UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-9692
TELLABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3831568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4951 Indiana Avenue, Lisle, Illinois 60532
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708)969-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common shares, with $.01 par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
On March 1, 1996, 88,881,441 common shares of Tellabs, Inc., were
outstanding, and the aggregate market value (based upon the closing sale
price of the National Market System) of such shares held by nonaffiliates
was approximately $3,552,039,000.
Documents incorporated by reference: Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended December 29, 1995, are
incorporated by reference into Parts I and II, and portions of the
1
registrant's Proxy Statement dated March 21, 1996 are incorporated by
reference into Part III.
PART I
ITEM I. BUSINESS
Tellabs, Inc., an Illinois corporation, began operations in 1975 and became
publicly owned in 1980. During 1992, the Illinois corporation merged with
and into Tellabs Operations, Inc., a wholly owned subsidiary. As a result
of the merger, Tellabs Operations, Inc., became a subsidiary of Tellabs,
Inc., a Delaware corporation (with its subsidiaries, unless the context
indicates otherwise, "Tellabs" or the "Company"). The Company designs,
manufactures, markets and services voice and data transport and network
access systems that are used worldwide by public telephone companies,
long-distance carriers, alternate service providers, cellular and other
wireless service providers, cable operators, government agencies,
utilities, and business end-users.
Products provided by the Company include digital cross-connect systems,
managed digital networks and network access products. Digital
cross-connect systems include the Company's TITAN (a registered trademark
of Tellabs Operations, Inc.) 5500 series of digital cross-connect systems.
Managed digital networks include the Martis (a trademark of Martis Oy) DXX
multiplexer, statistical multiplexers, packet switches, T1 multiplexers,
and network management systems. Network access products include digital
signal processing (DSP) products such as echo cancellers and T-coders;
special service products (SSP) such as voice frequency products; and local
access products such as high bit rate digital subscriber line (HDSL)
products and the CABLESPAN (a trademark of Tellabs Operations, Inc.)
system.
The Company's products are sold in both the domestic and international
marketplaces (under the Tellabs name and trademarks and under private
labels) through the Company's field sales force and selected distributors
to a major customer base. This base includes Regional Bell Operating
Companies (RBOCs), independent telephone companies (ITCs), interexchange
carriers (IXCs), local telephone administrations (PTTs), local exchange
carriers (LECs), original equipment manufacturers (OEMs), cellular and
other wireless service companies, cable operators, alternate service
providers, system integrators, government agencies, and business end-users
ranging from small businesses to Fortune 500 companies.
The availability of digital technology along with the use of
microprocessors and other custom and standard very large scale integrated
(VLSI) circuitry continues to make it economically possible for the Company
to expand its product lines to meet the changing customer demands and
industry trends inherent in today's dynamic telecommunications environment.
This expansion primarily involves the development of broad lines of
service-provider-oriented networking systems that meet the ever increasing
demands for efficient, multipurpose data, video, and voice communications
services.
This same availability of technology in capital equipment makes it possible
for the Company to efficiently and competitively continue to produce its
own products in its world class manufacturing facilities located throughout
the world.
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Each of the Company's manufacturing operations is registered under the ISO
9000 standard. ISO 9000 is an international set of standards developed to
provide quality assurance for companies seeking to improve their quality
standards and customer service. The final registrant was the Company's
subsidiary in Finland, which successfully completed the ISO 9001 audit at
the end of 1995.
Digital Cross-Connect Systems
The TITAN product family consists of software intensive digital
cross-connect systems and network management platforms. These flagship
products address the needs of RBOCs, PTTs, IXCs, alternate local exchange,
cellular, cable, government and Fortune 500 companies. These complex
transmission systems are designed to exceed domestic and international
telephone industry standards.
The SONET (synchronous optical network) Digital Cross-Connect Systems
operate under software control and are typically used to build and control
the wideband and broadband transmission infrastructure of the
telecommunication service provider. Telecommunication managers utilize the
digital cross-connect systems to reduce cycle time while minimizing capital
and operating expense. Key applications include centralized and remote
testing of transmission facilities, grooming of voice, data, and video
signals, automated provisioning of new services, and restoration of failed
facilities. All of the TITAN systems include a feature for monitoring
facility performance which enhances "process of elimination
troubleshooting" in a complex network. The user can determine the early
warnings of facility degradation rather than reacting to a network outage.
The digital cross-connect system also converts international to domestic
transmission and signaling standards. These products augment the ability
of users to provide current, emerging, and future service to business and
residential customers. Advanced survivable business services also utilize
the TITAN products for interconnecting fiber transmission.
The TITAN systems vary in switching rate and facility interface speed.
Tellabs offers the SONET TITAN 5300 series of cross-connect systems that
can interface facilities at STS-1, DS3, DS1, E1, DS0, and subrate levels,
and can switch them at DS0 levels and below. The systems in this series
allow modular non-service affecting growth with capacities ranging from 8
to 4,000 ports.
Tellabs offers the Company's flagship SONET TITAN 5500 system which
interfaces facilities at the DS1, DS3, STS-1 and/or fiber optic OC-N
levels, and cross-connects them at levels of DS1/VT1.5 and above. The
TITAN 5500 is the first digital cross-connect system in the world to
integrate optical (N=3,12) equipment. The high speed optical
transmission facilities are designed to meet the growing SONET standard. A
single TITAN 5500 system can carry the equivalent of 700,000 simultaneous
phone conversations.
It is expected that the SONET transmission market will continue to
demonstrate significant growth through the turn of the century. New
technologies in this market include fiber optics and the integration of
network management and asynchronous transfer mode (ATM) switching.
Digital systems products accounted for approximately 49 percent, 46
percent, and 42 percent of 1995, 1994, and 1993 sales, respectively.
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Managed Digital Networks
Since Tellabs' entry into the data communications marketplace in 1983, the
Company has developed a comprehensive family of networking products to
address the requirements and flexibility demanded by the users of
communications services. Products within this group include the Martis DXX
system and the CROSSNET (a registered trademark of Tellabs Operations,
Inc.) family of network-compatible T1/E1 time division multiplexers.
The Martis DXX system is a complete access and transport network designed
to be used by telecommunications service providers worldwide for the
delivery of business services, digital leased lines and integrated
customer access. Typical business service applications include PABX
networking, high speed data access, value added data services such as frame
relay and X.25, and voice telephony. The Martis DXX system acts as the
transport infrastructure for mobile networks such as digital and analog
cellular, paging, trunked mobile radio and mobile data. Martis DXX systems
can also function as general purpose networks carrying the wide variety of
services that may be provided by the public telecommunications service
provider.
Recent enhancements to the Martis DXX system have focused on extending the
current product portfolio with new features and functions including a wider
variety of access configurations and speeds as well as significant
enhancements to the DXX network management system to provide advanced
management options to the public telecommunications service provider such
as virtual private networking. The DXX system is also being enhanced to
provide high speed optical synchronous digital hierarchy interfaces as well
as support for cell and packet based technologies such as frame relay and
ATM.
The CROSSNET 440, 441 and 442 are a family of intelligent T1/E1
multiplexers that interface voice, data and video devices (up to 2.048Mbps)
and multiplex them over private TDM networks. The CROSSNET 445 provides
timeslot interchange and DS0/DS1 switching and is used to network 440, 441
and 442 nodes. This family of intelligent multiplexers can be provisioned
(network-wide) from any one node. In addition, they can automatically
provision many of the voice and data applications and have an integrated
NMS system that can adjust the bandwidth in 400bps increments for highly
efficient use of the DS1 or fractional DS1 facility.
These products compete in the Wide Area Network (WAN) access market. End-
users buy these products through value added re-sellers, service providers
and direct from Tellabs. The products are used to combine voice, data and
video applications for transmission over T1, FT1, E1, Nx56 and Nx64
facilities. They provide for more efficient utilization of the bandwidth
and access to dedicated services.
Although the CROSSNET product line serves a maturing market that is
migrating to newer technologies such as frame relay, ATM and
low-bit-rate-voice (LBRV), there continues to be significant opportunities
for the traditional CROSSNET multiplexers in both the domestic and
international markets. Tellabs has recently enhanced the CROSSNET family
of multiplexers by adding LBRV compression at 8 and 16kbps in its DS0
channels and T1 trunks and enhanced CROSSNET's analog voice capability for
competing in the growing branch office multiplexer market. The Company has
also added a variable-speed network interface (NX64) to the CROSSNET 44X
for use with international networks or satellite radio channels.
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Managed digital networks accounted for approximately 28 percent, 27
percent, and 21 percent, of 1995, 1994, and 1993 sales, respectively.
Network Access Systems
Network access products are primarily modular in design and can be used
either individually or in complex systems and assemblies. The three areas
making up network access products are DSP products, SSP products, and local
access products. The products are designed to meet telephone industry
standards, and, in many applications, they directly interface with customer
premises equipment. These products enhance the ability of LECs, cellular
companies, and end-users to provide current, emerging, and future services
to their business customers through innovative products and systems that
provide more cost-effective provisioning of existing basic services. These
products are deployed worldwide by LECs, PTTs, IXCs, wireless, private
networks, alternate service providers and cable providers. In order to
continue to grow this product area, state-of-the-art technology will be
deployed and value-added content will be provided.
DSP products primarily address the needs of cellular companies, LECs, and
IXCs, both domestically and internationally. Such products include the
Company's echo cancellation (or control) and voice compression products.
The echo control products primary function is to provide voice quality
enhancements such as the removal of irritating feedback (from one's own
voice) that occurs on virtually all long distance connections and many
wireless connections. The voice compression product (T-Coder) doubles the
capacity of digital transmission facilities used for voice and data
services. This product has great economic appeal to cellular companies,
IXCs, and end-users who want to double T1 or E1 capacity without incurring
the cost of a new facility. These DSP products have benefited from the
growth of the markets that these products address.
SSP products provide transmission and signaling conversion between the
central office and the customers' terminal equipment. These products
include: line amplifiers that compensate for loss and distortion in voice
and analog data transmission applications; terminating devices that provide
conversion between 4 wire transmission facilities and 2 wire local lines;
signaling equipment and systems that convert station on-hook/off-hook,
dialing and ringing information to signaling formats compatible with
transmission over metallic voice channels; and loop treatment equipment
typically used to extend the distance from a central office at which a
telephone functions satisfactorily. The Company also designs, manufactures
and sells a line of voice conferencing and alerting systems and a series of
products with remote alignment and diagnostic maintenance capabilities.
The local access product area includes CABLESPAN, a local access system,
and EXPRESSPAN, (a registered trademark of Tellabs Operations, Inc.) a T1
transmission product.
The CABLESPAN 2300 system is a product of Advanced Access Labs (AAL), a
joint venture between the Company and Advanced Fibre Communications, Inc.
(AFC), designed to address the emerging cable and alternate service
provider markets. With the CABLESPAN system, cable companies can offer a
variety of two-way services which include telephone, facsimile,
telecommuting, video conferencing and access to information services to
residential and business customers using their existing hybrid fiber
coaxial networks.
5
The EXPRESSPAN high bit rate digital subscriber line (HDSL) transmission
products allow LECs and large customer premise networks to address the
growing need to install T1 facilities quickly without the expense of
engineering, installation, and maintenance of T1 line repeaters.
Network access products accounted for approximately 21 percent, 26
percent, and 35 percent of 1995, 1994, and 1993 sales, respectively.
MARKETING
Sales are generated through the Company's direct sales organization and
selected distributors. The Domestic sales group consists of approximately
57 direct sales personnel, and additional sales agents and sales support
personnel located throughout the United States. The International sales
group consists of approximately 35 direct sales personnel, and additional
sales agents and sales support personnel in Canada, Latin America, South
America, Europe, the Middle East, Africa, Asia and Australia.
The Domestic sales organization conducts its activities from the corporate
headquarters and eight regional or district offices. The International
sales organization conducts its activities from the corporate headquarters
and fifteen regional offices. The regional offices are generally staffed
by a regional sales manager, system sales engineers, and additional
personnel as required.
Direct orders through the Company's field sales organization accounted for
approximately 88 percent of 1995 sales.
The Company has national account managers to coordinate sales activities
for its major customer groups, and product managers to coordinate the
marketing activities for each major product area.
The Domestic sales organization uses a vertical markets approach for the
sales of its products. As a result, large accounts such as RBOCs, IXCs,
wireless, alternate service providers, and emerging market customers are
serviced by teams to better represent both product and service offerings.
The International sales organization is structured to support activities on
a regional basis.
The Company has arrangements with a number of distributors of
telecommunications equipment, both in the United States and
internationally, some of whom maintain inventories of the Company's
products to facilitate prompt delivery. These distributors provide
information on the Company's products through their catalogs and through
trade show demonstrations. The Company's field sales force also assists
these distributors with regular calls to them and their customers. In
addition, the Company utilizes other channels of distribution, including
approximately 13 value added resellers for its CROSSNET line of networking
multiplexers. Distributors, as a group, accounted for approximately 12
percent of 1995 sales. No single distributor accounted for more than 10
percent of 1995 sales.
CUSTOMER SERVICE
Tellabs maintains a worldwide customer service organization focused on
providing its customers high quality technical and administrative product
support. To ensure global support, Tellabs has five worldwide logistic
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centers (Lisle, Illinois; Shannon, Ireland; Mississauga, Canada; Espoo,
Finland; and Hong Kong).
Tellabs' customer service organization supports its customers with a wide
range of services that include application engineering and support,
installation, post-sale support, service agreements, on-site training,
product repair (warranty administration), on-site maintenance, third
party maintenance, consultation, logistics management, and 24-hour
technical support.
The Tellabs technical support organization consists of unique and
highly-trained teams that focus on customer support of the TITAN 5500,
TITAN 53XX, 44X, 33X, VF and Martis DXX product lines. The teams track
customer complaints to capture, collect and report on product performance
and overall customer profiles, as they continue to track the status of
customers' calls until completion.
Tellabs provides product warranties for periods ranging from one to five
years for the repair or replacement of customer premises-located modules
and systems found to be faulty due to defective material. Tellabs has an
Advance Replacement Policy that allows for the immediate replacement of
customer modules in response to a time critical service outage.
CUSTOMERS
Sales to customer groups as a percentage of total sales were approximately
as follows:
1995 1994 1993
Bell Operating Companies 28% 26% 23%
Independent Telephone Companies 5% 7% 10%
Interexchange Carriers 16% 16% 12%
Corporate America, OEMs, Governmental
Agencies, Cellular Companies, Utility
and Railroad Companies, Alternate Service
Providers, and System Integrators 14% 17% 25%
Foreign Sales
North America (primarily Canada) 4% 4% 9%
International 33% 30% 21%
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
At December 29, 1995, and December 30, 1994, backlogs were approximately
$84 million and $80 million, respectively. All of the December 29, 1995,
backlog is expected to be shipped in 1996. The Company considers backlog
to be an indicator, but not the sole predictor, of future sales.
COMPETITION
The Company's products are sold in global markets and compete on the
following key factors: responsiveness to customer needs,
customer-oriented planning, price, product features, performance,
reliability, breadth of product line, technical documentation, and prompt
delivery.
The digital cross-connect systems compete principally with AT&T, Alcatel
and DSC Communications Corporation (DSC).
7
The managed digital network products compete in two areas. The principal
competition for the multiplexers are Newbridge Networks Corporation,
General DataComm Industries Inc., Premisys, Timeplex, Inc. and Ascend. The
major competitors of the Martis DXX type networks are Newbridge Networks
Corporation, Nokia Telecommunications, and Network Equipment Technologies.
The network access products currently compete in five product areas:
special services, echo cancellers, transcoders, HDSL and CABLESPAN. The
principal competitors in the special services market are Teltrend and
Westell. The leading competitors in the echo canceller market are
Coherent Communications, DSC and Ditech. The major competitors in the
transcoder market are DSC and Aydin. In the HDSL arena, Pair Gain and
Adtran are the principal competitors. CABLESPAN competitors are Nortel,
Motorola, Scientific Atlanta and ADC Telecommunications, Inc.
RESEARCH AND DEVELOPMENT
The telecommunications industry continues to be characterized by rapid
technological change. Historically, the technology of this industry had
been mainly analog, characterized by signals continuous in time with
information contained in the frequency and amplitude of the signals. The
industry has rapidly shifted toward digital technology in which information
is coded in discrete pulses. The Company's current product development
effort is directed almost entirely toward designing new products utilizing
digital, fiber optic and ATM technology. The Company has also focused much
of its research and development efforts on large system software
development and associated processes.
Many products used in network access system applications are well-suited to
the use of digital implementation techniques, including utilization of
microprocessors and other VLSI devices. The Company's ability to combine
analog and digital technologies has been an important ingredient in its
product development. The Company currently manufactures a number of
products using microprocessor control circuitry which make extensive use of
microprocessors and complex system software. The Company is also
actively developing products which utilize high speed fiber optic
technologies to provide higher performance transmission characteristics in
today's telecommunication networks. The Company is continually updating
its research and development capabilities through the addition of new
computer-aided design (CAD) and computer-aided software engineering (CASE)
tools, which assist in electronic, mechanical, and software design. Use of
such tools is imperative as the Company seeks to respond to industry and
customer demands for intelligent digital systems and networking products
with capabilities for automated remote maintenance and provisioning.
The Company is involved in several product-oriented alliances. In April
1994, the Company entered into a joint venture agreement with AFC, a
Petaluma, California-based provider of next-generation digital loop carrier
equipment. Under the agreement, the Company and AFC formed a 50/50 joint
venture partnership (AAL) for the development and manufacture of a
telephony-over-cable transport system which is being marketed by the
Company under the tradename CABLESPAN. The CABLESPAN system, which is
currently in field trial, allows customers to use existing hybrid
fiber-coax for telephone and other new services such as telecommuting,
video conferencing and access to information services. In addition to its
investment in AAL, the Company has made several equity investments in AFC.
8
In 1995, the Company renegotiated the OEM agreement and licensing agreement
with Cisco Systems, Inc. Under the terms of the agreements, the Company
retained the right to market Cisco's existing ATM product and received
licensing rights to develop derivative works of the product. Although, the
Company has cancelled the PORTSPAN 4000 development project which uses the
Promptus Communications technology, the Company continues to have the right
to manufacture the Promptus OASIS 1000 (a registered trademark of Promptus
Communications, Inc.) bandwidth manager, an inverse multiplexing and
switched digital services access product.
Martis Oy in Espoo, Finland, and Tellabs Holdings Ltd. in Shannon, Ireland,
are the focal points for the Company's research and development efforts
for the European Economic Community. The Company's Canadian subsidiary
discontinued its research and development efforts in early 1996.
These agreements, relationships and international development efforts allow
the Company access to technology that is important to the future of its
products. In addition, to ensure that the technologies Tellabs uses are in
keeping with industry developments and to increase the Company's ability to
develop new technologies, the Company conducts research at its laboratory
in Mishawaka, Indiana, and also utilizes its research facilities at its
Espoo, Finland-based subsidiary along with a separate facility in Oulu,
Finland, and its Shannon, Ireland-based subsidiary for the European
marketplace.
Research and development expenses were $81.9 million in 1995, $64.8
million in 1994, and $51.0 million in 1993. The Company plans to spend
approximately $95.0 million on research and development in 1996. These
expenditures reflect the Company's commitment to the enhancement of
existing products and development of new products designed to satisfy the
needs of communications service providers worldwide.
MANUFACTURING AND EMPLOYEES
The Company assembles its products from standard components and from
fabricated parts which are manufactured by others to the Company's
specifications. Such purchased items represented approximately 72 percent
of cost of sales in 1995.
Most purchased items are standard commercial components available from a
number of suppliers with only a few items procured from a single-source
vendor. Management believes that alternate sources could be developed for
those parts and components of proprietary design and those available only
from single or limited sources. However, future shortages could result in
production delays that could adversely affect the Company's business.
As part of the manufacturing process, hazardous waste materials that are
present are handled and disposed of in compliance with all Federal, State
and local provisions. These waste materials and their disposal have no
significant impact on either the Company's production process or its
earnings or capital expenditures.
At December 29, 1995, the Company had 2,814 employees, of which 618 were
employed in the sales, sales support and marketing area, 786 in product
development, 1,172 in manufacturing, and 238 in administration. The
Company considers its employee relations to be good. It is not a party to
any collective bargaining agreement.
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TRADEMARKS, PATENTS AND COPYRIGHTS
The Company has various trade and service marks, both registered and
unregistered, in the U.S. and in numerous foreign countries (collectively,
Marks). All of these Marks are important in that they differentiate the
Company's products and services within the industry through brand name
recognition. Current Marks of the Company include TELLABS, MARTIS, ALTA,
ASC, CABLESPAN, CLEARCALL, CROSSNET, DATAPLEXER, DXX, DYNAMIC SIGNAL
TRANSFER, ESQ, ExpresSPAN, FLASHLOAD, INTERMAKER, NAVIGATING CHANGE, NMCS
2500, PORTSPAN, RADAR, RA SERIES, SONET TO THE CORE, T-CODER, TELEMARK,
TITAN, TURNING YOUR COPPER INTO GOLD, VANTAGE POINT, WE PUT THE WIRE IN
WIRELESS, YOUR NETWORKING PARTNER, 331 XPLEXER, and the Company's logos.
The Company is not aware of any factor which would affect its ability to
utilize any of its major trademarks.
The Company has developed certain proprietary, confidential software
programs which are important to its business. The Company owns various
rights, which are protectable under copyright and trade secret laws, in
such software programs.
The Company currently holds 14 U.S. and 3 Canadian patents. Although
patents may be important to certain of the Company's products, the Company
believes generally that patents are of substantially less significance to
its business than are the design, engineering, and development capabilities
of its personnel.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment. Information with respect to
the Company's operations in its two geographical areas for the fiscal
years ended December 29, 1995, December 30, 1994 and December 31, 1993, is
set forth in Note I on page 35 of the registrant's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 2. PROPERTIES
Tellabs' corporate headquarters is located on 18-1/2 acres of Company-owned
land approximately 30 miles west of Chicago in Lisle, Illinois. Located
on this property are three buildings. The first is a 65,000 square foot
building that functions as the Company's headquarters and houses a
portion of the Digital Systems division's marketing and engineering
personnel. The second is a 103,000 square foot building which houses
customer service, research and development and administrative functions.
The third building is a 54,000 square foot building utilized by the
majority of the Digital Systems division's engineering operations.
The Company also owns 50 acres of land in Bolingbrook, Illinois (near
Lisle) where a 230,000 square foot manufacturing, engineering and office
building was completed and occupied in July 1993. The Company expects to
begin construction of a new 300,000 square foot addition to this facility
in the spring of 1996. Construction of the addition, which is expected to
be completed by mid-1997, is expected to cost approximately $33,000,000.
The Company also owns approximately 75 acres of land in Round Rock, Texas,
and approximately 2.6 acres of land in Mississauga, Ontario, Canada. The
Texas property includes an 84,000-square foot manufacturing facility. The
Canadian property includes a 20,000-square foot office/warehousing
10
building. The Company also owns three office/manufacturing facilities in
Espoo, Finland. A 62,000-square foot building is used for engineering,
marketing, and administrative offices. The second building of
approximately 150,000 square feet is used for production. The third is a
35,000 square foot office building which is currently used for engineering
offices.
The Company leases additional facilities at the following locations:
Mishawaka, Indiana (research); Atlanta, Georgia (sales); White Plains, New
York (customer service); Naperville, Illinois (sales); Denver, Colorado
(sales); Pulallup, Washington (customer service); Irving, Texas (sales);
Rockville, Maryland (sales); Costa Mesa, California (Sales); San Jose,
California (Sales); Littleton, Colorado (Sales); St. Louis, Missouri
(Sales); and Lisle, Illinois (training). Some of the Company's
international subsidiaries also lease space for their operations, including
a 56,000 square foot sales and production facility in County Clare, Ireland
and additional space in Espoo, Finland and Oulu, Finland for administration
and engineering, respectively.
The Company owns substantially all the equipment used in its business. The
Company believes that its facilities are adequate for the level of
production anticipated in 1996, and that suitable additional space and
equipment will be available to accommodate expansion as needed.
ITEM 3. LEGAL PROCEEDINGS
On October 13, 1995, Tellabs Operations, Inc., a wholly-owned subsidiary
of the Company, was served with a complaint filed by DSC Technologies
Corporation and DSC Communications Corporation (collectively, DSC) in The
Circuit Court of Cook County, Illinois, alleging misappropriation of DSC's
trade secrets. The complaint seeks a permanent injunction on the use,
disclosure or dissemination of DSC's trade secret information, actual and
exemplary damages, disgorgement of any unjust enrichment, a constructive
trust for the benefit of DSC holding all profits generated by the alleged
misappropriation of DSC's trade secrets and costs in connection with the
complaint. Pursuant to the terms of the joint venture agreement between
the Company and AFC, AFC is obligated to defend and indemnify the Company
against any and all damages and costs, including attorney's fees, arising
out of these claims. The Company has tendered the complaint to AFC
pursuant to the joint venture agreement. The Company believes that it has
meritorious defenses to the complaint and intends to pursue them
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
NAMES AND BUSINESS EXPERIENCE YEAR OF CURRENT
BIRTH POSITION
Michael J. Birck 1938 President, Chief
President, Chief Executive Officer Executive Officer and
and Director since 1975. Director
Peter A. Guglielmi 1942 President, Tellabs
President, Tellabs International, International, Inc.,
Inc. and Director since 1993; Executive Vice President,
Executive Vice President, Chief Chief Financial Officer,
Financial Officer and Treasurer Treasurer and Director
since 1990; Secretary 1988 to 1993. Tellabs, Inc., and Tellabs
Operations, Inc.
Brian J. Jackman 1941 President, Tellabs
President, Tellabs Operations, Inc. Operations, Inc,
and Director since 1993; Executive Executive Vice President
Vice President, since 1990. and Director
Charles C. Cooney 1941 Vice President, Sales and
Vice President, Sales and Service, Service, Tellabs Operations,
Tellabs Operations, Inc. since 1993; Inc.
Vice President, Sales, 1979 to 1993.
Carol Coghlan Gavin 1956 Vice President, General
Vice President and General Counsel, Counsel and Secretary,
Tellabs Operations, Inc. since Tellabs Operations, Inc.,
1992; Secretary since 1993; Secretary
Assistant Secretary 1989 to 1993;
General Counsel, 1988 to 1992.
Jon C. Grimes 1947 Vice President and General
Vice President and General Manager, Manager, Network Access
Network Access Systems Division, Systems Division,
Tellabs Operations, Inc. since 1993; Tellabs Operations, Inc.
Vice President and General Manager,
Network Products Division 1989 to 1993.
J. Thomas Gruenwald 1948 Vice President, Strategic
Vice President, Strategic Resources, Resources, Tellabs
Tellabs Operations, Inc. since 1995; Operations, Inc.
Director, Engineering 1991 to 1995.
J. Peter Johnson 1949 Vice President, Finance and
Vice President, Finance and Treasury, Treasury, Assistant Secretary
Assistant Secretary and Controller, and Controller, Tellabs, Inc.,
Tellabs Operations, Inc. since 1992; and Tellabs Operations, Inc.
Vice President, Finance and Treasury,
Assistant Secretary and Controller,
1990 to 1992.
John C. Kohler 1952 Vice President, Manufacturing,
Vice President, Manufacturing, Tellabs Tellabs Operations, Inc.
Operations, Inc. since 1993; Vice
President, Product Support Services,
1989 to 1993.
12
Harvey R. Scull 1949 Vice President, Advanced
Vice President, Advanced Business Development, Tellabs
Business Development, Tellabs Operations, Inc.
Operations, Inc. since 1993;
Director, New Business Development,
1989 to 1993.
Richard T. Taylor 1948 Vice President and General
Vice President and General Manager, Manager, Digital Systems
Digital Systems Division, Tellabs Division, Tellabs
Operations, Inc. since 1993; Director Operations, Inc.
of Marketing and Product Development,
Digital Systems Division, 1989 to 1993.
Jeffrey J. Wake 1949 Vice President and General
Vice President and General Manager, Europe, Middle East
Manager, Europe, Middle East and Africa, Tellabs
and Africa, Tellabs International, International, Inc.
Inc. since 1993; Director of
International Sales, 1992; Sales
Director, Tellabs Pty. Ltd, 1990
to 1992.
Nicholas J. Williams 1947 Vice President and General
Vice President and General Manager, The Americas,
Manager, The Americas, Tellabs Tellabs International, Inc.
International, Inc. since 1993;
Vice President and General Manager,
Advanced Technology Products, AT&T
Paradyne Corporation, 1992 to 1993;
Vice President, North American Sales,
AT&T Paradyne Corporation, 1989 to
1991.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections entitled "Common Stock Market Data" on pages 5 and 42 of the
Company's Annual Report to Stockholders for the year ended December 29,
1995 (the "Annual Report") are incorporated herein by reference. They are
also included in Exhibit 13, as filed with the SEC. See discussion
referred to in Item 7 below for dividend information.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Five-Year Summary of Selected Financial Data" on page
4 of the Annual Report is incorporated herein by reference. It is also
included in Exhibit 13, as filed with the SEC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis" on Pages 37
to 40 of the Annual Report is incorporated herein by reference. It is
also included in Exhibit 13, as filed with the SEC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Certified Public Accountants and the Consolidated
Financial Statements and Notes thereto on pages 21 through 36 of the
Annual Report are incorporated herein by reference. They are also included
in Exhibit 13, as filed with the SEC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required, except for information relating to the executive
officers of the registrant which appears at the end of Part I above, is
incorporated herein by reference to the section entitled "Election of
Directors" in the registrant's Proxy Statement (the "Proxy Statement")
dated March 21, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Management and Certain Other
Beneficial Owners" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of Tellabs, Inc., and
Subsidiaries, included in registrant's Annual Report to Stockholders for
the year ended December 29, 1995, are incorporated by reference in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets: December 29, 1995 and December 30, 1994
Consolidated Statements of Earnings: Years ended December 29, 1995,
December 30, 1994 and December 31, 1993
Consolidated Statements of Stockholders' Equity: Years ended
December 29, 1995, December 30, 1994, and December 31, 1993
Consolidated Statements of Cash Flows: Years ended December 29,
1995, December 30, 1994 and December 31, 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following Consolidated Financial Statement Schedules of Tellabs, Inc.,
and Subsidiaries are included herein pursuant to Item 14(d):
Report of Independent Certified Public Accountants on Schedule
Schedule II Valuation and Qualifying Accounts and Reserves
Schedules not included have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) The Registrant filed a report on Form 8-K on or about April 25, 1995,
as disclosed in the second quarter 10-Q and another report on Form
8-K on or about March 15, 1996.
(c) Exhibits:
3.1 Restated Certificate of Incorporation 5/
3.2 Amended and Restated By-Laws, as amended 3/
4. Upon request of the Securities and Exchange Commission,
registrant hereby agrees to furnish to the Commission
copies of instruments (not filed) defining the rights
of holders of long-term debt of the Company. (This
undertaking is in lieu of a separate exhibit.)
10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its
related trust
10.2 1981 Incentive Stock Option Plan, as amended and restated 1/
10.3 1984 Incentive Stock Option Plan, as amended and restated 1/
10.4 1986 Non-Qualified Stock Option Plan, as amended and
restated 1/
16
Exhibits: (Continued)
10.5 1987 Stock Option Plan for Non-Employee Corporate Directors,
as amended and restated 1/
10.6 1989 Stock Option Plan, as amended and restated 1/
10.7 Employee Quality Stock Award Program 2/
10.8 Form of Employment Agreement 3/
10.9 1991 Stock Option Plan, as amended and restated 1/
10.10 Description of Split-Dollar Insurance Arrangement with
the Michael J. Birck Irrevocable Trust 3/
10.11 1994 Stock Option Plan 4/
11. Computation of Per Share Earnings
13. Annual Report to Stockholders
20.1 Agreement of Merger Between Tiger Merger Co., and Steinbrecher
Corporation dated as of March 11, 1996
21. Subsidiaries of the Registrant
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
Exhibits 10.1 through 10.11 are management contracts or compensatory plans
or arrangements required to be filed as an Exhibit to this Form 10-K
pursuant to Item 14(c) hereof.
(d) Schedules: See Item 14(a)2 above.
1/ Incorporated by reference from Tellabs, Inc. Post-effective
Amendment No. 1 on Form S-8 to Form S-4 filed on or about
June 29, 1992 (File No. 33-45788).
2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended April 1, 1988 (File No. 0-9692).
3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual
Report for the year ended January 1, 1993 (File No. 0-9692).
4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report
for the year ended December 31, 1993 (File No. 0-9692).
5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended June 30, 1995 (File No. 0-9692).
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TELLABS, INC.
March 20, 1996 By /s Michael J. Birck
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s Michael J. Birck President and Director March 20, 1996
(Principal Executive
Officer)
/s Peter A. Guglielmi Executive Vice President March 20, 1996
(Principal Financial
Officer) and Director
/s J. Peter Johnson Controller (Principal March 20, 1996
Accounting Officer)
/s Brian J. Jackman Director March 20, 1996
/s John D. Foulkes Director March 20, 1996
/s Frederick A. Krehbiel Director March 20, 1996
/s Stephanie Pace Marshall Director March 20, 1996
/s Robert P. Reuss Director March 20, 1996
/s William F. Souders Director March 20, 1996
/s Thomas H. Thompson Director March 20, 1996
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
Tellabs, Inc.
In connection with our audit of the consolidated financial statements of
Tellabs, Inc., and Subsidiaries, referred to in our report dated January
17, 1996, which is included in the annual report to shareholders and
incorporated by reference in Part II of this form, we have also audited
Schedule II for each of the three years in the period ended December 29,
1995. In our opinion, this schedule presents fairly the information
required to be set forth therein.
Grant Thornton LLP
Chicago, Illinois
January 17, 1996
19
<TABLE>
<CAPTION>
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended December 29, 1995, December 30, 1994 and December 31, 1993
($ in thousands)
Additions
Balance at charged to Balance
beginning costs and Deduc- at end
of year expenses tions (A) of year
--------- --------- --------- -------
<S> <C> <C> <C> <C>
1995
Allowance for
doubtful receivables $992 $1,407 $82 $2,317
====== ======
1994
Allowance for
doubtful receivables $844 $259 $111 $992
====== ======
1993
Allowance for
doubtful receivables $1,498 $83 $737 $844
====== ======
<FN>
NOTE:
(A) - Uncollectible accounts charged off, net of recoveries.
</TABLE>
20
EXHIBIT 10.1
TELLABS, INC.
401(k) Excess-Deferred Income Plan
Tellabs, Inc. (the "Company") hereby establishes a non-qualified
deferred compensation program for certain of its employees or employees
of its subsidiaries who have adopted the Plan. For purposes hereof,
"Company" shall also mean any subsidiary which has adopted the Plan and
is the employer of the participant in question. The following shall
constitute the terms and conditions of the 401(k) Excess-Deferred Income
Plan (the "Plan"), effective April 1, 1992 (the "Effective Date").
I.
Administration
1. Full power and authority to construe, interpret and administer the
Plan shall be vested in the Tellabs, Inc. Employee Benefits
Committee (the "Committee"). The Committee shall have the
authority to make determinations provided for or permitted to be
made under the Plan and to promulgate such rules and regulations,
if any, as the Committee considers necessary and appropriate for
the ongoing administration of the Plan.
II.
Eligibility and Participation
2. An employee of the Company shall be eligible to participate in the
Plan on the January 1st following the date upon which he or she
becomes:
an officer or operating director
in pay grade 26 or higher
with nine months continuous Company service
The Committee shall have the discretion to allow other selected
management or highly-compensated employees to participate in the
Plan, it being intended that this Plan be an unfunded plan of
deferred compensation as described in Section 201(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
III.
Deferred Compensation Elections
3. Each eligible employee may elect in writing to defer a maximum of
15% of his or her salary and incentive pay and/or a maximum of 25%
of any bonus payable with respect to such year, subject to such
limits as the Company may establish from year to year and to the
following Plan provisions.
4. Elections to defer Compensation shall be irrevocable and shall be
made prior to the first day of each calendar year. Deferrals shall
relate only to compensation for services to be performed during
such period, except that, employees becoming newly eligible may
elect within sixty (60) days after eligibility for the Plan to
defer compensation to be earned for services performed in the
balance of the year remaining after the date the deferral election
is made. Such newly eligible employees shall be deemed, for all
other Plan purposes, to have made the deferral election on the
immediately preceding December 31.
5. "Compensation" for purposes of this Plan means the annual gross
salary, incentive pay, and bonuses payable to the participant,
before reduction for taxes or pursuant to this or any other
employee benefit plan. In the initial year of the Plan,
"Compensation" shall be deemed to be gross salary and bonuses
payable to the participant with respect to the portion of the year
beginning on the effective date of the Plan and ending on December
31.
IV.
Earnings on Deferrals
6. The Company shall establish a Deferral "Account" in the name of
each participant on the books and records of the Company. The
Account shall carry the amount of the deferrals, as made, plus any
earnings thereon, as a liability of the Company to the participant.
