<PAGE>
As filed with the Securities and Exchange Commission on February 24, 2000
Registration No. 333-93409
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
EMBEDDED SUPPORT TOOLS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 3674 04-3034207
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number)Identification Number)
incorporation or
organization)
120 Royall Street
Canton, MA 02021
(781) 828-5588
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------
PETER S. DAWSON
120 Royall Street
Canton, MA 02021
(781) 828-5588
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
Copies to:
JAMES POLLOCK, ESQ. TIMOTHY C. MAGUIRE, ESQ.
HOLLAND & KNIGHT LLP TESTA, HURWITZ & THIBEAULT, LLP
One Beacon Street High Street Tower
Boston, Massachusetts 02109 125 High Street
Telephone: (617) 523-2700 Boston, Massachusetts 02110
Telecopy: (617) 720-0325 Telephone: (617) 248-7000
Telecopy: (617) 248-7100
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. EST +
+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 it is not soliciting an offer to buy these +
+securities in any state on where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION--FEBRUARY 24, 2000
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4,500,000 Shares
[LOGO]
Common Stock
- --------------------------------------------------------------------------------
Embedded Support Tools Corporation is offering 4,100,000 shares and one
stockholder is offering 400,000 shares of common stock in an initial public
offering. Prior to this offering, there has been no public market for EST's
common stock.
EST designs, manufactures, sells and supports integrated hardware and software
tools for programming, testing and debugging embedded systems.
It is anticipated that the public offering price will be between $10.00 and
$12.00 per share. The shares of EST will be quoted in the Nasdaq National
Market under the symbol "ESTC".
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price................................. $ $
Underwriting discounts and commissions................ $ $
Proceeds, before expenses, to EST..................... $ $
Proceeds to the selling stockholder................... $ $
</TABLE>
See "Risk Factors" on pages 8 to 14 for factors that should be considered
before
investing in the shares of EST.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to 475,000
additional shares from EST and 200,000 shares from another stockholder at the
public offering price, less underwriting discounts and commissions. Delivery
and payment for the shares will be on March , 2000.
Prudential Volpe Technology Chase H&Q
a unit of Prudential
Securities
Needham & Company, Inc.
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Forward-Looking Statements................................................ 14
Subchapter S Corporation and Termination of Subchapter S Corporation
Status................................................................... 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................................ 21
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 30
Management ................................................................ 39
Certain Transactions....................................................... 44
Principal and Selling Stockholders......................................... 45
Description of Capital Stock............................................... 48
Shares Eligible for Future Sale............................................ 48
Underwriting............................................................... 50
Legal Matters.............................................................. 52
Experts.................................................................... 52
Available Information...................................................... 52
Index to Consolidated Financial
Statements................................................................ F-1
</TABLE>
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"EST," "ESTC," "CPMSpy," "visionPROBE," "visionICE," "visionCLICK,"
"visionEVENT" and "visionXD" are our trademarks. This prospectus also contains
trademarks and trade names of other companies.
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It may not contain all of the information investors should consider before
investing in the common stock of EST. Investors should read the entire
prospectus carefully.
Embedded Support Tools Corporation
We design, manufacture, sell and support integrated hardware and software
tools for programming, testing and debugging embedded systems. Our products
enable developers to quickly and reliably program and debug the embedded
systems that manufacturers build into their industrial and consumer products.
As the complexity and speed of embedded systems increase, we believe that
embedded systems developers will require more efficient solutions to program
their products and that we are well positioned to offer these solutions.
A significant portion of our customers are in the communications industry,
including telecommunications, data communications and Internet infrastructure
equipment suppliers. Our largest customers by revenue include Hewlett-Packard,
Lucent Technologies, Motorola, Nortel Networks, Tellabs Wireless and 3Com.
We were incorporated in Massachusetts in 1989. Our principal executive
offices are located at 120 Royall Street, Canton, Massachusetts 02021 and our
telephone number is (781) 828-5588. Our World Wide Web site address is
www.estc.com. The information contained on our Web site is not part of this
prospectus.
Our Market Opportunity
Embedded systems are the special purpose computers within intelligent
industrial and consumer products such as network switches and routers, cellular
base stations, process control systems, cell phones, printers and anti-lock
braking systems. As with all computers, embedded systems minimally consist of a
microprocessor, memory and software, and the level of complexity of that system
can be enhanced with additional components. Embedded systems differ from
general purpose computers, such as PCs, workstations and mainframes, in that
they are designed to run only the specific set of tasks required for the end
product to operate as intended. Manufacturers use embedded systems to enhance
functionality and performance, reduce cost and size, and improve reliability of
a broad variety of products, ranging from simple systems found in microwave
ovens to complex multiprocessor driven systems controlling the infrastructure
of the Internet. Embedded systems development tools enable the developer to
edit and compile code, transfer the operating system and application software
to the microprocessor, and test and debug the program and the functionality of
the embedded system as a whole.
According to industry and market research firms, at least 55% of the more
than 265 million microprocessors produced by the semiconductor industry in 1998
were used in embedded systems, while the remainder were used in general purpose
computers such as PCs. We participate in the market for the higher-end 32-bit
and greater embedded microprocessors, which is forecast to grow at a rate of
21%, from 106 million units in 1998 to 228 million units in 2002. Motorola is
the largest supplier of embedded microprocessors, with a market share of 35% in
1997, the latest year for which data is available. The market for embedded
software development tools is part of the overall embedded operating systems
and development tools market, which was approximately $550 million in 1998 and
is forecast to grow 14% annually through 2003.
4
<PAGE>
Our Solution
We design, manufacture, sell and support a comprehensive suite of high
performance, open and scalable embedded systems development tools, consisting
of both hardware and software components. Our tools enable development
engineers to program, test and debug embedded systems quickly and reliably at
each stage of the development process. We believe that our leadership position
arises from the following:
Superior Development Tools - Our tools offer the following advantages:
. Bundled - We bundle software debuggers and other graphical utilities
with hardware tools to produce a complete solution for early stage
hardware and firmware development;
. Open - We enable developers using our tools to incorporate a variety of
real-time operating systems into their products and to use a wide range
of software tools with our hardware products;
. Graphical - Our software tools provide a rich graphical user interface,
which gives programmers easy access to multiple in-depth views of
microprocessor data and development status; and
. Scalable - Our hardware tools are modular and designed to easily allow
developers to configure and scale their development environments to meet
their specific needs.
Microprocessor Knowledge Base - We were one of the first companies in the
industry to develop and market tools for debugging Motorola microprocessors
using its on-chip debug capabilities. We have been able to adapt our tools
to work with over 50 different microprocessors within the Motorola and IBM
families. Through our relationships with Motorola and IBM, we gain early
access to new microprocessor designs prior to commercial release.
Comprehensive Customer Support - We deploy a team of 41 field salespeople
and support engineers to assist our customers throughout the development
process. This support includes providing early development kits containing
single board computers and board support packages. We also offer our
customers formal one-day and three-day training sessions on microprocessor
architectures.
Our Strategy
Our goal is to maintain and enhance our position as a technological and
market leader in embedded systems development tools. In order to achieve this
goal, we intend to:
Extend Our Technological Leadership - We have established leadership in
development tools by bundling hardware and software solutions, and we must
insure that our products continue to embody the latest technologies and
features.
Continue Our Focus on Communications Applications - A significant number of
our customers build highly complex data communications, telecommunications
and Internet networking equipment. We plan to expand our product offerings
to address the specific needs of developers by leveraging our strengths
within these markets.
Increase Our Software Product Offerings - We intend to use our strengths in
the hardware bring-up development stage to extend and enhance our software
solutions, while remaining operating system independent.
Satisfy Customer Demand for Additional Microprocessor Architectures - Our
tools work with more than 50 different microprocessors from Motorola and
IBM. We intend to meet the needs of our customers by continuing to adapt
our development tools for an even wider range of microprocessor
architectures.
Strengthen and Develop Strategic Alliances - We have developed significant
relationships with Motorola and Wind River Systems, and we intend to
strengthen these relationships as well as seek new alliances.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Shares offered by EST............... 4,100,000 shares
Shares offered by the selling
stockholder ....................... 400,000 shares
Total shares outstanding after this
offering........................... 16,994,000 shares (1)
Use of proceeds by EST.............. To (i) make a distribution of previously
undistributed subchapter S corporation
income of approximately $4.6 million, (ii)
repay a $2.4 million line of credit and
(iii) for general corporate purposes,
including working capital and capital
expenditures.
Nasdaq National Market Symbol....... ESTC
</TABLE>
(1) The common stock to be outstanding after this offering is based on shares
outstanding as of February 1, 2000 and excludes 2,555,500 shares of common
stock issuable upon the exercise of options outstanding as of such date at
a weighted average exercise price of $3.27 per share and 1,444,500 shares
available for future grant under our stock plans. See Note 8 of Notes to
Consolidated Financial Statements.
Except as set forth in the consolidated financial statements or as otherwise
indicated, all information in the prospectus:
. reflects a two-for-one stock split effective December 21, 1999; and
. does not include the 475,000 shares offered by EST and the 200,000
shares offered by another selling stockholder if the underwriters
exercise their over-allotment option in full.
Risk Factors
You should consider the risk factors before investing in EST's common stock
and the impact from various events which could adversely affect our business.
6
<PAGE>
Summary Consolidated Financial Data
EST has been treated as a Subchapter S corporation for federal income tax
purposes since its organization on January 5, 1989. As a Subchapter S
corporation, EST has not been subject to federal and certain state income
taxes. The pro forma net income (loss) reflects the provision for income taxes
that would have been recorded had EST been a Subchapter C corporation, assuming
an effective tax rate of 40%, 32%, 34%, 40%, and 11% for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999, respectively. See Notes 2 and 10
of Notes to Consolidated Financial Statements.
Pro forma as adjusted balance sheet data set forth below reflects the
distribution of an estimated $4.6 million of cumulative undistributed
Subchapter S corporation taxable income for which stockholders of record prior
to the closing of this offering have been taxed. The distribution will be made
out of the net proceeds of this offering. The pro forma as adjusted balance
sheet data also reflects the sale of 4,100,000 shares of common stock by EST at
an assumed initial public offering price of $11.00 per share, after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by EST.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues.................. $4,787 $8,262 $11,766 $18,250 $28,451
Total cost of revenues.......... 1,326 1,945 2,874 3,823 5,349
------ ------ ------- ------- -------
Gross profit.................... 3,461 6,317 8,892 14,427 23,102
Selling and marketing........... 1,575 2,833 4,052 7,236 10,595
Research and development........ 1,100 1,636 2,150 3,085 4,838
General and administrative...... 314 541 721 1,040 1,815
Stock-related compensation
expense(1)..................... -- -- -- -- 9,437
------ ------ ------- ------- -------
Total operating expenses........ 2,989 5,010 6,923 11,361 26,685
------ ------ ------- ------- -------
Income (loss) from operations... 472 1,307 1,969 3,066 (3,583)
Net income (loss)............... $ 269 $1,101 $ 1,860 $ 2,890 $(3,747)
====== ====== ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Pro Forma Statement of Operations Data(2):
Pro forma net income (loss)................. $ 283 $ 874 $1,314 $1,865 $(2,977)
Pro forma net income (loss) per share -
basic and diluted.......................... $0.03 $0.09 $ 0.13 $ 0.18 $ (0.26)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Pro Forma
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 1,552 $37,846
Working capital............................................. 3,401 39,695
Total assets................................................ 13,261 49,555
Redeemable common stock..................................... 1,893 --
Total stockholders' equity.................................. $ 3,995 $41,632
</TABLE>
- --------
(1) The stock-related compensation expense relates to the issuance of
2,783,000 shares of common stock and the grant of options to purchase
1,692,000 shares of common stock to employees in June 1999. See Note 8 to
Notes to Consolidated Financial Statements.
(2) Pro forma net income (loss) and net income (loss) per share data assumes:
(i) the termination of the redemption rights of certain common
stockholders and therefore excludes related accretion charges and
(ii) that EST was subject to income taxation as a Subchapter C corporation
for all periods presented. See Note 2 to Notes to Consolidated Financial
Statements.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information in this prospectus, before purchasing shares of EST common
stock. Each of these risk factors could adversely affect our business,
operating results and financial condition as well as adversely affect the value
of an investment in our common stock and could cause you to lose some or all of
your investment. This offering involves a high degree of risk.
Risks Related To Our Business
If Motorola microprocessor sales are disrupted or decline for any reason our
business would suffer since we derive substantially all of our revenues from
customers who use Motorola microprocessors.
We have designed our tools to work principally with embedded systems using
Motorola microprocessor architectures. To date, substantially all of our
revenues have come from customers who use Motorola microprocessors in their
embedded systems. We would be harmed if Motorola microprocessor sales are
interrupted for any reason or if embedded systems developers who use our tools
choose another microprocessor family. We are in the process of creating
development tools to be used with microprocessors made by manufacturers in
addition to Motorola. If we are unsuccessful in developing tools that work with
microprocessors other than Motorola microprocessors, we may fail to grow our
business and our revenues may decline.
Our success is dependent upon early access to Motorola microprocessor
designs and product information and we could lose significant revenue if our
early access to such information from Motorola is interrupted for any
reason.
As part of our relationship with Motorola, our engineers communicate with
their counterparts at Motorola and have early access to new microprocessor
designs. With this knowledge, we are able to adapt our tools to these new
designs and make our tools available at the time our customers begin to
incorporate new Motorola microprocessor releases into their product designs.
Our relationship with Motorola is not the subject of any written agreement and
it is not exclusive.
If Motorola expands its operations to become a direct source of development
tools to a broad range of embedded systems developers our revenues and
profits could be negatively impacted.
Motorola has traditionally relied on third-party vendors to provide tools
for its microprocessors. Motorola recently acquired Metrowerks, a maker of
software-only tools. If Motorola expands its operations to include selling
development tools to a broad range of embedded systems developers, our revenues
and profits could be negatively impacted.
We believe our relationship with Wind River, which entails a collaborative
effort in the marketing and selling of our respective products will be
discontinued and such discontinuation could significantly harm our business.
Wind River Systems is a major provider of operating systems and development
tools. Currently, we collaborate with Wind River in marketing and selling our
respective product offerings. However, Wind River recently acquired Integrated
Systems, another provider of operating systems and development tools. We
believe this acquisition will likely affect our relationship with Wind River,
as Wind River will expand its product offerings to actively market and sell
development tools similar to the products we offer. Any interruption of our
relationship would likely cause significant harm to our business.
Intense competition in our industry may result in price reductions, reduced
gross margins and loss of market share, and in turn may hurt our business
and ability to compete successfully.
The embedded systems development tools market is rapidly evolving and
intensely competitive. Competition could intensify even further if
microprocessor manufacturers were to enter into our marketplace.
8
<PAGE>
Competitors may develop and offer products and services similar to ours in the
future. Our business would be harmed if we are not able to compete
successfully against current or future competitors. Although we believe that
there are market opportunities for several providers of products and services
similar to ours, a single provider might obtain a dominant position. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could harm our business. A number of our
current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing, technical and other resources than we do. Our competitors may be
able to devote significantly greater resources to marketing campaigns, adopt
more aggressive pricing policies and may expend substantially more resources
on product development. If we do not compete effectively, our revenues and
earnings may suffer.
If we lose the services of any of our key personnel, our ability to develop
new products, service our customers or expand our operations could be
impeded.
In order to continue to provide quality services in our rapidly changing
business, we believe it is particularly important to retain personnel with
experience. Our business depends in large part on the continued service of a
number of key employees, including Peter Dawson, our President and Chief
Executive Officer, and James Watkins, our Chief Operating Officer and Senior
Vice President of Sales and Marketing. The loss of the services of Mr. Dawson,
Mr. Watkins or any of our other key personnel could seriously impede our
success. Our employees, other than Messrs. Dawson, Watkins, Lossky and
McGillivray, are not subject to employment contracts and are free to leave us
at any time. We might not be able to prevent key personnel, who may leave our
employ in the future, from disclosing or using our technical knowledge,
practices and procedures. One or more of our key employees could join a
competitor or form a competing company. Losing the services of one or more of
our key employees could impede our ability to develop new products, service
our customers or expand our operations.
There is intense competition for qualified engineers and sales and
marketing personnel, and our failure to recruit, retain and motivate such
skilled employees could affect our ability to increase our sales.
Our failure to attract and retain qualified employees could impair our
ability to grow our business. In order to maintain and increase our market
share, we must be able to hire, train, and retain and manage highly skilled
employees. To date, we have been successful in meeting our requirements for
highly skilled sales and support personnel and research and development
engineers. However, competition for such engineers is intense and likely to
become more so in the future. If our operations continue to grow, it may
become more difficult to recruit, train and retain skilled engineers and
managers. Failure to attract and retain qualified employees will impede our
ability to develop new products and service our customers and expand our
operations.
If our customers' new products do not use microprocessors for which we
supply development tools, we will lose significant sales in the future.
We do not provide development tools for many microprocessor families used
in embedded systems. Our success depends on our customers selecting
microprocessors that we provide development tools for as the standard for new
generations of their products. If our customers do not use these
microprocessors, our future sales would be reduced.
If customers are late in commencing their product development cycles, our
short-term revenues would be negatively affected.
Developers generally buy our development tools at the beginning of a
product development cycle. If a customer delays its product development cycle,
it will likely also postpone the purchase of our development tools. Such a
delay could cause a decline in our short-term revenues. There are many reasons
why a particular customer's project might experience delays. For example, the
customer's own design process could be slowed by technical problems or
unavailability of personnel.
9
<PAGE>
The unpredictability of our operating results may adversely affect the
trading price of our common stock.
We expect that our quarterly and annual operating results will fluctuate
significantly due to many factors, some of which are outside our control,
including:
. demand for and market acceptance of our products and services;
. our ability to retain key customers or strategic partners;
. intense and increased competition;
. introductions of new products or services, by us and our competitors; and
. our ability to control our costs.
Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes any prediction of results
of operations on a quarterly basis unreliable. As a result, we believe that
period-to-period comparisons of our historical results of operations are not
necessarily meaningful and that you should not rely on them as an indication
of future performance. It is possible that our quarterly results of operations
may be below the expectations of public market analysts and investors. This
could cause the price of our common stock to decline substantially.
Risks associated with our international business operations could impair
our ability to grow our business.
A significant portion of our sales are generated outside the United States.
This exposes us to risks such as economic fluctuations in various countries,
longer accounts receivable collection periods, greater difficulty in
collecting accounts receivable, reduced or limited protection for intellectual
property, export license requirements and other trade barriers and potentially
adverse tax consequences. We must employ and retain personnel throughout the
world and employment laws vary widely from country to country. To date, we
have been able to successfully staff our international operations, but if we
continue to grow our operations, it may become more difficult to manage our
business. We may also experience foreign currency fluctuations which could
have a significant impact on our revenues, cash flow and ability to achieve
and maintain profitability as we attempt to grow our business. If we fail to
manage our international operations successfully, our ability to service our
foreign customers and grow our business in these countries will be seriously
impeded.
We rely on a single source for supply of a circuit board component and our
business may be harmed if our supply of this component is disrupted.
We currently purchase a key component (field programmable gate arrays) from
Altera Corporation. We purchase this component as needed and have no long-term
contracts with Altera. Although we believe that there are alternative sources
for this component, switching to another source could require significant re-
engineering and result in product delays. Such a disruption in supply could
hurt our ability to deliver our products to our customers and negatively
affect our operating margins.
Our customers give us orders for projects at hand rather than for long-term
requirements. Thus, our failure to obtain and fulfill orders in a quarter
will hurt our operating result for that period.
A majority of our revenue is derived from orders relating to a customer's
particular projects rather than long-term contracts. We cannot assure you that
a customer will purchase additional products from us once a project is
completed. A decrease in demand for our products from one or more customers
could occur with limited advance notice and could have a negative impact on
our results of operations in any particular period. In addition, a substantial
portion of our expenses, including most product development and selling and
marketing expenses, must be incurred in advance of revenue generation. If our
revenues do not meet our expectations, then our operating profit, if any, may
fall short of our expectations.
10
<PAGE>
If we do not respond rapidly to technological changes, our business will
suffer.
Our customers are continuously developing new products to compete within
their own markets and are seeking to both shorten the time to market and
improve the quality of their products. In addition, microprocessor technology
is constantly changing and our competitors are constantly improving their
products in response. As a result, we must anticipate and react to changes in
our market, and we cannot assure you that we will be able to respond quickly
or effectively to such developments. The introduction of new products by
competitors, market acceptance of products based on new or alternative
technologies or the emergence of new industry standards could render our
existing or future products obsolete. Our business will suffer if we do not
modify our products or create new ones in order to meet customer needs on a
timely basis and match or surpass the advances in competitive products.
Expanding our product offerings may strain our ability to manage our
business.
We seek continued growth by expanding our product line and extending it to
microprocessor platforms for which we do not currently provide tools. This
effort will:
. place a significant burden on our management;
. require our recruiting and retaining additional high-level executives;
. require the hiring of significantly more engineers;
. require significant outlays of cash for technically skilled sales persons
and sales efforts; and
. strain existing operational systems and controls.
We may not be able to meet our hiring needs for engineering and management
personnel because of the small number of qualified candidates and the intense
demand for their services. We are unable to assure you that we will be able to
expand our product offerings and, if we do grow, whether we will be able to
expand our managerial and operational infrastructure to manage such expansion
successfully.
We could become involved in litigation regarding intellectual property
rights which could seriously harm our business.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into nondisclosure agreements with our employees,
consultants and corporate partners, and control access to our proprietary
information. Litigation may be necessary in order to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Although we are not aware of any third party intellectual
property rights that would prevent the use and sale of our products, we may
unknowingly infringe the proprietary rights of others. Any infringement could
result in significant liability to us. If we do infringe the proprietary
rights of others, we could be forced to either seek a license to those
intellectual property rights or alter our products so that they no longer
infringe upon other's proprietary rights. Any such license could be very
expensive to obtain or may not be available at all. Similarly, changing our
products or processes to avoid infringing the rights of others may be costly
or impractical. Such litigation could result in substantial costs and
diversion of resources and management's focus.
Year 2000 non-compliance by our customers, vendors or third parties could
adversely impact our business.
Many computers use two-digit date fields to identify a given year. Year
2000 non-compliance is the failure of date sensitive computing systems and
applications to properly recognize and process dates into and after the year
2000. Problems associated with such recognition failures may not become
apparent until some time after January 2000. We believe that our own products
do not contain any date sensitive components. However, we
11
<PAGE>
are unable to evaluate whether our customers', vendors' or third parties'
products are Year 2000 compliant. Purchasing patterns may be affected by Year
2000 issues if our customers are required to expend significant resources to
correct or replace their current systems. These customers and potential
customers may have fewer funds available to purchase our products. Further,
our vendors and suppliers may use computing systems that are not Year 2000
compliant. If a limited or sole source supplier experienced difficulties
relating to their computer system, we may be forced to expend resources in
locating an alternative supplier. In addition, our internal information and
manufacturing systems are dependent upon personal computers using date
sensitive components. If any of these systems were to fail, we may have to
expend financial and managerial resources to correct any problems.
Our former status as a Subchapter S corporation could expose us to
liability.
We elected Subchapter S corporation status under the Internal Revenue Code
from our inception to the completion of this offering. Although we believe
that we met the Subchapter S corporation requirements under the Code during
this period, we have not requested, and the IRS has not made a determination,
as to our status. If the IRS were to challenge our status and determine that
we did not meet the Code requirements for Subchapter S corporations, we could
be liable for unpaid federal and state income taxes for all or a part of the
time that we elected Subchapter S corporation status, plus interest and
possible penalties.
Risks Related To This Offering
We are controlled by a small number of stockholders who could make
decisions that adversely affect other stockholders.
Peter Dawson, James Watkins and John Baggott will, in the aggregate, hold
57.1% of the outstanding shares of our common stock upon the closing of this
offering, or 55.6% if the underwriters exercise their over-allotment option in
full. As a result of their ownership share, these stockholders will have
significant control over management and operations and will have a significant
influence on all votes requiring stockholder approval, including votes to
amend our Restated Articles of Organization in certain respects or approve a
merger, sale of assets or other major corporate transactions.
Our stock has never been traded publicly and its price could be volatile,
which could affect your ability to resell your shares at a profit.
Prior to this offering, you could not buy or sell our common stock
publicly. An active market for our common stock may not develop or be
sustained after this offering. The stock market has from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies. As a result, you may
not be able to resell your shares at a price equal to or greater than the
initial public offering price.
The market price of our common stock may fluctuate significantly in
response to many factors, some of which are beyond our control, including the
following:
. actual or anticipated fluctuations in our operating results;
. changes in market valuations of other technology companies;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic relationships, joint
ventures or capital commitments;
. termination of a strategic relationship; and
. sales of common stock in the future.
12
<PAGE>
A significant number of shares are restricted from immediate resale but may
be sold into the market in the near future. This could cause the market
price of our common stock to drop significantly.
After this offering, we will have outstanding 16,994,000 shares of common
stock. This includes the 4,500,000 shares we and a selling stockholder are
selling in this offering, all of which may be resold in the public market
immediately. The remaining 12,494,000 shares of our total outstanding shares
are presently restricted but will become available for resale in the public
market as shown below.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the
market as intending to sell them.
<TABLE>
<CAPTION>
Number of Shares Date of availability for resale into public market
---------------- --------------------------------------------------
<C> <S>
8,689,900 On September , 2000, due to a lock-up agreement these
stockholders have with Prudential Securities Incorporated on
behalf of the underwriting group. However, Prudential
Securities Incorporated can waive this restriction at any
time and without notice.
3,804,100 Between September , 2000 and March , 2001, due to the
requirements of the federal securities laws.
</TABLE>
After the date of this prospectus, we intend to file one or more
registration statements under the Securities Act to register all shares of
common stock issuable upon the exercise of outstanding stock options or
reserved for issuance under our Amended and Restated 1999 Stock Option Plan of
which 652,200 will be immediately exercisable as of April 1, 2000 and 652,200
shares will be exercisable within 60 days of February 1, 2000. Those
registration statements are expected to become effective immediately upon
filing, and subject to the vesting requirements and exercise of the related
options and the grant of stock awards as well as the terms of the lock-up
agreements, shares covered by those registration statements will be eligible
for sale in the public markets, except for any shares held by our
"affiliates."
Investors in this offering will experience immediate and substantial
dilution and may experience additional dilution in the future.
The initial public offering price of our stock is substantially higher than
the net tangible book value per share of our common stock immediately after
this offering. Therefore, if you purchase our common stock in the offering,
you will incur immediate and substantial dilution of approximately $8.76 per
share in the net tangible book value per share of common stock from the price
you pay for a share of common stock in the offering based upon the assumed
initial public offering price of $11.00 per share. In addition, as of December
31, 1999, there were options outstanding to purchase 2,555,500 shares of our
common stock at a weighted average exercise price of $3.27. To the extent any
of these options are exercised, you will suffer dilution greater than the
$8.68 per share described above.
Our management will have broad discretion in the use of proceeds and they
may not effectively utilize those funds.
The primary purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate future access to
public markets. We expect to use the net proceeds from this offering for
working capital and other general corporate purposes, including expansion of
our sales staff. Our management will have considerable discretion in the
application of the net proceeds of this offering and you will not have the
opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. Because of the number and variability
of the factors that may determine our use of the net proceeds from this
offering, we cannot assure you that the net proceeds will be used for
corporate purposes that increase our profitability or our market value or that
you will agree with our use of proceeds.
13
<PAGE>
Our charter and Massachusetts law may inhibit a takeover, which may limit
the price an investor is willing to pay for our common stock.
Certain provisions of our Restated Articles of Organization and Amended and
Restated Bylaws, and certain provisions of Massachusetts law could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of EST. Such
provisions could limit the price that investors might be willing to pay in the
future for the EST's common stock. These provisions permit the issuance of
"blank check" preferred stock by the Board of Directors without stockholder
approval, require super-majority approval to amend certain provisions in the
charter and Bylaws and impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions. The application of such provisions also could have the effect of
delaying or preventing a change of control in the Company.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about us, including, among other things:
. General economic and business conditions, both nationally and in our
markets,
. Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition,
. Anticipated trends in our business,
. Competition in our market, and
. Other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to us, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. In light of these risks and uncertainties, the forward-looking
events and circumstances discussed in this prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements.
14
<PAGE>
SUBCHAPTER S CORPORATION AND TERMINATION OF SUBCHAPTER S CORPORATION STATUS
We have been treated as a Subchapter S corporation for federal income tax
purposes since we were organized on January 5, 1989. As a result, we have not
been liable for federal and certain state income taxes, and all of our earnings
have been subject to federal, and certain state, income taxation directly at
the stockholder level. Our Subchapter S corporation status will terminate upon
the closing of this offering, at which time we will become subject to corporate
income taxation under Subchapter C of the Internal Revenue Code and applicable
state income taxation law. Pro forma statement of operations data included in
this prospectus have been adjusted to include pro forma income tax provisions
as if we had been a Subchapter C corporation during the relevant periods.
As soon as practicable following the closing of this offering, we intend to
make a distribution to our stockholders of record on the day prior to the
effective date of the registration statement of $4.6 million, which is the
estimated amount of our cumulative Subchapter S income for the period we were a
Subchapter S corporation (from January 5, 1989 through the date of the closing
of this offering ) minus any distributions made to stockholders during this
period. Investors purchasing shares in this offering will not receive any
portion of the distribution.
We expect to enter into a Tax Indemnification Agreement with our existing
stockholders providing for, among other things, the stockholders to indemnify
us for any federal and state income taxes, including interest and penalties,
incurred by us if for any reason we are deemed to be treated as a Subchapter C
corporation during any period in which we reported our taxable income as a
Subchapter S corporation. The tax indemnification obligation of each existing
stockholder is limited to the aggregate amount of all distributions made to
such stockholders by us since the first day of the first tax year that we are
deemed to be treated as a Subchapter C corporation. We believe we have met the
requirements for a Subchapter S corporation and the Tax Indemnification
Agreement will provide for payment by our existing stockholders to us and by us
to our existing stockholders to adjust for any increases or decreases in tax
liability arising from a tax audit which affects our tax liability and results
in a corresponding adjustment to the tax liability of our existing
stockholders. The amount of any payment cannot exceed the amount of refund
received from the IRS by us or our existing stockholders attributable to the
adjustment.
15
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,100,000 shares of
common stock to be sold by us will be approximately $40,943,000 ($45,802,250 if
the underwriters exercise their over-allotment option from us in full),
assuming an initial public offering price of $11.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us. We intend to use these net proceeds for the following
specific purposes:
. to make a distribution of previously undistributed Subchapter S
corporation income of approximately $4.6 million;
. to repay an outstanding balance of $2.4 million on a $2.5 million line of
credit from BankBoston, N.A., dated as of December 27, 1999. This line of
credit requires monthly payments of accrued interest to be paid until
August 31, 2001, at which time all outstanding principal is payable. The
line of credit accrues interest at an initial rate of 8.25% per annum and
is collateralized by all of our assets. The purpose of the borrowings
under the line of credit is to fund payments of taxes to the Internal
Revenue Service and state taxing authorities incurred by seven key
employee stockholders, other than the recipients of the $4.6 million
described above, who were awarded shares of common stock in 1999; and
. for general working capital purposes.
We have broad discretion regarding the use of some of the proceeds to us
from this offering. We currently intend to use the remainder of the net
proceeds from this offering for general corporate purposes, including working
capital, product development, the hire of additional engineers and the
expansion of our sales force, and expansion of our international operations. We
may also use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. We have no specific understandings, commitments or
agreements with respect to any such acquisition or investment. Pending these
uses, we plan to invest the net proceeds of this offering in short-term,
interest-bearing, investment-grade securities or guaranteed obligations of the
U.S. government. We will not receive any proceeds from the sales of common
stock by the selling stockholders.
DIVIDEND POLICY
We do not anticipate declaring or paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, to finance
the expansion of our business. We currently intend, subject to our contractual
obligations under the Tax Indemnification Agreement, to retain earnings for the
expansion and continued development of our business. Our current loan agreement
restricts the payment of dividends without prior written consent. Other
restrictions or limitations on the payment of dividends may be imposed in the
future under the terms of credit agreements or under other contractual
provisions. In the absence of such restrictions or limitations, the declaration
and payment of any dividends will be at the discretion of our Board of
Directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth EST's capitalization as of December 31, 1999:
(i) on an actual basis,
(ii) on a pro forma as adjusted basis after giving effect to:
. the intended distribution to stockholders of approximately $4.6
million of cumulative undistributed Subchapter S corporation
taxable income for which stockholders of record prior to the
closing of this offering have been taxed and reclassification of
the remaining undistributed losses to additional paid-in capital,
. termination of the redemption rights of the existing holders of
common stock upon consummation of the initial public offering,
and
. the sale of 4,100,000 shares of common stock by EST in this
offering at an assumed initial public offering price of $11.00
per share, after deducting underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------
Pro Forma
Actual As Adjusted
---------------- -------------------
(in thousands, except share data)
<S> <C> <C>
Redeemable common stock:
Common stock, $0.10 par value;
45,000,000 shares authorized;
10,111,000 shares issued and
outstanding; none issued and
outstanding, pro-forma as adjusted.... 1,893
Note receivable from stockholder....... (550)
----------------
Total redeemable common stock...... 1,343
----------------
Stockholders' equity:
Common stock, $.10 par value;
45,000,000 shares authorized;
2,783,000 shares issued and
outstanding; 16,994,000 shares
issued and outstanding, pro-forma as
adjusted.............................. 278 1,699
Additional paid-in capital............. 8,206 41,986
Deferred compensation ................. (942) (942)
Note receivable from stockholder....... (472) (1,022)
Accumulated deficit.................... (2,986) --
Accumulated other comprehensive loss... (89) (89)
---------------- ----------------
Total stockholders' equity .......... 3,995 41,632
---------------- ----------------
Total capitalization............... $ 5,338 $ 41,632
================ ================
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of February 1, 2000 and excludes 2,555,500 shares of common
stock issuable upon the exercise of options outstanding as of such date at a
weighted average exercise price of $3.27 per share. See Note 8 of Notes to
Consolidated Financial Statements.
