels by offering a broad range of new and de-installed equipment from
a variety of manufacturers. We offer infrastructure equipment used in
both wireline and wireless networks including switching, transmission,
access, wireless, microwave and power products. We believe the equipment
we sell provides carriers with a more flexible and cost-effective
alternative to existing suppliers.
.Rapid Responsiveness to Dynamic Customer Needs. We offer our customers
rapid, customized solutions to address their unique equipment needs. We
provide carriers with convenient access to our skilled and dedicated
sales and service professionals who are capable of quickly identifying
and responding to their diverse network needs. We are able to quickly
locate and provide equipment to carriers by using our relationship
management database and maintaining selective inventory.
.Flexible Asset Recovery Programs. We provide innovative and effective
asset recovery programs that enable carriers to cost-effectively build,
upgrade and maintain their networks and to recapture value from their de-
installed equipment. Our asset recovery programs are customized to meet
carriers' specific objectives and include equipment purchases, as well as
trade-in, remarketing and consignment programs that offer carriers a
creative means to recapture a portion of their original equipment
investment.
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.Simplified, Value-added Materials Management Services. We provide carriers
with a comprehensive, cost-effective source for buying and selling
telecommunications infrastructure equipment that simplifies the
management of their equipment inventory and allows them to focus more on
their core business. We also provide carriers with a full range of value-
added services, including technical, materials management and other
network deployment services.
The Somera Strategy
Our objective is to be the premier provider of telecommunications
infrastructure equipment and related services to carriers worldwide. Key
elements of our strategy include:
.Expand Penetration of Telecommunications Carrier Market. Our strategy is
to further penetrate our existing base of over 750 customers and to
identify, target, and develop additional customers. We intend to increase
our sales force and continue our highly interactive dialogue with
carriers to better understand and respond to their specific equipment and
service needs. We believe we have established a track record of providing
high levels of customer service and that our reputation will give us
access to greater customer opportunities in the future. We believe that
our relationship management database provides us with the broad industry
pricing and equipment deployment knowledge necessary to meet our
customers' needs and anticipate market trends.
.Expand Product Lines and Service Capabilities. To continue to meet the
dynamic needs of carriers, we intend to continuously add to the depth and
breadth of our equipment and service offerings. We intend to expand our
product lines by increasing our access to carriers' de-installed
equipment and partnering with additional OEMs and distributors. We will
aggressively seek new supply sources to address under-served equipment
segments.
.Increase RBOC Penetration. We intend to expand our relationships with the
RBOCs by increasing our resources dedicated to this market, including
expanding our sales force and obtaining ISO 9000 certification for our
distribution center and testing facilities. We also intend to further
strengthen product expertise in those areas most heavily demanded by
RBOCs. We believe that maintaining strong relationships with the RBOCs
can also offer a significant potential source of de-installed equipment.
.Pursue Opportunities for International Growth. International markets
represent a significant opportunity for future growth. We are currently
generating net revenue in Latin America, Europe and Asia and expect to
continue this international expansion. We intend to add additional sales
management and resources to focus on these markets and plan to open our
first European office in the first six months of 2000. Entry into the
European market gives us the opportunity to expand our current offering
of equipment based on European standards and technology and increases our
ability to serve foreign markets. In addition, we believe that
international expansion by some of our existing customers will provide us
with greater access to these foreign markets.
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.Pursue Selective Acquisitions. The secondary market for telecommunications
equipment is highly fragmented, consisting primarily of suppliers
offering limited products to niche markets. We believe that these
suppliers and other equipment providers, especially those that can
increase the breadth and depth of our equipment and service offerings and
enable us to reach new markets or further penetrate existing markets,
represent potential acquisition opportunities.
Equipment and Services
Equipment
We offer our customers a broad range of telecommunications infrastructure
equipment to address their specific and changing equipment needs. The equipment
we sell includes new and de-installed items from a variety of manufacturers. In
1998, we sold over 6,000 different items, from over 250 different
manufacturers. We offer the original manufacturer's warranty on all new
equipment we sell. On de-installed equipment, we offer our own warranty which
guarantees that the equipment will perform up to the manufacturer's original
specifications.
The new equipment we offer consists of telecommunications equipment purchased
primarily from the OEM or a distributor. The de-installed equipment we offer
consists primarily of equipment removed from carriers' existing
telecommunications networks. These carriers are typically the original owners
of such equipment. This equipment is professionally removed by the carrier or
another third party upon installation of the replacement equipment. In some
instances, we will remove the equipment directly on behalf of the carrier.
Following removal, de-installed equipment is shipped to our distribution
facility where we test and refurbish the equipment as necessary. Our
refurbishment process includes services such as cleaning and testing de-
installed equipment, and repairing and reconfiguring the equipment where
necessary. The refurbishment process is conducted by our in-house technicians,
whom we train, or by third parties. Upon completion of this process, the de-
installed equipment is added to our list of available items and may be sold to
a customer.
The equipment we sell is grouped into several general categories including
switching, transmission, access, wireless, microwave and power products.
Switching. Switching equipment is used by carriers to manage call traffic and
to deliver value-added service. Switches and related equipment are located in
the central office of a telecommunications carrier and serve to determine
pathways and circuits for establishing, breaking or completing voice and data
communications over the public switched telephone network, or PSTN, and the
Internet. We provide a variety of switching equipment, including switches,
circuit cards, shelves, racks and other ancillary items in support of carrier
upgrades and reconfigurations. Manufacturers of switching equipment whose
products we sell include Alcatel USA, Centigram, Lucent Technologies and Nortel
Networks.
Transmission. Transmission equipment is used by carriers to carry information
to multiple points in a carrier's network. Transmission equipment serves as the
backbone of a
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telecommunications carrier's network and transmits voice and data traffic in
the form of standard electrical or optical signals. We sell a broad range of
transmission products, including channel banks, multiplexors, digital cross-
connect systems, DSX panels and echo cancellers. Manufacturers of transmission
equipment whose products we sell include ADC Telecommunications Inc., Fujitsu
Ltd., Lucent Technologies Inc., NEC Corp., Nortel Networks Inc., Telco Systems,
Inc. and Tellabs Inc.
Access. Access equipment is used by carriers, to provide local telephone
service and Internet access. Access equipment is used in the local loop, or
last mile, portion of the PSTN and connects a home or business to the switch in
a carrier's central office. We provide a variety of access equipment, including
digital loop carriers, channel service units/digital subscriber units,
multiplexors and network interface units. Manufacturers of access equipment
whose products we sell include ADC Telecommunications Inc., Carrier Access
Corp., Lucent Technologies Inc., NEC Corp., Newbridge Networks Corp., Nortel
Networks Inc., Telco Systems, Inc. and VINA Technologies, Inc.
Wireless. Cell sites and other wireless equipment are used by cellular, PCS
and paging carriers to provide wireless telephone and Internet access. This
equipment is used to amplify, transmit and receive signals between mobile users
and transmission sites, including cell sites and transmission towers. We sell a
broad range of wireless equipment including radio base stations, towers,
shelters, combiners, transceivers and other related items. Manufacturers of
wireless and cell site equipment whose products we sell include Allen Telecom
Inc., Telefon AB LM Ericsson, Lucent Technologies Inc., Motorola Inc., Nortel
Networks Inc. and Siemens AG.
Microwave. Microwave systems are used by carriers to transmit and receive
voice, data and video traffic. These systems enable point to point high speed
wireless communications. We provide a variety of microwave systems, including
antennas, dishes, coaxial cables and connectors. Manufacturers of microwave
systems whose products we sell include Alcatel Alsthom S.A., Adaptive Broadband
Corp., Digital Microwave Corp., Digital Transmission Systems Inc., Harris-
Farinon Canada Inc., Nortel Networks Inc. and Glenayre Technologies Inc.
Power. Power equipment is used by carriers to provide direct current, or DC,
power to support their network infrastructure equipment. We sell a broad range
of power equipment, including power bays, rectifiers, batteries, breaker panels
and converters. Manufacturers of power equipment whose products we sell include
C&D Technologies, GEC, Lucent Technologies, Nortel Networks, Peco II and Power
Conversion Products.
Services
Unlike other equipment providers that are product driven, we are customer
focused. Our equipment and service offerings, industry focused sales teams and
internal systems and procedures are all specifically designed to meet the needs
of each carrier market we serve. We train our employees to offer high quality
service and to provide consistent, reliable customer service. We believe these
elements enable us to offer a sales force that can provide rapid, knowledgeable
and creative solutions to our customers.
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To enable carriers to focus on their core business, we offer the following
services in connection with our equipment sales and procurement:
.Asset Recovery Programs. Our innovative asset recovery programs offer
carriers effective solutions to manage their de-installed equipment.
These programs are customized to meet the specific objectives of each
carrier, and include equipment purchases as well as equipment trade-ins,
consignment and re-marketing programs. The programs allow carriers to
easily and rapidly recapture value from de-installed equipment.
.Technical Services. Our technical services include product selection,
equipment configuration, custom integration and technical support. These
services enable carriers to supplement their internal technical
resources.
.Value-added Materials Management Services. Our materials management
services include equipment procurement, multi-vendor equipment packaging,
which we refer to as kitting, warehousing and other inventory management
and deployment services.
.Other Services. Through our extensive network of subcontractor
relationships and partners, we are also capable of providing specialized
transportation services, regional warehousing, repair services,
installation and de-installation services.
Sales, Marketing and Procurement
Our sales organization is located primarily at our corporate headquarters in
Santa Barbara, California and is augmented by our satellite offices in Pasadena
and Los Gatos, California. As of September 30, 1999, we employed more than 75
sales and procurement professionals. We generate leads primarily through direct
marketing, customer referrals and participation in industry tradeshows. Our
sales force is organized by market segment, including specialized teams focused
on the RBOCs, independent local exchange carriers, IXCs, CLECs, and wireless
carriers, including cellular, PCS and SMRs.
Our sales force operates on a named account basis rather than by geography,
which allows us to maintain a consistent, single point of contact for each
customer. Another key feature of our selling effort is the relationships we
establish at various levels in our customers' organizations. This structure
allows us to establish multiple contacts with each customer across their
management, engineering and purchasing operations. For each type of carrier, we
employ dedicated teams with extensive market knowledge to meet the specific
equipment needs of these customers.
Each team member has access to, and is supported by, our relationship
management database. This real time proprietary information system allows each
team to:
.respond to customer requirements by accessing our extensive database of
excess and de-installed equipment located at carriers, manufacturers,
distributors and other third parties worldwide, as well as by accessing
our select inventory;
.access relevant detailed purchase and sale information by customer and
part number;
.access technical and system configuration information;
.trace and track all customer and vendor order activity; and
.project and anticipate customer equipment requirements.
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Each of our teams is directed by a group sales manager who is responsible for
the overall customer relationship and is supported by a number of account
executives, logistics administrators and production controllers. We believe our
dedicated team structure provides consistent high quality customer service
which builds long-term relationships with our customers. Our account executives
have frequent customer contact and oversee customer proposals while our
logistics administrators work with our production controllers as well as our
customers to coordinate sourcing, delivery and any required follow-through
procedures to ensure our customers receive quality, timely customer service.
Our marketing effort focuses on enhancing market awareness of our brand
through industry trade shows, professional sales presentations and brochures,
an informative web site, branded giveaways and special customer events.
Additionally, we advertise in key telecommunications industry publications. We
believe the size and scope of our operations in our highly fragmented industry
gives us both a unique advantage and opportunity to further build and enhance
our brand recognition.
In support of our sales activities, we have teams who are responsible for
procurement of the de-installed equipment we sell. Procurement teams are
organized by market segment, including specialized teams focused on wireless
carriers, wireline carriers, and new equipment OEMs and distributors. Our
procurement specialists are dedicated, on a named account basis, to purchase
de-installed equipment from carriers. We also employ a product marketing group
that develops and maintains our relationships with manufacturers and
distributors to assure the availability of new equipment for our customers.
As we attempt to expand our sales, marketing and procurement efforts into
international markets, we face a number of challenges, including:
. recruiting skilled sales and technical support personnel;
. creation of new supply and customer relationships;
. difficulties and costs of managing and staffing international operations;
and
. developing relationships with local suppliers;
We cannot be certain that one or more of these factors will not harm our
future international operations.
Customers
We sell equipment to independent local exchange carriers, RBOCs, IXCs, a
broad range of wireless carriers including cellular, PCS, paging and SMRs, and
CLECs. We have over 750 customers who are located primarily in the United
States. In the nine months ended September 30, 1999 no single customer
accounted for more than 10% of our net revenue. In 1998 ALLTEL Corporation
accounted for 10.2% of our net revenue, in 1997 Vodafone AirTouch plc accounted
for 10.1% of our net revenue, and in 1996 ALLTEL Corporation accounted for
11.4% of our net revenue. Sales to customers outside of the United States
accounted for 10.7% of our net revenue in the nine months ended September 30,
1999, 19.7% of our net revenue in 1998, 16.5% of our net revenue in 1997, and
6.8% of our net revenue in 1996.
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The following examples demonstrate how we have helped our customers:
Long Distance Carrier. An international long distance carrier made a
significant investment in several Lucent 4ESS and 5ESS legacy switches
installed throughout the United States. Although these switches were mature
technologies and, in some cases, were discontinued, they still performed well
and the carrier wanted to continue utilizing them. Because these were older
pieces of equipment, obtaining plug-in cards, spare parts and other items
necessary to maintain and expand the switches from the manufacturer was
difficult and expensive. Consequently, the carrier was forced to explore
alternative supply sources. In response to inquiries, we utilized our
relationship management database and network of supply channels to locate and
procure the necessary items on a rapid and cost-effective basis.
CLEC. A CLEC specializing in providing bundled services to businesses and
other carriers had a major customer request which would require the
construction of a multi-site synchronous optical network, or SONET, OC-12 ring.
After completing the initial network expansion design based on new equipment
from an OEM, the carrier determined that the delivery would not be timely or
cost-effective enough to provide a competitive solution. After the carrier
contacted us, we reviewed the engineering specifications and project schedule.
We were able to recommend an alternate equipment configuration utilizing a
combination of available new and de-installed equipment at 40% less than the
price quoted by the OEM. This solution allowed the carrier to build the SONET
ring and meet their customer's requirement in a cost-effective and timely
manner.
Wireless Carrier. A major Latin American wireless carrier had contracted with
a large OEM to replace its existing cellular network with a new digital
network. Design and installation of this new digital network was to be
completed in one year. While the new network was being installed, the carrier
needed to address significant service quality issues it faced due to capacity
constraints on its existing network from rapid subscriber growth. However, the
carrier was reluctant to deploy significant capital on equipment which would
only be in service for one year. By utilizing de-installed equipment from
another carrier's network and refurbishing, testing and reconfiguring it to
meet the specific requirements of the carrier, we were able to deliver this
equipment within 30 days of their order at a significant discount to the cost
of equivalent new equipment. Furthermore, we agreed to repurchase the de-
installed digital network equipment from the implementation of the carrier's
digital network. This cost-effective solution allowed the carrier to expand
capacity to meet demand and generating additional revenues.
Competition
The market for our equipment and service offerings is highly competitive. We
believe that the trends toward greater demand for telecommunications services,
increasing global deregulation and rapid technology advancements characterized
by shortened product lifecycles will continue to drive competition in our
industry for the foreseeable future. Increased competition may result in price
reductions, lower gross margins and loss of our market share.
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Increased competition in the secondary market for telecommunications
equipment could also heighten demand for the limited supply of de-installed
equipment, which would lead to increased prices for, and reduce the
availability of, this equipment. Any increase in these prices could
significantly impact our ability to maintain our gross margins. Any reduction
in the availability of this equipment could cause us to lose customers.
We currently face competition primarily from OEMs, distributors and secondary
market dealers. Many of these competitors have longer operating histories,
significantly greater resources and name recognition, and a larger base of
customers. These competitors are also likely to enjoy substantial competitive
advantages over us, including the following:
.ability to devote greater resources to the development, promotion and sale
of their equipment and related services;
.ability to adopt more aggressive pricing policies than we can;
.ability to expand existing customer relationships and more effectively
develop new customer relationships than we can, including securing long
term purchase agreements;
.ability to leverage their customer relationships through volume purchasing
contracts, and other means intended to discourage customers from
purchasing products from us;
.ability to more rapidly adopt new or emerging technologies and increase
the array of products offered to better respond to changes in customer
requirements;
.greater focus and expertise on specific manufacturers or product lines;
.ability to implement more effective electronic commerce solutions; and
.ability to form new alliances or business combinations to rapidly acquire
significant market share.
There can be no assurance that we will have the resources to compete
successfully in the future or that competitive pressures will not harm our
business.
Employees
As of September 30, 1999, we had 128 full-time employees. We consider our
relations with our employees to be satisfactory. We have never had a work
stoppage, and none of our employees is represented by a collective bargaining
agreement. We believe that our future success will depend in part on our
ability to attract, integrate, retain and motivate highly qualified personnel,
and upon the continued service of our senior management and key sales
personnel. Competition for qualified personnel in the telecommunications
equipment industry and our geographic location is intense. We cannot assure you
that we will be successful in attracting, integrating, retaining and motivating
a sufficient number of qualified employees to conduct our business in the
future.
Facilities
Our principal executive and corporate offices occupy approximately 19,400
square feet in Santa Barbara, California under a lease agreement that expires
in January 2003 with one three-year extension. Our distribution center occupies
approximately 100,000 square feet in Oxnard, California under a lease agreement
that expires in May 2004. We also have a
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warehouse of approximately 23,000 square feet in Santa Barbara, California
under a lease agreement that expires in March 2005. Additionally, we lease
sales offices of approximately 435 square feet in Los Gatos, California under a
lease agreement that expires in April 2000 and of approximately 455 square feet
in Pasadena, California under a lease agreement that expires in May 2000. We
are currently exploring additional locations to expand our corporate
facilities. We believe that our facilities are adequate for our current
operations and that additional space can be obtained if needed.
Legal Proceedings
From time to time, we may be involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this prospectus,
we are not a party to or aware of any litigation or other legal proceeding that
could harm our business.
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MANAGEMENT
Directors and Executive Officers
Our executive officers and directors and their ages as of August 1, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Positions
------------------------------------ --- -------------------------------------
<C> <C> <S>
Dan Firestone....................... 37 Chairman of the Board of Directors,
President and Chief Executive Officer
Jeffrey G. Miller................... 36 Executive Vice President, Sales and
Marketing
Gary J. Owen........................ 45 Chief Financial Officer
Gil Varon........................... 38 Director and Vice President, Wireline
Division
Walter G. Kortschak(1).............. 40 Director
Peter Y. Chung(2)................... 31 Director
Barry Phelps(1)(2).................. 52 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Dan Firestone co-founded Somera Communications in July 1995, has served as
our Chief Executive Officer since 1996, has served as our President since
December 1998, and has also served as our Chairman of the Board since our
inception. From 1994 to the present, Mr. Firestone has also operated SDC
Business Consulting, a private business consulting firm. In 1984, Mr. Firestone
co-founded Century Computer Marketing, a distributor of computer service spare
parts and related products, and served as its Chief Executive Officer until May
1994.
Jeffrey G. Miller has served as our Executive Vice President, Sales and
Marketing since joining Somera Communications in May 1999. From January 1996
until May 1999, Mr. Miller served as Regional Director for North American Sales
and Operations for the Cellular Infrastructure Group of Motorola, Inc. From
1985 until January 1996, Mr. Miller worked in various capacities with AT&T,
including positions in sales management, product management, marketing, and
software development in their long distance, premises equipment, and voice
messaging business segments. Mr. Miller holds a B.S. in business administration
from Miami University and an M.B.A. from Ohio State University.