7. The Company shall annually credit the Account balance as of
December 31 of each year with earnings applied and compounded
annually for the entire deferral year at 12%.
8. If a participant becomes entitled to payments or benefits, as
provided in Article V, prior to December 31, then crediting of
earnings to the Account shall occur as of the date of such
entitlement.
9. Amounts paid to the participants or beneficiaries pursuant to this
Plan shall be deducted from the Account balance as of the first day
of the month in which such payment is made.
V.
Payments and Benefits
10. Retirement Benefit: The benefit is a level, annual payment of the
Account balance amortized at 12% for the duration of payments.
Commencement of this the first day of the year following the latest
of actual retirement, age 55, or five years of plan participation.
The participant shall elect the number of payments (five minimum,
20 maximum), when the election to defer compensation is made.
11. Death Benefits: If the participant dies prior to the commencement
of any other benefits set forth in paragraphs 10 through 13, the
participant's beneficiary shall receive the Account balance in a
lump sum in lieu of any other benefits hereunder. If a participant
dies after commencement of any such benefits, any amounts unpaid
pursuant to paragraphs 10 through 13 of Section V shall be
continued to the beneficiary. Payment shall be made within thirty
(30) days of a Committee determination that a payment is due and on
each subsequent anniversary thereof, if applicable.
12. Disability Benefits: At the time the deferral election is made,
each participant shall elect whether, if he or she becomes disabled
under the Long Term Disability Program of Tellabs, Inc., the
Account balance shall be paid as a Retirement Benefit pursuant to
paragraph 10, or a Termination Benefit, pursuant to paragraph 13.
Payment shall be made within thirty (30) days of a Committee
determination that a payment is due and on each subsequent
anniversary thereof, if applicable.
13. Termination Benefit: Upon termination of employment for reasons
other than death, retirement or, if applicable, disability, the
Company shall pay the terminated participant his or her Account
balance. Payment shall be made within thirty (30) days of a
Committee determination that a payment is due and on each
subsequent anniversary thereof, if applicable.
14. Payment of the Termination Benefit shall be in a lump sum, except
for those participants who terminate within the first three (3)
years of Plan participation, in which event payment shall occur
over a three (3) year period in equal annual amounts, amortized at
the rate applicable in paragraph 7.
15. Interim Distributions: When the election to defer compensation is
made, the participant may also elect to receive one (1) lump sum
Interim Distribution from the Deferral Account balance. Such
distribution shall equal the amount of the Compensation deferred.
Interim Distributions may be elected to be paid the first day of
any specified year following the seventh year after the deferral.
16. Hardship Distributions: The Committee has the authority to make or
accelerate distributions on account of hardship. Participants must
petition the Committee in writing for such distributions, which may
be granted, in the sole discretion of the Committee upon its
determination that failure to make such distribution would create
or continue, urgent and severe financial hardship for the
participant. The amount of the distribution shall not exceed an
amount reasonably necessary to eliminate the hardship.
VI.
Beneficiary Designation
17. Each participant shall designate in writing a legal or natural
person or persons as beneficiary to whom benefits hereunder are to
be paid, if the participant dies before receiving his or her entire
Account ("Beneficiary"). The beneficiary designation may be
changed by the participant from time to time by written election
delivered to the Committee.
18. If a participant fails to designate a Beneficiary as provided
above, or if all designated Beneficiaries of a participant die
before the participant, or before complete payment of all amounts
due hereunder, the Committee, in its discretion, may direct the
Company to pay the unpaid amounts to one or more of such
participant's relatives by blood, adoption or marriage in any
manner permitted by law which the Committee considers to be
appropriate, including but not limited to payment to the legal
representative or representatives of the estate of the last to die
of participant and participant's designated Beneficiaries.
VII.
Incapacity of Participant
19. If, in the Committee's opinion, a participant or other person then
entitled to payment of benefits under the Plan is under a legal
disability or is in any way incapacitated so as to be unable to
manage his or her financial affairs, then the Committee may (but
shall have no obligation), until claim is made by a conservator or
other person legally charged with the care of his or her person or
of his or her estate, direct the Company to make payment to a
relative or friend of such person for his or her benefit.
Thereafter, any benefits under the Plan to which such participant
or other person is entitled shall be paid to such conservator or
other person legally charged with the care of his or her person or
his estate.
VIII.
Rights of Participants.
20. Compensation deferred shall be part of the general assets of the
Company. The Company shall not be required to segregate, set aside
or escrow the compensation deferred, nor earnings credited thereon.
With respect to benefits payable under this Plan, the participants
shall have the status of general creditors of the Company;
participants may look only to the Company and its general assets
for payment of the Account.
21. In its sole discretion, the Company may acquire insurance policies
or other financial vehicles for the purpose of providing future
Company assets to meet its anticipated liabilities under this Plan.
Such policies or other investments, shall at all times be and
remain unrestricted general property and assets of the Company.
Plan participants shall likewise have no rights, other than as
general creditors, with respect to such policies or other acquired
assets.
IX.
Deferred Compensation Trust
22. Notwithstanding any other provision or interpretation of this Plan,
the Company may establish a trust in which to hold cash, insurance
policies or other assets to be used to make or reimburse the
Company for payments to the participants of the benefits under this
Plan, provided, however, that the trust assets shall at all times
remain subject to the claims of general creditors of the Company in
the event of the Company's insolvency.
23. If a trust permitted by this Section is established, the
participants shall be notified and a copy of the trust document
made available to them on request.
24. The Company and not the trust shall be liable for paying the
benefits set forth in Section V. However, after its payment of
benefits pursuant to this Plan, the Company may be reimbursed by
the trust for the after-tax cost of the benefit payment, upon proof
of payment and request for reimbursement.
25. Any payment of benefits made by the trust shall satisfy the
Company's obligation to make such payment to the affected
participant.
X.
Effect on Other Benefits
26. Except as otherwise required by applicable law, the compensation
deferred by a participant shall be included in the participant's
annual compensation for purposes of calculating the participant's
bonuses and awards, insurance, and other employee benefits, except
that in accordance with the terms of any plan qualified under
Section 401 of the Internal Revenue Code of 1986 maintained by the
Company, the amount deferred under Section III shall not be
included as calendar year compensation in calculating the
participant's benefits or contributions by or on behalf of the
participant under such plan or plans. Benefits under the Plan
shall be excluded from compensation in years paid for purposes of
calculating a participant's bonuses and awards, insurance, and
other employee benefits.
XI.
Claims Procedure
27. Any claim by a participant or his Beneficiary (hereinafter
"Claimant") for benefits shall be submitted to the Committee. The
Committee shall be responsible for deciding whether such claim is
within the scope provided by the Plan (a "Covered Claim") or is
otherwise subject to payment pursuant to the terms of any plan, and
for providing full and fair review of the decision on such claim.
In addition, the Committee shall provide a full and fair review in
accordance with ERISA, including without limitatio Section 503
thereof.
Each Claimant or other interested person shall file with the
Committee such pertinent information as the Committee may specify,
and in such manner and form as the Committee may specify and
provide, and such person shall not have any rights or be entitled
to any benefits or further benefits hereunder, as the case may be,
unless such information is filed by the Claimant or on behalf of
the Claimant. Each Claimant shall supply at such times and in such
manner as may be required, written proof that the benefit is
covered under the Plan. If it is determined that a Claimant has
not incurred a Covered Claim or if the Claimant shall fail to
furnish such proof as is requested, no benefits or no further
benefits hereunder, as the case may be, shall be payable to such
Claimant.
Notice of a decision by the Committee with respect to a Claim shall
be furnished to the Claimant within ninety (90) days following the
receipt of the claim by the Committee (or within ninety (90) days
following the expiration of the initial ninety (90) day period, in
a case where there are special circumstances requiring extension of
time for processing the claim). If special circumstances require
an extension of time for processing the claim, written notice of
the extension shall be furnished by the Committee to the Claimant
prior to the expiration of the initial ninety (90) day period. The
notice of extension shall indicate the special circumstances
requiring the extension and the date by which the notice of
decisions with respect to the claim shall be furnished.
Commencement of benefit payments shall constitute notice of
approval of a claim to the extent of the amount of the approved
benefit. If such claim shall be wholly or partially denied, such
notice shall be in writing and worded in a manner calculated to be
understood by the claimant, and shall set forth: (i) the specific
reason or reasons for the denial; (ii) specific reference to
pertinent provisions of the Plan on which the denial is based;
(iii) a description of any additional material or information
necessary for the Claimant to perfect the claim and an explanation
of why such material or information is necessary; and (iv) an
explanation of the Plan's claims review procedure. If the
Committee fails to notify the Claimant of the dec regarding his
claim in accordance with these "Claims Procedure" provisions, the
claim shall be deemed denied and the Claimant shall then be
permitted to proceed with the claims review procedure provided
herein.
Within sixty (60) days following receipt by the Claimant of notice
of the claim denial, or within sixty (60) days following the close
of the ninety (90) day period referred to herein, or if the
Committee fails to notify the Claimant of the decision within such
ninety (90) day period, the Claimant may appeal denial of the claim
by filing a written application for review with the Committee.
Following such request for review, the Committee shall fully and
fairly review the decision denying the claim. Prior to the decision
of the Committee, the Claimant shall be given an opportunity to
review pertinent documents and to submit issues and comments to the
Committee in writing. The decision of the Committee shall be made
within sixty (60) days following receipt by the Committee of the
request for review (or within one hundred and twenty (120) days
after such receipt, in a case where there are special circumstances
requiring extension of time for reviewing such denied claim). The
Committee shall deliver its decision to the Claimant in writing. If
the decision on review is not furnished within the prescribed time,
the claim shall be deemed denied on review.
For all purposes under the Plan, the decision with respect to a
claim if no review is requested and the decision with respect to a
claim if review is requested shall be final, binding and conclusive
on all interested parties as to matters relating to the Plan.
XII.
Miscellaneous Provisions
28. Non-Alienation: Neither a participant nor anyone claiming through
him or her shall have any right to commute, sell, assign, transfer
or otherwise convey the right to receive any payments hereunder,
which payments and the rights thereto hereby are expressly declared
to be non-assignable and non-transferable, nor shall any such right
to receive payments hereunder be subject to the claims of creditors
of a participant or anyone claiming through him or her or to any
legal, equitable, or other proceeding or process for the enforcement
of such claims.
29. Tax Withholding: Notwithstanding the provisions of Section IX, the
Company may withhold from any payment made by it under the Plan
such amount or amounts as may be required for purposes of complying
with the tax withholding or other provisions of the Internal
Revenue Code of 1986 or the Social Security Act or any state income
or employment tax act or for purposes of paying any estate,
inheritance or other tax attributable to any amounts payable
hereunder.
30. Non-Secured Promise: The rights under this Plan of a participant
and any person or entity claiming through him shall be solely those
of an unsecured, general creditor of the Company. Any insurance
policy or other asset acquired or held by the Company shall not be
deemed to be held by the Company for or on behalf of a participant,
or any other person, or to be security for the performance of any
obligations hereunder of the Company, but shall, with respect to
this Plan, be a general, unpledged, unresticted asset of the
Company. No assets held by any trust established under Section IX
shall constitute security for the performance of any obligations
hereunder.
31. Independence of Plan: Except as otherwise expressly provided
herein, this Plan shall be independent of, and in addition to, any
other employment agreement or employment benefit agreement or plan
or rights that may exist from time to time between the parties
hereto. This Plan shall not be deemed to constitute a contract of
employment between the Company and a participant, nor shall any
provision hereof restrict the right of the Company to discharge a
participant, or restrict the right of a participant to terminate
his employment with the Company.
32. Paragraph Headings: The Paragraph headings used in this Plan are
for convenience of reference only and shall not be considered in
construing this Plan.
33. Responsibility for Legal Effect: Neither the Committee nor the
Company makes any representations or warranties, express or
implied, or assumes any responsibility concerning the legal, tax,
or other implications or effects of this Plan.
34. Committee Determinations Final: Each determination provided for in
the Plan shall be made in the absolute discretion of the Committee.
Any such determination shall be binding on all persons.
35. Amendment: The Company may in its sole discretion amend the Plan
from time to time. No such amendment shall adversely affect the
rights of any participant or beneficiary with respect to benefits
under the Plan related to amounts previously deferred.
36. Extension to Subsequent Periods: This Plan applies only to the
year 1993. Nevertheless, by amendment attached hereto, the Company
may adopt the provisions of this Plan in their entirety for any one
or more subsequent years, in which case reference herein to 1993 or
other specific dates shall be accordingly adjusted. In such event,
however, all of the provisions of this Plan for each year shall be
interpreted and applied as if there were a separate and independent
plan for each such year.
37. Termination at the Company's Option: Notwithstanding any other
provision of this Plan, the Company may terminate this Plan at any
time if the Committee, in its sole and absolute discretion,
determines that any change in federal or state law, or judicial or
administrative interpretation thereof, has materially affected the
Company's cost of providing the benefits otherwise payable under
this Plan, or for any other reason whatsoever. Except with the
consent of a participant, no such termination shall adversely
affect the rights of any participant or beneficiary with respect to
benefits under the Plan related to amounts previously deferred.
38. Notwithstanding paragraph 37, payment of benefits accrued under the
Plan shall not be accelerated as a result of a Plan termination but
shall continue to be paid in the normal forms provided for in the
Plan, unless the Committee, in its sole discretion, elects to pay
the Account balance in a lump sum at the time of termination of the
Plan.
39. Successors, Acquisitions, Mergers, Consolidations: The terms and
conditions of this Plan and each Deferral Election shall inure to
the benefit of and bind the Company, the participants, their
successors, assigns, and personal representatives.
40. Controlling Law and Venue: The Plan shall be construed in
accordance with the laws of the State of Illinois to the extent not
preempted by laws of the United States of America. Venue shall lie
in Du Page County, Illinois.
Signed this 1st day of April, 1992, with the approval and
authorization of the Board of Directors.
Tellabs Operations, Inc.
By: Peter A. Guglielmi
Title: Executive Vice President, Chief Financial Officer
401(k) Excess-Deferred Income Plan
Amendment
Pursuant to Article XII, Paragraph 35 of the Tellabs, Inc. 401(k) Excess-
Deferred Income Plan dated April 1, 1992, the Plan is hereby amended (the
new language has been highlighted) as follows:
Introductory paragraph: The name of the Plan is changed from "the 401(k)
Excess-Deferred Income Plan" to "THE TELLABS, INC. DEFERRED INCOME PLAN."
Article II, Paragraph 2: Paragraph 2 is changed to read as follows:
"An employee of the Company shall be eligible to participate in the
Plan on the January 1st following the date upon which he or she becomes:
- an officer or operating director
- in pay grade 26 or higher
- with nine months continuous Company service
FOR PURPOSES OF THIS PLAN, SUCH EMPLOYEES SHALL BE REFERRED TO AS
'ELIGIBLE EMPLOYEES' AND ELIGIBLE EMPLOYEES PARTICIPATING IN THE
PLAN SHALL BE REFERRED TO AS 'PARTICIPANTS.' The Committee shall
have the discretion to allow other selected management or highly-
compensated employees to participate in the Plan, it being intended
that this Plan be an unfunded plan of deferred compensation as
described in Section 201(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")."
Article III, Paragraph 3: Paragraph 3 is changed to read as follows:
"Each eligible employee may elect in writing to defer a maximum of
15% of his or her salary and incentive pay and/or A MAXIMUM OF 25%
OF PAYMENT TO BE RECEIVED FROM STOCK APPRECIATION RIGHTS AND/OR a
maxmim of: (I) IN THE CASE OF ANY ELIGIBLE EMPLOYEE WITH GRADE
LEVEL 29 OR HIGHER, 100% OF ANY BONUS PAYABLE IN 1995 WITH RESPECT
TO 1994 WHICH SUCH EMPLOYEE ELECTED TO DEFER IN 1994; (II) IN THE
CASE OF ANY ELIGIBLE EMPLOYEE WITH GRADE LEVEL 27 OR HIGHER, 100%
OF ANY BONUS PAYABLE IN 1996 WITH RESPECT TO 1995 WHICH SUCH EMPLOYEE
ELECTED TO DEFER IN 1995 AND 100% OF ANY BONUS PAYABLE WITH RESPECT
TO 1996 OR ANY YEAR THEREAFTER; AND (III) IN THE CASE OF ALL OTHER
ELIGIBLE EMPLOYEES, 25% OF ANY BONUS PAYABLE with respect to such
year, subject to such limits as the Company may establish from year
to year and to the following Plan provisions. ANY OF THE PROVISIONS
HEREOF WITH RESPECT TO 1996 AND SUBSEQUENT YEARS ARE EXPRESSLY
SUBJECT TO THE CONDITION THAT THE COMPANY ADOPT THIS PLAN DURING
SUCH YEAR, AS PROVIDED IN ARTICLE XII, PARAGRAPH 36."
Article III, Paragraph 4: Paragraph 4 is changed to read as follows:
"Elections to defer Compensation shall be irrevocable and shall be
made prior to the first day of each calendar year. Deferrals shall
relate only to compensation for services to be performed during such
period, EXCEPT AS PROVIDED IN PARAGRAPH 3 ABOVE, AND except that,
employees becoming newly eligible may elect within sixty (60) days
after eligibility for the Plan to defer compensation to be earned
for services performed in the balance of the year remaining after
the date the deferral election is made. Such newly eligible
employees shall be deemed, for all other Plan purposes, to have
made the deferral election on the immediately preceding December
31."
Article IV is re-titled "Earnings" and Article IV, Paragraph 6: Paragraph
6 is changed to read as follows:
"The Company shall establish an "Account" in the name of each
participant on the books and records of the Company. The Account
shall carry the amount of the deferrals, as made, plus ANY
CONTRIBUTIONS MADE PURSUANT TO ARTICLE XIII, PARAGRAPHS 41 AND 42,
PLUS any earnings thereon, as a liability of the Company to the
participant."
Article IV, Paragraph 7: Paragraph 7 is amended by adding the following
sentence at the end of the paragraph:
"THE COMPANY RESERVES THE RIGHT TO ADJUST THE ANNUAL CREDITING RATE
REFERRED TO HEREIN FROM TIME TO TIME IN THE COMPANY'S DISCRETION AND
IN ACCORDANCE WITH PARAGRAPH 35 OF THE PLAN."
Article V, Paragraph 14: Paragraph 14 is changed to read as follows:
"PAYMENT OF THE TERMINATION BENEFIT SHALL BE IN A LUMP SUM."
Article XII, Paragraph 36: Paragraph 36 is amended by adding the
following sentence at the end of the paragraph:
"THE COMPANY HEREBY RATIFIES AND CONFIRMS THAT THE PLAN WAS DULY
ADOPTED FOR YEARS 1993, 1994 AND 1995."
Article XIII, Paragraphs 41 and 42: A new Article XIII "Additional
Contributions" shall be added. Paragraphs 41 and 42 shall be added to
Article XIII to read as follows:
"41. BENEFITS IN EXCESS OF APPLICABLE TAX LAW LIMITATIONS:
SECTION 401(A)(17) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED FROM TIME TO TIME, LIMITS THE CONTRIBUTIONS ("EXCESS
BENEFIT LIMITATION") THE COMPANY MAY MAKE TO THE TELLABS
ADVANTAGE PROGRAM, AS AMENDED AND RESTATED AS OF JANUARY 2,
1995 (THE "ADVANTAGE PROGRAM"). THE COMPANY SHALL CONTRIBUTE
AMOUNTS TO THE PLAN FOR THE BENEFIT OF THOSE PARTICIPANTS TO
WHICH THE EXCESS BENEFIT LIMITATION APPLIES ("RESTORATION
CONTRIBUTIONS"). THE RESTORATION CONTRIBUTION FOR EACH
QUALIFYING PARTICIPANT SHALL EQUAL, DURING EACH YEAR, THE
DIFFERENCE BETWEEN THE AMOUNT CONTRIBUTED ON BEHALF OF
SUCH PARTICIPANT UNDER THE ADVANTAGE PROGRAM AND THE AMOUNT
THAT WOULD HAVE BEEN CONTRIBUTED UNDER THE ADVANTAGE PROGRAM
WITHOUT REGARD TO THE EXCESS BENEFIT LIMITATION. RESTORATION
CONTRIBUTIONS SHALL BE MADE FOR EACH QUALIFYING PARTICIPANT
IN SUBSEQUENT YEARS SUBJECT TO THE CONDITION THAT THE COMPANY
ADOPT THIS PLAN DURING SUCH YEAR, AS PROVIDED IN ARTICLE XII,
PARAGRAPH 36.
42. THE COMPANY HAS DETERMINED TO MAKE A ONE-TIME CONTRIBUTION
TO CERTAIN PARTICIPANTS EFFECTIVE AS OF JANUARY 1, 1994.
THE PARTICIPANTS AND THE CONTRIBUTIONS SUCH PARTICIPANTS
SHALL RECEIVE ARE AS FOLLOWS:
WILLIAM BARTHOLOMEW $ 916
MICHAEL BIRCK $13,047
JON GRIMES $ 1,322
PETER GUGLIELMI $ 5,886
LARRY HENDERSON $ 712
BRIAN JACKMAN $ 7,425
MICHAEL JOHNSON-FOGG $ 402
JAMES MELSA $ 2,153
CRAIG SPEAK $ 8,776."
Effective as of January 1, 1995 and signed this 25th day of April 1995,
with the approval and authorization of the Board of Directors.
Tellabs, Inc.
By: s\ Peter A. Guglielmi
------------------------
Peter A. Guglielmi
Title: Executive Vice President and Chief Financial Officer
TRUST DOCUMENT
INDEX
Section 1. The Trust
Section 2. Contributions
Section 3. Investment of Trust Assets
Section 4. Accounting by the Trustee
Section 5. Distribution and Payment of Trust Assets
Section 6. Responsibilities of Parties in Event of Insolvency
Section 7. Responsibility of Trustee
Section 8. Compensation and Expenses of Trustee
Section 9. Resignation and Replacement of Trustee
Section 10. Amendment or Termination
Section 11. Communication
Section 12. Severability and Alienation
Section 13. Governing Law
Section 14. Miscellaneous
TRUST DOCUMENT
This Trust Agreement made as of this 31st day of January, 1995, by
and between Tellabs Operations, Inc., a Delaware corporation (the
"Company"), and Harris Trust and Savings Bank (the "Trustee"). This
Trust Agreement provides for the establishment of a trust to be known
as the Tellabs, Inc. Deferred Income Plan Trust (hereinafter called the
"Trust") to hold funds for certain payments required to be made by the
Company to certain of its key employees (the "Participants") pursuant
to the Tellabs, Inc. Deferred Income Plan (the "Plan").
WITNESSETH:
WHEREAS, the Company expects to become obligated under the Plan to
make payments to the Participants and their beneficiaries, and
WHEREAS, the Company wishes to establish the Trust to hold certain
Company assets, subject to the claims of the Company's creditors in
the event the Company is Insolvent (as defined in Section 6 hereof)
until the Participants and their beneficiaries have received all of
their benefits pursuant to the Plan.
NOW THEREFORE, in consideration of the mutual undertakings of the
parties and other good and valuable consideration, the parties do
hereby establish the Trust and agree that the Trust shall be
comprised, held and disposed of as follows:
Section 1. The Trust
- ---------------------
(a) The Company hereby establishes the Trust with the Trustee for the
benefit of Plan Participants, to the extent set forth herein.
(b) The Trustee accepts the Trust established under this Trust Agreement
on the terms and subject to the provisions set forth herein.
(c) This Trust is intended to be a grantor trust, within the meaning of
Section 671 of the Internal Revenue Code of 1986, as amended (the
"Code"), and shall be construed accordingly.
(d) The purpose of the Trust is to help ensure that the Company's
obligation to make benefit payments pursuant to the Plan will be
fulfilled to each of the Participants and their beneficiaries.
The Trust is not designed or intended to qualify under Section
401(a) of the Code.
(e) The principal of the Trust, and any earnings thereon (such
principal, together with any earnings thereon and other increases
thereof, reduced by any losses and distributions from the Trust
and any other reductions thereof, is sometimes referred to herein
as the "Trust Assets"), shall be held separate and apart from other
funds of the Company for the purposes herein set forth. However,
the Participants and their beneficiaries shall not have any
preferred claim on, or any beneficial ownership interest in, any
of the Trust Assets prior to the time such Trust Assets are paid
to the Participants and their beneficiaries pursuant to the terms
of this Trust Agreement, and all rights created under the Plan and
this Trust Agreement shall be mere unsecured contractual rights of
the Participants and their beneficiaries against the Company.
(f) Notwithstanding the foregoing paragraph (e) or any other provisions
of this Trust Agreement, the Trust Assets shall remain subject to
the claims of the Company's general creditors in the event the
Company is Insolvent (as defined in Section 6 hereof).
Section 2. Contributions
- -------------------------
(a) Upon execution of this Trust Agreement by both parties, the Company
shall make an initial contribution of one hundred dollars ($100.00)
to the Trust. The Trustee shall invest the initial contribution in
accordance with Section 3 hereof.
(b) The Company shall contribute to the Trust not later than ninety
(90) days after the last day of each calendar year, the amount, if
any, necessary so that the balance of the assets in the Trust is
then equal to the amount of all benefits credited under the Plan
to the Accounts (as such term is defined in the Plan and as here-
inafter referred to the "Accounts") of the Participants as of such
last day of the calendar year. The Company, in its sole discretion,
may at any time, or from time to time, make additional contributions of
cash or other property in trust with the Trustee to augment the
principal to be held, administered and disposed of by the Trustee as
provided in this Trust Agreement. Neither the Trustee nor any
Participant or beneficiary shall have any right to compel such
additional contributions. At the time of each contribution, the
Company shall certify to the Trustee the amount of the contribution
being made with respect to the Accounts of each Participant and the
Trustee shall allocate the amounts accordingly.
(c) The Company shall also contribute such amounts to the Trust as may
be required pursuant to Sections 8 and 14 (b) hereof within ten (10)
days of receiving written notice from the Trustee of payments by the
Trustee from the Trust pursuant to Sections 8 and 14 (b).
(d) Upon a Change of Control (as defined in Section 14 hereof), the
Company shall, as soon as possible, but in no event longer than
sixty (60) days following such Change of Control make an irrevocable
contribution to the Trust in an amount that is sufficient to pay
each Participant or beneficiary the benefits to which Participants
or their beneficiaries would be entitled pursuant to the terms of
the Plan as of the date on which the Change of Control occurred.
Section 3. Investment of Trust Assets
- --------------------------------------
(a) The Tellabs, Inc. Employee Benefits Committee (the "Committee")
shall have the right and power to direct the Trustee with respect
to investment of the Trust Assets. It is anticipated that the
Trust Assets will be invested to the maximum extent possible in
life insurance policies to be specifically named by the Committee.
All such policies shall name the Trustee as owner and beneficiary.
(b) In the event that the Committee shall fail to provide the investment
direction specified in paragraph (a), the Trustee shall invest and
reinvest the principal and income of the Trust in accordance with
the Tellabs, Inc. Investment Policy, as amended from time to time
(the Tellabs, Inc. Investment Policy effective July 20, 1988 is
attached hereto as Exhibit A).
(c) Notwithstanding the discretion provided to the Committee and the
Trustee, under no circumstances shall Trust Assets be invested in
"employer securities," as such term is defined in Section 407 of the
Employee Retirement Security Act of 1974, as amended other than a de
minimus amount held in common investment vehicles in which the Trust
Assets are invested.
Section 4. Accounting by the Trustee
- -------------------------------------
(a) The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions
required to be done, including amounts contributed or credited
with respect to each Participant's Account and disbursements
charged thereto and such other specific records as shall be agreed
upon in writing between the Company and the Trustee. Within sixty
(60) days following the close of each calendar year and within
sixty (60) days after removal or resignation of the Trustee, the
Trustee shall deliver to the Company a written account of its
administration of the Trust during such year or during the period
from the close of the last preceding year to the date of such
removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued
interest paid or receivable being shown separately), showing all
cash, securities and other property held in the Trust at the end
of such year or as of the date of such removal or resignation, as
the case may be, and the book and fair market value of any such
asset.
(b) The Company shall furnish the Trustee with copies of the Plan and
any and all amendments thereto. The Company will promptly provide
the Trustee with any and all information the Trustee reasonably
requests or the Company believes would be useful in order to enable
the Trustee to determine at any time and from time to time the
amount of any payment which would be due to a Participant or a
Participant's beneficiary.
(c) The Trustee shall notify the Company of any payment made from the
Trust to a Participant or a Participant's beneficiary pursuant to
the terms of the Plan, and the Company shall notify the Trustee of
any other payment pursuant to the terms of the Plan.
(d) All accounts, books and records maintained pursuant to this Section
4 shall be opened to inspection and audit at all reasonable times by
the Company and on an annual basis, after receipt of the written
account described in the next sentence, by the Participants;
provided, however, that no Participant shall have access to
information about another Participant's Account other than in the
normal course of performing his duties as an employee of the
Company.
(e) Within ninety (90) days of the end of each calendar year, the
Company shall provide the Trustee with a current list of
Participants, the amount which each Participant has deferred for the
preceding year of Plan participation, the amount of earnings for the
calendar year on the Participant's deferrals, the balance of each
Participant's accounts and copies of any participation or election
forms completed by a Participant during the preceding year.
Section 5. Distribution and Payment of Trust Assets
- ----------------------------------------------------
(a) The Trustee shall make payments to the Participants (and his/her
beneficiaries) and the Company in accordance with the provisions of
this Trust, provided that the Company is not Insolvent (as defined
in Section 6 hereof) at the time any such payment is required to be
made. Prior to making any payments to the Participants (or his/her
beneficiaries), the Trustee shall receive from the Company a
schedule that indicates the amounts payable to each Participant (and
his/her beneficiaries) that provides a formula or other instructions
for determining the Plan benefits payable and the time of
commencement for Plan benefit payments. Except as otherwise
provided herein, the Trustee shall make Plan benefit payments in
accordance with such schedule.
(b) Payment of the benefits promised in the Plan shall be and remain
the primary obligation and liability of the Company. Plan benefit
payments shall be made from the Trust only upon occurrence of the
events specified hereafter.
(c) If the Company should fail or refuse to make any scheduled Plan
benefit payment when due pursuant to the Plan, then, upon
notification of and verification by the Trustee of the fact of
non-payment, the Trustee is hereby authorized and directed to make
scheduled and unpaid benefit payments directly from the Trust to
Participants who shall request such payment in writing.
(d) Prior to any payment or series of payments which the Trustee intends
to make pursuant to paragraph (c) of this Section 5, the Trustee
shall notify the Company of its intention, and the Company shall
have until the later of thirty (30) days from the date of default
or ten (10) days from the date of the Trustee's notice to cure its
default and make payment consistent with its obligations under the
Plan.
(e) The Trustee shall require reasonable verification as to the amount
and fact of non-payment by the Company.
(f) After making any Plan benefit payment to Participants or their
beneficiaries pursuant to the Plan, the Company shall have the right
upon written request to receive payment from the Trust of amounts
equal to the after-tax cost of the Plan benefit payments, provided
that such amount does not exceed the amount of Trust Assets then
credited to the Participant's Account.
(g) After all Plan benefit payments to Participants and their
beneficiaries have been made, the Trustee is authorized to pay the
remainder of the Trust Assets to the Company subject to Section 10
(b), upon written request for such payment by the Company. Further,
if Trust Assets should at any time exceed 125% of the amount
necessary so that the balance of the assets in the Trust is then
equal to the amount of all benefits credited under the Plan to the
Accounts of the Participants as of each calendar year, then the
Company may upon request received by the Trustee not later than
ninety (90) days after the last day of each calendar year receive
payment of such excess Trust Assets for amounts equal to any net
corporate outlay it has incurred with respect to the Plan and the
Trust.
(h) Subject to the terms of Section 3 (a), the Trustee shall manage
the Trust Assets in the manner which shall maximize the financial
return for the Trust and best ensure that the Participants and their
beneficiaries receive the benefits promised under the Plan. This
management of Trust Assets for the benefit of the Participants and
their beneficiaries shall include the right to surrender all or a
portion of any insurance policies owned by the Trust, if, in the
opinion of the Trustee, the tax due by the Company upon such
surrender would cause the Company to resume benefit payments which
it has failed or refused to make for reasons other than Insolvency
(as defined in Section 6 hereof).
(i) Following any notice of non-payment of benefits by the Company, the
Trustee shall determine whether the Trust has sufficient assets to
make all scheduled Plan benefit payments at the applicable crediting
rate provided in the Plan. If it appears to the Trustee that there
will not be sufficient assets to make the scheduled Plan benefit
payments at the promised crediting rates, the Trustee may reduce the
amount to be paid to Participants and their beneficiaries by the
Trust to such amount which is anticipated to provide all
Participants and their beneficiaries with a proportional share of
Trust Assets relative to their Account balances, but, for any
Participant (or his/her beneficiary), to the extent possible, an
amount which shall in no event be less than the amount of his or her
deferrals.
(j) Anything in this Trust Agreement to the contrary notwithstanding,
all payments pursuant to this Section 5 or Section 14 (a) may be
made without the approval or direction of the Company and shall be
made despite any direction to the contrary by the Company.
Section 6. Responsibilities of Parties in Event of Insolvency
- --------------------------------------------------------------
(a) The Company shall be considered "Insolvent" for purposes of this
Trust Agreement if (i) the Company is unable to pay its debts as
they mature, or (ii) the Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code or any similar
law of any state.
(b) At all times during the continuance of this Trust, the principal
and income of the Trust shall be subject to the claims of general
creditors of the Company as hereinafter set forth, and at any time
the Trustee has actual knowledge or has determined that the Company
is Insolvent, the Trustee shall deliver any undistributed Trust
Assets to satisfy such claims as a court of competent jurisdiction
may direct.
(c) The Board of Directors and the chief executive officer of the
Company shall have the duty, promptly and in writing, to inform
the Trustee of the Company's Insolvency upon their knowledge of
such Insolvency.
(d) In the event that the Trustee has actual knowledge or is informed
of Insolvency pursuant to Section 6 (c), the Trustee shall suspend
payments to Participants and their beneficiaries and reimbursement
to the Company and will hold the assets of the Trust for the benefit
of general creditors of the Company. In addition, if the Trustee
receives other written allegation of Insolvency that the Trustee in
good faith believes is reliable, the Trustee shall suspend payments
to Participants and their beneficiaries, shall hold the assets of
the Trust for the benefit of such general creditors, and shall take
such steps as it determines in its sole discretion to be reasonably
necessary to determine within thirty (30) days whether Insolvency
has occurred. Upon a determination that the Company is not
Insolvent, whether or not the Company was previously Insolvent,
the Trustee shall resume payments, including any benefits previously
suspended and not otherwise paid. In carrying out its obligations
under this Section 6 (d), the Trustee shall rely on good faith
written notice provided by the Company stating whether or not the
Company is Insolvent or has ceased to be Insolvent (where there has
been no entry of a court order concerning the disposition of the
Trust Assets). In the case of the Trustee's actual knowledge of or
determination of Insolvency, the Trustee will deliver Trust Assets
as directed by a court of competent jurisdiction to satisfy claims
of the Company's general creditors. For purposes of this Trust
Agreement, the Trustee shall be considered to possess any knowledge
and information concerning the Company that is in the possession of
any department of the Trustee and which can reasonably be imputed to
the Trustee under procedures generally prevailing in the banking
industry as then in effect. Nothing in this Trust Agreement shall
in any way diminish any rights of a Participant (or his/her
beneficiary) to pursue his rights as a general creditor of the
Company with respect to the Plan or otherwise.
(e) If the Trustee discontinues payments from the Trust to any
Participant or his/her beneficiary pursuant to Section 6 (d) and
subsequently resumes such payments, provided that there are
sufficient assets, the first payment following such discontinuance
shall, subject to Sections 5 (a) and 5 (b) hereof, include the
aggregate amount of all payments which would have been made to the
Participant or his/her beneficiary, together with interest at a rate
equal to the higher of (i) the rate determined pursuant to Section
1274 of the Internal Revenue Code, on the amount delayed and (ii) 8%
during the period of such discontinuance, less the aggregate amount
of payments made to each such Participant or beneficiary by the
Company in lieu of the payments provided for hereunder during any
such period of discontinuance.
Section 7. Responsibility of Trustee
- -------------------------------------
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims;
provided, however, that the Trustee shall incur no liability to
anyone for any action taken pursuant to a direction, request, or
approval given by the Company or any Participant contemplated by
and complying with the terms of this Trust Agreement except to the
extent that this paragraph is inconsistent with Section 5 (j).
(b) The Trustee may consult with legal counsel (who may also be counsel
for the Trustee generally) with respect to any of its duties or
obligations hereunder, and shall be fully protected in acting or
refraining from acting in accordance with the advice of such
counsel.