17
<PAGE>
DILUTION
Purchasers of the common stock in the offering will experience immediate and
substantial dilution in the net tangible book value of the common stock from
the initial public offering price. The pro forma net tangible book value per
share represents the amount of the total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding,
including redeemable common stock. At December 31, 1999, we had a pro forma net
tangible book value of approximately $0.7 million or $0.05 per share of common
stock. After giving effect to the sale of 4,100,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 per share,
the assumed exercise of 2,555,500 options at a weighted average exercise price
of $3.27 per share outstanding at February 2, 2000 and after the deduction of
underwriting discounts and commissions and estimated offering expenses, pro
forma net tangible book value at December 31, 1999 would have been
approximately $45.3 million or $2.32 per share. This represents an immediate
increase in net tangible book value of $2.27 per share to existing shareholders
and an immediate and substantial dilution of $8.68 per share to new investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $11.00
Pro forma net tangible book value as of December 31, 1999.... $0.05
Increase attributable to new investors....................... 2.27
-----
Pro forma, as adjusted, net tangible book value after this
offering...................................................... 2.32
------
Dilution to new investors...................................... $ 8.68
======
</TABLE>
Excluding the effect of the assumed exercise of stock options, the pro
forma, as adjusted net tangible book value after this offering would be $2.18
per share and the dilution to new investors would be $8.82 per share.
The following table summarizes, on the pro forma basis described above as of
December 31, 1999, the differences between existing stockholders and new
investors in this offering with respect to the number of shares of common stock
purchased from us, the total consideration paid to EST and the average
consideration paid per share at an assumed initial public offering price of
$11.00 per share, before the deduction of underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 15,449,500 79.0% $ 8,345,000 15.6% $ 1.85
New investors.................. 4,100,000 21.0% $45,100,000 84.4% $11.00
---------- ----- ----------- -----
Total........................ 19,549,500 100.0% $53,445,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus. The
selected consolidated statement of operations data for the years ended December
31, 1997, 1998 and 1999, and the selected consolidated balance sheet data as of
December 31, 1998 and 1999, are derived from and are qualified by reference to
the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations data for the years ended
December 31, 1995 and 1996 and the consolidated balance sheet data as of
December 31, 1995, 1996 and 1997, have been derived from audited consolidated
financial statements of EST that do not appear in this prospectus. The
historical results are not necessarily indicative of the operating results to
be expected in the future.
EST has been treated as a Subchapter S corporation under the applicable
provisions of the Internal Revenue Code since January 5, 1989. As a Subchapter
S corporation, EST has not been subject to federal and certain state income
taxes. Therefore, the historical net income (loss) and net income (loss) per
share data set forth below does not include provision for federal income taxes.
The pro forma net income (loss) reflects the provision for income taxes that
would have been recorded had EST been a Subchapter C corporation, assuming an
effective tax rate of 40%, 32%, 34%, 40% and 11% for the years ended December
31, 1995, 1996, 1997, 1998 and 1999, respectively. See Notes 2 and 10 to Notes
to Consolidated Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... $4,787 $8,262 $11,766 $18,250 $28,451
Cost of revenues............... 1,326 1,945 2,874 3,823 5,349
------ ------ ------- ------- -------
Gross profit................... 3,461 6,317 8,892 14,427 23,102
Selling and marketing.......... 1,575 2,833 4,052 7,236 10,595
Research and development....... 1,100 1,636 2,150 3,085 4,838
General and administrative..... 314 541 721 1,040 1,815
Stock-related compensation
expense (1)................... -- -- -- -- 9,437
------ ------ ------- ------- -------
Total operating expenses....... 2,989 5,010 6,923 11,361 26,685
Income (loss) from operations.. 472 1,307 1,969 3,066 (3,583)
Interest income (expense)...... -- (22) 22 42 238
------ ------ ------- ------- -------
Income (loss) before provision
for income taxes and minority
interest in majority owned
subsidiary.................... 472 1,285 1,991 3,108 (3,345)
Provision for income taxes..... 111 116 131 218 402
------ ------ ------- ------- -------
Income before minority interest
in majority owned subsidiary.. 361 1,169 1,860 2,890 (3,747)
Minority interest in majority
owned subsidiary.............. 92 68 -- -- --
------ ------ ------- ------- -------
Net income (loss).............. 269 1,101 1,860 2,890 (3,747)
Accretion of redeemable common
stock to redemption value..... -- -- -- -- (1,893)
------ ------ ------- ------- -------
Net income (loss) to common
stockholders.................. $ 269 $1,101 $ 1,860 $ 2,890 $(5,640)
====== ====== ======= ======= =======
Historical net income (loss)
per share -basic and diluted.. $ 0.03 $ 0.11 $ 0.18 $ 0.29 $ (0.49)
Pro forma statement of
operations data
(unaudited):
Historical income (loss) before
income taxes.................. $ 472 $1,285 $ 1,991 $ 3,108 $(3,345)
Pro forma provision for income
taxes assuming C corporation
tax........................... 189 411 677 1,243 (368)
------ ------ ------- ------- -------
Pro forma net income (loss).... $ 283 $ 874 $ 1,314 $ 1,865 $(2,977)
====== ====== ======= ======= =======
Pro forma net income (loss) per
common share - basic and
diluted....................... $ 0.03 $ 0.09 $ 0.13 $ 0.18 $ (0.26)
</TABLE>
<TABLE>
<CAPTION>
December
December 31, 31, 1999
--------------------------- ---------------
Pro
1995 1996 1997 1998 Actual Forma
------ ------ ------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....... $ 232 $ 618 $1,158 $2,440 $ 1,552 $ 1,552
Working capital................. 507 1,513 2,321 3,848 3,401 3,401
Total assets.................... 2,229 3,072 4,728 7,604 13,261 13,261
Redeemable common stock......... -- -- -- -- 1,893 --
Total stockholders' equity...... 530 1,609 2,685 4,393 3,995 689
</TABLE>
- --------
(1) The stock-related compensation expense relates to the issuance of
2,783,000 shares of common stock and the grant of options to purchase
1,692,000 shares of common stock to employees in June 1999. See Note 8 to
Notes to Consolidated Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of EST should be read in conjunction with "Selected Consolidated
Financial Data" and EST's consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. You should not
place undue reliance on these forward-looking statements. Our actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain important factors, including, but not limited
to, those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We design, manufacture, sell and support integrated hardware and software
tools for programming, testing and debugging embedded systems. Embedded systems
are special purpose computers within intelligent industrial and consumer
products such as network switches and routers, cellular base stations, process
control systems, cell phones, printers and anti-lock braking systems. Our
products enable developers to quickly and reliably program and debug the
embedded systems that manufacturers build into their industrial and consumer
products.
Founded in January 1989 by our current president and chief executive
officer, Peter Dawson, we have experienced consistent annual growth in revenues
and operating profits, except for a loss in the year ended December 31, 1999
attributable to the unusual compensation charge described further below. We
have financed this growth principally from operations and, to a lesser extent,
through periodic short-term bank borrowings. Prior to the offering, EST's
common stock was owned solely by its founder, officers and employees.
Over the three years ended December 31, 1999, revenues have grown at a
compound annual rate of xx%. We have experienced significant revenue growth
both internationally and domestically as a result of our late 1997 transition
from indirect sales through manufacturing representatives to direct sales
utilizing our own sales personnel; overall growth in industry demand; increased
penetration of major domestic and international accounts; our focus on adding
more functionality and features in an integrated hardware/software development
solution; and comprehensive customer support available from our experienced
development engineers, sales personnel and technical support teams.
Revenues are recognized when products are shipped against written purchase
orders. Service and extended warranty revenues, which are not significant, are
recognized as earned over the related contract periods. We sell our products
pursuant to purchase orders and do not have long term contracts with customers.
Because we typically ship within 30 days of receipt of an order, we do not have
a significant backlog. The lack of any substantial backlog could contribute to
fluctuations in quarterly operating results.
In the year ended December 31, 1999, we recorded compensation expense of
$9.4 million related to the fair value of common stock and stock options
awarded to employees and to partial payment of related tax liabilities on
behalf of employees related to the common stock awards. For more information,
please see Note 8 to Notes to the Consolidated Financial Statements.
Our business could over time be affected materially by competitive changes
in the embedded systems industry, including industry consolidation, decisions
by major industry elements to change their methods of securing tool support for
customer development, improved or restricted access to qualified engineering
employees (for sales and support as well as for research and development), our
present efforts to adapt our tools to support non-Motorola microprocessors, as
well as general industry conditions and trends in individual overseas
economies.
Costs of revenues as a percentage of sales could be affected by any number
of factors, including availability and prices of key components and
subassemblies. Any gradual improvement in margins as a result
21
<PAGE>
of greater software value and manufacturing efficiencies may well be offset by
higher expenses relating to customer and technical support.
Our policy is to hire sales, support and development engineers qualified in
the embedded systems field whenever they become available. We are currently
hiring aggressively to staff up for the development and introduction of tools
for new microprocessor families. Hiring in advance of budget could adversely
effect our quarterly results. We intend to continue and accelerate our policy
of maximizing growth in products, features and customer support with the view
of maximizing long-term shareholder value.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in our statement of operations:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 24.4 20.9 18.8
------ ------ ------
Gross profit....................................... 75.6 79.1 81.2
------ ------ ------
Operating expenses:
Selling and marketing................................ 34.4 39.7 37.2
Research and development............................. 18.3 16.9 17.0
General and administrative........................... 6.1 5.7 6.4
Stock-related compensation expense (1)............... -- -- 33.2
------ ------ ------
Total operating expenses........................... 58.8 62.3 93.8
------ ------ ------
Income (loss) from operations.......................... 16.8 16.8 (12.6)
Interest income (expense).............................. 0.2 0.2 0.8
------ ------ ------
Income (loss) before provision for income taxes ....... 17.0 17.0 (11.8)
Provision for income taxes............................. 1.1 1.2 1.4
------ ------ ------
Net income (loss)...................................... 15.9% 15.8% (13.2)%
====== ====== ======
</TABLE>
- --------
(1) The stock-related compensation expense relates to the issuance of
2,783,000 shares of common stock and the grant of options to purchase
1,692,000 shares of common stock to employees in June 1999. See Note 8 to
Notes to Consolidated Financial Statements.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Revenues increased to $28.5 million for the year ended December
31, 1999 from $18.3 million for the year ended December 31, 1998, an increase
of 55.7%. Domestic revenue increased from $12.9 million in the year ended
December 31, 1998 to $19.3 million in the year ended December 31, 1999, an
increase of 48.8%, while foreign revenue increased from $5.3 million in the
year December 31, 1998 to $9.2 million in the year ended December 31, 1999, an
increase of 73.6%. Unit sales for all significant product lines increased. Our
subsidiaries in Japan and the UK contributed strongly to unit sales growth in
overseas revenues for the year as compared with the comparable period in 1998.
Cost of Revenues. Cost of revenues consists of materials (including
procurement costs of finished boards and subassemblies), manufacturing expenses
(final test, assembly and quality control), and costs associated with our
technical support department. For the year ended December 31, 1999 compared to
the comparable period in 1998, cost of revenues increased to $5.4 million in
1999 from $3.8 million in the 1998 period, but declined as a
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percentage of revenues from 20.9% to 18.8%. The decline in cost of revenues as
a percentage of revenues and commensurate increase in gross margins is
attributable to increased features and functionality delivered in our bundled
products, as well as to overall manufacturing efficiencies on higher volumes.
Selling and Marketing. Selling and marketing expenses increased by 47.2%
from $7.2 million in the year ended December 31, 1998 to $10.6 million in the
year ended December 31, 1999, but decreased as a percentage of revenue from
39.6% to 37.2% during this period. The increase in selling and marketing
expenses was principally due to a growth in sales and marketing personnel,
including salaries, related benefits, commissions, travel and other personnel-
related expenses, from 35 at December 31, 1998 to 70 at December 31, 1999. We
intend to continue to increase the number of sales and marketing personnel and
these associated expenses are likely to continue to increase.
Research and Development. Research and development expenses increased to
$4.8 million in the year ended December 31, 1999 from $3.1 million in the year
ended December 31, 1998, an increase of 54.8%, and remained constant at 17% as
a percentage of revenue. The increase in research and development expenses
(which includes salaries and related benefits as well as expenses for
development materials and depreciation on computer facilities related to
personnel) was principally due to a growth in research and development
personnel from 23 at December 31, 1998 to 40 at December 31, 1999. Our plans to
adapt our development tools for use with non-Motorola microprocessor
architectures, to add application specific features and to provide software
services to our tools suite, will result in increases in these expenses in the
future.
General and Administrative. General and administrative expenses increased to
$1.8 million in the year ended December 31, 1999 from $1.0 million in the year
ended December 31, 1998, an increase of 74.5%. The increase in general and
administrative expenses was principally due to a growth in general and
administrative personnel from 7 at December 31, 1998 to 11 at December 31,
1999. We expect to add additional personnel and incur increased infrastructure
costs in support of growth and our status as a publicly-held company.
Stock-Related Compensation Expense. Results for the year ended December 31,
1999 include a charge of $9.4 million related to the fair value of common stock
and stock options awarded to employees and to partial payment of related tax
liabilities on behalf of employees related to the common stock awards. For more
information, please see Note 8 to Notes to the Consolidated Financial
Statements.
Interest Income. Interest income increased to $238,000 in the year ended
December 31, 1999 from $42,000 in the year ended December 31, 1998, an increase
of 466.7%. The increase in interest income was largely due to higher average
cash balances.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues increased to $18.3 million in the year ended December 31,
1998 from $11.8 million in the year ended December 31, 1997, an increase of
55.1%. Domestic revenue increased from $9.0 million in the year ended December
31, 1997 to $12.9 million in the year ended December 31, 1998, an increase of
43.3%, while foreign revenue increased from $2.8 million in the year ended
December 31, 1997 to $5.3 million in the year ended December 31, 1998, an
increase of 89.3%. All product lines contributed to the revenue growth. The
increase in revenues was due to greater market penetration achieved through an
increase in direct sales personnel as a result of the shift from indirect to
direct selling, both domestically and internationally.
Cost of Revenues. Cost of revenues increased to $3.8 million for the period
ended December 31, 1998 from $2.9 million for the period ended December 31,
1997, an increase of 33%, but declined as a percentage of revenues to 20.9%
from 24.4%. The corresponding increase in gross margin was principally due to
lower costs associated with direct sales in 1998 compared to sales through
manufacturers' representatives in 1997.
Selling and Marketing. Selling and marketing expenses increased to $7.2
million for the year ended December 31, 1998 from $4.1 million for the year
ended December 31, 1997, an increase of 78.6%, but
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<PAGE>
increased as a percentage of revenue from 34.4% to 39.6%. The year-to-year
increase in expenses was due to higher personnel and related costs associated
with converting our distribution channel from reliance on manufacturers'
representatives to a direct sales force. This conversion involved opening
several new sales offices and forming two new subsidiaries, and increasing
selling and marketing personnel from 21 at December 31, 1997 to 29 at December
31, 1998.
Research and Development. Research and development expenses increased to
$3.1 million in the year ended December 31, 1998 from $2.2 million in the year
ended December 31, 1997, an increase of 43.5%, but decreased as a percentage of
revenue from 18.3% to 16.9%. The increase in research and development expenses
was principally due to increased costs associated with an increase in research
and development personnel from 16 at December 31, 1997 to 23 at December 31,
1998.
General and Administrative. General and administrative expenses increased to
$1.0 million in the year ended December 31, 1998 from $0.7 million in the year
ended December 31, 1997, an increase of 44.2%, but decreased as a percentage of
revenue from 6.1% to 5.7%. The increase in general and administrative expenses
resulted from higher compensation awarded to key employees in the year ended
December 31, 1998.
Interest Income. Interest income increased to $42,000 in the year ended
December 31, 1998 from $22,000 in the year ended December 31, 1997, an increase
of 90.9%. The increase in interest income was largely due to higher average
cash balances.
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<PAGE>
Quarterly Results of Operations
The following tables set forth a summary of EST's unaudited quarterly
results for each of the eight quarters ended December 31, 1999. This
information has been derived from unaudited interim consolidated financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the audited Consolidated Financial Statements contained
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
information. The operating results for any quarter are not necessarily
indicative of results for any future quarterly period.
Statement of Operations Data:
<TABLE>
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $3,476 $4,436 $5,259 $5,079 $5,530 $ 6,495 $7,519 $8,907
Cost of revenues........ 791 1,201 976 855 1,083 1,282 1,424 1,560
------ ------ ------ ------ ------ ------- ------ ------
Gross profit........... 2,685 3,235 4,283 4,224 4,447 5,213 6,095 7,347
------ ------ ------ ------ ------ ------- ------ ------
Operating expenses:
Selling and marketing.. 1,322 1,599 2,190 2,125 2,026 2,497 2,751 3,321
Research and
development........... 710 740 831 804 1,041 1,043 1,294 1,460
General and
administrative........ 235 280 251 274 318 381 415 701
Stock-related
compensation expense.. -- -- -- -- -- 9,363 30 44
------ ------ ------ ------ ------ ------- ------ ------
Total operating
expenses.............. 2,267 2,619 3,272 3,203 3,385 13,284 4,490 5,526
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) from
operations............. 418 616 1,011 1,021 1,062 (8,071) 1,605 1,821
Interest income......... 7 3 11 21 57 56 51 74
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) before
provision for income
taxes.................. 425 619 1,022 1,042 1,119 (8,015) 1,656 1,895
Provision for income
taxes.................. 41 53 63 61 74 89 111 128
------ ------ ------ ------ ------ ------- ------ ------
Net income (loss)....... $ 384 $ 566 $ 959 $ 981 $1,045 ($8,104) $1,545 $1,767
====== ====== ====== ====== ====== ======= ====== ======
As a Percentage of Revenues:
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 22.8 27.1 18.6 16.8 19.6 19.7 18.9 17.5
------ ------ ------ ------ ------ ------- ------ ------
Gross profit........... 77.2 72.9 81.4 83.2 80.4 80.3 81.1 82.5
------ ------ ------ ------ ------ ------- ------ ------
Operating expenses:
Selling and marketing.. 38.0 36.0 41.6 41.8 36.6 38.4 36.6 37.3
Research and
development........... 20.4 16.7 15.8 15.8 18.8 16.1 17.2 16.4
General and
administrative........ 6.8 6.3 4.8 5.4 5.7 5.9 5.5 7.9
Stock-related
compensation expense.. -- -- -- -- -- 144.2 0.4 0.5
------ ------ ------ ------ ------ ------- ------ ------
Total operating
expenses.............. 65.2 59.0 62.2 63.1 61.1 204.6 59.7 62.1
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) from
operations............. 12.0 13.9 19.2 20.1 19.3 (124.3) 21.4 20.4
Interest income......... 0.2 0.1 0.2 0.4 1.0 0.9 0.7 0.8
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) before
provision for income
taxes.................. 12.2 14.0 19.4 20.5 20.3 (123.4) 22.1 21.2
Provision for income
taxes.................. 1.2 1.2 1.2 1.2 1.3 1.4 1.5 1.4
------ ------ ------ ------ ------ ------- ------ ------
Net income (loss)....... 11.0% 12.8% 18.2% 19.3% 19.0% (124.8)% 20.6% 19.8%
====== ====== ====== ====== ====== ======= ====== ======
</TABLE>
25
<PAGE>
During the eight quarters ended December 31, 1999, revenues increased
consecutively with the exception of the fourth quarter of 1998, during which we
experienced a slowdown in revenue primarily attributable to new product
introductions and a temporary slowing in industry demand. Cost of revenues
increased to 27.1% of revenues in the quarter ended June 30, 1998 as a result
of book-to-physical inventory charges and cost adjustments to inventory
incurred during that period. Stock-related compensation expense, during the
quarter ended June 30, 1999, attributable to the issuance of common stock to
seven key employees and the grant of stock options to employees in connection
with previously granted common stock rights and stock option rights, distorted
operating expenses and overall results for that period. Although overall
operating expenses, as a percentage of revenues, during the eight quarters
ended December 31, 1999, excluding the stock-related compensation expense in
the quarter ended June 30, 1999, remained steady or declined slightly,
accelerated spending on the development of tools for new microprocessor
families could significantly increase research and development expenses both in
absolute dollars and as a percentage of revenues in future quarters.
Historical and Pro forma (Unaudited) Income Taxes
EST has been treated as a Subchapter S corporation for federal income tax
purposes since its organization in 1989. As such, EST has not been subject to
federal and certain state income taxes. Therefore, historical provision for
income taxes reflects state and foreign tax provisions only. The increase in
the provision for income taxes over the period from the year ended December 31,
1997 through the year ended December 31, 1999 is due to increased revenues and
profits before taxes in EST's foreign subsidiaries.
The pro forma provision for income taxes reflects the estimated tax expense
EST would have incurred had it been subject to federal and state income taxes
as a Subchapter C corporation under the Internal Revenue Code. The pro forma
provisions reflect pro forma tax rates of 34%, 40% and 11% for the years ended
December 31, 1997, 1998 and 1999, respectively. The increase in the pro forma
tax rates from the year ended December 31, 1997 to the year ended December 31,
1998 is principally due to higher foreign taxes. The decrease in the pro forma
tax rates from the year ended December 31, 1998 to the year ended December 31,
1999 is principally due to the tax benefit associated with the stock-related
compensation expense offset by an increase in research and development tax
credits which increased the tax benefit generated.
Liquidity and Capital Resources
Since our inception, we have financed our operations and capital
requirements primarily through cash provided by operations and periodic short-
term borrowing.
Cash provided by operations was $1.7 million, $2.8 million and $0.5 million
for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. Cash
provided by operations for the year ended December 31, 1999 was primarily
driven by operating profit, excluding compensation expense (see Note 8 to Notes
to Consolidated Financial Statements) as well as increases in accounts payable
and accrued liabilities, offset by increases in accounts receivable.
Working capital at December 31, 1999 was approximately $3.4 million compared
to approximately $3.8 million at December 31, 1998. The decrease in working
capital from December 31, 1998 to December 31, 1999 was primarily due to
increased expenditures to support EST's growing expense base.
In December 1999, we borrowed $2.4 million from BankBoston, N.A. to fund in
part the payment of federal and state taxes incurred by us and seven key
employees upon their receipt of stock-related compensation. We intend to repay
this line of credit from the proceeds of this offering. In addition, these
stockholders delivered promissory notes providing for the repayment of
approximately $0.5 million of this amount on or before April 1, 2005, which
notes will be collateralized by their shares of our common stock.
We believe that the financial resources available to us, including the net
proceeds of the offering, our current working capital, and any future
availability under the working capital portion of our loan agreement, will be
sufficient to finance our planned operations and capital expenditures at least
through 2000. However,
26
<PAGE>
our future liquidity and capital requirements beyond 2000 will depend upon
numerous factors, including the resources required to further develop our
marketing and sales organization domestically and internationally, to expand
manufacturing capacity, and to meet market demand for our products.
Year 2000 Compliance
The Year 2000 problem stems from the fact that many currently installed
computer systems include software and hardware products that are unable to
distinguish dates after December 31, 1999. As a result, computer software
and/or hardware used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions to normal business activities.
We have defined Year 2000 compliant or Year 2000 readiness as the ability
to:
. Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. Function according to the product documentation provided for this date
change, without changes in operation, assuming correct configuration;
. Where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
. Store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
. Recognize Year 2000 as a leap year.
State of Readiness. We have made an assessment of the Year 2000 readiness of
our mission critical operating, financial and administrative systems, including
the hardware and software that support our systems. This review included
assessing and validating and, where necessary, remediation, upgrading and
replacing noncompliant systems, hardware or software, as well as evaluating the
need for contingency planning.
We have completed our Year 2000 compliance efforts and believe that our
products are Year 2000 compliant in all material respects. For all other
mission critical internal information technology systems, we have determined
that all our critical hardware and software is up to date. A small number of
desktop computers and workstations whose operating systems are not Year 2000
compliant was identified, but are not used in ongoing business activities.
We are also conducting an assessment of our non-information technology
systems. Some aspects of our facilities and manufacturing equipment may include
embedded technology, such as microcontrollers. The Year 2000 problem could
cause a system failure or miscalculation in such facilities or manufacturing
equipment, which could disrupt our operations. Affected areas include voice
mail and phone systems and computer-based test equipment. We believe we have
identified and addressed all material systems for Year 2000 readiness.
We have experienced no material adverse effect on our products as a result
of the Year 2000 issue, including any problems relating to other vendors or our
target customers. Nevertheless, there can be no assurances that we will not
experience problems resulting from any of the foregoing which could have a
material adverse impact on our business, operating results and financial
condition.
Costs. Our costs to date associated with assessment, remediation and testing
activities concerning the Year 2000 problem have not been material. Costs
incurred for Year 2000 compliance for our products were included in the regular
costs of research and development. We estimate that we will not incur more than
approximately $5,000 of additional costs in connection with addressing Year
2000 compliance issues.
Worst Case Scenario. Our reasonably likely worst case Year 2000 scenario
would be that a material third party vendor or supplier, such as a limited or
sole source supplier or a microprocessor manufacturer or operating system
supplier for which we develop tools, or a significant customer, would, as a
result of its own Year 2000 difficulties, fail to successfully remediate Year
2000 problems in hardware, software or equipment which is material to our
business and operations. If this scenario occurred, we may be required to seek
out new vendors and suppliers, which may not be available to us in a timely
basis, if at all. Furthermore, we would be required to certify certain new
limited or sole source suppliers. If we are required to seek out or certify new
27
<PAGE>
vendors or suppliers, it will be costly and divert management attention and our
resources, which could have a material adverse effect on our business and
operating results. If embedded systems manufacturers were to cease using
microprocessors or operating systems which our tools support, our business
would be harmed.
Contingency Plan. To date, we have no specific contingency plan to address
the effect of Year 2000 compliance failures. If, in the future, it comes to our
attention that certain of our products need modifications or certain of our
third party hardware, software and equipment are not Year 2000 compliant or
certain vendors are not Year 2000 compliant, then we will seek to make the
necessary modifications or substitutions. In such cases, we expect such
modifications or substitutions to be made on a timely basis and we do not
believe that the cost of such modifications or substitutions will have a
material effect on our business, financial condition and results of operations.
There can be no assurance, however, that we will be able to modify our
products, services, systems and equipment or find alternative vendors in a
timely and successful manner to comply with Year 2000 requirements, which could
have a material adverse effect on our business, financial condition and results
of operations.
Conversion to the Euro
On January 1, 1999, 11 European countries began using the euro as their
single currency, while still continuing to use their own notes and coins for
cash transactions. Bank notes and coins denominated in euros are expected to be
in circulation by 2002, at which time local notes and coins will cease to be
legal tender. We conduct a significant amount of business in these countries
and although our accounting systems permit invoicing in multiple currencies, to
date no customer has requested invoices in Euros. The introduction of the euro
has not resulted in any material adverse impact upon our operations, although
we continue to monitor the effects of the conversion.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Most of our revenue is transacted
in U.S. dollars. However, a significant portion of our international sales and
the expenses and capital spending of our international subsidiaries are
transacted in local currency. As a result, changes in foreign currency exchange
rates or weak economic conditions in foreign markets could affect our financial
results. We do not use derivative instruments to hedge our foreign exchange
risk. Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalents and loan agreement. The majority of
our investments are in short-term instruments and subject to fluctuations in
U.S. interest rates. Due to the short-term nature of our cash equivalents and
note payable, we believe that there is no material risk exposure.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. We will adopt SFAS No. 133 as
required by SFAS 137, "Deferral of the Effective Date of FASB Statement No.
133," in fiscal year 2001. The adoption of SFAS No. 133 is not expected to have
an impact on our financial condition or results of operations.
28
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. EST will apply the accounting and
disclosure requirements of SAB 101 and does not expect its application will
have a material effect on its results of operations.
29
<PAGE>
BUSINESS
Overview
We design, manufacture, sell and support integrated hardware and software
tools for programming, testing and debugging embedded systems. Our products
enable developers to quickly and reliably program and debug the embedded
systems that are part of the industrial and consumer products they manufacture.
As the complexity and speed of embedded systems increase, we believe that
embedded systems developers will require more efficient solutions to debug
their products and that we are well positioned to offer these solutions.
A significant portion of our customers are in the communications industry,
including telecommunications, data communications and Internet infrastructure
equipment suppliers. Our largest customers by revenue include Hewlett-Packard,
Lucent Technologies, Motorola, Nortel Networks, Tellabs Wireless and 3Com.
Industry Background
Embedded systems are the special purpose computers within intelligent
industrial and consumer products such as network switches and routers, cellular
base stations, process control systems, cell phones, printers and anti-lock
braking systems. As with all computers, embedded systems minimally consist of a
microprocessor, memory and software, and the level of complexity of that system
can be enhanced with additional components. Embedded systems differ from
general purpose computers, such as PCs, workstations and mainframes, in that
they are designed to run only the specific set of tasks required for the end
product to operate as intended. Manufacturers use embedded systems to enhance
functionality and performance, reduce cost and size, and improve reliability of
a broad variety of products, ranging from simple systems found in microwave
ovens to complex multiprocessor driven systems controlling the infrastructure
of the Internet.
According to industry and market research firms, at least 55% of the more
than 265 million microprocessors produced by the semiconductor industry in 1998
were used in embedded systems, while the remainder were used in general purpose
computers such as PCs. We participate in the market for the higher-end 32-bit
and greater embedded microprocessors, which is forecast to grow at a rate of
21%, from 106 million units in 1998 to 228 million units in 2002. Motorola is
the largest supplier of embedded microprocessors, with a market share of 35% in
1997, the latest year for which data is available. The market for embedded
software development tools is part of the overall embedded operating systems
and development tools market, which was approximately $550 million in 1998 and
is forecast to grow 14% annually through 2003.
The advancement in microprocessors to 32-bit and greater devices has enabled
the development of embedded systems capable of performing more complex tasks
more efficiently. As microprocessor prices have declined and performance has
increased, manufacturers have incorporated more powerful chips into embedded
systems in order to increase the end product's functionality, reduce product
size and cost, and enhance product reliability. As an example, the
implementation of more powerful embedded systems into increasing complex
communications infrastructure equipment has enabled the deployment of greater
network connectivity ranging from small local area networks to the Internet.
Building a complex embedded system requires significant technical expertise,
time and capital investment. Product manufacturers compete on the basis of the
functionality and quality of their products, and therefore must design and
develop increasingly complex embedded systems that possess greater speed,
performance and reliability. Competitive demands increase pressure to minimize
development costs and time to market. The necessity for product reliability and
interoperability leaves no margin for error or delay in the development cycle.
Complex embedded systems development projects require sophisticated
development tools. In their search for shorter time to market, increased
functionality, and assured reliability, embedded systems developers demand, and
product manufacturers must invest, in technically sophisticated tools that help
them accomplish these objectives quickly, economically and reliably.
30
<PAGE>
Our Solution
We design, manufacture, sell and support a comprehensive suite of bundled
high performance, open and scalable embedded systems development tools
consisting of both hardware and software components. We are a worldwide
provider of integrated tools necessary to develop complex embedded systems. Our
tools enable development engineers to program, test and debug embedded systems
quickly, economically and reliably at each stage of the development process. We
believe that our leadership position arises from the following:
Superior Development Tools. Our tools, which support five different
microprocessor families encompassing more than 50 microprocessor derivatives,
offer the following advantages:
. Bundled - We bundle source level software debuggers and other graphical
utilities with hardware tools to produce a complete solution for early
stage hardware and firmware development. Traditional hardware tools
makers generally do not engineer and bundle software development tools
with hardware tools. Conversely, software tool makers do not develop
their own hardware connectivity products. Our integrated solution
enables developers to more effectively visualize the operation of the
application software on the embedded microprocessor.
. Open - We enable developers using our tools to incorporate a broad range
of real-time operating systems and a wide range of applications. For
example, during the early stage of hardware and firmware development,
our tools allow customers to optimize their system design by choosing
and incorporating the real-time operating system best suited to their
end product. In the later applications software development phase, the
customer may choose to maintain hardware connectivity using our tools as
a platform while integrating tools from other vendors as appropriate.
. Graphical - Our software tools provide a rich graphical user-interface,
which gives developers easy access to multiple in-depth views of
microprocessor data and development status. For example, simultaneous
access to microprocessor registers and program data structures increases
developers' productivity.
. Scalable - Our hardware tools are modular and designed to easily allow
developers to configure and scale their development environments to meet
their specific needs. For example, developers using our entry level
products in the early stage of hardware and firmware development can
subsequently upgrade to our trace analyzer, which provides visibility
into the real time issues typically associated with later phases of the
development cycle.
Microprocessor Knowledge Base. We were one of the first companies in the
industry to develop and market tools for debugging Motorola microprocessors
using its on-chip debug capabilities. We have been able to adapt our tools to
work with over 50 different microprocessors within the Motorola and IBM
families. We have done this through relationships with Motorola and IBM, which
gives us early access to new microprocessor designs prior to commercial
release. We are then able to identify new features and implement them in our
tools for the new microprocessors. We also provide customers with hardware and
software reference designs, which enable them to initiate early development of
their embedded systems.
Comprehensive Customer Support. We believe customer support and service is a
critical component of our success. Our in-depth knowledge of microprocessor
technology enables us to provide a high level of technical and informational
support to our customers. We deploy a team of 41 sales and support engineers to
assist our customers throughout their development cycles. We effect a major
knowledge transfer to our customers by providing early development kits
containing single board computers and board support packages. We also offer our
customers formal one-day or three-day training sessions on the microprocessor
architectures we support. Because we use embedded systems in our own products
and test and debug them with our own tools, we can anticipate and provide
solutions for the problems our customers are likely to face in the development
cycle.