Gary J. Owen has served as our Chief Financial Officer since joining Somera
Communications in July 1999. From January 1999 until July 1999, Mr. Owen served
as Group Finance Director for Logical Holdings Ltd., a U.K. software
development and services company. From January 1997 to January 1999, Mr. Owen
served as Group Finance Director for IFX Group plc, an international
information services company. From September 1996 to December 1996, Mr. Owen
served as a finance consultant doing project work for Fujitsu
Telecommunications Ltd. From May 1994 to September 1996, Mr. Owen served as
Director, European Operations, for Aurora Electronics, Inc., an electronic
materials management company. From 1986 until May 1994, Mr. Owen served as
Chief Financial Officer of Century Computer Marketing, a distributor of
computer service spare parts and related products. Mr. Owen holds a B.A. in
accounting and finance from Nottingham
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University, England. Mr. Owen is also a qualified member of the Institute of
Chartered Accountants.
Gil Varon co-founded Somera Communications in July 1995, served as our
President from July 1995 until December 1998, has served as our Vice President,
Wireline Division since January 1999, and has served as one of our directors
since our inception. From 1995 until the present, Mr. Varon has also served as
a Senior Sales Manager. From May 1994 to June 1995, Mr. Varon served in sales
and procurement positions for Aurora Electronics, Inc. From 1985 until May
1994, Mr. Varon served as a Group Sales Manager at Century Computer Marketing.
Walter G. Kortschak has served as a director of Somera Communications since
July 1998. Mr. Kortschak is a Managing Partner and Managing Member of various
entities affiliated with Summit Partners, L.P., a private equity capital firm
in Palo Alto, California, where he has been employed since June 1989. Summit
Partners, L.P., and its affiliates manage a number of venture capital funds,
including Summit Ventures V, L.P., Summit V Advisors (QP) Fund, L.P., Summit V
Advisors Fund, L.P., and Summit Investors III, L.P. Mr. Kortschak also serves
as a director of E-Tek Dynamics, Inc., an optical components and modules
company. Mr. Kortschak holds a B.S. in engineering from Oregon State
University, an M.S. in engineering from The California Institute of Technology
and an M.B.A. from the University of California, Los Angeles.
Peter Y. Chung has served as a director of Somera Communications since July
1998. Mr. Chung is a General Partner and Member of various entities affiliated
with Summit Partners, L.P., a private equity capital firm in Palo Alto,
California, where he has been employed since August 1994. Summit Partners,
L.P., and its affiliates manage a number of venture capital funds, including
Summit Ventures V, L.P., Summit V Advisors (QP) Fund, L.P., Summit V Advisors
Fund, L.P., and Summit Investors III, L.P. From August 1989 to July 1992, Mr.
Chung worked in the Mergers and Acquisitions Department of Goldman, Sachs & Co.
Mr. Chung also serves as a director of Ditech Communications Corporation, a
telecommunications equipment company, E-Tek Dynamics, Inc., an optical
components and modules company, and Splash Technology Holdings, Inc., a
developer of color server systems. Mr. Chung holds an A.B. from Harvard
University and an M.B.A. from Stanford University.
Barry Phelps has served as a director of Somera Communications since July
1999. Mr. Phelps is the President and Chief Executive Officer of Netcom
Systems, Inc., a network performance analysis company in Calabasas, California,
where he has been employed since November 1996. Before he became President and
Chief Executive Officer in November 1997, Mr. Phelps served as the Vice
President, Finance and Chief Financial Officer of Netcom Systems. Netcom
Systems was acquired by Bowthorpe plc in July 1999. Prior to joining Netcom
Systems, from February 1992 to November 1996, Mr. Phelps served as Chairman and
Chief Executive Officer of MICOM Communications Corporation, a data
communications equipment company which was acquired by Nortel Networks in June
1996. Mr. Phelps holds a B.S. in mathematics from St. Lawrence University and
an M.B.A. from the University of Rochester.
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<PAGE>
The executive officers serve at the discretion of the board of directors.
There are no family relationships among any of our directors or executive
officers.
Board Composition
We currently have five authorized directors. In accordance with the terms of
our bylaws, the terms of the directors will be divided into three classes.
Class I director terms will expire at the annual meeting of stockholders to be
held in 2000. Class II director terms will expire at the annual meeting of
stockholders to be held in 2001. Class III director terms will expire at the
annual meeting of stockholders to be held in 2002. The Class I director is Mr.
Chung, the Class II directors are Messrs. Phelps and Varon, and the Class III
directors are Messrs. Firestone and Kortschak. At each annual meeting of
stockholders after the initial classification or special meeting in lieu of the
annual meeting, 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 or special meeting held in lieu of the annual
meeting. Each director is elected at the respective meeting of our stockholders
by a vote of the holders of a plurality of the voting power represented at that
meeting. In addition, our bylaws provide that the authorized number of
directors may be changed by resolution of the board of directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the total number of directors. This
classification of the board of directors may have the effect of delaying or
preventing a change of control or management of Somera Communications.
Board Committees
Our audit committee, which consists solely of two independent directors,
reviews, acts on and reports to our board of directors on various auditing and
accounting matters, including the selection of our independent accountants, the
scope of our annual audits, fees to be paid to the independent accountants, the
performance of our independent accountants and our accounting practices and
internal controls. Messrs. Chung and Phelps are the members of our audit
committee.
Our compensation committee establishes salaries, incentives and other forms
of compensation for officers and other employees. This committee also
administers our incentive compensation and benefit plans. Messrs. Kortschak and
Phelps are the members of the compensation committee.
Director Compensation
Except for reimbursement of reasonable expenses incurred in connection with
serving as a director and the grant of stock options, our directors are not
compensated for their service as directors. In July 1999, we granted Mr.
Phelps, one of our non-employee directors, an option to purchase 50,000 shares
of common stock at an exercise price of $8.50 per share under our 1999 Unit
Option Plan. These options vest 25% after one year, and ratably thereafter over
a period of three years. Under our 1999 Director Option Plan, each
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<PAGE>
non-employee director will automatically be granted an option to purchase
30,000 shares of our common stock on the date on which he or she becomes a
director. In addition to this first option grant, each outside director will
automatically be granted an option to purchase 7,500 shares on each July 1st,
if on the date of such subsequent grant he or she shall have served on the
board for six months from the date of such grant. Both the initial 30,000 share
initial option grant and subsequent 7,500 share option grant shall vest 25%
after one year, and ratably thereafter over a period of three years. The
exercise price for each option granted under the Director Plan will be the fair
market value of our common stock on the date of grant.
Compensation Committee Interlocks and Insider Participation
Our compensation committee consists of Messrs. Kortschak and Phelps. Prior to
the offering, our compensation committee consisted of Messrs. Firestone and
Kortschak.
None of the current members of our compensation committee is an officer or
employee of Somera Communications. No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has such an interlocking
relationship existed in the past.
Employment Agreements
Jeffrey G. Miller. Mr. Miller entered into an employment agreement and
commenced his employment with the Company on May 6, 1999. Under the agreement,
we agreed to pay Mr. Miller an annual salary of $225,000 and a bonus of up to
$100,000 based on the achievement of performance milestones. Under this
agreement, Mr. Miller received a signing bonus of $40,000. For the first year
of Mr. Miller's employment, the full performance bonus is guaranteed. In
conjunction with this agreement, we have granted Mr. Miller an option to
purchase 660,093 shares of our common stock at an exercise price of $7.57 per
share with 25% of the shares subject to this option vesting on the first
anniversary of his commencement date, and 1/36th of the remaining shares
vesting monthly thereafter.
As a part of this employment agreement, we have provided Mr. Miller with an
interest-free mortgage loan in the amount of $600,000 for the purpose of Mr.
Miller acquiring a new home. Under the agreement, the loan will be forgiven
over eight years for $50,000 per year for the first four years and $100,000 per
year for the final four years. We will retain a mortgage security interest in
the home during the term of the loan. In the event Somera Communications
experiences a change of control and Mr. Miller is terminated without cause or
constructively terminated within twelve months, the outstanding balance of the
loan will be forgiven. In the event Mr. Miller is terminated without cause by
us, the loan will be due and repayable upon one year after he is first able to
sell his shares following this offering. In addition, he would be entitled to
receive severance equal to one year of his base salary and target bonus and
additional vesting of that number of shares subject to his option that would
have become vested had Mr. Miller remained employed by us for an additional six
months. In the event Mr. Miller leaves our employment voluntarily during the
term of the loan, the loan would be due and repayable within six months of the
date of the termination of his employment.
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<PAGE>
Gary J. Owen. Mr. Owen entered into an employment agreement with the Company
on July 16, 1999 and commenced his employment with the Company on July 26,
1999. Under the agreement, we have agreed to pay Mr. Owen an annual salary of
$200,000 and a bonus of up to $25,000 based on the achievement of performance
milestones. Under this agreement, Mr. Owen received a signing bonus of $15,000.
For the first year of Mr. Owen's employment, $12,500 of the performance bonus
is guaranteed. In conjunction with this agreement, we have granted Mr. Owen an
option to purchase 405,000 shares of our common stock at an exercise price of
$8.50 per share with 25% of the shares subject to this option vesting on the
first anniversary of his commencement date, and 1/36th of the remaining shares
vesting monthly thereafter.
As a part of this employment agreement, Mr. Owen is eligible to receive a
six-month interest-free mortgage loan in an amount to be determined by our
president for purposes of Mr. Owen's purchase of and relocation to a new home.
In the event Mr. Owen is terminated without cause by us, he would be entitled
to receive severance equal to nine months of his base salary and target bonus.
In addition, he would be entitled to receive additional vesting of that number
of shares subject to his option that would have become vested had Mr. Owen
remained employed by us for an additional six months. In the event of a change
of control of Somera Communications, 50% of the shares subject to Mr. Owen's
option, together with any subsequent options granted to him, will vest and
become immediately exercisable.
Dan Firestone. Our compensation committee adopted a bonus plan for Mr.
Firestone that provides him with incentive compensation based on performance
milestones. Under this bonus plan, Mr. Firestone is eligible to receive a
bonus, in addition to his base salary, of up to 250% of his base salary based
on the company's achievement of performance milestones.
Executive Compensation
The following table sets forth all compensation paid or accrued during 1998
to our chief executive officer and our other most highly compensated executive
officer whose salary and bonus for 1998 was more than $100,000. The table also
sets forth compensation on an annualized basis for our chief executive officer
and our other executive officers whose salaries, excluding bonuses if any, for
1999 will exceed $100,000 when calculated on an annualized basis.
Summary Compensation Table
<TABLE>
<CAPTION>
1998 Annual Compensation
------------------------------
Other Annual 1999 Annual
Name and Principal Positions Salary Bonus Compensation Salary
- ----------------------------------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Dan Firestone, Chairman of the
Board, President and Chief
Executive Officer................. $109,936 $219,872 $3,250 $360,000
Gil Varon, Director and Vice
President, Wireline Division...... 43,978 169,792 1,600 100,000
Jeffrey G. Miller, Executive Vice
President, Sales and Marketing.... -- -- -- 225,000
Gary J. Owen, Chief Financial
Officer........................... -- -- -- 200,000
</TABLE>
50
<PAGE>
Option Grants
We did not grant stock options to any of our executive officers in 1998. In
1999, Somera Communications, LLC granted options to purchase Class A units
under its 1999 Unit Option Plan. Following the completion of this offering, no
further options will be granted under the 1999 Unit Option Plan and all
outstanding options under this plan will be assumed by and converted into
options to purchase common stock under the 1999 Stock Option Plan. In May 1999,
Somera Communications, LLC granted an option to Mr. Miller to purchase 660,093
Class A units at an exercise price of $7.57 per unit under our 1999 Unit Option
Plan. In July 1999, Somera Communications, LLC granted an option to Mr. Owen to
purchase 405,000 Class A units at an exercise price of $8.50 per unit under our
1999 Unit Option Plan. In July 1999, Somera Communications, LLC granted an
option to Mr. Firestone to purchase 375,000 Class A units at an exercise price
of $8.50 per unit under our 1999 Unit Option Plan. The options granted to these
executive officers are nonqualified stock options and vest over four years at
the rate of 25% of the shares subject to the option on the first anniversary of
the date of grant, and 1/36th of the remaining shares each subsequent month. A
portion of each of these options will accelerate upon a change of control or
termination of the optionee's employment. See "--Employment Agreements" for
further descriptions of these employee benefits. The options expire ten years
from the date of grant and were granted at an exercise price equal to the
deemed fair value of our common stock on the date of grant, as determined by
the board.
Employee Benefits Plans
1999 Stock Option Plan
Our 1999 Stock Option Plan was adopted and approved by our board in September
1999. It provides for the grant of incentive stock options to employees and
nonstatutory stock options and share purchase rights to employees, directors
and consultants. We have reserved for issuance under our 1999 Stock Option Plan
a total of 6,750,000 shares of common stock. As of August 31, 1999, no options
were outstanding under this plan. However, following the consummation of this
offering, all options granted under the 1999 Unit Option Plan will be assumed
and converted into options to purchase an equivalent number of shares of our
common stock under the 1999 Stock Option Plan. Following this assumption and
conversion, 5,259,907 shares of our common stock will remain available for
future option grants. The number of shares of common stock reserved for
issuance under this plan will be subject to an annual increase on each
anniversary beginning January 1, 2000 equal to the lesser of:
.2,500,000 shares;
.4% of the outstanding shares on each anniversary date; or
.an amount determined by the board of directors.
The 1999 Stock Option Plan is currently administered by the compensation
committee of our board of directors. Options and stock purchase rights granted
under the 1999 Stock Option Plan will vest as determined by the relevant
administrator, and if not assumed or substituted by a successor corporation
will accelerate and become fully vested in the event we are acquired. The
exercise price of options and stock purchase rights granted under the
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<PAGE>
1999 Stock Option Plan will be determined by the relevant administrator,
although the exercise price of incentive stock options must be at least equal
to the fair market value of our common stock on the date of grant. Options
granted under the 1999 Stock Option Plan generally vest over a four-year
period. The board of directors may amend, modify or terminate the 1999 Stock
Option Plan at any time as long as such amendment, modification or termination
does not impair vesting rights of plan participants. The 1999 Stock Option Plan
will terminate in 2009, unless terminated earlier by the board of directors.
1999 Unit Option Plan
Our 1999 Unit Option Plan was approved by our board of directors in May 1999.
We adopted the 1999 Unit Option Plan when we were a limited liability company.
We have reserved 2,003,289 Class A units under the 1999 Unit Option Plan. As of
August 1, 1999, options to purchase a total of 1,490,093 Class A units at a
weighted average exercise price of $8.09 per share were outstanding and 513,196
Class A units remained available for future option grants. Following the
completion of this offering, no further options will be granted under the 1999
Unit Option Plan and all outstanding options under this plan will be assumed by
and converted into options to purchase common stock under the 1999 Stock Option
Plan.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted and approved by our board
in September 1999. Our Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, provides our employees with an
opportunity to purchase our common stock through accumulated payroll
deductions. This plan will become effective upon the closing of this offering.
A total of 300,000 shares of common stock have been reserved for issuance under
the Purchase Plan, none of which have been issued. The number of shares
reserved for issuance under the Purchase Plan will be subject to an annual
increase on each anniversary beginning January 1, 2000 equal to the lesser of:
.the number of shares issued under the Purchase Plan in the prior year; or
.an amount determined by the board of directors.
The Purchase Plan will be administered by the compensation committee of our
board of directors. The Purchase Plan grants each eligible employee an option
to purchase common stock through payroll deductions up to a maximum of $25,000
for all purchases ending within the same calendar year and 5,000 shares for
each purchase period thereafter. Employees are eligible to participate if they
are employed by us for at least 20 hours per week and more than five months in
any calendar year. Unless the board of directors or its committee determines
otherwise, each offering period will run for six months. The first offering
period will commence on the date of this prospectus and end on or about August
14, 2000, and new offering periods thereafter will commence on the first
trading day on or after February 15th or August 15th. In the event we are
acquired, each outstanding option may be assumed or an equivalent option
substituted by the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the offering period
then in progress will be shortened by setting a new exercise date to precede
the date of the
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<PAGE>
acquisition. The price at which common stock will be purchased under the
Purchase Plan is equal to 85% of the fair market value of the common stock on
the first or last day of the applicable offering period, whichever is lower.
Employees may end their participation at any time during the offering period,
and participation automatically ends on termination of employment. Generally,
the board of directors may amend, modify or terminate the Purchase Plan at any
time as long as the amendment, modification or termination does not impair the
rights of plan participants. The Purchase Plan will terminate in 2009, unless
terminated earlier in accordance with its provisions.
1999 Director Option Plan
Our 1999 Director Option Plan was adopted and approved by our board in
September 1999. Our Director Plan provides for the grant of non-statutory stock
options to non-employee directors. The Director Plan has a term of ten years
unless terminated earlier by the board of directors. A total of 300,000 shares
of our common stock, plus an annual increase equal to the number of shares
needed to restore the number of shares of common stock that are available for
grant under the Plan to 300,000 shares, have been reserved for issuance under
the Director Plan. As of the date of this prospectus, no options have been
granted under the Director Plan.
Our Director Plan provides that each new outside director shall automatically
be granted an option to purchase 30,000 shares of our common stock on the date
that outside director first becomes a director. In addition to this first
option grant, each outside director shall automatically be granted an option to
purchase 7,500 shares on each July 1st, if on the date of the subsequent grant
he or she shall have served on the board for six months from the date of such
grant. Options granted under the Director Plan vest at a rate of 25 percent of
the shares subject to the option on each anniversary of its grant date,
provided this director continues to serve as an outside director on these
vesting dates. Options granted under the Director Plan are exercisable by the
outside director only while the individual remains one of our directors. The
exercise price for each first option and subsequent option grant shall be 100%
of the fair market value per share of our common stock on the date of grant.
In the event of our merger or the sale of substantially all of our assets,
each outstanding option shall be assumed or an equivalent option substituted by
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the option, or following assumption or substitution
the director is terminated, each option granted to an outside director under
the Director Plan shall become fully vested and exercisable for a period of
thirty days after which period the option shall terminate. Options granted
under the Director Plan must be exercised within three months of the end of the
optionee's tenure as one of our directors, or within 12 months after the
director's termination by death or disability.
401(k) Plan
We provide a tax-qualified employee savings and retirement plan, commonly
known as a 401(k) plan, which covers our eligible employees. Under our 401(k)
plan, employees may elect to reduce their current annual compensation, on a
pre-tax basis, up to the lesser of 15%
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<PAGE>
or the statutorily prescribed limit, which is $10,000 in calendar year 1999,
and have the amount of the reduction contributed to the 401(k) plan. The 401(k)
plan is intended to qualify under Sections 401(a) and 401(k) of the Internal
Revenue Code so that contributions by our employees to the 401(k) plan and
income earned on plan contributions are not taxable to employees until
withdrawn from the 401(k) plan and so that contributions will be deductible by
us when made. The trustee of the 401(k) plan invests the assets of the 401(k)
plan in the various investment options as directed by the participants.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors 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:
.any 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
federal and state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify other officers,
employees and other agents to the fullest extent permitted by law. We believe
that indemnification by our bylaws covers at least 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 in their capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses (including attorneys' fees), judgments,
fines and settlement amounts incurred by any director or executive officer in
any action or proceeding, including any action by or on our behalf, arising out
of the individual's services as our director or executive officer, or the
director or executive officer of any subsidiaries 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 any of our
directors, officers or employees for which indemnification is sought. We are
not aware of any threatened litigation that may result in claims for
indemnification. We currently have liability insurance for our directors and
officers and intend to extend that coverage for public securities matters.