(c) Subject to Sections 3 (a) and 5 (h) above, the Trustee is authorized
and empowered to (i) purchase, hold, sell, invest and reinvest the
Trust Assets, together with income therefrom; (ii) hold, manage and
control all property at any time forming part of the Trust Assets,
including the right to borrow or withdraw cash values from insurance
policies; (iii) sell, convey, transfer, exchange, surrender and
otherwise dispose of the Trust Assets from time to time in such
manner, for such consideration and upon such terms and conditions as
it shall determine; (iv) make payments from the Trust as provided
hereunder; and (v) exercise all the further rights, powers, options
and privileges granted, provided for or vested in trustees generally
under applicable Federal or State of Illinois law, as amended from
time to time (other than any power to lend funds to the Company), it
being intended that, except as herein otherwise provided, the powers
conferred upon the Trustee herein shall not be construed as being in
limitation of any authority conferred by law, but shall be construed
as in addition thereto.
(d) The Trustee in any and all events is authorized and empowered to do
all other acts necessary or desirable for the proper administration
of the Trust Assets, as though the absolute owner thereof,
including, but not limited to, authorization and power to: (i) cause
any property of the Trust to be issued, held or registered in the
individual name of the Trustee, or in the name of its nominee, or in
such form that title will pass by delivery, provided, the records of
the Trustee shall indicate the true ownership of such property; (ii)
employ such agents and counsel as may be reasonably necessary in
managing and protecting the Trust Assets and to pay them reasonable
compensation; and (iii) undertake or defend any litigation arising
in connection with the Trust Agreement, and settle, compromise or
abandon with the consent of the Company all claims and demands from
other than the Participants, their beneficiaries or the Company in
favor of or against the Trust Assets.
(e) Notwithstanding anything to the contrary elsewhere in this Agreement
(including the authority of the Committee to direct the Trustee with
respect to the investment of the Trust Assets), the Trustee shall
not have the power to start, to enter into, or otherwise to engage
in any business enterprise, or to continue to operate any business
interest that becomes part of the Trust, if such activity
constitutes "carry(ing) on business for joint profit" within the
meaning of section 301.7701-2(a) of the treasury procedural and
administrative regulations of the United States Treasury.
Section 8. Compensation and Expenses of Trustee
- ------------------------------------------------
The Trustee shall be entitled to receive such reasonable compensation
for its services as shall be agreed by the Company and the Trustee.
The Trustee shall also be entitled to receive its reasonable expenses
incurred with respect to the administration of the Trust, including
counsel fees and fees incurred by the Trustee pursuant to Sections 7
(b), 7 (c) and 7 (d) of this Trust Agreement. Such compensation and
expenses shall be payable by the Company and if not so paid, shall be
paid by the Trustee from the Trust Assets. In the event any Trust
Assets are used or required pursuant to the preceding sentence to pay
compensation and expenses to the Trustee, the Company shall promptly
contribute to the Trust any such amount.
Section 9. Resignation and Replacement of Trustee
- --------------------------------------------------
(a) The Trustee may resign at any time during the term of this Trust
by delivering to the Company a written notice of the proposed
resignation. Such resignation shall take effect upon the
qualification of a successor Trustee and when such successor Trustee
commences to act.
(b) In the event that the Trustee notifies the Company of its intention
to resign, in accordance with the foregoing provisions of this
Section 9, the Company shall appoint a successor Trustee which shall
be a bank or trust company. The Trustee hereunder shall thereupon
deliver to the successor Trustee all property of this Trust,
together with such records and documents as may be reasonably
required to enable the successor Trustee to properly administer the
Trust, reserving such funds as it reasonably deems necessary to
cover its unpaid bills and expenses and closing costs.
(c) Upon qualification of a successor Trustee, all right, title and
interest of the resigning Trustee in the Trust Assets and all rights
and privileges under this Trust Agreement theretofore vested in such
resigning Trustee shall vest in the successor Trustee where
applicable, and thereupon all future liability of said resigning
Trustee shall terminate; provided, however, that the Trustee shall
execute, acknowledge and deliver all documents and written
instruments which are necessary to transfer and convey the right,
title and interest in the Trust Assets, and all rights and
privileges to the successor Trustee.
(d) Nothing in this Trust Agreement shall be interpreted as depriving
the Trustee or the Company of the right to have a judicial
settlement of the Trustee's accounts, and upon any proceeding for a
judicial settlement of the Trustee's accounts or for instructions
the only necessary parties thereto will be the Trustee and the
Company.
Section 10. Amendment or Termination
- ------------------------------------
(a) This Trust Agreement may be amended by a written instrument executed
by the Trustee and the Company to the extent that (i) its purposes
and irrevocability are not changed, (ii) the amendment does not
permit the Trust Assets to be used, diverted or encumbered for
purposes other than those described elsewhere herein, unless required
under applicable law or regulation, and (iii) such amendment is not
contrary to applicable law or regulation.
(b) This Trust shall be irrevocable and remain in effect until the
receipt by the Trustee of a certification from the Company,
satisfactory to the Trustee, that all liabilities under the Plan
have been satisfied; provided that, if any payment made from the
Trust or to be made pursuant to the Plan is being contested or
litigated, the Trust shall remain in effect until such contest,
litigation or dispute is resolved. This Trust shall, in all events,
terminate not later than twenty-one (21) years after the death of
the last of the Participants in the Plan.
(c) At the termination of the Trust pursuant to Section 10 (b), the
Trustee shall, as soon as practicable but in any event within ninety
(90) days of the date of such termination, transfer to the Company
the value of the Trust Assets as of the termination date.
Section 11. Communication
- -------------------------
(a) Communications to the Company and the Committee shall be addressed
to the Company at:
Tellabs Operations, Inc.
4951 Indiana Avenue
Lisle, IL 60532
Attention: Employee Benefits Committee
(b) Communications to the Trustee shall be addressed to it at:
Harris Trust and Savings Bank
111 West Monroe
Chicago, IL 60603
Attention: Personal Trust Administration
Section 12. Severability and Alienation
- ---------------------------------------
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition without
invalidating or in any other way limiting the remaining provisions
hereof.
(b) The interest, if any, of Participants or their beneficiaries in the
Trust or with respect to payments from the Trust Assets may not be
anticipated, assigned (either at law or in equity), alienated or
subject to attachment, garnishment, levy, execution or other legal
or equitable process except as required by law. Any attempt by a
Participant to anticipate, alienate, assign, sell, transfer, pledge,
encumber or charge the same shall be void. The Trust Assets shall
not in any manner be subject to the debts, contracts, liabilities,
engagements or torts of any Participant or any beneficiary and shall
not be considered an asset of a Participant or his/her beneficiary
in the event of his/her insolvency or bankruptcy.
Section 13. Governing Law
- -------------------------
This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois, without reference to principles
of conflicts of law, except to the extent superseded by federal law.
Section 14. Miscellaneous
- -------------------------
(a) The Trustee shall not be either individually or severally liable for
any taxes of any kind levied or assessed under existing or future
laws against the Trust Assets. The Trustee shall withhold from each
payment to any Participant or beneficiary the amount of any Federal,
state or local withholding taxes which are from time to time
required to be deducted under applicable laws. To the extent that
any taxes levied or assessed upon the Trust are not paid by the
Company, the Trustee shall pay such taxes out of the Trust Assets.
(b) Expenses and fees of the Company for the administration of this
Trust and services in relation thereto for actuarial, legal and
accounting and other similar expenses, including any costs with
respect to the creation of the Trust, shall be paid by the Company
and, if not so paid may be paid by the Trustee from the Trust Assets
provided, however, that if Trust Assets are so paid, the Company
shall promptly contribute to the Trust any such amount so paid.
(c) A Participant's status as a beneficiary of the Trust shall not give
such Participant any right to be retained as an employee of the
Company nor any rights other than those specifically enumerated
herein or in any agreement applicable to any Participant or pursuant
to which such Participant has become a beneficiary hereof.
(d) Any payment to any Participant or his/her beneficiary in accordance
with the provisions of the Trust shall, to the extent thereof, be in
full satisfaction of all claims against the Trustee and the Company
under the Plan and this Trust Agreement. Nothing in this Trust
shall relieve the Company of its liability to pay benefits to
Participants or their beneficiaries under the Plan, except to the
extent such liabilities are met through the use of the Trust Assets.
(e) Headings in this Trust Agreement are inserted for convenience or
reference only and are not to be considered in the construction of
the provisions hereof.
(f) This Trust Agreement may be executed in several counterparts, each
of which shall be deemed an original, and said counterparts shall
constitute but one and the same instrument, which may be
sufficiently evidenced by any one counterpart.
(g) This Trust Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their successors and assigns.
(h) As used in this Trust Agreement, the masculine gender shall include
the feminine and neuter genders.
(i) Any action of the Company pursuant to this Trust Agreement,
including all orders, requests, data, directions, instructions and
other related information shall be in writing and signed on behalf
of the Company by an officer or named designee of the Company.
(j) For the purposes of this Trust, Change of Control shall be deemed to
occur when and only when the first of the following events occurs:
(i) Any "person" or "group" (as such terms are used in Section
3(a), 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended, and regulations promulgated thereunder
(the "Act")), other than (1) a trustee or other fiduciary
holding securities under any employee benefit plan of
Tellabs, Inc., the parent holding company of the Company
(the "Holding Company"), or any of its subsidiaries, (2) a
corporation owned directly or indirectly by the stockholders
of the Holding Company in substantially the same proportions
as their ownership of stock in the Holding Company, (3)
Michael J. Birck, his spouse, any of his descendants or the
spouse of any such descendants, the estate of Michael J.
Birck, his spouse, any of his descendants or the spouse of
any such descendant, any trust or other arrangement for the
benefit of Michael J. Birck, his spouse or any of his
descendants or the spouse of any such descendants (the
"Birck Family") or (4) any group which includes the Birck
Family if a majority of the voting securities of the Holding
Company beneficially owned by the members of such group are
beneficially owned by a member or members of the Birck
Family, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of
securities of the Holding Company representing 20% or more
of the total voting power of the then outstanding securities
of the Holding Company entitled to vote generally in the
election of directors (the "Voting Stock"); or
(ii) Individuals who are members of the Incumbent Board, cease
to constitute a majority of the Board of Directors of the
Holding Company, or
(iii) (1) The merger or consolidation of the Company with any
other corporation or entity, other than a merger or
consolidation which would result in the Voting Stock
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity)
at least 80% of the total voting power represented by the
Voting Stock or the voting securities of such surviving
entity outstanding immediately after such merger or
consolidation, (2) the sale, transfer or disposition of
all or substantially all of the Holding Company's assets
to any other corporation or entity, or (3) the dissolution
or liquidation of the Holding Company.
(k) The term "Incumbent Board" shall mean (i) the members of the Board
of Directors of the Holding Company on January 1, 1995, and (ii) any
individual who becomes a member of the Board of Directors of the
Holding Company after January 1, 1995, if he or his election or
nomination for election as a director was approved by the
affirmative vote of a majority of the then Incumbent Board.
IN WITNESS WHEREOF, the Company and the Trustee have executed this
Agreement as of the date first above written.
Tellabs Operations, Inc. Harris Trust and Savings Bank
By: s\ Brian J. Jackman By: s\ Irene Demeur
------------------------------ -----------------------------
Name: Brian J. Jackman Name: Irene Demeur
Title: President Title: Vice President
Exhibit A (Page 1 of 2)
TELLABS, INC.
INVESTMENT POLICY
(Effective July 20, 1988)
OBJECTIVE:
- ---------
Maximize current income to the extent consistent with the
preservation of capital and liquidity by investing in high
quality money market instruments.
INVESTMENT PARAMETERS:
- ---------------------
- All instruments should be rated by an appropriate agency and
receive their rating as outlined in the attached table.
- All instruments should mature within two years, subject to
thirty (30) day review by Treasurer. (Except investments
in Puerto Rico)
- All instruments purchased must be easily sold in active
secondary markets.
- Investments under direct control shall be limited to $2.5
million to any one issuer, with the exception of U.S.
Governmental obligations.
- Credit enhancements such as Letters of Credit and insurance
guarantees shall be by an issuer who meets the appropriate
investment criteria.
New investment securities to the market place; not otherwise
covered in this policy; may be purchased, subject to the
discretion of the Treasurer, not to exceed the lesser of 10%
of the total portfolio or $3 million.
- Investment decisions shall adhere to the above policy as it
applies to the portfolio at date of the investment. Subsequent
portfolio changes shall not necessitate premature disposals to
bring the portfolio in compliance with the policy.
Exhibit A
(Page 2 of 2)
TELLABS, INC.
INVESTMENT POLICY
(Effective July 20, 1988)
<TABLE>
<CAPTION>
MAXIMUM INVESTMENT CRITERIA
% OF MAXIMUM MINIMUM RATINGS
SECURITY TYPE PORTFOLIO MATURITY S&P/MOODYS/Duff & Phelps
- ------------- --------- -------- ------------------------
<C> <C> <C> <C> <C> <C>
U.S. Treasury 100% 2 years N/A
U.S. Government Agencies 10% 2 years N/A
Municipals 40% (2) 18 months (1) AA (4) / Aa3 / 4
SP1 / MIG2 / 1
A2 / P2 / 1
Commercial Paper 50% (2) 9 months A1 / P1 / 1
20% (3) 9 months A2 / P2 / 1
Open end Demand Notes 10% N/A A1 / P1 / 1
Corporate Notes 10% 12 months AA / Aa3 / 4
Certificate of Deposit 50% 2 years (1) N/A / P1 / 1
Bankers Acceptances 40% 9 months Banks with asset size
greater than $3 Billion
(US Bank) or $20 Billion
(non-US Bank).
Preferred Stocks 20% N/A A / A3 / 7
Common Stocks 5% N/A A / A3 / 7
Bonds 20% 2 years AA / Aa3 / 4
Eurodollar Time Deposits 10% 18 months same as BA's
Repo's 20% 1 year (1) same as BA's
(fully collateralized)
Other 10% 1 year N/A
</TABLE>
(1) Except investments in Puerto Rico maximum shall be 5 years.
(2) % of Portfolio for all grades.
(3) % of Portfolio for lower grades
(4) Except Escrowed to Maturity by U.S. government securities-
non-rated is acceptable.
EXHIBIT 11
TELLABS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
PRIMARY EARNINGS PER SHARE 1995 1994 1993
---- ---- ----
Weighted average number of common
shares outstanding during the period 88,194 86,812 84,616
Net additional shares assuming dilutive
stock options exercised and proceeds
used to purchase treasury shares at
average fair market value 3,433 3,747 3,596
------ ------ ------
Weighted average number of common shares
and common equivalent shares outstanding 91,627 90,559 88,212
======= ======= =======
Net earnings $115,606 $72,389 $31,967
======= ======= =======
Primary earnings per share $1.26 $0.80 $0.36
===== ===== =====
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding during the period 88,194 86,812 84,616
Net additional shares assuming dilutive
stock options exercised and proceeds
used to purchase treasury shares at
fair market value 3,516 3,852 3,855
----- ----- -----
Weighted average number of common shares
and common equivalent shares outstanding 91,710 90,664 88,471
======= ======= =======
Net earnings $115,606 $72,389 $31,967
======= ======= =======
Fully diluted earnings per share $1.26 $0.80 $0.36
===== ===== =====
[FN]
NOTE:
Restated to reflect the stock splits in 1995, 1994 and 1993.
EXHIBIT 13
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(In thousands, except per-share data)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $635,229 $494,153 $320,463 $258,560 $212,751
Gross profit $363,835 $270,003 $164,255 $125,876 $100,154
Earnings before income taxes $162,825 $97,824 $35,801 $19,152 $7,025
Net earnings before cumulative effect
of accounting change $115,606 $72,389 $30,467 $16,854 $6,631
Cumulative effect of accounting change ---- ---- $1,500 ---- ----
Net earnings $115,606 $72,389 $31,967 $16,854 $6,631
Earnings per share before cumulative effect
of accounting change $1.26 $0.80 $0.34 $0.20 $0.08
Cumulative effect on earnings per share ---- ---- $0.02 ---- ----
Earnings per share $1.26 $0.80 $0.36 $0.20 $0.08
Stockholders' equity $433,233 $292,790 $207,006 $167,144 $145,043
Total assets $552,051 $390,067 $328,766 $210,748 $185,964
Net working capital $267,806 $138,317 $64,285 $109,201 $96,753
Long-term debt $2,850 $2,850 $2,850 $2,850 $3,992
No cash dividends per common share were paid. Per-share amounts are restated
to reflect stock splits in 1995, 1994 and 1993.
COMMON STOCK MARKET DATA
(Restated for stock splits in 1995 and 1994)
1995 1994
High Low High Low
First Quarter 32 7/8 23 1/2 15 3/8 10 15/16
Second Quarter 48 1/4 28 18 5/8 12 5/8
Third Quarter 52 3/4 39 1/4 22 7/8 14 1/8
Fourth Quarter 42 3/4 29 3/4 28 21
The Company's common stock is traded over-the-counter under the symbol
TLAB. The shares are included in the NASDAQ National Market System, which
reports sales prices for actual transactions. At February 28, 1996, there
were approximately 2,685 stockholders of record.
Management Statement of Financial Responsibilities
The financial statements of Tellabs, Inc., and Subsidiaries have been
prepared under the direction of management in conformity with generally
accepted accounting principles. In the opinion of management, the
financial statements set forth a fair presentation of the consolidated
financial condition of Tellabs, Inc., and Subsidiaries at December 29,
1995, and December 30, 1994, and the consolidated results of its operations
for the years ended December 29, 1995, December 30, 1994, and December 31,
1993.
The Company maintains accounting systems and related internal controls
which, in the opinion of management, provide reasonable assurances that
transactions are executed in accordance with management's authorization,
that financial statements are prepared in accordance with generally
accepted accounting principles, and that assets are properly accounted for
and safeguarded.
Ethical decision-making is fundamental to the Company's management
philosophy. Management recognizes its responsibility for fostering a
strong ethical climate so that the Company's affairs are conducted to the
highest standards of personal and corporate conduct. Employee awareness of
these objectives is achieved through key written policy statements.
The Board of Directors has appointed two of its non-employee members as an
Audit Committee. This committee meets periodically with management and the
independent certified public accountants, who have free access to this
committee without management present, to discuss the results of their
audit work and their evaluation of the internal control structure and the
quality of financial reporting.
Michael J. Birck Peter A. Guglielmi
President and Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer,
Tellabs, Inc. Tellabs, Inc.
January 17, 1996 January 17, 1996
Report of Independent Certified Public Accountants
We have audited the accompanying consolidated balance sheets of
Tellabs, Inc., and Subsidiaries as of December 29, 1995, and
December 30, 1994, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended December 29, 1995,
December 30, 1994 and December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tellabs,
Inc., and Subsidiaries at December 29, 1995, and December 30, 1994, and the
consolidated results of its operations and its consolidated cash flows for
the years ended December 29, 1995, December 30, 1994 and December 31,
1993, in conformity with generally accepted accounting principles.
As discussed in Note G to the consolidated financial statements, effective
January 2, 1993, the Company changed its method of accounting for income
taxes.
Grant Thornton LLP
Chicago, Illinois
January 17, 1996
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share data)
Year Year Year
Ended Ended Ended
12/29/95 12/30/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Net sales $635,229 $494,153 $320,463
Cost of sales 271,394 224,150 156,208
------- ------- -------
Gross Profit 363,835 270,003 164,255
Operating expenses
Marketing 85,843 67,310 55,611
Research and development 81,893 64,765 50,987
General and administrative 36,878 35,857 24,926
Goodwill amortization 2,568 2,389 685
------- ------- -------
207,182 170,321 132,209
------- ------- -------
Operating Profit 156,653 99,682 32,046
Other income (expense)
Interest income 5,855 3,185 2,935
Interest expense (124) (1,773) (487)
Other 441 (3,270) 1,307
------- ------- -------
6,172 (1,858) 3,755
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 162,825 97,824 35,801
Income taxes 47,219 25,435 5,334
Earnings Before Cumulative Effect on Prior
Years of Changing to a Different Method of ------- ------- -------
Accounting for Income Taxes 115,606 72,389 30,467
Cumulative effect on prior years of changing
to a different method of accounting for
income taxes --- --- 1,500
------- ------- -------
Net Earnings $115,606 $72,389 $31,967
======= ======= =======
Average number of common and common
equivalent shares outstanding 91,710 90,664 88,471
Earnings per Share Before Cumulative Effect on
Prior Years of Changing to a Different
Method of Accounting for Income Taxes $1.26 $0.80 $0.34
Cumulative effect on prior years of changing
to a different method of accounting for
income taxes --- --- 0.02
----- ----- -----
Earnings per Share $1.26 $0.80 $0.36
===== ===== =====
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS (In thousands)
12/29/95 12/30/94
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $92,485 $51,460
Investments in marketable securities 69,751 23,209
Accounts receivable -- primarily trade,
net of allowance for doubtful receivables
of $2,317,000 at December 29, 1995 and
$992,000 at December 30, 1994 127,565 84,397
Inventories
Raw materials 31,302 20,898
Work in process 11,694 12,396
Finished goods 24,719 18,587
------- -------
67,715 51,881
Other current assets 8,854 9,609
------- -------
Total Current Assets 366,370 220,556
Property, Plant and Equipment -- at Cost
Buildings and improvements 55,852 46,516
Equipment 139,117 114,853
------- -------
194,969 161,369
Less accumulated depreciation 84,419 69,300
------- -------
110,550 92,069
Land 6,472 5,562
------- -------
117,022 97,631
Goodwill 44,958 44,252
Other Assets 23,701 27,628
------- -------
Total Assets $552,051 $390,067
======== ========
<FN>
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 12/29/95 12/30/94
(In thousands) -------- --------
<S> <C> <C>
Current Liabilities
Accounts payable-trade $30,097 $22,606
Accrued liabilities
Compensation 23,861 23,200
Payroll and other taxes 6,268 5,146
Other 12,054 10,470
------ ------
Total accrued liabilities 42,183 38,816
Income taxes 26,284 20,817
------ ------
Total Current Liabilities 98,564 82,239
Long-Term Debt 2,850 2,850
Long-Term Income Taxes --- 6,572
Other Long-Term Liabilities 6,179 3,844
Deferred Income Taxes 11,225 1,772
Commitments --- ---
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and
outstanding --- ---
Common stock: authorized 200,000,000 shares of
$.01 par value; issued 88,798,372 shares at
December 29, 1995, and 87,288,692 shares at
December 30, 1994 888 436
Additional paid-in capital 72,385 54,150
Cumulative translation adjustment 7,842 2,102
Unrealized net gains (losses) on
available-for-sale securities 48 (803)
Retained earnings 352,070 236,905
------- -------
Total Stockholders' Equity 433,233 292,790
------- -------
Total Liabilities and Stockholders' Equity $552,051 $390,067
<FN> The accompanying notes are an integral ======== ========
part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Cumulative Unrealized
Common Paid-In Translation Net Gains Retained
(In thousands) Stock Capital Adjustment (Losses) Earnings Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 2, 1993 $138 $34,373 ($205) $ --- $132,838 $167,144
Net earnings --- --- --- --- 31,967 31,967
Stock options exercised 5 10,591 --- --- --- 10,596
Employee stock awards --- 108 --- --- --- 108
Stock Split 72 --- --- --- (72) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 28 --- 28
Foreign currency
translation adjustment --- --- (2,837) --- --- (2,837)
Balance at ------ ------ ------ ------ ------- -------
December 31, 1993 215 45,072 (3,042) 28 164,733 207,006
====== ====== ====== ====== ======= =======
Net earnings --- --- --- --- 72,389 72,389
Stock options exercised 4 8,883 --- --- --- 8,887
Employee stock awards --- 195 --- --- --- 195
Stock split 217 --- --- --- (217) ---
Unrealized net losses on
available-for-sale
marketable securities --- --- --- (831) --- (831)
Foreign currency
translation adjustment --- --- 5,144 --- --- 5,144
Balance at ------ ------ ------ ------ ------- -------
December 30, 1994 436 54,150 2,102 (803) 236,905 292,790
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 115,606 115,606
Stock options exercised 11 18,128 --- --- --- 18,139
Employee stock awards --- 107 --- --- --- 107
Stock split 441 --- --- --- (441) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 851 --- 851
Foreign currency
translation adjustment --- --- 5,740 --- --- 5,740
Balance at ------ ------ ------ ------ ------- -------
December 29, 1995 $888 $72,385 $7,842 $48 $352,070 $433,233
====== ======= ====== ====== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Year Year
Ended Ended Ended
(In thousands) 12/29/95 12/30/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings $115,606 $72,389 $31,967
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 23,682 19,502 14,511
Provision for doubtful receivables 1,396 254 83
Deferred income taxes 9,214 (1,757) (1,902)
Gain on sale of long-term investment (929) --- ---
Cumulative effect of change
in accounting principle --- --- (1,500)
Net (increase) decrease in current assets,
net of effects from purchase of subsidiary:
Accounts receivable (42,689) (7,660) (16,868)
Inventories (14,696) 92 (8,446)
Other current assets 353 (724) (410)
Net increase (decrease) in current liabilities,
net of effects from purchase of subsidiary:
Accounts payable 7,067 7,001 (4,060)
Accrued liabilities 2,807 9,991 9,315
Income taxes 3,793 9,054 2,777
Net increase in other assets (3,637) (665) (9,537)
Net (decrease) increase in other liabilities (4,312) 3,638 675
------ ------ ------
Net Cash Provided by Operating Activities 97,655 111,115 16,605
Investing Activities
Acquisition of property, plant and
equipment, net (35,191) (22,956) (28,671)
Proceeds from sales and maturities of 65,780 7,543 60,271
marketable securities
Payments for purchases of marketable
securities (111,168) (15,602) (37,112)
Payments for purchases of long-term
investments (1,215) (9,005) (5,102)
Proceeds from sale of long-term
investment 3,429 --- ---
Payment for purchase of subsidiary,
net of cash acquired --- --- (56,866)
------- ------- -------
Net Cash Used by Investing Activities (78,365) (40,020) (67,480)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Year Year
Ended Ended Ended
12/29/95 12/30/94 12/31/93
-------- -------- --------
Financing Activities
Common stock sold through stock-option plans 18,246 9,082 10,704
Proceeds from notes payable --- --- 60,000
Payments of notes payable --- (60,000) ---
------ ------ ------
Net Cash Provided(Used) by Financing Activities 18,246 (50,918) 70,704
Effect of Exchange Rate Changes on Cash 3,489 1,694 (477)
Net Increase in Cash And Cash Equivalents 41,025 21,871 19,352
Cash and Cash Equivalents At Beginning of Year 51,460 29,589 10,237
------- ------- -------
Cash and Cash Equivalents At End of Year $92,485 $51,460 $29,589
======= ======= =======
Other Information
Interest paid $111 $1,798 $507
Income taxes paid $28,646 $10,664 $3,333
Supplemental Schedule of Non-cash Investing and Financing Activities:
In acquiring all of the outstanding shares of Martis Oy during 1993, the
Company paid direct costs totaling $71,263,000. In conjunction with the
acquisition, liabilities were assumed as follows:
(In thousands)
Fair value of assets acquired $40,070
Costs in excess of fair value 45,429
Direct costs paid (71,263)
-------
Liabilities assumed $14,236
=======
<FN> The accompanying notes are an integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Summary of Significant Accounting Policies
Nature of Business
Operating in one business segment, the Company and its Subsidiaries
design, assemble, market and service a diverse line of electronic
communications equipment used in public and private communications
networks worldwide.
Consolidation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's investment in a joint
venture is accounted for under the equity method. The results of Martis Oy
are included since the purchase date of October 7, 1993.
Certain reclassifications have been made in the 1993 and 1994 consolidated
financial statements to conform to the 1995 presentation. The presentation
of the consolidated financial statements requires the use of estimates by
management.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
marketable securities, cost-basis investments, and long-term debt. The
carrying value of the cash and cash equivalents and long-term debt
approximates their estimated fair values based upon quoted market prices.
The fair value of investments in marketable securities is estimated based
on quotes from brokers or current rates offered for instruments with
similar characteristics. Management believes the estimated fair value of
a cost-basis investment equals or exceeds its carrying value although
there are no independent means of assuring that this is the case.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on
both the declining-balance and straight-line methods.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial-
statement carrying amounts of existing assets and liabilities and their
respective tax bases at enacted tax rates when such amounts are supposed to
be realized or settled.
Goodwill
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net income generated by the related subsidiaries to
determine that no impairment has occurred. Goodwill is amortized over 20
Note A: Summary of Significant Accounting Policies (continued)
years using the straight-line method. The accumulated amortization of
goodwill is approximately $6,092,000 and $3,524,000 as of December 29, 1995
and December 30, 1994, respectively.
Stock Awards
When an employee stock award is granted (see Note D), compensation expense
is charged for the fair market value of the shares issued.
Revenue Recognition
The Company recognizes revenue at the date of shipment.
Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during each period along with the
dilutive effect of outstanding stock options. On October 21, 1993, the
Company declared a 3-for-2 stock split, payable in the form of a 50 percent
stock dividend. On April 22, 1994, the Company declared a 2-for-1 stock
split, payable in the form of a 100 percent stock dividend. On April 25,
1995, the Company declared a 2-for-1 stock split, payable in the form of a
100 percent stock dividend. All references to the number of common shares
and per share amounts have been retroactively restated to give effect to
the stock dividends.
Foreign Currency Translation
The financial statements of the Company's subsidiaries are generally
measured using the local currency as the functional currency. Accordingly,
the effect of translating a subsidiary's financial statements into U.S.
dollars is recorded as a separate component of stockholders' equity.
Foreign Exchange
Gains and losses from changes in exchange rates are recognized in "Other
Income (Expense)." Net losses of $302,000 and $1,555,000 were recorded in
1995 and 1994, respectively, and a net gain of $1,118,000 was recorded in
1993.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts as a hedge against
net foreign accounts receivable and payable. Market value gains and
losses on the contracts are recognized and are combined with offsetting
foreign exchange gains or losses on those accounts.
<TABLE>
Note B: Investments
Available-for-sale marketable securities are accounted for at market with
the unrealized gain or loss net of deferred income taxes shown as a
separate component of stockholders' equity. At December 29, 1995, and
December 30, 1994, they consisted of the following:
Amortized Unrealized Market
(In thousands) Cost Gain (Loss) Value
1995 ------- ------- -------
<S> <C> <C> <C>
State and municipal securities $39,938 $151 $40,089
Preferred and common stocks 12,423 (30) 12,393
U.S. government and corporate
debt obligations 16,022 (53) 15,969
------- ------- -------
$68,383 $68 $68,451
======= ======= =======
Amortized Unrealized Market
Cost Gain (Loss) Value
------- ------- -------
<S> <C> <C> <C>
1994
State and municipal securities $7,748 ($262) $7,486
Preferred and common stocks 5,496 (305) 5,191
U.S. government and corporate
debt obligations 11,051 (519) 10,532
------- ------- -------
$24,295 ($1,086) $23,209
======= ======= =======
Held-to-maturity securities are carried at their amortized cost. At
December 29, 1995, and December 30, 1994, the balance was $1,300,000,
which consists entirely of U.S. government and corporate debt obligations
maturing in 1996. This amount is included in "Investments in Marketable
Securities" in 1995 and included in "Other Assets" in 1994.
In the ordinary course of managing its assets and liabilities, the Company
uses financial instruments, which are not reflected in the financial
statements, to reduce or eliminate its exposure to foreign exchange risks.
Foreign currency risk is managed through forward exchange contracts.
At December 29, 1995, the Company had forward exchange contracts,
generally having maturities of less than 120 days, in the amount of
$41,914,000. These contracts are primarily denominated in Finnish markka
but also include contracts for Irish punts and Canadian dollars.
During 1995, the Company sold one of its long-term investments for a gain
of $929,000 and, in accordance with the equity method of accounting, wrote
down its investment in the joint venture by $988,000.
</TABLE>
Note C: Long-Term Debt
The long-term debt of $2,850,000 comprises industrial revenue bonds that
were issued on December 20, 1991, with the principal payable in October
2014. Interest is payable quarterly based on a variable interest rate set
weekly based on market conditions for similar instruments. The effective
rates for 1995, 1994 and 1993 were 3.94 percent, 2.88 percent and 2.43
percent, respectively. The debt is unsecured. The provisions of the loan
agreement contain restrictive covenants, including a minimum net worth and
debt-to-equity ratio.
Note D: Stock Options and Awards
The Company's 1981 Incentive Stock Option Plan is a tax-qualified plan
that provided for 2,160,000 shares of common stock to be reserved for
options issued under the plan. No grants have been made under the 1981
Plan since its expiration on November 24, 1991. Unless the option
agreement provides otherwise, options granted under the 1981 plan
terminated at the end of five years after grant. At December 29, 1995, all
shares that had been granted under the 1981 Plan had been exercised or
cancelled.
The Company's 1984 Incentive Stock Option Plan is a tax-qualified plan
that provides for 2,400,000 shares of common stock to be reserved for
options that may be issued under the plan. The plan also provides that
the option price shall be the market value of the shares as of the date
of grant, except for options granted to holders of 10 percent or more of
the outstanding shares, in which case the option price shall be 110
percent of the market value of the shares as of the date of grant. Unless
the option agreement provides otherwise, options granted under this plan
become exercisable on a cumulative basis at the rate of 25 percent during
each of the second through fifth years after grant. Unless the option
agreement provides otherwise, options under this plan terminate at the end
of ten years after the grant.
The Company's 1986 Non-Qualified Stock Option Plan provides for 6,000,000
shares of common stock to be reserved for options that may be issued under
the plan. The plan provides that the option price shall be the market
value of the shares as of the date of grant. Unless the option agreement
provides otherwise, options granted under this plan become exercisable on a
cumulative basis at the rate of 25 percent during each of the second
through fifth years after grant. Unless the option agreement provides
otherwise, options granted under the plan terminate at the end of five
years after the grant.
The Company's 1987 Stock Option Plan for Non-Employee Corporate Directors
provides for the non-discretionary grant of options to non-employee
directors of the Company to purchase a combined maximum of 600,000 shares
of common stock of the Company at a per-share price not less than the fair
market value per share of the common stock on the date of grant. The plan
provides that each non-employee director, on the date such person becomes a
non-employee director, will be granted options to purchase 10,000 shares of
common stock and, provided such person is still serving as a non-employee
director, will automatically be granted options to purchase 6,000
additional shares of common stock each year thereafter on the anniversary
of the last day of the month in which the initial options were granted.
Note D: Stock Options and Awards (continued)
The Company's 1989 Stock Option Plan provides for 6,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
6,000,000 shares and up to 6,000,000 stock appreciation rights (SARs). The
SARs may be granted in conjunction with, or independently of, the options
under the plan. The plan provides that the option price and the SAR price
shall be the market value of the Company's shares as of the date of grant.
Unless the option or SAR agreement expressly provides otherwise, options
and SARs granted under this plan become exercisable on a cumulative basis
at the rate of 25 percent during each of the second through fifth years
after grant. Unless the option agreement provides otherwise, options and
SARs granted under the plan terminate at the end of 10 years after the
grant. At December 29, 1995, 762,000 SARs with grant prices ranging from
$1.50 to $2.17 and 5-year terms and 390,000 SARs with a grant price of
$3.04 and 10-year terms had been granted. At that date, a total of
1,011,500 SARs had been exercised and 7,500 had been cancelled, leaving
133,000 outstanding.
The Company's 1991 Stock Option Plan provides for 3,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
3,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant. Unless the
option agreement provides otherwise, options granted under this plan become
exercisable on a cumulative basis at the rate of 25 percent during each of
the second through fifth years after grant. Unless the option agreement
provides otherwise, options granted under the plan terminate at the end of
10 years after the grant.
The Company's 1994 Stock Option Plan provides for 4,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
4,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant. Unless the
option agreement expressly provides otherwise, options granted under this
plan become exercisable on a cumulative basis at the rate of 25 percent
during each of the second through fifth years after grant. Unless the
option agreement provides otherwise, options granted under the plan
terminate at the end of 10 years after the grant.
The Company has a program to award shares of the Company's common stock to
employees in recognition of their past service. Each full-time employee
who has worked for a continuous 5- or 20-year period is awarded 10 or 25
shares, respectively, of the Company's common stock as of the first
business day of the month in which the employee's 5- or 20-year anniversary
occurs. Common shares totaling 2,235 were awarded in 1995; totaling
6,140 in 1994; and totaling 6,280 in 1993.
The Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123), issued in October 1995, establishes
accounting and reporting standards for stock-based employee compensation
plans with adoption required for fiscal years beginning after December 15,
1995. As permitted under the provisions of this Statement, the Company has
elected to continue the use of APB Opinion No. 25 to measure compensation
costs, and will make the pro forma disclosures of net income and earnings
per share.
<TABLE>
<CAPTION>
Note D: Stock Options and Awards (continued)
The following table summarizes the changes in the number of common
shares under stock options granted pursuant to the preceding plans.