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<PAGE>
Our Strategy
Our goal is to maintain and enhance our position as a technological and
market leader in embedded systems development tools. In order to achieve this
goal, we intend to:
Extend Our Technological Leadership. The embedded systems industry is
characterized by the introduction of faster microprocessors and more complex
applications software. We have established leadership in development tools by
bundling hardware and software solutions, and we must insure that our products
continue to embody the latest technologies and features. To accomplish this, we
intend to substantially increase our investment in research and development and
expand the number of engineers with embedded systems experience.
Continue Our Focus On Communications Applications. We believe that the
communications network and Internet infrastructure markets provide us with
major growth opportunities. A significant number of our customers build highly
complex data communications, telecommunications and Internet networking
equipment. These customers require greater visibility into their network
applications during the development stage. We plan to expand our product
offerings to address the specific needs of these developers by leveraging our
existing strengths within the communications market. To do this, we will focus
on making our tools more application specific by adding additional features for
networking and network data acquisition.
Increase Our Software Product Offerings. Our customers increasingly demand
integrated hardware and software development solutions. We intend to use our
strengths in the hardware bring-up development stage to extend and enhance our
software solutions for embedded systems. We plan to:
. extend our graphical user interface products to provide an integrated
development environment; and
. provide systems developers with initialization code and diagnostics that
can be embedded into a user's end application.
A key aspect of our strategy is to remain operating system independent; that
is, we will build our products to interface with a wide variety of operating
systems.
Satisfy Customer Demand for Additional Microprocessor Architectures. The
embedded microprocessor market is increasingly competitive, with semiconductor
manufacturers introducing new architectures for embedded applications. We have
adapted our tools to work with more than 50 different microprocessors from
Motorola and IBM. As our customers are exposed to an even wider choice of
microprocessor architectures, we intend to meet their needs by continuing to
adapt our development products for those architectures. Our product design
incorporating field programmable logic devices allows for timely and cost-
effective adaptations to new architectures.
Strengthen and Develop Strategic Alliances. We believe that our customers
are best served by our having strategic alliances with market leaders. We have
developed significant relationships with both Motorola and Wind River Systems.
These relationships provide us with early access to new microprocessor
technology as well as expanded sales channels. We intend to strengthen these
relationships as well as seek new alliances. Moreover, we may seek additional
technology or distribution channels through selective acquisitions.
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Customers
Our customers develop a wide range of products that incorporate embedded
systems. A significant portion of our customers are in the communications
industry, including telecommunications, data communications and Internet
infrastructure equipment suppliers. In each of 1997 and 1998, no customer
accounted for more than ten percent or more of our revenues and in 1999 Nortel
Networks accounted for ten percent of our revenues. Each of the following
customers was one of our top ten customers by sales during one or more of the
years ended December 31, 1997, 1998 or 1999:
<TABLE>
<S> <C>
Advanced Fibre Communications (1998, 1999)Next Level Systems (1997, 1998,
Ciena (1998) 1999)
General Instruments (1998) Nortel Networks (1997, 1998,
Lucent Technologies (1997, 1998, 1999) 1999)
Motorola (1997, 1998, 1999) Tellabs Wireless (1998, 1999)
</TABLE> 3 Com (1999)
The following is a representative list of emerging growth companies who have
purchased products from us during fiscal 1999:
Diamond Lane Sycamore Networks
Castle Networks Sunrise Telecom
Copper Mountain Networks Tut Systems
Strategic Relationships
We have established and will continue to pursue strategic relationships with
significant industry leaders to increase our market penetration and to maintain
our technological leadership. Our principal relationships are with Motorola, a
leading supplier of microprocessors for embedded systems, and with Wind River
Systems, a leading supplier of real time operating systems and software tools
for embedded applications.
Motorola. Our first products introduced in 1989 were hardware tools which
connected an embedded system developer's workstation to Motorola
microprocessors. Since that time we have enjoyed a close informal relationship
with Motorola that provides us with silicon design documentation and the
related pre-release versions of new microprocessors. This enables us to design
and build tools concurrently with Motorola's microprocessor development cycle
and make these tools available to embedded systems developers at the same time
that Motorola delivers the new microprocessor. These tools, which include
reference designs, help embedded systems designers evaluate the microprocessor
and initiate their development efforts prior to investing in their own hardware
design. Motorola benefits from our relationship because our tools help
customers adopt new microprocessors rapidly into their embedded systems, thus
reducing Motorola's sales cycle.
Wind River Systems. We have worked closely with Wind River Systems, a
leading supplier of real time operating systems and software tools for embedded
applications. We have jointly designed our tools to provide seamless
integration with Wind River's Tornado(TM) development environment. This
integration provides Wind River customers with critical hardware connectivity
while increasing our target market. In June 1999 we became one of a limited
number of charter members of the Wind River Direct Program. Our membership
allows Wind River's direct sales force to sell our development tools. Recently,
Wind River acquired a development tools company considered by us to be a direct
competitor. We anticipate that Wind River will focus on developing this new
line of business and that our relationship with Wind River is likely to weaken
over time, reducing the volume of sales and sales leads which we might
otherwise have expected.
33
<PAGE>
Products
We offer bundled hardware and software tools and reference designs for
programming, testing and debugging complex embedded systems throughout their
development cycle. Our products are categorized as follows:
Microprocessor Connectivity and Debug Run Control Products
We are a leader in hardware tools that connect a PC or workstation
programming station to a Motorola or IBM embedded microprocessor using on-chip
debug technology. On-chip debug is a set of services that silicon vendors
design into their microprocessors to allow developers to download and test
software running on the embedded system. Substantially all recent 32-bit and
64-bit microprocessors targeted for embedded applications have on-chip debug
capabilities designed into the microprocessor.
Product
Description
Benefits
visionPROBE
Entry-level on-chip . Easy control of the embedded
debug cable which microprocessor
connects a PC .Reduces development time
running visionCLICK .Enables flash programming
software to the .Used with over 50
embedded microprocessors
microprocessor
.All benefits of visionPROBE,
plus
-Turnkey network support
Scalable hardware -Scales with real-time trace
development tool option
connects PC or UNIX
programming station
to the
microprocessor via a
visionICE local area network
Host Software Tools
We develop, market and support software development tools which run on PCs
under Windows 9x/NT, as well as workstations under UNIX and Linux. The software
tools provide a graphical user interface designed to control and operate our
hardware connectivity tools and real-time data acquisition systems. The
software tools include C and C++ source-level debuggers. These high-level
language debuggers significantly increase developers' productivity by
correlating microprocessor data and status to the embedded program as
originally coded in the C or C++ programming language.
We bundle and sell our software tools in combination with our hardware tools
to form an integrated development solution. These tools are:
Product
Description
Benefits
visionCLICK Graphical User . Lets programmers control the
visionXD Interface and C/C++ embedded microprocessor
High Level Language . Multiple windows provide
Debuggers. easy and simultaneous access
visionCLICK runs to pertinent microprocessor
under PC/Windows; data and status
visionXD runs under . Correlates microprocessor
UNIX and Linux instructions and trace data
to high-level language
statements
34
<PAGE>
Real-time Data Acquisition Systems
We market visionEVENT, a sophisticated real-time trace and data acquisition
system as a modular upgrade to visionICE. visionEVENT utilizes external
hardware to capture and store microprocessor activity while the microprocessor
continues to operate at full speed. Developers upload and analyze the captured
data in order to gain system visibility and identify complex software and
hardware bugs.
Description Benefits
Product
Modular real-time . Captures and stores
visionEVENT trace and data microprocessor code and
acquisition data at full processor
system speed
. Developers analyze the
captured data to identify
real-time hardware and
software problems
. Provides detailed timing
information used to
optimize the embedded
application
Reference Designs
We engineer, market, sell and support reference designs consisting of
microprocessor-based circuit boards, software examples and hardware design
documentation. These components, which constitute our reference designs, create
both a blueprint or roadmap for understanding the particular microprocessor
being programmed and a working environment for programming the microprocessor
prior to incorporation in a customer's product. These reference designs enable
our customers to begin developing systems with a new microprocessor in parallel
with their own hardware development. We also reduce our customers' total
development time by encouraging them to re-use much of the hardware and
software components and intellectual property included in the reference
designs. We offer the following reference designs to our customers:
Product Description Benefits
SBC8260 Reference designs . Board schematics, which
SBC8240 for specific accelerate customer
SBC603/740/750 Motorola embedded hardware development
MDP8xx microprocessors . Board support packages,
SBC520x which adapt operating
SBC5307 systems to target hardware,
SBC3xx reduce early software
SBC360 development time and enable
SBC34x software development in
parallel with hardware
development
- --------
x denotes that a design supports multiple microprocessor derivatives.
Sales and Marketing
Purchase decisions for development tools are generally not centralized.
Typically, project managers decide which development tools to use and their
decisions are based upon the nature of the project and the preferences of the
engineers using the tools. Therefore, our field salespeople may be
simultaneously pursuing multiple sales within the same company. We rely on our
field salespeople and support engineers to make and nurture these contacts with
customer decision makers.
Our field salespeople and support engineers market our products in North
America, Europe and Japan by direct contact, engineer to engineer, with project
managers and development engineers of existing and prospective customers. We
employ a total of 54 field salespeople and support engineers in North America,
Europe and Japan. We have eight offices in the major markets of North America,
and operate wholly-owned subsidiaries in Canada, France, Germany, Japan, Sweden
and the United Kingdom.
35
<PAGE>
Our field salespeople and support engineers have on average 10 years
experience in selling to and supporting customers in the embedded systems
industry. We believe that the experience and expertise of our sales and support
staff has been critical in building and sustaining customer relationships.
We contract with distributors of embedded systems development tools in
China, India, Israel, Italy, Korea and Taiwan for sales and customer support in
these countries. We also utilize direct mail and phone promotions to targeted
prospects and participate in national and international trade shows.
Competition
The market for development tools used in the embedded systems market is
highly competitive and characterized by rapidly changing technological needs
and capabilities. Competition focuses on a variety of factors, including the
availability of tools that are compatible with the customer's chosen embedded
microprocessor, engineering workstation and other software development
equipment, performance characteristics and features such as high-speed
processing, real-time visibility and control, high-level programming language
and ease-of-use, product reliability, price/performance characteristics,
customer service and worldwide support, and product availability and delivery
time. We believe that the relative importance of each of these factors to a
prospective customer varies for each development project depending upon the
complexity of the embedded system design, the microprocessor to be used, the
project development schedule and the software engineer's budget and experience
level.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially adversely affect the
Company's business financial condition and results of operations. If we are
unable to compete successfully against current and future competitors, our
business will be materially adversely affected. We presently compete primarily
against Applied Microsystems, Agilent Technologies and Lauterbach GmbH. In
October, 1999, Wind River Systems acquired Integrated Systems, Inc., which had
earlier in the year acquired a development tools business directly competitive
with ours. Wind River is a major supplier of operating systems which are widely
used by embedded systems makers. We anticipate that Wind River will focus on
the manufacture and sale of programming tools directly competitive with ours
for use in the early stages of hardware and firmware development.
We anticipate that competition in the embedded systems market is likely to
intensify as competitors consolidate to broaden their product offerings. In
addition, microprocessor manufacturers may acquire or form alliances with
developers of development tools. We believe that much of the competition is
now, and will increasingly be, from companies larger than us and having
substantially greater technical, financial and marketing resources, as well as
larger customer bases and greater name recognition. To compete effectively, we
must continue to differentiate our development tools from those available or
under development by our competitors and we may find it necessary to enter into
alliances with other tool makers, or to acquire other technologies or product
lines, in order to broaden our product offerings.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and products and operate
without infringing on the proprietary rights of others. We rely primarily on a
combination of trade secret, copyright law and contractual restrictions and to
a lesser extent patent law to protect the proprietary aspects of our products.
These legal protections afford only limited protection for our products. We
presently have one patent application pending in the United States and we
cannot be certain that a patent will be granted based on this or any other
application. We believe that our technological leadership is based on our know-
how, our in-depth expertise in microprocessor technology and our superior
utilization of known core technologies present in the industry.
For example, we utilize field programmable gate array technology to make our
tools programmable. This means that as we elect to adapt our tools to different
microprocessor architectures, we can do so by re-
36
<PAGE>
programming certain components without having to effect a complete product
redesign. At present, we have re-programmed visionPROBE and visionICE to adapt
to more than 50 different microprocessors within the Motorola PowerPC(TM),
ColdFire(TM) and CPU32 families and the IBM PowerPC(TM) family. We believe that
this feature will also enable us to re-program and adapt our tools for
architectures from other major microprocessor families.
visionEVENT is our version of high speed logic analysis, or trace, which is
used by programmers to correct extremely complex embedded software bugs. This
technology uses passive pod connectivity, which facilitates connections to the
target microprocessor and enables traces to the microprocessor at higher bus
frequencies than tools using traditional emulation techniques.
CPMSpy is a recently introduced software utility bundled with visionCLICK.
As visionEVENT captures data from the microprocessor's communications processor
module, CPMSpy uploads the communications data and presents the programmer with
a three pane window showing key information about packet transmission and
behavior.
Our products are susceptible to reverse engineering; however, we believe
such a process would be difficult, laborious and costly. In addition, we
believe that due to rapid technological change, factors such as the
technological and creative skills of our personnel, new product developments
and enhancements to existing products are more important to establishing and
maintaining a leadership position than the various legal protections afforded
our products.
Research and Development
We invest significant resources in research and development. In general, we
have invested in new product development and major enhancements to our existing
products through product engineering. A significant portion of our research and
development has focused on:
. Broadening the capabilities of our integrated development environment;
. Adding new features to address the needs of the communications industry;
and
. Extending our product line to new microprocessors.
As of January 31, 2000, we had 43 employees engaged in research and
development. We expended approximately $2.1 million, $3.0 million and $4.8
million for the years ended 1997, 1998 and 1999, respectively, on research and
development.
Manufacturing and Facilities
We conduct final assembly, test, quality assurance, packaging and shipping
of our products at our 28,878 square foot plant in Canton, Massachusetts. Our
purchase managers conduct all parts procurement from the Canton office. Parts
suppliers are selected for their reputation and experience and their output is
tested for quality assurance in Canton. Purchased parts are then collected into
kits and sent for board assembly at any one of several qualified board assembly
companies located in close proximity to our plant. The completed boards are
returned to us for final assembly and testing.
Typically, our customers place orders when they are about to commence a new
product development cycle. Because we maintain an adequate inventory of
components and are able to assemble products quickly, we can satisfy most
orders within a short period of time after receiving the order. As a result, we
do not have a significant backlog of unfilled orders. We believe that backlog
is neither a significant factor in understanding our business nor a useful
means to predict potential revenue in any particular future period. However,
our inability to predict order volume at any particular time can result in
unexpected increases in our assembly
37
<PAGE>
activity. This requires us to maintain considerable inventory of product
components to avoid delivery delays under such circumstances.
We moved to our current location in Canton in 1992 and have leased
additional space there as needed from time to time. The present lease expires
on January 1, 2003. We believe that our currently leased facilities are
adequate for operations for the foreseeable future. We presently maintain sales
offices in Dana Point and San Jose, California, Colorado Springs, Colorado,
Westford, Massachusetts, Ambler, Pennsylvania and Addison, Texas in the United
States and Hampshire, England, Vallingby, Sweden, Malsch, Germany, Tokyo,
Japan, Montigny, France and Richmond, Canada. We expect that we will need
additional space if our business expands, and that we will be able to obtain
additional space on an as needed basis on commercially reasonable terms.
Employees
As of January 31, 2000, 1999, we employed approximately 151 full time
employees world wide as follows: 43 in research and development; 70 in sales
and marketing; 16 in manufacturing; 8 in service and support; and 14 in
administration.
None of our employees is represented by a union. We believe that our
relationship with our employees is good.
Legal Proceedings
We are not a party to any material legal proceedings.
38
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the directors and executive officers of EST,
their ages and the positions held by them.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Peter S. Dawson......... 44 Chairman of the Board of Directors, President and Chief Executive Officer
Mark F. Lapham.......... 53 Chief Financial Officer and Treasurer
James E. Watkins (1).... 37 Chief Operating Officer, Senior Vice President of Sales and
Marketing and Director
John T. W. Baggott ..... 64 Vice President of Human Resources and Director
Nicolas Lossky.......... 36 Vice President of European Sales and Business Development
Daniel McGillivray...... 36 Vice President of Sales for North America and Asia
Howard V. Neff, Jr. (1)
(2).................... 51 Director
P. J. Plauger, Ph.D (2). 55 Director
John C. Edmunds (1)(2).. 52 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Peter S. Dawson has served as Chairman of the Board of Directors, President
and Chief Executive Officer of EST since he founded EST in January 1989. Prior
to 1989 Mr. Dawson was a principal software engineer and project leader at EMC
Corporation. Mr. Dawson attended the University of Hull in England where he
earned a B.S. in Electrical Engineering.
Mark F. Lapham has served as EST's Chief Financial Officer since April 1999
and as Treasurer since December 1999. From January 1995 to April 1998 Mr.
Lapham provided consulting services to several companies and in particular
served as Vice President of Corporate Development for MRS Technology. From
April 1998 to April 1999 he served as a consultant for Resources Connection.
Mr. Lapham received an A.B. from Harvard College and an M.B.A. from Babson
College.
James E. Watkins has served as EST's Senior Vice President of Sales and
Marketing from May 1991. Since September 1999 he has also served as Chief
Operating Officer of EST. Mr. Watkins holds a B.S. in Electrical Engineering
from the University of Missouri - Rolla. Mr. Watkins has served as a director
of EST since May 1991.
John T. W. Baggott joined EST in May 1991. He served as Vice President of
Finance and Treasurer of EST from May 1991 to December 1999. Since December
1999 he has served as Vice President of Human Resources of EST and has served
as a director since May 1991. Mr. Baggott was educated in England at S.W. Essex
College.
Nicolas Lossky joined EST in February 1993 as General Manager for EST
Corporation Europe and served in that position until August 1997. From August
1997 to February 1999 he served as Director of European Sales and Director of
Strategic Relationships. Since February 1999 Mr. Lossky has served as Vice
President of European Sales and Business Development. Mr. Lossky graduated from
Northeastern University and holds a B.S. in Computer Science.
Daniel McGillivray has served as the Vice President of Sales for North
America and Asia from April 1992 to January 1999. Mr. McGillivray holds an
M.B.A. from Boston University and a B.S. in Computer Science and Accounting
from Boston College.
39
<PAGE>
Howard V. Neff, Jr. has served as a member of EST's Board of Directors since
June 1999. For the past five years, Mr. Neff has served as Senior Vice
President, Real Estate at Boston Mutual Insurance Company. Mr. Neff attended
Nichols College.
P.J. Plauger, Ph.D has served as a member of EST's Board of Directors since
June 1999. Since 1995 Dr. Plauger has been President of Dinkumware, Ltd., which
licenses certain software libraries and on-line documentation. Dr. Plauger has
also served since 1990 as Senior Editor of The C/C++ User's Journal, and a
Contributing Editor to Embedded Systems Programming. Dr. Plauger received a
Ph.D. in nuclear physics from Michigan State University and an A.B. in physics
from Princeton University.
John C. Edmunds has served as a member of EST's Board of Directors since
December 1999. Mr. Edmunds is Chairman of Finance Faculty at Babson College and
since June 1998 has served as Professor of Quantitative Methods at the Arthur
D. Little School of Management. He is also a director of Greenpoint Mortgage
Securities, Inc.
Election of Officers and Directors
The executive officers of EST are elected by the Board of Directors on an
annual basis and serve until their successors are duly elected and qualified.
Our Restated Articles of Organization and Amended and Restated Bylaws provide
that our board of directors will be divided into three classes of directors,
with the classes to be as equal in number as possible. Messrs. Edmunds and
Baggott will serve as Class I directors, whose terms expire at the annual
meeting of stockholders to be held in 2000. Messrs. Neff and Plauger will serve
as Class II directors, whose terms expire at the annual stockholders meeting to
be held in 2001. Messrs. Dawson and Watkins will serve as Class III directors,
whose terms expire at the annual meeting of the stockholders to be held in
2002.
Board Committees
On December 17, 1999 we established an Audit Committee and a Compensation
Committee. The Audit Committee, which currently consists of Messrs. Neff,
Plauger and Edmunds, reviews our internal accounting procedures and consults
with and reviews the services provided by our independent accountants. The
Compensation Committee, which consists of Messrs. Watkins, Neff and Edmunds,
reviews and determines the compensation and benefits of all our officers and
reviews general policies relating to the compensation and benefits of employees
and administers our Amended and Restated 1999 Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
Prior to December 1999, we did not have a separate compensation committee or
other board committee performing equivalent functions. These functions were
performed by our board of directors. In December 1999, we established a
compensation committee and appointed Messrs. Watkins, Neff and Edmunds to serve
on the compensation committee.
The compensation committee evaluates the salaries and incentive compensation
of management and employees of EST and administers our equity incentive plans.
Peter S. Dawson, Chairman of the Board, President and Chief Executive Officer,
participates in discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of EST, except that he
is excluded from all discussions regarding his own salary and incentive
compensation. Other than Mr. Watkins, who serves as our Chief Operating Officer
and Senior Vice President of Sales and Marketing, no member of this committee
was at any time during the past year an officer or employee of EST or any of
its subsidiaries. Other than Mr. Watkins, no member of the compensation
committee owns any capital stock of EST. No interlocking relationships exist
between any member of the compensation committee and any member of any other
company's board of directors or compensation committee. No interlocking
relationship existed between any member of our board of directors and any
member of any other company's board of directors or compensation committee in
1999.
40
<PAGE>
Mr. Neff is a Senior Vice President, Real Estate of Boston Mutual Insurance
Company, the landlord of our principal office in Canton, Massachusetts. We pay
rent of $52,402 per month to Boston Mutual Insurance Company.
Director Compensation
We pay each non-employee director $6,000 annually as compensation. Each
director is reimbursed for reasonable travel and other out-of-pocket expenses
incurred in attending meetings of the Board of Directors or of any committee of
the board of directors. Non-employee directors are eligible to receive options
to purchase shares of our common stock pursuant to our Amended and Restated
1999 Stock Option Plan. During 1999 we granted options to purchase 20,000
shares of common stock to each of our non-employee directors.
Executive Compensation
The table below sets forth the total compensation paid or accrued for the
fiscal year ended December 31, 1999 for our chief executive officer and each of
our four most highly compensated other executive officers who received annual
compensation in excess of $100,000 for the fiscal year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------ ----------------------
Name and Principal Other Annual Number of Securities All Other
Position Salary Bonus Compensation Underlying Options Compensation
------------------ -------- -------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Peter S. Dawson......... $500,000 $100,000 -- -- $23,800(1)
Chairman of the Board
of Directors, President
and Chief Executive
Officer
James E. Watkins........ $300,000 $ 75,000 -- -- $25,247(2)
Chief Operating Officer
and Senior Vice
President of
Sales and Marketing
John T. W. Baggott...... $250,000 $ 50,000 -- -- $19,609(3)
Vice President of Human
Resources
Nicolas Lossky.......... $227,496 $ 25,000 -- -- $23,719(4)
Vice President of
European Sales and
Business Development
Daniel McGillivray...... $261,600 -- -- -- $19,609(3)
Vice President of Sales
for North America and
Asia
</TABLE>
- --------
(1) Consists of $3,333 for 401(k) matching payments, $6,676 in 401(k) plan
contributions, $9,600 in defined contribution plan contributions and
$4,190 in payments for a car allowance.
(2) Consists of $3,333 for 401(k) matching payments, $6,676 in 401(k) plan
contributions, $9,600 in defined contribution plan contributions and
$5,638 in payments for a car allowance.
(3) Consists of $3,333 for 401(k) matching payments, $6,676 in 401(k) plan
contributions and $9,600 in defined contribution plan contributions.
(4) Consists of $3,333 for 401(k) matching payments, $6,676 in 401(k) plan
contributions, $9,600 in defined contribution plan contributions and
$4,110 in payments for a car allowance.
41
<PAGE>
Option Grants
The table below sets forth grants of stock options granted to each of the
named executive officers during fiscal year 1999. The exercise price per share
of each option was equal to the fair market value of the common stock on the
date of grant as determined by the board of directors. The potential realizable
value is calculated based on the term of the option at its time of grant (10
years). It is calculated assuming that the fair market value of common stock on
the date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price.
Option Grants
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Individual Grants Stock Price Appreciation for
-------------------------------------------- Option Term
Number of Percent of
Securities Total
Underlying Options Exercise or
Options Granted to Base Price Expiration
Name Granted(1) Employees Per Share Date 5% 10%
- ---- ---------- ---------- ----------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter S. Dawson......... -- -- -- -- -- --
James E. Watkins........ -- -- -- -- -- --
John T. W. Baggott...... -- -- -- -- -- --
Nicolas Lossky.......... 10,000 0.4% $1.73(2) 7/01/09 $ 28,180 $ 44,872
50,000 2.0% $9.90 12/17/09 $ 806,303 $ 1,283,900
Daniel McGillivray...... 10,000 0.4% $1.73(2) 7/01/09 $ 28,180 $ 44,872
50,000 2.0% $9.90 12/17/09 $ 806,303 $ 1,283,900
</TABLE>
- --------
(1) The dates of exercisability of the options are determined in accordance
with their respective vesting schedules. These options vest in five equal
installments.
(2) The fair value at the grant date was $2.55 which was determined by the
Board of Directors based primarily upon the price per share of an arms'
length offer made by a third party in May 1999 to acquire EST and the
sales price of a comparable company sold in July 1999.
Amended and Restated 1999 Stock Option Plan
Our Amended and Restated 1999 Stock Option Plan was adopted by the Board of
Directors on June 15, 1999 and approved by our stockholders on the same day. It
was amended and restated in December 1999. The Plan provides employees,
directors, independent contractors, consultants and advisers an opportunity to
acquire an ownership interest and a shared incentive. During 1999, we granted
options to purchase a total of 2,589,500 shares of common stock to our
employees, of which options for 520,000 shares were granted to our executive
officers. The Plan is administered by the Compensation Committee of the Board
of Directors. As of December 21, 1999, 4,000,000 shares of our common stock
were reserved for issuance under the Plan. The Plan provides for the grant of
incentive stock options and nonqualified stock options. However, eligibility
for the grant of incentive stock options is limited to employees. Options need
not have identical terms with respect to each optionee. Options shall have such
terms and be exercisable in such manner and at such times as the Compensation
Committee may determine. Each option must expire within 10 years from the grant
date. Each option is transferable only by will or the law of descent and
distribution and exercisable only by the optionee during his or her lifetime.
The Plan remains in effect until June 15, 2009 or earlier if terminated by
the Board of Directors. Any amendment is subject to the approval of
stockholders only to the extent required by applicable laws, regulations or
rules. Rights and obligations under any option may not be materially altered or
impaired without the optionee's consent.
42
<PAGE>
Employment and Non-Competition Agreements
We have entered into employment agreements with Messrs. Dawson, Watkins,
Lossky and McGillivray, which become effective upon completion of this
offering:
Mr. Dawson has agreed to serve as President and Chief Executive Officer of
EST, Mr. Watkins has agreed to serve as Chief Operating Officer and Senior Vice
President of Sales and Marketing, Mr. Lossky has agreed to serve as Vice
President of European Sales and Business Development and Mr. McGillivray has
agreed to serve as Vice President of Sales for North America and Asia, each for
a period of three years. Their annual base salary will be $300,000, $240,000,
$150,000 and $170,000 respectively. Each will be entitled to an annual bonus if
certain performance targets established by them and our Compensation Committee
are met.
Under the agreements, we may terminate either for cause or without cause. If
we terminate any of them without cause we must continue salary payments for the
lesser of 52 weeks or the balance of the employment term. Each may resign on
180-days notice. Their agreements contain non-competition covenants and
provisions limiting the solicitation of our employees for other jobs. These
provisions survive termination of employment for a period of one year.
On July 1, 1999, we entered into an Employment Agreement with Mr. Baggott
and amended such agreement on December 17, 1999. Mr. Baggott's Employment
Agreement currently provides for an annual salary of $250,000. From January 1,
2000 through December 31, 2000 Mr. Baggott will be paid an annual salary of
$125,000 and be required to work no more than 20 hours per week as Vice
President of Human Resources. After December 31, 2002, Mr. Baggott may continue
to provide services to EST at the same level of compensation, provided,
however, his compensation and related benefits shall be reduced proportionately
if he reduces his responsibilities or time commitment. Mr. Baggott's agreement
contains non-solicitation and non-competition provisions that are intended to
survive termination of his employment.
43
<PAGE>
CERTAIN TRANSACTIONS
First Amended and Restated Shareholders' Agreement
On July 1, 1999 we entered into the First Amended and Restated Founding
Shareholders' Agreement with each of Messrs. Dawson, Watkins and Baggott, each
a director, officer and stockholder of EST. This Agreement will terminate upon
completion of this offering. However, pursuant to the Agreement Messrs. Dawson,
Watkins and Baggott could require EST to purchase annually 10% of their total
common stock or extend to each of them a loan in lieu of such purchase. On July
1, 1999 Mr. Baggott borrowed $550,000 from EST pursuant to a promissory note
secured by a pledge of his EST common stock. Mr. Baggott will pay his
obligations under the promissory note from the proceeds he shall receive from
the sale of his common stock in the offering. On December 17, 1999, each waived
his rights under the Agreement to borrow funds from us, participate in any new
stock issuances and require us to re-purchase any of their shares of common
stock.
Stock Grants
We granted to employees options to purchase 202,000 shares of our common
stock pursuant to our 1998 Stock Option Plan. Further, in years prior to 1998,
we granted 2,124,000 common stock rights to seven employees pursuant to so-
called "mirror stock" agreements entitling the employees to receive cash upon
the occurrence of certain events, and we issued an option to purchase 659,000
shares of our common stock to Nicolas Lossky which was not pursuant to a plan.
Of these common stock rights, 868,000 were granted to Daniel McGillvray. In
June 1999, we cancelled all outstanding common stock rights and stock options
granted to date. In lieu of cancelled common stock rights and the stock option
not pursuant to a plan, we issued 2,783,000 shares of common stock, which
included 659,000 shares to Mr. Lossky and 868,000 shares to Mr. McGillvray. In
lieu of the remaining cancelled stock options, we granted stock options for
202,000 shares of common stock under the 1999 Stock Option Plan. In connection
with the grant of 2,783,000 shares of common stock, we agreed to pay the
employees' tax liability resulting from the issuance of common stock, provided,
however, that the employees have agreed to repay an amount equal to their
capital gains tax liability. Each has agreed to evidence his or her obligation
with a promissory note collateralized by his or her shares of our common stock.
Payment of these notes will be due no later than April 1, 2005. See Note 8 to
Notes to Consolidated Financial Statements.
Distributions
We have been treated as a Subchapter S corporation for federal income tax
purposes since our formation in January 1989. As a result, we have never paid
federal, and certain state income taxes. Instead, all of our earnings are
subject to federal, and certain state, income taxation directly at the
stockholder level. In each calendar year, we have distributed enough cash to
our stockholders for them to pay their personal federal and state tax
liabilities to the extent related to our Subchapter S income. Our Subchapter S
corporation status will terminate upon the closing of this offering, at which
time we will become subject to corporate income taxation under Subchapter C of
the Internal Revenue Code. As soon as practicable following the closing of this
offering, we intend to make a distribution to the stockholders of record on the
day prior to the effective date of the registration statement in the amount of
approximately $4.6 million, which is the estimated amount of undistributed
cumulative Subchapter S income from our date of formation through the closing
of this offering, less the sum of amounts previously distributed.
Lease
Mr. Neff, a director of EST, is the Senior Vice President, Real Estate of
Boston Mutual Insurance Company, the landlord for our principal office in
Canton, Massachusetts. We pay rent in the amount of $52,402 per month to Boston
Mutual Insurance Company.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of February 1, 2000, including the selling stockholders, as
adjusted to reflect sale of common stock offered by us in this offering by:
. each of our directors and the named executive officers;
. all of our directors and executive officers as a group; and
. each person who beneficially owns more than 5% of the outstanding shares
of our common stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power
with respect to shares. For purposes of calculating the percentage of shares
beneficially owned, the number of shares of our common stock outstanding as of
February 1, 2000 was 12,894,000 shares. Shares of common stock issuable by EST
to a person named below pursuant to stock options that are exercisable within
60 days after February 1, 2000 are deemed to be beneficially owned and
outstanding for computing the percentage ownership of the person holding the
options. However, these shares are not deemed to be beneficially owned and
outstanding for computing the percentage ownership of any other person.
Unless otherwise indicated below, to our knowledge, all persons named in the
table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, the address of each person listed
on the table is c/o Embedded Support Tools Corporation, 120 Royall Street,
Canton, Massachusetts 02021.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering Shares After the Offering (1)(2)
----------------------------- Being ---------------------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ------------------------ --------------- -------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Peter S. Dawson (3)..... 5,667,000 44.0% -- 5,667,000 33.3%
John T. W. Baggott (4).. 2,222,000 17.2 400,000 1,822,000 10.7
James E. Watkins ....... 2,222,000 17.2 -- 2,222,000 (5) 13.1
Nicolas Lossky (6)...... 659,000 5.1 -- 659,000 3.9
Daniel McGillivray (7).. 869,000 6.7 -- 869,000 5.1
Howard V. Neff, Jr...... -- * -- -- *
P. J. Plauger, Ph.D..... -- * -- -- *
John C. Edmunds......... -- * -- -- *
All current directors
and executive officers
as a group (8 persons) . 11,639,000 90.3% -- 11,239,000 66.1%
</TABLE>
- --------
* Beneficially owns less than 1% of the outstanding common stock.