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<PAGE>
CERTAIN TRANSACTIONS
Summit Financing
On July 23, 1998, Summit Ventures V, L.P., Summit V Advisors (QP) Fund, L.P.,
Summit V Advisors Fund, L.P., Summit Investors III, L.P., which we refer to
collectively as the Summit funds, and several other investors invested an
aggregate of $51.8 million in Somera Communications, LLC in exchange for
14,070,000 Class B units. These Class B units will be exchanged for 14,070,000
shares of common stock upon the effectiveness of the registration statement
with respect to this offering. Based upon an assumed initial public offering
price of $12.00, the value of these shares will be $168.8 million. The parties
also entered into related agreements which provided for registration rights,
liquidation preferences, transfer restrictions, and specified other rights.
These related agreements specify that the Class B investors have the
authority to elect two individuals to the board of managers of Somera
Communications, LLC. Currently, two Class B representatives, Messrs. Kortschak
and Chung, are members of the board of directors of Somera Communications, Inc.
The right of the Class B investors to designate managers of Somera
Communications, LLC, and directors of Somera Communications, Inc., as well as
the transfer restrictions, will terminate upon this offering, although we
expect Messrs. Kortschak and Chung to continue to serve as directors.
Distribution Involving Officers, Directors and Five Percent Owners
On August 31, 1999, we entered into a credit agreement, consisting of a term
loan facility and a revolving loan facility with a syndicate of financial
institutions led by Fleet National Bank. As of September 30, 1999, $50.0
million was outstanding under the term loan facility and $6.4 million has been
drawn under the revolving loan facility. We used the proceeds from the term
loan facility to make a distribution to our members in the aggregate amount of
$48.5 million, including $11.8 million to Dan Firestone, $11.9 million to Gil
Varon, and $17.5 million to the Summit funds. We plan to use a portion of the
net proceeds of this offering to repay all outstanding amounts under the term
loan facility and revolving loan facility. For additional information on the
terms of the Fleet credit facility, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," and for additional information regarding repayment of the
facility, please see "Use of Proceeds."
Loan From Officers and Related Parties
From July 1996 through November 1998, we borrowed an aggregate of $3.5
million from Dan Firestone, Gil Varon, Robert Firestone, who is Dan Firestone's
father, and Voyage Partners, a partnership whose partners include Dan Firestone
and Gil Varon, under a series of promissory notes that carried annual interest
rates that varied between eight and thirteen percent. These notes were fully
repaid in September 1999.
Miller Loan Agreement
We have provided Jeffrey G. Miller, our executive vice president of sales and
marketing, with a $600,000 interest-free mortgage loan. This loan was made in
conjunction with his
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employment agreement dated May 6, 1999 to assist with Mr. Miller's relocation
to the Santa Barbara, California area and his purchase of a home. If Mr. Miller
remains employed with us, this loan will be forgiven over an eight-year period.
As of September 30 , 1999, approximately $579,000 was outstanding on this loan.
For additional information regarding this loan, please see "Management--
Employment Agreements".
Promoters of Somera Communications
Mr. Firestone and Mr. Varon are each promoters for purposes of the federal
securities laws. All material transactions with such persons are described in
this section or elsewhere in this prospectus. Please see "Management" and Note
4 to the financial statements.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of September 30, 1999, as adjusted to reflect
the sale of our common stock in this offering, by:
.each person who beneficially owns more than 5% of the common stock;
.each of our executive officers;
.each of our directors; and
.all executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to shares. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of common stock subject to options that
are currently exercisable or exercisable within 60 days of September 30, 1999
are deemed to be outstanding and to be beneficially owned by the person holding
the options for the purpose of computing the percentage ownership of that
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise indicated, the
address for each listed stockholder is c/o Somera Communications, 5383
Hollister Avenue, Santa Barbara, California 93111.
The applicable percentage of ownership for each stockholder is based on
38,062,500 shares of common stock outstanding as of September 30, 1999,
together with applicable options for that stockholder.
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<TABLE>
<CAPTION>
Percentage of Ownership
------------------------------
Number of Shares of
Common Stock
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
- --------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Dan Firestone.............. 9,285,036 24.4% -- %
Jeffrey G. Miller.......... -- * *
Gary J. Owen............... -- * *
Gil Varon.................. 9,375,000 24.6 --
Walter G. Kortschak(1)..... -- -- --
c/o Summit Partners
499 Hamilton Avenue, Suite
200
Palo Alto, CA 94301
Peter Y. Chung(2).......... -- -- --
c/o Summit Partners
499 Hamilton Avenue, Suite
200
Palo Alto, CA 94301
Barry Phelps............... -- -- --
Summit Funds(3)............ 13,757,333 36.1 --
c/o Summit Partners
499 Hamilton Avenue, Suite
200
Palo Alto, CA 94301
All executive officers and
directors as a group
(7 persons)............... 18,660,036 49.0 --
</TABLE>
- --------
* Represents beneficial ownership of less than 1%
(1) Mr. Kortschak, one of our directors, is a managing member of Summit
Partners, LLC, which is the general partner of Summit Partners, V, which is
the general partner of each of Summit Ventures V, Summit V Advisors Fund,
(QP) and Summit V Advisors Fund. Mr. Kortschak is also a general partner of
Summit Investors III. Mr. Kortschak does not have voting or dispositive
power with respect to the shares owned by the Summit funds and disclaims
beneficial ownership of these shares.
(2) Mr. Chung, one of our directors, is a member of Summit Partners, LLC, which
is the general partner of Summit Partners V, which is the general partner
of each of Summit Ventures V, Summit V Advisors Fund, (QP) and Summit V
Advisors Fund. Mr. Chung does not have voting or dispositive power with
respect to the shares owned by the Summit funds and disclaims beneficial
ownership of these shares.
(3) Consists of 12,618,986 shares of common stock owned by Summit Ventures V,
723,116 shares of common stock owned by Summit V Advisors Fund, (QP),
220,978 shares of common stock owned by Summit V Advisors Fund, and
194,253 shares of common stock owned by Summit Investors III.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 20,000,000 shares of
undesignated preferred stock, $0.001 par value.
Common Stock
As of September 30, 1999, there were 38,062,500 shares of common stock
outstanding which were held of record by 22 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The holders of common stock have no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred Stock
The board of directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, any or all of which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of the preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change of control without
further action by the stockholders. Immediately prior to the closing no shares
of preferred stock will be outstanding, and we have no present plans to issue
any shares of preferred stock.
Warrants
As of September 30, 1999, we had an outstanding warrant to purchase 95,155
shares of our common stock at an exercise price of $7.57 per share, and a
outstanding warrant to purchase 112,500 shares of our common stock at an
exercise price of $8.50 per share. Each of the warrants has a two-year term.
Each of the warrants has a net exercise provision under which the holder may,
in the exercise price in cash, surrender the warrant and receive a net amount
of shares, based on the fair market value of our stock at the time of the
exercise of the warrant, after deducting the aggregate exercise price.
59
<PAGE>
Registration Rights
As of September 30, 1999, the holders of 38,062,500 shares of our common
stock or their transferees are entitled to have us register their shares under
the Securities Act. These rights are provided under the terms of an agreement
between us and the holders of these securities. Subject to limitations in the
agreement, if we register any of our common stock either for our own account or
for the account of other security holders, these holders will be entitled to
include their shares of common stock in that registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. We will be responsible for paying all registration expenses,
including reasonable legal fees, and the holders selling their shares will be
responsible for paying all other selling expenses.
Delaware Anti-takeover Law and Certain Charter and Bylaw Provisions
Provisions of Delaware law and our amended and restated certificate of
incorporation and bylaws summarized below could make it more difficult to
acquire us by means of a tender offer, a proxy contest or otherwise and to
remove our incumbent officers and directors. These provisions are expected to
discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control to first negotiate with us. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweighs the disadvantages of discouraging these
proposals because, among other things, negotiations could result in improved
acquisition terms.
Board of Directors
Our board of directors will be divided into three classes of directors
serving staggered three year terms. Our bylaws authorize our board of directors
to fill vacant directorships or increase the size of the board of directors.
Accordingly, even if a stockholder brings a successful proxy fight, the
stockholder would likely only be able to elect a minority of our board of
directors at any single annual meeting.
Stockholder Meetings
Under our amended and restated certificate of incorporation and bylaws, the
board of directors, the chairman of the board and the president may call
special meetings of stockholders but the stockholders may not call a special
meeting.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws establish advance notice procedures with respect to stockholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee thereof.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-
60
<PAGE>
takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with some exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in control or management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services LLC.
Nasdaq National Market Listing
We have applied to list our common stock on the Nasdaq National Market under
the symbol "SMRA."
61
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
following the offering could cause the market price of our common stock to fall
and could affect our ability to raise capital on terms favorable to us.
Of the 46,562,500 shares to be outstanding after the offering, assuming that
the underwriters do not exercise their over-allotment option, only the
8,500,000 shares of common stock sold in this offering will be freely tradable
without restriction in the public market unless the shares are held by
"affiliates," as that term is defined in Rule 144(a) under the Securities Act
of 1933. For purposes of Rule 144, an "affiliate" of an issuer is a person
that, directly or indirectly through one or more intermediaries, controls, or
is controlled by or is under common control with, the issuer. The remaining
shares of common stock to be outstanding after the offering are "restricted
securities" under the Securities Act of 1933 and may be sold in the public
market upon the expiration of the holding periods under Rule 144, described
below, subject to the volume, manner of sale and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
. 1% of the then outstanding shares of our common stock (approximately
465,625 shares immediately following the offering); or
. the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale of shares of common stock.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
us. A stockholder who is deemed not to have been an "affiliate" of ours at any
time during the 90 days preceding a sale, and who has beneficially owned
restricted shares for at least two years, would be entitled to sell shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions or public information requirements.
In addition, as of September 30, 1999, there were outstanding warrants to
purchase 207,655 shares of common stock and options to purchase 1,490,093
shares of common stock, of which no options were fully vested. An additional
5,259,907 shares are reserved for issuance under our 1999 Stock Option Plan. We
intend to register the shares of common stock issuable or reserved for issuance
under the 1999 Stock Option Plan as soon as practicable following the date of
this prospectus.
Holders of 38,062,500 shares of common stock are entitled to registration
rights with respect to these shares for resale under the Securities Act of
1933. If these holders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, these sales
could the market price for our common stock to fall. These registration rights
may not be exercised prior to the expiration of 180 days from the date of this
prospectus. See "Description of Capital Stock--Registration Rights."
62
<PAGE>
Lock-up Arrangements
Our directors and officers, along with stockholders who hold all shares of
our common stock have agreed not to sell or otherwise dispose of any shares of
common stock for a period of 180 days after the date of this prospectus without
prior written consent.
63
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated and Thomas Weisel Partners LLC are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ --------
<S> <C>
Lehman Brothers Inc. ..........................................
Dain Rauscher Wessels..........................................
Thomas Weisel Partners LLC.....................................
--------
Total..........................................................
========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at this public offering price less a selling concession not
in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 1,275,000 additional shares of common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discounts shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the table
above and we will be obligated, under the over-allotment option, to sell the
shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers, we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any
64
<PAGE>
securities that may be converted into or exchanged for any shares of common
stock for a period of 180 days from the date of this prospectus. All of our
executive officers and directors and stockholders holding all of the shares of
our capital stock, including all of the holders of the warrants, have agreed
under lock-up agreements that, without prior written consent, they will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for the period ending 180 days after the date of this
prospectus. See "Shares Available for Future Sale".
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered, among other things and in
addition to prevailing market conditions:
.our historical performance and capital structure;
.estimates of our business potential and earning prospects;
.an overall assessment of our management; and
.the above factors in relation to market valuations of companies in related
businesses.
We have applied to list our common stock on the Nasdaq Stock Market's
National Market under the symbol "SMRA."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offering.
65
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
The underwriters have informed us that they do not intend to confirm sales to
accounts over which they exercise discretionary authority in excess of 5% of
the shares of common stock offered by them.
At our request, the underwriters have reserved up to 425,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates at the
initial public offering price set forth on the cover page of this prospectus.
These persons must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares.
A prospectus may be available in electronic format on an Internet website
maintained by Fidelity Investments, which is expected to act as one of the
dealers in the offering.
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
76 filed public offerings of equity securities, of which 49 have been
completed, and has acted as a syndicate member in an additional 38 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with regard to its contractual relationship with us pursuant to
the underwriting agreement entered into in connection with this offering.
66
<PAGE>
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, will pass upon
the validity of the issuance of the shares of common stock offered by this
prospectus. Cooley Godward LLP will pass upon certain legal matters in
connection with this offering for the Underwriters. Jeffrey D. Saper, a member
of Wilson Sonsini Goodrich & Rosati, P.C., serves as our Secretary. As of the
date of this prospectus, a member of Wilson Sonsini Goodrich & Rosati, P.C.,
owns a warrant exercisable into 112,500 shares of our common stock.
EXPERTS
The audited financial statements of Somera Communications LLC at December 31,
1997 and 1998 and June 30, 1999 and for the years ended December 31, 1996, 1997
and 1998 and six months ended June 30, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
67
<PAGE>
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares to be sold in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect
to us and the shares to be sold in this offering, we refer you to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document to which we make
reference, are not necessarily complete.
You may read and copy all or any portion of the registration statement at the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices at 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
Commission or call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Our Commission filings, including
the registration statement, will also be available to you on the Commission's
Internet site, http://www.sec.gov.
We intend to send to our stockholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
financial statements for the first three quarters of each fiscal year.