1981 and 1984 1986 Non-Qualified
Incentive Stock Stock Option
Option Plans Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
<S>
Options outstanding at <C> <C> <C> <C>
January 2, 1993 1,154,340 $2.25 924,384 $2.35
Option changes - 1993
Granted 42,000 10.46 860,000 10.00
Exercised (675,028) 2.28 (434,184) 2.39
Cancelled (22,500) 2.08 --- ---
Options outstanding at ------- -------
December 31, 1993 498,812 $2.71 1,350,200 $7.21
======= =======
Option changes - 1994
Granted --- --- 14,000 $13.19
Exercised (158,800) 2.48 (164,698) 3.01
Cancelled (752) 1.59 (12,000) 10.00
Options outstanding at ------- -------
December 30, 1994 339,260 $2.53 1,187,502 $7.84
======= =======
Option changes - 1995
Granted --- --- 42,500 33.50
Exercised (146,335) 2.14 (291,700) 4.50
Cancelled --- --- (30,000) 10.00
Options outstanding at ------- -------
December 29, 1995 192,925 $3.34 908,302 $10.04
======= =======
Exercisable:
December 31, 1993 316,532 490,200
December 30, 1994 274,762 536,502
December 29, 1995 156,925 453,302
Available for grant:
December 31, 1993 74,408 15,238
December 30, 1994 --- 13,238
December 29, 1995 --- 738
</TABLE>
<TABLE>
<CAPTION>
Note D: Stock Options and Awards (continued)
1987 Stock
Option Plan
For Non-Employee 1989 Stock
Corporate Directors Option Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding at
January 2, 1993 126,000 $2.48 3,110,208 $2.16
Option changes - 1993
Granted 30,000 6.28 332,000 8.64
Exercised (72,000) 2.22 (1,390,452) 2.04
Cancelled --- --- (41,264) 2.40
Options outstanding at ------- -------
December 31, 1993 84,000 $4.07 2,010,492 $3.31
======= =======
Option changes - 1994
Granted 30,000 16.55 684,000 13.68
Exercised (54,000) 5.31 (537,026) 2.58
Cancelled --- --- (33,506) 5.40
Options outstanding at ------- -------
December 30, 1994 60,000 $9.20 2,123,960 $6.80
======= =======
Option changes - 1995
Granted 30,000 40.25 48,500 33.78
Exercised (18,000) 8.01 (402,996) 3.74
Cancelled --- --- (45,004) 12.05
Options outstanding at ------- -------
December 29, 1995 72,000 $22.43 1,724,460 $8.14
======= =======
Exercisable:
December 31, 1993 66,000 1,213,460
December 30, 1994 42,000 971,706
December 29, 1995 54,000 949,335
Available for grant:
December 31, 1993 294,000 657,648
December 30, 1994 264,000 7,154
December 29, 1995 234,000 3,656
</TABLE>
<TABLE>
<CAPTION>
Note D: Stock Options and Awards (continued)
1991 Stock 1994 Stock
Option Plan Option Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding at
January 2, 1993 2,907,148 $2.92 --- ---
Option changes - 1993
Granted 22,000 10.00 --- ---
Exercised (343,988) 2.86 --- ---
Cancelled (54,448) 2.86 --- ---
Options outstanding at ------- -------
December 31, 1993 2,530,712 $4.39 --- ---
======= =======
Option changes - 1994
Granted 91,002 13.35 469,200 13.19
Exercised (393,952) 2.90 --- ---
Cancelled (31,010) 4.16 (4,000) 13.19
Options outstanding at ------- -------
December 30, 1994 2,196,752 $3.40 465,200 13.19
======= =======
Option changes - 1995
Granted 5,000 33.50 318,500 $33.36
Exercised (601,802) 3.13 (45,700) 13.19
Cancelled (44,164) 4.84 (25,900) 13.19
Options outstanding at ------- -------
December 29, 1995 1,555,786 $3.56 712,100 $22.21
======= =======
Exercisable:
December 31, 1993 874,396 N/A
December 30, 1994 1,157,246 ---
December 29, 1995 1,213,536 65,700
Available for grant:
December 31, 1993 83,448 N/A
December 30, 1994 23,456 3,534,800
December 29, 1995 62,624 3,242,200
</TABLE>
Note E: Employee Benefit and Retirement Plans
The Company maintains a defined contribution 401(k) retirement plan for the
benefit of eligible employees. Under the plan, a participant may elect to
defer a portion of annual compensation. Matching contributions equal to
the first 3 percent of annual compensation were made by the Company for
all eligible participants. The Company may contribute additional amounts
at the discretion of the Board of Directors. Company contributions to the
plan were $4,707,000, $3,480,000 and $2,419,000 in 1995, 1994 and 1993,
respectively. Contributions to the plan are immediately vested in plan
participants' accounts.
The Company maintains a deferred compensation plan that permits officers
and certain management employees to defer portions of their compensation.
Unless the plan is amended by the Company, the deferred amounts earn an
annual interest rate of 12 percent during the term of the plan. The
liabilities for the deferred salaries plus interest are included in "Other
Long-Term Liabilities".
The Company began money purchase and profit sharing plans for the benefit
of eligible employees during 1993. Under the plans, 4 percent of eligible
annual compensation was contributed by the Company for each participant in
1994 and 3 percent in 1993. No part of the contribution is vested until
after a service period of five years, at which time the participant is
fully vested. Company contributions to the plan were $3,451,000,
$3,134,000 and $2,111,000 for 1995, 1994 and 1993,respectively.
<TABLE>
<CAPTION>
Note F: Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1995 and 1994 is as follows:
(In thousands, except per-share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1995
Net sales $142,212 $159,939 $151,754 $181,324 $635,229
Gross profit 79,269 90,956 84,415 109,195 363,835
Net earnings 22,941 27,118 27,441 38,106 115,606
Earnings per share $0.25 $0.30 $0.30 $0.42 $1.26 *
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1994
Net sales $99,538 $123,029 $123,015 $148,571 $494,153
Gross profit 53,411 66,632 66,665 83,295 270,003
Net earnings 11,198 17,018 18,098 26,075 72,389
Earnings per share $0.12 $0.19 $0.20 $0.29 $0.80
<FN>
Per-share amounts are restated to reflect stock splits in 1995 and 1994.
* The earnings-per-share computation for the year is a separate, annual
calculation. Accordingly, the sum of the quarterly earnings-per-share
amounts do not necessarily equal the earnings per share for the year.
</TABLE>
[CAPTION]
Note G: Income Taxes
(In thousands) Year Ended Year Ended Year Ended
12/29/95 12/30/94 12/31/93
Components of the Company's -------- -------- --------
earnings before income taxes are as follows:
Domestic source $97,372 $50,962 $15,593
Foreign source 65,453 46,862 20,208
------- ------- -------
Total $162,825 $97,824 $35,801
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $24,111 $16,689 $4,237
State 2,220 1312 301
Foreign 11,674 9,191 2,698
------ ------ ------
38,005 27,192 7,236
Deferred:
Federal 7,435 (906) (2,054)
Reduction of valuation allowance ---- (1,544) ----
Foreign and State 1,779 693 152
------ ------ ------
9,214 (1,757) (1,902)
------ ------ ------
Total $47,219 $25,435 $5,334
====== ====== ======
Deferred tax assets (liabilities) under FASB 109
for 1995 and 1994 are comprised of the following:
Ending Ending
(In thousands) Balance Balance
12/29/95 12/30/94
Deferred tax assets -------- --------
Inventory reserves $2,710 $3,069
Deferred employee benefit expenses 2,933 3,627
Deferred Compensation Plan 1,607 740
Accrued liabilities 2,502 1,790
Alternative minimum tax carryforwards ---- 5,135
Research and development credit carryforwards 457 1,890
Other 61 391
------ ------
Gross deferred tax assets 10,270 16,642
Deferred tax liabilities
Depreciation (12,625) (9,203)
Other untaxed reserves - Martis Oy (614) (566)
Other (332) (414)
------ ------
Gross deferred tax liabilities (13,571) (10,183)
------ ------
Net Deferred Tax (Liability) Asset ($3,301) $6,459
====== ======
<TABLE>
<CAPTION>
Note G: Income Taxes (continued)
Year Ended Year Ended Year Ended
12/29/95 12/30/94 12/31/93
--------- --------- ---------
<S> <C> <C> <C>
Federal income taxes at the statutory rate are reconciled with the
Company's income tax provision as follows:
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Foreign income taxes (5.1) (7.2) (11.7)
Foreign tax credit and research and (0.6) (2.9) (17.1)
development credit
Reduction of valuation allowance --- (1.6) ---
Benefits attributable to foreign (0.3) (0.9) (1.2)
sales corporation
Dividends received from foreign subsidiaries --- --- 11.8
Resolution of certain income tax contingencies --- --- (3.0)
Other - net --- 3.6 1.1
---- ---- ----
Effective Income Tax Rate 29.0% 26.0% 14.9%
==== ==== ====
</TABLE>
Note G: Income Taxes (continued)
In January 1993, the Company changed its method of accounting for income
taxes from Accounting Principles Board Opinion No. 11 (APB 11) and adopted
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." The adoption of SFAS 109 changed the
Company's method of accounting for income taxes from the deferred method to
an asset-and-liability approach. Previously, the Company deferred the past
tax effects of timing differences between financial reporting and taxable
income. The asset-and-liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities.
Deferred income taxes decreased to a liability balance of $3,301,000 at
December 29, 1995, from an asset balance of $6,459,000 at December 30,
1994. The reduction of the deferred tax balance is attributable to the
utilization of alternative minimum tax credits and research and
development credits that were in the deferred income tax asset balance at
the end of 1994. In 1994, the Company had reduced the valuation reserve
required by SFAS 109 to zero from the 1993 balance of $1,544,000. This
reduction resulted from the Company's re-evaluation of the realization of
tax benefits from the future utilization of research and development tax
credit carryforwards and alternative minimum tax credit carryforwards. The
Company's projections for domestic income made the realization of these
carryforwards more likely than not.
The Company has research and development tax credit carryforwards for state
income tax purposes of approximately $457,000 that will expire in the
year 2000.
Deferred U.S. income taxes are not provided on the undistributed
cumulative earnings of foreign subsidiaries because such earnings are
considered to be permanently invested in those operations. The cumulative
earnings of foreign subsidiaries were approximately $98,203,000 at December
29, 1995. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at December 29,
1995, was approximately $19,413,000.
Note H: Major Customers
No single customer accounted for more than 10 percent of consolidated net
sales in 1995. Single customers accounted for approximately 15.3 percent
and 12.3 percent of consolidated net sales in 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Note I: Business Segment and Geographical Information
The Company operates in one business segment. Products include voice and
data communication and networking equipment used in public and private
communication networks worldwide.
The Company operates in two principal geographic areas: North America and
Europe. A summary of the Company's operations by area is presented
below.
Adjustments
(In thousands) North and Consolidated
America Europe Elimination Total
1995 ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales
Unaffiliated customers $457,161 $178,068 --- $635,229
Intergeographic 2,751 7,156 ($9,907) ---
------- ------- ------- -------
Total $459,912 $185,224 ($9,907) $635,229
Operating profit $87,573 $69,080 --- $156,653
Identifiable assets $371,729 $180,322 --- $552,051
1994
Net Sales
Unaffiliated customers $377,554 $116,599 --- $494,153
Intergeographic 5,796 5,034 ($10,830) ---
------- ------- ------- -------
Total $383,350 $121,633 ($10,830) $494,153
Operating profit $53,277 $46,405 --- $99,682
Identifiable assets $249,224 $140,843 --- $390,067
1993
Net Sales
Unaffiliated customers $272,495 $47,968 --- $320,463
Intergeographic 5,307 4,671 ($9,978) ---
------- ------- ------- -------
Total $277,802 $52,639 ($9,978) $320,463
Operating profit $15,497 $16,549 --- $32,046
Identifiable assets $208,594 $120,172 --- $328,766
</TABLE>
Operating profit is net sales less all related costs of sales, marketing,
research and development, general and administrative and goodwill
amortization, excluding interest and income taxes. Identifiable assets
are those assets considered as necessary for the ongoing activities and
operations of each geographic area.
Intergeographic sales are accounted for as sales and as cost of sales
between the domestic parent and its subsidiaries. The sales price or cost
is dependent upon the product, consists of a discount from list price and
is sufficient to recover cost plus an appropriate markup for profit.
North American operating revenues include export sales to unaffiliated
customers of approximately $33,105,000, $31,018,000, and $18,645,000 in
1995, 1994, and 1993, respectively.
Note J: Commitments
The Company and its subsidiaries have a number of operating lease agreements
primarily involving office space, buildings and office equipment. These
leases are non-cancellable and expire on various dates through 2009.
As of December 29, 1995, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In thousands)
1996 $5,822
1997 3,784
1998 1,797
1999 562
2000 442
2001 and thereafter 2,445
------
Total Minimum Lease Payments $14,852
======
Rental expense for the years ended December 29, 1995, December 30, 1994,
and December 31, 1993, was approximately $3,420,000, $2,782,000, and
$3,314,000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales during 1995 hit a record high as they exceeded the
half-billion-dollar mark to reach $635,229,000 versus $494,153,000 in
1994. The 1995 sales growth of 28.5 percent was representative of both the
continued strength and acceptance in the domestic marketplace of the TITAN
(a registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect system and the growth of the Company's leading international
product, the Martis DXX (a trademark of Martis Oy, a subsidiary of Tellabs,
Inc.) integrated access and transport system. Each of these products
addresses a different geographic marketplace, which provided for growth of
24 percent domestically and 38 percent internationally. Additionally, all
of the major product groups posted gains over 1994 sales, as was the case
in the prior two years.
Digital cross-connect sales for 1995 reached the $300,000,000 mark, with an
increase of almost $81,000,000 over that of the previous year. Sales of
the Titan 5500 digital cross-connect system grew by 46 percent and continue
to drive this product group. The Titan 5500 system is now standard in all
but one of the major local exchange carriers and in most of the
interexchange carriers in North America. The digital cross-connect group
accounted for approximately 49 percent of total product sales as it
continues to lead all product groups.
The managed digital networks area exceeded last year's sales by 27 percent.
The acceptance of the Martis DXX system in the international marketplace
and agreements with Ericsson helped drive its $53,000,000 increase in sales
during 1995. As was expected, the remaining products in this group, such
as the CROSSNET (a registered trademark of Tellabs Operations, Inc.) data
multiplexer and 33X packet switch products, experienced decreases in their
sales over that of the previous year.
Sales of network access products, which include analog voice-frequency
products, digital echo cancellers and digital transcoders, exceeded the
previous year's sales in each of the last five years, even though they
continue to decrease as a percent of total product sales. Sales of the
digital products within this group continued to grow as the products are
incorporated into cellular networks. However, sales of the analog
products continue to decline as customers migrate to digital technology.
Net earnings for 1995 were $115,606,000, up 59.7 percent from 1994
earnings of $72,389,000. Earnings per share were $1.26 in 1995, compared
with 80 cents in 1994. (The earnings-per-share amounts for both years
are adjusted to reflect the effect of the 2-for-1 stock splits that
occurred in May 1995 and May 1994.) This significant increase in earnings
was primarily due to the increase in sales during 1995 and a corresponding
34.7 percent increase in gross profit dollars. Although operating
expenses exceeded 1994's total, they continue to decrease as a percentage
of sales.
Sales during the fourth quarter of 1995 were a record $181,324,000,
supporting the Company's typically strong fourth-quarter sales pattern.
Sales of the TITAN 5500 system and Martis DXX system led the 22 percent
sales increase over the 1994 fourth quarter. Net earnings for the quarter
were $38,106,000, a 46.1 percent increase over 1994 earnings of
$26,075,000. Earnings per share were 42 cents for the fourth quarter of
1995 and 29 cents for the fourth quarter of 1994. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
stock splits that occurred in May 1995 and May 1994.)
The gross profit margin for 1995 improved significantly to a record level
of 57.3 percent versus 54.6 percent in 1994. This improvement reflects
both the sales of higher-margin products, including a small amount of
higher-margin software sales, and the continuation of highly productive and
efficient manufacturing operations. It will be a challenge to sustain the
gross profit margin at this record-setting level.
Total operating expenses increased 21.6 percent during 1995, an increase
that was evenly divided between marketing and research and development.
Marketing expenses increased 27.5 percent due to headcount-related
expenses, international marketing activities, and customer support and
service expenses. Research and development expenses increased 26.4 percent
due to increased headcount-related expenses in support of planned
enhancements to the Company's domestic and international product base. As
a percentage of sales, total 1995 operating expenses were 32.6 percent
compared to 34.5 percent in 1994. Each category as a percentage of sales
decreased from 1994.
Interest income increased to $5,855,000 in 1995, an 83.8 percent increase,
compared with $3,185,000 in 1994. This was the result of
interest-bearing investments more than doubling during 1995. Interest
expense for 1995 of $124,000 decreased by $1,649,000 from 1994 expense of
$1,773,000. The expense incurred in 1994 was primarily related to the
bank debt used to finance the acquisition of Martis Oy. The debt was
entirely repaid by the fourth quarter of 1994.
The Company's investment in Advanced Access Labs, a joint venture between
Advanced Fibre Communications, Inc. (AFC) and the Company by which the two
companies combined their efforts in the local loop transport area to
develop the CABLESPAN (a trademark of Tellabs Operations, Inc.) 2300
system, was written down to reflect the Company's share of the losses of
the joint venture in accordance with the equity method of accounting. The
equity in cumulative losses of the joint venture increased to $2,000,000
by the end of 1995 from $1,012,000 at the end of 1994.
The technology platform that forms the basis for the CABLESPAN system is
provided by AFC. As previously disclosed, AFC is in litigation with DSC
Technologies Corporation and DSC Communications Corporation (collectively,
DSC) relating to the intellectual property comprising that platform. DSC
is seeking, among other things, a permanent injunction prohibiting AFC's
sale or other use of the property. AFC has denied DSC's allegations and
has filed counterclaims. If AFC were to lose its rights to the
intellectual property, the Company's ability to continue to promote its
CABLESPAN system as currently configured could be adversely affected.
While there can be no assurance that AFC will prevail in this litigation,
it has represented to the Company that it believes DSC's claims to be
without merit (see also Part I, Item 3, "Legal Proceedings" of the
Company's 1995 Annual Report on Form 10-K).
Foreign exchange losses of $302,000 in 1995 were the result of the
strength of the Finnish markka and the Irish punt versus the U.S. dollar.
The significantly higher foreign exchange losses of $1,555,000 in 1994
were primarily the result of the strength of the Finnish markka versus
the Swedish krona, U.S. dollar and other European currencies to which the
Company has exposure.
The effective tax rate was approximately 29 percent for 1995 and 26 percent
for 1994. The increase in the effective tax rate for 1995 is primarily due
to the reduction of research and development tax credits and reduced
foreign tax rate benefits. The 1995 effective rate reflects adjustments
from the federal statutory rate attributable to foreign tax rate benefits.
Sales during 1994 approached the half-billion-dollar mark by totaling
$494,153,000 versus $320,463,000 in 1993. The growth of 54.2 percent was
representative of both the continued strength and acceptance in the
domestic marketplace of the TITAN 5500 digital cross-connect system and
the inclusion of a full year of sales of the Company's leading
international product, the Martis DXX integrated access and transport
system. As mentioned earlier, each of these products addresses a
different geographic marketplace, which provided for growth in both the
domestic and international sales channels. Additionally, all of the major
product groups posted gains over 1993 sales, as was the case in the prior
year.
Total 1994 sales of network access products, which include analog voice-
frequency products, digital echo cancellers and digital transcoders,
exceeded the previous year's sales in each of the last four years even
though they decreased as a percent of total product sales. Cellular
operators became the frequent purchasers of these digital products.
However, the increasing need for digital network access products had the
opposite effect on the Company's sales of analog voice-frequency products.
The digital cross-connect area surpassed the $200,000,000 mark during 1994
after just surpassing the $100,000,000 mark in the previous year. As was
mentioned previously, the leader in this area was the TITAN 5500 digital
cross-connect system, whose sales doubled in 1994. The customers of this
product included five of the RBOCs and most of the interexchange carriers
in the United States. The digital cross-connect group continued to lead
all product groups in percent of total product sales.
The managed digital networks area saw a resurgence in the percentage of
total Tellabs sales in 1994 with the inclusion of the Martis DXX system in
the last quarter of 1993. This group also includes data products such as
the CROSSNET data multiplexer and 33X packet switch products, whose
growth has slowed in the last few years.
Net earnings for 1994 were $72,389,000, up 126.4 percent from 1993
earnings of $31,967,000. Earnings per share were 80 cents in 1994,
compared with 36 cents in 1993. (The earnings-per-share amounts for both
years have been adjusted to reflect the effect of the 2-for-1 stock
splits that occurred in May 1995 and May 1994 and also the 3-for-2 stock
split that occurred in November 1993). This significant increase in
earnings was again primarily due to the increase in sales during 1994 and a
corresponding 64.4 percent increase in gross profit dollars. Operating
expenses in 1994 exceeded the 1993 total but decreased by almost 7 percent
as a percentage of sales.
Sales during the fourth quarter of 1994 were a then-record $148,571,000,
reflecting the Company's typically strong fourth-quarter finish. Sales in
1994 of the TITAN 5500 system and Martis DXX system led the 38.6 percent
increase over the 1993 fourth quarter. Net earnings for the 1994 fourth
quarter were $26,075,000, a 72.1 percent increase over 1993 earnings of
$15,155,000. Earnings per share were 29 cents for the fourth quarter of
1994 and 17 cents for the fourth quarter of 1993. (The earnings-per-share
amounts for both years have been adjusted to reflect the effect of the
2-for-1 stock splits that occurred in May 1995 and May 1994 and also the
3-for-2 stock split that occurred in November 1993).
The gross profit margin for 1994 improved significantly to a then-record
level of 54.6 percent versus 51.3 percent in 1993. This improvement
reflected both the sales of higher-margin products and the continuation
of highly productive and efficient manufacturing operations.
Total operating expenses increased 28.8 percent during 1994, an increase
that was spread throughout all expense categories. Included in each
category discussed below for 1994 are 12 months of Martis' operating
expenses versus only three months for 1993. Marketing expenses increased
21 percent in total due to increases in customer support and service
expenses, headcount-related expenses and increased international marketing
activities. Research and development expenses increased 27 percent in
total due to increased headcount-related expenses in support of planned
enhancements to the Company's products. General and administrative
expenses increased 43.9 percent in total due to both the expense associated
with compensation tied to the market price of the Company's stock and
additional headcount-related expenses. As a percentage of sales, total
1994 operating expenses were 34.5 percent compared to 41.3 percent in 1993.
Each category except general and administrative has shown a constant
decrease as a percentage of sales since 1991.
Interest income increased to $3,185,000 in 1994, an 8.5 percent increase
over $2,935,000 in 1993. Interest-bearing investments increased as
additional cash balances became available to invest. The $1,286,000
increase in 1994 interest expense resulted from the interest paid on the
demand notes payable that were outstanding throughout most of 1994.
In April 1994, the Company and AFC began a joint venture. The equity in
losses of the joint venture totaled $1,012,000 in 1994.
Foreign exchange losses of $1,555,000 in 1994 were the result of the
strength of the Finnish markka versus the U.S. dollar and other European
currencies to which the Company has exposure. The foreign exchange gains
of $1,118,000 in 1993 were primarily the result of the devaluation of the
Irish punt in the first quarter of 1993, which accounted for $882,000 of
the total amount.
The effective tax rate was approximately 26 percent for 1994 and 14.9
percent for 1993. The 1994 effective rate primarily reflects adjustments
from the federal statutory rate attributable to foreign tax rate
benefits, benefits attributable to foreign tax credits and research and
development credits, and reduction in the valuation allowance. The 1993
effective rate reflected greater benefits attributable to foreign tax
rates, foreign tax credits and research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has never paid a cash dividend, and current policy is to retain
earnings to provide funds for the operation and expansion of the business.
The Company does not anticipate paying cash dividends in the foreseeable
future.
Net working capital at December 29, 1995, was $267,806,000, compared with
working capital of $138,317,000 at December 30, 1994. The Company's
current ratio at December 29, 1995 was 3.7 to 1. The increase in net
working capital is primarily due to the Company's record earnings.
Management believes this level of working capital will be adequate to
meet the Company's liquidity needs related to normal operations both
currently and in the foreseeable future. Sufficient resources exist to
support the Company's growth either through currently available cash,
through cash generated from future operations, or through additional
short-term or long-term financing.
Operating activities provided the Company with a significant amount of cash
due to net earnings of $115,606,000. Net trade accounts receivable
increased by $43,168,000 to a year-end balance of $127,565,000, due
primarily to the record-level sales volume in the fourth quarter of 1995.
Total inventory levels increased by $15,834,000 from 1994 levels. Raw
materials increased in support of the introduction of the CABLESPAN system
and the increased volume of cross-connect sales. The increase in finished
goods inventory is consistent with the increase in current sales levels
versus 1994 and with 1996 sales forecasts. The inventory turnover ratio
increased to 4.5 times from 4.4 times in 1994. The increase of $9,453,000
in the deferred income tax balance is attributable to the utilization of
alternative minimum tax credits and research and development credits. The
1994 long-term income taxes represented Martis Oy income taxes due in 1996.
The Company increased its holdings in marketable securities by $46,542,000
as additional cash balances became available for investment. The Company
also invested approximately $35,000,000 during 1995 in property, plant and
equipment. Additions were made to increase manufacturing capacity at
international locations, with the remainder of the increase representing
equipment to support domestic manufacturing and R&D capabilities. Finally,
an additional $18,245,000 of cash was provided to the Company through the
exercise of stock options under the Company's stock option plans.
OUTLOOK
The outlook for 1996 anticipates growth at both the international and
domestic levels. International growth will be primarily driven by sales
of the Martis DXX system. Domestic growth continues to be dependent upon
even stronger TITAN 5500 system sales. Adding to the growth of both
international and domestic channels will be the emergence of the
CABLESPAN system. At December 29, 1995, backlog increased to approximately
$84,000,000 from $80,000,000 at the end of the prior year. All of the 1995
backlog is expected to be shipped in 1996. The Company considers backlog
to be an indicator, but not the sole predictor, of future sales.
During 1996, the Company will continue to focus on providing the
resources to support revenue growth in the most cost-effective method
possible. To that end, total operating expenses for 1996 are expected to
average approximately 32 percent of planned revenues. Research and
development expenses are expected to maintain an average of approximately
13 percent of sales. Marketing and general and administrative expenses are
expected to average approximately 19 percent of sales. Management believes
these levels, which are relatively consistent with 1995 and 1994, can be
attained while supporting the sales and product growth slated for 1996 and
beyond as the Company continues to invest in its future growth.
The 1996 capital expenditure plan totals $45,000,000. It is anticipated
that 1996 working capital requirements and capital expenditures will be
met with funds currently on hand and funds generated by future earnings.
Earnings for 1996 are expected to be taxed at a 29 percent rate.
The Company believes that the formation of business relationships with
compatible organizations is important to future growth in that it allows
the Company the opportunity to share in the development of new markets,
products and technologies. It is for this reason that the Company will
continue to pursue the establishment of such relationships.
AGREEMENT OF MERGER
Dated as of March 11, 1996
Among
TELLABS, INC.,
TIGER MERGER CO.,
and
STEINBRECHER CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . .2
1.1. Definitions . . . . . . . . . . . . . . . . . . .2
ARTICLE II THE MERGER. . . . . . . . . . . . . . . . . . . 10
2.1. Surviving Corporation . . . . . . . . . . . . . 10
2.2. Effects of the Merger . . . . . . . . . . . . . 11
2.3. Certificate of Incorporation, By-Laws,
Directors and Officers. . . . . . . . . . . . . 11
ARTICLE III CONVERSION OF SHARES; DETERMINATION OF
PURCHASE PRICE. . . . . . . . . . . . . . . . . 11
3.1. Conversion Terms. . . . . . . . . . . . . . . . 11
3.2. Dissenting Shares . . . . . . . . . . . . . . . 14
3.3. Exchange of and Payment for Shares, Options
and Warrants. . . . . . . . . . . . . . . . . . 15
3.4. Lost Certificates and Agreements. . . . . . . . 16
3.5. Unclaimed Funds . . . . . . . . . . . . . . . . 16
3.6. Withholding Rights. . . . . . . . . . . . . . . 17
3.7. Indemnity Escrow Agreement. . . . . . . . . . . 17
3.8. Further Assurances. . . . . . . . . . . . . . . 18
ARTICLE IV CLOSING . . . . . . . . . . . . . . . . . . . . 18
4.1. Closing Date. . . . . . . . . . . . . . . . . . 18
4.2. Filing Certificate of Merger and
Effectiveness . . . . . . . . . . . . . . . . . 18
4.3. Parent's Additional Deliveries. . . . . . . . . 19
4.4. Mergerco's Deliveries . . . . . . . . . . . . . 19
4.5. The Company's Deliveries. . . . . . . . . . . . 20
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE
COMPANY . . . . . . . . . . . . . . . . . . . . 21
5.1. Organization and Capital Structure. . . . . . . 21
5.2. Subsidiaries and Investments. . . . . . . . . . 23
5.3. Authority . . . . . . . . . . . . . . . . . . . 24
5.4. Financial Statements. . . . . . . . . . . . . . 25
5.5. Operations Since Balance Sheet Date . . . . . . 25
5.6. No Undisclosed Liabilities. . . . . . . . . . . 28
5.7. Taxes . . . . . . . . . . . . . . . . . . . . . 28
5.8. Availability of Assets and Legality of Use. . . 30
5.9. Governmental Permits. . . . . . . . . . . . . . 30
5.10. Real Property . . . . . . . . . . . . . . . . . 31
5.11. Real Property Leases. . . . . . . . . . . . . . 31
5.12. Condemnation. . . . . . . . . . . . . . . . . . 31
5.13. Personal Property . . . . . . . . . . . . . . . 31
5.14. Personal Property Leases. . . . . . . . . . . . 31
5.15. Intellectual Property; Software . . . . . . . . 32
5.16. Accounts Receivable; Inventories. . . . . . . . 35
5.17. Title to Property . . . . . . . . . . . . . . . 36
5.18. Employee Benefit Plans. . . . . . . . . . . . . 36
5.19. Employee Relations. . . . . . . . . . . . . . . 41
5.20. Contracts; Product Warranties . . . . . . . . . 41
5.21. Status of Contracts . . . . . . . . . . . . . . 43
5.22. No Violation, Litigation or Regulatory
Action. . . . . . . . . . . . . . . . . . . . . 43
5.23. Environmental Matters . . . . . . . . . . . . . 44
5.24. Insurance . . . . . . . . . . . . . . . . . . . 46
5.25. Customers and Suppliers . . . . . . . . . . . . 47
5.26. Budgets . . . . . . . . . . . . . . . . . . . . 47
5.27. No Finder . . . . . . . . . . . . . . . . . . . 47
5.28. Financial Projections . . . . . . . . . . . . . 47
5.29. Proxy Statement . . . . . . . . . . . . . . . . 47
5.30. Opinion of Financial Advisor. . . . . . . . . . 48
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGERCO. . . . . . . . . . . . . . . . . . 48
6.1. Organization and Capital Structure. . . . . . . 48
6.2. Authority . . . . . . . . . . . . . . . . . . . 48
6.3. No Finder . . . . . . . . . . . . . . . . . . . 50
6.4. No Litigation or Regulatory Action. . . . . . . 50
6.5. Investment Representation . . . . . . . . . . . 50
ARTICLE VII ACTION PRIOR TO THE EFFECTIVE TIME. . . . . . . 50
7.1. Investigation of the Company by Parent. . . . . 50
7.2. Preserve Accuracy of Representations and
Warranties. . . . . . . . . . . . . . . . . . . 51
7.3. Consents of Third Parties; Governmental
Approvals . . . . . . . . . . . . . . . . . . . 51
7.4. Conduct of Business Prior to the Effective
Time. . . . . . . . . . . . . . . . . . . . . . 52
7.5. Notification by the Company of Certain
Matters . . . . . . . . . . . . . . . . . . . . 55
7.6. Mutual Cooperation; Reasonable Best Efforts . . 55
7.7. No Solicitation . . . . . . . . . . . . . . . . 55
7.8. Subsequent Financial Statements . . . . . . . . 56
7.9. Antitrust Law Compliance. . . . . . . . . . . . 57
ARTICLE VIII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . 57
8.1. Preparation of Proxy Statement; Action
by Company. . . . . . . . . . . . . . . . . . . 57
8.2. Restricted Parent Common Stock Pool . . . . . . 58
8.3. Indemnification and Insurance . . . . . . . . . 58
ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF
PARENT AND MERGERCO . . . . . . . . . . . . . . 59
9.1. No Misrepresentation or Breach of Covenants
and Warranties. . . . . . . . . . . . . . . . . 59
9.2. No Changes or Destruction of Property . . . . . 59
9.3. No Restraint or Litigation. . . . . . . . . . . 60
9.4. Necessary Governmental Approvals. . . . . . . . 60
9.5. Necessary Consents. . . . . . . . . . . . . . . 60
9.6. Stockholders' Approval; Dissenters' Rights. . . 60
9.7. Indebtedness. . . . . . . . . . . . . . . . . . 61
9.8. Warrants. . . . . . . . . . . . . . . . . . . . 61
9.9. FIRPTA Certificate. . . . . . . . . . . . . . . 61
9.10. Fairness Opinion. . . . . . . . . . . . . . . . 61
ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF
THE COMPANY . . . . . . . . . . . . . . . . . . 62
10.1. No Misrepresentation or Breach of Covenants
and Warranties. . . . . . . . . . . . . . . . . 62
10.2. No Restraint or Litigation. . . . . . . . . . . 62
10.3. Necessary Governmental Approvals. . . . . . . . 62
ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . 62
11.1. Indemnity Fund. . . . . . . . . . . . . . . . . 62
11.2. Indemnification from Indemnity Fund . . . . . . 63
11.3. Termination of Indemnity Fund . . . . . . . . . 64
11.4. Notice and Determination of Claims. . . . . . . 64
11.5. Stockholder Representatives . . . . . . . . . . 66
11.6. Actions of the Stockholder Representatives. . . 67
11.7. Third Person Claims . . . . . . . . . . . . . . 67
ARTICLE XII TERMINATION . . . . . . . . . . . . . . . . . . 68
12.1. Termination Rights. . . . . . . . . . . . . . . 68
12.2. Notice of Termination . . . . . . . . . . . . . 69
12.3. Effect of Termination . . . . . . . . . . . . . 69
ARTICLE XIII GENERAL PROVISIONS. . . . . . . . . . . . . . . 69
13.1. Survival of Obligations . . . . . . . . . . . . 69
13.2. Confidential Nature of Information;
Non-Solicitation. . . . . . . . . . . . . . . 69
13.3. No Public Announcement. . . . . . . . . . . . . 70
13.4. Notices . . . . . . . . . . . . . . . . . . . . 70
13.5. Successors and Assigns. . . . . . . . . . . . . 71
13.6. Entire Agreement; Amendments. . . . . . . . . . 72
13.7. Interpretation. . . . . . . . . . . . . . . . . 72
13.8. Waivers . . . . . . . . . . . . . . . . . . . . 72
13.9. Fees and Expenses . . . . . . . . . . . . . . . 73
13.10. Partial Invalidity. . . . . . . . . . . . . . . 74
13.11. Execution in Counterparts . . . . . . . . . . . 74
13.12. Further Assurances. . . . . . . . . . . . . . . 75
13.13. Governing Law . . . . . . . . . . . . . . . . . 75
<PAGE>
AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated as of March 11, 1996 (this
"Agreement"), among Tellabs, Inc., a Delaware corporation
("Parent"), Tiger Merger Co., a Delaware corporation indirectly
wholly-owned by Parent ("Mergerco"), and Steinbrecher
Corporation, a Delaware corporation (the "Company"), (Mergerco
and the Company being hereinafter sometimes referred to as the
"Constituent Corporations").
W I T N E S S E T H:
WHEREAS, Mergerco is a Delaware corporation having an
authorized capital of 1,000 shares of common stock, par value
$.01 per share ("Mergerco Common Stock"), all of which are issued
and outstanding and owned of record and beneficially by Tellabs
Operations, Inc., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Operations"); and
WHEREAS, the Company is a Delaware corporation having
(i) an authorized capital of 25,000,000 shares of common stock,
par value $.01 per share (the "Company Common Stock"), of which,
as of the date hereof, 1,530,679 shares are issued and
outstanding; (ii) 1,000,000 shares of special preferred stock,
$.01 par value per share (the "Special Preferred Stock"), none of
which are issued and outstanding; and (iii) 10,411,429 shares of
convertible preferred stock, $1.00 par value per share (the
"Company Preferred Stock"), of which, as of the date hereof,
9,147,548 shares are issued and outstanding; and
WHEREAS the Company also has outstanding certain
Warrants and Stock Options (as defined below); and
WHEREAS, the Company is engaged in the business of
developing, manufacturing and selling wideband wireless
communication systems; and
WHEREAS, the respective Boards of Directors of Parent
and the Constituent Corporations have approved the merger (the
"Merger") of Mergerco into the Company pursuant to the terms and
conditions of this Agreement, Operations has approved the Merger
and adopted this Agreement as the sole stockholder of Mergerco,
and the Board of Directors of the Company has directed that this
Agreement be submitted to its stockholders for adoption; and
WHEREAS, Parent, Mergerco and the Company desire to
make certain representations, warranties and agreements in
connection with the Merger and to prescribe various conditions to
the Merger.