(1) The number of shares of common stock deemed outstanding after this offering
includes the 4,100,000 shares of common stock being offered for sale in
this offering. The persons and entities named in the table have sole voting
and investment power with respect to the shares beneficially owned by them,
except as noted below. Share numbers include shares of common stock
issuable pursuant to outstanding options that may be exercised within the
60-day period following February 1, 2000.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes 500,000 shares held in trust for the benefit of Mr. Dawson's minor
children. Mr. Dawson disclaims beneficial ownership of the shares.
(4) Includes 260,000 shares held in trust for the benefit of Mr. Baggott's
adult child. Mr. Baggott disclaims beneficial ownership of the shares.
(5) Includes the 200,000 shares of common stock to be sold in the event the
underwriters exercise their over-allotment option in full.
(6) Includes 58,000 shares held in trust for the benefit of Mr. Lossky's minor
children. Mr. Lossky disclaims beneficial ownership of these shares.
(7) Includes 87,000 shares held in trust for the benefit of Mr. McGillivray's
minor children. Mr. McGillivray disclaims beneficial ownership of the
shares.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 45,000,000 shares of common stock, $.10 par value
per share, and 5,000,000 shares of preferred stock, $.10 par value per share.
Common Stock
As of February 1, 2000, there were 12,894,000 shares of common stock
outstanding and held of record by ten stockholders.
Following the filing of the Restated Articles of Organization all holders of
common stock shall be entitled to one vote for each share held on all matters
submitted to a vote of stockholders and will not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
EST, the holders of common stock are entitled to receive ratably the net assets
of EST available after the payment of all debts and other liabilities, subject
to the prior rights of any outstanding preferred stock. Holders of the common
stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares offered by EST in this
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that EST may designate and issue in the future.
Preferred Stock
The Restated Articles of Organization authorize our Board of Directors,
subject to certain limitations prescribed by law and without further
stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock, $.10 par value per share, in one or more
series and to fix or alter the designations, preferences and rights, and any
qualifications, limitations or restrictions thereof, of the shares of each such
series, including the number of shares constituting any such series and the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices and
liquidation preferences thereof. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of EST. Upon
the closing of this offering, there will be no shares of preferred stock
outstanding. EST has no present plans to issue any shares of preferred stock.
Massachusetts Law and Certain Provisions of EST's Restated Articles of
Organization and Amended and Restated By-Laws
Our Amended and Restated By-Laws include a provision excluding EST from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more
of the outstanding voting stock of a corporation may not vote such stock unless
the other stockholders of the corporation so authorize. In addition,
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly-held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless such
corporation elects to opt out of the statute's coverage. The Amended and
Restated By-Laws contain provisions which give effect to Section 50A.
The Amended and Restated By-Laws require that nominations for the Board of
Directors made by a stockholder of a planned nomination must be given not less
than 30 and not more than 90 days prior to a scheduled meeting, provided that
if less than 40 days' notice is given of the date of the meeting, a stockholder
will have 10 days within which to give such notice.
46
<PAGE>
The Amended and Restated By-Laws also require that a stockholder seeking to
have any business conducted at a regularly scheduled meeting of stockholders
generally give notice to EST not less than 120 calendar days prior to the date
EST's proxy statement was released to stockholders in connection with the
previous year's annual meeting. Proposals for meetings of stockholders that are
not regularly scheduled must be received a reasonable time before EST begins to
print its proxy materials. The notice from the stockholder must describe the
proposed business to be brought before the meeting and include information
about the stockholder making the proposal, any beneficial owner on whose behalf
the proposal is made. The By-Laws require EST to call a special stockholders
meeting at the request of stockholders holding at least 40% of the voting
ownership of EST.
The Restated Articles of Organization provide that the directors and
officers of EST shall be indemnified by EST to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against
all expenses and liabilities reasonably incurred in connection with service for
or on behalf of EST. In addition, the Restated Articles of Organization provide
that the directors of EST will not be personally liable for monetary damages to
EST for breaches of their fiduciary duty as directors, unless they have
violated their duty of loyalty to EST or its stockholders, acted in bad faith,
knowingly or intentionally violated the law, including the securities laws,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.
The Restated Articles of Organization provide that any amendment to the
Articles of Organization, the sale, lease or exchange of all or substantially
all of EST's property and assets, or the merger or consolidation of EST into or
with any corporation may be authorized by the approval of the holders of a
majority of the shares of each class of stock entitled to vote thereon, rather
than by two-thirds as otherwise provided by statute, provided that the
transactions have been authorized by a majority of the members of the Board of
Directors and the requirements of any other applicable provisions of the
Articles of Organization have been met.
The Restated Articles of Organization contain a provision excluding EST from
the applicability of Massachusetts General Laws Chapter 110F, which places
limitations on a Massachusetts corporation's ability to engage in business
combinations with certain stockholders for a period of three years.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 16,994,000 shares of common stock will be outstanding
(17,469,000 shares if the underwriters exercise their over-allotment option
from us in full). Of these shares, the 4,500,000 shares (5,175,000 shares if
the underwriters exercise their over-allotment options in full) sold in this
offering will be freely tradable without restriction under the Securities Act
except for any shares purchased by "affiliates" of the Company as defined in
Rule 144 under the Securities Act. The remaining 12,494,000 shares are
"restricted securities" within the meaning of Rule 144 under the Securities
Act. The restricted securities generally may not be sold unless they are
registered under the Securities Act or are sold pursuant to an exemption from
registration, such as the exemption provided by Rules 144 or 701 under the
Securities Act.
We, our officers, directors, all of our stockholders and a majority of our
optionholders, including the selling stockholders, have entered into lock-up
agreements pursuant to which we and they have agreed not to offer or sell any
shares of common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days after the date
of this prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the underwriters. Transfers or dispositions can be
made in the case of gifts or estate planning transfers where the donee signs a
lock-up agreement. Prudential Securities Incorporated may, at any time and
without notice, waive any of the terms of these lock-up agreements specified in
the underwriting agreement. Following the lock-up period, these shares will not
be eligible for sale in the public market without registration under the
Securities Act unless such sales meet the conditions and restrictions of Rules
144 and 701 as described below.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them, or are perceived by the
market as intending to sell them.
<TABLE>
<CAPTION>
Date of availability for resale
Number of shares into public market
---------------- -------------------------------
<C> <S>
8,689,900 September , 2000, due to lock-up agreements these
stockholders have with Prudential Securities Incorporated.
However, Prudential Securities Incorporated can waive this
restriction at any time and without notice.
3,804,100 Between September , 2000 and March , 2001, due to the
requirements of the federal securities laws.
</TABLE>
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of
. 1% of the then-outstanding shares of common stock; and
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about EST.
In addition, a person (or persons whose shares are aggregated) who has not
been an affiliate of EST at any time during the 90 days immediately preceding a
sale, and who has beneficially owned the shares for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and
48
<PAGE>
other conditions described above. Therefore, unless otherwise restricted, Rule
144(k) shares may be sold immediately upon the completion of this offering. The
foregoing summary of Rule 144 is not intended to be a complete description.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from EST by its employees, directors, officers,
consultants or advisors prior to the date the issuer becomes subject to the
reporting requirements of the Exchange Act. To be eligible for resale under
Rule 701, shares must have been issued pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the SEC has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of the offering).
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
affiliates, subject only to the manner of sale provisions of Rule 144, and by
affiliates, under Rule 144 without compliance with its one-year minimum holding
period requirement. The foregoing summary of Rule 701 is not intended to be a
complete description.
Ninety days following the consummation of this offering, EST intends to file
a registration statement under the Securities Act to register the shares of
common stock available for issuance pursuant to its stock option plans as of
the date of this prospectus. Shares issued pursuant to these plans after the
effective date of such registration statement will be available for sale in the
open market subject to the lock-up period and, for affiliates of EST, subject
to conditions and restrictions of Rule 144.
49
<PAGE>
UNDERWRITING
We and each of the selling stockholders have entered into an underwriting
agreement with the underwriters named below, for whom Prudential Securities
Incorporated, Chase Securities Inc. and Needham & Company, Inc. are acting as
representatives. We and the selling stockholder are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to conditions of the
underwriting agreement, each underwriter has severally agreed to purchase the
shares indicated opposite its name:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Prudential Securities Incorporated....................................
Chase Securities Inc..................................................
Needham & Company, Inc................................................
---------
Total............................................................... 4,500,000
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, over-allotment options to purchase up to
475,000 additional shares from us and up to 200,000 additional shares from
another selling stockholder. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as shown
in the table above.
The representatives of the underwriters have advised us and the selling
stockholders that the shares will be offered to the public at the offering
price indicated on the cover page of this prospectus. The underwriters may
allow selected dealers a concession not in excess of $[ ] share and such
dealers may reallow a concession not in excess of $[ ] share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions. The
representatives have informed us that the underwriters do not intend to sell
shares to any investor who has granted them discretionary authority.
We and the selling stockholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares:
<TABLE>
<CAPTION>
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us.......... $ $ $
Fees paid by the selling
stockholders............ $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $1,000,000 in
expenses for this offering, including expenses for the selling stockholders.
We, the recipients of the Subchapter S distribution and the selling
stockholders have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, or contribute to payments that
the underwriters may be required to make in respect of these liabilities.
We, our officers, directors and all stockholders, including the selling
stockholders, have entered into lock-up agreements pursuant to which we and
they have agreed not to offer or sell any shares of common stock or securities
convertible into or exchangeable or exercisable for shares of common stock for
a period of 180 days
50
<PAGE>
from the date of this prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the underwriters. Prudential
Securities Incorporated may, at any time and without notice, waive the terms of
these lockup agreements specified in the underwriting agreement.
Prior to this offering, there has been no public market for our common
stock. The public offering price, negotiated among us, the selling stockholders
and the representatives, is based upon various factors such as our financial
and operating history and condition, our prospects, the prospects for the
industry we are in and prevailing market conditions.
Prudential Securities Incorporated, on behalf of the underwriters, may
engage in the following activities in accordance with applicable securities
rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities Incorporated may elect to reduce
this short position by exercising some or all of the over-allotment
option.
. Stabilizing and short covering: stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the underwriters to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions that were retained by or released to the syndicate
member.
Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
.the Public Offers of Securities Regulations 1995,
.the Financial Services Act 1986, and
.the Financial Services Act 1986, Investment Advertisements, Exemptions,
Order 1996 (as amended).
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor SM, a full-service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
51
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for EST
by Holland & Knight LLP, Boston, Massachusetts. Legal matters will be passed
upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 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.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement on Form S-1 including the exhibits and schedules thereto under the
Securities Act with respect to the shares to be sold in this offering. This
prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to EST and the shares to be
sold in this offering, reference is made to the Registration Statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, each
statement being qualified in all respects by a more complete description of the
matter involved, and each such statement shall be deemed incorporated by such
reference.
You may read and copy all or any portion of the Registration Statement or
any reports, statements or other information we file at the Commission's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our filings, including the
Registration Statement will also be available to you on the Commission's
Internet site (http://www.sec.gov).
EST intends to send to its stockholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
Consolidated Financial Statements for the first three quarters of each fiscal
year.
52
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999........... F-3
Consolidated Statements of Operations For the Years Ended December 31,
1997, 1998 and 1999................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Cash Flows For the Years Ended December 31,
1997, 1998 and 1999................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Embedded Support Tools Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Embedded Support Tools Corporation and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2000
F-2
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------------
Pro forma
1998 1999 1999
------ ------- -----------
(unaudited)
(Note 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $2,440 $ 1,552 $ 1,552
Accounts receivable, net of allowance for
doubtful accounts of $90 and $105 at December
31, 1998 and 1999, respectively................. 2,778 5,915 5,915
Inventory, net (Note 3).......................... 1,757 3,658 3,658
Prepaid expenses and other current assets........ 84 199 199
------ ------- -------
Total current assets............................ 7,059 11,324 11,324
Property and equipment, net (Note 4).............. 505 1,240 1,240
Other assets...................................... 40 697 697
------ ------- -------
Total assets.................................... $7,604 $13,261 $13,261
====== ======= =======
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. 964 1,766 1,766
Accrued expenses (Note 5)........................ 1,692 2,530 2,530
Deferred revenue................................. 555 1,227 1,227
Note payable (Note 6)............................ -- 2,400 2,400
Distribution payable............................. -- -- 4,649
------ ------- -------
Total current liabilities....................... 3,211 7,923 12,572
------ ------- -------
Commitments and contingencies (Note 11)
Redeemable common stock (Note 7):
Common stock, $0.10 par value; 45,000,000 shares
authorized; shares issued and outstanding: 0 and
10,111,000 at December 31, 1998 and 1999,
respectively; no shares issued and outstanding
on a pro forma basis............................ -- 1,893 --
Note receivable from stockholder (Note 7)........ -- (550) --
------ ------- -------
Total redeemable common stock................... -- 1,343 --
------ ------- -------
Stockholders' equity:
Common stock, $0.10 par value; 45,000,000 shares
authorized; shares issued and outstanding:
10,111,000, 2,783,000 and 12,894,000 at December
31, 1998, 1999 and on a pro forma basis,
respectively.................................... 1,011 278 1,289
Additional paid-in capital....................... -- 8,206 1,453
Deferred compensation............................ -- (942) (942)
Note receivable from stockholders (Note 7)....... -- (472) (1,022)
Retained earnings (accumulated deficit).......... 3,441 (2,986) --
Accumulated other comprehensive loss............. (59) (89) (89)
------ ------- -------
Total stockholders' equity...................... 4,393 3,995 689
------ ------- -------
Total liabilities, redeemable common stock and
stockholders' equity.......................... $7,604 $13,261 $13,261
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues.............................................. $11,766 $18,250 $28,451
Cost of revenues...................................... 2,874 3,823 5,349
------- ------- -------
Gross profit......................................... 8,892 14,427 23,102
------- ------- -------
Operating expenses:
Selling and marketing................................ 4,052 7,236 10,595
Research and development............................. 2,150 3,085 4,838
General and administrative........................... 721 1,040 1,815
Stock-related compensation expense................... -- -- 9,437
------- ------- -------
Total operating expenses............................ 6,923 11,361 26,685
------- ------- -------
Income (loss) from operations......................... 1,969 3,066 (3,583)
Interest income....................................... 22 42 238
------- ------- -------
Income (loss) before provision for income taxes....... 1,991 3,108 (3,345)
Provision for income taxes............................ 131 218 402
------- ------- -------
Net income (loss)..................................... 1,860 2,890 (3,747)
Accretion of redeemable common stock to redemption
value................................................ -- -- (1,893)
------- ------- -------
Net income (loss) to common stockholders.............. $ 1,860 $ 2,890 $(5,640)
======= ======= =======
Historical net income (loss) per share--basic and
diluted.............................................. $ 0.18 $ 0.29 $ (0.49)
Shares used in computing historical net income (loss)
per share--basic and diluted......................... 10,111 10,111 11,621
Pro forma data (unaudited) (Note 2):
Historical income (loss) before provision for income
taxes............................................... $ 1,991 $ 3,108 $(3,345)
Pro forma provision for income tax expense (benefit)
assuming C corporation tax.......................... 677 1,243 (368)
------- ------- -------
Pro forma net income (loss).......................... $ 1,314 $ 1,865 $(2,977)
======= ======= =======
Pro forma net income (loss) per common share--basic
and diluted......................................... $ 0.13 $ 0.19 $ (0.25)
Shares used in computing pro forma net income (loss)
per share--basic and diluted........................ 10,111 10,111 12,043
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Notes Retained Accumulated
Common Stock Additional Receivable Earnings Other Total
---------------- Paid-in Deferred From (Accumulated Comprehensive Comprehensive Stockholders'
Shares Amount Capital Compensation Stockholders Deficit) Income (Loss) Income (Loss) Equity
------- ------- ---------- ------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ 10,111 $ 1,011 $ 584 $ 14 $ 1,609
Distribution
paid to
shareholders... (735) (735)
Comprehensive
income:
Net income...... 1,860 $ 1,860 1,860
Foreign currency
translation
adjustments.... (49) (49) (49)
-------
Comprehensive
income......... 1,811
------- ------- ------- ---- ======= -------
Balance at
December 31,
1997............ 10,111 1,011 1,709 (35) 2,685
Distribution
paid to
shareholders... (1,158) (1,158)
Comprehensive
income:
Net income...... 2,890 2,890 2,890
Foreign currency
translation
adjustments.... (24) (24) (24)
-------
Comprehensive
income......... 2,866
------- ------- ------- ---- ======= -------
Balance at
December 31,
1998............ 10,111 1,011 3,441 (59) 4,393
Distributions
paid to
shareholders (1,798) (1,798)
Reclassification
of common stock
to redeemable
common stock... (10,111) (1,011) 1,011 --
Accretion of
redeemable
common stock to
redemption
value.......... (1,893) (1,893)
Issuance of
common stock
under stock-
based
compensation
program........ 2,783 $ 278 $ (278)
Deferred
compensation
associated with
stock and stock
option awards
to employees... 8,484 $(8,484) --
Amortization of
deferred
compensation... 7,542 7,542
Notes receivable
from
stockholders... $(472) (472)
Comprehensive
income:
Net loss........ (3,747) (3,747) (3,747)
Foreign currency
translation
adjustments.... (30) (30) (30)
-------
Comprehensive
income......... $(3,777)
------- ------- ------ ------- ----- ------- ---- ======= -------
Balance at
December 30,
1999............ 2,783 $ 278 $8,206 $ (942) $(472) $(2,986) $(89) $ 3,995
======= ======= ====== ======= ===== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 1,860 $ 2,890 $ (3,747)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 98 250 249
Stock-related compensation expense............... -- -- 7,542
Changes in operating assets and liabilities:
Accounts receivable.............................. (829) (597) (3,139)
Inventory........................................ 42 (876) (1,907)
Prepaid expenses and other current assets........ (97) (2) (707)
Accounts payable................................. (135) 527 687
Accrued expenses................................. 553 582 862
Deferred revenue................................. 175 71 690
------- -------- --------
Net cash provided by operating activities....... 1,667 2,845 530
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (366) (401) (926)
Other assets..................................... -- -- (79)
------- -------- --------
Net cash used in investing activities........... (366) (401) (1,005)
------- -------- --------
Cash flows from financing activities:
Notes receivable from stockholders............... -- -- (1,022)
Borrowings on demand note payable................ -- -- 2,400
Distributions paid to stockholders............... (735) (1,158) (1,798)
------- -------- --------
Net cash used in financing activities........... (735) (1,158) (420)
------- -------- --------
Effect of exchange rate changes on cash........... (26) (4) 7
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 540 1,282 (888)
Cash and cash equivalents, beginning of year...... 618 1,158 2,440
------- -------- --------
Cash and cash equivalents, end of year............ $ 1,158 $ 2,440 $ 1,552
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes..................................... $ 116 $ 131 $ 218
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Embedded Support Tools Corporation (the "Company" or "EST") and its
subsidiaries operate in one segment. EST designs, manufactures, sells and
supports hardware and software tools used for development and debugging
embedded systems. Embedded systems are programmable semiconductor chips that
are used in a wide variety of data communications, computer networking,
automotive and consumer electronic applications. EST was incorporated in the
Commonwealth of Massachusetts on January 5, 1989 and is located in Canton,
Massachusetts.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Embedded
Support Tools Corporation and its wholly-owned subsidiaries: E.S.T. Corp.
Europe SARL, a French corporation; Embedded Support Tools Corp. Nordic AB, a
Swedish corporation; E.S.T. KK, a Japanese corporation and E.S.T. Corp., UK
Ltd., a United Kingdom corporation. All significant intercompany accounts and
transactions have been eliminated.
Pro Forma Balance Sheet Presentation (Unaudited)
The pro forma balance sheet reflects the termination, upon the closing of
EST's initial public offering, of the redemption rights of the existing holders
of common stock resulting in the reclassification of $1,893,000 from redeemable
common stock to common stock and accumulated deficit in the amount of
$1,011,100 and $881,900, respectively. The pro forma balance sheet also gives
effect to the estimated $4,649,000 distribution to shareholders upon the
closing of the initial public offering and reclassification of the remaining
undistributed losses to additional paid-in capital in the amount of $6,753,000.
Historical and Pro Forma (Unaudited) Net Income (Loss) Per Share
EST computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share." SFAS 128 requires both basic and diluted earnings per share, which is
based on the weighted average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted average number of common
shares outstanding and all dilutive potential common equivalent shares
outstanding. The dilutive effect of options is determined under the treasury
stock method using the average fair value for the period. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive. The stock rights and stock options granted under
stock-based compensation plans in years prior to 1999 have been excluded from
the computation of diluted earnings per share because the employees' right to
the stock was exercisable only upon a future event.
Historical net income (loss) and net income (loss) per share is not
meaningful as a result of accretion associated with redemption rights on
certain common stock which terminate upon the closing of this offering and
EST's planned conversion from a Subchapter S corporation to a Subchapter C
corporation upon the closing of this offering. For purposes of the pro forma
disclosures, historical net income (loss) has been adjusted to exclude the
accretion and to include the pro forma provision for income taxes calculated
assuming EST was subject to income taxation as a Subchapter C corporation, at a
pro forma tax rate of 34%, 40% and 11% for the years ended December 31, 1997,
1998 and 1999, respectively. In accordance with a regulation of the Securities
and Exchange Commission, pro forma net income (loss) per share for the year
ended December 31, 1999 has been presented to reflect, as of January 1, 1999,
the effect of the assumed issuance of 422,636 shares of
F-7
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock necessary to be sold at the proposed initial public offering price
of $11.00 in order to fund the intended distribution of the accumulated and
undistributed S corporation earnings.
The following is a comparison of basic and diluted pro forma and historical
net income (loss) per share (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1998 1999
------------------ ------------------ -------------------
Pro Pro Pro
forma Historical forma Historical forma Historical
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $ 1,314 $ 1,860 $ 1,865 $ 2,890 $(2,977) $(5,640)
Shares used in net
income (loss) per
common share, basic and
diluted................
Weighted average common
shares outstanding..... 10,111 10,111 10,111 10,111 12,043 11,621
======= ======= ======= ======= ======= =======
Net income (loss) per
common share, basic and
diluted................ $ 0.13 $ 0.18 $ 0.18 $ 0.29 $ (0.25) $ (0.49)
======= ======= ======= ======= ======= =======
</TABLE>
Cash and Cash Equivalents
EST considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. EST invests its excess
cash primarily in an overnight investment account that invests primarily in
money market accounts, commercial paper and treasury bills. The carrying value
of EST's cash and cash equivalents approximates their fair value. Accordingly,
these investments are subject to minimal credit and market risk.
Financial Instruments
The carrying value of EST's financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
notes payable, approximate their fair values.
Revenue Recognition
Revenue from product sales is recognized upon shipment provided that no
uncertainties regarding customer acceptance exist and collection of the related
receivable is probable. Revenue from maintenance services is recognized ratably
over the contract period, generally one year. Revenue from consulting and
training services is recognized when the services are provided.
Concentration of Credit Risk
Financial instruments which potentially expose EST to concentrations of
credit risk consist primarily of trade accounts receivable. Management
considers its concentration of credit risk with respect to accounts receivable
to be limited due to its credit evaluation policies, relatively short payment
terms, and geographical dispersion of sales. EST obtains letters of credit for
sales to foreign customers based on management's credit evaluation.
EST maintains reserves for potential credit losses. Such losses historically
have been minimal and within management's expectations.
F-8
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventory
Inventory is stated at the lower of cost or market value, with cost being
determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets or,
where applicable, over the lease term. The cost of additions and improvements
are capitalized, while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost of the disposed assets
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is credited or charged to income.
Research and Development and Computer Software Development Costs
Research and development costs are expensed as incurred. Software
development costs are expensed until technological feasibility is established
at which time, and until the product is available for general release to
customers, costs are capitalized. No software development costs were
capitalized during the years ended December 31, 1997, 1998 and 1999, since
costs incurred subsequent to establishment of technological feasibility were
not material.
Foreign Currency Translation
The functional currency of EST's foreign subsidiaries is the local currency.
Accordingly, the assets and liabilities of EST's foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange rates for the
period. Foreign currency translation adjustments are included in accumulated
other comprehensive income as a separate component of stockholders' deficit.
Foreign currency transaction gain or losses are recorded in operating expenses
and were not significant for the years ended December 31, 1997, 1998 and 1999.
Product Warranty Costs
EST provides three months hardware warranty as part of its product sales.
Estimated future costs for initial product warranties are provided for at the
time of sale.
Advertising Expense
EST recognizes advertising expense as incurred. Advertising expense was
approximately $256,000, $310,000 and $669,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Accounting for Stock-Based Compensation
EST accounts for its stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
EST has adopted the disclosure only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
F-9
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Prior to its completed reorganization as a Subchapter C corporation
effective upon completion of the initial public offering, EST has been treated
as a Subchapter S corporation and is not required to pay federal income taxes.
Subchapter S corporation shareholders are required to report their respective
share of EST's taxable income or loss on their individual tax returns and are
personally liable for the related tax.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
At December 31, 1998 and 1999, accumulated other comprehensive income was
comprised solely of cumulative foreign currency translation adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas particularly subject to estimation include the
allowance for doubtful accounts, inventory reserves and revenue reserves.
Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. EST will adopt SFAS No. 133 as
required by SFAS 137, "Deferral of the Effective Date of FASB Statement No.
133," in fiscal year 2001. The adoption of SFAS No. 133 is not expected to have
an impact on EST's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. EST will apply the accounting and
disclosure requirements of SAB 101 and does not expect that its application
will have a material effect on its results of operations.
F-10
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventory
Inventory consists of the following (in 000's):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Raw material................................................... $ 765 $1,857
Work-in-process................................................ 864 1,031
Finished goods................................................. 128 770
------ ------
$1,757 $3,658
====== ======
</TABLE>
4. Property and Equipment
Property and equipment consist of the following (in 000's):
<TABLE>
<CAPTION>
Estimated December 31,
useful lives --------------
(years) 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Computer software and equipment................. 3 $ 839 $1,357
Furniture and fixtures.......................... 7 110 116
Office equipment................................ 5 79 356
Leasehold improvements.......................... 5 23 61
------ ------
1,051 1,890
Less: accumulated depreciation.................. (546) (650)
------ ------
Property and equipment, net..................... $ 505 $1,240
====== ======
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following (in 000's):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Wages and benefits............................................. $ 974 $1,759
Taxes.......................................................... 262 274
Commissions.................................................... 248 339
Professional fees.............................................. 132 106
Other.......................................................... 76 52
------ ------
$1,692 $2,530
====== ======
</TABLE>
6. Line of Credit
At December 31, 1999, EST had a $2,500,000 revolving line of credit with
BankBoston, N.A. Borrowings under the line are payable on demand and bear
interest at the Base Rate determined by BankBoston N.A. (8.5% at December 31,
1999). Borrowings are collateralized by all of the assets of EST. Interest is
payable monthly in arrears. Under the terms of the agreement, EST is required
to comply with certain covenants, the most restrictive of which are cash flow
requirements and debt to tangible net worth. EST was in compliance with all
restrictive covenants at December 31, 1999. At December 31, 1999, $2,400,000 of
borrowings were outstanding under the line of credit. See Note 13.
F-11
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Redeemable Common Stock
On January 1, 1998, EST's stockholders approved an increase in the
authorized shares of common stock, $0.10 par value, to 7,500,000. Also on
January 1, 1998, EST effected a five hundred-for-one stock split of its common
stock in the form of a stock dividend. Accordingly, all share amounts have been
adjusted to give retroactive effect to this stock split. In December 1999, the
Board of Directors approved an increase in the authorized capital of the
Company to 45,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The Board of Directors also approved a two-for-one stock split effected
in the form of a stock dividend. All share and per share amounts in these
consolidated financial statements have been adjusted to give retroactive effect
to this stock split.
EST had an agreement with certain of its shareholders under which EST had
the right to repurchase all or part of the founders' shares of common stock at
a stated value per share, as defined, upon certain events including death,
termination of employment by EST, permanent disability or retirement. On July
1, 1999, EST executed the First Amended and Restated Founding Shareholders
Agreement ("Amended Shareholders Agreement") which amended and restated the
Shareholders Agreement. Under the Amended Shareholders Agreement, in addition
to EST's right to repurchase the founders' shares, during the period beginning
on July 1, 1999 and ending on the earlier of either an initial public offering
or a change in control, at the election of each individual founder, EST shall
be required to purchase up to 10% per year of the founder's respective shares
of common stock at a redemption price in accordance with a redemption formula,
as defined. Alternately, and in lieu of the right to redeem shares of common
stock, each founder is entitled to obtain loans from EST which are
collateralized by a pledge of shares of common stock. Accordingly, the carrying
value for the common stock has been recorded at its redemption value at
December 31, 1999. On July 1, 1999, a loan totaling $550,000 was issued to a
founder, which is collateralized by a pledge of 220,000 shares of common stock.
8. Stock-Based Compensation
The 1998 Stock Option Plan ("the 1998 Plan") provided for the grant of
nonqualified stock options to employees. Options granted under the 1998 Plan
were exercisable only upon notification by the Company prior to a change in
control, and expired on the earlier of the day prior to a change in control,
whether or not notification had occurred, and termination of employment.
Options to purchase 202,000 shares of common stock were granted under the 1998
Plan through the year ended December 31, 1998. In addition, prior to 1998, EST
had issued an option, not pursuant to a plan, to an employee to purchase
659,000 shares of common stock and issued common stock rights to employees
pursuant to "mirror stock" agreements under which the employees had rights to
cash or common stock totaling 2,124,000 shares. The employees' rights to common
stock under this option and the "mirror stock" agreements were exercisable only
upon a change in control, registration of the common stock of EST under the
Securities Act of 1933 or liquidation of EST. No compensation expense had been
recorded in the years ended December 31, 1997, 1998 and 1999 with respect to
any stock options or common stock rights granted in years prior to 1999 because
the stock options or common stock rights were contingent and forfeitable upon
the occurrence of certain future events.
During 1999, EST's Board of Directors approved the 1999 Stock Option Plan
(the "1999 Plan"). The 1999 Plan provides for the granting of incentive and
nonqualified stock options and stock bonus awards to officers, directors,
employees and consultants of EST. The exercise price of stock options granted
under the 1999 Plan is determined by the Board of Directors. The maximum number
of common shares that may be issued pursuant to the 1999 Plan is 4,000,000.
During the year ended December 31, 1999, EST granted 2,462,000 options under
the 1999 Plan to employees, officers and directors. No options have been
granted to consultants. All options granted under the 1999 Plan expire ten
years from the date of grant and generally vest over a five-year period
beginning on the date of hire.
F-12
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1999, EST cancelled all outstanding stock options and common stock
rights granted prior to December 31, 1998 and terminated the 1998 Plan and the
"mirror stock" agreements. Also in June 1999, EST granted 2,783,000 shares of
common stock to certain employees, in lieu of the rights to 2,124,000 shares of
common stock under the "mirror stock" agreements and the stock option for
659,000 shares of common stock not pursuant to a plan. EST has a right of first
refusal in any proposed transfer of the shares by the employee until EST
completes an initial public offering. Additionally, EST has a right, but not an
obligation, to repurchase the shares in the event of termination of employment
with EST at the fair value of the common stock as determined by the Board of
Directors. In addition, included in the 2,462,000 stock options granted in
1999, 202,000 stock options were granted in lieu of stock options granted under
the 1998 Plan.
In connection with the June 1999 grant of 2,783,000 shares of common stock,
at no cost to the grantees, and 1,692,000 stock options, at an exercise price
of $1.73, in June 1999, EST recorded deferred compensation of $8,484,000
representing the difference between the fair value of the common stock of $2.55
at the grant date and the purchase or exercise prices of the common stock and
stock options. During 1999, EST amortized to expense $7,542,000 based on the
vesting provisions. In connection with the issuance of the common stock, EST
agreed to pay a portion of the employees' tax liability resulting from the
issuance of common stock. As a result, an additional charge of $1,895,000 was
also recorded in June 1999. At December 31, 1999, holders of the 2,783,000
shares of common stock issued promissory notes to the Company in the amount of
$472,000, collateralized by the common stock. Payment of these notes will be
due no later than April 1, 2005.
The following table summarizes the activity of the Company's stock options
plans:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
period................. 659,000 $0.10 861,000 $0.19
Granted below fair
value.................. -- -- 1,692,000 1.73
Granted at fair value... 659,000 $0.10 202,000 0.50 770,000 5.83
Exercised............... -- -- -- -- -- --
Canceled................ -- -- -- -- 861,000 0.19
------- ----- ------- ----- --------- -----
Outstanding-end of
period................. 659,000 $0.10 861,000 $0.19 2,462,000 $3.01
======= ======= =========
Exercisable at end of
period................. 473,600 $1.16
Weighted average grant
date fair value........ $0.03 $0.12 $1.44
</TABLE>
F-13
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------- ---------------------
Weighted-average Weighted- Weighted-
remaining average average
Range of Number contractual life exercise Number exercise
exercise prices outstanding (in years) price exercisable price
--------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.73 1,692,000 9.5 $1.73 456,000 $1.73
2.55 426,000 9.7 2.55 17,600 2.55
9.90 344,000 10.0 9.90 -- 9.90
--------- -------
$1.73 -
$9.90 2,462,000 9.6 $3.01 473,600 $3.01
========= =======
</TABLE>
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company continues to recognize
compensation costs using the intrinsic value based method described in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense recognized was different than
what would have been otherwise recognized under the fair value based method
defined in SFAS No. 123. Had the Company accounted for these plans under SFAS
No. 123, the Company's pro forma net loss to common shareholders and net loss
per share would have been the same for the two years ended December 31, 1997
and 1998 because none of the common stock rights or stock options were
exercisable, and for the year ended December 31, 1999 would have been as
follows:
<TABLE>
<S> <C>
Net loss to common stockholders-as reported (000's)................ ($5,640)
Net loss to common stockholders-pro forma (000's).................. ($6,929)
Net loss per common share-basic and diluted as reported............ $ (0.25)
Net loss per common share-basic and diluted pro forma.............. $ (0.57)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are expected
to be made.