68
<PAGE>
SOMERA COMMUNICATIONS, LLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Members' Capital (Deficit).................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Somera Communications, LLC
In our opinion, the accompanying balance sheets and the related statements of
operations, of members' capital (deficit) and of cash flows present fairly, in
all material respects, the financial position of Somera Communications, LLC at
December 31, 1997, 1998 and June 30, 1999 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998 and the six months ended June 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
San Jose, California
September 9, 1999
To the Members of
Somera Communications, LLC
The accompanying financial statements included herein reflect the approval by
the Company's members of the Company's 3 for 2 split of the Company's Class A
and Class B units as described in Note 10. The above opinion is in the form
that will be signed by PricewaterhouseCoopers LLP upon the effectiveness of
such event assuming that from September 9, 1999 to the effective date of such
event, no other events shall have occurred that would affect the accompanying
financial statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 15, 1999
F-2
<PAGE>
SOMERA COMMUNICATIONS, LLC
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, Pro-forma
--------------- June 30, September 30, September 30,
1997 1998 1999 1999 1999 (Note 9)
------ -------- -------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $1,419 $ 1,930 $ 482 $ 195 $ 195
Accounts receivable, (net
of allowance for
doubtful accounts of
$197, $249, $458 and
$684 at December 31,
1997, 1998, June 30,
1999 and September 30,
1999, respectively)..... 6,095 10,237 14,989 17,611 17,611
Inventories, net......... 1,456 4,067 9,994 9,048 9,048
Other current assets..... 169 186 229 301 301
------ -------- -------- -------- --------
Total current assets... 9,139 16,420 25,694 27,155 27,155
Property and equipment,
net....................... 131 547 1,380 1,596 1,596
Deferred tax asset......... -- -- -- -- 17,000
Other assets............... 11 42 128 681 681
------ -------- -------- -------- --------
Total assets........... $9,281 $ 17,009 $ 27,202 $ 29,432 $ 46,432
====== ======== ======== ======== ========
Liabilities, Mandatorily
Redeemable Class B Units
and Members' Capital
(Deficit)/Stockholders'
Deficit
Current liabilities:
Accounts payable......... $4,130 $ 5,901 $ 11,660 $ 10,600 $ 10,600
Borrowings under
revolving loan
facility................ -- -- 779 6,435 6,435
Accrued commissions...... 262 496 950 1,270 1,270
Other accrued
liabilities............. 145 541 651 1,178 1,178
Capital lease
obligations--current
portion................. -- -- 179 255 255
Notes payable to related
parties--current
portion................. -- -- 1,300 -- --
Notes payable--current
portion................. -- -- 200 -- --
------ -------- -------- -------- --------
Total current
liabilities........... 4,537 6,938 15,719 19,738 19,738
Capital lease
obligations--net of
current portion......... -- -- 541 575 575
Notes payable--net of
current portion......... 638 1,838 1,638 -- --
Notes payable to related
parties--net of current
portion................. 319 1,619 319 -- --
Term debt................ -- -- -- 48,900 48,900
------ -------- -------- -------- --------
Total liabilities...... 5,494 10,395 18,217 69,213 69,213
------ -------- -------- -------- --------
Commitments (Note 5)
Mandatorily redeemable
Class B units............. -- 51,750 51,750 51,750 --
------ -------- -------- -------- --------
Members' Capital
(Deficit)/Stockholders'
Deficit
Class A Units............ 3,443 (51,359) (49,793) (79,658) --
Class B Units............ 344 6,223 7,028 (11,165) --
Common stock: $0.001 par
value
Shares authorized: pro
forma 200,000
(unaudited)
Shares issued and
outstanding
38,063 pro forma
(unaudited)............. -- -- -- -- 38
Additional paid in
capital................... -- -- -- -- (39,111)
Retained earnings.......... -- -- -- -- 17,000
Unearned stock based
compensation.............. -- -- -- (708) (708)
------ -------- -------- -------- --------
Total members' capital
(deficit)/stockholders'
deficit............... 3,787 (45,136) (42,765) (91,531) (22,781)
------ -------- -------- -------- --------
Total liabilities and
members' capital
(deficit)/stockholders'
deficit............... $9,281 $ 17,009 $ 27,202 $ 29,432 $ 46,432
====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SOMERA COMMUNICATIONS, LLC
STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
Year Ended December 31, June 30, September 30,
-------------------------- -------------------- -----------------------
1996 1997 1998 1998 1999 1998 1999
-------- -------- -------- ----------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue................. $ 10,149 $ 34,603 $ 72,186 $ 34,417 $ 52,834 $ 51,271 $ 87,034
Cost of net revenue......... 5,532 20,587 43,132 21,037 34,023 30,890 56,678
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 4,617 14,016 29,054 13,380 18,811 20,381 30,356
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing....... 780 2,593 5,747 2,394 4,385 3,895 7,238
General and
administrative........... 696 1,648 3,939 1,326 2,999 2,922 5,085
Stock based compensation.. -- -- -- -- 193 -- 652
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 1,476 4,241 9,686 3,720 7,577 6,817 12,975
-------- -------- -------- -------- -------- -------- --------
Income from operations.. 3,141 9,775 19,368 9,660 11,234 13,564 17,381
Interest expense, net....... 18 82 187 75 144 117 656
-------- -------- -------- -------- -------- -------- --------
Net income............ $ 3,123 $ 9,693 $ 19,181 $ 9,585 $ 11,090 $ 13,447 $ 16,725
======== ======== ======== ======== ======== ======== ========
Net income per unit--basic.. $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
-------- -------- -------- -------- -------- -------- --------
Weighted average units--
basic...................... 37,500 38,052 38,063 38,063 38,063 38,063 38,063
-------- -------- -------- -------- -------- -------- --------
Net income per unit--
diluted.................... $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
-------- -------- -------- -------- -------- -------- --------
Weighted average units--
diluted.................... 37,500 38,052 38,063 38,063 38,069 38,063 38,115
-------- -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SOMERA COMMUNICATIONS, LLC
STATEMENT OF MEMBERS' CAPITAL (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Class A Units Class B Units Class B Units
------------------ ----------------- ----------------
Total
Unearned Members'
Stock Based Capital
Number Value Number Value Compensation (Deficit) Number Value
------- --------- ------ --------- ------------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996................... 10,099 $ 68 -- $ -- -- $ 68 -- $ --
Capital contributed..... 23,651 367 3,750 46 -- 413 -- --
Net income.............. -- 2,811 -- 312 -- 3,123 -- --
Distributions to
members................ -- (2,118) -- (235) -- (2,353) -- --
------- --------- ------ --------- ------- --------- ------- --------
Balances, December 31,
1996................... 33,750 1,128 3,750 123 -- 1,251 -- --
Capital contributed..... 563 300 -- -- -- 300 -- --
Net income.............. -- 8,738 -- 955 -- 9,693 -- --
Distributions to
members................ -- (6,723) -- (734) -- (7,457) -- --
------- --------- ------ --------- ------- --------- ------- --------
Balances, December 31,
1997................... 34,313 3,443 3,750 344 -- 3,787 -- --
Conversion of Class B
units to Class A
units.................. 2,501 344 (2,501) (344) -- -- -- --
Proceeds from issuance
of new units........... -- -- -- -- -- -- 14,070 51,750
Repurchase of members'
units.................. (12,821) (51,750) (1,249) -- -- (51,750) -- --
Net income.............. -- 11,590 -- 7,591 -- 19,181 -- --
Distributions to
members................ -- (14,986) -- (1,368) -- (16,354) -- --
------- --------- ------ --------- ------- --------- ------- --------
Balances, December 31,
1998................... 23,993 (51,359) -- 6,223 -- (45,136) 14,070 51,750
Net income.............. -- 6,991 -- 4,099 -- 11,090 -- --
Distributions to
members................ -- (5,618) -- (3,294) -- (8,912) -- --
Warrants issued in
exchange for services.. -- 193 -- -- -- 193 -- --
------- --------- ------ --------- ------- --------- ------- --------
Balances, June 30,
1999................... 23,993 $ (49,793) -- $ 7,028 -- $ (42,765) 14,070 $ 51,750
Net income.............. -- 3,552 -- 2,083 -- 5,635 -- --
Distribution to
members................ -- (34,584) -- (20,276) -- (54,860) -- --
Unearned employee stock-
based compensation..... -- 830 -- -- (830) -- -- --
Amortization of unearned
Stock-based
Compensation........... -- -- -- -- 122 122 -- --
Warrants issued in
exchange for Services.. -- 337 -- -- -- 337 -- --
------- --------- ------ --------- ------- --------- ------- --------
Balances, September 30,
1999 (unaudited)....... 23,993 $ (79,658) -- $ (11,165) $ (708) $ (91,531) 14,070 $ 51,750
======= ========= ====== ========= ======= ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SOMERA COMMUNICATIONS, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
Year Ended December 31, June 30, September 30,
-------------------------- -------------------- -----------------------
1996 1997 1998 1998 1999 1998 1999
------- ------- -------- ----------- -------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 3,123 $ 9,693 $ 19,181 $ 9,585 $ 11,090 $ 13,447 $ 16,725
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 25 54 137 46 94 85 175
Provision for doubtful
accounts............. 49 145 52 113 209 168 450
Provision for write-
downs of
inventories.......... 35 10 12 327 539 484 789
Warrants issued in
exchange for
services............. -- -- -- -- 193 -- 530
Training costs
financed by capital
lease................ -- -- -- -- 65 -- 65
Amortization of stock-
based compensation... -- 122
Changes in operating
assets and
liabilities:
Accounts receivable.. (2,159) (4,038) (4,194) (4,104) (4,961) (3,487) (7,824)
Inventories.......... (927) (529) (2,623) (1,598) (6,466) (1,906) (5,770)
Other current
assets.............. (310) 141 (17) (209) (43) (325) (115)
Accounts payable..... 1,736 2,352 1,771 2,899 5,759 1,638 4,699
Accrued commissions.. 112 150 234 257 454 349 774
Other accrued
liabilities......... 76 66 396 91 110 295 637
------- ------- -------- ------- -------- --------- --------
Net cash provided by
operating
activities......... 1,760 8,044 14,949 7,407 7,043 10,748 11,257
------- ------- -------- ------- -------- --------- --------
Cash flows from
investing activities:
Acquisition of
property and
equipment............ (124) (85) (553) (233) (272) (368) (459)
Decrease (increase) in
other assets ........ (13) 5 (31) (65) (86) (70) (639)
------- ------- -------- ------- -------- --------- --------
Net cash used in
investing
activities......... (137) (80) (584) (298) (358) (438) (1,098)
------- ------- -------- ------- -------- --------- --------
Cash flows from
financing activities:
Proceeds from term
loan................. -- -- -- -- -- -- 48,900
Payments on line of
credit............... (32) -- -- -- -- -- --
Proceeds from issuance
of mandatorily
redeemable class B
units................ 413 300 51,750 -- -- 51,750 --
Proceeds from
revolving loan
facility............. -- -- -- -- 779 -- 6,435
Repurchase of members'
capital.............. -- -- (51,750) -- -- (51,750) --
Proceeds
from/(repayment of)
notes payable........ 662 295 2,500 1,500 -- 1,500 (3,457)
Distributions to
members.............. (2,353) (7,457) (16,354) (8,063) (8,912) (12,652) (63,772)
------- ------- -------- ------- -------- --------- --------
Net cash used in
financing
activities......... (1,310) (6,862) (13,854) (6,563) (8,133) (11,152) (11,894)
------- ------- -------- ------- -------- --------- --------
Net increase (decrease)
in cash and cash
equivalents........... 313 1,102 511 546 (1,448) (842) (1,735)
Cash and cash
equivalents, beginning
of year............... 4 317 1,419 1,419 1,930 1,419 1,930
------- ------- -------- ------- -------- --------- --------
Cash and cash
equivalents, end of
year.................. $ 317 $ 1,419 $ 1,930 $ 1,965 $ 482 $ 577 $ 195
======= ======= ======== ======= ======== ========= ========
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for interest.. $ 14 $ 98 $ 201 $ 81 $ 175 $ 144 $ 370
======= ======= ======== ======= ======== ========= ========
Fixed assets acquired
under capital lease.. $ -- $ -- $ -- $ -- $ 655 $ -- $ 765
======= ======= ======== ======= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Note 1--Formation and Business of the Company:
Somera Communications, LLC (the "Company") was formed as a Limited Liability
Company in 1995 under the laws of the State of California. The Company is a
provider of telecommunications infrastructure equipment and services to
telecommunications carriers. The Company provides customers with a combination
of new and de-installed equipment.
Note 2--Summary of Significant Accounting Policies:
Basis of Presentation
Commencing with fiscal 1997, the Company's fiscal years are on a 52 or 53
week basis. The 1997 and 1998 years which ended on December 28, 1997 and
January 3, 1999 were 52 and 53 week periods, respectively. The six month
periods presented ended on June 28, 1998 and July 4, 1999 respectively and the
nine month periods presented ended on September 27, 1998 and October 3, 1999
respectively.
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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Substantially all of the Company's revenue is derived from the sale of
products. Revenue is recognized upon shipment of product by the Company
provided that, at the time of shipment, there is evidence of contractual
arrangement with the customer, the fee is fixed and determinable and collection
of the resulting receivable is probable. Reserves for equipment returns and
warranty obligations are recorded at the time of shipment and are based on the
historical experience of the Company.
Income Taxes
The Company is treated as a partnership for federal and state income tax
purposes. Consequently, federal income taxes are not payable, or provided for,
by the Company. Members are taxed individually on their share of the Company's
earnings. The Company's net income or loss is allocated among the members in
accordance with the regulations of the Company.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments which potentially expose the Company to a concentration
of credit risk principally consist of cash and cash equivalents and accounts
receivable. The
F-7
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Company places its temporary cash with two high credit quality financial
institutions in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral.
During the year ended December 31, 1996 one customer accounted for 11.4% of
net revenue. During the year ended December 31, 1997 one customer accounted for
10.1% of net revenue. During the year ended December 31, 1998 one customer
accounted for 10.2% of net revenue and 12.0% of the total accounts receivable
at December 31, 1998. No individual customer accounted for more than 10% of net
revenue in the six months ended June 30, 1999.
During the six months ended June 30, 1999 one supplier accounted for 11.0% of
new and de-installed equipment purchases.
Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, borrowing under
revolving loan facility, accounts payable and notes payable approximate fair
value due to their short-term maturities.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased with an original or remaining maturity of three
months or less, at the date of purchase, to be cash equivalents.
Inventories
Inventories, which are comprised of finished goods held for resale, are
stated at the lower of cost (determined on an average cost basis) or net
realizable value. Inventories are stated net of provisions for obsolete and
slow moving items.
Property and Equipment
Property and equipment are recorded at cost and are stated net of accumulated
depreciation. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets. These lives vary from three to seven
years.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the asset or remaining lease term on a straight-line basis.
F-8
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions, major renewals and replacements that increase the property's useful
life are capitalized. Gains and losses on dispositions of property and
equipment are included in net income.
During 1999 the Company adopted the provisions of Accounting Standards
Executive Committee ("AcSEC") Statement of Position ("SOP") 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." Any
costs capitalized are depreciated on a straight-line basis over the lesser of
the estimated useful life of three years or the term of the lease.
Stock-based Compensation
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 or APB 25, "Accounting for Stock Issued to Employees," in
accounting for its employee stock options, and presents disclosure of pro forma
information required under Statement of Financial Accounting Standards No. 123
or SFAS 123, "Accounting for Stock-Based Compensation."
F-9
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Net Income Per Unit
Basic net income per unit is computed by dividing the net income for the
period by the weighted average number of units outstanding during the period.
Diluted net income per unit is computed by dividing the net income for the
period by the weighted average number of units and equivalent units outstanding
during the period. Equivalent units, composed of units issuable upon the
exercise of options and warrants, are included in the diluted net income per
unit computation to the extent such units are dilutive. A reconciliation of the
numerator and denominator used in the calculation of basic and pro-forma
diluted net loss per unit follows (in thousands, except per unit data):
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
Year Ended December 31, June 30, September 30,
----------------------- ------------------- -----------------------
1996 1997 1998 1998 1999 1998 1999
------- ------- ------- ----------- ------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator
Net income $ 3,123 $ 9,693 $19,181 $ 9,585 $11,090 $13,447 $16,725
------- ------- ------- ------- ------- ------- -------
Denominator
Weighted average
units--basic......... 37,500 38,052 38,063 38,063 38,063 38,063 38,063
Dilutive effect of
options and warrants
to purchase units.... -- -- -- -- 6 -- 52
------- ------- ------- ------- ------- ------- -------
Weighted average
units--diluted....... 37,500 38,052 38,063 38,063 38,069 38,063 38,115
------- ------- ------- ------- ------- ------- -------
Net income per unit--
basic................ $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
======= ======= ======= ======= ======= ======= =======
Net income per unit--
diluted.............. $ 0.08 $ 0.25 $ 0.50 $ 0.25 $ 0.29 $ 0.35 $ 0.44
======= ======= ======= ======= ======= ======= =======
</TABLE>
Comprehensive Income
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130 or SFAS No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. There was no difference between
the Company's net income and its total comprehensive income for the years ended
December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998
(unaudited) and June 30, 1999, and for the nine months ended September 30, 1998
(unaudited) and September 30, 1999 (unaudited).
F-10
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Unaudited Interim Results
The accompanying interim financial statements as of September 30, 1999 and
for the periods ended June 30, 1998, September 30, 1998 and September 30, 1999
are unaudited. The unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and, in the option of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly in all material respects the Company's
financial position as of September 30, 1999 and its results of operations and
its cash flows for the six months ended June 30, 1998 and for the nine months
ended September 30, 1998 and 1999. The financial data and other information
disclosed in these notes to financial statements related to this period are
unaudited.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities.
Note 3--Balance Sheet Accounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30, September 30,
1997 1998 1999 1999
------ ------ -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Property and equipment, net
Computer and telephone equipment ..... $ 142 $ 486 $ 1,265 $1,520
Office equipment and furniture........ 32 124 191 195
Warehouse equipment................... 28 73 75 90
Leasehold improvements................ 8 80 159 181
------ ------ ------- ------
210 763 1,690 1,986
Less accumulated depreciation and
amortization......................... (79) (216) (310) (390)
------ ------ ------- ------
$ 131 $ 547 $ 1,380 $1,596
====== ====== ======= ======
</TABLE>
F-11
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998, the six months ended June 30, 1998 and 1999 and the nine months
ended September 30, 1998 and 1999 amounted to $25,000, $54,000, $137,000,
$46,000 (unaudited), $94,000, $85,000 (unaudited) and $175,000 (unaudited),
respectively.
Included in computer and telephone equipment is an amount of approximately
$655,000 and $830,000 (unaudited) representing assets held under capital lease
as of June 30, 1999 and September 30, 1999 respectively. These represent costs
incurred to date in respect of software, hardware and related costs arising
from the implementation of the Company's new accounting system. No depreciation
or amortization has been charged on these amounts for the six months ended June
30, 1999 and for the nine months ended September 30, 1999 as the implementation
was not complete.
Note 4--Notes Payable:
Notes payable to related parties include amounts payable to two of the
Company's members. At December 31, 1997 and 1998, June 30, 1999, the aggregate
amount of notes payable to these members was $319,000, $619,000, $619,000,
respectively. These notes bear interest at rates of 10% and 13% per annum.
Also included in notes payable to related parties is an amount of $1,000,000
issued in March 1998 to an outside partnership, of which a member is a general
partner. This amount remains outstanding at December 31, 1998 and June 30,
1999. This note bears interest at 10% per annum and is due in March 2000.
Notes payable bear interest at rates varying between 8% and 13% per annum,
and all notes mature at dates between 2000 and 2002. Repayment terms are
interest only with principal due on maturity date. The notes are unsecured.
Repayments due on notes payable in each of the next three years are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000................................................................ $2,500
2001................................................................ 585
2002................................................................ 372
-------
3,457
Less: current portion............................................... (1,500)
-------
Notes payable--net of current portion............................... $1,957
=======
</TABLE>
F-12
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
On October 8, 1997, the Company entered into a revolving line of credit
facility of $2,500,000. There were no borrowings on this facility during each
of the years ended December 31, 1997 and 1998. On January 12, 1999, the Company
replaced this facility with a new revolving line of credit with the same bank.
The facility includes a fixed amount of $2,000,000 plus an amount based on a
percentage of eligible accounts receivable and inventory with a maximum amount
of $17,000,000 available. The facility matures on January 31, 2001 and bears
interest at LIBOR plus 2% (7.75% at June 30, 1999). Any drawings on this
facility are collateralized by all assets of the Company. There was $779,000
outstanding on this facility at June 30, 1999.
Note 5--Commitments:
The Company is obligated under several operating leases for both office and
warehouse space. The lease terms range in length from five years to seven
years. Rent expense, net of sublease income, for the years ended December 31,
1996, 1997 and 1998 and for the six months ended June 30, 1998 and 1999 was
$60,000, $131,000, $297,000, $127,000 (unaudited) and $234,000, respectively.
On June 1, 1999, the Company entered into a five year lease for new warehouse
space. The lease terms include two options to renew for three years and rentals
of $38,000 are due on a monthly basis.
Future minimum lease payments, under noncancelable operating and capital
leases at June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999....................................................... $ 91 $ 466
2000....................................................... 273 926
2001....................................................... 272 918
2002....................................................... 182 918
2003....................................................... -- 706
Thereafter................................................. -- 451
----- -------
Total minimum lease payments............................. 818 $ 4,385
=======
Less amount representing interest........................ (98)
-----
Present value of capital lease obligations............... 720
Less current portion..................................... (179)
-----
Capital lease obligations--net of current portion...... $ 541
=====
</TABLE>
Under the terms of the lease agreements, the Company is also responsible for
internal maintenance, utilities and a proportionate share (based on square
footage occupied) of
F-13
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
property taxes. The Company is also exposed to credit risk in the event of
default of the subleasee, because the Company is still liable to meet its
obligations under the terms of the original lease agreement.
Note 6--Members' Capital (Deficit):
Members' capital includes two classes of units--Class A and Class B. At
December 31, 1997 there were 34,313,000 Class A and 3,750,000 Class B units
outstanding. At December 31, 1998 and June 30, 1999 there were 23,993,000 Class
A units and 14,070,000 Class B units outstanding. Each unit represents the
members proportionate allocation of net income or net loss.
On July 23, 1998, the Company authorized the issuance and sale of an
aggregate of 14,070,000 Class B units, which represented approximately 37.0% of
the outstanding units. Consideration of $51,750,000 was received in cash for
the sale of these units. The Company then authorized the repurchase of an
aggregate of 12,821,000 Class A units and an aggregate of 1,249,000 Class B
units for an aggregate amount of $51,750,000. Each of the remaining 2,501,000
Class B units were exchanged for one Class A unit.
The Class A units participate in the net income of the company based on their
percentage ownership. In addition, the holder of each Class A unit is entitled
to one vote per unit. The Class B units outstanding at June 30, 1999 differ
from the Class A units as follows:
(a) On a change in ownership the Class B unit holders may elect to redeem
all or any part of the Class B units at an amount equal to the greater
of:
(i) the original cost thereof; or
(ii) an amount equal to the number of Class B units to be redeemed
multiplied by the maximum consideration payable with respect to
any unit in such a change of ownership.
(b) In the event of the bankruptcy of the Company, all of the Class B units
are subject to immediate redemption at a price equal to the original
cost thereof.
(c) The Class B units convert automatically on the closing of a firm
commitment underwritten public offering of the Company's (or a
corporate successor's) equity securities resulting in proceeds to the
Company or such corporate successor (net of underwriting discounts and
commissions and related offering expenses) of at least $30 million at a
price per share to the public of at least 200% of the original cost of
each Class B unit.
(d) In a winding up or liquidation of the Company, the Class B units are
paid out in preference to the Class A units up to the amount of the
original cost of the Class B units.
F-14
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
The members' liability is limited to the total balance held in the members'
capital account.
In May 1999, the Company effected a 2,500-for-1 split of the then outstanding
Class A and Class B units. The effect of this split has been retroactively
reflected throughout the financial statements.
Warrants
In May 1999, warrants exercisable into 95,155 Class A units were issued in
consideration for recruitment services. The warrants become fully exercisable
upon a merger or consolidation of the Company or upon completion of the
Company's initial public offering. The warrants are exercisable at $7.57 per
unit and have a two year term. The fair value of the warrants of approximately
$193,000 has been recorded as an expense in the six months ended June 30, 1999.
This was estimated using the Black-Scholes model and the following assumptions:
dividend yield of 0%; volatility of 40%; risk free interest rate of 5.58% and a
term of two years.