NOW, THEREFORE, in consideration of the mutual cove-
nants and agreements hereinafter set forth, it is hereby agreed
among the parties as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. In this Agreement, the following
terms have the meanings specified or referred to in this Sec-
tion 1.1 and shall be equally applicable to both the singular and
plural forms and reference to the neuter gender includes the
masculine and feminine where appropriate. Any agreement referred
to below shall mean such agreement as amended, supplemented and
modified from time to time to the extent permitted by the
applicable provisions thereof and by this Agreement.
"Accruing Dividends" has the meaning specified in
paragraph 3 of Article FOURTH of the Company's Certificate of
Incorporation as in effect on the date hereof.
"Acquisition Expenses" has the meaning specified in
Section 13.9(a).
"Acquisition Proposal" shall have the meaning specified
in Section 7.7.
"Affiliate" means, with respect to any Person, any
other Person which directly or indirectly controls, is controlled
by or is under common control with such Person.
"Agreement" shall have the meaning specified in the
first paragraph of this Agreement of Merger.
"Aggregate Merger Consideration" has the meaning
specified in Section 3.1(k).
"Associate" has the meaning specified in Section
5.18(j).
"Audited Financial Statements" has the meaning
specified in Section 5.4.
"Balance Sheet" means the audited balance sheet of the
Company as of December 31, 1995 included in Schedule 5.4.
"Balance Sheet Date" means December 31, 1995.
"Cash Flow Projection" means the cash flow projection
from the Company's calendar year 1996 Business Plan, as amended
on January 31, 1996, a copy of which is attached as Schedule I to
the Parent Loan Agreement.
"CERCLA" means the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Subsection 9601 et
seq., any amendments thereto, any successor statutes, and any
regulations promulgated thereunder.
"Claim Notice" has the meaning specified in
Section 11.4(a).
"Closing" means the closing of the Merger of Mergerco
with and into the Company in accordance with Article IV.
"Closing Date" has the meaning specified in
Section 4.1.
"Code" means the Internal Revenue Code of 1986, as
amended from time to time.
"Common Stock Premium" means, with respect to any date,
5% of $2.02, compounded annually, calculated from August 5, 1987
up to and including such date.
"Company" has the meaning specified in the first
paragraph of this Agreement.
"Company Agreements" has the meaning specified in
Section 5.21.
"Company Ancillary Agreements" means the Certificate of
Merger identified in Section 4.2 and all certificates to be
executed and delivered by or on behalf of the Company under this
Agreement.
"Company Common Stock" has the meaning specified in the
second WHEREAS clause of this Agreement.
"Company Group" means any "affiliated group" (as
defined in Section 1504(a) of the Code without regard to the
limitations contained in Section 1504(b) of the Code) that files
or has filed a consolidated federal income Tax Return and that,
at any time on or before the Effective Time, includes or has
included the Company or any predecessor of or successor to the
Company (or another such predecessor or successor), or any other
group of corporations which, at any time on or before the
Effective Date, files or has filed Tax Returns on a combined,
consolidated or unitary basis with the Company or any predecessor
of or successor to the Company (or another such predecessor or
successor).
"Company Preferred Stock" has the meaning specified in
the second WHEREAS clause of this Agreement.
"Company Property" means any real or personal property,
plant, building, facility, structure, underground storage tank,
equipment or unit, or other asset owned, leased or operated by
the Company (including any surface water thereon or adjacent
thereto and any soil or ground water thereunder), whether
currently or at any previous time.
"Confidentiality Agreement" means that certain Non-Disclosure
Agreement dated January 30, 1996, between Parent and the Company.
"Constituent Corporations" has the meaning specified in
the first paragraph of this Agreement.
"Contaminant" means any waste, pollutant, hazardous or
toxic substance or waste, petroleum, petroleum-based substance or
waste, special waste, or any constituent of any such substance or
waste.
"Court Order" means any judgment, order, award or
decree of any foreign, federal, state, local or other court or
tribunal and any award in any arbitration proceeding.
"DGCL" means the Delaware General Corporation Law, as
amended.
"Dissenting Consideration" has the meaning specified in
Section 3.2.
"Dissenting Shares" has the meaning specified in
Section 3.2
"Effective Date" and "Effective Time" have the
respective meanings specified in Section 4.2.
"Encumbrance" means any lien, claim, charge, security
interest, mortgage, pledge, easement, conditional sale or other
title retention agreement, defect in title, covenant or other
restriction of any kind.
"Environmental Encumbrance" means an Encumbrance in
favor of any Governmental Body for (i) any liability under any
Environmental Law, or (ii) damages arising from, or costs
incurred by such Governmental Body in response to, a Release or
threatened Release of a Contaminant into the environment.
"Environmental Law" means all Requirements of Laws
derived from or relating to all federal, state and local laws or
regulations relating to or addressing the environment, health or
safety, including but not limited to CERCLA, OSHA and RCRA and
any state equivalent thereof.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time, including any
regulations promulgated thereunder.
"Expense" means any and all expenses incurred in
connection with investigating, defending or asserting any claim,
action, suit or proceeding incident to any matter indemnified
against hereunder (including, without limitation, court filing
fees, court costs, arbitration fees or costs, witness fees and
reasonable fees and disbursements of legal counsel,
investigators, expert witnesses, consultants, accountants and
other professionals).
"Extra Per Share Payment" has the meaning specified in
Section 3.1(j).
"Governmental Body" means any foreign, federal, state,
local or other governmental authority or regulatory body.
"Governmental Permits" has the meaning specified in
Section 5.9.
"HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Indemnity Agent" has the meaning specified in Section
11.1.
"Indemnity Agreement" has the meaning specified in
Section 11.1.
"Indemnity Amount" has the meaning specified in Section
3.7.
"Indemnity Fund" has the meaning specified in Section
3.7.
"IRS" means the Internal Revenue Service.
"Leased Real Property" has the meaning specified in
Section 5.11.
"Loss" means any and all losses, costs, obligations,
liabilities, settlement payments, awards, judgments, fines,
penalties, damages, expenses, deficiencies or other charges.
"Material Adverse Change" or "Material Adverse Effect"
means any change or effect (or any development that, insofar as
can be reasonably foreseen, would result in any change or effect)
that is materially adverse to the assets, business, financial
condition or results of operations of the applicable Person or
Persons.
"MCRC Warrant" has the meaning specified in the
definition of "Warrants" below.
"Merger" has the meaning in the fifth WHEREAS clause of
this Agreement.
"Mergerco" has the meaning specified in the first
paragraph of this Agreement.
"Mergerco Common Stock" has the meaning specified in
the first WHEREAS clause of this Agreement.
"1988 Stock Plan" means the 1988 Incentive Stock Option
Plan adopted by the Board of Directors of the Company on October
19, 1988, as amended on August 17, 1990, July 19, 1991, February
1, 1993 and November 30, 1993.
"1994 Stock Plan" means the 1994 Stock Option/Stock
Issuance Plan adopted by the Board of Directors of the Company on
April 12, 1994, as amended on September 16, 1994.
"Option Consideration" has the meaning specified in
Section 3.1(h).
"OSHA" means the Occupational Safety and Health Act, 29
U.S.C. Subsection 651 et seq., any amendment thereto, any successor
statute, and any regulations promulgated thereunder.
"Parent" has the meaning specified in the first para-
graph of this Agreement.
"Parent Ancillary Agreements" means the Indemnity
Agreement and all certificates to be executed and delivered by or
on behalf of Parent under this Agreement.
"Parent Group Member" means Parent and its Affiliates
and their respective successors and assigns, including, after the
Effective Time, the Surviving Corporation.
"Parent Loan Agreement" means that certain Loan
Agreement, dated as of February 26, 1996, between Parent as
Lender and the Company as Borrower.
"Paying Agent" has the meaning specified in Section
3.3(a).
"Paying Agency Agreement" has the meaning specified in
Section 3.3(a).
"Per Common Share Price" has the meaning specified in
Section 3.1(c).
"Per Preferred Share Price" means the amount into which
any share of Company Preferred Stock is convertible pursuant to
Sections 3.1(d), 3.1(e), 3.1(f) or 3.1(g).
"Permitted Encumbrances" means (i) liens for Taxes not
yet due or liens for Taxes being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto
are reflected on the Balance Sheet of the Company in accordance
with generally accepted accounting principles;
(ii) liens on property or assets of the Company, such
as carriers', warehousemen's, landlord's and mechanics' liens and
other similar liens, in each case, arising in the ordinary course
of business and that do not in the aggregate materially detract
from the value of the property or assets subject thereto or
materially impair the use thereof in the operation of the
business of the Company;
(iii) pledges or deposits incurred or made in
connection with workmen's compensation, unemployment insurance
and other social security benefits, or securing the performance
of bids, tenders, leases, contracts (other than for the repayment
of borrowed money), statutory obligations, progress payments,
surety and appeal bonds and other obligations of like nature, in
each case incurred in the ordinary course of business, not
involving in excess of $100,000 in the aggregate;
(iv) liens under Article 2 of the Uniform Commercial
Code that are special property interests in goods identified as
goods to which a contract refers;
(v) liens under Article 9 of the Uniform Commercial
Code that are purchase money security interests attaching to the
assets acquired in connection therewith;
(vi) existing liens described on Schedule 5.17 and
existing liens securing lease obligations which involve the
payment by the Company of less than $10,000 per year; and
(vii) liens in favor of Parent.
"Person" means any individual, corporation, partner-
ship, limited liability company, joint venture, association,
joint-stock company, trust, unincorporated organization or
Governmental Body.
"Proxy Statement" has the meaning specified in Section
5.29.
"RCRA" means the Resource Conservation and Recovery
Act, 42 U.S.C. Subsection 6901 et seq., and any successor statute, and
any regulations promulgated thereunder.
"Release" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration of a Contaminant into the indoor or outdoor
environment or into or out of any Company Property, including the
movement of Contaminants through or in the air, soil, surface
water or groundwater of any Company Property.
"Remedial Action" means actions required to (i) clean
up, remove, treat or in any other way address Contaminants in the
indoor or outdoor environment; (ii) prevent the Release or
threatened Release or minimize the further Release of
Contaminants or (iii) investigate and determine if a remedial
response is needed and to design such a response and post-remedial
investigation, monitoring, operation and maintenance and care.
"Requirements of Laws" means any foreign, federal,
state and local laws, statutes, regulations, rules, codes or
ordinances enacted, adopted, issued or promulgated by any
Governmental Body (including, without limitation, those
pertaining to electrical, building, zoning, environmental and
occupational safety and health requirements) or common law.
"Securities" means, collectively, shares of Company
Common Stock and Company Preferred Stock, Stock Options and
Warrants.
"Series A Preferred Stock," "Series B Preferred Stock,"
"Series C Preferred Stock" and "Series D Preferred Stock" each
has the meaning set forth in Section 5.1(b).
"Software" has the meaning specified in Section
5.15(b).
"Special Preferred Stock" has the meaning specified in
the second WHEREAS clause of this Agreement.
"Stock Agreements" has the meaning specified in Section
3.3(b).
"Stock Certificates" has the meaning specified in
Section 3.3(b).
"Stock Options" means the option agreements granted
under the Company's 1988 Stock Plan or 1994 Stock Plan for the
purchase of shares of Company Common Stock.
"Stockholder Representatives" means two Persons (and an
alternate Person, to serve in the event either of them is unable
or unwilling to act) designated in writing by the Company to
Parent prior to the delivery of the Proxy Statement pursuant to
Section 8.1, or if such Person is unable or unwilling to act,
then the Person appointed by a written instrument or instruments
delivered to Parent and signed by the holders of Securities
(other than shares of Series D Preferred Stock and Dissenting
Shares) who would be entitled to receive a majority of the
Aggregate Merger Consideration at the Effective Time pursuant to
Section 3.1.
"Stockholders' Meeting" has the meaning specified in
Section 5.29.
"Subordinated Note" means that certain 8 1/2% Subordinated
Note, in the aggregate principal amount of $1,000,000, dated
March 5, 1993, issued to Massachusetts Capital Resource Company.
"Subsidiary" means, for any Person, any corporation,
partnership, joint venture or other entity of which the Person
(i) owns, directly or indirectly, 50% or more of the outstanding
voting securities or equity interests, or (ii) is a general
partner.
"Surviving Corporation" has the meaning specified in
Section 2.1.
"Surviving Corporation Common Stock" has the meaning
specified in Section 3.1(a).
"Tax" (and with correlative meaning "Taxes", "Taxing"
and "Taxable") means: (i) any federal, state, local or foreign
net income, alternative or add-on minimum, gross income, gross
receipts, property, ad valorem, value added, sales, use,
transfer, gains, license, franchise, severance, excise,
employment, payroll, environmental, windfall profit, withholding,
stamp or any other tax, custom, duty, governmental fee or other
like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount
imposed by any Governmental Body; and (ii) any liability of the
Company for the payment of amounts with respect to payments of a
type described in clause (i) of this definition as a result of
being a member of an affiliated, consolidated, combined or
unitary group, or as a result of any obligation of the Company
under any Tax Sharing Arrangement or Tax indemnity arrangement.
"Tax Return" means any return, report or similar
statement required to be filed with any Taxing authority with
respect to any Taxes (including any attached schedules),
including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
"Tax Sharing Arrangement" means any written or
unwritten agreement or arrangement for the allocation or payment
of Tax liabilities or payment for Tax benefits with respect to a
consolidated, combined or unitary Tax Return which Tax Return
includes or included the Company (or predecessors or successors
of the Company).
"Unaudited Financial Statements" has the meaning
specified in Section 5.4.
"Warrant Consideration" has the meaning specified in
Section 3.1(i).
"Warrants" means (i) that certain Common Stock Purchase
Warrant, dated March 5, 1993 (the "MCRC Warrant"), to acquire
238,095 shares of Company Common Stock issued to Massachusetts
Capital Resource Company pursuant to a certain Subordinated Note
and Warrant Purchase Agreement, dated as of March 5, 1993,
between the Company and Massachusetts Capital Resource Company,
and (ii) that certain Stock Purchase Warrant to purchase 20,000
shares of Company Common Stock issued to Financing for Science
International, Inc.
ARTICLE II
THE MERGER
2.1. Surviving Corporation. Upon the terms and subject
to the conditions contained herein and in accordance with the
provisions of this Agreement and the DGCL, at the Effective Time,
Mergerco shall be merged with and into the Company, which, as the
corporation surviving in the Merger (the "Surviving
Corporation"), shall continue to exist under and be governed by
the laws of the State of Delaware. Upon the effectiveness of the
Merger, the separate existence of Mergerco shall cease except to
the extent provided by the DGCL and the Surviving Corporation
shall succeed to and assume all the rights and obligations of
Mergerco in accordance with the DGCL.
2.2. Effects of the Merger. The Merger shall have the
effects set forth in Sections 259 through 261 of the DGCL.
2.3. Certificate of Incorporation, By-Laws, Directors
and Officers. At the Effective Time, the Certificate of
Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be amended so that Article FOURTH
thereof reads in its entirety as follows: "The authorized
capital stock of the Corporation shall be 1,000 shares of Common
Stock, $0.01 par value". As so amended, such Certificate of
Incorporation shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law. The By-Laws of the
Company, as in effect immediately prior to the Effective Time,
shall continue in full force and effect as the By-Laws of the
Surviving Corporation. The directors of Mergerco immediately
prior to the Effective Time shall be the initial directors of the
Surviving Corporation until their resignation or removal or until
their respective successors are duly elected and qualified. The
statutory officers of the Company immediately prior to the
Effective Time shall be the initial statutory officers of the
Surviving Corporation until their resignation or removal or until
their respective successors are duly elected and qualified.
ARTICLE III
CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE
3.1. Conversion Terms. As of the Effective Time, by
virtue of the Merger and without any action on the part of any
stockholder of the Company or Mergerco:
(a) Mergerco Common Stock. Each share of Mergerco
Common Stock issued and outstanding immediately prior to the
Effective Time shall be converted into and become one fully
paid and nonassessable share of common stock, par value $.01
per share, of the Surviving Corporation ("Surviving
Corporation Common Stock"). From and after the Effective
Time, each outstanding certificate theretofore representing
shares of Mergerco Common Stock shall be deemed for all
purposes to evidence ownership of, and to represent the
number of shares of, Surviving Corporation Common Stock into
which such shares of Mergerco Common Stock shall have been
converted.
(b) Treasury Stock. All shares of Company Common
Stock and Company Preferred Stock that immediately prior to
the Effective Time are held in the treasury of the Company
shall be canceled and retired and no cash or other
consideration shall be paid or delivered in exchange
therefor and the Merger will effect no conversion thereof.
(c) Company Common Stock. Subject to the provisions
of Section 3.7 and Article XI, each share of Company Common
Stock issued and outstanding immediately prior to the
Effective Time, including any shares of Company Common Stock
issued after the date of this Agreement upon the exercise of
existing Stock Options or Warrants, or the conversion of
existing shares of Company Preferred Stock in accordance
with their respective terms (other than shares to be
canceled pursuant to Section 3.1(b)), shall be converted
into and become the right to receive, without interest,
$2.02 plus the accrued and unpaid Common Stock Premium up to
and including the Effective Date and plus (to the extent
provided in Section 3.1(j)) the Extra Per Share Payment
(such aggregate amount being hereinafter referred to as the
"Per Common Share Price"). All such shares of Company
Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired;
and each holder of a certificate representing any such
Company Common Stock shall cease to have any rights with
respect thereto, except the right to receive the Per Common
Share Price for each share of Company Common Stock.
(d) Series A Preferred Stock. Subject to the
provisions of Section 3.7 and Article XI, each share of
Series A Preferred Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be
canceled pursuant to Section 3.1(b)) shall be converted into
and become the right to receive, without interest, $4.20
plus the unpaid Accruing Dividends with respect thereto
(whether or not declared) and plus (to the extent provided
in Section 3.1(j)) the Extra Per Share Payment times 4.20
divided by 1.26. All such shares of Series A Preferred
Stock, when so converted, shall no longer be outstanding and
shall automatically be canceled and retired; and each holder
of a certificate representing any such Series A Preferred
Stock shall cease to have any rights with respect thereto,
except the right to receive the Per Preferred Share Price
specified in the foregoing sentence for each share of Series
A Preferred Stock.
(e) Series B Preferred Stock. Subject to the
provisions of Section 3.7 and Article XI, each share of
Series B Preferred Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be
canceled pursuant to Section 3.1(b)) shall be converted into
and become the right to receive, without interest, $2.02
plus the unpaid Accruing Dividends with respect thereto
(whether or not declared) and plus (to the extent provided
in Section 3.1(j)) the Extra Per Share Payment times 2.02
divided by 1.26. All such shares of Series B Preferred
Stock, when so converted, shall no longer be outstanding and
shall automatically be canceled and retired; and each holder
of a certificate representing any such Series B Preferred
Stock shall cease to have any rights with respect thereto,
except the right to receive the Per Preferred Share Price
specified in the foregoing sentence for each share of Series
B Preferred Stock.
(f) Series C Preferred Stock. Subject to the
provisions of Section 3.7 and Article XI, each share of
Series C Preferred Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be
canceled pursuant to Section 3.1(b)) shall be converted into
and become the right to receive, without interest, $2.10
plus the unpaid Accruing Dividends with respect thereto
(whether or not declared) and plus (to the extent provided
in Section 3.1(j)) the Extra Per Share Payment. All such
shares of Series C Preferred Stock, when so converted, shall
no longer be outstanding and shall automatically be canceled
and retired; and each holder of a certificate representing
any such Series C Preferred Stock shall cease to have any
rights with respect thereto, except the right to receive the
Per Preferred Share Price specified in the foregoing
sentence for each share of Series C Preferred Stock.
(g) Series D Preferred Stock. Each share of Series D
Preferred Stock issued and outstanding immediately prior to
the Effective Time (other than shares to be canceled
pursuant to Section 3.1(b)) shall be converted into and
become the right to receive, without interest, $8.00. All
such shares of Series D Preferred Stock, when so converted,
shall no longer be outstanding and shall automatically be
canceled and retired; and each holder of a certificate
representing any such Series D Preferred Stock shall cease
to have any rights with respect thereto, except the right to
receive the Per Preferred Share Price specified in the
foregoing sentence for each share of Series D Preferred
Stock.
(h) Stock Options. Subject to Section 3.7 and Article
XI, each unexpired Stock Option outstanding immediately
prior to the Effective Time shall, effective as of the
Effective Time, be converted into the right to receive,
without interest, for each share of Company Common Stock
subject thereto, the Per Common Share Price less the per
share exercise price of such Stock Option (in each case, the
"Option Consideration"), as and when received by the holders
of the shares of Company Common Stock.
(i) Warrants. Subject to Section 3.7 and Article XI,
each unexpired Warrant outstanding immediately prior to the
Effective Time shall, effective as of the Effective Time, be
converted into the right to receive, without interest, for
each share of Company Common Stock subject thereto, the Per
Common Share Price less the per share exercise price of such
Warrant (but not less than $0) (in each case, the "Warrant
Consideration"), as and when received by the holders of the
Company Common Stock.
(j) Extra Per Share Payment. The "Extra Per Share
Payment" shall be an amount equal to the Aggregate Merger
Consideration minus all amounts payable under Sections
3.1(c) - (i) (excluding any portion thereof attributable to
the Extra Per Share Payments) divided by the number of all
of the shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time (assuming the
exercise of the MCRC Warrants and all Stock Options
outstanding immediately prior to the Effective Time and the
conversion of all shares of Series of A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock
outstanding immediately prior to the Effective Time for
shares of Company Common Stock).
(k) Total Consideration. Notwithstanding anything in
this Agreement to the contrary, in no event shall the
aggregate merger consideration payable by Parent, Mergerco
or the Surviving Corporation to holders of Securities in
connection with the Merger exceed $76,000,000 (the
"Aggregate Merger Consideration").
3.2. Dissenting Shares. Notwithstanding anything in
this Agreement to the contrary, shares of Company Common Stock
and Company Preferred Stock issued and outstanding immediately
prior to the Effective Time which are held of record by
stockholders who shall not have voted such shares in favor of the
Merger and who shall have demanded properly in writing appraisal
of such shares in accordance with the provisions of Section 262
of the DGCL ("Dissenting Shares") shall not be converted into the
right to receive the Per Common Share Price specified in Section
3.1(c) or the Per Preferred Share Price specified in Section
3.1(d), 3.1(e), 3.1(f) or 3.1(g), as applicable, but the holders
thereof instead shall be entitled to, and the Dissenting Shares
shall only represent the right to receive, payment of the fair
value of such shares in accordance with the provisions of Section
262 of the DGCL (the "Dissenting Consideration"); provided,
however, that (i) if such a holder fails to demand properly in
writing from the Surviving Corporation the appraisal of its
shares in accordance with Section 262(d) of the DGCL or, after
making such demand, subsequently delivers an effective written
withdrawal of such demand, or fails to establish its entitlement
to appraisal rights as provided in Section 262 of the DGCL, if so
required, or (ii) if a court shall determine that such holder is
not entitled to receive payment for its shares or such holder
shall otherwise lose its appraisal rights, then in any such case,
each share of Company Common Stock or Company Preferred Stock, as
the case may be, held of record by such holder shall
automatically be converted into and represent only the right to
receive the applicable consideration specified in Sections 3.1(c)
- - (g), upon the surrender of the certificate or certificates
representing such Dissenting Shares.
3.3. Exchange of and Payment for Shares, Options and
Warrants.
(a) Immediately after the Effective Time and subject
to Section 3.7 and Article XI, Parent shall make available, by
transferring to First Chicago Trust Company of New York, or
another financial institution mutually acceptable to Parent and
the Company (the "Paying Agent"), cash in an amount necessary to
make the payments provided for in Section 3.1 hereof with respect
to the outstanding Company Common Stock and Company Preferred
Stock not constituting Dissenting Shares, and all of the Stock
Options and Warrants. The Paying Agent shall hold such funds and
deliver them in accordance with the terms hereof and the terms of
a Paying Agency Agreement to be entered into by and between the
Paying Agent and Parent and reasonably acceptable to the Company
(the "Paying Agency Agreement").
(b) Subject to receipt by the Paying Agent and Parent
of sufficient information from the Company to satisfy such
obligations, the Paying Agent shall promptly mail or cause to be
mailed to each record holder (other than the Company) of a
certificate or certificates which, immediately prior to the
Effective Time, represented outstanding shares of Company Common
Stock or Company Preferred Stock except for shares to be canceled
pursuant to Section 3.1(b) (the "Stock Certificates"), and to
each holder of an agreement evidencing any Stock Options or
Warrants (collectively, the "Stock Agreements"), a form letter of
transmittal (the "Transmittal Letter") specifying that delivery
shall be effected, and risk of loss and title to the Stock
Certificates and Stock Agreements shall pass, only upon proper
delivery of the Stock Certificates and Stock Agreements to the
Paying Agent, and instructions for use in effecting the surrender
of the Stock Certificates and the Stock Agreements in exchange
for payment therefor.
(c) After the Effective Time and subject to Section
3.7 and Article XI, each holder of a Stock Certificate, except
for shares to be canceled pursuant to Section 3.1(b), and each
holder of a Stock Agreement, in each case outstanding immediately
prior to the Effective Time, may surrender such Stock Certificate
or Stock Agreement to the Paying Agent, and, subject to the
provisions of this Section 3.3, the Paying Agent shall promptly
deliver or cause to be delivered to such holder a check in an
amount equal to the consideration exchangeable therefor pursuant
to Section 3.1, minus the portion of the Indemnity Amount
allocable to each such holder as provided in Section 3.7, with
respect to such Stock Certificates and/or Stock Agreements. In
no event shall the holder of any such surrendered Stock
Certificates or Stock Agreements be entitled to receive interest
on any of the funds to be received in the Merger. If such check
is to be sent to a Person other than the Person in whose name the
Stock Certificates or Stock Agreements are registered, among
other things, it shall be a condition of the exchange that the
Person requesting such exchange shall pay to the Paying Agent the
transfer Taxes required by reason of the delivery of such check
to a Person other than the registered holder of the Stock
Certificates or Stock Agreements surrendered, or shall establish
to the satisfaction of Parent that such Tax has been paid or is
not applicable.
(d) Until so surrendered, each outstanding Stock
Certificate and each outstanding Stock Agreement, in each case
immediately prior to the Effective Time, shall not be
transferable on the books of the Surviving Corporation or Parent
after the Effective Time, but shall be deemed for all purposes to
evidence only the right to receive such Per Common Share Price,
Per Preferred Share Price, Option Consideration or Warrant
Consideration, as the case may be, as such holders are entitled
to receive pursuant to the terms of this Agreement.
3.4. Lost Certificates and Agreements. In the event
any Stock Certificate or Stock Agreement shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact
by the record holder thereof claiming such Stock Certificate or
Stock Agreement to be lost, stolen or destroyed, the Paying Agent
shall pay to such Person the amount of cash payable to the holder
of such lost, stolen or destroyed Stock Certificate or Stock
Agreement determined in accordance with Sections 3.1 and 3.3.
When authorizing such payment in exchange for any lost, stolen or
destroyed Stock Certificate or Stock Agreement, the Person to
whom the cash is to be paid shall, as a condition precedent to
the payment thereof, give the Surviving Corporation a bond
satisfactory to the Surviving Corporation in such sum as it may
direct, or otherwise indemnify the Surviving Corporation in a
manner satisfactory to the Surviving Corporation, against any
claim that may be made against Parent, Mergerco or the Surviving
Corporation with respect to the Stock Certificates or Stock
Agreements alleged to have been lost, stolen or destroyed.
3.5. Unclaimed Funds. Thirty days after the first
anniversary of the Effective Time, Parent shall be entitled to
require the Paying Agent to deliver to the Parent any funds which
have not been disbursed to holders of Stock Certificates or Stock
Agreements, and thereafter such holders shall be entitled only to
look to Parent and the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) for the cash
payable upon due surrender of their Stock Certificates or Stock
Agreements (and Parent and the Surviving Corporation shall,
subject to such laws, be required to make such cash payments).
None of Parent, Mergerco, the Surviving Corporation, the Company
or the Paying Agent shall be liable to any Person in respect of
any cash delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
3.6. Withholding Rights. Parent shall be entitled to
deduct and withhold from the Per Common Share Price, the Per
Preferred Share Price, the Option Consideration or the Warrant
Consideration (or any component thereof) otherwise payable
pursuant to this Agreement to any holder of Company Common Stock,
Company Preferred Stock, Stock Options or Warrants, or to any
designee of such holder, such amounts as may be required to be
deducted and withheld with respect to the making of such payments
under the Code, or any provision of state, local or foreign tax
law. To the extent practicable, Parent shall instruct the Paying
Agent with respect to tax matters relating to employee tax
withholding prior to the Effective Time. At least five days
before the Effective Date, the Company shall provide to Parent
all information reasonably necessary to permit Parent to
determine the amounts, if any, required to be withheld with
respect to employee tax withholding.
3.7. Indemnity Escrow Agreement. Notwithstanding
anything else to the contrary in this Agreement, $2,500,000 of
the aggregate amount payable under this Article III to the
holders of Stock Certificates (not representing Dissenting
Shares) and Stock Agreements (collectively, the "Indemnity
Amount") shall not be deposited with the Paying Agent and shall
not be paid to such holders upon the surrender of such
certificates and agreements to the Paying Agent. Instead, the
Indemnity Amount shall be deposited by Parent immediately after
the Effective Time with the Indemnity Agent and shall constitute
the initial escrow fund to be held and released in accordance
with the provisions of Article XI and the Indemnity Agreement
(the "Indemnity Fund"). The Indemnity Amount shall be allocated
among and withheld from payment to the holders of Securities,
other than holders of Series D Preferred Stock and holders of
Dissenting Shares, pro-rata based on their ownership of shares of
Company Common Stock (assuming the conversion of all shares of
Company Preferred Stock (other than shares of Series D Preferred
Stock and other than Dissenting Shares) and the exercise of the
MCRC Warrant and the Stock Options).
3.8. Further Assurances. If, at any time after the
Effective Time, the Surviving Corporation shall consider or be
advised that any deeds, bills of sale, assignments or assurances
or any other acts or things are necessary, desirable or proper
(i) to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title and interest in, to or
under any of the rights, privileges, powers, franchises,
properties or assets of either of the Constituent Corporations or
(ii) otherwise to carry out the purposes of this Agreement, the
Surviving Corporation, and its proper officers and directors or
their designees shall be authorized to execute and deliver, in
the name and on behalf of either Constituent Corporation, all
such deeds, bills of sale, assignments and assurances and to do,
in the name and on behalf of either Constituent Corporation, all
such other acts and things as may be necessary, desirable or
proper to vest, perfect or confirm the Surviving Corporation's
right, title and interest in, to and under any of the rights,
privileges, powers, franchises, properties or assets of such
Constituent Corporation and otherwise to carry out the purposes
of this Agreement.
ARTICLE IV
CLOSING
4.1. Closing Date. The Closing of the Merger shall
take place at 10:00 A.M., local time, on April 17, 1996 at the
offices of Foley, Hoag & Eliot, One Post Office Square, Boston,
Massachusetts, or as soon thereafter as reasonably practicable
consistent with the terms and provisions of this Agreement. The
date on which the Closing is actually held is hereinafter
sometimes referred to as the "Closing Date." Each party agrees
to use its reasonable best efforts to satisfy promptly all
conditions to the respective obligations of the parties hereto in
order to close the Merger on April 17, 1996, or, if the parties
are unable after using such reasonable best efforts to close on
such date, in order to close as soon thereafter as is reasonably
practicable.
4.2. Filing Certificate of Merger and Effectiveness.
Subject to the fulfillment or waiver of the conditions to the
respective obligations of each of the parties set forth in
Article IX or Article X, as the case may be, at the Closing the
parties shall cause the Merger to be consummated by filing a
Certificate of Merger (which shall be in form and substance
reasonably satisfactory to the parties hereto), executed and
acknowledged in accordance with the laws of the State of
Delaware, in the office of the Secretary of State of the State of
Delaware. The Merger shall become effective upon such filing as
provided by the DGCL. The date and time on such date of
effectiveness of the Merger are herein called, respectively, the
"Effective Date" and the "Effective Time."
4.3. Parent's Additional Deliveries. Subject to
fulfillment or waiver of the conditions set forth in Article IX,
at the Effective Time Parent shall deliver to the Company all of
the following:
(a) a copy of the Certificate of Incorporation of
Parent, certified as of a recent date by the Secretary of
State of the State of Delaware;
(b) a certificate of good standing of Parent, issued
as of a recent date by the Secretary of State of the State
of Delaware;
(c) a certificate of the Secretary or an
Assistant Secretary of Parent, dated the Effective
Date, in form and substance reasonably satisfactory to
the Company, as to (i) no amendments to the Certificate
of Incorporation of Parent since a specified date; (ii)
the By-laws of Parent; (iii) the resolutions of the
Board of Directors of Parent authorizing the execution
and performance of this Agreement and the transactions
contemplated herein; and (iv) the incumbency and
signatures of the officers of Parent executing this
Agreement and any Parent Ancillary Agreement;
(d) an opinion of internal counsel to Parent and
Mergerco, dated the Effective Date and in form and
substance reasonably satisfactory to the Company;
(e) the certificate contemplated by Section 10.1,
duly executed by the President or any Vice President of
Parent;
(f) all consents, waivers or approvals obtained by
Parent with respect to the consummation of the transactions
contemplated by this Agreement; and
(g) the Indemnity Agreement duly executed by Parent.
4.4. Mergerco's Deliveries. Subject to fulfillment or
waiver of the conditions set forth in Article IX, at the
Effective Time Mergerco shall deliver to the Company all of the
following:
(a) a copy of the Certificate of Incorporation of
Mergerco certified as of a recent date by the Secretary
of State of the State of Delaware;
(b) a certificate of good standing of Mergerco,
issued as of a recent date by the Secretary of State of
the State of Delaware;
(c) a certificate of the Secretary or an
Assistant Secretary of Mergerco, dated the Effective
Date, in form and substance reasonably satisfactory to
the Company, as to (i) no amendments to the Certificate
of Incorporation of Mergerco since a specified date;
(ii) the By-laws of Mergerco; (iii) the resolutions of
the Board of Directors of Mergerco authorizing the
execution and performance of this Agreement and the
transactions contemplated herein and the written
consent of Operations adopting this Agreement in
accordance with Section 251 of the DGCL; and (iv) the
incumbency and signatures of the officers of Mergerco
executing this Agreement; and
(d) the certificate contemplated by Section 10.1,
duly executed by the President or any Vice President of
Mergerco.
4.5. The Company's Deliveries. Subject to fulfillment
or waiver of the conditions set forth in Article X, at the
Effective Time the Company shall deliver to Parent all of the
following:
(a) a copy of the Certificate of Incorporation of
the Company, certified as of a recent date by the
Secretary of State of the State of Delaware;
(b) a certificate of good standing of the
Company, issued as of a recent date by the Secretary of
State of the State of Delaware;
(c) a certificate of the Secretary or an
Assistant Secretary of the Company, dated the Effective
Date, in form and substance reasonably satisfactory to
Parent, as to (i) no amendments to the Certificate of
Incorporation of the Company since a specified date;
(ii) the By-laws of the Company; (iii) the resolutions
of the Board of Directors of the Company authorizing
the execution and performance of this Agreement and the
transactions contemplated herein and the resolutions of
the stockholders of the Company adopting this Agreement
in accordance with Section 251 of the DGCL; and (iv)
the incumbency and signatures of the officers of the
Company executing this Agreement and any Company
Ancillary Agreement;
(d) An opinion of Foley, Hoag & Eliot, counsel to
the Company, dated the Effective Date and in form and
substance reasonably satisfactory to Parent;
(e) all consents, waivers or approvals obtained
by the Company with respect to the consummation of the
transactions contemplated by this Agreement;
(f) resignations of each of the directors of the
Company, effective as of the Effective Time;
(g) the certificates contemplated by Sections
9.1, 9.2, 9.6, 9.7(a) and 9.10 duly executed by the
appropriate officer of the Company;
(h) the documents contemplated by Section 9.7(b) to be
delivered to Parent;
(i) copies of the consents of Warrant holders to the
cancellation of their Warrants pursuant to the Merger to be
delivered pursuant to Section 9.8; and
(j) the Indemnity Agreement duly executed by the
Stockholder Representatives; and
(k) the FIRPTA certificate contemplated by Section
9.9.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and Mergerco to enter into
this Agreement and to consummate the transactions contemplated
hereby, the Company represents and warrants to Parent and
Mergerco and agrees as follows:
5.1. Organization and Capital Structure. (a) The
Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The
Company is duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions
listed in Schedule 5.1(a), which are the only jurisdictions in
which the ownership or leasing of its assets or the conduct of
its business requires such qualification, and no other
jurisdiction has demanded, requested or otherwise indicated that
the Company is required to so qualify, in each case other than
those jurisdictions where the failure to be so qualified would
not have a Material Adverse Effect on the Company. The Company
has full power and authority to own or lease and to operate and
use its assets and to carry on its business as now conducted.