For the purpose of providing pro forma disclosures, the fair values of
options granted were estimated using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1999: no
dividend yield; risk free interest rates of 6.33%, 5.49% and 5.87% for the
years ended December 31, 1997, 1998 and 1999; no volatility; and an expected
option term of 6 years.
9. Employee Benefit Plans
EST maintains a defined contribution plan incorporating features under
section 401(a) of the Internal Revenue Code which covers substantially all
employees. Under the money purchase pension feature of the plan, employer
contributions are determined at a rate of eligible employees' salary. Under the
profit sharing feature of the plan, EST may make annual discretionary
contributions at a rate determined by the Board of Directors. Under the 401(k)
feature of the plan, eligible employees can elect to contribute up to 12% of
their salary limited to a total contribution of $10,000 a year. EST matches
these contributions at a rate of 33% for each dollar contributed by its
employees up to a maximum of 3% of the eligible employee's annual salary.
During the years ended December 31, 1997, 1998 and 1999, EST made contributions
of approximately $300,000, $500,000 and $800,000, respectively.
F-14
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
The components of the income tax provision are as follows at December 31
(000's):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
State......................................................... $ 28 $ 59 $--
Foreign....................................................... 103 159 402
---- ---- ----
$131 $218 $402
==== ==== ====
</TABLE>
The Company has elected to be taxed as a Subchapter S Corporation for
federal and certain state income tax purposes and, as a result, is not subject
to federal taxation, but is subject to state taxation on income in certain
states. The stockholders are liable for individual federal and certain state
income taxes on their allocated portion of the Company's taxable income. The
foreign taxes primarily represent income taxes of EST's foreign subsidiaries
based upon the income reported in the respective jurisdictions.
As EST is not subject to federal income taxes, a reconciliation of the
effective tax rate to the federal statutory rate is not meaningful.
11. Commitments and Contingencies
Commitments
EST and its subsidiaries lease their facilities and certain office equipment
under operating leases in excess of one year.
Future minimum lease payments due under noncancellable operating leases are
as follows at December 31, 1999 (000's):
<TABLE>
<S> <C>
2000................................................................. $ 775
2001................................................................. 683
2002................................................................. 629
2003................................................................. 167
------
Total minimum lease payments......................................... $2,254
======
</TABLE>
Total rent expense under operating leases was $164,000, $288,000 and
$524,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Contingencies
EST outsources the assembly of its product components to a limited number of
subcontractors. Although there are several available vendors for assembly of
its products, management believes that the nature of its business requires
outsourcing to vendors who have expertise in assembling the components for
EST's products. A change in or loss of one or more of these subcontractors
could cause delays in meeting customer orders, delays in revenue recognition or
the loss of sales which could adversely affect results of operations.
F-15
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Segment Information
EST operates in one reportable segment: the design, development,
manufacture, sale and support of development tools for embedded systems.
During the years ended December 31, 1997 and 1998, no single customer
accounted for greater than 10% of revenues. During the year ended December 31,
1999, EST had one customer that accounted for approximately 12% of revenues.
Information by geographic area as of December 31, 1997, 1998 and 1999 and
for the years then ended, is summarized below (in thousands):
<TABLE>
<CAPTION>
Other
Year Ended December 31, United Foreign
1997 States France Subsidiaries Eliminations Consolidated
----------------------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated
Customers............ $ 8,958 $2,449 $ 359 $ -- $11,766
Intercompany.......... 2,222 -- -- (2,222) --
Property and equipment,
net.................... 320 23 11 -- 354
<CAPTION>
Other
Year Ended December 31, United Foreign
1998 States France Subsidiaries Eliminations Consolidated
----------------------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated
Customers............ $12,936 $2,771 $2,543 $ -- $18,250
Intercompany.......... 3,292 -- -- (3,292) --
Property and equipment,
net.................... 436 17 52 -- 505
<CAPTION>
Other
Year Ended December 31, United Foreign
1999 States France Subsidiaries Eliminations Consolidated
----------------------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated
Customers............ $19,254 $3,055 $6,142 $ -- $28,451
Intercompany.......... 5,429 -- -- (5,429) --
Property and equipment,
net.................... 1,059 28 153 -- 1,240
</TABLE>
Revenue is presented geographically based on the country in which the sale
is recorded. Inventories are transferred to the Company's foreign subsidiaries
at previously established transfer prices, resulting in intercompany revenue
and receivables for the United States operations.
Other foreign subsidiaries is comprised of the United Kingdom, Sweden,
Japan, Germany and Canada at December 31, 1999, the United Kingdom, Sweden and
Japan at December 31, 1998 and the United Kingdom and Sweden at December 31,
1997. None of these foreign subsidiaries were significant during the periods
presented.
F-16
<PAGE>
- -------------------------------------------------------------------------------
Until , all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
[ESTC LOGO]
Prudential Volpe Technology
a unit of Prudential Securities
Chase H&Q
Needham & Company, Inc.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................ $ 16,394
NASD filing fee................................................. 6,710
Nasdaq National Market listing fee.............................. 95,000
Blue Sky fees and expenses...................................... 10,000
Transfer Agent and Registrar fees............................... 25,000
Accounting fees and expenses.................................... 375,000
Legal fees and expenses......................................... 300,000
Printing and mailing expenses................................... 125,000
Miscellaneous................................................... 46,896
==========
Total $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors And Officers.
Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (1) the articles of organization; (2) a by-law adopted by the
stockholders; or (3) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization
(the "Articles of Organization"), the Registrant has elected to commit to
provide indemnification to its directors and officers in specified
circumstances. Generally, Article 6 of the Registrant's Articles of
Organization provides that the Registrant shall indemnify directors and
officers of the Registrant against liabilities and expenses arising out of
legal proceedings brought against them by reason of their status as directors
or officers or by reason of their agreeing to serve, at the request of the
Registrant, as a director or officer with another organization. Under this
provision, a director or officer of the Registrant shall be indemnified by the
Registrant for all costs and expenses (including attorneys' fees), judgments,
liabilities and amounts paid in settlement of such proceedings, even if he is
not successful on the merits, if he acted in good faith in the reasonable
belief that his action was in the best interests of the Registrant. The Board
of Directors may authorize advancing litigation expenses to a director or
officer at his request upon receipt of an undertaking by any such director or
officer to repay such expenses if it is ultimately determined that he is not
entitled to indemnification for such expenses.
Article 6 of the Registrant's Articles of Organization eliminates the
personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's fiduciary duty,
except to the extent Chapter 156B of the Massachusetts General Laws prohibits
the elimination or limitation of such liability.
Under Section 9 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act").
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
Set forth below is information regarding shares of our common stock issued,
and options granted, by the Registrant within the past three years. Further
included is the consideration, if any, received by the Registrant for such
shares and options and information relating to the section of the Securities
Act, or rule of the Securities and Exchange Commission under which exemption
from registration was claimed.
Certain of the transactions described below involved directors, officers and
5% stockholders of the Registrant. See "Certain Transactions."
Certain Sales of Securities. Within the past three years, the Registrant has
issued the following securities that were not registered under the Securities
Act.
The Registrant's Board of Directors approved the 1997 Stock Option Plan and
1998 Stock Option Plan (the "Plans"). The Plans provided for the grant of
nonqualified stock options to employees. Options to purchase an aggregate of
202,000 shares of common stock were granted under the Plans. In addition, prior
to 1998, the Registrant issued an option to Nicolas Lossky to purchase 659,000
shares of common stock, which was exercisable only upon the occurrence of
certain events. In years prior to 1997, Registrant granted common stock rights
under its Mirror Stock Plan that entitled certain of its employees to receive
cash or shares of common stock upon the occurrence of certain events.
In June 1999, Registrant cancelled all outstanding stock options and common
stock rights granted pursuant to the Plans, as well as the common stock rights
granted to Nicolas Lossky. In exchange, Registrant issued 2,783,000 shares of
common stock to certain employees in lieu of any options to purchase common
stock under previously cancelled options and any common stock rights under the
mirror stock agreements. Additionally, EST has agreed to pay a portion of the
employees' tax liability resulting from the issuance of common stock.
In June 1999, Registrant's Board of Directors approved the 1999 Stock Option
Plan. The 1999 Plan provides for the granting of incentive and nonqualified
stock options and stock bonus awards to officers, directors, employees and
consultants of EST. In December 1999 the Board of Directors amended and
restated the 1999 Plan to increase the maximum number of shares of common stock
of the Registrant that may be issued pursuant to the 1999 Plan from 2,000,000
to 4,000,000. As of December 17, 1999, Registrant granted 2,589,500 options at
a weighted average exercise price of $3.36 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon exemptions from the registration provisions of
the Securities Act set forth in Sections 3(b) and 4(2) thereof relative to
sales by an issuer not involving any public offering or the rules and
regulations thereunder or, in the case of options to purchase common stock,
Rule 701 of the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement
3.1+ Restated Articles of Organization
3.2+ Amended and Restated By-Laws
4.1+ First Amended and Restated Founding Shareholders' Agreement
4.2+ First Amendment to First Amended and Restated Founding Shareholders'
Agreement
4.3+ Specimen Certificate for shares of common stock, $0.10 par value, of
the Registrant
5.1 Opinion of Holland & Knight LLP with respect to the validity of the
securities being offered
10.1+ 1999 Stock Option Plan
10.2+ Form of Option Agreement under 1999 Stock Option Plan
10.3+ Amended and Restated 1999 Stock Option Plan
10.4+ Form of Employment Agreement by and between Peter S. Dawson and the
Registrant
10.5+ Form of Employment Agreement by and between James E. Watkins and the
Registrant
10.6+ Employment Agreement by and between John T. W. Baggott and the
Registrant
10.7+ First Amendment to Employment Agreement by and between John T. W.
Baggott and the Registrant
10.8+ Employment Letter Agreement by and between Mark F. Lapham and the
Registrant
10.9+ Lease dated October 1, 1999 between Boston Mutual Life Insurance and
the Registrant
10.10+ Lease dated July 1, 1999 between Westford Plaza Trust and the
Registrant
10.11+ Lease and Service Agreement dated July 8, 1998 between the Registrant
and ANI Dallas Inc.
10.12+ Office Lease Agreement dated January 7, 1999 between Gwynedd Office
Park Associates, L.P. and the Registrant
10.13+ Standard Industrial/Commercial Multi-Tenant Lease dated August 3,
1999 between the City of Dana Point and the Registrant
10.14+ Business Lease Agreement dated August 30, 1999 between Pointe West,
Inc. and the Registrant
10.15+ Agreement dated July 25, 1997 between Richmond House (Newbury)
Limited and the Registrant
10.16+ Agreement between the Registrant and Viak AB/Valling by Kontposhotell
relating to lease of certain premises in Sweden
10.17+ Lease Agreement between Kabushikikaisha Katori Shoten and the
Registrant relating to lease of certain premises in Japan
10.18+ Lease Agreement dated September 17, 1999 between Samuel A. Lu,
Winston A. Lu and the Registrant
10.19 Standard Office Lease dated November 5, 1999 between Katherine
Amoukhteh and the Registrant
10.20+ Office Park Commercial Lease and Service Agreement dated July 17,
1998 between the Registrant and Promopole S.E.M.L. relating to lease
of certain premises in France
10.21+ Lease Agreement dated March 1, 1999 between the Registrant and
Marketteam Creativ GmbH relating to lease of certain premises in
Germany
10.22+ Business Loan Agreement dated September 23, 1999 between BankBoston,
N.A. and the Registrant
10.23+ Commercial Security Agreement dated September 23, 1999 between
BankBoston, N.A. and the Registrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.24+ Form of Tax Indemnification Agreement between the Registrant and each
of its stockholders
10.25+ Stock Pledge Agreement dated July 30, 1999 between John T. W. Baggott
and the Registrant
10.26+ Secured Demand Promissory Note dated July 30, 1999 issued by John
T. W. Baggott in favor of the Registrant
10.27+ Sourcebook Program Distribution Agreement dated July 19, 1999 between
Wind River Systems, Inc. and the Registrant
10.28+ Confidential Disclosure Agreement dated May 9, 1999 between
International Business Machines, Inc., and the Registrant together
with Supplement relating thereto
10.29+ PowerPC(TM) Confidential Disclosure Agreement dated June 25, 1998
between International Business Machines, Inc. and the Registrant,
together with Supplement relating thereto
10.30+ Confidential Disclosure Agreement dated November 1, 1999 between
Hewlett-Packard and the Registrant
10.31+ Agreement with Case Assembly dated May 11, 1999
10.32 Employment Agreement by and between Daniel McGillivray and the
Registrant
10.33+ Distributor Agreement dated February 4, 1994 between Toyo Corporation
and the Registrant
10.34+ Distributor Agreement dated September 18, 1998 between Microtek
International Inc. and the Registrant
10.35+ Distributor Agreement dated April 1, 1998 between Microtask and the
Registrant
10.36+ Distributor Agreement dated May 26, 1999 between New Level Telecom
and the Registrant
10.37+ Distributor Agreement dated May 24, 1998 between DeSecam and the
Registrant
10.38 Employment Agreement by and between Nicolas Lossky and the Registrant
10.39+ Intentionally omitted
10.40+ Assignment and Assumption Agreement dated December 14, 1999 between
Achieve Software Corporation and the Registrant
21 Subsidiaries of the Registrant
23.1 Consent of Holland & Knight LLP (included in Exhibit 5)
23.2 Consent of PricewaterhouseCoopers LLP
24+ Powers of Attorney (included on page II-6)
27.1+ Financial Data Schedule for the year ended December 31, 1999
27.2+ Financial Data Schedule for the year ended December 31, 1998
27.3+ Financial Data Schedule for the year ended December 31, 1997
27.6 Financial Data Schedule for the year ended December 31, 1999
</TABLE>
- --------
+ Previously filed
(b) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
contained in the Registrant's Restated Articles of Organization, the
Underwriting Agreement, the laws of the Commonwealth of Massachusetts, 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 that 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,
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, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Canton, Massachusetts on February
24, 2000.
EMBEDDED SUPPORT TOOLS CORPORATION
By /s/ Peter S. Dawson
-----------------------------------
Peter S. Dawson
President, Chief Executive Officer
and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Peter S. Dawson
______________________________________
Peter S. Dawson President, Chief Executive February 24, 2000
Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
*
______________________________________
Mark F. Lapham Chief Financial Officer February 24, 2000
and Treasurer (Principal
Financial and Accounting
Officer)
*
______________________________________
James E. Watkins Chief Operating Officer, February 24, 2000
Senior Vice President of Sales
and Marketing and Director
*
______________________________________
John T. W. Baggott Vice President and February 24, 2000
Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
______________________________________
Howard V. Neff Director February 24, 2000
*
______________________________________
P.J. Plauger, Ph.D Director February 24, 2000
*
______________________________________
John C. Edmunds Director February 24, 2000
*By: /s/ Peter S. Dawson
-------------------------------------------------
Peter S. Dawson
Attorney-in-fact
</TABLE>
II-7
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders
of Embedded Support Tools Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 31, 2000, appearing elsewhere in this Registration
Statement also included an audit of the financial statement schedule listed in
Item 16(b) of this Registration Statement.
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 consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2000
S-1
<PAGE>
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Accounts receivable reserve............ $12 12 $ 24
Inventory obsolescence reserve......... $23 (1) $ 22
Year Ended December 31, 1998
Accounts receivable reserve............ $24 $66 $ 90
Inventory obsolescence reserve......... $22 22 $ 44
Year Ended December 31, 1999
Accounts receivable reserve............ $90 62 $(47) $105
Inventory obsolescence reserve......... $44 (16) $ 28
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement.................................
3.1+ Restated Articles of Organization..............................
3.2+ Amended and Restated By-Laws...................................
4.1+ First Amended and Restated Founding Shareholders' Agreement....
4.2+ First Amendment to First Amended and Restated Founding
Shareholders' Agreement.......................................
4.3+ Specimen Certificate for shares of common stock, $0.10 par
value, of the Registrant......................................
5.1 Opinion of Holland & Knight LLP with respect to the validity of
the securities being offered..................................
10.1+ 1999 Stock Option Plan.........................................
10.2+ Form of Agreement under 1999 Stock Option Plan.................
10.3+ Amended and Restated 1999 Stock Option Plan....................
10.4+ Form of Employment Agreement by and between Peter S. Dawson and
the Registrant................................................
10.5+ Form of Employment Agreement by and between James E. Watkins
and the Registrant............................................
10.6+ Employment Agreement by and between John T.W. Baggott and the
Registrant....................................................
10.7+ First Amendment to Employment Agreement by and between John
T.W. Baggott and the Registrant...............................
10.8+ Employment Letter Agreement by and between Mark F. Lapham and
the Registrant................................................
10.9+ Lease dated October 1, 1999 between Boston Mutual Insurance
Company and the Registrant....................................
10.10+ Lease dated July 1, 1999 between the Registrant and Westford
Plaza Trust...................................................
10.11+ Lease and Service Agreement dated July 8, 1998 between the
Registrant and ANI Dallas, Inc. ..............................
10.12+ Office Lease Agreement dated January 7, 1999 between the
Registrant and Gwynedd Office Park Associates, L.P. ..........
10.13+ Standard Industrial/Commercial Multi-Tenant Lease dated August
3, 1999 between the Registrant and the City of Dana Point.....
10.14+ Business Lease Agreement dated August 30, 1999 between
Registrant and Pointe West, Inc. .............................
10.15+ Agreement dated July 25, 1997 between the Registrant and
Richmond House (Newbury) Limited .............................
10.16+ Contract of Lease dated October 21, 1997 between the Registrant
and Viak AB/Vallingby Kontposhotell, relating to lease of
certain premises in Sweden....................................
10.17+ Lease Agreement between the Registrant and Kabushikikaisha
Katori Shoten relating to lease of certain premises in Japan..
10.18+ Lease Agreement dated September 17, 1999 between the Registrant
and Samuel A. Lu and Winston A. Lu............................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.19 Standard Office Lease dated November 5, 1999 between the
Registrant and Katherine Amoukhteh............................
10.20+ Office Park Commercial Lease and Service Agreement dated July
17, 1998 between the Registrant and Promopole S.E.M.L.
relating to lease of certain premises in France...............
10.21+ Lease Agreement dated March 1, 1999 between the Registrant and
Marketteam Creativ GmbH relating to lease of certain premises
in Germany....................................................
10.22+ Business Loan Agreement dated September 23, 1999 between the
Registrant and BankBoston, N.A. ..............................
10.23+ Commercial Security Agreement dated September 23, 1999 between
the Registrant and BankBoston, N.A. ..........................
10.24+ Form of Tax Indemnification Agreement between the Registrant
and each of its stockholders..................................
10.25+ Stock Pledge Agreement dated July 30, 1999 between the
Registrant and John T.W. Baggott..............................
10.26+ Secured Demand Promissory Note dated July 30, 1999 issued by
John T.W. Baggott in favor of the Registrant..................
10.27+ Sourcebook Program Distribution Agreement dated July 19, 1999
between the Registrant and Wind River Systems, Inc. ..........
10.28+ Confidential Disclosure Agreement dated May 9, 1999 between the
Registrant and International Business Machines, Inc., together
with Supplement relating thereto..............................
10.29+ Power PC Confidential Disclosure Agreement dated June 25, 1998
between the Registrant and International Business Machines,
Inc., together with Supplement relating thereto...............
10.30+ Confidential Disclosure Agreement dated November 1, 1999
between the Registrant and Hewlett-Packard....................
10.31+ Agreement with Case Assembly dated May 11, 1999................
10.32 Employment Agreement by and between Daniel McGillivray and the
Registrant....................................................
10.33+ Distributor Agreement dated February 4, 1994 between Toyo
Corporation and the Registrant................................
10.34+ Distributor Agreement dated September 18, 1998 between the
Registrant and Microtek International Inc. ...................
10.35+ Distributor Agreement dated April 1, 1998 between the
Registrant and Microtask......................................
10.36+ Distributor Agreement dated May 26, 1999 between the Registrant
and New Level Telecom.........................................
10.37+ Distributor Agreement dated May 24, 1998 between the Registrant
and DeSecam...................................................
10.38 Employment Agreement by and between Nicolas Lossky and the
Registrant....................................................
10.39+ Intentionally Omitted
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.40+ Assignment and Assumption Agreement dated December 14, 1999
between the Registrant and Achieve Software Corporation.........
21 Subsidiaries of the Registrant...................................
23.1 Consent of Holland & Knight LLP (included in Exhibit 5)..........
23.2 Consent of PricewaterhouseCoopers LLP............................
24+ Powers of Attorney (included on page II-6).......................
27.1+ Financial Data Schedule for the year ended December 31, 1999.....
27.2+ Financial Data Schedule for the year ended December 31, 1998.....
27.3+ Financial Data Schedule for the year ended December 31, 1997.....
27.6 Financial Data Schedule for the year ended December 31, 1999.....
</TABLE>
- --------
+ Previously filed
<TABLE>
<S> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 1
TH&T DRAFT: 1/19/00
--------------------
EMBEDDED SUPPORT TOOLS CORPORATION
4,500,000 SHARES/1/
COMMON STOCK $0.10 PAR VALUE
UNDERWRITING AGREEMENT
- ----------------------
________ ___, 2000
PRUDENTIAL SECURITIES INCORPORATED
HAMBRECHT & QUIST LLC
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Ladies and Gentlemen:
Embedded Support Tools Corporation, a Massachusetts corporation (the "Company"),
- ----------------------------------
certain stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") and Peter S. Dawson hereby confirm their agreement with the
several underwriters named in Schedule I hereto (the "Underwriters"), for whom
you have been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
----------
Company and one Selling Stockholder propose to sell to the several Underwriters
an aggregate of 4,500,000 shares (the "Firm Securities") of the Company's Common
Stock, par value $0.10 per share (the "Common Stock") of which the Company
proposes to issue and sell 4,100,000 shares of Common Stock and John T.W.
Baggott, a Selling Stockholder, proposes to sell 400,000 shares of Common Stock.
The Company and another Selling Stockholder, James E. Watkins, also propose to
sell to the several Underwriters not more than 675,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."
2. (a) Representations and Warranties of the Company, the Selling
--------------------------------------------------------------
Stockholders and Peter S. Dawson. The Company, the Selling Stockholders and
- --------------------------------
Peter S. Dawson, jointly and severally, represent and warrant to the several
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-93409) with
respect to the Securities, including a prospectus subject to completion,
has been filed by the Company with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and one or more amendments to such registration statement may have
been so filed. After the execution of this Agreement, the Company will
file with the Commission either (A) if such registration statement, as it
may have been amended, has been declared by the Commission to be effective
under the Act, either (1) if the Company relies on Rule 434 under the Act,
a Term Sheet (as hereinafter defined) relating to the Securities, that
shall identify the Preliminary Prospectus (as hereinafter defined) that it
supplements containing such information as is required or permitted
- --------------------
/1/ Plus an option to purchase from the Company and a Selling Stockholder up to
an additional 675,000 shares of Common Stock to cover over-allotments.
<PAGE>
by Rules 434, 430A and 424(b) under the Act or (2) if the Company does not
rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act, and in the case of either clause
(A)(1) or (A)(2) of this sentence as have been provided to and approved by
the Representatives prior to the execution of this Agreement, or (B) if
such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to
such registration statement, including a form of prospectus, a copy of
which amendment has been furnished to and approved by the Representatives
prior to the execution of this Agreement. The Company may also file a
related registration statement with the Commission pursuant to Rule 462(b)
under the Act for the purpose of registering certain additional Securities,
which registration shall be effective upon filing with the Commission. As
used in this Agreement, the term "Original Registration Statement" means
the registration statement initially filed relating to the Securities, as
amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission
pursuant to Rule 462(b) under the Act (including the Registration Statement
and any Preliminary Prospectus or Prospectus incorporated therein at the
time such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any Rule
462(b) Registration Statement; the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration statement or
any amendment thereto (including the prospectus subject to completion, if
any, included in the Registration Statement or any amendment thereto at the
time it was or is declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference herein to the "date"
of a Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
(ii) The Commission has not issued any order preventing or suspending
use of any Preliminary Prospectus. When any Preliminary Prospectus was
filed with the Commission it (A) contained all statements required to be
stated therein in accordance with, and complied in all material respects
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of a
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<PAGE>
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, not misleading. When the Registration Statement or any amendment
thereto was or is declared effective, it (A) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the rules and regulations of the Commission thereunder and (B) did not
or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading. When the Prospectus or any Term Sheet that is a part thereof or
any amendment or supplement to the Prospectus is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such
amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment
or supplement to the Prospectus was or is declared effective) and on the
Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time,
(A) contained or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all material respects
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any 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, not misleading. The foregoing provisions of
this paragraph (ii) do not apply to statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon
and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (A) the
Company has filed a Rule 462(b) Registration Statement in compliance with
and that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (B) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection
with the filing of the Rule 462(b) Registration Statement, in compliance
with Rule 111 promulgated under the Act or the Commission has received
payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the Company and
its subsidiaries, taken as a whole.
(v) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus; and the Company has full power
(corporate and other) to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus. All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. The Firm Securities
and the Option Securities have been duly authorized and, at the Firm
Closing Date or the related Option Closing Date (as the case may be), after
payment therefor in accordance herewith, will be validly issued, fully paid
and nonassessable. No holders of outstanding shares of capital stock of
the Company are entitled as such to any preemptive or other rights to
subscribe for any of the Securities, and no holder of securities of the
Company has any right which has not been fully exercised or waived to
require the Company to register the offer or sale of any securities owned
by such holder under the Act in the public offering contemplated by this
agreement.
(viii) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus.
(ix) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations or (C) obligations of the Company or any such subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(x) The consolidated financial statements and schedules of the Company
and its consolidated subsidiaries included in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) fairly present the financial position of the
Company and its consolidated
3
<PAGE>
subsidiaries and the results of operations and changes in financial
condition as of the dates and periods therein specified. Such financial
statements and schedules have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved (except as otherwise noted therein). The selected financial data
set forth under the caption "Selected Consolidated Financial Data" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the
Prospectus (or such Preliminary Prospectus), the information included
therein.
(xi) PricewaterhouseCoopers LLC, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
and schedules included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by the Act and
the applicable rules and regulations thereunder.
(xii) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms.
(xiii) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of
the Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
are not described therein, and no such proceedings have been threatened
against the Company or any of its subsidiaries or with respect to any of
their respective properties; and no contract or other document is required
to be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement that is not described
therein (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or filed as required.
(xiv) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not
(A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained, such as may be required under state securities or blue sky
laws and, if the registration statement filed with respect to the
Securities (as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease
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
or any of their respective properties are bound, or the charter documents
or by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any
of its subsidiaries.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
neither the Company nor any of its subsidiaries has sustained any material
loss or interference with their respective businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the
condition (financial or otherwise), management, business prospects, net
worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(xvi) The Company has not, directly or indirectly, (A) taken any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Securities, or (2) paid or
agreed to pay to any person any compensation for soliciting
4
<PAGE>
another to purchase any other securities of the Company (except for the
sale of Securities by the Selling Stockholders under this Agreement).
(xvii) The Company has not distributed and, prior to the later of
(A) the Closing Date and (B) the completion of the distribution of the
Securities, will not distribute any offering material in connection with
the offering and sale of the Securities other than the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or other materials, if
any permitted by the Act.
(xviii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
(A) the Company and its subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business, (B) the
Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind
on its capital stock, and (C) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xix) The Company and each of its subsidiaries have good and
marketable title in fee simple to all items of real property and marketable
title to all personal property owned by each of them, in each case free and
clear of any security interests, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the
value of such property and do not interfere with the use made or proposed
to be made of such property by the Company or such subsidiary, and any real
property and buildings held under lease by the Company or any such
subsidiary are held under valid, subsisting and enforceable leases, with
such exceptions as are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company or
such subsidiary, in each case except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xx) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxi) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent applications, trademarks,
service marks, trade names, licenses, copyrights and proprietary or other
confidential information currently employed by them in connection with
their respective businesses, and neither the Company nor any such
subsidiary has received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse change in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxii) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any such subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
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<PAGE>
(xxiii) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from the
Company or from transferring any of such subsidiary's property or assets to
the Company or any other subsidiary of the Company, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiv) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxv) The Company will conduct its operations in a manner that will
not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended, and this transaction will not
cause the Company to become an investment company subject to registration
under such Act.
(xxvi) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have
a material adverse effect on the Company and its subsidiaries) and has paid
all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due
and payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(xxvii) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials and the Company and its
subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety and
health and environmental laws and regulations to conduct their respective
businesses, and the Company and each such subsidiary is in compliance with
all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals which would not,
singly or in the aggregate, result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxviii) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company, the Selling
Stockholders and Peter S. Dawson to each Underwriter as to the matters
covered thereby.
(xxix) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, neither the
Company nor any such subsidiary owns any shares of stock or any other
equity securities of any corporation or has any equity interest in any
firm, partnership, association or other entity, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xxx) There are no holders of securities of the Company, who, by
reason of the filing of the Registration Statement, have the right (and
have not waived such right) to request the Company to register under the
Act, or to include in the Registration Statement, securities held by them.
(xxxi) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with
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<PAGE>
management's general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability, (C) access to assets is permitted only in accordance
with management's general or specific authorization, and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxxii) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease 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 or any of their respective properties is
bound or may be affected in any material adverse respect with regard to
property, business or operations of the Company and its subsidiaries.
(b) Representations and Warranties of the Selling Stockholders. Each of
the Selling Stockholders further represents and warrants to, and agrees with,
each of the several Underwriters that:
(i) Such Selling Stockholders has full power to enter into this
Agreement and to sell, assign, transfer and deliver to the Underwriters the
Securities to be sold by such Selling Stockholder hereunder in accordance
with the terms of this Agreement; and this Agreement has been duly executed
and delivered by such Selling Stockholder.
(ii) Such Selling Stockholder has duly executed and delivered a power
of attorney and custody agreement (with respect to such Selling
Stockholder, the "Power of Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the
Representatives, appointing Mark F. Lapham as such Selling Stockholder's
Attorney in Fact (the "Attorney in Fact") with authority to execute,
deliver and perform this Agreement on behalf of such Selling Stockholder
and appointing the Company, as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or accompanied by blank
stock powers duly executed, with signatures appropriately guaranteed,
representing the Securities to be sold by such Selling Stockholder
hereunder have been deposited with the Custodian pursuant to the Custody
Agreement for the purpose of delivery pursuant to this Agreement. Such
Selling Stockholder has full power to enter into the Custody Agreement and
the Power of Attorney and to perform his obligations under the Custody
Agreement. The Custody Agreement and the Power of Attorney have been duly
executed and delivered by such Selling Stockholder and, assuming due
authorization, execution and delivery by the Custodian, are the legal,
valid, binding and enforceable instruments of such Selling Stockholder.
Such Selling Stockholder agrees that each of the Securities represented by
the certificate or certificates on deposit with the Custodian is subject to
the interests of the Underwriters hereunder, that the arrangements made for
such custody, the appointment of the Attorney in Fact and the right, power
and authority of the Attorney in Fact to execute and deliver this
Agreement, to agree on the price at which the Securities (including such
Selling Stockholder's Securities) are to be sold to the Underwriters, and
to carry out the terms of this Agreement, are to that extent irrevocable
and that the obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or the Custody Agreement,
by any act of such Selling Stockholder, by operation of law or otherwise,
whether in the case of any individual Selling Stockholder by the death or
incapacity of such Selling Stockholder, in the case of a trust or estate by
the death of the trustee or trustees or the executor or executors or the
termination of such trust or estate, or by the occurrence of any other
event. If any such Selling Stockholder, trustee or executor should die or
become incapacitated or any such trust should be terminated, or if any
other event should occur, before the delivery of such Securities hereunder,
the certificates for such Securities deposited with the Custodian shall be
delivered by the Custodian in accordance with the respective terms and
conditions of this Agreement as if such death, incapacity or other event
had not occurred, regardless of whether or not the Custodian or the
Attorney in Fact shall have received notice thereof.
(iii) Such Selling Stockholder is the lawful owner of the Securities
to be sold by such Selling Stockholder hereunder and upon sale and delivery
of, and payment for, such Securities, as provided herein, such Selling
Stockholder will convey good and marketable title to such Securities, free
and clear of any security interests, liens, encumbrances, equities, claims
or other defects.
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(iv) Such Selling Stockholder has not, directly or indirectly,
(A) taken any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or (B) since the filing
of the Registration Statement (1) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of, the Securities or (2) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Securities by the Selling Stockholders under this Agreement.
(v) Such Selling Stockholder has reviewed the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
the Registration Statement, and the information regarding such Selling
Stockholder set forth therein under the caption "Principal and Selling
Stockholders" is complete and accurate.
(vi) The sale by such Selling Stockholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company
that is not set forth in the Registration Statement or the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(vii) The sale of the Securities to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement and the Custody
Agreement and the consummation of the other transactions herein
contemplated do not require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained, such as may be required under state securities
or blue sky laws and, if the registration statement filed with respect to
the Securities (as amended) is not effective under the Act as of the time
of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act.