Unit Option Plan
In May 1999 the Company adopted the 1999 unit option plan (the "Plan") under
which 2,003,000 Class A units were reserved for issuance of stock options to
employees, directors, or consultants under terms and provisions established by
the Board of Managers. Under the terms of the Plan, incentive options may be
granted to employees, and nonstatutory options may be granted to employees,
directors and consultants, at prices no less than 100% and 85%, respectively,
of the fair market value of the Class A units at the date of grant, as
determined by the Board of Members. Options granted under the Plan vest at a
rate of 25% after one year with the remaining vesting evenly over the next
three years. The options expire ten years from the date of grant.
Activity under the Plan is set forth below:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------
Weighted
Average Remaining
Available Price per Exercise Contractual
for Grant Units Unit Price Life
--------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Units reserved at plan
inception, May 1999.... 2,003,000
Options granted on May
15, 1999............... (660,093) 660,093 $ 7.57 $7.57 9.61
--------- --------- ---------- ----- ----
Balances, June 30,
1999................... 1,342,907 660,093 $ 7.57 $7.57
Options granted on July
13, 1999............... (830,000) 830,000 8.50 8.50 9.78
--------- --------- ---------- ----- ----
Balances, September 30,
1999 (unaudited)....... 512,907 1,490,093 $7.57-8.50 $8.09 9.7
========= ========= ========== ===== ====
</TABLE>
F-15
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
At June 30, 1999 no options outstanding were exercisable. The weighted
average fair value of options granted during the six months ended June 30, 1999
was $1.84 per unit.
Pro-forma Unit Compensation
The Company has adopted the disclosure-only provisions of SFAS 123 for option
grants to employees. Had compensation cost been determined based on the fair
value at the grant date for the awards in 1999 consistent with the provisions
of SFAS 123, the Company's net income for 1999 would have been as follows (in
thousands, except per unit data):
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999
--------------
<S> <C>
Net income--as reported....................................... $11,090
Net income--as adjusted....................................... $11,052
Net income per unit--basic as reported........................ $ 0.29
Net income per unit--basic as adjusted........................ $ 0.29
Net income per unit--diluted as reported...................... $ 0.29
Net income per unit--diluted as adjusted...................... $ 0.29
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following assumptions:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999
--------------
<S> <C>
Risk-free interest rate....................................... 5.65%
Expected life (in years)...................................... 5
Dividend yield................................................ 0%
Expected volatility........................................... 0%
</TABLE>
As the determination of fair value of all options granted after such time as
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph, the above
results may not be representative of future periods.
Note 7--401(k) Savings Plan:
In February 1998, the Company adopted a 401(k) Savings Plan (the "Savings
Plan") which covers all employees. Under the Savings Plan, employees are
permitted to contribute up to 15% of gross compensation not to exceed the
annual IRS limitation for any plan year ($10,000 in 1999). The Company matches
25% of employee contributions for all employees who receive less than 50% of
their total compensation in the form of commissions. The Company made matching
contributions of $15,000, $5,000 (unaudited), $8,000, $10,000
F-16
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
(unaudited) and $14,000 (unaudited) for the year ended December 31, 1998, for
the six months ended June 30, 1998 and 1999 and for the nine months ended
September 30, 1998 and 1999, respectively.
Note 8--Geographic Information:
The Company has adopted Statement of Financial Accounting Standards No. 131,
or SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 31, 1997.
SFAS 131 supersedes Statement of Financial Accounting Standards No. 14, or SFAS
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting and also requires interim reporting of segment
information. Management uses one measurement of profitability for its business.
The Company markets products and related services to customers in the United
States, Canada, Europe and Latin America.
Net revenue information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Net
Revenue
-------
<S> <C>
Year ended December 31, 1996:
United States..................................................... $ 9,454
Canada............................................................ 392
Latin America..................................................... 302
Other............................................................. 1
-------
Total........................................................... $10,149
=======
Year Ended December 31, 1997:
United States..................................................... $28,907
Canada............................................................ 409
Latin America..................................................... 5,204
Other............................................................. 83
-------
Total........................................................... $34,603
=======
Year Ended December 31, 1998:
United States..................................................... $57,958
Canada............................................................ 895
Latin America..................................................... 13,051
Other............................................................. 282
-------
Total........................................................... $72,186
=======
Six Months Ended June 30, 1999:
United States..................................................... $45,760
Canada............................................................ 1,178
Latin America..................................................... 5,547
Other............................................................. 349
-------
Total........................................................... $52,834
=======
</TABLE>
F-17
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
All long lived assets are maintained in the United States.
Revenue from external customers split between new and deinstalled products is
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
----------------------- ended June
1996 1997 1998 30, 1999
------- ------- ------- ----------
<S> <C> <C> <C> <C>
New..................................... $ -- $ 3,088 $17,099 $ 8,192
Deinstalled............................. 10,149 31,515 55,087 44,642
------- ------- ------- -------
$10,149 $34,603 $72,186 $52,834
======= ======= ======= =======
</TABLE>
Note 9--Unaudited Pro-forma Balance Sheet Data:
Prior to the effectiveness of the public offering by Somera Communications,
Inc., a Delaware Corporation ("Somera Delaware"), the unit holders of the
Company will exchange all of their outstanding units for shares of common stock
of Somera Delaware and the corporation will succeed the limited liability
company. As a result of this reorganization the Company will become a taxable
entity and a deferred tax asset, arising from the difference in the tax and
book basis of the Company's net assets, of approximately $17,000,000 will be
recorded in net income. The effects of the reorganization, which include the
one for one exchange of all outstanding units Class A and B, for common shares
in Somera Delaware and the creation of the deferred tax asset have been
presented as a separate column in the Company's balance sheet assuming that the
reorganization had occurred at September 30, 1999.
Note 10--Subsequent Events:
Distribution to Members
In July 1999 the Company paid a distribution to members of approximately
$6,359,000.
Loan to Officer
On July 12, 1999 the Company entered into a mortgage loan agreement under
which it advanced $600,000 to an officer of the Company. The mortgage loan has
a term of eight years, is interest free and is secured on the principal
residence of the officer. Under the terms of the mortgage loan the amount
advanced will be forgiven as to $50,000 on each of the first four anniversaries
of the note and $100,000 on each of the fifth through eighth anniversaries.
F-18
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
The loan can be forgiven in full in the event that the officer's employment
is either terminated without cause or is constructively terminated within 12
months of a change in control of the Company. If the officer's employment with
the Company ceases for any other reason, including death or disability, the
remaining balance becomes repayable to the Company. The term of repayment is
dependent upon the reason for the officer's employment ceasing and ranges from
six to eighteen months from the date of termination of employment.
As a result of the above, the Company will record a compensation charge equal
to the amount forgiven for each period the loan is outstanding.
Option Grants and Warrant Issuance
On July 13, 1999, the Company issued stock options to two officers and one
outside director resulting in unearned stock-based compensation of $830,000
which will be recorded and amortized over the vesting period, generally four
years of the underlying options. The charge will be amortized to net income as
follows: $244,000 for the remainder of 1999, $367,000 on 2000, $148,000 in
2001, $63,000 in 2002 and $8,000 in 2003. In addition, the Company issued a
warrant to purchase 112,500 shares of common stock in exchange for services.
The warrants were immediately vested and will result in a one-time charge of
$337,000 to be recorded in the Company's third quarter results.
Term Loan and Revolving Loan Facility
On August 31, 1999, the Company signed an agreement under which a syndicate
of banks provided a $50,000,000 term loan and $15,000,000 revolving loan
facility.
The term loan matures on August 31, 2004 and the Company is required to make
quarterly payments of principal and interest. The term loan and revolving
credit facility are secured by all of the Company's assets.
Distribution to Members and Repayment of Notes Payable
On August 31, 1999, the Company paid a distribution of $48,500,000 to its
members. In addition, the Company repaid the notes payable described in Note 4
to these financial statements.
Stock Split
On September 9, 1999 the Company approved a 3 for 2 split of its Class A and
B units which will be effected prior to any exchange of outstanding units for
shares of common
F-19
<PAGE>
SOMERA COMMUNICATIONS, LLC
Notes To Financial Statements--(Continued)
Information as of and for the periods ended June 30, 1998
and September 30, 1998 and 1999 is unaudited
stock of Somera Delaware. All unit data and unit option plan information have
been restated to reflect the effect of the forward split.
On September 9, 1999 the Board of Managers resolved to take all actions
necessary to assist Somera Delaware in the preparation, execution and filing
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended, a Registration Statement on Form S-1 relating to the public
offering by Somera Delaware of up to $127,075,000 of its authorized but
unissued shares of Common Stock.
Note 11--Pro-forma net income per unit
Prior to the effectiveness of the initial public offering of its common
stock, the Company's operations, assets and liabilities will be assumed by
Somera Communications Inc, a "C" Corporation. As a result the future earnings
of the Company will be liable to both federal and state income taxes. The pro
forma effect of such income taxes on the Company's net income and net income
per unit, assuming a 40% effective tax rate is presented in the table below:
<TABLE>
<CAPTION>
Nine months
Year ended December 31, ended September 30,
------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income as reported..... $ 3,123 $ 9,983 $19,181 $13,447 $16,725
Income tax expense--pro
forma..................... (1,249) (3,877) (7,672) (5,626) (6,690)
------- ------- ------- ------- -------
Net income as adjusted..... 1,874 5,816 11,509 7,821 10,035
======= ======= ======= ======= =======
Weighted average units--
basic..................... 37,500 38,052 38,063 38,063 38,063
------- ------- ------- ------- -------
Weighted average units--
diluted................... 37,500 38,052 38,063 38,063 38,115
------- ------- ------- ------- -------
Net income per unit as
reported--basic........... $ 0.08 $ 0.25 $ 0.50 $ 0.35 $ 0.44
------- ------- ------- ------- -------
Net income per unit as
reported--diluted......... $ 0.08 $ 0.25 $ 0.50 $ 0.35 $ 0.44
------- ------- ------- ------- -------
Net income per unit as
adjusted--basic........... $ 0.05 $ 0.15 $ 0.30 $ 0.21 $ 0.26
------- ------- ------- ------- -------
Net income per unit as
adjusted--diluted......... $ 0.05 $ 0.15 $ 0.30 $ 0.21 $ 0.26
------- ------- ------- ------- -------
</TABLE>
F-20
<PAGE>
During the nine months ended September 30, 1999, the Company has made
distributions in excess of its earnings to the members. The pro forma per unit
data below, gives effect to the increase in the number of units, which when
multiplied by an assumed initial offering price of $12 per share of the
Company's common stock, would have been sufficient to replace the capital in
excess of the earnings being withdrawn.
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Net income as reported........................ $19,181 $16,725
======= =======
Weighted average units as reported--basic..... 38,063 38,063
Pro forma units issued to replace capital
deficit...................................... 4,087 4,087
------- -------
Weighted average units as adjusted--basic..... 42,150 42,150
------- -------
Weighted average units as reported--diluted... 38,063 38,115
Pro forma units issued to replace capital
deficit...................................... 4,087 4,087
------- -------
Weighted average units as adjusted--diluted... 42,150 42,202
------- -------
Net income per unit as reported--basic........ $0.50 $0.44
======= =======
Net income per unit as reported--diluted...... $0.50 $0.44
======= =======
Net income per unit as adjusted--basic........ $0.45 $0.40
======= =======
Net income per unit as adjusted--diluted...... $0.45 $0.40
======= =======
</TABLE>
F-21
<PAGE>
Immediately above 6 photographs of representative pieces of telecommunications
infrastructure equipment is a heading entitled "We supply telecommunications
equipment from over 250 different manufacturers..." The 6 photographs of
equipment have the following captions beside them: "Switching," "Wireless,"
"Transmission," "Microwave," "Access" and "Power". Immediately below the
photographs is a heading entitled "...to leading carriers", followed by the
names of seven major customers: "ALLTEL Corporation," "AT&T Corporation," "GTE
Corporation," "Liberty Cellular," "U.S. Cellular Corp.," "Vodafone AirTouch
plc." and "Western Wireless."
<PAGE>
8,500,000 Shares
[SOMERA LOGO]
Common Stock
-------------
PROSPECTUS
, 1999
-------------
Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Thomas Weisel Partners LLC
<PAGE>
Part II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq/National
Market System listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 35,327
NASD Filing Fee.................................................... 12,000
Nasdaq National Market Listing Fee................................. *
Printing Costs..................................................... *
Legal Fees and Expenses............................................ 400,000
Accounting Fees and Expenses....................................... *
Blue Sky Fees and Expenses......................................... *
Transfer Agent and Registrar Fees.................................. *
Miscellaneous...................................................... *
--------
Total.......................................................... $ *
========
</TABLE>
- --------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article IX of
our Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and
Article VI of our current Bylaws (Exhibit 3.3 hereto) provide for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by Delaware law. In addition, we have entered into
Indemnification Agreements (Exhibit 10.1 hereto) with our officers and
directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-
indemnification among Somera Communications, Inc. and the Underwriters with
respect to certain matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
Since August 1996, the company has issued and sold the following securities:
1. In April 1997, the company issued an aggregate of 563,000 of its Class A
units to 3 investors for an aggregate cash consideration of $300,000.
2. On July 23, 1998, the company issued an aggregate of 14,070,000 of its
Class B units to 8 accredited investors for an aggregate cash
consideration of $51,750,000.
3. On May 6, 1999, the company issued a warrant to purchase 95,155 of its
Class A units with an exercise price of $7.57 per share to a party in
partial consideration for the rendering of professional services to the
company.
4. On July 13, 1999, the company issued a warrant to purchase 112,500 of
its Class A units with an exercise price of $8.50 per unit to a party in
partial consideration for the rendering of professional services to the
company.
II-1
<PAGE>
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or with respect to
issuances to employees, directors and consultants, Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under 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 share certificates and warrants issued in such transactions. All
recipients either received adequate information about us or had adequate
access, through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation of Somera Communications, Inc., a
Delaware corporation, as currently in effect.
3.2** Form of Amended and Restated Certificate of Incorporation of Somera
Communications, Inc. to be filed immediately following the closing of
the offering made under this registration statement.
3.3** Bylaws of Somera Communications, Inc., as currently in effect.
4.1 Specimen common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1** Form of Indemnification Agreement between Somera Communications, Inc.
and each of its directors and officers.
10.2** 1999 Stock Option Plan and form of agreements thereunder (as adopted
September 3, 1999).
10.3** 1999 Employee Stock Purchase Plan (as adopted September 3, 1999).
10.4** 1999 Director Option Plan and form of agreements thereunder (as
adopted September 3, 1999).
10.5** Loan Agreement by and between Somera Communications and Fleet National
Bank, dated August 31, 1999.
10.6** Security Agreement by and between Somera Communications and Fleet
National Bank, dated August 31, 1999.
10.7** Employment Agreement between Somera Communications and Jeffrey Miller,
dated May 6, 1999.
10.8** Employment Agreement between Somera Communications and Gary Owen,
dated July 16, 1999.
10.9** Lease dated January 20, 1998 between Santa Barbara Corporate Center,
LLC and Somera Communications.
10.10** First Amendment to Lease, dated February 2, 1998, between Santa
Barbara Corporate Center, LLC and Somera Communications.
10.11** Second Amendment to Lease, dated February 1, 1999, between Santa
Barbara Corporate Center, LLC and Somera Communications.
10.12 Industrial/Commercial Lease, dated May 12, 1999, between Sunbelt
Properties and Somera Communications.
10.13** Sublease, dated January 30, 1999, between GRC International, Inc. and
Somera Communications.
10.14* Form of Registration Agreement, between Somera Communications, Inc.
and certain of its stockholders.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1).
24.1** Powers of Attorney (included on signature page to Registration
Statement).
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be supplied by amendment.
** Previously filed.
II-2
<PAGE>
(b) Financial Statement Schedules.
Schedule
--------
II - Valuation and Qualifying Accounts
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes 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 a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Santa Barbara, State of California on October 15, 1999.
By: *
----------------------------------
Daniel A. Firestone
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the registration statement has been signed by the following
persons in the capacities indicated on October 15, 1999:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
* President, Chief Executive October 15, 1999
_____________________________________ Officer and Chairman of the
Daniel A. Firestone Board (Principal Executive
Officer)
/s/ Gary J. Owen Chief Financial Officer October 15, 1999
_____________________________________ (Principal Financial and
Gary J. Owen Accounting Officer)
* Director October 15, 1999
_____________________________________
Gil Varon
* Director October 15, 1999
_____________________________________
Walter G. Kortschak
* Director October 15, 1999
_____________________________________
Peter Y. Chung
* Director October 15, 1999
_____________________________________
Barry Phelps
</TABLE>
*By: /s/ Gary J. Owen
- --------------------------------
Gary J. Owen
(Attorney-In-Fact)
II-4
<PAGE>
SCHEDULE II
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Members
of Somera Communications, LLC:
Our audits of the financial statements referred to in our report dated
September 9, 1999 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule listed in Item 16 of this
Form S-1. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PricewaterhouseCoopers LLP
San Jose, California
September 9, 1999
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and Ending
of Period Expenses Deductions of Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for sales returns...... $ 1 $ 79 $ 41 $ 39
Allowance for doubtful accounts.. 3 49 -- 52
Allowance for write-downs of
inventory....................... -- 163 128 35
Year Ended December 31, 1997
Allowance for sales returns...... $ 39 $249 $138 $150
Allowance for doubtful accounts.. 52 145 -- 197
Allowance for write-downs of
inventory 35 370 360 45
Year Ended December 31, 1998
Allowance for sales returns...... $150 $424 $289 $285
Allowance for doubtful accounts.. 197 201 149 249
Allowance for write-downs of
inventory....................... 45 634 622 57
Six Months Ended June 30, 1999
Allowance for sales returns...... $285 $276 $211 $350
Allowance for doubtful accounts.. 249 209 -- 458
Allowance for write-downs of
inventory....................... 57 615 76 596
</TABLE>
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation of Somera Communications, Inc., a
Delaware corporation, as currently in effect.
3.2** Form of Amended and Restated Certificate of Incorporation of Somera
Communications, Inc. to be filed immediately following the closing of
the offering made under this registration statement.
3.3** Bylaws of Somera Communications, Inc., as currently in effect.
4.1 Specimen common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** Form of Indemnification Agreement between Somera Communications, Inc.
and each of its directors and officers.
10.2** 1999 Stock Option Plan and form of agreements thereunder (as adopted
September 3, 1999).
10.3** 1999 Employee Stock Purchase Plan (as adopted September 3, 1999).
10.4** 1999 Director Option Plan and form of agreements thereunder (as
adopted September 3, 1999).
10.5** Loan Agreement by and between Somera Communications and Fleet National
Bank, dated August 31, 1999.
10.6** Security Agreement by and between Somera Communications and Fleet
National Bank, dated August 31, 1999.
10.7** Employment Agreement between Somera Communications and Jeffrey Miller,
dated May 6, 1999.
10.8** Employment Agreement between Somera Communications and Gary Owen,
dated July 16, 1999.
10.9** Lease dated January 20, 1998 between Santa Barbara Corporate Center,
LLC and Somera Communications.
10.10** First Amendment to Lease, dated February 2, 1998, between Santa
Barbara Corporate Center, LLC and Somera Communications.
10.11** Second Amendment to Lease, dated February 1, 1999, between Santa
Barbara Corporate Center, LLC and Somera Communications.
10.12 Industrial/Commercial Lease, dated May 12, 1999, between Sunbelt
Properties and Somera Communications.
10.13** Sublease, dated January 30, 1999, between GRC International, Inc. and
Somera Communications.
10.14* Form of Registration Agreement, between Somera Communications, Inc.
and certain of its stockholders.