True and complete copies of the Certificate of Incorporation and
all amendments thereto and of the By-laws, as amended, of the
Company have been delivered to Parent.
(b) The authorized capital of the Company consists of
(i) 25,000,000 shares of Company Common Stock, of which 1,530,679
have been issued and are outstanding, none of which are held as
treasury shares and, except as set forth in Schedule 5.1(b), none
of which is reserved for any purpose; (ii) 10,411,429 shares of
Company Preferred Stock, of which 476,192 shares of Series A
convertible redeemable preferred stock, par value $1.00 per share
("Series A Preferred Stock") are issued and outstanding,
1,143,568 shares of Series B convertible redeemable preferred
stock, par value $1.00 per share ("Series B Preferred Stock") are
issued and outstanding, 3,166,669 shares of Series C convertible
redeemable preferred stock, par value $1.00 per share ("Series C
Preferred Stock") are issued and outstanding and 4,361,119 shares
of Series D convertible redeemable preferred stock, par value
$1.00 per share ("Series D Preferred Stock") are issued and
outstanding, and none of which are held as treasury shares or are
reserved for any purpose; and (iii) 1,000,000 shares of Special
Preferred Stock, none of which have been issued or are
outstanding. All of the outstanding shares of capital stock of
the Company are validly issued, fully paid and nonassessable.
Schedule 5.1(b) sets forth (i) as of February 29, 1996, the
unpaid Accruing Dividends (whether or not declared) with respect
to each holder of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock and (ii) commencing
on March 1, 1996 and up to and including the Effective Date, the
per diem accrual rate of the Accruing Dividends (whether or not
declared) on each share of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock. Schedule 5.1(b)
also sets forth (i) as of February 29, 1996, the unpaid Common
Stock Premium and (ii) commencing on March 1, 1996 and up to and
including the Effective Date, the per diem accrual rate of the
Common Stock Premium. There are no declared but unpaid dividends
or other distributions with respect to any shares of Company
Common Stock or Company Preferred Stock.
(c) All of the Company Common Stock, Company Preferred
Stock, Stock Options and Warrants are held of record by the
holders and in the amounts identified in Schedule 5.1(c).
Schedule 5.1(c) also sets forth the number of shares of Company
Common Stock into which each share of Company Preferred Stock is
convertible, the "exercise price" per share of each Stock Option
and each Warrant, the date of grant of each Stock Option and
Warrant and the expiration date thereof and the number of shares
of Company Common Stock issuable upon the exercise of each Stock
Option or Warrant. True and complete copies of the stock record
books, agreements evidencing Warrants and, to the extent
available to the Company, agreements evidencing Stock Options
have been made available to Parent. Each Warrant and Stock
Option was duly issued, and is valid and in full force and
effect.
(d) The sum of the number of shares of outstanding
Company Common Stock, the number of shares of Company Common
Stock into which all the outstanding shares of Company Preferred
Stock are convertible and the number of shares of Company Common
Stock issuable upon the exercise of all of the Stock Options and
Warrants is 13,893,974.
(e) Except as set forth in Schedule 5.1(e), the
consideration to be received by holders of the shares of Company
Common Stock, Company Preferred Stock, Stock Options and Warrants
and the treatment of such holders pursuant to Section 3.1 is in
accordance with and consistent with the Certificate of
Incorporation of the Company, as amended to date, and the Stock
Agreements. Commencing from the Effective Time, neither Parent
nor the Surviving Corporation shall have any further obligation
with respect to Stock Options other than the payment of the
Option Consideration in accordance herewith and remitting to the
appropriate Governmental Body any amount withheld with respect
thereto under Section 3.6.
(f) Except for the Stock Options and Warrants described
in Schedule 5.1(c) and except as set forth in Schedule 5.1(f),
there are no agreements, arrangements, options, warrants, calls,
rights or commitments of any character relating to the issuance,
sale, purchase or redemption of any shares of capital stock or
other equity interest of the Company, whether on conversion of
other securities or otherwise. None of the issued and
outstanding shares of Company Common Stock or Company Preferred
Stock has been issued in violation of, or is subject to, any
preemptive or subscription rights. Except as set forth in this
Agreement or in Schedule 5.1(f), the Company is not a party to,
and does not otherwise have any knowledge of the current
existence of, any stockholder agreement, voting trust agreement
or any other similar contract, agreement, arrangement,
commitment, plan or understanding restricting or otherwise
relating to the voting, dividend, ownership or transfer rights of
any shares of capital stock of the Company. The Company has not
issued any security in breach of any applicable Requirements of
Laws of the United States of America or any state thereof.
(g) The Company is its own "ultimate parent entity"
(as defined in 16 C.F.R. Section 801.1(a)(3) (1994)).
5.2. Subsidiaries and Investments. Except as set forth
in Schedule 5.2, the Company does not own directly or indirectly
any outstanding voting securities or equity interests in any
corporation, partnership, limited liability company, joint
venture or other entity and is not a partner in any partnership
or a joint venturer in any joint venture.
5.3. Authority. (a) The Company has full power and
authority to execute, deliver and perform this Agreement and all
of the Company Ancillary Agreements. The execution, delivery and
performance of this Agreement and the Company Ancillary
Agreements by the Company have been duly authorized and approved
by the Company's Board of Directors and, except for the adoption
of this Agreement by Company's stockholders in accordance with
Section 8.1(b) and the filing contemplated by Section 4.2, no
other corporate proceedings on the part of the Company are
necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly authorized,
executed and delivered by the Company and is the legal, valid and
binding obligation of the Company enforceable in accordance with
its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and
by the effect of general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at
law), and each of the Company Ancillary Agreements has been duly
authorized by the Company and will be duly executed and delivered
at the Closing.
(b) Except as set forth in Schedule 5.3, neither the
execution and delivery of this Agreement, any of the Company
Ancillary Agreements or the consummation of any of the
transactions contemplated hereby or thereby nor compliance with
or fulfillment of the terms, conditions and provisions hereof or
thereof, in each case by the Company will:
(i) conflict with, result in a breach of the
terms, conditions or provisions of, or constitute a
default, an event of default or an event creating
rights of acceleration, termination or cancellation or
a loss of rights under, or result in the creation or
imposition of any Encumbrance upon, any of the
Company's assets, under (1) the Certificate of
Incorporation or By-laws of the Company, (2) any
Company Agreement, (3) any other material note,
instrument, agreement, mortgage, lease, license,
franchise, permit or other authorization, right,
restriction or obligation to which the Company is a
party or any of its assets or business is subject or by
which the Company is bound, (4) any Court Order to
which the Company is a party or any of its assets or
business is subject or by which the Company is bound,
other than such as do not and would not reasonably be
expected to have a Material Adverse Effect on the
Company, or (5) any Requirements of Laws affecting the
Company or its assets or business, other than such as
do not and would not reasonably be expected to have a
Material Adverse Effect on the Company; or
(ii) require the approval, consent, authorization
or act of, or the making by the Company of any
declaration, filing or registration with, any Person,
except for the applicable requirements of the HSR Act
and the filing contemplated by Section 4.2 with the
Secretary of State of the State of Delaware.
5.4. Financial Statements. Schedule 5.4 contains (i)
the audited balance sheets of the Company as of December 31, 1995
and March 31, 1995 and the related audited statements of
operations (the "Statements of Income"), stockholder's equity and
cash flows for the nine months ended December 31, 1995 and the
fiscal years ended March 31, 1995 and March 31, 1994, together
with the appropriate notes to such financial statements,
accompanied by the report thereon of Ernst & Young L.L.P.,
independent public accountants (the "Audited Financial
Statements"), and (ii) the unaudited balance sheet of the Company
as of February 24, 1996 and the related unaudited statement of
operations for the two months then ended (the "Unaudited
Financial Statements"). Except as disclosed in the notes
thereto, the Audited Financial Statements and the Unaudited
Financial Statements have been prepared in conformity with
generally accepted accounting principles consistently applied and
fairly present in all material respects the financial position of
the Company at the dates of such balance sheets and the results
of its operations and cash flows for the respective periods
indicated, except that the Unaudited Financial Statements are
subject to normal year-end audit adjustments and the addition of
footnotes. Except as set forth on Schedule 5.4 or in the
Unaudited Financial Statements, the Unaudited Financial
Statements include all adjustments, which consist only of normal
recurring accruals, necessary for such fair presentation, other
than normal year-end audit adjustments. All costs and expenses
incurred in generating the revenues reflected in the Statements
of Income during the respective periods covered thereby which are
required by generally accepted accounting principles to be
reflected in the Statements of Income are so reflected.
5.5. Operations Since Balance Sheet Date. (a) Except
as set forth in Schedule 5.5(a), since the Balance Sheet Date,
there has been:
(i) no Material Adverse Change in the assets,
business, financial condition or results of operations
of the Company, and, to the Company's knowledge, no
fact or condition exists or is threatened which might
reasonably be expected to cause such a change in the
future (other than general business and economic
conditions); and
(ii) no damage, destruction, loss or claim,
whether or not covered by insurance, or condemnation or
other taking adversely affecting in any material
respect any of the Company's assets or its business.
(b) Except as set forth in Schedule 5.5(b), since the
Balance Sheet Date, the Company has conducted its business only
in the ordinary course and in conformity with past practice.
Without limiting the generality of the foregoing, since the
Balance Sheet Date, except as set forth in such Schedule, the
Company has not:
(i) issued, delivered or agreed (conditionally or
unconditionally) to issue or deliver, or granted any option,
warrant or other right to purchase, any of its capital stock
or other equity interest or any security convertible into
its capital stock or other equity interest;
(ii) issued, delivered or agreed (conditionally or
unconditionally) to issue or deliver any of its bonds, notes
or other debt securities, or borrowed or agreed to borrow
any funds, other than from Parent under the Parent Loan
Agreement;
(iii) paid any obligation or liability (absolute or
contingent) other than current liabilities reflected on the
Balance Sheet and current liabilities incurred since the
Balance Sheet Date in the ordinary course of business
consistent with past practice;
(iv) declared or made, or agreed to declare or make,
any payment of dividends or distributions to its
stockholders or purchased or redeemed, or agreed to purchase
or redeem, any of its capital stock or other equity
interest;
(v) except in the ordinary course of business
consistent with past practice, made or permitted any
material amendment or termination of any Company Agreement;
(vi) undertaken or committed to undertake capital
expenditures other than in accordance with the Cash Flow
Projection;
(vii) made any charitable donations;
(viii) sold, leased (as lessor), transferred or
otherwise disposed of, or mortgaged or pledged, or
imposed or suffered to be imposed any Encumbrance on,
any of the assets reflected on the Balance Sheet or any
assets acquired by the Company after the Balance Sheet
Date, except for inventory and minor amounts of
personal property sold or otherwise disposed of for
fair value in the ordinary course of its business
consistent with past practice and except for Permitted
Encumbrances;
(ix) canceled any debts owed to or claims held by
the Company (including the settlement of any claims or
litigation) other than in the ordinary course of its
business consistent with past practice;
(x) created, incurred or assumed, or agreed to
create, incur or assume, any indebtedness for borrowed
money other than borrowings from Parent under the
Parent Loan Agreement or entered into, as lessee, any
capitalized lease obligations (as defined in Statement
of Financial Accounting Standards No. 13);
(xi) accelerated or delayed collection of notes
or accounts receivable in advance of or beyond their
regular due dates or the dates when the same would have
been collected in the ordinary course of its business
consistent with past practice;
(xii) delayed or accelerated payment of any
account payable or other liability beyond or in advance
of its due date or the date when such liability would
have been paid in the ordinary course of its business
consistent with past practice;
(xiii) entered into or become committed to enter into
any other material transaction except in the ordinary course
of business other than transactions with Parent;
(xiv) allowed the levels of raw materials, sup-
plies, work-in-process or other materials included in
the inventory of the Company to vary in any material
respect from the levels customarily maintained in its
business;
(xv) instituted any increase in any compensation
payable to any employee of the Company or in any
profit-sharing, bonus, incentive, deferred compensa-
tion, insurance, pension, retirement, medical, hospi-
tal, disability, welfare or other benefits made
available to employees of the Company;
(xvi) made any change in the accounting
principles and practices used by the Company from those
applied in the preparation of the Balance Sheet and the
related statements of income, stockholder's equity and
cash flow for the nine months ended on the Balance
Sheet Date; or
(xvii) prepared or filed any Tax Returns in a manner
inconsistent with past practice or, on such Tax Returns,
taken any position, made any election, or adopted any method
that is inconsistent with the positions taken, elections
made or methods used in preparing and filing similar Tax
Returns in prior periods (including positions which would
have the effect of deferring income to periods after the
Balance Sheet Date or accelerating deductions to periods on
or prior to the Balance Sheet Date).
5.6. No Undisclosed Liabilities. Except as set forth
in Schedule 5.6 or in the Audited Financial Statements or the
Unaudited Financial Statements (including the footnotes thereto)
and except for liabilities of a type required to be disclosed
elsewhere in this Article V, the Company is not subject to any
liabilities which are, in the aggregate, material to the
business, operations or financial condition of the Company,
whether absolute, contingent, accrued or otherwise, which are not
shown or which in aggregate are in excess of amounts shown or
reserved for in the Balance Sheet, other than liabilities of the
same nature as those set forth on the Balance Sheet and the
footnotes thereto, and reasonably incurred in the ordinary course
of its business consistent with past practice after the Balance
Sheet Date.
5.7. Taxes. (a) Except as set forth on Schedule 5.7,
(i) the Company and each Company Group has filed all Tax Returns
required to be filed, as of the date filed (or subsequently
amended) all such Tax Returns are complete and accurate in all
material respects, and all Taxes shown to be due on such Tax
Returns have been timely paid (ii) all Taxes (whether or not
shown on any Tax Return) owed by the Company or any Company Group
and required to be paid on or before the Effective Date have been
timely paid or, in the case of Taxes which the Company or any
Company Group is presently contesting in good faith, the Company
has established an adequate reserve for such Taxes on the Balance
Sheet or the balance sheet included in the Unaudited Financial
Statements; (iii) all Taxes (whether or not shown on any Tax
Return) that are or will be owed by the Company or any Company
Group with respect to taxable years or periods (or portions
thereof) ending on or prior to the date of the balance sheet
included in the Unaudited Financial Statements have been fully
paid or shown as a liability on the Unaudited Financial
Statements; (iv) none of the Company or any member of any Company
Group has waived any statute of limitations in respect of Taxes
(and no request for any such waiver is currently pending); (v)
the income Tax Returns referred to in clause (i) have been
examined by the IRS or the appropriate state, local or foreign
taxing authority or the period for assessment of the Taxes in
respect of which such income Tax Returns were required to be
filed has expired; (vi) there is no action, suit, investigation,
audit, claim or assessment pending or, to the Company's
knowledge, proposed or threatened with respect to Taxes of the
Company or any Company Group and, to the Company's knowledge, no
valid basis exists therefor; (vii) all material deficiencies
asserted or assessments made as a result of any examination of
the Tax Returns referred to in clause (i) have been paid in full;
(viii) all Tax Sharing Arrangements and Tax indemnity
arrangements to which the Company is or has been a party will
terminate prior to the Effective Date and the Company will not
have any liability thereunder on or after the Effective Date;
(ix) there are no liens for Taxes upon the assets of the Company
except liens relating to current Taxes not yet due; (x) all
material Taxes which the Company or any Company Group are
required by law to withhold or to collect for payment have been
duly withheld and collected, and have been paid or accrued,
reserved against and entered on the books of the Company; (xi)
the Company has never been a member of any Company Group, (xii)
as a result of a change in accounting method for a Tax period
beginning on or before the Balance Sheet Date, the Company will
not be required to include any adjustment under Section 481(c) of
the Code (or any corresponding provisions of state, local or
foreign Tax law) in taxable income for any period ending after
the Balance Sheet Date; and (xiii) there are no Tax rulings,
requests for rulings, or closing or similar agreements relating
to the Company or any Company Group which could affect the
Company's liability for Taxes for any period after the Balance
Sheet Date.
(b) The federal income tax "regular" and "alternative
minimum tax" carryforwards of the Company for each of the taxable
years of the Company ending on or prior to December 31, 1995 (the
"NOLs"), and the taxable years in which the NOLs arose, are set
forth in the footnotes to the Audited Financial Statements. None
of the NOLs constitute separate return limitation year ("SRLY")
or consolidated return change of ownership ("CRCO") losses with
respect to the Company immediately prior to the Effective Date
and, except as set forth in Schedule 5.7, none of the NOLs
constitute "dual consolidated losses" (as defined in Section 1503
of the Code and the regulations thereunder) which cannot be
offset against United States federal taxable income of the
Company.
(c) No transaction contemplated by this Agreement is
subject to withholding under Section 1445 of the Code and no
stock transfer Taxes, sales Taxes, use Taxes, real estate
transfer Taxes, or other similar Taxes will be imposed on the
Company as a result of the Merger.
(d) As a result of the transactions contemplated by
this Agreement, none of the Company or the Parent will be
obligated to make a payment to an individual that would be an
"excess parachute payment" to a "disqualified individual" as
those terms are defined in Section 280G of the Code, without
regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
5.8. Availability of Assets and Legality of Use.
Except as set forth in Schedule 5.8 the assets owned, leased or
licensed by the Company constitute all the assets used in its
business as currently conducted (including, but not limited to,
all books, records, computers and computer programs and data
processing systems), have been maintained in accordance with
normal industry practice and are generally suitable for the uses
for which intended.
5.9. Governmental Permits. (a) The Company owns,
holds or possesses all licenses, franchises, permits, privileges,
immunities, approvals and other authorizations from Governmental
Bodies which are necessary to entitle it to own or lease, operate
and use its assets and to carry on and conduct its business
substantially as currently conducted, except for those as to
which the failure to so own, hold or possess would not have a
Material Adverse Effect on the Company (herein collectively
called "Governmental Permits"). Schedule 5.9(a) sets forth a
list of such Governmental Permits, except for such incidental
licenses, permits and other authorizations which would be readily
obtainable by any qualified applicant without undue burden in the
event of any lapse, termination, cancellation or forfeiture
thereof. Complete and correct copies of all of the Governmental
Permits have heretofore been delivered to Parent.
(b) Except as set forth in Schedule 5.9(b), (i) the
Company has fulfilled and performed in all material respects its
obligations under each of the Governmental Permits, and to the
Company's knowledge, no event has occurred or condition or state
of facts exists which constitutes or, after notice or lapse of
time or both, would constitute a breach or default in any
material respect under any such Governmental Permit or which
permits or, after notice or lapse of time or both, would permit
revocation or termination of any such Governmental Permit, or
which could reasonably be expected to adversely affect in any
material respect the rights of the Company under any such Govern-
mental Permit, except in each case such as would not have a
Material Adverse Effect on the Company; (ii) no written notice of
cancellation, of default or of any material dispute concerning
any Governmental Permit except in each case such as would not
have a Material Adverse Effect on the Company, or of any event,
condition or state of facts described in the preceding clause,
has been received by, or is known to, the Company; and (iii)
except to an extent that would not have a Material Adverse Effect
on the Company, each of the Governmental Permits is valid,
subsisting and in full force and effect and will continue in full
force and effect after the Effective Date of the Merger, in each
case without (x) the occurrence of any breach, default or
forfeiture of rights thereunder, or (y) the consent, approval, or
act of, or the making of any filing with, any Governmental Body.
5.10. Real Property. The Company does not own any
parcel of real property and does not hold any option to acquire
any real property.
5.11. Real Property Leases. Schedule 5.11 sets forth
a list of each lease or similar agreement under which the Company
is lessee of, or holds or operates, any real property owned by
any third Person (the "Leased Real Property"). Except as set
forth in such Schedule (or in any agreement listed thereon), the
Company has the right to quiet enjoyment of all the real property
described in such Schedule of which it is the lessee for the full
term of each such lease or similar agreement (and any related
extension option) relating thereto, and the leasehold or other
interest of the Company in such real property is not subject or
subordinate to any Encumbrance except for Permitted Encumbrances.
Complete and correct copies of any such leases or similar
agreements, including amendments thereto, regarding any Leased
Real Property have heretofore been delivered to Parent.
5.12. Condemnation. Neither the whole nor any part of
any Leased Real Property is subject to any pending suit for
condemnation or other taking by any public authority or other
Person, and, to the Company's knowledge, no such condemnation or
other taking is threatened or contemplated.
5.13. Personal Property. Schedule 5.13 contains a
list of all machinery, equipment, vehicles, furniture and other
personal property owned by the Company having an original cost of
$10,000 or more.
5.14. Personal Property Leases. Schedule 5.14 sets
forth a list of each lease or agreement or under which the
Company is lessee of, or holds or operates, any machinery,
equipment, vehicle or other tangible personal property owned by a
third Person, except for any such lease or agreement that is
terminable by the Company without penalty or payment on notice of
30 days or less, or which involves the payment by the Company of
rentals of less than $10,000 per year.
5.15. Intellectual Property; Software. (a)
Schedule 5.15 contains a list and description (showing in each
case any product, device, process, service, business or
publication covered thereby, the registered or other owner,
expiration date and number, if any) of all United States and
foreign patents, patent applications, continuations,
continuations-in-part, divisions and reissues, registered
Trademarks, and registered Copyrights and applications for
registration of Trademarks and Copyrights, in each case, owned by
the Company. For purposes of this Agreement, the "Intellectual
Property" means:
(i) all United States and foreign patents, patent
applications, continuations, continuations-in-part,
divisions, reissues, patent disclosures, inventions (whether
or not patentable) or improvements thereto ("Patent
Rights");
(ii) all United States, state and foreign trademarks,
service marks, logos, trade dress and trade names (including
all assumed or fictitious names under which the Company is
conducting its business or has within the previous five
years conducted its business), whether registered or
unregistered, and pending applications to register the
foregoing ("Trademarks");
(iii) all United States and foreign copyrights, whether
registered or unregistered and pending applications to
register the same ("Copyrights"); and
(iv) all confidential ideas, trade secrets, know-how,
concepts, methods, processes, formulae, reports, data,
customer lists, mailing lists, business plans, or other
proprietary information ("Trade Secrets").
(b) Schedule 5.15 contains a list of all material
computer software programs and software systems owned by,
licensed to, or currently used by the Company in the conduct of
the Company's business, including, without limitation, all
databases, compilations, tool sets, compilers, higher level or
proprietary languages, whether in source code, object code or
human readable form ("Software"), provided, however, that
Schedule 5.15 and Schedule 5.20 may omit in all instances (i)
Software licensed to or used by the Company that is or was
available in consumer retail stores and subject to no license
agreement or to license agreements that purport to become
effective without execution by the purchaser and (ii) license
agreements for Software described in clause (i) immediately
above.
(c) Schedule 5.15 contains a list of all material
agreements, commitments, contracts, understandings, licenses,
sublicenses, assignments and indemnities which relate or pertain
to Company Intellectual Property or Software or to disclosure or
use of ideas or information of the Company or third Persons to
which the Company is a party, showing in each case the parties
thereto. For purposes of this Agreement, "Company Intellectual
Property" means any Intellectual Property owned by, currently
used by, or licensed to or by the Company.
(d) Except as disclosed on Schedule 5.15 or in any
agreement listed thereon, the Company either: (i) owns the
entire right, title and interest in and to the Company Intellec-
tual Property and Software, free and clear of any Encumbrance,
other than security interests disclosed elsewhere herein in favor
of Parent or NationsCredit Commercial Corporation and other than
Permitted Encumbrances applying generally to the assets of the
Company; or (ii) has the perpetual, royalty-free right to use the
same.
(e) Except as disclosed on Schedule 5.15, the Company
is not in breach of any material provision of any material
agreement, commitment, contract, understanding, license,
sublicense, assignment or indemnity which relates to any of the
Company Intellectual Property or Software, and the Company has
not taken any action which would impair or otherwise adversely
affect its rights in any of the Company Intellectual Property or
Software, other than any actions that, at the time they were
taken, were reasonable and customary in the Company's industry.
The Company has all right, power and authority with respect to
material Company Intellectual Property, Software and materials
identified in Section 5.15, to execute and deliver this Agreement
and the Company Ancillary Agreements, to consummate the
transactions contemplated hereby and thereby and to comply with
or fulfill the terms, conditions or provisions hereof or thereof.
The transactions contemplated by this Agreement and the Company
Ancillary Agreements shall have no adverse effect on the validity
and enforceability of any of the material Company Intellectual
Property, Software or materials identified in Section 5.15, and
the Company's right, title and interest thereto immediately after
the Effective Time shall be identical to that of the Company
immediately prior to the Effective Time.
(f) Except as disclosed on Schedule 5.15: (i) all
registrations for Intellectual Property identified as being owned
by the Company are valid and in force, and all applications to
register any unregistered Intellectual Property identified as
being owned by the Company are pending and in good standing, all
without challenge of any kind; and (ii) the Company has the sole
and exclusive right to bring actions for infringement or
unauthorized use of the Intellectual Property and Software owned
by the Company, and to the Company's knowledge, there is no basis
for any such action. Correct and complete copies of: (x)
registrations for all registered Copyrights and Trademarks, and
copies of all issued Patent Rights, identified as being owned by
the Company; (y) all pending applications for Patent Rights or to
register unregistered Copyrights or Trademarks identified as
being owned by the Company (together with any subsequent
correspondence or filings relating to the foregoing); and (z) all
items identified in Section 5.15(c), have heretofore been made
available by the Company to Parent.
(g) Except as disclosed in Schedule 5.15, no
infringement by the Company of any Patent Rights, Copyrights or
Trade Secrets or, to the knowledge of the Company, Trademarks of
any other Person has occurred or results in any way from the
operations of the Company's business. Except as disclosed in
Schedule 5.15, no claim of any infringement of any Intellectual
Property of any other Person has been made or asserted in respect
of the operations of the Company's business. Except as disclosed
in Schedule 5.15, the Company has not had notice of, or knowledge
of any basis for, a claim against the Company that its
operations, activities, products, Software, equipment, machinery
or processes of the Company's business infringe any Intellectual
Property of any other Person.
(h) Except as disclosed on Schedule 5.15 or any
agreement listed thereon: (i) the Software is not subject to any
transfer, assignment, site, equipment, or other operational
limitations; (ii) the Company has maintained and protected all
computer software programs and software systems owned by the
Company, including, without limitation, all databases,
compilations, tool sets, compilers, higher level or proprietary
languages, whether in source code, object code or human readable
form ("Owned Software") (including, without limitation, all
source code and system specifications) with appropriate
proprietary notices (including, without limitation, in the case
of published Software, the notice of copyright in accordance with
the requirements of 17 U.S.C. Section 401) and confidentiality and
non-disclosure agreements; (iii) the Owned Software has been
registered or is eligible for protection and registration under
applicable copyright law and no copyright in the Owned Software
has been forfeited to the public domain; (iv) the Company has
copies of all releases or separate published versions of the
Owned Software so that the same may be subject to registration in
the United States Copyright Office; (v) the Company has complete
and exclusive right, title and interest in and to the Owned
Software; (vi) the Company has developed the Owned Software
through its own efforts and for its own account without the aid
or use of any consultants, agents, independent contractors or
Persons (other than Persons that are employees of the Company);
(vii) the Owned Software does not infringe any Patent Rights,
Copyrights or Trade Secrets or, to the knowledge of the Company,
Trademarks of any other Person; (viii) the Company has lawful
possession of the source code, system documentation, statements
of principles of operation and schematics relating to the Owned
Software, as well as any pertinent commentary, explanation,
program (including compilers), workbenches, tools, and higher
level or proprietary language necessary for the development,
maintenance, implementation and use thereof, sufficient to permit
a trained computer programmer to develop, maintain, support,
compile and use all releases or separate versions of the same
that are currently subject to maintenance obligations by the
Company; (ix) there are no agreements or arrangements in effect
with respect to the marketing, distribution, licensing or
promotion of the Owned Software by any other Person; (x) the
Company has complied with all applicable Requirements of Laws
relating to the export or reexport of the Owned Software by the
Company; and (xi) the Owned Software may be exported or
reexported to all countries without the necessity of any license
(other than a general license), other than to those countries,
projects or persons specified as prohibited destinations or
recipients pursuant to applicable regulations of the U.S.
Department of Commerce, the United States State Department and/or
the United States Treasury Department.
(i) Except as disclosed on Schedule 5.15, each
employee, agent, consultant, or contractor who has contributed to
or participated in the creation or development of any
copyrightable, patentable or Trade Secret material on behalf of
the Company or any predecessor in interest thereto either: (i)
is a party to a "work-for-hire" agreement under which the Company
is deemed to be the original owner/author of all property rights
therein (or, by operation of law, all works he created or creates
are "works made for hire" under the Unites States Copyright Act);
or (ii) has executed an assignment or an agreement to assign in
favor of the Company (or such predecessor in interest, as
applicable) of all right, title and interest in such material.
5.16. Accounts Receivable; Inventories. All accounts
receivable of the Company have arisen from bona fide transactions
by the Company in the ordinary course of its business. All
accounts receivable reflected in the Balance Sheet have been
collected or are good and collectible in the ordinary course of
business at the aggregate recorded amounts thereof, net of any
applicable allowance for doubtful accounts reflected in the
Balance Sheet.
The inventories of the Company (including raw mate-
rials, supplies, work-in-process, finished goods and other mater-
ials) reflected in the Balance Sheet are in merchantable
condition and are reflected in the books and records of the
Company at the lower of average cost or market value. The
inventory obsolescence policies of the Company are appropriate
for the nature of the products sold and the marketing methods
used by the Company, and the reserve for inventory obsolescence
contained in the Balance Sheet fairly reflects the amount of
obsolete inventory as of the Balance Sheet Date. The Company has
heretofore delivered to Parent a list of places where material
inventories of the Company were located as of the date hereof.
5.17. Title to Property. The Company has good title
to all of its assets reflected on the Balance Sheet as being
owned by it and all of the assets thereafter acquired by it
(except to the extent that such assets have been disposed of
after the Balance Sheet Date in the ordinary course of business
consistent with past practice), free and clear of all
Encumbrances, except for Permitted Encumbrances and except as set
forth in Schedule 5.17.
5.18. Employee Benefit Plans. (a) Set forth in
Schedule 5.18(a) is a true and complete list of each "employee
pension benefit plan" (as such term is defined in Section 3(2) of
ERISA) maintained by the Company or an ERISA Affiliate (defined
in clause (j) below), or with respect to which the Company or an
ERISA Affiliate is or will be required to make any payment, or
which provides or will provide benefits to present or prior
employees of the Company or an ERISA Affiliate due to such
employment (the "Pension Plans"). Set forth in Schedule 5.18(a)
is a true and complete list of each "employee welfare benefit
plan" (as such term is defined in Section 3(1) of ERISA)
maintained by the Company, or with respect to which the Company
is or will be required to make any payment, or which provides or
will provide benefits to present or prior employees of the
Company due to such employment (the "Welfare Plans") (the Pension
Plans and Welfare Plans being the "ERISA Benefit Plans"). In
addition, set forth in Schedule 5.18(a) is a true and complete
list of each other "employee pension benefit plan" (as such term
is defined in Section 3(2) of ERISA) that is or has ever been
subject to Section 302 of ERISA and (i) maintained by the Company
or an ERISA Affiliate at any time during the six-year period
prior to the Effective Time, or (ii) with respect to which the
Company or an ERISA Affiliate was required to make any payment at
any time during such period (the "Prior Pension Plans").
(b) Other than those listed in Schedule 5.18(a), set
forth in Schedule 5.18(b) is a true and complete list of each of
the following to which the Company is a party or with respect to
which it is or will be required to make any payment (the "Non-ERISA
Commitments"):
(i) each retirement, savings, profit sharing,
deferred compensation, severance, stock ownership,
stock purchase, stock option, performance, bonus,
incentive, vacation or holiday pay, hospitalization or
other medical, disability, life or other insurance, or
other welfare, benefit or fringe benefit plan, policy,
trust, understanding or arrangement of any kind,
whether written or oral; and
(ii) each material understanding or arrangement
and each agreement, in each case in effect, whether
written or oral, with or for the benefit of any present
or prior officer, director, employee, agent or
consultant (including, without limitation, each
employment, compensation, deferred compensation,
severance or consulting agreement or arrangement,
confidentiality agreement (excluding any for the
benefit of the Company), covenant not to compete
(excluding any for the benefit of the Company) and any
agreement or arrangement associated with a change in
ownership or control of the Company, but excluding
employment agreements terminable by the Company without
premium or penalty on notice of thirty (30) days or
less under which the only monetary obligation of the
Company is to make current wage or salary payments and
provide current fringe benefits).
The Company has delivered to Parent correct and complete copies
of (i) all written Non-ERISA Commitments and (ii) all insurance
and annuity policies and contracts and other documents relevant
to any Non-ERISA Commitment. Schedule 5.18(b) contains a
complete and accurate description of all material oral Non-ERISA
Commitments. Except as disclosed in Schedule 5.18(a) or Schedule
5.18(b), none of the ERISA Benefit Plans or the Non-ERISA
Commitments is subject to the law of any jurisdiction outside of
the United States of America.
(c) The Company has delivered to Parent with respect
to each ERISA Benefit Plan and with respect to each Prior Pension
Plan, other than any ERISA Benefit Plan or Prior Pension Plan
which is a "multiemployer plan" (as such term is defined in
Section 3(37) of ERISA), correct and complete copies, where
applicable, of (i) all plan documents and amendments thereto,
trust agreements and amendments thereto and insurance and annuity
contracts and policies, (ii) the current summary plan
description, (iii) the Annual Reports (Form 5500 series) and
accompanying schedules, as filed, for the most recently completed
three plan years for which such reports have been filed, (iv) the
financial statements for the most recently completed three plan
years for which such statements have been prepared, (v) the
actuarial reports for the most recently begun three plan years
for which such reports exist, (vi) the most recent determination
letter issued by the IRS, (vii) PBGC Form 1 for the most recently
begun plan year and (viii) all correspondence with the IRS,
Department of Labor and Pension Benefit Guaranty Corporation
concerning any controversy during the last six years. Each
report described in clause (v) of the preceding sentence
accurately describes the funded status of the plan to which it
relates and subsequent to the date of such report there has been
no adverse change in the funding status or financial condition of
such plan. With respect to each Pension Plan that is a
"multiemployer plan" (the "Multiemployer Plans"), (A) the Company
has delivered to Parent correct and complete copies of all plan
documents and amendments thereto and trust agreements and
amendments thereto, the items described in clauses (ii), (iii)
and (v) of the second preceding sentence but with respect to the
reports described in such clauses (iii) and (v) only such reports
for the most recent year, and all correspondence and other
information in the Company or any ERISA Affiliate's possession
relating to any anticipated increases in contribution rates with
respect to such plan, and (B) set forth in Schedule 5.18(c) is a
true and complete list of the amounts which each of the Company
and each ERISA Affiliate paid to such plan with respect to each
of the calendar years 1994 through 1995. The Company has
delivered to Parent with respect to each of the Multiemployer
Plans and with respect to each of the Prior Pension Plans which
is a "multiemployer plan" (the "Prior Multiemployer Plans")
correct and complete copies of all correspondence and other
information in the Company's or any ERISA Affiliate's possession
relating to the amount for which the Company or any ERISA
Affiliate is or could be liable under Title IV of ERISA for a
total or partial withdrawal as of any date or for any other
reason.
(d) With respect to each Pension Plan subject to
Section 302 of ERISA other than any Multiemployer Plan, (i) no
proceeding has been initiated to terminate such plan, (ii) there
has been no "reportable event" (as such term is defined in
Section 4043(b) of ERISA), (iii) no "accumulated funding
deficiency" (within the meaning of Section 412 of the Code),
whether or not waived, has occurred, (iv) no person has failed to
make a required installment or any other payment required under
Section 412 of the Code before the applicable due date,
(v) neither the Company nor any ERISA Affiliate has provided or
is required to provide security to such plan under Section
401(a)(29) of the Code due to a plan amendment that results in an
increase in current liability, and (vi) without any additional
contributions being made to such plan, the assets of such plan
are sufficient to satisfy all obligations of the plan if the plan
were to terminate (regardless of whether the plan can legally
terminate). Each Pension Plan which is intended to qualify under
Section 401(a) of the Code has been determined to be so qualified
by the IRS, and to the Company's knowledge no circumstance has
occurred or exists which could reasonably be expected to cause
such plan to cease being so qualified.