3. Purchase, Sale and Delivery of the Securities. (a) On the basis of
---------------------------------------------
the representations, warranties, agreements and covenants herein contained, and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell, and John T.W. Baggott, the Selling Stockholder, agrees to sell,
to each of the Underwriters, and each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and John T.W. Baggott, at a
purchase price of $[________] per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule I hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and John T.W. Baggott to
the Representatives for the respective accounts of the Underwriters, against
payment by or on behalf of the Underwriters of the purchase price therefor by
wire transfer in same-day funds (the "Wired Funds") to the account of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of Testa, Hurwitz & Thibeault, LLP at 9:30 A.M., New York City time,
on __________, 2000, or at such other place, time or date as the Representatives
and the Company may agree upon or as the Representatives may determine pursuant
to Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date." The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at least 24
hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company and another Selling Stockholder, James E. Watkins, hereby grant to
the several Underwriters an option to purchase, severally and not jointly, the
Option Securities. The purchase price to be paid for any Option Securities
shall be the same price per share as the price per share for the Firm Securities
set forth above in paragraph (a) of this Section 3, plus, if the purchase and
sale of any Option Securities takes place after the Firm Closing Date and after
the Firm Securities are trading "ex-dividend," an amount equal to the dividends
payable on such Option Securities. The option granted hereby may be exercised
as to all or any part of the Option Securities from time to time within thirty
days after the date of the Prospectus (or, if such 30th day shall be a Saturday
or Sunday or a holiday, on the next business day thereafter when the New York
Stock Exchange is open for trading). The Underwriters shall not be under any
obligation to purchase any of the Option Securities prior to the exercise of
such option. The Representatives may from time to time exercise the option
granted hereby by giving notice in writing or by telephone (confirmed in
writing) to the Company and James E. Watkins setting forth the aggregate
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<PAGE>
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, is herein called the "Option Closing Date" with respect to such Option
Securities. Upon exercise of the option as provided herein, the Company and
James E. Watkins shall become obligated to sell to each of the several
Underwriters, and, subject to the terms and conditions herein set forth, each of
the Underwriters (severally and not jointly) shall become obligated to purchase
from the Company and James E. Watkins, the same percentage of the total number
of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company and the Selling Stockholders hereby acknowledge that the
wire transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute closing of a purchase and sale of the Securities.
Only execution and delivery of a receipt for the Securities by the Underwriters
indicates completion of the closing of a purchase of the Securities from the
Company and the Selling Stockholders. Furthermore, in the event that the
Underwriters wire funds to the Company and the Selling Stockholders prior to the
completion of the closing of a purchase of Securities, the Company and the
Selling Stockholders hereby acknowledge that until the Underwriters execute and
deliver a receipt for the Securities, by facsimile or otherwise, the Company
will not be entitled to the Wired Funds and shall return the Wired Funds to the
Underwriters as soon as practicable (by wire transfer of same-day funds) upon
demand. In the event that the closing of a purchase of Securities is not
completed and the Wired Funds are not returned by the Company and the Selling
Stockholders to the Underwriters on the same day the Wired Funds were received
by same, the Company and the Selling Stockholders agree to pay to the
Underwriters in respect of each day the Wired Funds are not returned by it, in
same-day funds, interest on the amount of such Wired Funds in an amount
representing the Underwriters' cost of financing as reasonably determined by
Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. (a) Covenants of the Company, the Selling Stockholders and Peter S.
----------------------------
Dawson. The Company, the Selling Stockholders and Peter S. Dawson covenant and
agree with each of the Underwriters that:
(i) The Company will cause the Registration Statement, if not
effective at the time of execution of this Agreement, and any amendments
thereto to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under
the Act. During any time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company (A) will comply with
all requirements imposed upon it by the Act and the rules and regulations
of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with
the provisions hereof and of the Prospectus, as then amended or
supplemented, and (B) will not file with the Commission the prospectus,
Term Sheet or the amendment referred to in the second sentence of Section
2(a)(i) hereof, any amendment or supplement to such Prospectus, Term Sheet
or any amendment to the Registration Statement or any Rule 462(b)
Registration Statement of which the Representatives previously have been
advised and furnished with a copy for a reasonable period of time prior to
the proposed filing and as to which filing the Representatives shall not
have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
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promptly upon request by the Representatives or counsel for the
Underwriters, any amendments to the Registration Statement or amendments or
supplements to the Prospectus that may be necessary or advisable in
connection with the distribution of the Securities by the several
Underwriters, and will cause any such amendment to the Registration
Statement to be declared effective by the Commission as promptly as
possible. The Company will advise the Representatives, promptly after
receiving notice thereof, of the time when the Registration Statement or
any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Representatives of each such filing or
effectiveness.
(ii) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (A) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (B) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (C) the institution, threatening or
contemplation of any proceeding for any such purpose, or (D) any request
made by the Commission for amending the Original Registration Statement or
any Rule 462(b) Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best
efforts to prevent the issuance of any such stop order and, if any such
stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(iii) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws of
such jurisdictions as the Representatives may designate and will continue
such qualifications in effect for as long as may be necessary to complete
the distribution of the Securities, provided, however, that in connection
-------- -------
therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(iv) If, at any time prior to the later of (A) the final date when a
prospectus relating to the Securities is required to be delivered under the
Act or (B) the Option Closing Date, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if for any other reason it
is necessary at any time to amend or supplement the Prospectus to comply
with the Act or the rules or regulations of the Commission thereunder, the
Company will promptly notify the Representatives thereof and, subject to
Section 5(a)(i) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(v) The Company will, without charge, provide (A) to the
Representatives and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto) or any
Rule 462(b) Registration Statement, certified by the Clerk or an Assistant
Clerk of the Company to be true and complete copies thereof as filed with
the Commission by electronic transmission, (B) to each other Underwriter, a
conformed copy of such registration statement or any Rule 462(b)
Registration Statement and each amendment thereto (in each case without
exhibits thereto) and (C) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (C) of this sentence, the Company, not
later than (1) 6:00 P.M., New York City time, on the date of determination
of the public offering price, if such determination occurred at or prior to
10:00 A.M., New York City time, on such date, or (2) 2:00 P.M., New York
City time, on the business day following the date of determination of the
public offering price, if such determination occurred after 10:00 A.M.,
New York City time, on such date, will deliver to the Underwriters, without
charge, as many copies of the Prospectus and any amendment or supplement
thereto as the Representatives may reasonably request for purposes of
confirming orders that are expected to settle on the Firm Closing Date.
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<PAGE>
(vi) The Company, as soon as practicable, will make generally
available to its stock holders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(vii) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(viii) The Company and Peter S. Dawson will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of
any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of
180 days after the date hereof, except pursuant to this Agreement and
except for issuances pursuant to the exercise of employee stock options
granted or to be granted under the Company's Amended and Restated 1999
Stock Option Plan, as such plan exists on the date hereof, provided that
prior to any such issuance of securities under such plan, the
Representatives shall have received a lock-up agreement (as described in
Section 7(f) hereto) from each person to be issued such securities.
(ix) The Company and Peter S. Dawson will not, directly or indirectly,
(A) take any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or (B) (1) sell, bid
for, purchase, or pay anyone any compensation for soliciting purchases of
the Securities or (2) pay or agree to pay to any person any compensation
for soliciting another to purchase any other securities of the Company
(except for the sale of Securities by the Selling Stockholders under this
Agreement).
(x) The Company will obtain the agreements described in Section 7(f)
hereof prior to the Firm Closing Date.
(xi) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date,
any rumor, publication or event relating to or affecting the Company shall
occur as a result of which in your opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you
advising the Company to the effect set forth above, forthwith prepare,
consult with you concerning the substance of and disseminate a press
release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(xii) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with
Rule 111 promulgated under the Act by the earlier of (A) 10:00 P.M. New
York City time on the date of this Agreement and (B) the time confirmations
are sent or given, as specified by Rule 462(b)(2).
(xiii) The Company will cause the Securities to be duly included for
quotation on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") prior to the Firm Closing Date. The Company will ensure
that the Securities remain included for quotation on the Nasdaq National
Market following the Firm Closing Date.
(b) Covenants of the Selling Stockholders. Each of the Selling Stockholders
further covenants and agrees with each of the Underwriters that:
(i) Such Selling Stockholders will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer
of sale, contract of sale, pledge, grant of any option to purchase or other
sale or disposition) of any Securities legally or beneficially owned by
such Selling Stockholder or any securities convertible into, or
exchangeable or exercisable for, Securities for a period of 180 days after
11
<PAGE>
the date hereof except pursuant to this Agreement and except for issuances
pursuant to the exercise of employee stock options granted or to be granted
under the Company's Amended and Restated 1999 Stock Option Plan, as such
plan exists on the date hereof, provided that prior to any such issuance of
securities under such plan, the Representatives shall have received a lock-
up agreement (as described in Section 7(f) hereto) from each person to be
issued such securities.
(ii) Such Selling Stockholder will not, directly or indirectly,
(A) take any action designed to cause or result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities or (B) (1) sell, bid for, purchase, or pay
anyone any compensation for soliciting purchases of, the Securities or
(2) pay or agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company (except for the
sale of Securities by the Selling Stockholders under this Agreement).
(iii) Such Selling Stockholders, in order to document the
Underwriters' compliance with the reporting and withholding provisions of
the Internal Revenue Code of 1986, as amended, with respect to the
transactions herein contemplated, agree to deliver to you prior to or on
the Firm Closing Date, as hereinafter defined, a properly completed and
executed United States Treasury Department Form W-8 or W-9 (or other
applicable form of statement specified by Treasury Department regulations
in lieu thereof).
6. Expenses. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to
(a) the printing or other production of documents with respect to the
transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (b) all arrangements relating to the delivery to the Underwriters
of copies of the foregoing documents, (c) the fees and disbursements of the
counsel, the accountants and any other experts or advisors retained by the
Company and the Selling Stockholders, (d) preparation, issuance and delivery to
the Underwriters of any certificates evidencing the Securities, including
transfer agent's and registrar's fees, (e) the qualification of the Securities
under state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (f) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (g) any quotation of the Securities on the Nasdaq
National Market, (h) any meetings with prospective investors in the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters) and (i) advertising relating to the offering of
the Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters). If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 7 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 11 hereof, or because
of any failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all out-of-
pocket expenses (including counsel fees and disbursements) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company, the Selling Stockholders and
Peter S. Dawson contained herein as of the date hereof and as of the Firm
Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of
the statements of the Company, the Selling Stockholders and Peter S. Dawson made
pursuant to the provisions hereof, to the performance by each of the Company,
the Selling Stockholders and Peter S. Dawson of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of
(i) 11:00 A.M., New York City time, on the date on which the amendment
12
<PAGE>
to the registration statement originally filed with respect to the Securities or
to the Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Securities has been filed
with the Commission and (ii) the time confirmations are sent or given as
specified by Rule 462(b)(2), or with respect to the Original Registration
Statement, or such later time and date as shall have been consented to by the
Representatives; if required, the Prospectus or any Term Sheet that constitutes
a part thereof and any amendment or supplement thereto shall have been filed
with the Commission in the manner and within the time period required by
Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness
of the Registration Statement or any amendment thereto shall have been issued,
and no proceedings for that purpose shall have been instituted or threatened or,
to the knowledge of the Company or the Representatives, shall be contemplated by
the Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Holland & Knight LLP, counsel for the Company to the effect
that:
(i) the Company and each of its subsidiaries listed in Exhibit 22 to
the Registration Statement (the "Subsidiaries") have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the Company and
the Subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have the corporate power
to own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus,
and the Company has corporate power to enter into this Agreement and to
carry out all the terms and provisions hereof to be carried out by it;
(iii) the issued shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of
any perfected security interests or, to the best knowledge of such counsel,
any other security interests, liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Firm Securities have been duly
authorized by all necessary corporate action of the Company and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be validly issued, fully paid and nonassessable; the
Securities have been duly included for quotation on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other rights to subscribe for any
of the Securities; and no holders of securities of the Company are entitled
to have such securities registered under the Registration Statement;
(v) the statements set forth under the heading "Description of Capital
Stock" in the Prospectus, insofar as such statements purport to summarize
certain provisions of the capital stock of the Company, provide a fair
summary of such provisions; and the statements set forth under the headings
"Legal Proceedings" in the Prospectus, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, provide a fair summary of such legal matters,
documents and proceedings;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company; ;
(vii) (A) no legal or governmental proceedings are pending to which
the Company or any of the Subsidiaries is a party or to which the property
of the Company or any of the Subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are not
described therein, and, to the best knowledge of such counsel, no such
proceedings have been threatened against the Company or any of the
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Subsidiaries or with respect to any of their respective properties, and
(B) no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as
required;
(viii) the issuance, offering and sale of the Securities to the
Underwriters by the Company and the offering pursuant to this Agreement,
the compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do not
(A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained and such as may be required under state securities or blue
sky laws, or (B) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument, known to
such counsel, to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or
any of the Subsidiaries, or any statute or any judgment, decree, order,
rule or regulation of any court or other governmental authority or any
arbitrator known to such counsel and applicable to the Company or
Subsidiaries;
(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or threatened or, to the best knowledge of such counsel,
are contemplated by the Commission;
(x) the Registration Statement originally filed with respect to the
Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder; and
(xi) if the Company elects to rely on Rule 434, the Prospectus is not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A).
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the Commonwealth of
Massachusetts or the United States, to the extent satisfactory in form and scope
to counsel for the Underwriters, upon the opinions of [INSERT NAMES OF LOCAL
----------------------
COUNSEL TO SUBSIDIARIES]. The foregoing opinion shall also state that the
- ------------------------
Underwriters are justified in relying upon such opinions of [INSERT NAME OF
---------------
LOCAL COUNSEL TO SUBSIDIARIES], and copies of such opinion shall be delivered to
- ------------------------------
the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received opinions dated the Firm
Closing Date and the Option Closing Date, respectively, of [Fred Wilson, Esq.],
counsel for John T.W. Baggott, a Selling Stockholder, and Holland & Knight LLP,
counsel for James E. Watkins, another Selling Stockholder, to the effect that:
(i) such Selling Stockholder has full corporate power to enter into
this Agreement, the Custody Agreement and the Power of Attorney and to
sell, transfer and deliver the Securities being sold by such Selling
Stockholder hereunder in the manner provided in this Agreement and to
perform his obligations under the Custody Agreement; the execution and
delivery of this Agreement, the Custody Agreement and the Power of Attorney
have been duly executed and delivered by such Selling Stockholder; assuming
due authorization, execution and delivery by the Custodian, the Custody
Agreement and the Power of Attorney are the legal, valid, binding and
enforceable instruments of
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such Selling Stockholder, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law);
(ii) the delivery by such Selling Stockholder to the several
Underwriters of certificates for the Securities being sold hereunder by
such Selling Stockholder against payment therefor as provided herein, will
convey good and marketable title to such Securities to the several
Underwriters, free and clear of all security interests, liens,
encumbrances, equities, claims or other defects;
(iii) the sale of the Securities to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state
securities or blue sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority or
any arbitrator applicable to such Selling Stockholder.
In rendering such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem proper, on certificates of responsible officers of
the Company and public officials and, as to matters involving the application of
laws of any jurisdiction other than the State of Massachusetts or the United
States, to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of Holland & Knight LLP. The foregoing opinion
shall also state that the Underwriters are justified in relying upon such
opinion of and copies of such opinion shall be delivered to the Representatives
and counsel for the Underwriters.]
References to the Registration Statement and the Prospectus in this
Paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
(d) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters. In rendering such opinion, such
counsel may rely as to all matters of law upon the opinions of Holland & Knight
LLP [, Fred Wilson, Esq.] and [INSERT NAMES OF LOCAL COUNSEL TO SUBSIDIARIES]
-----------------------------------------------
referred to in paragraphs (b) and (c) above.
(e) The Representatives shall have received from PricewaterhouseCoopers LLC
a letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company and
its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
and schedules and pro forma financial statements examined by them and
included in the Registration Statement and the Prospectus comply in form in
all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
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(iii) on the basis of a reading of the interim unaudited consolidated
condensed financial statements of the Company and its consolidated
subsidiaries and carrying out certain specified procedures (which do not
constitute an examination made in accordance with generally accepted
auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company and each of its
consolidated subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention that
caused them to believe that:
(A) the unaudited consolidated condensed financial statements of
the Company and its consolidated subsidiaries included in the
Registration Statement and the Prospectus do not comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder or are
not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration
Statement and the Prospectus;
(B) at a specific date not more than five business days prior to
the date of such letter, there were any changes in the capital stock
or long-term debt of the Company and its consolidated subsidiaries or
any decreases in not current assets or stockholders' equity of the
Company and its consolidated subsidiaries, in each case compared with
amounts shown on the December 31, 1999 consolidated balance sheet
included in the Registration Statement and the Prospectus, or for the
period from January 1, 2000 to such specified date there were any
decreases, as compared with the period from October 1, 1999 to the
comparable specified date in [November] 1999, in sales, net revenues,
income before income taxes or total or per share amounts of net
income of the Company and its consolidated subsidiaries, except in all
instances for changes, decreases or increases set forth in such
letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus under the captions
"Capitalization," Dilution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and in
Exhibit 11 to the Registration Statement, and have compared such amounts,
percentages and financial information with such records of the Company and
its consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation; and
(v) on the basis of a reading of the unaudited pro forma consolidated
condensed financial statements included in the Registration Statement and
the Prospectus, carrying out certain specified procedures that would not
necessarily reveal matters of significance with respect to the comments set
forth in this paragraph (v), inquiries of certain officials of the Company
and its consolidated subsidiaries who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the application
of the pro forma adjustments to the historical amounts in the unaudited pro
forma consolidated condensed financial statements, nothing came to their
attention that caused them to believe that the unaudited pro forma
consolidated condensed financial statements do not comply in form in all
material respects with the applicable accounting requirements of Rule 11-02
of Regulation S-X or that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such statements.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
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<PAGE>
(f) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal accounting
officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any 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, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings for
that purpose have been instituted or threatened or, to the best of the
Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company or any of its subsidiaries, except in each case
as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
(g) The Representatives shall have received from each person who is a
director or officer of the Company and all individuals who own shares or options
to purchase such shares of Common Stock an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date of this Agreement.
(h) The Representatives shall have received a certificate from each
Selling Stockholder, signed by such Selling Stockholder, dated the Firm Closing
Date, to the effect that:
(i) the representations and warranties of such Selling Stockholder in
this Agreement are true and correct as if made on and as of the Firm
Closing Date;
(ii) to the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
specifically for use therein, the Registration Statement, as amended as of
the Firm Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented as
of the Firm Closing Date, does not include any 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, not misleading; and
(iii) such Selling Stockholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Closing Date.
(i) On or before the Firm Closing Date, the Representatives and counsel for
the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company, the
Selling Stockholders and Peter S. Dawson.
17
<PAGE>
(j) Each of the Selling Stockholders, in order to document the
Underwriters' compliance with the reporting and withholding provisions of the
Internal Revenue Code of 1986, as amended, with respect to the transactions
herein contemplated, agree to deliver to you prior to or on the Firm Closing
Date, as hereinafter defined, a properly completed and executed United States
Treasury Department Form W-8 or W-9 (or other applicable form of statement
specified by Treasury Department regulations in lieu thereof).
(k) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for quotation on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution. (a) The Company, the Selling
--------------------------------
Stockholders and Peter S. Dawson, jointly and severally, agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act"), against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of, caused by, related to, based upon or arising out of or in
connection with:
(i) any untrue statement or alleged untrue statement made by the
Company, the Selling Stockholders or Peter S. Dawson in Section 2 of this
Agreement,
(ii) any untrue statement or alleged untrue statement of any material
fact contained in (A) the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company, the Selling Stockholders or
Peter S. Dawson or based upon written information furnished by or on behalf
of the Company, the Selling Stockholders or Peter S. Dawson and filed in
any jurisdiction in order to qualify the Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials, including, without
limitation, slides, videos, films and tape recordings used in connection
with the marketing of the Securities, including, without limitation,
statements communicated to securities analysts employed by the
Underwriters,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company, the Selling
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Stockholders and Peter S. Dawson will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
18
<PAGE>
specifically for use therein; and provided, further, that the Company, the
-------- -------
Selling Stockholders and Peter S. Dawson will not be liable to any Underwriter
or any person controlling such Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is corrected in
the Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus
(as amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company, the Selling Stockholders or Peter S. Dawson with
Sections 5(a)(iv) and 5(a)(v) of this Agreement. This indemnity agreement will
be in addition to any liability which the Company, the Selling Stockholders and
Peter S. Dawson may otherwise have, provided, however, that in no event shall
-------- -------
the liability of each of the Selling Stockholders and Peter S. Dawson for
indemnification under this Section 8, contribution under Section 8(d) or breach
of the representations and warranties contained in Section 2 exceed, in each
case, the sum of (i) the proceeds, net of underwriting discounts and
commissions, from the Underwriters in the offering (if any), and (ii) the amount
which such Selling Stockholder and Peter S. Dawson receive pursuant to any
declared distribution of previously undistributed Subchapter S corporation
income of approximately $4.6 million (the "Distribution"). The Company, the
Selling Stockholders and Peter S. Dawson will not, without the prior written
consent of the Underwriter or Underwriters purchasing, in the aggregate, more
than fifty percent (50%) of the Securities, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to which
the Company or any such director, officer or Selling Stockholder may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (ii) the omission or the alleged omission to state therein
a material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein: and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company or any such director, officer
or such Selling Stockholder in connection with investigating or defending any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this
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<PAGE>
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from (A) the offering of the Securities and (B) the proceeds from the
Distribution, or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Stockholders and Peter S. Dawson on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders, Peter S. Dawson or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company, the Selling Stockholders, Peter S. Dawson
and the Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable considerations
referred to above in this paragraph (d). Notwithstanding any other provision of
this paragraph (d), no Underwriter shall be obligated to make contributions
hereunder that in the aggregate exceed the total public offering price of the
Securities purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph (d), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities
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<PAGE>
that such defaulting Underwriter or Underwriters agreed but failed to purchase.
If one or more Underwriters so default with respect to an aggregate number of
Securities that is more than ten percent of the aggregate number of Firm
Securities or Option Securities, as the case may be, to be purchased by all of
the Underwriters at such time hereunder, and if arrangements satisfactory to the
Representatives are not made within 36 hours after such default for the purchase
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company, the Selling
Stockholders and Peter S. Dawson, other than as provided in Section 10 hereof.
In the event of any default by one or more Underwriters as described in this
Section 9, the Representatives shall have the right to postpone the Firm Closing
Date or the Option Closing Date, as the case may be, established as provided in
Section 3 hereof for not more than seven business days in order that any
necessary changes may be made in the arrangements or documents for the purchase
and delivery of the Firm Securities or Option Securities, as the case may be.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers, the
Selling Stockholders, Peter S. Dawson and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, the Selling Stockholders, Peter S. Dawson, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination. (a) This Agreement may be terminated with respect to the
-----------
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the Company,
the Selling Stockholders and Peter S. Dawson shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company), in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on
either such exchange or market system;
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party, except as provided in Section
10 hereof.
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12. Information Supplied by Underwriters. The statements set forth in the
------------------------------------
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2 and 8 hereof. The Underwriters confirm that such statements (to such
extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
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sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, the Selling Stockholders or
Peter S. Dawson, as the case may be, shall be delivered or sent by mail, telex
or facsimile transmission and confirmed in writing to the Company, the Selling
Stockholders or Peter S. Dawson, as the case may be, at 120 Royall Street,
Canton, Massachusetts 02021.
14. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, the Selling Stockholders,
Peter S. Dawson and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (a) the indemnities of the Company, the Selling
Stockholders and Peter S. Dawson contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (b) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement, the Selling
Stockholders, Peter S. Dawson and any person or persons who control the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act.
No purchaser of Securities from any Underwriter shall be deemed a successor
because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement each of the Selling Stockholders and
Peter S. Dawson accepts for himself and in connection with his properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts and waives any defense of forum non conveniens and irrevocably agrees to
be bound by any judgment rendered thereby in connection with this Agreement.
The Selling Stockholders and Peter S. Dawson designate and appoint Mark F.
Lapham, and such other persons as may hereafter be selected by the Selling
Stockholders and Peter S. Dawson irrevocably agreeing in writing to so serve, as
their agent to receive on their behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Selling Stockholders and Peter S. Dawson to be effective and binding service in
every respect. A copy of any such process so served shall be mailed by
registered mail to the Selling Stockholders and Peter S. Dawson at the address
provided in Section 13 hereof; provided, however, that, unless otherwise
-------- -------
provided by applicable law, any failure to mail such copy shall not affect the
validity of service of such process. If any agent appointed by the Selling
Stockholders and Peter S. Dawson refuses to accept service, the Selling
Stockholders and Peter S. Dawson hereby agree that service of process sufficient
for personal jurisdiction in any action against the Selling Stockholders and
Peter S. Dawson in the State of New York may be made by registered or certified
mail, return receipt requested, to the Selling Stockholders and Peter S. Dawson
at the address provided in Section 13 hereof, and the Selling Stockholders and
Peter S. Dawson hereby acknowledge that such service shall be effective and
binding in every respect. Nothing herein shall affect the right to serve
process in any other manner permitted by law or shall limit the right of any
Underwriter to bring proceedings against the Selling Stockholders and Peter S.
Dawson in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
22
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, the Selling
Stockholders, Peter S. Dawson and each of the several Underwriters.
Very truly yours,
EMBEDDED SUPPORT TOOLS CORPORATION
By:
----------------------------------
Peter S. Dawson
President
SELLING STOCKHOLDERS:
--------------------------------------
John T.W. Baggott
--------------------------------------
James E. Watkins
--------------------------------------
Peter S. Dawson, individually
23
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
HAMBRECHT & QUIST LLC
NEEDHAM & COMPANY, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By:
--------------------------------------
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
24
<PAGE>
SCHEDULE I
- ----------
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
- ----------- ------------
PRUDENTIAL SECURITIES INCORPORATED
HAMBRECHT & QUIST LLC
NEEDHAM & COMPANY, INC.
alphabetically by bracket or in other
order determined by Prudential Securities Incorporated
Equity Transactions Group
Total .............. _______________
25
<PAGE>
SCHEDULE II
- -----------
SELLING STOCKHOLDERS
John T.W. Baggott 400,000 Firm Securities
James E. Watkins 200,000 Option Securities
26
<PAGE>
EXHIBIT 5.1
February __, 2000
Embedded Support Tools Corporation
120 Royall Street
Canton, MA 02021
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-93409) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of an aggregate of 5,175,000 shares of Common Stock, $.10 par value per share
(the "Shares"), of Embedded Support Tools Corporation, a Massachusetts
corporation (the "Company"), of which (i) up to 4,500,000 Shares (including
400,000 Shares issuable upon exercise of an over-allotment option granted by the
Company) will be issued and sold by the Company and (ii) up to 600,000 Shares
(including 200,000 Shares issuable upon exercise of an over-allotment option
granted by a certain stockholder) will be sold by certain stockholders of the
Company (the "Selling Stockholders).
The Shares are to be sold by the Company and the Selling Stockholders
pursuant to an underwriting agreement (the "Underwriting Agreement") to be
entered into by and among the Company, the Selling Stockholders and Prudential
Securities Incorporated, Chase Securities Inc. and Needham & Company, Inc., as
representatives of the several underwriters named in the Underwriting Agreement,
the form of which has been filed as Exhibit 1 to the Registration Statement.
We are acting as counsel for the Company in connection with the sale by the
Company and James E. Watkins of the Shares. We have examined signed copies of
the Registration Statement as filed with the Commission. We have also examined
and relied upon the Underwriting Agreement, minutes of
<PAGE>
Embedded Support Tools Corporation
February __, 2000
Page 2
meetings of the stockholders and the Board of Directors of the Company as
provided to us by the Company, stock record books of the Company as provided to
us by the Company, the Certificate of Incorporation and By-Laws of the Company,
each as restated and/or amended to date, and such other documents as we have
deemed necessary for purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts and the federal
laws of the United States of America. To the extent that any other laws govern
the matters as to which we are opining herein, we have assured that such laws
are identical to the state laws of the Commonwealth of Massachusetts, and we are
expressing no opinion herein as to whether such assumption is reasonable or
correct.
Based upon and subject to the foregoing, we are of the opinion that (i) the
Shares to be issued and sold by the Company have been duly authorized for
issuance and, when such Shares are issued and paid for in accordance with the
terms and conditions of the Underwriting Agreement, such Shares will be validly
issued, fully paid and nonassessable and (ii) the Shares to be sold by the
Selling Stockholders have been duly authorized and are validly issued, fully
paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
<PAGE>
Embedded Support Tools Corporation
February __, 2000
Page 3
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do hereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission.
Very truly yours,
HOLLAND & KNIGHT LLP
<PAGE>
EXHIBIT 10.19
STANDARD OFFICE LEASE -- GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Lease Provisions ("Basic Lease Provisions").
------------------------------------------------
1.1 Parties. This Lease, dated for reference purposes only, November 5,
-------
1999, made by and between Katherine Amoukhten, d/b/a Workforce America (herein
called "Lessor") and Embedded Support Tools, Inc., doing business under the name
of N/A (herein called "Lessee").
1.2 Premises. Suite Number(s) in a floor plan (Exhibit A) floors,
--------
consisting of approximately 170 feet, more or less as defined in paragraph 2 and
as shown on Exhibit "A" hereto (the "Premises").
1.3 Building. Commonly described as being located at 52 Harold Avenue in
--------
the City of San Jose, County of Santa Clara, State of California, as more
particularly described in Exhibit _____ hereto, and as defined in paragraph 2.
1.4 Use. ____________________________________________________________
---
________________________________________________________________________,
subject to paragraph 8.
1.5 Term. ________________ November 2, 2000, commencing November 3, 1999
----
("Commencement Date") and ending November 8, 2000, as defined in paragraph 3.
1.6 Base Rent. $500 per month, payable on the 1st day of each month under
---------
paragraph 4.1 _____________________________________________________________
_____________________________________________________________________________.
1.7 Base Rent Increase. On ______________________, the monthly Base Rent
------------------
payable under paragraph 1.8 above shall be adjusted as provided in paragraph 4.3
below.
1.8 Rent Paid Upon Execution. $323.33, November 8 through November 30,
------------------------
1999.
1.9 Security Deposit. $500.
----------------
1.10 Lessee's Share of Operating Expense Increase. 0% as defined in
--------------------------------------------
paragraph 4.2.
<PAGE>
2. Premises, Parking and Common Areas.
----------------------------------
2.1 Premises. The Premises are a portion of a building, herein sometimes
--------
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
building Project." Lessor hereby leases to lessee and Lessee leased from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2 as
the "Premises," including rights to the Common Areas as hereinafter specified.
2.2 Vehicle Parking. So long as Lessee is not in default and subject to
---------------
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use two parking spaces in the
Office Building Project at the monthly rate applicable from time to time for
monthly parking as set by Lessor and/or the licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge a cost
to Lessee, which cost shall be immediately payable upon demand by Lessor.
2.2.2 The monthly parking rate per parking space will be $2 per month
at the commencement of the term of this Lease and is subject to change upon five
(5) days prior written notice to Lessee. Monthly parking fees shall be payable
one month in advance prior to the first day of each calendar month.
2.3 Common Areas -- Definition. The term "Common Areas" is defined as all
--------------------------
areas and facilities outside the Premises and within the exterior boundary line
of the Office building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent that otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas -- Rules and Regulations. Leases agrees to abide by and
-------------------------------------
conform to the rules and regulations attached hereto as Exhibit B with respect
-2-
<PAGE>
to the Office Building Project and Common Areas, and to cause the employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations, Lessor shall not be
responsible to Lessee for the noncompliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 Common Areas -- Changes. Lessor shall have the right, in Lessor's sole
-----------------------
discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common Areas,
including, without limitation, changes in the location, size, shape, number, and
appearance thereof, including but not limited to the lobbies, windows,
stairways, air shafts, elevators, escalators, restrooms, driveways, entrances,
parking spaces, parking areas, loading and unloading areas, ingress, egress,
direction of traffic, decorative walls, landscaped areas and walkways; provided,
however, Lessor shall at all times provide the parking facilities required by
applicable law;
(b) To close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available; that such other
land and improvements have a reasonable and functional relationship to the
Office Building Project;
(c) To designate other land and improvements outside the boundaries of the
Office Building Project to be a part of the Common Areas, provided that such
other land and improvements have a reasonable and functional relationship to the
Office Building Project.
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes in, to or
with respect to the Common Areas and Office Building Project, the Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term.
----
3.1 Term. The term and Commencement Date of this Lease shall be as
----
specified in paragraph 1.5 of the Basic Lease provisions.
-3-
<PAGE>
3.2 Delay in Possession. Notwithstanding said Commencement Date, if, for
-------------------
any reason, Lessor cannot deliver possession of the Premises to Lessee on said
date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease or
the obligations of Lessee hereunder or extend the term hereof; but, in such
case, Lessee shall not be obligated to pay rent or perform any other obligation
of Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is rendered to Lessee, as
hereinafter defined; provided, however, that if lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's _________ Doors.
4.3.4 Lessee shall continue to pay the rent at the rate previously in
effect until the increase, if any, is determined. Within five (5) days
following the date on which the increase is determined, Lessee shall make such
payment to Lessor as will bring the increased rental current, commencing with
the effective date of such increase through the date of any rental installments
then due. Thereafter the rental shall be paid at the increased rate.
4.3.5 At such time as the amount of any change in rental required by
this Lease is known or determined, Lessor and Lessee shall execute an amendment
to this Lease setting forth such change.
Security Deposit. Lessee shall deposit with Lessor upon execution hereof
----------------
the security deposit set forth in paragraph 1.9 of the Basic Lease provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder.
If Lessee fails to pay rent or other charges due hereunder, otherwise defaults
with respect to any provision of this Lease. lessor may use, apply or retain
all or any portion of said deposit for the payment of any rent or other charge
in default for the payment of any other sum to which Lessor may become obligated
by reason of Lessee's default, or to compensate Lessor for any loss or damage
which Lessor may suffer thereby. If Lessor so uses or applies al or any portion
of said deposit. Leases ___ all within ten (10) days after written demand
therefor deposit cash with Lessor in an amount sufficient to restore said
deposit to the full amount in required of Lessee. If the monthly Base Rent
shall, from time to time, increase during the term of this Lease, Lessee shall,
at the time of such increase, deposit with Lessor additional money as a security
deposit so that the total amount of the security deposit held by Lessor shall at
all times bear the same proportion to the then current Base Rent as the initial
security deposit bears to the initial Base Rent set forth in paragraph 1.6 of
the Basic Lease Provisions, Lessor shall not be required to keep said security
deposit separate from its general accounts. If Lessor performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any of Lessee's interest
-4-
<PAGE>
hereunder) at the expiration of the term hereof, and after Lessee has vacated
the Premises. No trust relationship is created herein between Lessor and Lessee
with respect to said Security Deposit.