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consents of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1)
24.1** Powers of Attorney (included on signature page to Registration
Statement)
27.1** Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
** Previously filed.
<PAGE>
EXHIBIT 1.1
[ ] Shares
SOMERA COMMUNICATIONS, INC.
Common Stock
FORM OF UNDERWRITING AGREEMENT
LEHMAN BROTHERS INC. November __, 1999
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
THOMAS WEISEL PARTNERS LLC
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Somera Communications, Inc., a Delaware corporation (the "Company"),
proposes to sell [ ] shares (the "Firm Stock") of the Company's Common
Stock, par value $0.001 per share (the "Common Stock").
It is understood that, subject to the conditions hereinafter stated, [ ]
shares of the Firm Stock (the "Firm Stock") will be sold to the several
Underwriters named in Schedule 1 hereto (the "Underwriters") in connection with
the offering and sale of such Firm Stock. Lehman Brothers Inc., Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, and Thomas Weisel Partners
LLC shall act as representatives (the "Representatives") of the several
Underwriters.
In addition, the Company proposes to grant to the Underwriters an option
to purchase up to an additional [ ] shares of the Common Stock on the
terms and for the purposes set forth in Section 3 (the "Option Stock"). The Firm
Stock and the Option Stock, if purchased, are hereinafter collectively called
the "Stock". This is to confirm the agreement concerning the purchase of the
Stock from the Company by the Underwriters.
It is understood and agreed that as of the Closing Date (as defined below),
the Company will issue and sell the Stock pursuant to this Agreement. The
Company is successor to Somera Communications, LLC, a California limited
liability company (the "Predecessor"), as a result of the assumption by the
Company of the operations, assets, liabilities and commitments of the
Predecessor that became effective on ___________ __, 1999.
It is further understood that [ ] shares of the Firm Stock (the
"Directed Stock") will initially be reserved by the several Underwriters for
offer and sale, upon the terms and conditions set forth in the Prospectus and in
accordance with the rules and regulations of the National Association of
Securities Dealers, Inc. (the "Directed Stock Program"), to employees and
persons having business relationships with the Company and its subsidiaries
(collectively,
1
<PAGE>
"Participants") who have heretofore delivered to the Representatives offers or
indications of interest to purchase shares of Directed Stock in form
satisfactory to the Representatives, and that any allocation of such Directed
Stock among such persons will be made in accordance with timely directions
received by the Representatives from the Company; provided, that under no
circumstances will the Representatives or any Underwriter be liable to the
Company or to any such person for any action taken or omitted in good faith in
connection with such offering to any Participant. It is further understood that
any shares of Directed Stock which are not purchased by Participants will be
offered by the Underwriters to the public upon the terms and conditions set
forth in the Prospectus.
Section 1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the Stock
has (i) been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the Securities Act.
Copies of such registration statement and each of the amendments thereto have
been delivered by the Company to you. As used in this Agreement, "Effective
Time" means the date and the time as of which such registration statement, or
the most recent post-effective amendment thereto, if any, was declared effective
by the Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the Company with
the consent of the Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration statement, as
amended at the Effective Time, including all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations and deemed to be a part of the registration statement as of the
Effective Time pursuant to Rule 430A of the Rules and Regulations; and
"Prospectus" means the prospectus in the form first used to confirm sales of
Stock. If the Company has filed an abbreviated registration statement to
register additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act (the "Rule 462 Registration Statement"), then any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462 Registration Statement. The Commission has not issued any order preventing
or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all respects to the requirements of the Securities
Act and the Rules and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any amendment thereto) and
as of the applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that no representation or warranty
is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
2
<PAGE>
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
15) have been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as foreign corporations
in each jurisdiction in which their respective ownership or lease of property or
the conduct of their respective businesses requires such qualification, and have
all power and authority necessary to own or hold their respective properties and
to conduct the businesses in which they are engaged; and none of the
subsidiaries of the Company is a "significant subsidiary", as such term is
defined in Rule 405 of the Rules and Regulations.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; and all of
the issued shares of capital stock of each subsidiary of the Company have been
duly and validly authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor in accordance with this Agreement,
will be duly and validly issued, fully paid and non-assessable; and the Stock
will conform to the descriptions thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby and thereby.
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(h) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act.
(i) The Company has not sold or issued any shares of Common Stock
during the six-month period preceding the date of the Prospectus, including any
sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act
other than shares issued pursuant to employee benefit plans, qualified stock
options plans or other employee compensation plans or pursuant to outstanding
options, rights or warrants.
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such date, there
has not been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the general
affairs, management, consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved.
(l) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who have
delivered the initial letter referred to in Section 7(e) hereof, are independent
public accountants as required by the Securities Act and the Rules and
Regulations during the periods covered by the financial statements on which they
reported.
(m) The Company and each of its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects, except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and all assets held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
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(n) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar businesses in
similar industries.
(o) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of their respective businesses
and have no reason to believe that the conduct of their respective businesses
will conflict with, and have not received any notice of any claim of conflict
with, any such rights of others.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, might have a
material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries; and to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others.
(q) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described in the Prospectus or filed as exhibits to the Registration
Statement.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent, which might be expected to have a
material adverse effect on the general affairs, management, consolidated
financial position, stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
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(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined adversely to
the Company or any of its subsidiaries which has had (nor does the Company have
any knowledge of any tax deficiency which, if determined adversely to the
Company or any of its subsidiaries, might have) a material adverse effect on the
consolidated financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material respect,
and no event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its properties or assets is subject or
(iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property or
assets may be subject or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit necessary
to the ownership of its property or to the conduct of its business.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of its
subsidiaries (or, to the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company or its subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law,
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ordinance, rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not have, or could not be reasonably
likely to have, singularly or in the aggregate with all such violations and
remedial actions, a material adverse effect on the general affairs, management,
consolidated financial position, stockholders' equity or results of operations
of the Company and its subsidiaries; there has been no material spill,
discharge, leak, emission, injection, escape, dumping or release of any kind
onto such property or into the environment surrounding such property of any
toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its subsidiaries or with
respect to which the Company or any of its subsidiaries have knowledge, except
for any such spill, discharge, leak, emission, injection, escape, dumping or
release which would not have or would not be reasonably likely to have,
singularly or in the aggregate with all such spills, discharges, leaks,
emissions, injections, escapes, dumpings and releases, a material adverse effect
on the general affairs, management, consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and the terms "hazardous wastes", "toxic wastes", "hazardous
substances" and "medical wastes" shall have the meanings specified in any
applicable local, state, federal and foreign laws or regulations with respect to
environmental protection.
(aa) Neither the Company nor any subsidiary is, or, as of the Closing
Date after giving effect to the sale of the Stock by the Company and the
application of the net proceeds therefrom as described in the Prospectus, will
be, an "investment company" as defined in the Investment Company Act of 1940, as
amended.
(bb) The execution and delivery of the Recapitalization Agreement
dated as of _________ __, 1999 (the "Recapitalization Agreement") between the
Company and the holders of all of the outstanding units of the Predecessor
(collectively, the "Holders"), pursuant to which the Predecessor became a
wholly-owned subsidiary of the Company, was duly authorized by all necessary
corporate action of the Company and the Holders. Each of the Company and the
Holders had all corporate power and authority to execute and deliver the
Recapitalization Agreement and to consummate the transactions contemplated by
the Recapitalization Agreement at the time of execution. The Recapitalization
Agreement has been duly executed and delivered by the Company and the Holders.
The Recapitalization Agreement constitutes a valid and binding obligation of
each of the Company and the Holders, enforceable in accordance with its terms
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies. Upon consummation of the Recapitalization Agreement the Company shall
become the sole holder of units of the Predecessor and shall assume all of the
operations, assets and liabilities of the Predecessor. Each of the Company and
the Predecessor had all corporate power and authority to execute and deliver the
Recapitalization Agreement and any other agreements, actions and/or filings
necessary to complete transaction and to consummate the transactions
contemplated by the Recapitalization Agreement, and the Recapitalization
Agreement at the time of execution and filing constituted a valid and binding
obligation of each of the Company and the Predecessor, enforceable in accordance
with its terms. The recapitalization has been consummated in compliance with
applicable law. The Company has succeeded to all of the rights, privileges,
powers and franchises, and is subject to all of the
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restrictions, disabilities and duties, of the Predecessor. The Company has
succeeded to all of the contract rights of the Predecessor, and all required
consents with respect to such contracts have been obtained, except for such
consents which would not have, or could not be reasonably likely to have,
singularly or in the aggregate, a material adverse effect on the general
affairs, management, consolidated financial position, stockholders' equity or
results of operations of the Company. All of the previously outstanding units of
the Predecessor have been converted into that number of shares of capital stock
of the Company having the same rights, preferences and privileges (except for
differences resulting from the reverse stock split described in the Prospectus,
applicable law and applicable by-laws) as described in the Prospectus. All of
the previously outstanding options and warrants of the Predecessor are
exercisable for that number of shares of Common Stock of the Company as
described in the Prospectus. The consummation of the recapitalization did not
conflict with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time or both would constitute a
breach of or default under), any indenture, mortgage, deed of trust, loan
agreement, or other agreement or instrument material to the Company's business
as described in the Registration Statement and Prospectus to which the Company
is a party or by which it is bound or to which any of its properties or assets
is subject. The consummation of the recapitalization did not and will not
conflict with, or result in a violation of, any federal, state, local or foreign
law, regulation or rule or any decree, judgment or order applicable to the
Company, or immediately prior to the recapitalization, the Predecessor, the
result of which could have a material adverse effect on the business, financial
position, or results of operations of the Company. The issuance of capital stock
by the Company in the recapitalization was in compliance with all applicable
state securities or blue sky laws and was exempt from registration under the
Securities Act.
(cc) None of the Directed Stock distributed in connection with the
Directed Stock Program will be offered or sold outside of the United States.
Section 2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell [ ] shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set forth opposite that Underwriter's name in Schedule 1 and 2 hereto. The
respective purchase obligations of the Underwriters with respect to the Firm
Stock shall be rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to purchase
up to [ ] shares of Option Stock. Such option is granted for the purpose
of covering over-allotments in the sale of Firm Stock and is exercisable as
provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set forth opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts.
The price of both the Firm Stock and any Option Stock shall be $[ ]
per share.
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The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), except upon payment
for all the Stock to be purchased on such Delivery Date as provided herein.
Section 3. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
Section 4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the offices of Cooley Godward LLP, Five Palo
Alto Square, 3000 El Camino Real, Palo Alto, California 94306, at 10:00 A.M.,
New York City time, on the fourth full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company. This date and time are sometimes
referred to as the "First Delivery Date". On the First Delivery Date, the
Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by wire
transfer in immediately available funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Firm Stock shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Firm Stock, the Company shall make the
certificates representing the Firm Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the First Delivery Date.
The option granted in Section 2 will expire 30 days after the date of this
Agreement and may be exercised in whole or in part from time to time by written
notice being given to the Company by the Representatives. Such notice shall set
forth the aggregate number of shares of Option Stock as to which the option is
being exercised, the names in which the shares of Option Stock are to be
registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 4 (or at
such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the
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Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the Representatives shall request in the
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to such Second Delivery Date.
Section 5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the issuance by
the Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as originally
filed with the Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits) and (ii)
each Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus; and, if the delivery of a prospectus is required at any time after
the Effective Time in connection with the offering or sale of the Stock or any
other securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Representatives and, upon
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their request, to prepare and furnish without charge to each Underwriter and to
any dealer in securities as many copies as the Representatives may from time to
time reasonably request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing;
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the Company
to its shareholders and all public reports and all reports and financial
statements furnished by the Company to the principal national securities
exchange upon which the Common Stock may be listed pursuant to requirements of
or agreements with such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock (other than the Stock and shares issued pursuant to employee
benefit plans, qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants with respect
to any shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than the grant of options pursuant to option plans existing
on the date hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of
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such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case without the prior written consent
of Lehman Brothers Inc. on behalf of the Underwriters; and to cause each
shareholder, officer and director of the Company to furnish to the
Representatives, prior to the First Delivery Date, a letter or letters,
substantially in the form of Exhibit A hereto, pursuant to which each such
person shall agree not to, directly or indirectly, (1) offer for sale, sell,
pledge or otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person at
any time in the future of) any shares of Common Stock (including, without
limitation, shares of Common Stock that may be deemed to be beneficially owned
by such person in accordance with the rules and regulations of the Securities
and Exchange Commission and shares of Common Stock that may be issued upon
exercise of any option or warrant) or securities convertible into or
exchangeable for Common Stock or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Common Stock or other securities, in cash or otherwise, in each case for a
period of 180 days from the date of the Prospectus, without the prior written
consent of Lehman Brothers Inc. on behalf of the Underwriters;
(j) To apply for the listing of the Stock on The Nasdaq National
Market, and to use its best efforts to complete that listing, subject only to
official notice of issuance, prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock by the
Company as set forth in the Prospectus ;
(l) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment company" as defined
in the Investment Company Act of 1940, as amended; and
(m) In connection with the Directed Stock Program, to ensure that the
Directed Stock will be restricted to the extent required by the National
Association of Securities Dealers, Inc. or the rules of such association from
sale, transfer, assignment, pledge or hypothecation for a period of three months
following the date of the effectiveness of the Registration Statement, and
Lehman Brothers Inc. will notify the Company as to which Participants will need
to be so restricted. At the request of Lehman Brothers Inc., the Company will
direct the transfer agent to place stop transfer restrictions upon such
securities for such period of time.
Section 6. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement, the Agreement Among Underwriters, Master Dealers Agreement and
any other related documents in connection with the
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offering, purchase, sale and delivery of the stock (e.g. the filing fees
incident to securing the review by the National Association of Securities
Dealers, Inc. of the terms of sale of the Stock); (f) any applicable listing or
other fees; (g) the fees and expenses (not in excess, in the aggregate, of
$10,000) of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 5(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the Underwriters); (h) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, incident
to the Directed Stock Program described in Section 3; (i) the costs and expenses
of the Company relating to investor presentations on any "road show" undertaken
in connection with the marketing of the offering of the Stock, including,
without limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged in connection with
the road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the
roadshow and (j) all other costs and expenses incident to the performance of the
obligations of the Company under this Agreement; provided that, except as
provided in this Section 6 and in Section 11 the Underwriters shall pay their
own costs and expenses, including the costs and expenses of their counsel, any
transfer taxes on the Stock which they may sell and the expenses of advertising
any offering of the Stock made by the Underwriters.
Section 7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 5(a); no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise shall
have been complied with.
(b) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement the Stock, the Registration
Statement and the Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Underwriters, and the
Company shall have furnished to such counsel all documents and information that
they may reasonably request to enable them to pass upon such matters.
(c) Wilson Sonsini Goodrich & Rosati, P.C. shall have furnished to
the Representatives their written opinion, as counsel to the Company, addressed
to the Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their
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respective jurisdictions of incorporation, are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their respective
businesses requires such qualification and have all power and authority
necessary to own or hold their respective properties and conduct the businesses
in which they are engaged;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the Prospectus;
and all of the issued shares of capital stock of each subsidiary of the Company
have been duly and validly authorized and issued and are fully paid, non-
assessable and (except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances, equities
or claims;
(iii) The shares of the Stock being delivered on such Delivery
Date to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor will be duly and validly
issued, fully paid and non-assessable;
(iv) There are no preemptive or other rights to subscribe for
or to purchase, nor any restriction upon the voting or transfer of, any shares
of the Stock pursuant to the Company's charter or by-laws or any agreement or
other instrument known to such counsel;
(v) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of the Company or any
of its subsidiaries is the subject which, if determined adversely to the Company
or any of its subsidiaries, might have a material adverse effect on the
consolidated financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(vi) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion, the
Prospectus was filed with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such opinion on the date
specified therein and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the knowledge of such counsel, no
proceeding for that purpose is pending or threatened by the Commission;
(vii) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to such
Delivery Date (except for the financial statements and financial schedules and
other financial and statistical data included therein, as to which such counsel
need express no belief) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(viii) The statements contained in the Prospectus under the
captions "Certain Transactions", "Description of Capital Stock" and "Shares
Eligible for
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Future Sale" and in the Registration Statement Items 14 and 15 insofar as they
describe federal statutes, rules and regulations, constitute a fair summary
thereof and the opinion of such counsel filed as Exhibit 5.1 to the Registration
Statement is confirmed and the Underwriters may rely upon such opinion as if it
were addressed to them;
(ix) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to the
Registration Statement;
(x) This Agreement has been duly authorized, executed and
delivered by the Company;
(xi) The issue and sale of the shares of Stock being delivered
on such Delivery Date by the Company pursuant to this Agreement, and the
execution, delivery and compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and, except for the
registration of the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby, except for such consents, approvals,
authorizations, orders, filings or registrations as have been obtained or made;
(xii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with respect
to any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the
Securities Act;
(xiii) The Company is in compliance in all material respects with
all presently applicable provisions of ERISA; no "reportable event" (as defined
in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Code; and each "pension plan" for which the
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Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification;
(xiv) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company or any
of its subsidiaries (or, to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property now or previously
owned or leased by the Company or its subsidiaries in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any violation or
remedial action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial actions, a
material adverse effect on the general affairs, management, consolidated
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to or caused
by the Company or any of its subsidiaries or with respect to which the Company
or any of its subsidiaries have knowledge, except for any such spill, discharge,
leak, emission, injection, escape, dumping or release which would not have or
would not be reasonably likely to have, singularly or in the aggregate with all
such spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a material adverse effect on the general affairs, management,
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries;
(xv) Neither the Company nor any subsidiary is an "investment
company" as defined in the Investment Company Act of 1940, as amended; and
(xvi) The execution and delivery of the Recapitalization
Agreement was duly authorized by all necessary corporate action of the Company
and the Holders. Each of the Company and the Holders had all corporate power and
authority to execute and deliver the Recapitalization Agreement and to
consummate the transactions contemplated by the Recapitalization Agreement at
the time of execution. The Recapitalization Agreement has been duly executed and
delivered by the Company and the Holders. The Recapitalization Agreement
constitutes a valid and binding obligation of each of the Company and the
Holders, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies. Upon consummation of the
Recapitalization Agreement the Company shall become the sole holder of units of
the Predecessor and shall assume all the operations, assets and liabilities of
the Predecessor. Each of the Company and the Predecessor had all corporate power
and authority to execute and deliver the Recapitalization Agreement and any
other agreements, actions and/or filings necessary to complete transaction and
to consummate the transactions contemplated by the Recapitalization Agreement,
and the Recapitalization Agreement at the time of execution and filing
constituted a valid and binding obligation of each of the Company and the
Predecessor, enforceable in
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accordance with its terms. The recapitalization has been consummated in
compliance with applicable law. The Company has succeeded to all of the rights,
privileges, powers and franchises, and is subject to all of the restrictions,
disabilities and duties, of the Predecessor. The Company has succeeded to all of
the contract rights of the Predecessor, and all required consents with respect
to such contracts have been obtained, except for such consents which would not
have, or could not be reasonably likely to have, singularly or in the aggregate,
a material adverse effect on the general affairs, management, consolidated
financial position, stockholders' equity or results of operations of the
Company. All of the previously outstanding units of the Predecessor have been
converted into that number of shares of capital stock of the Company having the
same rights, preferences and privileges (except for differences resulting from
the reverse stock split described in the Prospectus, applicable law and
applicable by-laws) as described in the Prospectus. All of the previously
outstanding options and warrants of the Predecessor are exercisable for that
number of shares of Common Stock of the Company as described in the Prospectus.