(e) There is no pending or, to the Company's
knowledge, threatened claim in respect of any of the ERISA
Benefit Plans other than claims for benefits in the ordinary
course of business. Except as set forth in Schedule 5.18(e),
each of the ERISA Benefit Plans other than any Multiemployer
Plans (i) has been administered in accordance with its terms and
(ii) complies in form, and has been administered in accordance,
with the requirements of ERISA and, where applicable, the Code,
except for such failures to comply or be so administered that
would not individually or in the aggregate have a Material
Adverse Effect on the Company. The Company and each ERISA
Affiliate have complied, except for such failures to comply that
would not individually or in the aggregate have a Material
Adverse Effect on the Company, with the health care continuation
requirements of Part 6 of Title I of ERISA. The Company has no
obligation under any ERISA Benefit Plans or otherwise to provide
health or other welfare benefits to any prior employees or any
other person, except as required by Part 6 of Title I of ERISA.
The consummation of the transaction contemplated by this
Agreement will not result in an increase in the amount of
compensation or benefits or accelerate the vesting or timing of
payment of any compensation or benefits payable to or in respect
of any participant under any ERISA Benefit Plan. The Company is
in compliance with the requirements of the Workers Adjustment and
Retraining Notification Act ("WARN") and has no material
liabilities pursuant to WARN.
(f) To the Company's knowledge, no proceeding has been
initiated to terminate any Multiemployer Plan, and there has been
no "reportable event" (as such term is defined in Section 4043(b)
of ERISA) with respect to any such plan. No Multiemployer Plan
is in reorganization as described in Section 4241 of ERISA or
insolvent as described in Section 4245 of ERISA. Assuming the
Company and each ERISA Affiliate incurred a complete withdrawal
under Section 4203 of ERISA from each Multiemployer Plan, the
withdrawal liability arising under Section 4201 of ERISA with
respect to each such plan as a result thereof would not exceed
the amount set forth in Schedule 5.18(f). Except as described in
Schedule 5.18(f), neither the Company nor any ERISA Affiliate has
failed to make a required or disputed contribution to any
Multiemployer Plan or any Prior Multiemployer Plan. Except as
described in Schedule 5.18(f), (i) neither the Company nor any
ERISA Affiliate has incurred any liability on account of a
"partial withdrawal" or a "complete withdrawal" (within the
meaning of Sections 4205 and 4203, respectively, of ERISA) from
any multiemployer plan (as such term is defined in Section 3(37)
of ERISA), no such liability has been asserted, there are no
events or circumstances which could result in any such partial or
complete withdrawal, and neither the Company nor any ERISA
Affiliate is bound by a contract or agreement or has any
obligation or liability described in Section 4204 of ERISA. To
the Company's knowledge, each Multiemployer Plan (i) complies in
form, and has been administered in accordance, with the
requirements of ERISA and, where applicable, the Code, and (ii)
is qualified under Section 401(a) of the Code as amended to the
date hereof.
(g) Except as to Multiemployer Plans (as to which this
representation and warranty is made only to the Company's
knowledge), neither the Company nor, to the Company's knowledge,
any other "disqualified person" (within the meaning of Section
4975 of the Code) or "party in interest" (within the meaning of
Section 3(14) of ERISA) has taken any action with respect to any
ERISA Benefit Plan which could reasonably be expected to subject
any such plan (or its related trust) or the Company or any
officer, director or employee of any of the foregoing to the
penalty or tax under Section 502(i) or Section 502(l) of ERISA or
Section 4975 of the Code.
(h) The Company has no potential liability, whether
direct or indirect, contingent or otherwise, under Section 4063,
4064, 4069, 4204 or 4212(c) of ERISA.
(i) Schedule 5.18(i) contains: (i) a list of all
employees or commission salespersons of the Company as of
December 31, 1995 whose then current annual compensation was in
excess of $35,000; (ii) the then current annual compensation of,
and a description of the fringe benefits (other than those
generally available to employees of the Company) provided by the
Company to any such employees or commission salespersons; (iii) a
list of all present or former employees or commission
salespersons of the Company paid in excess of $35,000 in calendar
year 1995 who have terminated or given notice of their intention
to terminate their relationship with the Company; (iv) a list of
any increase, effective after December 31, 1995, in the rate of
compensation of any employees or commission salespersons if such
increase exceeds 6% of the previous annual salary of such
employee or commission salesperson; and (v) a list of all
substantial changes in job assignments of, or arrangements with,
or promotions or appointments of, any employees or commission
salespersons whose compensation as of December 31, 1995 was in
excess of $35,000 per annum.
(j) For purposes of this Agreement, "ERISA Affiliate"
means (i) any corporation which at any time on or before the
Effective Time is or was a member of the same controlled group of
corporations (within the meaning of Section 414(b) of the Code)
as the Company; (ii) any partnership, trade or business (whether
or not incorporated) which at any time on or before the Effective
Time is or was under common control (within meaning of Section
414(c) of the Code) with the Company; and (iii) any entity which
at any time on or before the Effective Time is or was a member of
the same affiliated service group (within the meaning of Section
414(m) of the Code) as either the Company, any corporation
described in clause (i) of this paragraph or any partnership,
trade or business described in clause (ii) of this paragraph. An
"Associate" of any Person means (i) a corporation or organization
of which such Person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10 percent or more of any
class of equity securities, (ii) any trust or other estate in
which such Person has a substantial beneficial interest or as to
which such Person serves as trustee or in a similar fiduciary
capacity and (iii) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or
who is a director or officer of the Person or any of its parents
or Subsidiaries.
5.19. Employee Relations. (a) Except as set forth in
Schedule 5.19(a), the Company has complied in all material
respects with all applicable laws, rules and regulations which
relate to wages, hours, discrimination in employment and
collective bargaining and is not liable for any arrears of wages
or any taxes or penalties for failure to comply with any of the
foregoing. The Company believes that the Company's relations
with its employees are satisfactory. The Company is not a party
to any collective bargaining agreement and the Company is not a
party to, and, to the Company's knowledge, it is not affected by
or threatened with, any dispute or controversy with a union or
with respect to unionization or collective bargaining involving
its employees. To the Company's knowledge, the Company is not
materially affected by any dispute or controversy with a union or
with respect to unionization or collective bargaining involving
any supplier or customer of the Company. Schedule 5.19(a) sets
forth a description of any union organizing or election
activities involving any non-union employees of the Company which
have occurred since January 1, 1995 or, to the Company's
knowledge, are threatened as of the date hereof.
(b) Except as set forth in Schedule 5.19(b), to the
Company's knowledge, the Company is not involved in any
transaction with any employee, officer, director or Affiliate of
the Company (other than transactions with such Persons in their
capacities as employees, officers, directors or Affiliates of the
Company) pursuant to which the Company provides or receives any
benefit.
5.20. Contracts; Product Warranties. Except as set
forth in Schedule 5.20 or any other Schedule hereto, the Company
is not a party to or bound by:
(i) any contract for the purchase, sale or lease
of real property;
(ii) any contract for the purchase of raw mate-
rials which involved the payment of more than $50,000
in 1995, which the Company reasonably anticipates will
involve the payment of more than $50,000 in 1996 or
which extends beyond December 31, 1996;
(iii) any contract for the sale of goods or
services which involved the payment of more than
$50,000 in 1995, which the Company reasonably
anticipates will involve the payment of more than
$50,000 in 1996 or which extends beyond December 31,
1996;
(iv) any contract for the purchase, licensing or
development of Software to be used by the Company;
(v) any consignment, distributor, dealer, manu-
facturers representative, sales agency, advertising
representative or advertising or public relations
contract which involved the payment of more than
$50,000 in 1995, which the Company reasonably
anticipates will involve the payment of more than
$50,000 in 1996 or which extends beyond December 31,
1996;
(vi) any guarantee of the obligations or
liabilities of customers, suppliers, officers,
directors, employees, Affiliates of the Company or
others;
(vii) any agreement which provides for, or
relates to, the incurrence by the Company of debt for
borrowed money or the extension of credit (other than
in the ordinary course of business consistent with past
practice) by the Company to any other Person;
(viii) any agreement or understanding with a third
Person that restricts the Company from carrying on its
business anywhere in the world;
(ix) any material contract which provides for, or
relates to, any non-competition or confidentiality
arrangement with any Person, but not including any such
contract with any current or former officer or employee of
the Company for the benefit of the Company;
(x) any contract or group of related contracts for
capital expenditures other than in accordance with the Cash
Flow Projection;
(xi) any partnership, joint venture or other similar
arrangement or agreement involving a sharing of profits or
losses;
(xii) any contract which involves payments or receipts
by the Company of more than $50,000; or
(xiii) any contract for any purpose (whether or
not made in the ordinary course of the business or
otherwise not required to be listed or described in
Schedule 5.20) which is material to the Company or its
business.
The reserve for liabilities with respect to warranty
claims contained in the Balance Sheet fairly reflects in all
material respects the amount required in accordance with
generally accepted accounting principles to be shown thereon as
of the Balance Sheet Date.
5.21. Status of Contracts. Except as set forth in
Schedule 5.21 or in any other Schedule hereto, and assuming the
due authorization, execution and delivery thereof by each other
party thereto, each of the leases, contracts and other agreements
listed in Schedules 5.11, 5.14, 5.15, 5.18 and 5.20
(collectively, the "Company Agreements") constitutes a valid and
binding obligation of the Company, and to the Company's
knowledge, each other party thereto, and is in full force and
effect. The Company has fulfilled and performed in all material
respects its obligations under each of the Company Agreements in
accordance with the terms thereof, and the Company is not in, or
alleged to be in, breach or default in any material respect
under, nor is there or is there alleged to be any valid basis for
termination of, any of the Company Agreements and, to the
Company's knowledge, no other party to any of the Company Agree-
ments has breached or defaulted thereunder in any material
respect, and, to the Company's knowledge, no event has occurred
and no condition or state of facts exists which, with the passage
of time or the giving of notice or both, would constitute such a
default or breach by the Company or, to the Company's knowledge,
by any such other party. The Company is not currently
renegotiating any of the Company Agreements or paying liquidated
damages in lieu of performance thereunder. Complete and correct
copies of each of the written Company Agreements have heretofore
been made available to Parent.
5.22. No Violation, Litigation or Regulatory Action.
Except as set forth in Schedule 5.22:
(i) the Company's assets and their uses comply in all
respects with all applicable Requirements of Laws and Court
Orders, except for such failures to so comply which would
not have a Material Adverse Effect on the Company;
(ii) the Company has complied in all respects
with all Requirements of Laws and Court Orders which
are applicable to the Company's assets or its business,
except for such failures to so comply which would not
have a Material Adverse Effect on the Company;
(iii) there are no lawsuits, claims, suits,
proceedings or investigations pending or, to the
Company's knowledge, threatened against or affecting
the Company or its assets or business nor, to the
Company's knowledge, is there any valid basis for any
of the same, and there are no lawsuits, suits or
proceedings pending in which the Company is the
plaintiff or claimant; and
(iv) there is no action, suit or proceeding
pending or, to the Company's knowledge, threatened
which questions the legality or propriety of the trans-
actions contemplated by this Agreement.
5.23. Environmental Matters. Except as set forth in
Schedule 5.23:
(i) the Company's past and present operations of the
Company's business have complied and are in compliance in all
material respects with all applicable Environmental Laws;
(ii) the Company has obtained all environmental, health
and safety Governmental Permits necessary for the operation of
its business except where the failure so to obtain such
Governmental Permit would not have a Material Adverse Effect on
the Company, and all such Governmental Permits are in good
standing and the Company is in compliance in all material
respects with all terms and conditions of such permits;
(iii) neither the Company, nor any of the Company
Property that is currently leased (as lessee) by the Company
("Current Company Property"), nor, to the Company's knowledge,
any of the Company Property that was previously leased (as
lessee) or owned by the Company ("Previous Company Property"), is
subject to any on-going investigation by, order from or agreement
with any Person (including without limitation any prior owner or
operator of any Company Property) or any material liability
respecting (i) material noncompliance with any Environmental Law,
(ii) any Remedial Action or (iii) any claim of Losses and
Expenses arising from the Release or threatened Release of a
Contaminant into the environment that could reasonably be
expected to give rise to any material Loss on the part of the
Company;
(iv) The Company is not subject to any judicial or
administrative proceeding, order, judgment, decree or settlement
alleging or addressing a violation of or liability under any
Environmental Law;
(v) The Company has not:
(a) reported a Release of a hazardous substance
pursuant to Section 103(a) of CERCLA, or any state
equivalent;
(b) filed a notice pursuant to Section 103(c) of
CERCLA;
(c) filed notice pursuant to Section 3010 of
RCRA, indicating the generation of any hazardous waste,
as that term is defined under 40 CFR Part 261 or any
state equivalent; or
(d) filed any notice under any applicable
Environmental Law reporting a substantial violation of
any applicable Environmental Law;
(vi) there is not now on or in any Current Company
Property (or, to the Company's knowledge, any Previous Company
Property), nor to the Company's knowledge has there ever been, on
or in any Company Property:
(a) any treatment, recycling, storage or disposal
of any hazardous waste, as that term is defined under
40 CFR Part 261 or any state equivalent, that requires
or required a Governmental Permit pursuant to Section
3005 of RCRA; or
(b) any underground storage tank or surface
impoundment or landfill or waste pile.
(vii) there is not now on or in any Current Company
Property (or, to the Company's knowledge, any Previous Company
Property) any polychlorinated biphenyls (PCB) used in pigments,
hydraulic oils, electrical transformers or other equipment which
would give rise to any material liability under any Environmental
Law;
(viii) the Company has not received any notice or claim
to the effect that it is or may be liable to any Person as a
result of the Release or threatened Release of a Contaminant into
the environment on any Company Property or generated by the
Company;
(ix) no Current Company Property (or, to the
Company's knowledge, no Previous Company Property) has been
listed or, to the Company's knowledge, proposed for listing on
the National Priorities List pursuant to CERCLA, on the
Comprehensive Environmental Response, Compensation and Liability
Information System List or any state list of sites requiring
Remedial Action;
(x) the Company has not sent or arranged for the
transport of any Contaminant to any site listed on the National
Priorities List pursuant to CERCLA or that otherwise could
reasonably be expected to give rise to material liability on the
part of the Company for Remedial Action, Losses or Expenses;
(xi) no Environmental Encumbrance has attached to any
Current Company Property (or, to the Company's knowledge, any
Previous Company Property);
(xii) any asbestos-containing material which is on or
part of any Current Company Property (or, to the Company's
knowledge, any Previous Company Property) (excluding any raw
materials used in the manufacture of products or products
themselves) is in good repair according to the current standards
and practices governing such material, and its presence or
condition does not violate in any material respect any currently
applicable Environmental Law; and
(xiii) none of the products that the Company
manufactures, distributes or sells in connection with its
business, now or in the past, contains asbestos or asbestos-containing
material.
5.24. Insurance. Schedule 5.24 sets forth a list and
brief description (including nature of coverage, limits, deduc-
tibles, premiums and the loss experience for the most recent five
years with respect to each type of coverage) of all policies of
insurance maintained, owned or held by the Company during the
period from April 1, 1995 up to and including on the date hereof.
The Company shall keep or cause such insurance or comparable
insurance to be kept in full force and effect through the
Effective Date. The Company has complied in all material
respects with each of such insurance policies and has not failed
to give any notice or present any claim thereunder in a due and
timely manner. Except as set forth in Schedule 5.24, each of
such policies is in full force and effect and will not be
affected by or terminate or lapse by reason of the transactions
contemplated by this Agreement. The Company has delivered to
Parent correct and complete copies of the most recent inspection
reports, if any, received from insurance underwriters as to the
condition of the Company's assets.
5.25. Customers and Suppliers. Set forth in
Schedule 5.25 hereto is a list of names and addresses of the ten
largest customers and the ten largest suppliers (measured by
dollar volume of purchases or sales in each case) of the Company
during the nine months ended December 31, 1995 and the fiscal
year ended March 31, 1995. Except as set forth in Schedule 5.25,
there exists no actual or, to the Company's knowledge, threatened
termination, cancellation or limitation of, or any material
adverse modification or change in, the business relationship of
the Company with any customer or group of customers listed in
Schedule 5.25, or with any supplier or group of suppliers listed
in Schedule 5.25.
5.26. Budgets. Schedule 5.26 sets forth (a) as of
the date hereof, the budgets of capital, payroll and other
expenditures of the Company prepared in the ordinary course of
its business for the fiscal year ending December 31, 1996 and (b)
the total capital expenditures through February 24, 1996, if any,
for each capital expenditure project for which funds are proposed
to be expended during 1996.
5.27. No Finder. Neither the Company nor any Person
acting on behalf of the Company has paid or become obligated to
pay any fee or commission to any broker, finder or intermediary
for or on account of the transactions contemplated by this
Agreement, other than to Alex. Brown & Sons Incorporated.
Complete and correct copies of the engagement and indemnification
agreements entered into with Alex. Brown & Sons Incorporated have
been furnished to Parent.
5.28. Financial Projections. The Company has made
available to Parent certain financial projections with respect to
the Company's business which projections were prepared for
internal use only. The Company makes no representation or
warranty regarding the accuracy of such projections or as to
whether such projections will be achieved or otherwise, except
that the Company represents and warrants that such projections
were prepared in good faith and are based on assumptions believed
by them to be reasonable.
5.29. Proxy Statement. The proxy statement and
related materials (collectively, the "Proxy Statement") to be
prepared by the Company in accordance with Section 8.1 and used
in connection with the Company's meeting of stockholders
described in Section 8.1 at which the approval of the Merger and
the adoption of the Merger Agreement will be considered (the
"Stockholders' Meeting") will, when prepared by the Company and
distributed to the stockholders, comply in all material respects
with the provisions of the DGCL and will not, at the time of the
mailing of the Proxy Statement to the stockholders of the
Company, at the time of the Stockholders' Meeting or at the
Effective Time, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not
misleading; provided, that the Company makes no representation
with respect to information concerning Parent (including
information concerning Parent's intentions concerning the
operations of the business) or information as to the federal
income tax consequences of the Merger supplied by Parent to the
Company for inclusion in the Proxy Statement.
5.30. Opinion of Financial Advisor. The Company has
received the opinion of Alex. Brown & Sons Incorporated dated the
date of this Agreement, to the effect that, as of the date of
this Agreement, the consideration to be received in the Merger by
the Company's stockholders is fair to the Company's stockholders
from a financial point of view, and a complete and correct signed
copy of such opinion has been, or promptly upon receipt thereof
will be, delivered to Parent.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO
As an inducement to the Company to enter into this
Agreement and to consummate the transactions contemplated hereby,
Parent and Mergerco hereby jointly and severally represent and
warrant to the Company and agree as follows:
6.1. Organization and Capital Structure. Parent is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has full corporate
power and authority to own or lease and to operate and use its
properties and assets and to carry on its business as now
conducted. Mergerco is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware. Mergerco has not engaged in any business since it was
incorporated which is not in connection with this Agreement. All
of the outstanding shares of capital stock of Mergerco are
validly issued, fully paid and nonassessable and owned of record
and beneficially by Operations, free from all Encumbrances.
6.2. Authority. (a) Parent has full corporate power
and authority to execute, deliver and perform this Agreement and
all of the Parent Ancillary Agreements. The execution, delivery
and performance of this Agreement and the Parent Ancillary
Agreements by Parent have been duly authorized and approved by
Parent's Board of Directors and no other corporate proceedings on
the part of Parent are necessary to authorize this Agreement, the
Parent Ancillary Agreements and the transactions contemplated
hereby and thereby. This Agreement has been duly authorized,
executed and delivered by Parent and is the legal, valid and
binding obligation of Parent enforceable in accordance with its
terms and each of the Parent Ancillary Agreements has been duly
authorized by Parent and upon execution and delivery by Parent
will be a legal, valid and binding obligation of Parent
enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and by the effect
of general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
(b) Mergerco has full corporate power and authority to
execute, deliver and perform this Agreement. The execution,
delivery and performance of this Agreement by Mergerco have been
duly authorized and approved by Mergerco's Board of Directors,
Operations has approved the Merger and adopted this Agreement as
the sole stockholder of Mergerco, and, except for the filing
contemplated by Section 4.2, no other corporate proceedings on
the part of Mergerco are necessary to authorize this Agreement
and the transactions contemplated hereby. This Agreement has
been duly authorized, executed and delivered by Mergerco and is
the legal, valid and binding agreement of Mergerco enforceable in
accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the effect of general
principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(c) Neither the execution and delivery of this
Agreement or any of the Parent Ancillary Agreements or the
consummation of any of the transactions contemplated hereby or
thereby nor compliance with or fulfillment of the terms,
conditions and provisions hereof or thereof, in each case by
Parent or Mergerco will:
(i) conflict with, result in a breach of the
terms, conditions or provisions of, or constitute a
default, an event of default or an event creating
rights of acceleration, termination or cancellation or
a loss of rights under, or result in the creation or
imposition of any Encumbrance upon any of Parent's,
Operation's or Mergerco's assets under, (1) the
Certificate of Incorporation or By-laws of Parent,
Operations or Mergerco, (2) any material note,
instrument, agreement, mortgage, lease, license,
franchise, permit or other authorization, right,
restriction or obligation to which Parent, Operations
or Mergerco is a party or any of their respective
assets or business is subject or by which Parent,
Operations or Mergerco is bound, (3) any Court Order to
which Parent, Operations or Mergerco is a party or any
of their assets or business is subject or by which
Parent, Operations or Mergerco is bound or (4) any
Requirements of Laws affecting Parent, Operations or
Mergerco or any of their assets or business; or
(ii) require the approval, consent, authorization or
act of, or the making by Parent, Operations or Mergerco of
any declaration, filing or registration with, any Person,
except for the applicable requirements of the HSR Act and
the filing contemplated by Section 4.2 with the Secretary of
State of the State of Delaware.
6.3. No Finder. Neither Mergerco, Operations or
Parent nor any Person acting on their behalf has paid or become
obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions contemplated
by this Agreement other than to Goldman Sachs & Co., whose fees
and expenses, to the extent payable, shall be paid by Parent.
6.4. No Litigation or Regulatory Action. Except as
set forth in Schedule 6.4, there is no action, suit or proceeding
pending or, to Parent's knowledge, threatened against Parent
which questions the legality or propriety of the transactions
contemplated by this Agreement, or which would, if adversely
determined, impair Parent's ability to consummate the
transactions contemplated hereby.
6.5. Investment Representation. Each of Parent and
Operations is acquiring the Surviving Corporation Common Stock
for its own account for investment, and not with a view to, or
for sale in connection with, any distribution thereof, nor with
any present intention of distribution or selling the same.
Neither Parent nor Operations has any present or contemplated
agreement, undertaking, arrangement, obligation or commitment
providing for the disposition of the Surviving Corporation Common
Stock after the Closing.
ARTICLE VII
ACTION PRIOR TO THE EFFECTIVE TIME
The respective parties hereto covenant and agree to
take the following actions between the date hereof and the
Effective Time:
7.1. Investigation of the Company by Parent. The
Company shall afford to the officers, employees and authorized
representatives of Parent (including, without limitation, its
independent public accountants, attorneys, environmental
consultants and financial advisors) complete access during normal
business hours and upon reasonable advance notice to the offices,
properties, employees and business, Tax and financial records
(including, without limitation, computer files, retrieval
programs and similar documentation) of the Company to the extent
Parent shall deem necessary or desirable, and shall furnish to
Parent or its authorized representatives such additional
information concerning the operations, properties and business of
the Company as may be reasonably requested to enable Parent or
its representatives to verify the accuracy of the representations
and warranties contained in this Agreement, to verify that the
covenants of the Company contained in this Agreement have been
complied with and to determine whether the conditions set forth
in Article IX have been satisfied. Parent agrees that such
investigation shall be conducted in such a manner as not to
interfere unreasonably with the operations of the Company. With-
out limiting the foregoing, the Company shall permit Parent, or
its representatives, to conduct an environmental audit of any of
the Leased Real Property with respect to any environmental health
and safety issues deemed material by Parent. No investigation
made by Parent or its representatives hereunder shall affect the
representations and warranties of the Company hereunder.
7.2. Preserve Accuracy of Representations and
Warranties. Each of the parties hereto shall refrain from taking
any action which would render any representation or warranty con-
tained in Article V or VI and Section 7.9 of this Agreement
inaccurate as of the Effective Time. Each party shall promptly
notify the other parties of any action, suit or proceeding that
shall be instituted or threatened against such party to restrain,
prohibit or otherwise challenge the legality of any transaction
contemplated by this Agreement. Each party shall promptly notify
the other party of any lawsuit, claim, proceeding or
investigation that may be instituted or threatened against the
first party which would have been listed in Schedule 5.22 or
Schedule 6.4 if such lawsuit, claim, proceeding or investigation
had arisen prior to the date hereof.
7.3. Consents of Third Parties; Governmental
Approvals. (a) The Company will act diligently and reasonably to
secure, before the Effective Time, the consent, approval or
waiver, in form and substance reasonably satisfactory to Parent,
from any party to any Company Agreement required to satisfy the
conditions set forth in Section 9.5; provided that no party
hereto shall have any obligation to offer or pay any
consideration in order to obtain any such consents or approvals;
and provided, further, that the Company shall not make any
agreement or understanding affecting the Company or its assets or
business as a condition for obtaining any such consents or
waivers except with the prior written consent of Parent. During
the period prior to the Effective Time, Parent shall act
diligently and reasonably to cooperate with the Company to obtain
the consents, approvals and waivers contemplated by this Section
7.3(a).
(b) During the period prior to the Effective Time, the
parties hereto shall act diligently and reasonably, and shall
cooperate with each other, to secure any consents and approvals
of any Governmental Body required to be obtained by them in order
to permit the consummation of the transactions contemplated by
this Agreement or to otherwise satisfy the conditions set forth
in Section 9.4; provided that the Company shall not make any
agreement or understanding affecting the Company or its assets or
business as a condition for obtaining any such consents or
approvals except with the prior written consent of Parent.
7.4. Conduct of Business Prior to the Effective Time.
(a) Except as expressly contemplated by this Agreement, the
Company shall carry on its business in, and not enter into any
material transaction other than in accordance with, the ordinary
course consistent with past practice and, to the extent
consistent therewith, use its reasonable best efforts to preserve
intact its current business organization, keep available the
services of its current officers and key employees and preserve
its relationships with customers, suppliers and others having
business dealings with it (except, in each case, with the prior
written consent of Parent). Without limiting the generality of
the foregoing, and except as expressly contemplated by this
Agreement, the Company shall not, without the prior written
consent of Parent:
(i) (A) declare, set aside or pay any dividends on, or
make any other actual, constructive or deemed distributions
in respect of, any of its capital stock, or otherwise make
any payments to any stockholder in its capacity as such, (B)
split, combine or reclassify any of its capital stock or
issue, sell or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for
shares of its capital stock or (C) purchase, redeem or
otherwise acquire any shares of capital stock of the Company
or any other securities thereof;
(ii) issue, deliver, sell, pledge, dispose of or
otherwise encumber any shares of its capital stock or other
securities (including, without limitation, any rights,
warrants or options to acquire any shares of its capital
stock or other securities other than any issuance of shares
of Common Stock upon the exercise of Stock Options and
Warrants or the conversion of Company Preferred Stock in
accordance with the terms thereof as in effect on the date
hereof);
(iii) amend its Certificate of Incorporation or
By-laws;
(iv) acquire or agree to acquire by merging or consol-
idating with, or by purchasing a substantial portion of the
assets of or equity in, or by any other manner, any business
or any corporation, partnership, association or other busi-
ness organization or division thereof;
(v) other than incurring indebtedness to Parent under
the Parent Loan Agreement, incur or assume any indebtedness
for borrowed money, enter into (as lessee) any capitalized
lease obligation, guarantee any such indebtedness or
obligation, issue or sell any debt securities, guarantee any
debt securities of others or make any loans, advances or
capital contributions to, or investments in, any other
Person;
(vi) make or incur or agree to make or incur any new
capital expenditure or expenditures other than in accordance
with the Cash Flow Projection;
(vii) pay, discharge or satisfy any claims, liabili-
ties or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the pay-
ment, discharge or satisfaction thereof in the ordinary
course of business consistent with past practice;
(viii) alter through merger, liquidation, reorganiza-
tion, restructuring or in any other fashion its corporate
structure;
(ix) enter into or adopt, or amend, any bonus,
incentive, deferred compensation, insurance, medical, hospi-
tal, disability or severance plan, agreement or arrangement
or enter into or amend any employee benefit plan or
employment, consulting or management agreement, other than
any such amendment to an employee benefit plan that is made
to maintain the qualified status of such plan or its contin-
ued compliance with applicable law and annual renewals of
such plans that do not materially increase the benefits
accruing to plan participants or the total cost or liability
to the Company;
(x) make any change in accounting practices or
policies applied in the preparation of the financial
statements referred to in Section 5.4, except as required by
generally accepted accounting principles;
(xi) modify any Company Agreement, enter into any
agreement, understanding, obligation or commitment, or incur
any indebtedness or obligation, of the type that would have
been a Company Agreement if in existence on the date hereof,
or enter into any contract which requires any approval or
consent by any other Person to the transactions contemplated
by this Agreement;
(xii) pay or commit to pay any bonus to any officer or
employee of the Company, or make any other material change
in the compensation of its employees; provided, however,
that nothing contained herein shall preclude the Company
from adjusting salaries for its employees pursuant to the
Company's normal year-end salary review process in an
aggregate amount not to exceed 6% of the prior year's
aggregate compensation base as reflected on Form W-3 for the
employee group subject to such salary review;
(xiii) make any change in its business or operations or
make any expenditure which shall exceed the amount, as set
forth in Schedule 5.26, budgeted therefor;
(xiv) enter into any contract for the purchase of
real property or exercise any option to extend a lease
listed in Schedule 5.11;
(xv) sell, lease (as lessor), transfer or
otherwise dispose of, or mortgage or pledge, or impose
or suffer to be imposed any Encumbrance on, any of the
Company's assets, other than inventory and minor
amounts of personal property sold or otherwise disposed
of for fair value in the ordinary course of the
Company's business consistent with past practice and
other than Permitted Encumbrances;
(xvi) cancel any debts owed to or claims held by
the Company (including the settlement of any claims or
litigation) other than in the ordinary course of the
Company's business consistent with past practice;
(xvii) accelerate or delay collection of any
notes or accounts receivable in advance of or beyond
their regular due dates or the dates when the same
would have been collected in the ordinary course of its
business consistent with past practice;
(xviii) delay or accelerate payment of any
account payable or other liability beyond or in advance
of its due date or the date when such liability would
have been paid in the ordinary course of its business
consistent with past practice;
(xix) allow the levels of raw materials, sup-
plies, work-in-process or other materials included in
its inventory to vary in any material respect from the
levels customarily maintained in its business;
(xx) prepare or file any Tax Returns in a manner
inconsistent with past practice or, on such Tax Returns,
take any position, make any election, or adopt any method
that is inconsistent with the positions taken, elections
made or methods used in preparing and filing similar Tax
Returns in prior periods; or
(xxi) enter into any other transaction affecting the
business of the Company, other than in the ordinary course
of business consistent with past practice or as expressly
contemplated by this Agreement.
7.5. Notification by the Company of Certain Matters.
During the period prior to the Effective Time, the Company shall
promptly advise Parent in writing of (i) any change or event
having a Material Adverse Effect on the Company, (ii) any notice
or other communication from any third Person alleging that the
consent of such third Person is or may be required in connection
with the transactions contemplated by this Agreement, and (iii)
any material default under any Company Agreement or event which,
with notice or lapse of time or both, would become such a default
on or prior to the Effective Time and of which the Company has
knowledge.
7.6. Mutual Cooperation; Reasonable Best Efforts. The
parties hereto shall cooperate with each other, and shall use
their respective reasonable best efforts to cause as promptly as
practicable the fulfillment of the conditions to each other
party's obligations hereunder, including without limitation
Sections 9.3 and 10.2, and to obtain as promptly as practicable
all consents, authorizations, orders or approvals from each and
every third party, whether private or governmental, required in
connection with the transactions contemplated by this Agreement;
provided, however, that the foregoing shall not require Parent or
the Company to make any divestiture or consent to any divestiture
in order to obtain any consent, authorization or approval or
fulfill any condition.
7.7. No Solicitation. From and after the date of this
Agreement and prior to the Effective Time, except as provided
below, the Company agrees that (a) the Company shall not, and the
Company shall not authorize or permit its officers, directors,
Affiliates, employees or authorized agents and representatives
(including, without limitation, any investment banker, attorney
or accountant retained by it) to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or
implementation of any proposal or offer with respect to a merger,
acquisition, consolidation or similar transaction involving, or
any purchase of all or any significant portion of the assets or
any equity securities of, the Company (excluding discussions with
holders of currently outstanding Warrants and Stock Options
relating to the exercise or termination thereof) (any such
proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or engage in any negotiations concerning,
or provide any confidential information or data to, or have any
substantive discussions with, any Person relating to an
Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; and (b) it
will notify Parent immediately if any such inquiries or proposals
are received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated or
continued with, it, including the identity of the Person making
the inquiry or proposal and the terms of any proposal; provided,
however, that nothing contained in this Section 7.7 shall
prohibit the Board of Directors of the Company from furnishing
information to or entering into discussions or negotiations with,
any Person that indicates an interest in making a Superior
Proposal (as hereinafter defined) if, and only to the extent that
the Board of Directors determines in good faith that such action
is required for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by laws as advised by
the Company's outside counsel in writing. If any Person makes a
Superior Proposal, upon receipt thereof the Company shall
immediately provide written notice (a "Notice of a Superior
Proposal") to Parent of such Superior Proposal, including the
identity of the Person making such Superior Proposal and the
terms and structure thereof, and if, within five business days
following the delivery of the Notice of a Superior Proposal, the
Superior Proposal does not continue to be superior in terms of
the aggregate value to be received by the holders of Securities
in light of any improved transaction proposed by Parent prior to
the expiration of such five-day period, the Company shall cease
all discussions or negotiations with such Person. For purposes
of this Agreement, "Superior Proposal" means an unsolicited bona
fide Acquisition Proposal in writing that the Board of Directors
determines in its good faith judgment (based on the advice of a
nationally recognized investment banking firm) provides greater
aggregate value to the holders of Securities than the
transactions contemplated by this Agreement. Subject to Article
XII, nothing in this Section 7.7 shall (i) permit the Company to
terminate this Agreement, (ii) permit the Company to enter into
any agreement with respect to an Acquisition Proposal during the
term of this Agreement or (iii) affect any other obligation of
any party under this Agreement.
The Company shall enforce and not waive any
"standstill" agreement currently in effect with any Person.
7.8. Subsequent Financial Statements. Prior to the
Effective Date, the Company shall deliver to Parent, not later
than 10 business days after the end of each monthly period and in
the form customarily prepared by the Company, the unaudited
internal financial statements of the Company, including an income
statement, for the monthly period then ended and for the period
from the beginning of the current fiscal year to the end of such
monthly period.
7.9. Antitrust Law Compliance. Parent and the Company
shall use their respective reasonable best efforts to file, on or
before March 12, 1996, with the Federal Trade Commission and the
Antitrust Division of the Department of Justice the notifications
and other information required to be filed under the HSR Act, or
any rules and regulations promulgated thereunder, with respect to
the transactions contemplated hereby. Each of Parent and the
Company warrants that all such filings by it will be, as of the
date filed, true and accurate and in accordance with the
requirements of the HSR Act and any such rules and regulations.
Each of Parent and the Company agrees to make available, or cause
to be made available, to the other party such information as each
of them may reasonably request relative to its business, assets
and property as may be required of each of them to file any
additional information requested by such agencies under the HSR
Act and any such rules and regulations.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1. Preparation of Proxy Statement; Action by
Company. (a) The Company shall prepare the Proxy Statement as
promptly as practicable after the date hereof and shall submit
the proposed Proxy Statement to Parent and its counsel not less
than three days prior to submitting the Proxy Statement to its
stockholders. The Company shall use its reasonable best efforts
to mail the Proxy Statement to all holders of Securities on or
before March 18, 1996. If prior to the Effective Time either (i)
the Company determines that the Proxy Statement needs to be
amended or supplemented in order for the representation and
warranty of the Company in Section 5.29 to be correct or (ii)
Parent determines that any information included in the Proxy
Statement and supplied by Parent needs to be supplemented or
amended, the Company or Parent, as the case may be, shall notify
the other of such determination and shall deliver to the other
such amendment or supplement as such party believes is necessary.
The Company shall consider all such amendments proposed by
Parent, and shall cause all the amendments or supplements that
the Company reasonably believes are necessary to be mailed to its
stockholders as soon as practicable after such delivery.