Use
- ---
6.1 Use. The Premises shall be used and occupied only for the purpose set
---
forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
-------------------
(a) Lessor warrants to Lessee that the Premises, in the state existing
on the date that the Lease term commences, but without regard to alterations or
improvements made by lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, any
applicable building code, regulation or ordinance in effect on such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated, then it shall be the obligation of the Lessor, after written notice
from Lessee, to promptly, at Lessor's sole cost and expense, cure any, such
violation.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in affect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term hereof, relating in
any manner to the Premises and the occupation and use by Lessee of the premises.
Lessee shall conduct its business in a lawful manner and shall not use or permit
the use of the Premises or the Common Areas in any manner that will tend to
create waste or a nuisance or shall tend to disturb other occupants of the
Office Building Project.
6.3 Condition of Premises.
---------------------
(a) Lessor shall deliver the Premises to Lessee in a clean condition
on the Lease Commencement Date (unless Lessee is already in possession) or
Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and
heating system in the premises shall be in good operating condition. In the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises and the Office Building Project in their condition existing of the
Lease Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, principal,
county
-5-
<PAGE>
and state laws, ordinances and regulations governing and regulating the use of
the Premises, and any easements, covenants or acknowledges that it has satisfied
itself by its own independent investigation that the Premises are suitable for
its intended use, and that neither Lessor or Lessor's agent or agents has made
any representation or warranty as to the present or future suitability of the
Premises. Common Areas, or Office Building Project for the conduct of Lessee's
business.
Maintenance Repairs, Alterations and Common Area Services.
- ---------------------------------------------------------
7.1 Lessor's Obligations. Lessor shall keep the Office Building Project,
--------------------
including the Premises, interior and exterior walls, roof, and common areas of
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any Improvements that are not ordinarily a part of the building or are above
then Building standards. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee on count of any injury or interference
with Lessee's business with respect to any improvements, alterations or repairs
made by Lessor to the Office Building Project or nay part thereof. Lessee
expressly waives the benefits of any statute now or hereafter in effect which
would otherwise afford Lessee the right to make repairs at Lessor's expense or
to terminate this Lease because of Lessor's failure to keep the Premises in good
order, conditions and repair.
7.2 Lessee's Obligations.
--------------------
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the upkeep
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) it
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear, Lessee shall be responsible or the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards, Lessor may, at the option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs,
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage of
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this :Lease, Lessee shall have the air lines,
power panels,
-6-
<PAGE>
electrical distribution systems, lighting fixtures, air conditions, window
coverings, wall coverings carpets, wallpaper, ceilings, and plumbing on the
Premises and in good operating condition.
7.3 Alterations and Additions.
-------------------------
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility installations or repairs in, on
about the Premises, or the Office Building Project. As used in this paragraph
7.3 the term "Utility Installation" shall mean carpeting, window and all
coverings, power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment. At the expiration of the term, Lessor may require the removal of any
or all of said alterations, improvements, additions or Utility installations,
and the restoration of the Premises and the Office Building Project to their
prior condition, at Lessee's expense. Should Lessor permit Lessee to make its
own alterations, improvements, additions or Utility Installations. lessee shall
use only such contractor as has been expressly proved by Lessor, and Lessor may
require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work. Should Lessee make any
alterations, Improvements, additions or Utility Installations without the prior
approval of Lessor, or use a contractor not expressly approved by Lessor. Lessor
may, at any time during the term of this Lease, require that Lessee move any
part or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in or about the Premises of the Office Building Project that Lessee shall desire
to make shall be presented to Lessor in written form, with proposed detailed
plans. If Lessor shall give its consent to Lessee's making such alteration,
Improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.
(c) 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 in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in the Premises by Lessee, and Lessor will have
the right to post notices or non-responsibility in or on the Premises or the
Building
-7-
<PAGE>
as provided by law. If Lessee shall, in good faith, contend invalidity of any
such lien, claim or demand, then Lessee shall at its sole expense defend itself
and Lessor against the same and shall pay and satisfy such adverse judgment that
may be rendered thereon before the enforcement thereof against the Lessor or the
Premises, the Building or the Office Building Project, upon the condition that
if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against Liability for the same and holding the Premises, the
Building and the Office Building Project free from the effect of such lien or
claim. In addition. Lessor may require Lessee to pay Lessor's reasonable
attorneys' fees and costs anticipating in such action if Lessor shall decide it
is to Lessor's best interest so to do.
(e) All alterations, Improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee).
Improvements may be made to the premises by Lessee, including but not limited
to, floor coverings, panellings, doors, drapes, pull-ins, moldings, sound
systems, and lighting and telephone or communication systems, conduit, wiring
and outlets, shall be made and done in a good and workmanlike manner and of
good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises the expiration of the Lease
term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding provisions of this paragraph
7.3(e). lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed without material damage to
the Premises or the Building, and other than Utility Installations, shall remain
the property or Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and specifications
for any alterations, improvements, additions or Utility Installations.
7.4. Utility Additions. Lessor reserves the right to install new or
------------------
additional utility facilities throughout the Office Building Project for the
benefit of Lessor of Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
Premises.
Insurance; Indemnity
- --------------------
8.1 Liability Insurance -- Losses. Lessee shall, at Lessee's expense,
-----------------------------
obtain and keep in force during the term of this Lease a policy of Comprehensive
General Liability Insurance utilizing an Insurance Services Office standard form
with Broad Form General Liability Endorsement (GL0404), equivalent, in an amount
of not less than $1,000,000 per occurrence of bodily injury and property damage
combined or in
-8-
<PAGE>
a greater amount as reasonably determined by Lessor and shall insure Lessee with
Lessor as an additional insured against liability arising out of the use,
occupancy or maintenance of the Premises. Compliance with the above requirement
shall not, however, limit the liability of Lessee hereunder.
8.2 Liability Insurance -- Lessor. Lessor shall obtain and keep in force
------------------- ---------
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, and not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $__,000,000.00 per
occurrence.
8.3 Property Insurance -- Lessee. Lessee shall, at Lessee's expense,
------------------- --------
obtain and keep in force during the form of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements. In an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4. Property Insurance -- Lessor. Lessor shall obtain and keep in force
------------------- ---------
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project Improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements. In the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification office, extended coverage,
vandalism, malicious mischief, broken glass, and such other perils as Lessor
deems advisable or may be required by a lender having a lien on the Office
Building Project. In addition, Lessor shall obtain and keep in force, during
the term of this Lease, a policy of rental value insurance covering a period of
one year, with loss payable to Lessor, such insurance shall also cover all
Operating Expenses for said period, Lessee will not be named in any such
policies carried by lessor and shall have no right to any proceeds therefrom.
The policies required by these paragraphs 8.2 and 8.4 shall contain such
deductibles as Lessor or the aforesaid lender may determine. In the event that
the Premises shall suffer an insured loss as defined in paragraph 9.1(1) hereof,
the deductible amounts under the applicable insurance policies shall be deemed
an Operating Expense. Lessee shall not do or permit to be done anything which
will invalidate the insurance policies carried by lessor. lessee shall pay the
entirety of any increase in the property insurance premium for the Office
Building Project over what it was immediately prior to the commencement of the
term of this Lease if the increase is specified by Lessor's insurance carrier as
being caused by the nature of Lessee's occupancy or any act of omission of
Lessee.
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<PAGE>
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of
------------------
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable
subject to reduction of coverage or other 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 renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
---------------------
relieve the other, and waive their entire right of recovery against the other
direct or consequential loss or damage arising out of or incident to the perils
covered by property insurance carried by such party, whether due the negligence
of Lessor or lessee or their agents, employees, contractors and/or invitees. If
necessary all property insurance policies required under this Lease shall be
endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
---------
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct or
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees, or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default, or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against, Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with lessee in such defense. Lessor need not have first paid
any such claim in order to be so indemnified, Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessor
or injury to persons, in, upon or about he Office Building Project arising from
any cause and Lessee hereby waives all claims in respect hereof against Lessor.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
----------------------------------
shall not be liable for injury to Lessee's business or any loss of income
herefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, no shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage
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<PAGE>
or injury is caused by or results from theft, fire, steam, electricity, gas,
water or rain, or from the breakage, blockage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, neither said damage or injury results from
conditions arising upon the Premises or upon other portions of the Office
Building Project, or from other sources or places, or from new construction or
the repair, alteration or improvement of any part of the Office Building
Project, or of the equipment, or appurtenances applicable thereto, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible. Lessor shall not be liable for any damages
arising from any act or neglect of any other lessee, occupant or user of the
Office Building Project, or from the failure of Lessor to enforce the provisions
of any other lease of any other lessee of the Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no
--------------------------------------
representation that the limits or forms of coverage or insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
Damage or Destruction.
- ---------------------
9.1 Definitions.
-----------
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the building.
(c) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent at the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the extent
that the cost of repair is fifty percent (50%) or more of the then Replacement
Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an insured Loss has a deductible amount shall not make the loss an
uninsured loss.
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<PAGE>
(g) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee' expense.
9.2 Premises Damage; Premises Building Partial Damage.
--------------------------------------------------
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage which is an Insured
Loss and which falls into the classification of either Premises Damage or
Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may at Lessor's option either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 Premises Building Total Destruction; Office Building Project Total
------------------------------------------------------------------
Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any
- -----------
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classification of either (i) Premises
Building Total Destruction, or (ii) Office Building Project Total Destruction,
then Lessor may at Lessor's option either (i) repair such damage or destruction
as soon as reasonably possible at Lessor's expense (to the extent the required
materials are readily available through usual commercial channels) to its
condition existing at the time of the damage, but not Lessee's fixtures,
equipment or tenant improvements, and this Lease shall continue in full force
and effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, in which case this Lease shall terminate as of the date of
the occurrence of such damage.
9.4 Damage Near End of Term.
------------------------
(a) Subject to paragraph 9.4(b), if at any time during the last twelve
(12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel
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<PAGE>
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee exercises such
option during said twenty (20) days period, Lessor shall at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said twenty (20) day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of said
twenty (20) day period, notwithstanding any term or provision in the grant of
option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
------------------------------------
(a) In the event Lessor repairs or restores the Building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (including Lessee's Share of Operating Expense
increase) for the period during which such damage, repair or restoration
continues shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent the
operation and profitability of Lessee's business as operated on the Premises is
adversely affected. Except for said abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises or
the Building under the provisions of this Paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence. Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessor's election to do so at any time prior
to the commencement or
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<PAGE>
completion, respectively, of such repair or restoration, in such event this
Lease shall terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination - Advance Payments. Upon termination of this Lease
------------------------------
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor, Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which
------
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
Real Property Taxes.
- --------------------
10.1 Payment of Taxes. Lessor shall pay the real property tax as defined
----------------
in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying
-----------------------
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "real
--------------------------------
property tax" shall include any form of real estate tax or assessment, general,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement thereof, against any legal or
equitable interest of Lessor in the Office Building Project or in any portion
thereof, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Office Building Project. The term
"real property tax" shall also include any tax, fee, or assessment of charge
(i) in substitution of, partially or totally, any tax, fee, levy, assessment or
charge hereinabove included within the definition of "real property
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<PAGE>
tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a right not
charged prior to June 1, 1979, or, if previously charged, has been increased
since June 1, 1978, or (iv) which is imposed as a result of a change in
ownership, as defined by applicable local statutes for property tax purposes, of
the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment. If the improvements or property, the taxes for
----------------
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's worksheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
-----------------------
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
Utilities.
- ---------
11.1 Services Provided by Lessor. Lessor shall provide heating,
---------------------------
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas,
----------------------------
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately
supplied to the Premises, Lessee shall pay at Lessor's option, either Lessee's
Share or a reasonable proportion to be determined by Lessor of all charges
jointly, metered with other premises in the Building.
11.3 Hours of Service. Said services and utilities shall be provided
----------------
during generally accepted business days and hours or such other days or hours as
may
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<PAGE>
hereafter be set forth. Utilities and services required at other times shall be
subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof.
11.4 Excess Usage by Lessee. Lessee shall not make connection to the
----------------------
utilities except by or through existing outlets and shall not install or use
machinery or equipment on the Premises that uses excess water, lighting or
power, or suffer or permit any act that causes extra burden upon utilities or
services, including but not limited to security services, over standard office
usage for the Office Building Project. Lessor shall require Lessee to reimburse
Lessor for any excess expenses or costs that may arise out of a breach of this
subparagraph by Lessee. Lessor may, in its sole discretion, install equipment
and/or separate metering applicable to Lessee's excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall
-------------
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or delay in utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control.
Assignment and Subletting.
- -------------------------
12.1 Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage, sublet, or otherwise transfer or exchange all or any part of Lessee's
interest in the Lease or in the Premises, without Lessor's prior written
consent, which Lessor shall not unreasonably withhold. Lessor shall respond to
Lessee's request for consent hereunder in a timely manner and any attempted
assignment, transfer, mortgage, or encumbrance shall be void, and shall
constitute a material default and breach of this Lease without the need for
notice within the meaning of this paragraph 12 shall include the transfer or
transfers aggregating: (a) if Lessee is a corporation, more than twenty-five
percent (25%) of the voting stock of such corporation, or (b) if Lessee is a
partnership, more than twenty-five percent (25%) of the profit and loss
participation in such partnership.
12.2 Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may
assign or sublet the Premises, or any portion thereof, without Lessor's consent,
to any corporation which controls, is controlled by or is under common control
with Lessee, or to any corporation resulting in the merger or consolidation with
Lessee, or to any person or entity which acquires all the assets of Lessee as a
going concern of the business and is being conducted on the Premises all of
which are referred to as "Lessee Affiliate"; provided that before such
assignment shall be effective, said Affiliate of Lessee under this Lease and
(b) Lessor shall be given written notice of such assignment and assumption.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
------------------------------------------------------------
(a) No assignment or subletting shall release Lessee of Lessee's
obligations hereunder or alter the primary ability of Lessee to pay the rent or
other
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<PAGE>
sums due Lessor hereunder including Lessee's Share of Operating Expense
Increase, and to perform all other obligations to be performed by Lessee
hereunder.
(b) Lessee shall allow no other party other than Lessee pending
approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such assignment
or subletting, nor the acceptance of rent, shall constitute a waiver or
renouncement of Lessor's claim for the breach of any of the terms or conditions
of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent to such
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
(e) The assignment or subletting shall not constitute a consent to
any subsequent assignment or subletting by Lessee in regards to any subsequent
or successive assignment or subletting by the sublessee. However, Lessor may
consent to subsequent sublettings and assignments of a sublease or any
amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining prior consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; however, such persons shall not be responsible to the extent any such
amendment or modification enlarges or increases the obligations of the Lessee or
sublessee under this Lease or any sublease.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or any one else responsible for
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible to Lessor, of
any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgement that no default
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 Additional Terms and Conditions Applicable to Subletting. Regardless
--------------------------------------------------------
of Lessor's consent, the following terms and conditions shall apply to any
subletting
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<PAGE>
by Lessee of all or any part of the Premises and shall be deemed included in all
subleases under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
otherwise made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such lessee under such sublease. Lessee
hereby irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor that a default exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents due and to become due
under the lease. Lessee agrees that such sublessee shall have the right to reply
upon any such statement and request from Lessor, and that such sublessee shall
pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Lessor to the contrary. Lessee shall have no right or claim against said
sublessee or Lessor for any such rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublessee as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublease shall, by reason of entering into a
sublease under this Lease, be deemed, for the benefit of Lessor, have assumed
and agreed to conform and comply with each and every obligation herein to be
performed by Lessee other than such obligations as contrary to or inconsistent
with provisions contained in a sublease of which Lessor has expressly consented
in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any obligation to
do so may require any sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of Lessee under such sublease from the time of the
exercise of said option to the termination of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to Lessee or for any other prior defaults of Lessee under such
sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
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<PAGE>
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the
-----------------
Premises or request the consent of Lessor to any assignment or subletting Lessee
shall request the consent of Lessor for any-act Lessee proposes to do then
Lessee shall pay Lessor's reasonable costs and expenses in connection therewith,
including attorneys; architects; engineers' or other consultants' fees.
12.6 Conditions by Consent. Lessor reserves the right to condition any
---------------------
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants to the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment,
whichever is greater.
Default; Remedies.
- ------------------
13.1 Default. The occurrence of any one or more of the following events
-------
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination) or 41.1
(easements), all of which are hereby deemed to be material, non-curable defaults
without the necessity of any notice by Lessor to Lessee thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, and if such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the Notice required by
this subparagraph.
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<PAGE>
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee
other than those referenced in subparagraphs (b) and (c), above, where such
failure shall continue for a period of thirty (30) days after written notice
thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default if Lessee
commenced such cure within said thirty (30) day period and notice required to be
given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within sixty (60)
days; (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(3) is contrary to
any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
rights hereunder, was materially false.
13.2 Remedies. In the event of any material default or breach of this
--------
Lease by Lessee, Lessor may at any time thereafter, with or without notice and
without limiting Lessor in the exercise of any right of remedy which Lessor may
have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender, possession of the Premises to Lessor, in
such event Lessor shall be entitled to recover from Lessee all damages incurred
by Lessor by reason of Lessee's default, 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 any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.
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<PAGE>
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or abandoned
the Premises. In such event Lessor shall be entitled to enforce all of Lessor'
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor
-----------------
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that the late payment by
------------
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense and or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any
installment of Base Rent, Operating Expenses and or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due. Lessee, without any requirement for notice to
Lessor, Lessee shall pay to Lessor a later charge equal to 8% of such overdue
amount. The parties hereby agree that such later charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such later charge by Lessor shall in not event constitute
a waiver of Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
Condemnation. If the Premises or any portion thereof or the Office Building
- ------------
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation").
This Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Building Project is taken by such
condemnation as would
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substantially and adversely affect the operation and profitability of Lessee's
business conducted from the Premises, Lessee shall have the option, to be
exercised only in writing within thirty (30) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
thirty (30) days after the condemning authority shall have taken possession), to
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 rent and Lessee's Share of Operating
Expense shall be reduced in the proportion that the floor area of the Premises
taken bears to the total floor area of the Premises. Common Areas condemned
shall be excluded from the Common Areas usable by Lessee and no reduction of
rent shall occur with respect thereto or by reason thereof. Lessor shall have
the option in its sole discretion to terminate this Lease as of the taking of
possession by the condemning authority by giving written notice to Lessee of
such election within thirty (30) days after receipt of notice of a taking by
condemnation of any part of the Premises or the Office Building Project. Any
award for the taking of all or any part of the Premises or the Office Building
Project under the power of eminent domain, or any claim made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for depreciation in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any separate claim for loss of or damage to Lessee's trade
fixtures, removable personal property and unamortized tenant improvements that
have been paid for by Lessee. For that purpose the cost of such improvements
shall be amortized over the original term of this Lease excluding any options.
In the event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of severance damages received by Lessor in connection
with such condemnation, repair any damage to the Premises caused by such
condemnation except to the extent that Lessee has been reimbursed by the
condemning authority. Lessee shall pay any amount in excess of such severance
damages required to complete such repair.
Broker's Fee.
- ------------
(a) The brokers involved in this transaction are none "listing broker" and
none as "cooperating broker", ____________ real estate broker(s). A
"cooperating Broker" is defined as any broker other than the listing broker
entitled to a share of any commission _________ under this Lease. Upon
execution of this Lease by both parties, Lessor shall pay to said brokers
jointly, or in such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Lessor and said broker(s), or
in the event there is no separate agreement between Lessor and said broker(s),
the sum of $0 for brokerage services rendered by said broker(s) to Lessor in
this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any
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<PAGE>
subsequently granted option which is substantially similar to an Option granted
to Lessee under this Lease, or (ii) if Lessee acquires its rights to the
Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (iii) if Lessee remains in possession of the Premises
after the expiration of the term of this Lease after Lessee failed to exercise
an Option, or (iv) if said broker(s) are the procuring cause of any other lease
or sale entered into between the parties pertaining to the Premises and/or any
adjacent property in which Lessor has an interest, or (v) if the Base Rent is
increased, whether by agreement to an escalation clause contained herein, then
as to any of said transactions or rent increases. Lessor shall pay said
broker(s) a fee in accordance with the schedule of said broker(s) in effect at
the time of execution of this Lease. Said fee shall be paid at the time such
increased rental is determined.
(c) Lessor agrees to pay said free not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, or other such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing and cooperating
broker shall be a third party beneficiary of the provisions of this paragraph 15
to the extent of their interest in any commission due under this Lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealing with any person, firm, broker or finder (other than the
person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of dealings or actions of the indemnifying
party.
Estoppel Certificate.
- --------------------
(a) Each party (as "responding party") shall at any time upon not less than
ten (10) days' prior written notice from the other party ("requesting party")
execute, acknowledge and deliver to the requesting party a statement in writing
(i) certifying that this Lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date which the rent
and other charges are paid in advance, if any, and (ii) acknowledging that there
are not, to the responding party's
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<PAGE>
knowledge, any default on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) AT the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party
requested to respond, without any further notice to such party, or it shall be
conclusive upon such party that (i) this Lease is in full force and effect, and
no modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance, (iii) if Lessor
is the requesting party, not more than one months' rent has been paid in
advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements will include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender of purchaser in
confidence and shall be used only for the purposes herein set forth.
Liability. The term "Lessor" as used herein shall mean only the owner or
- ---------
owners, at the time in question, of the fee title or a lessee's interest in a
ground lease of the Office Building Project, and except as expressly provided in
paragraph 15. In the event of any transfer of such title interest, Lessor herein
named (and in case of any subsequent transfers then the grantor) shall be
relieved from and after the date of such transfer liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor or shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
The invalidity of any provision of this Lease as determined by a court of
competent jurisdiction shall in no way affect the validity of other provisions
hereof.
Interest on Past-due Obligations. Except as expressly herein provided, any
- --------------------------------
amount due to Lessor not paid when due shall bear interest at the minimum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
Time of Essence. Time is of the essence with respect to the obligations to be
- ---------------
performed under this Lease.
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<PAGE>
Additional Rent. All monetary obligations of Lessee to Lessor under the terms
- ---------------
of this Lease, including but not limited to Lessee's Share of Operating Expense
increase and any other expenses payable by Lessee hereunder shall be deemed to
be rent.
Incorporation of Prior Agreements; Amendments. This Lease contains all
- ---------------------------------------------
agreements of the parties with respect to any matter mentioned herein. Prior or
contemporaneous agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing signed by the parties in
interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither real estate broker listed in
paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employee or agent of any other persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal and adaptability of the Premises and the compliance thereof with
all applicable laws and regulations in effect during the term of this Lease.
Notices. Any notice required or permitted to be given hereunder shall be in
- -------
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the name of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for all purposes except that
upon Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice purposes and of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses and may from time to time hereafter designate by
notice to Lessee.
Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver
- -------
of any other provision hereof or of any subsequent breach by Lessee of the same
or any other provision. Lessor's consent to, or approval of, any act shall not
be deemed to render unnecessary the obtaining of Lessor's consent to or approval
of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor
shall not be a waiver of any preceding breach by Lessee of any provision hereof,
other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of the preceding breach at the time of
acceptance of such rent.
Recording. Either Lessor or Lessee shall, upon request of the other, execute,
- ---------
acknowledge and deliver to the other a "short form" memorandum of Lessee for
recording purposes.
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<PAGE>
Holding Over. If Lessee, with Lessor's consent, remains in possession of the
- ------------
Premises or any part thereof after the expiration of the term hereof. The new
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that rent payable shall be
two hundred percent (200%) of the rent payable immediately preceding the
termination date of this Lease, and all Options, if granted under the terms of
this Lease shall be deemed terminated and be of no further effect during said
month to month tenancy.
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.
Binding Effect; Choice of Law. Subject to any provisions hereof restricting
- -----------------------------
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of State where
the Office Building Project is located and any litigation concerning this Lease
between the parties hereto shall be initiated in the City in which the Office
Building Project is located.
Subordination.
- -------------
(a) This Lease, and any Option or right or first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on security thereof and
to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and continue and perform all of the provisions of
this Lease unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or the Lessor shall elect to have this Lease and any
Options granted hereby prior to the line of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Option shall be deemed prior to such mortgage, deed of trust or ground
lease, whether Lease or such Options are dated prior or subsequent to the date
of said Mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted
hereunder prior to the lien of any mortgage, deed of trust or ground lease, as
the case may be. Lessee's failure to execute such documents within ten (10)
days after written demand shall constitute a material default by Lessee
hereunder without further notice to Lessee or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact..
Lessee does hereby make,
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constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
Lessee' name, place and stead, to execute such documents in accordance with this
paragraph 30(b).
Attorneys' Fees.
- ---------------
If either party or the broker(s) named herein bring an action to enforce
the terms hereof or declare rights hereunder, the prevailing party in such
action, trial or appeal thereon, shall be entitled to his reasonable attorneys'
fees to be paid by the losing party as fixed by the court in the action or a
separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
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 good faith.
Lessor shall be entitled to reasonable attorneys' fees and all other costs
and expenses incurred in the preparation and service of notice of action and
consultations in connection therewith, whether or not a legal transaction is
subsequently commenced in connection with such default.
Lessor's Access.
- ---------------
Lessor and Lessor's agents shall have the right to enter the Premises at
reasonable times for the purpose of inspecting the same, performing services
required of Lessor, showing the same to prospective purchasers, lenders, or
lessees, taking such safety measures, erecting such scaffolding or other
necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability for the same.
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forceable or unlawful entry or
detainer of
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the Premises or an eviction. Lessee waives any charges for damages or injuries
or interference with Lessee's property or business in connection therewith.
1. Auctions. Lessee shall not conduct, nor permit to be conducted, either
--------
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in
violation of this paragraph shall constitute a material default of this Lease.
4. Signs. Lessee shall not place any sign upon the Premises or the Office
-----
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
5. Merger. The voluntary or other surrender of this Lease, or a mutual
------
cancellation thereof, or a termination by Lessor, shall not work as a merger and
shall, at the option of Lessor, terminate all or any existing subtenancies or
may, at the option of Lessor, operate as an assignment to Lessor of any or all
of such subtenancies.
6. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
--------
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
7. Guarantor. In the event that there is a guarantor of this Lease, said
---------
guarantor shall have the same obligations as Lessee under this Lease.
8. Quiet Possession. Upon Lessee paying the rent for the Premises and
----------------
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
39. Options.
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39.1 Definition. As used in this paragraph the word "Option" has the
----------
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of
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<PAGE>
Lessor; (3) the right or option to purchase the Premises or the Office Building
Project, or the right of first refusal to purchase the Premises or the Office
Building Project or the right of first offer to purchase the Premises or the
Office Building Project, or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease is
----------------
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that the Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple options
----------------
to extend or renew this Lease a later option cannot be exercised unless a prior
option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
----------------------------
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary (i) during the time commencing
from the date Lessor gives to Lessee a notice of default pursuant to paragraph
13.1(c) or 13.1(d) and continuing until the noncompliance outlined in said
notice of default is cured, or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) and continuing until the obligation
is paid, or (iii) in the event that Lessor has given to Lessee three or more
notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not
the defaults are cured, during the 12 month period of time immediately prior to
the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has
committed any non-curable breach, including without limitation those described
in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants
or conditions of this Lease.
(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 any Option
because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease,
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<PAGE>
(i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period
of thirty (30) days after such obligation becomes due (without any necessity of
Lessor to give notice thereof to Lessee), or if Lessee fails to commence to cure
a default specified in paragraph 13.1(d) within thirty (30) days after the date
that Lessor gives notice to Lessee such default and/or Lessee fails thereafter
to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, or (iv) if Lessee has committed any non-
curable breach, including without limitation those described in paragraph
13.1(b), or is otherwise in default of any of the terms, covenants and
conditions of this Lease.
Security Measures - Lessor's Reservations.
- -----------------------------------------
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
discretion, from providing security protection for the Office Building Project
or any part thereof, in which event the cost thereof shall be included within a
definition of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building Project or
building in which the Premises are located upon not less than 90 days prior
written notice;
(b) To, at Lessee's expense, provide and install Building standard graphics
on the door of the Premises and such portions of the Common Areas as Lessor
shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business as
long as such exclusive does not conflict with any rights expressly described
herein;
(d) To place such signs, notices or displays as Lessor reasonably deems
necessary or advisable upon the roof, exterior of the buildings or Office
Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building or the
Office Building Project or their name(s) in connection with Lessee's business;
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<PAGE>
(b) Suffer or permit anyone, except in emergency, to go upon the roof of
the Building.
Easements.
- ---------
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
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 payment. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
Authority. If Lessee is a corporation, trust, or general or limited
---------
partnership, Lessee, and each individual executing this Lease on behalf of such,
does hereby represent and warrant that such individual is duly authorized to
execute and deliver this Lease on behalf of said entity. If Lessee is a
corporation, trust or partnership, Lessee shall, within thirty (30) days after
execution of this Lease, deliver to Lessor evidence of such authority
satisfactory to Lessor.
Conflict. Any conflict between the printed provisions, Exhibits or Addenda
--------
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
Offer. Preparation of this Lease by Lessor or Lessor's agent and
-----
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
Modification. Lessee agrees to make such reasonable modifications to this
------------
Lease as may be reasonably required by an institutional lender in connection
with the obtaining of normal financial or refinancing of the Office Building
Project.
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<PAGE>
Multiple Parties. If more than one person or entity is named as either
----------------
Lessor or Lessee herein, except as otherwise expressly provided herein,
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
This Lease is supplemented by that certain Work Letter of even date
executed by Lessor and Lessee, attached hereto as Exhibit C, ________________
incorporated herein by this reference.
Attachments. Attached hereto are the following documents which constitute
-----------
a part of this Lease:
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY 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.
-32-
<PAGE>
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR
ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
- ------------------------------ ESTC
- ------------------------------ By /s/ Peter Dawson
Its President
- ---------------------------------- ---------------------------
- ---------------------------------- By /s/ Mark Lapham
Its Chief Financial Officer
Executed at Executed at
---------------------- ----------------------
on on
------------------------------- -------------------------------
Address Address
-------------------------- --------------------------
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<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: November 5, 1999
By and Between Lessee and Lessor
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or interfere
with other lessees or persons having business within the Office Building
Project.
4. Lessee shall not keep animals or birds within the Office Building Project,
and shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or out of
the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitation, techniques and timing as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
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<PAGE>
11. Lessee shall not employ any service or contractor for services or work to
be performed in the Building except as approved by Lender.
12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of 7 P.M.
and 8 A.M. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may
have opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and shall be
responsible for the cost of any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other than
as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines upon the
Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking or
food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants.
Lessee agrees to abide by these and such rules and regulations.
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<PAGE>
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than full
size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as
"Oversized Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
or invitees to be loaded, unloaded, or parked in areas other than those
designated by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of Lessor
and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces from
floor to floor within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard
size spaces as long as the same complies with applicable laws, rules and
regulations.
6. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is required
to park and lock his own vehicle. Lessor will not be responsible for any
damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method or
methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees, agents and
invitees comply with the applicable parking rules, regulations, laws and
agreements.
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<PAGE>
11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a license only
and no bailment is intended or shall be created hereby.
Initials:
--------------
EXHIBIT B
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<PAGE>
Construction of Improvements
- ----------------------------
Lessor shall construct and complete improvements to the Premises in
accordance with the plans and specifications prepared by _______________________
________________________________________________________, dated _______________
consisting of sheets ______________________, (the "Improvements").
Preparation of Plans and Specifications
- ---------------------------------------
Within ____ days after the date of this Lease, Lessor shall prepare at its
cost and deliver to Lessee for its approval _____ copies of preliminary plans
and specifications for the completion of the improvements, which plans and
specifications shall itemize the work to be done by each party, including a cost
estimate of any work required of Lessor in excess of Lessor's Standard
Improvement. Lessee shall approve said preliminary plans and specifications and
preliminary cost estimate or specify with particularity its objection thereto
within _____ days following receipt thereof. Failure to so approve or
disapprove within said period of time shall constitute approval thereof. If
Lessee shall reject said preliminary plans and specifications either partially
or totally, and they cannot in good faith be modified within ten (10) days after
such rejection to be acceptable to Lessor and Lessee, except that Lessee shall
be refunded any security deposit or prepaid rent. The plans and specifications,
when approved by Lessee, shall supersede any prior agreement concerning the
improvements.
Construction
- ------------
If Lessor's cost of constructing the Improvements to the Premises exceeds
the cost of Lessor's Standard Improvements, Lessee shall pay to Lessor cash
before the commencement of such construction a sum equal to such excess.
If the final plans and specifications are approved by Lessor and Lessee,
and Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and
expense, construct the improvements in accordance with said approved plans and
specifications and all applicable rules, regulations, laws or finances.
Completion.
- ----------
16.1 Lessor shall obtain a building permit to construct the improvements
as soon as possible.
16.2 Lessor shall complete the construction of the Improvements as soon as
reasonably possible after the obtaining of necessary building permits.
16.3 The term "Completion," as used in this Work Letter, is hereby defined
to mean the date the building department of the municipality having jurisdiction
of the Premises shall have made a final inspection of the Improvements and
-38-
<PAGE>
authorized a final release of restrictions on the use of public utilities
connection therewith and the same are in a broom-clean condition.
16.4 Lessor shall use its best efforts to achieve Completion of the
improvements on or before the Commencement Date set forth in paragraph 1.5 the
Basic Lease Provisions or within one hundred eighty (180) days after Lessor
obtains the building permit from the applicable building department, whichever
is later.