The consummation of the recapitalization did not conflict with, or result in any
breach of, or constitute a default under (nor constitute any event which with
notice, lapse of time or both would constitute a breach of or default under),
any indenture, mortgage, deed of trust, loan agreement, or other agreement or
instrument material to the Company's business as described in the Registration
Statement and Prospectus to which the Company is a party or by which it is bound
or to which any of its properties or assets is subject. The consummation of the
recapitalization did not and will not conflict with, or result in a violation
of, any federal, state, local or foreign law, regulation or rule or any decree,
judgment or order applicable to the Company, or immediately prior to the
recapitalization, the Predecessor, the result of which could have a material
adverse effect on the business, financial position, or results of operations of
the Company. The issuance of capital stock by the Company in the
recapitalization was in compliance with all applicable state securities or blue
sky laws and was exempt from registration under the Securities Act.
In rendering such opinion, such counsel may state that their opinion is
limited to matters governed by the Federal laws of the United States of America,
the laws of the State of California and the General Corporation Law of the
State of Delaware. Such opinion shall also be to the effect that (x) such
counsel has acted as counsel to the Company on a regular basis and has acted as
counsel to the Company in connection with the preparation of the Registration
Statement and (y) based on the foregoing, no facts have come to the attention
of such counsel which lead them to believe that the Registration Statement
(except for the financial statements and financial schedules and other financial
and statistical data included therein, as to which such counsel need express no
belief) as of the Effective Date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or that the
Prospectus (except as stated above) contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The foregoing opinion and
statement may be qualified by a statement to the effect that such counsel does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus (other than
as set forth in clause (viii) above).
(d) The Representatives shall have received from Cooley Godward LLP,
counsel for the Underwriters, such opinion or opinions, dated such Delivery
Date, with respect to
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the issuance and sale of the Stock, the Registration Statement, the Prospectus
and other related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(e) At the time of execution of this Agreement, the Representatives
shall have received from PricewaterhouseCoopers LLP a letter, in form and
substance satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(f) With respect to the letter of PricewaterhouseCoopers LLP referred
to in the preceding paragraph and delivered to the Representatives concurrently
with the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letters and (iii)
confirming in all material respects the conclusions and findings set forth in
the initial letters.
(g) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date; the Company
has complied with all its agreements contained herein; and the conditions set
forth in Sections 7(a), 7(i) and 7 (j) have been fulfilled; and
(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the Prospectus.
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(h) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus (A) any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (B) since such date there
shall not have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (A) or (B), is, in the
judgment of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(i) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of
the Representatives, impracticable or inadvisable to proceed with the public
offering or delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(j) The Nasdaq National Market shall have approved the Stock for
listing, subject only to official notice of issuance.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
Section 8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary
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Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto, (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading or (iii) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section 8(e). The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
The Company agrees to indemnify and hold harmless Lehman Brothers Inc.
(including its officers and employees) and each person, if any, who controls
Lehman Brothers Inc. within the meaning of the Securities Act ("Lehman Brothers
Entities"), from and against any loss, claim, damage or liability or any
action in respect thereof to which any of the Lehman Brothers Entities may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon (i) the
failure of any Participant to pay for and accept delivery of the Directed Stock
sold pursuant to the Directed Stock Program which, immediately following the
effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase or (ii) the Directed Stock Program, provided
that, the Company shall not be responsible under this subparagraph (ii) for any
loss, claim, damage, liability or action that is finally judicially determined
to have resulted from the gross negligence or willful misconduct of the Lehman
Brothers Entities. The Company shall reimburse the Lehman Brothers Entities
promptly upon demand for any legal or other expenses reasonably incurred by
them in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the
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Company or any such director, officer or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto, or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred. The
foregoing indemnity agreement is in addition to any liability which any
Underwriter may otherwise have to the Company or any such director, officer,
employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. Notwithstanding anything contained herein
to the contrary, if indemnity may be sought pursuant to Section 8(a) hereof in
respect of such claim or action, then in addition to such separate firm for the
indemnified parties, the indemnifying party shall be liable for the fees and
expenses of not more than one separate firm (in addition to any local counsel)
for the Lehman Brothers Entities for the defense of any loss, claim, damage,
liability or action arising out of the Directed Stock Program. No indemnifying
party shall (i) without the
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prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Stock or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and the Underwriters on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other with respect to such offering
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Stock purchased under this Agreement (before deducting expenses)
received by the Company, on the one hand, and the total underwriting discounts
and commissions received by the Underwriters with respect to the shares of the
Stock purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section shall be deemed to
include, for purposes of this Section 8(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Stock underwritten by
it and distributed to the public was offered to the public exceeds the amount of
any damages which such Underwriter has otherwise
22
<PAGE>
paid or become liable to pay by reason of any untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 8(d) are several in proportion to their respective
underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning over-
allotments on the inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
Section 9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the performance of
its obligations under this Agreement, the remaining non-defaulting Underwriters
shall be obligated to purchase the Stock which the defaulting Underwriter agreed
but failed to purchase on such Delivery Date in the respective proportions which
the number of shares of the Firm Stock set opposite the name of each remaining
non-defaulting Underwriter in Schedule 1 hereto bears to the total number of
shares of the Firm Stock set opposite the names of all the remaining non-
defaulting Underwriters in Schedule 1 hereto; provided, however, that the
remaining non-defaulting Underwriters shall not be obligated to purchase any of
the Stock on such Delivery Date if the total number of shares of the Stock which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
date exceeds 9.09% of the total number of shares of the Stock to be purchased on
such Delivery Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the number of shares of the Stock which
it agreed to purchase on such Delivery Date pursuant to the terms of Section 3.
If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining Underwriters or other underwriters
satisfactory to the Representatives do not elect to purchase the shares which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the Underwriters to purchase, and of the Company to sell, the
Option Stock) shall terminate without liability on the part of any non-
defaulting Underwriter or the Company, except that the Company will continue to
be liable for the payment of expenses to the extent set forth in Sections 6
and 11. As used in this Agreement, the term "Underwriter" includes, for all
purposes of this Agreement unless the context requires otherwise, any party not
listed in Schedule 1 hereto who, pursuant to this Section 9, purchases which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the
23
<PAGE>
Representatives or the Company may postpone the Delivery Date for up to seven
full business days in order to effect any changes that in the opinion of counsel
for the Company or counsel for the Underwriters may be necessary in the
Registration Statement, the Prospectus or in any other document or arrangement.
Section 10. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(h), 7(i) or 7(j), shall have
occurred or if the Underwriters shall decline to purchase the Stock for any
reason permitted under this Agreement.
Section 11. Reimbursement of Underwriters' Expense. If the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company
(including, without limitation, with respect to the transactions) is not
fulfilled, the Company will reimburse the Underwriters for all reasonable out-
of-pocket expenses (including fees and disbursements of counsel) incurred by the
Underwriters in connection with this Agreement and the proposed purchase of the
Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 9 by reason
of the default of one or more Underwriters, the Company shall not be obligated
to reimburse any defaulting Underwriter on account of those expenses.
Section 12. Notices, Etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World Financial Center,
New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588),
with a copy, in the case of any notice pursuant to Section 8(c), to the Director
of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World
Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Dan Firestone (Fax: 805-681-3325);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by
the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement
given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf
of the Representatives.
Section 13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only
24
<PAGE>
those persons, except that (A) the representations, warranties, indemnities and
agreements of the Company contained in this Agreement shall also be deemed to be
for the benefit of the person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Securities Act and (B) the indemnity
agreement of the Underwriters contained in Section 8(b) of this Agreement shall
be deemed to be for the benefit of directors of the Company, officers of the
Company who have signed the Registration Statement and any person controlling
the Company within the meaning of Section 15 of the Securities Act. Nothing in
this Agreement is intended or shall be construed to give any person, other than
the persons referred to in this Section 13, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
Section 14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
Section 15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
Section 16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
Section 17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
Section 18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
25
<PAGE>
If the foregoing correctly sets forth the agreement between the Company and
the Underwriters, please indicate your acceptance in the space provided for that
purpose below.
Very truly yours,
Somera Communications, Inc.
By: ________________________
Name:
Title:
26
<PAGE>
Accepted:
Lehman Brothers Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Thomas Weisel Partners LLC
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By: LEHMAN BROTHERS INC.
By: _____________________________
Authorized Representative
27
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of Shares of Firm Stock
Underwriters to be Purchased
- ------------------------------------------------ -------------------------------
<S> <C>
Lehman Brothers Inc............................
Dain Rauscher Wessels..........................
Thomas Weisel Partners LLC.....................
[Names of other Underwriters]
Total..........................................
_______________________
_______________________
</TABLE>
28
<PAGE>
Exhibit A
LOCK-UP LETTER AGREEMENT
LEHMAN BROTHERS INC.
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
THOMAS WEISEL PARTNERS LLC
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $[ ] per share (the "Common Stock"),
of Somera Communications, Inc., a Delaware corporation (the "Company"), and that
the Underwriters propose to reoffer the Shares to the public (the "Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc., on behalf of the Underwriters, the undersigned will not, directly
or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of) any
shares of Common Stock (including, without limitation, shares of Common Stock
that may be deemed to be beneficially owned by the undersigned in accordance
with the rules and regulations of the Securities and Exchange Commission and
shares of Common Stock that may be issued upon exercise of any option or
warrant) or securities convertible into or exchangeable for Common Stock (other
than the Shares) owned by the undersigned on the date of execution of this Lock-
Up Letter Agreement or on the date of the completion of the Offering, or (2)
enter into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of such
shares of Common Stock, whether any such transaction described in clause (1) or
(2) above is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, for a period of 180 days after the date of the final
Prospectus relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement.
29
<PAGE>
It is understood that, if the Company notifies you that it does not intend
to proceed with the Offering, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Shares, we will be released from our obligations under this
Lock-Up Letter Agreement.
The undersigned understands that the Company and the Underwriters will
proceed with the Offering in reliance on this Lock-Up Letter Agreement.
Whether or not the Offering actually occurs depends on a number of factors,
including market conditions. Any Offering will only be made pursuant to an
Underwriting Agreement, the terms of which are subject to negotiation between
the Company and the Underwriters.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents necessary in
connection with the enforcement hereof. Any obligations of the undersigned
shall be binding upon the heirs, personal representatives, successors and
assigns of the undersigned.
Very truly yours,
By: ________________________
Name:
Title:
Dated: ______________________
30
<PAGE>
EXHIBIT 4.1
Number ___________ Somera Communications, Inc.(TM) ___________ Shares
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 834458 10 1
THIS CERTIFIES THAT ___________________________ is the owner of
___________________________________ fully paid and non-assessable shares of
Common Stock, $0.001 par value, of Somera Communications, Inc. transferable on
the books of the Corporation by the holder hereof in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ GARY J. OWEN /s/ DAN FIRESTONE
- ------------------------- ------------------------
Chief Financial Officer Chief Executive Officer
<PAGE>
Somera Communications, Inc.
A statement of the powers, designations, preferences and 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 as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________Custodian ____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights under Uniform Gifts to Minors
of survivorship and not as tenants in common Act _______________________________
(State)
UNIF TRF MIN ACT -- _________Custodian (until age______)
(Cust)
____________ under Uniform Transfers
(Minor)
to Minors Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
____________________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
____________________________________________________________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
</TABLE>
Dated____________________
X_______________________________________
X_______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________________
THE SIGNATURES MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad 15.
<PAGE>
EXHIBIT 10.12
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, May
---
12, 1999 is made by and between SUNBELT PROPERTIES ("Lessor") and SOMERA
- -------- ------------------ ------
COMMUNICATIONS, LLC ("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 as 1401 Rice Ave. Oxnard 93030 located in the County of Ventura, State of
--------------------------- -------
California and general described as an approximately 98.005 square foot concrete
- ---------- --------------------------------------------
tilt-up building situated on an ML zoned (City of Oxnard) lot.
- -------------------------------------------------------------
________________________________________________________________________________
_________________ ("Premises"). (See also Paragraph 2)
1.3 Term: Five (5) years and no months ("Original Term") commencing June
-------- -- ----
1, 1999 ("Commencement Date") and ending May 31, 2004 ("Expiration Date"). (See
- ------- ------------
also Paragraph 3)
1.4 Early Possession: Upon lease execution and payment of November 1, 1999
----------------------------------------------------
rent and security deposit ("Early Possession Date"). (See also Paragraphs 3.2
- -------------------------
and 3.3)
1.5 Base Rent: Thirty Eight Thousand Two Hundred Twenty Two and 00/100
--------------------------------------------------------
Dollars ($38.222.00) per month ("Base Rent"), payable on the 1st day of each
- -------------------- ---
month commencing November 1, 1999 (See also Paragraph 4.)
----------------
[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: Thirty Eight Thousand Two Hundred
----------------------------------
Twenty Two and 00/100 Dollars ($38.222.00) as Base Rent for the period November
- ------------------------------------------ --------
1, 1999 through November 30, 1999
- ---------------------------------
1.7 Security Deposit: Thirty Eight Thousand Two Hundred Twenty Two and
------------------------------------------------
00/100 Dollars ($38.222.00) ("Security Deposit"). (See also Paragraph 5.)
- --------------------------
1.8 Agreed Use Office, warehouse and distribution functions
--------------------------------------------
_______________________________ (See also Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8.)
1.10 Real Estate Brokers. (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively,
the "Brokers") and brokerage relationship exist in this transaction (check
applicable boxes):
[_] ________________________ represents Lessor exclusively ("Lessor's Broker"):
[x] Blair Hayes Commercial represents Lessee exclusively ("Lessee's Broker") or
----------------------
[_] ________________________ represents both Lessor and Lessee ("Dual Agency").
(b) Payment to Brokers. Upon execution of this Lease by both Parties,
Lessor shall pay to the Broker, the fee agreed to in their separate written
agreement (of if there is no such agreement, the sum of five (5)% of the total
---------
Base Rent for the initial Lease Term only for the brokerage services rendered by
said Broker.) No commission is payable on Options.
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 63 and Exhibits A, B1, B2, C, D, E and F all
-- -- ------------------------
of which constitute a part of this Lease.
2. Premises. See Paragraph 61
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,
convenants and conditions set forth is this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable.
2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("Start Date"), and, so long as the required service contracts
described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30)
days following the Start Date, warrants that the existing electrical, plumbing,
fire sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors, if any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating condition on
said date and that the structural elements of the roof, bearing walls and
foundation of any buildings on the Premises (the "Building") shall be free of
material defects. If a non-compliance with said warranty exists as of the Start
Date, Lessor shall, as Lessor's sole obligation with respect to such matter,
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, after the Start Date,
Lessee does not give Lessor written notice of any non-compliance with this
warranty within: (iii) sixty (60) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessees sole cost and expense.
2.3 Compliance. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start 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. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, 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 Start Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in Paragraph
6.2(e) below) so as to require during the term of this Lease the construction of
an addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of the
Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of
such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are
required as a result of the specific and unique use of the Premises by Lessee as
compared with uses by tenants in general, Lessee shall be fully responsible for
the
1
<PAGE>
cost thereof, provided, however that if such Capital Expenditure is required
during the last two (2) years of this Lease and the cost thereof exceeds six (6)
months' Base Rent, Lessee may instead terminate this Lease unless Lessor
notifies Lessee, in writing, within ten (10) days after receipt of Lessee's
termination notice that Lessor has elected to pay the difference between the
actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee
elects termination, Lessee shall immediately cease the use of the Premises which
requires such Capital Expenditure and deliver to Lessor written notice
specifying a termination date at least ninety (90) days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.l(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor in
writing, within ten (10) days after receipt of Lessor's termination notice that
Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis.
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that; (a) that is has been
advised by Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with the
Applicable Requirements), and their suitability 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 its
occupancy of the Premises and; (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease In addition, Lessor
acknowledges that; (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises, and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date, Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
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
(including but not limited to the obligations to pay Real Property Taxes and
Insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay in Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date Lessee may, at its option, by notice in writing
within ten (10) days after the end of such sixty (60) day period, cancel this
Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee when required and Lessee does
not terminate this Lease, as aforesaid, any period of rent abatement 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 or
omissions of Lessee. If possession of the Premises is not delivered within four
(4) months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender possession of
the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence,
Lessee shall be required to perform all of its obligations under this Lease from
and after the Start Date, including the payment of Rent, notwithstanding
Lessor's election to withhold possession pending receipt of such evidence of
insurance. Further, if Lessee is required to perform any other conditions prior
to or concurrent with the Start Date, the Start Date shall occur but Lessor may
elect to withhold possession until such conditions are satisfied.
4. Rent.
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent 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. Rent 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 said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from time
to time designate in writing. Acceptance of a payment which is less than the
amount then due shall not be a waiver of Lessor's rights to the balance of such
Rent, regardless of Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit as security for Lessee's faithful performance of
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, 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, expense, loss or damage which Lessor may
suffer or incur by reason
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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 monies
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. If the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional monies
with Lessor so that the total amount of the Security Deposit shall at all times
bear the same proportion to the increased Base Rent as the initial Security
Deposit bore to the initial Base Rent. Should the Agreed Use be amended to
accommodate a material change in the business of Lessee or to accommodate a
sublessee or assignee, Lessor shall have the right to increase the Security
Deposit to the extent necessary, in Lessor's reasonable judgment, to account for
any increased wear and tear that the Premises may suffer as a result thereof. If
a change in control of Lessee occurs during this Lease and following such change
the financial condition of Lessee is, in Lessor's reasonable judgment,
significantly reduced, Lessee shall deposit such additional monies with Lessor
as shall be sufficient to cause the Security Deposit to be at a commercially
reasonable level based on said change in financial condition. Lessor shall not
be required to keep the Security Deposit separate from its general accounts.
Within fourteen (14) days after the expiration or termination of this Lease, if
Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise
within thirty (30) days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit
not used or applied by Lessor. No part of the Security Deposit shall be
considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to the neighboring properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's 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, or waste whose presence,
use, manufacture, disposal, transportation, or release 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 potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "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, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary material reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury, and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give Lessor written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. 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 or the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Substance brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations 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, removal remediation, restoration and/or abatement, and shall
survive the expiration or 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
Substance, unless specifically so agreed by Lessor in writing at the time of
such agreement.
(e) Lessor Indemnification. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages which existed as a
result of Hazardous Substances on the Premises prior to the Start Date or which
are caused by the gross negligence, or intentional acts of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous
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Substances on the Premises prior to the Start Date. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(g) Landlord Termination Option. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
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 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 date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Requirements. Except as otherwise provided in
this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a
timely manner, materially comply with all "Applicable Requirements," the
requirements of any applicable fire insurance underwriter or rating bureau, and
the recommendations of Lessor's engineers and/or consultants which relate in any
manner to the Premises, without regard to whether said requirements are now in
effect or become effective after the Start Date, Lessee shall, within ten (10)
days after receipt of Lessor's written request, provide Lessor with copies of
all permits and other documents, and other information evidencing Lessee's
compliance with any Applicable Requirements 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 the failure of Lessee or the
Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor, Lessor's Lender and consultants 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. The cost
of any such inspections shall be paid by Lessor, unless a violation of
Applicable Requirements or a contamination is found to exist or be imminent, or
the inspection is requested by a governmental authority. In such case, Lessee
shall upon request reimburse Lessor for the cost of such inspections, so long as
such inspection is reasonably related to the violation or contamination.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations. See Paragraph 62
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(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, but
not limited to, all equipment or facilities, such as plumbing, electrical,
lighting facilities, fire protection system, fixtures, walls, (interior and
exterior), ceilings, roofs, floors, windows, doors, plate glass, skylights,
fences, retaining walls, signs, located in, on, or adjacent to the Premises.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices, specifically including the
procurement and maintenance of the service contracts required by Paragraph
7.1(b) below. Lessee's obligation shall include restorations, replacements or
renewals when necessary from the result of Lessee's occupancy or failure to
notify Lessor of a failure or problem and to keep all improvements thereon or a
part thereof in good order, condition and state of repair. Lessee shall, during
the term of this Lease, keep the exterior appearance of the Building in a first-
class condition consistent with the exterior appearance of other similar
facilities of comparable age and size in the vicinity, including, when
necessary, the exterior repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements, ("Basic Elements"), if any, as and when
installed in the Premises: (iii) fire protection systems, if reasonably required
by Lessor.