16.5 In the event that the Improvements or any portion thereof have not
reached Completion by the Commencement Date, this Lease shall not be valid, but
rather Lessor shall complete the same as soon thereafter as is possible and
Lessor shall not be liable to Lessee for damages in any respect whatsoever.
16.6 If Lessor shall be delayed at any time in the progress of the
construction of the Improvements or any portion thereof by extra work changes in
construction ordered by Lessee, or by strikes, lockouts, fire, delay in
transportation, unavoidable casualties, rain or weather conditions, governmental
procedures or delay or by any other causes beyond Lessor's control, then, the
Commencement Date established in paragraph 1.5 of the Lessee shall be amended by
the period of such delay.
Term
- ----
Upon Completion of the Improvements as defined in paragraph 16.3 above,
Lessor and Lessee shall execute an amendment to the Lease selling with the date
of Tender of Possession as defined in paragraph 3.2.1 of the Lease or of actual
taking possession, whichever first occurs, as the Commencement Date of this
Lease.
Work Done by Lessee
- -------------------
Any work done by Lessee shall be done only with Lessor's prior written
consent and in conformity with a valid building permit and all applicable ____,
regulations, laws and ordinances, and was done in a good and workmanlike manner
with good and sufficient materials. All work shall be done only with union
labor and only by contractors approved by Lessor, it being understood that all
plumbing, mechanical, electrical wiring and ceiling work was to be done only by
contractors designated by lessor.
Taking of Possession of Premises.
- --------------------------------
Lessor shall notify Lessee of the Estimated completion date at least ten
(10) days before said date. Lessee shall thereafter have the right to enter the
Premises to commence construction of any Improvements Lessee is to construct and
to equip and fixturize the Premises, as long as such entry does not interfere
with Lessor's work. Lessee shall take possession of the Premises upon the
tender thereof as provided in paragraph 3.2.1 of the Lease to which this Work
Letter is attached. Any
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<PAGE>
entry by Lessee of the Premises under this paragraph shall be under all of the
terms and provisions the Lease to which this Work Letter is attached .
Accordance of Premises
- ----------------------
Lessee shall notify Lessor in writing of any items that Lessee deems
incomplete or incorrect. In order for the Premises to be acceptable to Lessee
within ten (10) days following Tender of Possession as set in paragraph 3.2.1 of
the Lease to which the Work Letter is attached. Lessee shall be deemed to have
accepted the Premises and approved construction if Lessee does not deliver such
a _____ to Lessor within said number of days.
__________ or shall be discontinued, then the index most nearly the same as
the C.P.I. shall be sued to make such calculations. In the event that Lessor
and Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in the ____ in
which the Premises are located. in accordance with the then rules of said
association and the decision of the arbitrators shall be binding on the parties,
notwithstanding one party failing to appear after due notice of the proceeding.
The cost of said Arbitrators shall be paid equally to Lessor and Lessee.
-40-
<PAGE>
EXHIBIT 10.32
EXECUTIVE EMPLOYMENT AGREEMENT
-----------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this ____ day of
____________, ____ is entered into by and between Embedded Support Tools
Corporation, a Massachusetts corporation with its principal place of business at
120 Royall Street, Canton, Massachusetts 02021(the "Company"), and Daniel
McGillivray of _________ (the "Executive").
WHEREAS, the Company desires to employ the Executive, and the Executive is
willing to be employed by the Company, upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Term of Employment. The Company hereby agrees to employ the Executive,
------------------
and the Executive hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the three-year period commencing on the completion
of a public offering of its common stock (the "Employment Period"). This
Agreement will take effect immediately but shall expire without any further
force and effect if no public offering is completed by May 1, 2000.
2. Title; Capacity. Executive shall serve as Vice President of Sales for
---------------
North America and Asia. Executive shall be based at the Company' principal place
of business. Executive shall be subject to the supervision of, and shall have
such authority and duties as is delegated to him by, the Board of Directors (the
"Board"). Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Board shall from time to time reasonably assign to the
Executive. The Executive agrees to devote his entire business time, attention
and energies to the business and interests of the Company during the Employment
Period. The Executive agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Company and any changes therein which
may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive in an annual salary of
------
$170,000.00 during the Employment Period in installments conforming to the
prevailing Company-wide payroll policies.
3.2 Bonus. In addition to base salary, Executive shall be entitled in each
-----
year during the Employment Period to a commissions package totaling $80,000.00.
3.3 Fringe Benefits. Executive shall be entitled to participate in all
------ ---------
bonus and benefit programs that the Company establishes and makes available to
its key employees, if any, to the extent that Executive's position, tenure,
salary, age, health and other qualifications make the
<PAGE>
Executive eligible to participate therein. Executive shall be entitled to ___
weeks paid vacation per year.
3.4 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred or paid by
the Executive in connection with, or related to, the performance of the
Executive's duties, responsibilities or services under this Agreement, upon
presentation by the Executive of documentation, expense statements, vouchers
and/or such other supporting information as the Company may request, provided,
--------
however, that the amount available for such travel, entertainment and other
- -------
expenses shall be fixed in advance by the Board.
3.5 Death of Executive. In the event of the death of the Executive during
------------------
the term of this Agreement, the Executive's salary and benefits earned through
the date of his death shall be paid to the legal representatives of the
Executive at the times specified in this Section 3.
4. Proprietary Information and Developments.
----------------------------------------
4.1 Proprietary Information.
-----------------------
(a) Executive agrees that all information and know-how, not in the public
domain or known within the industry, whether or not in writing, of a private,
secret or confidential nature concerning the Company's business, operations,
marketing, research and development or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. Executive acknowledges that in the course of his employment, the
Executive will have access to and contact with Proprietary Information. By way
of illustration, but not limitation, Proprietary Information may include
inventions, products, processes, methods, techniques, formulas, compositions,
compounds, projects, developments, plans, research data, clinical data,
financial data, personnel data, computer programs, marketing plans and customer
and supplier lists. Proprietary Information shall also include "Developments"
(as defined below).
(b) Executive will not disclose any Proprietary Information to others
outside the Company or use the same for any unauthorized purposes without
written approval by the President of the Company, either during or after his or
her employment, unless and until such Proprietary Information has become public
knowledge without fault by the Executive.
(c) Executive agrees that all files, letters, memoranda, reports, records,
data, sketches, drawings, laboratory notebooks, program listings, or other
written, photographic, electronic or other material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his or her custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his or her duties
for the Company.
(d) Executive agrees that the Executive's obligation not to disclose or use
information, know-how and records of the types set forth above, also extends to
such types of information, know-how, records and other property of customers of
the Company or suppliers to
-2-
<PAGE>
the Company or other third parties who may have disclosed or entrusted the same
to the Company or to the Executive in the course of the Company's business.
(e) Upon termination of this Agreement or at any other time upon
request by the Company, Executive shall promptly deliver to the Company all
records, files, memoranda, notes, designs, data, reports, price lists, customer
lists, drawings, plans, computer programs, software, software documentation,
sketches, laboratory and research notebooks and other documents and materials
(and all copies or reproductions of such materials) relating to the business of
the Company.
4.2 Developments.
------------
(a) Executive will make full and prompt disclosure to the Company of
all inventions, improvements, discoveries, methods, developments, software, and
works of authorship, whether or not patentable or copyrightable, which are
created, made, conceived or reduced to practice by the Executive or under the
Executive's direction or jointly with others during the Employment Period,
whether or not during normal working hours or on the premises of the Company
(all of which are collectively referred to in this Agreement as "Developments").
(b) Executive agrees to assign and does hereby assign to the Company
(or any person or entity designated by the Company) all of his or her right,
title and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications for no additional
consideration. However, this Section 4.2(b) shall not apply to Developments
which do not relate to the present or planned business or research and
development of the Company and which are made and conceived by the Executive not
during normal working hours, not on the Company's premises and not using the
Company's tools, devices, equipment or Proprietary Information.
(c) Notwithstanding the foregoing, copyrightable developments shall be
considered to be "works made for hire" (as such term is defined in the U.S.
Copyright Act), and as such shall be created by the Executive for the exclusive
benefit of the Company. To the extent that any Development does not qualify as a
"work made for hire," all right, title and interest in and to such Development,
or portion thereof, shall be assigned by the Executive to the Company for no
additional consideration in accordance with the preceding paragraph.
(d) Executive agrees to cooperate fully with the Company, both during
and after the Employment Period, with respect to the procurement, maintenance
and enforcement of copyrights, patents and all other intellectual property
rights (both in the United States and foreign countries) relating to
Developments. Executive shall sign all papers, including, without limitation,
copyright applications, patent applications, declarations, oaths, formal
assignments, assignment of priority rights, and powers of attorney, which the
Company may deem necessary or desirable in order to protect its rights and
interests in any Development.
(e) Executive represents that his or her engagement by the Company and
the performance of his or her duties on behalf of the Company does not, and
shall not, breach any agreement that obligates Executive to keep in confidence
any trade secrets or confidential or proprietary information of any other party
or to refrain from competing, directly or indirectly,
-3-
<PAGE>
with the business of any other party. Executive shall not disclose to the
Company any trade secrets or confidential or proprietary information of any
other party.
(f) Executive acknowledges that the Company from time to time may have
agreements with other persons or with the United States Government, or agencies
thereof, that impose obligations or restrictions on the Company regarding
inventions made during the course of work under such agreements or regarding the
confidential nature of such work. Executive agrees to be bound by all such
obligations and restrictions and to take all action necessary to discharge the
obligations of the Company under such agreements.
4.3 Remedies. Executive acknowledges that any breach of the provisions
--------
of this Section 4 shall result in serious and irreparable injury to the Company
for which the Company cannot be adequately compensated by monetary damages
alone. Executive agrees, therefore, that, in addition to any other remedy it may
have, the Company shall be entitled to enforce the specific performance of this
Agreement by Executive and to seek both temporary and permanent injunctive
relief (to the extent permitted by law) without the necessity of proving actual
damages.
4.4. Retroactive Confirmation. For the same consideration received upon
------------------------
entering into this agreement, Executive hereby confirms that from the time he
first entered the Company's employment, all Developments which he may claim as
attributable to him during that period of employment have been disclosed and
assigned to the Company or may be considered "works for hire" created for the
exclusive benefit of the Company, all as if the provisions of section 4.2,
including without limiting the generality of the foregoing provisions of section
4.2(d), were in full force and effect and binding upon the Executive during that
period of employment.
5. Employment Termination. The employment of the Executive by the
----------------------
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
5.1 Expiration of the Employment Period unless it is theretofore
extended by mutual written agreement of the parties hereto;
5.2 At the election of the Company, for cause, immediately upon written
notice by the Company to the Executive. For the purposes of this Section 5.2,
cause for termination shall be upon (a) a good faith finding by the Board of
Directors of the Executive's dishonesty, gross negligence or misconduct, or (b)
the conviction of the Executive of, or the entry of a pleading of guilty or nolo
contendere by the Executive to, any crime involving moral turpitude or any
felony;
5.3 Immediately upon the death or disability of the Executive. As used
in this Agreement, the term "disability" shall mean the inability of the
Executive, due to a physical or mental disability, for a period of 180 days,
whether or not consecutive, during any 365-day period to perform the services
contemplated under this Agreement. A determination of disability shall be made
by a physician satisfactory to both the Executive and the Company, provided that
-------------
if the Executive and the Board of Directors do not agree on a physician, the
Executive and the Company shall each select a physician and these two together
shall select a third physician, whose determination as to disability shall be
binding on all parties;
-4-
<PAGE>
5.4 At the election of the Executive, upon not less than one hundred
and eighty (180) days' prior written notice to the Company; or
5.5 At the election of the Company, upon its payment to the Executive
of $200,000.00 for the earlier of (a) a period of 12 months following the
termination date and (b) the balance of the Employment Period.
6. Effect of Termination. In the event the Executive's employment is
---------------------
terminated for any reason, the Company shall pay to the Executive the
compensation and benefits otherwise payable to him under Section 3 through the
last day of the Executive's actual employment by the Company except as may be
provided otherwise under section 5.5. The provisions of Sections 4 shall survive
the termination of this Agreement.
7. Non-Competition.
---------------
7.1 Executive hereby acknowledges that the Company has developed and
will develop substantial and valuable goodwill with its past, present and future
customers as a result of substantial investments of time, effort and capital.
Executive further acknowledges that he has acquired, and will continue to
acquire, a high level of skill and expertise in the Company's field of business
as a direct result of the Executive's employment by the Company, and that the
Company will likely suffer serious competitive damage if Executive were to
utilize that skill and expertise for the benefit of a competitor of the Company.
Accordingly, Executive hereby covenants and agrees that, during the Employment
Period or any extension thereof and for a period of one (1) year after
termination of his employment by the Company for any reason or no reason, or
from the date of any final judgment upholding the provisions of this Section 7,
whichever is later, Executive shall not, anywhere in North America, Europe and
the Pacific Rim countries, or any other state in which the Company conducts its
business, engage directly, work for or become employed by or associated with any
person or entity, in the same or similar lines of business as the Company.
7.2 Executive acknowledges that the Company has a place of business,
has employees or representatives, or has advertised or sold products or services
in the restricted geographic region referenced in Section 7.1, thereby
warranting such geographic restriction. The Company and Executive agree that the
duration and geographic scope of the non-competition provisions set forth in
this Section 7 are reasonable. In the event that any court determines that the
duration or the geographic scope, or both, are unreasonable and that either such
provision is to that extent unenforceable, the parties hereto agree that the
provision shall remain in full force and effect for the greatest time period and
in the greatest area that would not render it unenforceable. Executive expressly
grants to the Company for a period of up to one (1) year, as the case may be,
following the termination of this Agreement the right to notify any person at
any time of the terms of this restrictive covenant.
7.3 The provisions of this Section 7 shall survive any termination of
this Agreement.
8. Notices. Any notice required or permitted by this Agreement shall be
-------
given by registered or certified mail, return receipt required, addressed to the
Company at its then principal office, or to the Executive at his address
specified below, or to either party hereto at
-5-
<PAGE>
such other address or addresses as he or it may from time to time specify for
the purpose in a notice similarly given.
9. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties relating to the subject matter hereof, and there are no agreements,
representations or warranties not herein set forth. No modification of this
Agreement shall be valid unless in writing and signed by the parties hereto. The
waiver or breach of any term or condition of this Agreement shall not be deemed
to constitute a waiver of any subsequent breach of the same or any other term or
condition.
10. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by both the Company and the Executive.
11. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the Commonwealth of Massachusetts.
12. Successors and Assigns. This Agreement shall extend to and be
----------------------
binding upon the Executive, his legal representative or representatives and
testate or intestate distributees, and this Agreement shall extend to and be
binding upon the Company, its successors and assigns. The term "Company" as used
herein shall include such successors and assigns. The term "successors and
assigns" as used herein shall mean a corporation or other entity acquiring all
or substantially all the assets and business of this Company (including this
Agreement) whether by operation of law or otherwise.
13. Remedies. The rights and remedies of the parties hereunder shall
--------
not be mutually exclusive, i.e., the exercise of one or more of the provisions
hereof shall not preclude the exercise of any other provisions hereof. Each of
the parties confirms that damages at law will be an inadequate remedy for a
breach or threatened breach of this Agreement and agrees that, in the event of a
breach or threatened breach of any provision hereof, the respective rights and
obligations hereunder shall be enforceable by specific performance, injunction
or other equitable remedy, but nothing herein contained is intended to, nor
shall it, limit or affect any rights at law or by statute or otherwise of any
party aggrieved as against the other for a breach or threatened breach of any
provision hereof, it being the intention by this Section to make clear the
agreement of the parties that the respective rights and obligations of the
parties hereunder shall be enforceable in equity as well as at law or otherwise.
Anything in the contrary notwithstanding, neither party shall seek or be
entitled to punitive damages for any breach alleged of the other and each party
hereby waives his or its right to a jury trial on any matters in dispute under
the Agreement.
14. Severability. In the event that any section of this Agreement, or
------------
any provision of any such section, shall for any reason be held to be wholly
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other section hereof, or any other
provisions of any affected section, and this Agreement shall be construed as if,
and enforced as fully as if, such invalid, illegal or unenforceable section or
provisions had never been contained herein. In the event any section, or any
provision thereof, is found to be partially invalid, illegal or unenforceable
(on the ground, for example, that it is excessive in scope), then such section
or
-6-
<PAGE>
provision shall be enforced to the extent not invalid, illegal or unenforceable,
and its partial invalidity, illegality or unenforceability shall not affect any
other section of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement under seal as of the day, month and year first above.
COMPANY: EMBEDDED SUPPORT TOOLS
CORPORATION,
a Massachusetts corporation
By: /s/ Peter S. Dawson
-------------------------
Name: Peter S. Dawson
Title: President
EXECUTIVE: /s/ Daniel J. McGillivray
Print Name: Daniel J. McGillivray
------------------------
Address: 14 Drake Circle
Sharon, MA 02067
-7-
<PAGE>
ACKNOWLEDGMENT UPON
TERMINATION OF EMPLOYMENT
-------------------------
On this ____ day of ____________________, 20__, I have reread the
Executive Employment Agreement dated as of ____________________, ___ by and
between the undersigned and agree to abide by its terms.
EXECUTIVE: _____________________________
Print Name:
-----------------
Address:
--------------------
--------------------
COMPANY: Embedded Support Tools Corporation, a
Massachusetts corporation
By: ____________________________
Name:
Title:
-8-
<PAGE>
EXHIBIT 10.38
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this ____ day of
____________, ____ is entered into by and between Embedded Support Tools
Corporation, a Massachusetts corporation with its principal place of business at
120 Royall Street, Canton, Massachusetts 02021(the "Company"), and Nicholas
Lossky of _________ (the "Executive").
WHEREAS, the Company desires to employ the Executive, and the Executive is
willing to be employed by the Company, upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Term of Employment. The Company hereby agrees to employ the Executive,
------------------
and the Executive hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the three-year period commencing on the completion
of a public offering of its common stock (the "Employment Period"). This
Agreement will take effect immediately but shall expire without any further
force and effect if no public offering is completed by May 1, 2000.
2. Title; Capacity. Executive shall serve as Vice President of Sales for
---------------
Europe. Executive shall be based at the Company' principal place of business.
Executive shall be subject to the supervision of, and shall have such authority
and duties as is delegated to him by, the Board of Directors (the "Board").
Executive hereby accepts such employment and agrees to undertake the duties and
responsibilities inherent in such position and such other duties and
responsibilities as the Board shall from time to time reasonably assign to the
Executive. The Executive agrees to devote his entire business time, attention
and energies to the business and interests of the Company during the Employment
Period. The Executive agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Company and any changes therein which
may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive in an annual salary of
------
$150,000.00 during the Employment Period in installments conforming to the
prevailing Company-wide payroll policies.
3.2 Bonus. In addition to base salary, Executive shall be entitled in each
-----
year during the Employment Period to a bonus of $35,000.00 based on the
Company's performance targets, and to a commission package totaling $80,000.00.
3.3 Fringe Benefits. Executive shall be entitled to participate in all
---------------
bonus and benefit programs that the Company establishes and makes available to
its key employees, if any, to the extent that Executive's position, tenure,
salary, age, health and other qualifications make the
<PAGE>
Executive eligible to participate therein. Executive shall be entitled to ___
weeks paid vacation per year.
3.4 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred or paid by
the Executive in connection with, or related to, the performance of the
Executive's duties, responsibilities or services under this Agreement, upon
presentation by the Executive of documentation, expense statements, vouchers
and/or such other supporting information as the Company may request,
provided, however, that the amount available for such travel, entertainment and
- -----------------
other expenses shall be fixed in advance by the Board.
3.5 Death of Executive. In the event of the death of the Executive during
------------------
the term of this Agreement, the Executive's salary and benefits earned through
the date of his death shall be paid to the legal representatives of the
Executive at the times specified in this Section 3.
4. Proprietary Information and Developments.
----------------------------------------
4.1 Proprietary Information.
-----------------------
(a) Executive agrees that all information and know-how, not in the public
domain or known within the industry, whether or not in writing, of a private,
secret or confidential nature concerning the Company's business, operations,
marketing, research and development or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. Executive acknowledges that in the course of his employment, the
Executive will have access to and contact with Proprietary Information. By way
of illustration, but not limitation, Proprietary Information may include
inventions, products, processes, methods, techniques, formulas, compositions,
compounds, projects, developments, plans, research data, clinical data,
financial data, personnel data, computer programs, marketing plans and customer
and supplier lists. Proprietary Information shall also include "Developments"
(as defined below).
(b) Executive will not disclose any Proprietary Information to others
outside the Company or use the same for any unauthorized purposes without
written approval by the President of the Company, either during or after his or
her employment, unless and until such Proprietary Information has become public
knowledge without fault by the Executive.
(c) Executive agrees that all files, letters, memoranda, reports, records,
data, sketches, drawings, laboratory notebooks, program listings, or other
written, photographic, electronic or other material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his or her custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his or her duties
for the Company.
(d) Executive agrees that the Executive's obligation not to disclose or use
information, know-how and records of the types set forth above, also extends to
such types of information, know-how, records and other property of customers of
the Company or suppliers to
- 2 -
<PAGE>
the Company or other third parties who may have disclosed or entrusted the same
to the Company or to the Executive in the course of the Company's business.
(e) Upon termination of this Agreement or at any other time upon request by
the Company, Executive shall promptly deliver to the Company all records, files,
memoranda, notes, designs, data, reports, price lists, customer lists, drawings,
plans, computer programs, software, software documentation, sketches, laboratory
and research notebooks and other documents and materials (and all copies or
reproductions of such materials) relating to the business of the Company.
4.2 Developments.
------------
(a) Executive will make full and prompt disclosure to the Company of all
inventions, improvements, discoveries, methods, developments, software, and
works of authorship, whether or not patentable or copyrightable, which are
created, made, conceived or reduced to practice by the Executive or under the
Executive's direction or jointly with others during the Employment Period,
whether or not during normal working hours or on the premises of the Company
(all of which are collectively referred to in this Agreement as "Developments").
(b) Executive agrees to assign and does hereby assign to the Company (or
any person or entity designated by the Company) all of his or her right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications for no additional
consideration. However, this Section 4.2(b) shall not apply to Developments
which do not relate to the present or planned business or research and
development of the Company and which are made and conceived by the Executive not
during normal working hours, not on the Company's premises and not using the
Company's tools, devices, equipment or Proprietary Information.
(c) Notwithstanding the foregoing, copyrightable developments shall be
considered to be "works made for hire" (as such term is defined in the U.S.
Copyright Act), and as such shall be created by the Executive for the exclusive
benefit of the Company. To the extent that any Development does not qualify as
a "work made for hire," all right, title and interest in and to such
Development, or portion thereof, shall be assigned by the Executive to the
Company for no additional consideration in accordance with the preceding
paragraph.
(d) Executive agrees to cooperate fully with the Company, both during and
after the Employment Period, with respect to the procurement, maintenance and
enforcement of copyrights, patents and all other intellectual property rights
(both in the United States and foreign countries) relating to Developments.
Executive shall sign all papers, including, without limitation, copyright
applications, patent applications, declarations, oaths, formal assignments,
assignment of priority rights, and powers of attorney, which the Company may
deem necessary or desirable in order to protect its rights and interests in any
Development.
(e) Executive represents that his or her engagement by the Company and the
performance of his or her duties on behalf of the Company does not, and shall
not, breach any agreement that obligates Executive to keep in confidence any
trade secrets or confidential or proprietary information of any other party or
to refrain from competing, directly or indirectly,
- 3 -
<PAGE>
with the business of any other party. Executive shall not disclose to the
Company any trade secrets or confidential or proprietary information of any
other party.
(f) Executive acknowledges that the Company from time to time may have
agreements with other persons or with the United States Government, or agencies
thereof, that impose obligations or restrictions on the Company regarding
inventions made during the course of work under such agreements or regarding the
confidential nature of such work. Executive agrees to be bound by all such
obligations and restrictions and to take all action necessary to discharge the
obligations of the Company under such agreements.
4.3 Remedies. Executive acknowledges that any breach of the provisions of
--------
this Section 4 shall result in serious and irreparable injury to the Company for
which the Company cannot be adequately compensated by monetary damages alone.
Executive agrees, therefore, that, in addition to any other remedy it may have,
the Company shall be entitled to enforce the specific performance of this
Agreement by Executive and to seek both temporary and permanent injunctive
relief (to the extent permitted by law) without the necessity of proving actual
damages.
4.4. Retroactive Confirmation. For the same consideration received upon
------------------------
entering into this agreement, Executive hereby confirms that from the time he
first entered the Company's employment, all Developments which he may claim as
attributable to him during that period of employment have been disclosed and
assigned to the Company or may be considered "works for hire" created for the
exclusive benefit of the Company, all as if the provisions of section 4.2,
including without limiting the generality of the foregoing provisions of section
4.2(d), were in full force and effect and binding upon the Executive during that
period of employment.
5. Employment Termination. The employment of the Executive by the Company
----------------------
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
5.1 Expiration of the Employment Period unless it is theretofore extended
by mutual written agreement of the parties hereto;
5.2 At the election of the Company, for cause, immediately upon written
notice by the Company to the Executive. For the purposes of this Section 5.2,
cause for termination shall be upon (a) a good faith finding by the Board of
Directors of the Executive's dishonesty, gross negligence or misconduct, or (b)
the conviction of the Executive of, or the entry of a pleading of guilty or nolo
contendere by the Executive to, any crime involving moral turpitude or any
felony;
5.3 Immediately upon the death or disability of the Executive. As used in
this Agreement, the term "disability" shall mean the inability of the Executive,
due to a physical or mental disability, for a period of 180 days, whether or not
consecutive, during any 365-day period to perform the services contemplated
under this Agreement. A determination of disability shall be made by a physician
satisfactory to both the Executive and the Company, provided that if the
-------------
Executive and the Board of Directors do not agree on a physician, the Executive
and the Company shall each select a physician and these two together shall
select a third physician, whose determination as to disability shall be binding
on all parties;
- 4 -
<PAGE>
5.4 At the election of the Executive, upon not less than one hundred and
eighty (180) days' prior written notice to the Company; or
5.5 At the election of the Company, upon its payment to the Executive of
$200,000.00 for the earlier of (a) a period of 12 months following the
termination date and (b) the balance of the Employment Period.
6. Effect of Termination. In the event the Executive's employment is
---------------------
terminated for any reason, the Company shall pay to the Executive the
compensation and benefits otherwise payable to him under Section 3 through the
last day of the Executive's actual employment by the Company except as may be
provided otherwise under section 5.5. The provisions of Sections 4 shall survive
the termination of this Agreement.
7. Non-Competition.
---------------
7.1 Executive hereby acknowledges that the Company has developed and will
develop substantial and valuable goodwill with its past, present and future
customers as a result of substantial investments of time, effort and capital.
Executive further acknowledges that he has acquired, and will continue to
acquire, a high level of skill and expertise in the Company's field of business
as a direct result of the Executive's employment by the Company, and that the
Company will likely suffer serious competitive damage if Executive were to
utilize that skill and expertise for the benefit of a competitor of the Company.
Accordingly, Executive hereby covenants and agrees that, during the Employment
Period or any extension thereof and for a period of one (1) year after
termination of his employment by the Company for any reason or no reason, or
from the date of any final judgment upholding the provisions of this Section 7,
whichever is later, Executive shall not, anywhere in North America, Europe and
the Pacific Rim countries, or any other state in which the Company conducts its
business, engage directly, work for or become employed by or associated with any
person or entity, in the same or similar lines of business as the Company.
7.2 Executive acknowledges that the Company has a place of business, has
employees or representatives, or has advertised or sold products or services in
the restricted geographic region referenced in Section 7.1, thereby warranting
such geographic restriction. The Company and Executive agree that the duration
and geographic scope of the non-competition provisions set forth in this Section
7 are reasonable. In the event that any court determines that the duration or
the geographic scope, or both, are unreasonable and that either such provision
is to that extent unenforceable, the parties hereto agree that the provision
shall remain in full force and effect for the greatest time period and in the
greatest area that would not render it unenforceable. Executive expressly grants
to the Company for a period of up to one (1) year, as the case may be, following
the termination of this Agreement the right to notify any person at any time of
the terms of this restrictive covenant.
7.3 The provisions of this Section 7 shall survive any termination of this
Agreement.
8. Notices. Any notice required or permitted by this Agreement shall be
-------
given by registered or certified mail, return receipt required, addressed to the
Company at its then principal office, or to the Executive at his address
specified below, or to either party hereto at
- 5 -
<PAGE>
such other address or addresses as he or it may from time to time specify for
the purpose in a notice similarly given.
9. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties relating to the subject matter hereof, and there are no agreements,
representations or warranties not herein set forth. No modification of this
Agreement shall be valid unless in writing and signed by the parties hereto. The
waiver or breach of any term or condition of this Agreement shall not be deemed
to constitute a waiver of any subsequent breach of the same or any other term or
condition.
10. Amendment. This Agreement may be amended or modified only by a written
---------
instrument executed by both the Company and the Executive.
11. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the Commonwealth of Massachusetts.
12. Successors and Assigns. This Agreement shall extend to and be binding
----------------------
upon the Executive, his legal representative or representatives and testate or
intestate distributees, and this Agreement shall extend to and be binding upon
the Company, its successors and assigns. The term "Company" as used herein shall
include such successors and assigns. The term "successors and assigns" as used
herein shall mean a corporation or other entity acquiring all or substantially
all the assets and business of this Company (including this Agreement) whether
by operation of law or otherwise.
13. Remedies. The rights and remedies of the parties hereunder shall not be
--------
mutually exclusive, i.e., the exercise of one or more of the provisions hereof
shall not preclude the exercise of any other provisions hereof. Each of the
parties confirms that damages at law will be an inadequate remedy for a breach
or threatened breach of this Agreement and agrees that, in the event of a breach
or threatened breach of any provision hereof, the respective rights and
obligations hereunder shall be enforceable by specific performance, injunction
or other equitable remedy, but nothing herein contained is intended to, nor
shall it, limit or affect any rights at law or by statute or otherwise of any
party aggrieved as against the other for a breach or threatened breach of any
provision hereof, it being the intention by this Section to make clear the
agreement of the parties that the respective rights and obligations of the
parties hereunder shall be enforceable in equity as well as at law or otherwise.
Anything in the contrary notwithstanding, neither party shall seek or be
entitled to punitive damages for any breach alleged of the other and each party
hereby waives his or its right to a jury trial on any matters in dispute under
the Agreement.
14. Severability. In the event that any section of this Agreement, or any
------------
provision of any such section, shall for any reason be held to be wholly
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other section hereof, or any other
provisions of any affected section, and this Agreement shall be construed as if,
and enforced as fully as if, such invalid, illegal or unenforceable section or
provisions had never been contained herein. In the event any section, or any
provision thereof, is found to be partially invalid, illegal or unenforceable
(on the ground, for example, that it is excessive in scope), then such section
or
- 6 -
<PAGE>
provision shall be enforced to the extent not invalid, illegal or unenforceable,
and its partial invalidity, illegality or unenforceability shall not affect any
other section of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement under seal as of the day, month and year first above.
COMPANY: EMBEDDED SUPPORT TOOLS CORPORATION,
a Massachusetts corporation
By:
-----------------------------------------
Name:
Title:
EXECUTIVE:
-----------------------------------------
Print Name:
-----------------------------
Address:
-----------------------------
-----------------------------
- 7 -
<PAGE>
ACKNOWLEDGMENT UPON
TERMINATION OF EMPLOYMENT
-------------------------
On this ____ day of ____________________, 20__, I have reread the Executive
Employment Agreement dated as of ____________________, ___ by and between the
undersigned and agree to abide by its terms.
EXECUTIVE:
-----------------------------------------
Print Name:
-----------------------------
Address:
-----------------------------
-----------------------------
COMPANY: Embedded Support Tools Corporation, a
Massachusetts corporation
By:
-----------------------------------------
Name:
Title:
- 8 -
<PAGE>
EXHIBIT 21
EMBEDDED SUPPORT TOOLS CORPORATION
----------------------------------
SCHEDULE OF SUBSIDIARIES
------------------------
EST CORP. (UK) LIMITED
Ringwood House, Bell Road
Daneshill, Basingstoke
Hampshire RG24 8FB
Jurisdiction of Organization: United Kingdom
EST CORP. NORDIC AB
Vallingbyplan 26
S-162 65 Vallingby
Sweden
Jurisdiction of Organization: Sweden
EST KABUSHIKI KAISHA
Katori Building 8F
16-6 Nihonbashi-Kodenma-Cho
Cyuo-Ku Tokyo
Japan
Jurisdiction of Organization: Japan
EST EUROPE S.A.R.L.
Promoploe, 12 Avenue Des Pres
78180 Montigny-Le-Bretonneux
France
Jurisdiction of Organization: France
<PAGE>
EST GMBH
DaimlerStrabe 2
76316 Malsch
Germany
Jurisdiction of Organization: Germany
EST CANADA
3651 Moncton Street
Unit 290
Richmond, B.C. Canada
Jurisdiction of Organization: Canada
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated January 31, 2000 relating to the consolidated financial
statements and financial statement schedule of Embedded Support Tools
Corporation, which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 2000
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,552
<SECURITIES> 0
<RECEIVABLES> 2,883
<ALLOWANCES> 105
<INVENTORY> 1,757
<CURRENT-ASSETS> 11,324
<PP&E> 1,890
<DEPRECIATION> 650
<TOTAL-ASSETS> 13,261
<CURRENT-LIABILITIES> 7,923
<BONDS> 0
1,893
0
<COMMON> 278
<OTHER-SE> 3,720
<TOTAL-LIABILITY-AND-EQUITY> 13,261
<SALES> 28,451
<TOTAL-REVENUES> 28,451
<CGS> 5,349
<TOTAL-COSTS> 26,685
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,345)
<INCOME-TAX> 402
<INCOME-CONTINUING> (3,747)
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<CHANGES> 0
<NET-INCOME> (5,640)
<EPS-BASIC> (0.49)
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