(c) Replacement. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.l(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. 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, and
they expressly waive the benefit of any statue now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations, Trade Fixtures, Alterations.
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(a) Definitions; Consent Required. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communications systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on 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, 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 pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to 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) without such consent but upon notice to Lessor, 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 this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(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 detailed plans. Consent shall be deemed
conditioned upon Lessee's (i) acquiring all applicable governmental permits;
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work; and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and a
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.
(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 mechanic's 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, or about the Premises, and Lessor shall have the right to post notices
of non-responsibility. If Lessee shall 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. If Lessor shall require, Lessee shall furnish to Lessor a surety bond
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. If Lessor
elects to participate in any such action, Lessee shall pay Lessor's attorneys'
fees and costs.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing 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
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor not
later than ninety (90) days prior to the end of the term of this Lease, Lessor
may require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or termination of this Lease. 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.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom 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. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures,
furnishings and equipment, 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 groundwater contaminated by Lessee. Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee. The failure by Lessee to
timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express
written consent of Lessor shall constitute a holdover under the provisions of
Paragraph 26 below.
8. Insurance; Indemnity.
8.1 Payment of Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 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 in monthly installments as part of the
NNNcosts.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
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 $2,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement"
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 "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance 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. 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 Property Insurance-Building, Improvements and Rental Value.
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(a) Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor and to any Lender, insuring against 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
any Lender, but in no event more than the commercially reasonable and available
insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property 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 debris removal and the enforcement of any Applicable Requirements
requiring the upgrading, demolition, reconstruction or replacement of any
portion of the Premises as the result of a covered loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any co-insurance
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.
(b) Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor, with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for (1) one year. 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 Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any co-insurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent, otherwise payable by Lessee, for the next twelve (12) month period. Lessee
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 of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. 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, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. If reasonably available, and if Lessor
requests Lessee to do so in writing, Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted 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. as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable 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. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to
their property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's sole negligence, 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, liens, judgments, penalties, attorneys'
and consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with the use and/or occupancy of the Premises by Lessee. If any
action or proceeding is brought against Lessor by reason of any of the foregoing
matters, Lessee shall upon notice 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 defended
or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandize or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC 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. 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.
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(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee-Owned Alterations and Utility
Installations, which can reasonably be repaired in six (6) months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or destruction as to whether
or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
which cannot reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee-Owned Alterations and Utility Installations
and Trade Fixtures, 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 Requirements, 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 Premises Partial Damage - Insured Loss. If 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 any
applicable 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, such shortage 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 such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) 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, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of 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, 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),
Lessor may 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) terminate this Lessee by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such 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 after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee. Lessor shall have the right to
recover Lessor's damages from Lessee except as provided 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 terminate
this Lease effective sixty (60) days following the date of occurrence of such
damage by giving written termination notice to Lessee within thirty (30) days
after the date of occurrence of such damage. Notwithstanding the foregoing, 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 (a) exercising
such option, and (b) providing Lessor with any shortage in insurance proceeds
(or adequate assurance thereof) needed to make the repairs on or before the
earlier of (i) the date which is ten (10) days after Lessee's receipt of
Lessor's written notice purporting to terminate this Lease, or (ii) the day
prior to the date upon which such option expires. If Lessee duly exercises such
option during such period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds. Lessor shall, at Lessor's
commercially reasonable expense, repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee fails
to exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate on the date specified in the termination notice
and Lessee's option shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent, payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds from the Rental Value insurance. All
other obligations of Lessee hereunder shall be performed by Lessee, and Lessor
shall have no liability for any such damage, destruction, remediation, repair,
or restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration 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
and such repair or restoration is not commenced within thirty (30) days
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thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "Commence" 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 Termination -- Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payment 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.
9.8 Waiver of 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 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. 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 during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. If any such taxes
shall cover any period of time prior to or after the expiration or termination
of this Lease, Lessee's share of such taxes shall be prorated to cover only that
portion of the tax bill applicable to the period that this Lease is in effect,
and Lessor shall reimburse Lessee for any overpayment.
(b) Advance Payment. Lessor shall estimate the current Real Property
Taxes, and require that such taxes be paid to Lessor by Lessee, monthly in
advance as part of the NNN costs with the payment of the Base Rent. The monthly
payment shall be an amount equal to the amount of the estimated installment of
taxes divided by the number of months remaining before the month in which said
installment becomes delinquent. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payments shall be
adjusted as required to provide the funds needed to pay the applicable taxes. If
the amount collected by Lessor is insufficient to pay such Real Property Taxes
when due, Lessee shall pay Lessor, upon 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 its
obligations under this Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may at the option of Lessor, be treated as an
additional Security Deposit.
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 conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
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. When possible, Lessee shall cause such 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's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, 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.
12. Assignment and Subletting. See Paragraph 63
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of fifty one percent
(51%) 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,
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 by an amount greater than fifty
one percent (51%) of such Net Worth of Lessee as it was represented at the time
of the execution 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, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a non-
curable Breach without the necessity of any notice and grace period. If Lessor
elects to treat such unapproved assignment or subletting as a non-curable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect
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Further, in the event of such Breach and rental adjustment, (i) the purchase
price of any option to purchase the Premises held by Lessee shall be subject to
similar adjustment to one hundred ten percent (110%) of the price previously in
effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the
remainder of the Lease term shall be Increased to One Hundred Ten Percent
(110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or 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 Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of the Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor.
(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 fee of $500, as
consideration for Lessor's considering and processing said request Lessee agrees
to provide Lessor with such other or additional information and/or documentation
as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed 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 to in writing.
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 Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. 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 all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option
require 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 prior defaults or breaches of such
sublessor or for any prior defaults or breaches of such sublessor.
(c) Any matter requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor.
(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. A "Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within the
applicable grace period.
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent, or any other
monetary payment required to be made by Lessee hereunder whether to Lessor or to
a third party, when due, to provide reasonable evidence of insurance or surety
bond, or to fulfill any obligation under this Lease which endangers or threatens
life or property, where such failure continues for a period of three (3)
business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) 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 to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in Subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such
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that more than thirty (30) days are reasonably required for its cure, then it
shall not be deemed to be a Breach 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 of
any general arrangement or assignment for the benefit of creditors: (ii)
becoming a "debtor" as defined in 11 U.S. Code 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
reciever 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 that any financial statement of Lessee or of any
Guarantor, given to Lessor 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 basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide 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 of its affirmative duty or
obligations within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, 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 upon receipt of 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 own option, may require all future payments to be made by Lessee
to be by cashier's check. In the event of a Breach, Lessor may, 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:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee; (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary, to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees and that
portion of any leasing commission paid by Lessor in connection with this Lease
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 immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under this Paragraph 12. 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 the right to recover all or any part
thereof in a separate suit. If a notice and grace period required under
Paragraph 13.1 was not previously given, a notice to pay rent or quit given to
Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, 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
statue.
(b) Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interest, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. 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. Any agreement for free or abated rent or other
charges, 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. Upon Breach of this Lease
by Lessee, 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, 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
of Rent 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 any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee. Lessee shall pay to
Lessor a one time late charge equal to ten percent (10%) of each 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 such late
payment. 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 the exercise of 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 any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
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13.5 Interest. 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 (31/st/) day after it
was due. The interest ("Interest") charged shall be equal to the prime rate
charged by the largest state chartered bank in the state in which the Premises
are located plus 4%, but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. 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, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender 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 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.
(b) Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
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
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building, 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 proportion to the reduction in utility of
the Premises caused by such Condemnation. Condemnation awards and/or payments
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value of the part
taken, or for severance damages; provided, however, that Lessee shall be
entitled to any compensation for Lessee's relocation expenses, loss of business
goodwill and/or Trade Fixtures, without regard to whether or not this Lease is
terminated pursuant to the provisions of this Paragraph. All Alterations and
Utility Installations made to the Premises by Lessee, for purpose of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In the
event that this Lease is not terminated by reason of the Condemnation. Lessor
shall repair any damage to the Premises caused by such Condemnation.
15. Brokers' Fees.
Representations and Indemnities of Broker Relationships. Lessee and Lessor
each represent and warrant to the other that it has had no dealings with any
person, firm, broker (other than the Brokers, if any) in connection with this
Lease, and that no one other than said named Brokers is entitled to any
commission or finder's fee in connection herewith. 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 incurred with respect thereto.
16. Tenancy Statements/Estoppel Certificate.
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, an estoppel certificate 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, or any
part thereof, Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements 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. Definition of Lessor. 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 this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. 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. Notwithstanding the above, the original Lessor under this Lease, and
all subsequent holders of the Lessor's interest in this Lease shall remain
liable and responsible with regard to the potential duties and liabilities of
Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
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. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners of
Lessor or its or their
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individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers of shareholders, or any of their personal assets for such
satisfaction.
21. 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.
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. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Date of Notice. 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
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed delivered
upon telephone confirmation of receipt, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a 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 any other term, covenant or condition hereof, Lessor's consent to
or approval of, any such 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. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment 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
effect whatsoever unless specifically agreed to in writing by Lessor at or
before the time of deposit of such payment.
Recording
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
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; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assignees 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 upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof Lessee
agrees that the holders of any such Security Device shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior
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to the lien of its Security Device by giving 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 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 a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, 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. Further, within sixty (60) days after the execution of this Lease
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the Non-
Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's
option, directly contact Lessor's lender and attempt to negotiate for the
execution and delivery of a Non-Disturbance Agreement.
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 Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or non-disturbance agreement provided for herein.
31. Attorneys' 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) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' 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
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and
expenses incurred in 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, as Lessor may deem
necessary. All such activities shall be without abatement of rent or liability
to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale"
signs and Lessor may during the last six (6) months of the term hereof place on
the Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
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, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect 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. Except 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'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting 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. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the impositions 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. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any such
Guarantor fails or refuses, upon request to provide; (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in case of a corporate Guarantor,
a certified copy of a resolution of its board of directors authorizing the
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making of such guaranty, (b) current financial statements, (c) a Tenancy
Statement, or (d) written confirmation that the guaranty is still in effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and the
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease. Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean the right to extend the term of or to
renew this Lease or to extend or renew any lease that Lessee has on 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, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
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 have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of Default, 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) 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 prior to the commencement of the extended term. (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default 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 a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises. Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent 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.
44. Authority. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, 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. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence 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 either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the Party. This Lease is not intended to be binding until executed and delivered
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. 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 a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity, is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [_] is [X] is not attached to this Lease.
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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 LEASE 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.
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
- ---------
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1 SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCE OF THIS LEASE.
2 RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES. THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
- -------
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Moorpark, CA Executed at: Santa Barbara, CA
------------------------ -----------------------
on: 6/2/99 on: 6-1-99
---------------------------------- ---------------------------------
By LESSOR: By LESSEE:
SUNBELT PROPERTIES SOMERA COMMUNICATIONS,LLC
- ------------------------------------- ------------------------------------
_____________________________________ ____________________________________
By: /s/ Bonnie Mooney By: /s/ Dan Firestone
---------------------------------- ---------------------------------
Name Printed: Bonnie Mooney Name Printed: Dan Firestone
----------------------- -----------------------
Title: Authorized Agent for Sunbelt Title: CEO, Manager
Properties ------------------------------
------------------------------
By: /s/ Ken Bauman By:_________________________________
----------------------------------
Name Printed: Ken Bauman Name Printed:_______________________
------------------------
Title: Director of Real Estate Title:______________________________
------------------------------
Address: 14501 Los Angeles Ave. Address:____________________________
-----------------------------
Moorpark, CA 93021
- ------------------------------------- ____________________________________
Telephone:(805) 531-6500 Telephone:(805) 681-3322
--------------------------- --------------------------
Facsimile:(805) 523-0635 Facsimile:(805) 681-3319
--------------------------- --------------------------
BROKER: BROKER:
Executed at:_________________________ Executed at:________________________
on:__________________________________ on:_________________________________
By:__________________________________ By:_________________________________
Name Printed:________________________ Name Printed:_______________________
Title:_______________________________ Title:______________________________
Address:_____________________________ Address:____________________________
_____________________________________ ____________________________________
Telephone:( )_______________________ Telephone:( )______________________
Facsimile:( )_______________________ Facsimile:( )______________________
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ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE TENANT LEASE- NET DATED MAY 12, 1999
BY AND BETWEEN SUNBELT PROPERTIES, AS LESSOR
AND
SOMERA COMMUNICATIONS, LLC AS LESSEE
50. Land Use and Hazardous Wastes or Substances: Lessor shall provide Lessee,
-------------------------------------------
prior to rental payment commencement, a Phase I Environmental Site
Assessment. Also, see Exhibit C.
51. Abandoned Personal Property: If Lessee shall fail to remove all of its
---------------------------
personal property and effects from said Premises upon termination of this
Lease for any cause whatsoever, Lessor may, at its option, remove the same
in any manner that Lessor shall choose, and store said personal property
and effects without liability to Lessee for loss thereof, and Lessee agrees
to pay Lessor upon demand any and all expenses incurred in such removal,
including court costs and attorneys' fees and storage charges on such
personal property and effects for any length of time that the same shall be
in Lessor's possession, or Lessor may, at its option, without notice sell
said effects, or any of the same, at private sale and without legal
process, for such prices as Lessor may obtain and apply the proceeds of
such sale upon any amounts due under this Lease from Lessee to Lessor and
upon the expenses incident to the removal and sale of said personal
property and effects.
52. Lessee's Work: Lessee shall construct its own Improvements, subject to
-------------
Landlord's reasonable approval and Exhibit B-2.
53. Rent and NNN Abatement: Lessee shall receive free rent and NNN charges for
----------------------
the period of June 1, 1999 through October 31, 1999.
54. NNN Charges: Estimated NNN charges are $7,840.40 per month ($.08sqft.mo
-----------
including property taxes and assessments included in the tax bill).
55. Rental Adjustments: Monthly rent shall be increased every twelve (12)
------------------
months of the initial Lease Term on the anniversary of the Commencement
Date of this Lease by no less than 2% nor more than 5% in accordance with
the April Consumer Price Index of each year during the initial lease term
but in no event less than the amount paid the previous year.
56. Building Maintenance: Lessor shall be responsible for roof maintenance
--------------------
during the initial lease term and option periods.
57. Lessor warrants that the Premises are in compliance with Paragraph 2.3 at
Lease commencement.
58. Option: Landlord grants Lessee two ( 2 ) three ( 3 ) year options (the
------
"Options") to extend the Term of the Lease (the "Extended Term"). The
Options are granted subject to the terms of Paragraph #39 and the following
terms and conditions.
(i) Lessee shall exercise the Options by delivering written notice to
Landlord of such exercise no later than one hundred twenty days (120) prior
to the expiration of the Term or Extended Term.
(ii) All terms and conditions of the Lease shall remain in full force and
effect, except as follows:
(a) Monthly rent shall be at fair market value but in no event shall
the base rent be less than the previous year's rent. Paragraph
(a) applies to the first option period only.
(b) The base rent increase for the option years shall be adjusted
every twelve (12)
<PAGE>
months in accordance with the Consumer Price Index (C.P.I.) for
the Los Angeles-Riverside-Orange County, CA area. Said increase
shall be no less than two percent (2%) or more than five percent
(5%) per annum.
(c) The Security Deposit required by Paragraph 4 of the Lease shall
be increased to an amount equal to one (1) month's payment of the
new Minimum Rent by no later than the commencement date of the
Extended Term.
(d) Tenant shall have no further option to extend the Lease Term.
59. Confidentiality Clause: Lessee agrees not to discuss the terms
----------------------
and conditions of this lease with any prospective or existing Lessees of
Sunbelt Properties or with anyone other than Lessee's owners, employees and
consultants at any time during the term of this Lease. BROKERS TO THIS
TRANSACTION SHALL NOT REPORT THE TERMS OF THIS LEASE TO ANY MULTIPLE
LISTING SERVICE OR STATISTICAL BUREAU WITHOUT THE EXPRESS WRITTEN APPROVAL
OF LESSOR.
60. Wherever in this Lease Lessor or Lessee is required to give its consent or
approval to any action on the part of the other, such consent or approval
shall not be unreasonably withheld or delayed.
61. Adjustment to Paragraph 2.1 Letting: The size of the Premises stated herein
-----------------------------------
used to calculate the rent is an approximation which the Parties agree is
reasonable within plus or minus two percent (2%). If the actual size of the
Premises is found to be above or below the stated range, the base rent
shall be adjusted accordingly.
Adjustment to Paragraph 2.2 Condition: Lessee shall not be responsible for
-------------------------------------
defects or failure of the roof and structural portions of the roof,
foundations, and bearing walls, unless said failure or problem was caused
by reason of the Lessee's occupancy or Lessee's failure to notify Lessor of
a failure or problem.
62. Adjustment to Paragraph 7.1a Lessee's Obligations, General: Lessee shall,
----------------------------------------------------------
at its sole expense, be responsible for the maintenance, condition and
repair of any Improvements made to the Premises by Lessee, including HVAC.
Lessor shall maintain the roofing, drains, landscaping, driveways, parking
lots, sidewalks and parkways located in, on or adjacent to the Premises and
include the cost thereof in the NNN charges to be paid by Lessee.
Adjustments to Paragraph 7.2 Lessor's Obligations: Prior statements
-------------------------------------------------
notwithstanding, Lessor shall at his sole expense keep the structural
integrity of the foundation, roof structure, and building load bearing
walls in safe and good order.
63. Adjustments to Paragraph 12.3a Additional Terms and Conditions Applicable
-------------------------------------------------------------------------
to Subletting: If Lessee makes a permitted Sublease, then Lessee shall
-------------
retain any "profit" payable by the Sublessee pursuant to the terms of the
Sublease. "Profit" shall mean all rent and other considerations paid by
Sublessee to Lessee pursuant to the terms of the Sublease in excess of the
Base Rent and brokerage commissions to unrelated third parties.
LANDLORD: LESSEE:
SUNBELT PROPERTIES SOMERA COMMUNICATIONS, LLC
By: /s/ Bonnie Mooney By: /s/ Dan Firestone
---------------------------- ----------------------------
Bonnie Mooney, as Authorized Dan Firestone
Agent for Sunbelt Properties
By: /s/ Ken Bauman By:____________________________
----------------------------
Ken Bauman, Director of Real Estate
Date: 6/2/99 Date: 6/1/99
-------------------------- --------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated September 9, 1999 relating to the financial statements and
financial statement schedule of Somera Communications LLC, which appear in such
Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 15, 1999