(b) The Company shall duly call, give notice of,
convene and hold a meeting of its stockholders for the purpose of
approving the Merger and adopting this Agreement. The Company
will, through its Board of Directors, recommend to its
stockholders the adoption of this Agreement; provided, however,
that, without relieving the Company of its other obligations
under this Section 8.1(b), the Board of Directors shall not be
required to make, and shall be entitled to withdraw, such
recommendation if such Board of Directors concludes in good faith
on the basis of the written advice of its outside counsel that
the making of, or the failure to withdraw, such recommendation
would violate the fiduciary obligations of such Board of
Directors under applicable law. The Company shall use all
reasonable efforts to hold the Stockholders' Meeting on or before
April 17, 1996.
8.2. Restricted Parent Common Stock Pool.
Simultaneously with the Closing of the Merger, Parent will
establish a plan to encourage retention of key employees of the
Company. Under such plan, such key employees who continue to be
employed by the Company during the applicable vesting periods
would be eligible to receive (without payment of any
consideration by such employee) shares of Parent Common Stock
having an aggregate market value of $1 million as of the Closing.
Such shares would vest and be payable in two equal installments
on the first and second anniversary of the Closing of the Merger
and Parent will use its best commercial efforts to cause the
shares to be registered on Form S-8 under the Securities Act of
1933, as amended, on or before the first anniversary of the
Closing. The Company will be entitled to recommend, subject to
Parent's approval, the persons eligible to participate in the
plan and the amounts they may receive.
8.3. Indemnification and Insurance. (a) After the
Effective Time, the Surviving Corporation shall, to the fullest
extent provided under the Company's Certificate of Incorporation
or By-Laws as in effect on the date hereof, indemnify and hold
harmless, each present and former director, officer, employee,
fiduciary and agent of the Company (collectively, the
"Indemnified Parties") against any Losses or Expenses in
connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action or
omission occurring at or prior to the Effective Time for a period
of six years after the Effective Date. In the event of any such
claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) the Surviving
Corporation shall control the defense thereof, (ii) the
Indemnified Parties shall be entitled, at their expense, to
participate in any defense of such claims, (iii) the Indemnified
Parties will cooperate in the defense of any such matter, and
(iv) Parent shall have the right in its sole discretion to settle
any such claim, provided that release of all the liabilities of
the indemnified party with respect to the settled claim shall be
a condition to any settlement by Parent of such claim under this
Section 8.3(a); provided, however, that, in the event that any
claims for indemnification are asserted or made within such six-year
period, all rights to indemnification in respect of any such
claim or claims shall continue until the disposition thereof.
(b) For a period of three years after the Effective
Time, Parent shall cause the Surviving Corporation to use its
best efforts to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who are
currently covered by the Company's directors' and officers'
liability insurance policy (a copy of which has been heretofore
delivered to Parent) on terms comparable to those applicable to
the current directors and officers of the Company; provided,
however, that in no event shall the Surviving Corporation be
required to expend in excess of 150% of the annual premium
currently paid by the Company for such coverage, and provided,
further, that if the premium for such coverage exceeds such
amount, the Surviving Corporation shall purchase a policy with
the greatest coverage available for such 150% of the annual
premium. To the extent that the Surviving Corporation is
unwilling or unable to make the payments contemplated by this
Section 8.3(b), Parent agrees to make such payments.
(c) This Section shall survive the consummation of the
Merger at the Effective Time, is intended to benefit the Company,
the Surviving Corporation and the Indemnified Parties, and shall
be binding on all successors and assigns of the Surviving
Corporation and shall be enforceable by the Indemnified Parties.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO
The obligations of Parent and Mergerco under this
Agreement shall, at the option of Parent and Mergerco, be subject
to the satisfaction, on or prior to the Effective Time, of the
following conditions:
9.1. No Misrepresentation or Breach of Covenants and
Warranties. There shall have been no breach by the Company in
the performance of any of its covenants and agreements herein;
none of the representations and warranties of the Company
contained herein shall be untrue or incorrect in any respect and
at the Effective Time such representations and warranties shall
be true and correct in all material respects as though made at
the Effective Time except for changes therein specifically
permitted by this Agreement; and there shall have been delivered
to Parent and Mergerco a certificate or certificates to such
effect, dated the Effective Date and signed on behalf of the
Company by the President of the Company.
9.2. No Changes or Destruction of Property. Between
the date hereof and the Effective Time, there shall have been
(a) no Material Adverse Effect with respect to the Company; and
(b) no material damage to the Company's assets by fire, flood,
casualty, act of God or the public enemy or other cause,
regardless of insurance coverage for such damage; and there shall
have been delivered to Parent and Mergerco a certificate or
certificates to such effect, dated the Effective Date and signed
on behalf of the Company by the President of the Company.
9.3. No Restraint or Litigation. The waiting period
under the HSR Act shall have expired or been terminated, and no
action, suit, investigation or proceeding shall have been
instituted or threatened by any Governmental Body to restrain or
prohibit or otherwise challenge the legality or validity of the
transactions contemplated hereby. No Court Order shall be in
effect restraining or prohibiting such transactions.
9.4. Necessary Governmental Approvals. The parties
shall have received all approvals and actions of or by all
Governmental Bodies which are necessary to consummate the trans-
actions contemplated hereby, which are either specified in
Schedule 5.3 or otherwise required to be obtained prior to the
Closing by applicable Requirements of Laws or which are necessary
to prevent a Material Adverse Effect on the Company.
9.5. Necessary Consents. The Company shall have
received consents, in form and substance reasonably satisfactory
to Mergerco and Parent, to the transactions contemplated hereby
from the other parties to all contracts, leases, agreements and
permits to which the Company is a party or by which the Company
or any of its assets is affected and which are specified in
Schedule 9.5 or are otherwise necessary to prevent a Material
Adverse Effect on the Company.
9.6. Stockholders' Approval; Dissenters' Rights. (a)
This Agreement shall have been adopted by the affirmative vote of
(i) the holders of two-thirds of the issued and outstanding
Company Preferred Stock, voting as a single class, and (ii) the
holders of a majority of the issued and outstanding Company
Common Stock and Company Preferred Stock, voting together as a
single class, in each case entitled to vote thereon, as required
by the DGCL and the Certificate of Incorporation of the Company.
(b) Holders of not more than five percent (5%) of the
Company Common Stock (assuming the conversion of all of the
shares of Company Preferred Stock), shall have (i) delivered to
the Company, before the taking of the vote on the Merger, a
written demand for appraisal of their capital stock pursuant to
Section 262 of the DGCL and (ii) not voted in favor of or
consented to the Merger.
(c) The Company shall have given all notices required
to be given pursuant to subparagraph 6J of Article FOURTH of the
Company's Certificate of Incorporation and all notices required
to be given under the Warrants to the holders thereof in
connection with the Merger.
(d) There shall have been delivered to Parent and
Mergerco a certificate confirming compliance with the foregoing
requirements of this Section 9.6, dated the Effective Date and
signed on behalf of the Company by the President or any Vice
President of the Company.
9.7. Indebtedness. (a) As of the Effective Time, the
Company shall have no indebtedness for borrowed money (including
capitalized lease obligations) other than borrowings from Parent
under the Parent Loan Agreement, the Subordinated Note, and other
than existing capitalized lease obligations (i) listed on the
Schedules hereto or (ii) involving payment of less than $10,000
per year; and there shall have been delivered to Parent and
Mergerco a certificate to such effect, dated the Effective Date
and signed on behalf of the Company by the President or any Vice
President of the Company.
(b) NationsCredit Commercial Corporation (formerly
known as Greyrock Business Credit) shall have, in each case in
form and substance satisfactory to Parent, (i) issued and
delivered to Parent a pay off letter (stating among other things
that the Company owes it no indebtedness as of the Closing Date);
(ii) agreed to release all obligations of the Company, the
Surviving Corporation and Parent thereto upon payment of the
amount of indebtedness set forth in the pay off letter; and (iii)
agreed to execute and deliver all documents necessary to release
any security interest such party may have in any of the assets of
the Company and shall have returned any collateral held thereby
in respect of any indebtedness to the Company.
9.8. Warrants. (a) The Company shall have received
the written acknowledgment, in form reasonably acceptable to
Parent, of each holder of a Warrant that at the Effective Time
the Warrant shall be converted into the right described in
Section 3.1(i), and that after the Effective Time neither the
Company nor Parent has any obligations to such holders pursuant
to such Warrants, except for the obligations of Parent contained
in this Agreement with respect to payment of the Warrant
Consideration.
9.9. FIRPTA Certificate. The Company shall have
delivered to Parent, not more than 30 days prior to the Effective
Date, a statement in accordance with Treas. Reg. Subsection
1.1445-2(c)(3) and 1.897-2(h) certifying that the Company is not, and
has not been a "United States real property holding corporation"
for purposes of Sections 897 and 1445 of the Code and Parent
shall have no actual knowledge that such statement is false or
receive a notice that the statement is false pursuant to Treas.
Reg. Section 1.1445-4.
9.10. Fairness Opinion. The opinion of Alex. Brown &
Sons Incorporated that the consideration to be received in the
Merger by the Company's stockholders is fair to the Company's
stockholders from a financial point of view shall not have been
withdrawn or modified in any respect; and there shall have been
delivered to Parent and Mergerco a certificate to such effect,
dated the Effective Date and signed on behalf of the Company by
the President or any Vice President of the Company.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE COMPANY
The obligations of the Company under this Agreement
shall, at the option of the Company, be subject to the
satisfaction, on or prior to the Effective Time, of the following
conditions:
10.1. No Misrepresentation or Breach of Covenants and
Warranties. There shall have been no breach by Parent or
Mergerco in the performance of any of their respective covenants
and agreements herein; none of the representations and warranties
of Parent or Mergerco contained or referred to herein shall be
untrue or incorrect in any respect and at the Effective Time such
representations and warranties shall be true and correct in all
material respects as though made at the Effective Time except for
changes therein specifically permitted by this Agreement; and
there shall have been delivered to the Company a certificate or
certificates to such effect, dated the Effective Date and signed
on behalf of Parent by the President or any Vice President of
Parent and on behalf of Mergerco by the President or any Vice
President of Mergerco.
10.2. No Restraint or Litigation. The waiting period
under the HSR Act shall have expired or been terminated, and no
action, suit or proceeding shall have been instituted or
threatened by any Governmental Body to restrain, prohibit or
otherwise challenge the legality or validity of the transactions
contemplated hereby. No Court Order shall be in effect
restraining or prohibiting such transactions.
10.3. Necessary Governmental Approvals. The parties
shall have received all approvals and actions of or by all
Governmental Bodies necessary to consummate the transactions
contemplated hereby, which are required to be obtained prior to
the Closing by applicable Requirements of Laws.
ARTICLE XI
INDEMNIFICATION
11.1. Indemnity Fund. Immediately after the Effective
Time, Parent shall transfer and deposit the Indemnity Amount with
The First National Bank of Chicago, or another financial
institution selected by Parent and reasonably acceptable to the
Company, as Indemnity Fund and escrow agent (the "Indemnity
Agent"). Such deposit shall constitute the initial Indemnity
Fund and shall be governed by the terms set forth herein and in
the Indemnity Agreement, substantially in the form of Exhibit A
hereto, among Parent, the Stockholder Representatives and the
Indemnity Agent (the "Indemnity Agreement"). All funds or other
property received by the Indemnity Agent shall be retained by it
as part of the Indemnity Fund. The Indemnity Fund shall be
available to indemnify hold harmless and reimburse the Parent
Group Members from and against any Loss or Expense indemnifiable
under this Article XI and as provided in the Indemnity Agreement.
All fees and expenses of the Indemnity Agent shall be borne by
Parent; provided that any amounts relating to indemnification of
the Indemnity Agent shall be paid one-half by Parent and one-half
from the Indemnity Fund.
11.2. Indemnification from Indemnity Fund. (a)
Subject to Section 11.1, from and after the Effective Time, each
Parent Group Member shall be indemnified, held harmless and
reimbursed from the Indemnity Fund from and against any and all
Losses and Expenses incurred by such Parent Group Member in
connection with or arising from:
(i) any breach or failure to perform by the
Company of any of its agreements, covenants or
obligations in this Agreement to be performed by the
Company up to and including the Effective Time;
(ii) any breach of any warranty or the inaccuracy
of any representation of the Company contained in
Article V or Section 7.9 of this Agreement or any
certificate delivered by or on behalf of the Company
pursuant to Articles IV or IX of this Agreement; or
(iii) incurrence by the Company of any Acquisition
Expenses in excess of $900,000 in the aggregate.
provided, however, that the Indemnity Fund shall be used to
indemnify and hold harmless hereunder with respect to any
provision of Article V (other than Sections 5.1, 5.7, 5.17, 5.27
and 5.29, as to which this proviso shall not apply) only to the
extent that the aggregate amount (without duplication) of Losses
and Expenses borne by the Parent Group Members with respect
thereto exceeds $150,000. Any payment pursuant to this Section
11.2 shall be made in the form of a transfer of funds to the
applicable Parent Group Member(s) pursuant to the Indemnity
Agreement.
(b) The indemnification provided for in this Section
11.2 shall terminate one year after the Effective Date (and no
claims shall be made by any Parent Group Member under this
Section 11.2 thereafter), except that the indemnification by the
Indemnity Fund shall continue as to any Losses or Expenses in
connection with which Parent gives a Claim Notice in accordance
with the requirements of Section 11.4 on or prior to the date
such indemnification obligation would otherwise terminate in
accordance with this Section 11.2, as to which the
indemnification obligation of the Indemnity Fund shall continue
until the liability of the Indemnity Fund shall have been
determined pursuant to this Article XI, and all Parent Group
Members shall have been reimbursed out of the Indemnity Fund for
the full amount of such Loss and Expense for which the Indemnity
Fund is responsible in accordance with this Article XI.
(c) The sole source of recovery for any claim under
this Article XI shall be the Indemnity Fund. From and after the
Effective Time, the sole and exclusive remedy of any Parent Group
Member with respect to any and all claims (other than claims of,
or causes of action arising from, fraud) for money damages or
other monetary relief relating to or arising out of any breach or
failure to perform by the Company of any of its agreements,
covenants or obligations in this Agreement or any breach of any
warranty or the inaccuracy of any representation of the Company
contained in this Agreement or in any certificate delivered
pursuant to this Agreement shall be pursuant to the
indemnification provisions set forth in this Article XI.
11.3. Termination of Indemnity Fund. Upon termination
of the Indemnity Fund's indemnification obligations under this
Article XI and reimbursement of the Parent Group Members of all
Losses and Expenses payable thereto hereunder, the Indemnity Fund
shall terminate and shall be distributed to the Paying Agent (or
if the Paying Agency Agreement then shall have terminated, to
Parent) in accordance with the Indemnity Agreement after payment
of any amounts therefrom due to the Indemnity Agent and the
Stockholder Representatives in accordance with the Indemnity
Agreement. Amounts so distributed to the Paying Agent (or in
lieu thereof to Parent) shall be allocated among all holders of
Securities (excluding Series D Preferred Stock and Dissenting
Shares) based on each such holder's ownership of shares of
Company Common Stock (assuming the conversion of all shares of
Company Preferred Stock (other than Series D Preferred Stock) and
the exercise of the MCRC Warrant and all Stock Options). To the
extent so allocated to them, such amounts shall then be
distributed to the holders of Securities who shall have complied
with the requirements of Section 3.3 to receive their portion of
the Aggregate Merger Consideration.
11.4. Notice and Determination of Claims.
(a) If any Parent Group Member wishes to make a claim
for indemnification from the Indemnity Fund, such Parent Group
Member (individually or collectively the "Claiming Party") shall
so notify the Indemnity Agent in writing (the "Claim Notice") of
the facts giving rise to such claim for indemnification
hereunder. The Claim Notice shall be accompanied by a
certificate of the Claiming Party attesting to the Claiming
Party's contemporaneous delivery of a duplicate copy of the Claim
Notice to the Stockholder Representatives. Such Claim Notice
shall describe in reasonable detail (to the extent then known)
such Losses or Expenses and the method of computation of such
Losses or Expenses and contain a reference to the provisions of
this Agreement in respect of which such Loss or Expense shall
have occurred. If the Claiming Party is not Parent, the Claim
Notice must be accompanied by a certificate from Parent
confirming that the Claiming Party is a Parent Group Member.
Subject to Section 11.4(b), the Indemnity Agent shall, on the
twentieth (20th) business day after receipt of a Claim Notice
with respect to indemnification for a specified amount, pay or
deliver to Parent, for its account or the account of each Parent
Group Member named in the Claim Notice the Indemnity Fund or the
portion thereof specified in the Claim Notice. Payment shall be
delivered as specified in the Claim Notice.
(b) At the time of delivery of any Claim Notice to the
Indemnity Agent, a duplicate copy of such Claim Notice shall be
delivered to the Stockholder Representatives. Notwithstanding
the provisions of Section 11.4(a), the Indemnity Agent shall not
make any payment of the Indemnity Fund or any portion thereof
with respect to a Claim Notice if during the twenty (20) business
days after the Indemnity Agent's receipt of such Claim Notice the
Stockholder Representatives shall have delivered to the Indemnity
Agent a written objection to the claim made in the Claim Notice
(an "Objection"). At the time of delivery of any Objection to
the Indemnity Agent, a duplicate copy of such Objection shall be
delivered to the Claiming Party.
(c) Upon receipt of an Objection pursuant to this
Agreement, the Indemnity Agent shall (1) deliver to the Claiming
Party cash out of the Indemnity Fund, in an amount equal to that
portion, if any, of the Claim which is not disputed by the
Stockholder Representatives and (2) shall designate and segregate
out of the Indemnity Fund the amount subject to the Claim which
is disputed by the Stockholder Representatives. Thereafter, the
Indemnity Agent shall not dispose of that remaining portion of
the Indemnity Fund subject to the Claim until the Indemnity Agent
shall have received a certified copy of the final decision of the
arbitrators as contemplated by this Section 11.4(c) with respect
to the Claim or Claims set forth in the Claim Notice, or the
Indemnity Agent shall have received a copy of a written agreement
between the Claiming Party and the Stockholder Representatives
resolving such dispute and setting forth the amount, if any, of
the Claim which such Claiming Party is entitled to receive. The
Indemnity Agent will pay the Claiming Party out of the Indemnity
Fund the amount that the Claiming Party is entitled to receive as
set forth in such arbitration decision after the expiration of
ten (10) business days from the receipt of such decision or, in
the event that the amount to which the Claiming Party is entitled
is established pursuant to an agreement between the Claiming
Party and the Stockholder Representatives, as soon as possible
after the Indemnity Agent's receipt of such agreement. Copies of
any written agreement between the Stockholder Representatives and
the Claiming Party confirming that the Claiming Party is entitled
to a portion but not all of the amount claimed by the Claiming
Party may be filed by the Claiming Party with the Indemnity
Agent, with the effect set forth in the preceding sentence as to
the agreed amount, but no such agreement or filing thereof shall
operate as a waiver of the Claiming Party's rights as to the
disputed amount, including without limitation its right to
recover the same, and any decision of the arbitrators as
contemplated by this Section 11.4(c) that the Claiming Party is
entitled to receive the disputed amount may be filed with the
Indemnity Agent and shall, when filed with the Indemnity Agent,
be acted on as set forth above. If the Claiming Party and the
Stockholder Representatives do not resolve a dispute regarding a
Claim within thirty (30) days after the delivery of an Objection,
either the Claiming Party or the Stockholders Representatives
may, by written notice to the other, demand arbitration of the
matter; and in such event the matter shall be settled by
arbitration conducted by three arbitrators. Within fifteen (15)
days after such written notice is sent, the Claiming Party and
the Stockholders Representatives shall each select one
arbitrator, and the two arbitrators so selected shall select a
third arbitrator. The decision of the arbitrators as to the
validity and amount of any Claim shall be binding, and conclusive
upon the parties, and the Indemnity Agent shall be entitled to
act in accordance with such decision and make or withhold
payments out of the Indemnity Fund in accordance therewith.
Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration
shall be held in Chicago, Illinois under the commercial rules
then in effect of the American Arbitration Association. The
non-prevailing party to an arbitration shall pay its own expenses,
the fees of each arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including
without limitation, attorneys' fees and costs, reasonably
incurred by the other party to the arbitration. In the case of
the Stockholder Representatives, any such payment shall be made
from the Indemnity Fund.
(d) The foregoing provisions in this Section 11.4 may
be supplemented or amended pursuant to the terms of the
definitive Indemnity Agreement.
11.5. Stockholder Representatives. (a) The
Stockholder Representatives shall act as agents of the holders of
Securities (other than Dissenting Shares and Series D Preferred
Stock) and are entitled to give and receive notices and
communications, to authorize delivery to the Parent Group Members
of the funds or other property from the Indemnity Fund in
satisfaction of claims by the Parent Group Members, to object to
such deliveries in accordance herewith and in accordance with the
Indemnity Agreement, to agree to, negotiate, enter into
settlements and compromises of, and comply with orders of courts
and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the
Stockholder Representatives for the accomplishment of the
foregoing. No bond shall be required of the Stockholder
Representatives, and the Stockholder Representatives shall
receive no compensation for their services; however, the
Stockholder Representatives shall be reimbursed for reasonable
expenses incurred in connection with their duties out of the
Indemnity Fund to the extent provided in the Indemnity Agreement.
(b) The Stockholder Representatives shall not be
liable to the holders of Securities for any act done or omitted
hereunder or under the Indemnity Agreement as Stockholder
Representatives not constituting fraud or gross negligence.
(c) The Stockholder Representatives shall treat
confidentially and not disclose any nonpublic information from or
about the Company to anyone (except on a need to know basis to
individuals who agree to treat such information confidentially).
11.6. Actions of the Stockholder Representatives. A
decision, act, consent or instruction of the Stockholder
Representatives shall constitute a decision of all holders of
Securities for whom any portion of the Indemnity Amount otherwise
issuable to them is deposited in the Indemnity Fund and shall be
final, binding and conclusive upon each such holder of
Securities, and the Indemnity Agent and Parent may rely upon any
decision, act, consent or instruction of the Stockholder
Representatives as being the decision, act, consent or
instruction of each and every such holder of Securities. The
Indemnity Agent and each Parent Group Member are hereby relieved
from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Stockholder Representatives. For purposes of this Agreement and
the Indemnity Agreement any action by a majority of the then
Stockholder Representatives shall be deemed to be the action of
and binding upon all of the Stockholder Representatives.
11.7. Third Person Claims. In the event Parent becomes
aware of a third-party claim which Parent believes will result in
a demand against the Indemnity Fund, Parent shall notify the
Stockholder Representatives of such claim, and the Stockholder
Representatives shall be entitled, at their expense, to
participate in any defense of such claim. Parent shall have the
right in its sole discretion to settle any such claim; provided,
however, that Parent may not effect the settlement of any such
claims without the consent of the Stockholder Representatives,
which consent shall not be unreasonably withheld. In the event
that the Stockholder Representatives have consented to any such
settlement, the Stockholder Representatives shall have no power
or authority to object under Section 11.4 or any other provision
of this Article XI to the amount paid in settlement of such
claim.
ARTICLE XII
TERMINATION
12.1. Termination Rights. Anything contained in this
Agreement to the contrary notwithstanding, this Agreement may be
terminated at any time prior to the Effective Time:
(a) by mutual written consent of Parent and the
Company;
(b) by the Company if:
(i) there is a Superior Proposal and the Board of
Directors of the Company determines in good faith as advised
in writing by the Company's outside counsel that the failure
to approve such Superior Proposal would be inconsistent with
the fiduciary duties to stockholders of the Board of
Directors of the Company; provided, however, that the right
to terminate this Agreement pursuant to this clause shall
not be available (A) if the Company has breached any of its
obligations under Section 7.7, or (B) the Superior Proposal
shall not provide a greater aggregate value to the holders
of Securities than the aggregate value to such holders
pursuant to the Merger (as increased pursuant to any revised
proposal of Parent pursuant to Section 7.7); or
(ii) there has been a material breach by Parent or
Mergerco of any of their respective agreements,
representations or warranties contained herein and such
breach has not been cured within seven days following
receipt by Parent or Mergerco of notice from the Company
requesting that such breach be cured;
(c) by Parent if:
(i) the Board of Directors of the Company shall have
failed to recommend, or withdrawn, modified or amended in
any material respect its approval or recommendation of, the
Merger Agreement and the Merger or shall have resolved to do
any of the foregoing; or
(ii) there has been a material breach by the Company of
any of its agreements, representations or warranties
contained herein and such breach has not been cured within
seven days following the Company's receipt of notice from
Parent requesting that such breach be cured;
(d) by either Parent or the Company if:
(i) the Effective Time shall not have occurred on
or before June 30, 1996 (or such later date as may be
mutually agreed to by all of the parties hereto); or
(ii) at the Stockholders' Meeting, or upon any
adjournment or postponement thereof, the stockholders of the
Company shall have failed to give any approval of this
Agreement or the Merger required by applicable law.
12.2. Notice of Termination. Any party desiring to
terminate this Agreement pursuant to Section 12.1 shall give
notice of such termination to each of the other parties to this
Agreement.
12.3. Effect of Termination. In the event that this
Agreement shall be terminated pursuant to this Article XII, all
further obligations of the parties under this Agreement (other
than under Sections 13.2 and 13.9) shall be terminated without
further liability of any party to the others; provided, however,
that nothing herein shall relieve any party from liability for
its willful breach of this Agreement.
ARTICLE XIII
GENERAL PROVISIONS
13.1. Survival of Obligations. All representations,
warranties, covenants and obligations contained in this Agreement
shall survive the consummation of the transactions contemplated
by this Agreement; provided, however, that, except as otherwise
provided in Article XI, the representations and warranties
contained in Articles V and VI and in Section 7.9 shall terminate
on the first anniversary of the Effective Date. Except as
otherwise provided herein, no claim shall be made for the breach
of any representation or warranty contained in Articles V or VI
or Section 7.9 or under any certificate delivered with respect
thereto under this Agreement after the date on which such
representations and warranties terminate as set forth in this
Section.
13.2. Confidential Nature of Information; Non-Solicitation.
(a) Each party agrees that it will treat in confidence all
documents, materials and other information which it shall
have obtained regarding the other parties during the
course of the negotiations leading to the consummation of the
transactions contemplated hereby (whether obtained before or
after the date of this Agreement), the investigation provided for
herein and the preparation of this Agreement and other related
documents, and, in the event the transactions contemplated hereby
shall not be consummated, each party will return to the other
parties all copies of nonpublic documents and materials which
have been furnished in connection therewith. Such documents,
materials and information shall not be communicated to any third
Person (other than, in the case of Parent and Mergerco, to their
counsel, accountants, financial advisors or lenders, and in the
case of the Company, to its counsel, accountants or financial
advisors). No other party shall use any confidential information
in any manner whatsoever except solely for the purpose of
evaluating the proposed Merger; provided, however, that after the
Effective Time, Parent and the Surviving Corporation may use or
disclose any confidential information included in the assets of
the Company as of the Effective Time or otherwise reasonably
related to the assets or business of the Company. The obligation
of each party to treat such documents, materials and other
information in confidence shall not apply to any information
which (i) is or becomes available to such party without
restriction on disclosure from a source other than such party and
without breach of any known obligation of confidentiality, (ii)
is or becomes available to the public other than as a result of
disclosure by such party or its agents, (iii) is required to be
disclosed under applicable law or judicial process, but only to
the extent it must be disclosed, or (iv) such party reasonably
deems necessary to disclose to obtain any of the consents or
approvals contemplated hereby.
(b) Each party agrees that for a period of two years
from the date of this Agreement it will not solicit any employee
of the other parties to become an employee of or consultant to
such party or any of its Affiliates. The foregoing prohibition
on solicitation shall not apply to solicitation through general
advertisements or "head hunting" calls that are not exclusively
targeted at such employees. The provisions of this Section
13.2(b) shall cease to be effective at the Effective Time.
13.3. No Public Announcement. No party hereto shall,
without the approval of all of the other parties, make any press
release or other public announcement concerning the transactions
contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law or the rules of any
stock exchange, in which case such party shall so advise the
other parties and all parties shall use their reasonable best
efforts to cause a mutually agreeable release or announcement to
be issued; provided that the foregoing shall not preclude
communications or disclosures necessary to implement the
provisions of this Agreement or to comply with accounting and
Securities and Exchange Commission disclosure obligations.
13.4. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be
deemed given or delivered when delivered personally or four days
after being mailed by registered or certified mail, return
receipt requested, or one day after being sent by private
overnight prepaid courier addressed as follows:
(a) if to Parent, Mergerco or the Surviving
Corporation, to it:
c/o Tellabs International, Inc.
1000 Remington Boulevard
Bolingbrook, IL 60440
Attention: President
and to:
Tellabs Operations, Inc.
4951 Indiana Avenue
Lisle, IL 60532
Attention: General Counsel
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Attention: Thomas A. Cole
Imad I. Qasim
(b) if to the Company (prior to the Effective Time),
to:
Steinbrecher Corporation
30 North Avenue
Burlington, MA 01803
Attention: R. Douglas Shute
and to:
Steinbrecher Corporation
30 North Avenue
Burlington, MA 01803
Attention: Mitchell Mackoff
with a copy to:
Foley, Hoag & Eliot
One Post Office Square
Boston, MA 02109
Attention: David R. Pierson
or to such other address as such party may indicate by a notice
delivered to the other parties hereto.
13.5. Successors and Assigns. (a) The rights of each
party under this Agreement shall not be assignable by such party
prior to the Effective Time without the written consent of each
of the other parties, except that the rights of Parent hereunder
may be assigned prior to the Effective Time, without the consent
of any other party hereto, to any corporation all of the
outstanding capital stock of which is owned by Parent; provided
that (i) the assignee shall assume in writing all of Parent's
obligations hereunder, (ii) Parent shall not be released from any
of its obligations hereunder by reason of such assignment and
(iii) the obligations of the Company under this Agreement shall
be subject to the delivery by such assignee, on or prior to the
Effective Time, of a certificate signed on its behalf containing
representations and warranties similar to those made by Parent in
Article VI and an opinion of internal counsel to Parent, with
respect to the assignee which is similar to the opinion with
respect to Parent to be delivered pursuant to Section 4.3.
Following the Effective Time, any party may assign any of its
rights hereunder, but no such assignment shall relieve it of its
obligations hereunder.
(b) This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their successors and per-
mitted assigns. The successors and permitted assigns hereunder
shall include without limitation, in the case of Parent, any
permitted assignee as well as the successors in interest to such
permitted assignee (whether by merger, liquidation (including
successive mergers or liquidations) or otherwise). Nothing in
this Agreement, expressed or implied, is intended or shall be
construed to confer upon any Person other than the parties and
successors and assigns permitted by this Section 13.5 any right,
remedy or claim under or by reason of this Agreement.
13.6. Entire Agreement; Amendments. This Agreement,
the Indemnity Agreement and the Exhibits and Schedules referred
to herein and the documents delivered pursuant hereto contain the
entire understanding of the parties hereto with regard to the
subject matter contained herein or therein, and supersede all
prior agreements, understandings or letters of intent between or
among any of the parties hereto, including without limitation the
Confidentiality Agreement. This Agreement shall not be amended,
modified or supplemented except by a written instrument signed by
an authorized representative of each of the parties hereto.
13.7. Interpretation. Titles to articles and headings
to sections herein are inserted for convenience of reference only
and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement. The Schedules and Exhibits
referred to herein shall be construed with and as an integral
part of this Agreement to the same extent as if they were set
forth verbatim herein. Except as expressly stated to the
contrary herein, all dollar amounts in this Agreement refer to
lawful money of the United States of America.
13.8. Waivers. Any term or provision of this Agree-
ment may be waived, or the time for its performance may be
extended, by the party or parties entitled to the benefit
thereof. Any such waiver shall be validly and sufficiently
authorized for the purposes of this Agreement if, as to any
party, it is authorized in writing by an authorized
representative of such party. The failure of any party hereto to
enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to
affect the validity of this Agreement or any part hereof or the
right of any party thereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be
held to constitute a waiver of any other or subsequent breach.
13.9. Fees and Expenses. (a) Except as otherwise
provided in this Section 13.9, each of the parties hereto shall
bear its own costs and expenses (including, without limitation,
fees and disbursements of its counsel, accountants and other
financial, legal, accounting or other advisors), incurred by it
or its Affiliates in connection with the preparation,
negotiation, execution, delivery and performance of this
Agreement and each of the documents and instruments executed in
connection with or contemplated by this Agreement and the
consummation of the transactions contemplated hereby and thereby
(collectively, "Acquisition Expenses"); provided, however, that,
except for up to $900,000 of Acquisition Expenses of the Company
relating to the transactions contemplated by this Agreement,
which $900,000 of Acquisition Expenses are attributable to and
shall be borne by the Company, the Acquisition Expenses of the
Company shall be borne entirely by the Indemnity Fund.
(b) If (A) the Company terminates this Agreement
pursuant to Section 12.1(b)(i) or Parent terminates this
Agreement pursuant to Section 12.1(c)(i) or (B) within 180 days
after either the Company or Parent terminates this Agreement
pursuant to Section 12.1(d)(ii), either an Acquisition Proposal
is consummated (other than the issuance of equity securities (i)
to generate capital for the Company's operations or (ii) not in
excess in the aggregate of 10% of the issued and outstanding
shares of Company Common Stock on the date hereof (assuming all
shares of Company Preferred Stock are converted)) or the Company
enters into an agreement with respect to an Acquisition Proposal
(other than the issuance of equity securities (i) to generate
capital for the Company's operations or (ii) not in excess in the
aggregate of 10% of the issued and outstanding shares of Company
Common Stock on the date hereof (assuming all shares of Company
Preferred Stock are converted)), then the Company shall pay
Parent $2,500,000. In the case of clause (A) above, such payment
shall occur promptly after such termination, but in no event
later than two business days after such termination, and, in the
case of clause (B) above, such payment shall occur simultaneously
with the earlier to occur of the consummation of such Acquisition
Proposal or the entry into any such agreement relating to an
Acquisition Proposal. If the Company fails to pay such amounts
when due in accordance with the immediately preceding sentence,
which failure is finally determined by a court of competent
jurisdiction, Parent shall be entitled to the payment from the
Company, in addition to such amount, of any legal fees and
expenses incurred in procuring such judicial determination. Any
termination pursuant to Section 12.1(b)(i) or Section 12.1(c)(i)
shall constitute an "Event of Default" pursuant to the Parent
Loan Agreement once 30 days shall have elapsed after such
termination.
(c) If this Agreement is terminated (i) pursuant to
Section 12.1(b)(i) or Section 12.1(c)(i), or (ii) pursuant to
Section 12.1(d)(ii) and, within 180 days of such termination
pursuant to Section 12.1(d)(ii) an Acquisition Proposal is
consummated (other than the issuance of equity securities (i) to
generate capital for the Company's operations or (ii) not in
excess in the aggregate of 10% of the issued and outstanding
shares of Company Common Stock on the date hereof (assuming all
shares of Company Preferred Stock are converted)) or the Company
enters into an agreement with respect to an Acquisition Proposal
(other than the issuance of equity securities (i) to generate
capital for the Company's operations or (ii) not in excess in the
aggregate of 10% of the issued and outstanding shares of Company
Common Stock on the date hereof (assuming all shares of Company
Preferred Stock are converted)), then the Company shall reimburse
Parent and Mergerco (not later than two business days after
submission of statements therefor) for all of their Acquisition
Expenses; provided, however, that the amount to be paid to Parent
and Mergerco pursuant to this Section 13.9(c) shall not exceed
$900,000.
13.10. Partial Invalidity. Wherever possible, each
provision hereof shall be interpreted in such manner as to be
effective and valid under applicable law, but in case any one or
more of the provisions contained herein shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such
provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability
without invalidating the remainder of such invalid, illegal or
unenforceable provision or provisions or any other provisions
hereof, unless such a construction would be unreasonable.
13.11. Execution in Counterparts. This Agreement may
be executed in two or more counterparts, each of which shall be
considered an original instrument, but all of which shall be
considered one and the same agreement, and shall become binding
when one or more counterparts have been signed by each of the
parties hereto and delivered to each of the other parties.
13.12. Further Assurances. From time to time after
the Effective Time, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the
name and on behalf of Mergerco, the Company or otherwise, such
deeds and other instruments and to take or cause to be taken such
further or other action as shall be necessary or desirable in
order to vest or perfect in or to confirm, of record or
otherwise, in the Surviving Corporation title to, and possession
of, all of the property, rights, privileges, powers, immunities
and franchises of Mergerco and the Company and otherwise carry
out the purposes of this Agreement.
13.13. Governing Law. This Agreement shall be
governed by and construed in accordance with the internal laws
(as opposed to the conflicts of law provisions) of the State of
Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
TELLABS, INC.
By s\ Michael J. Birck
Name: Michael J. Birck
(Corporate Seal) Title: President
ATTEST:
s\ Peter A. Guglielmi
Name: Peter A. Guglielmi
Title: Exec. Vice President,
Treasurer, and Chief
Financial Officer
TIGER MERGER CO.
By s\ Michael J. Birck
Name: Michael J. Birck
Title: President
(Corporate Seal)
ATTEST:
s\ Peter A. Guglielmi
Name: Peter A. Giglielmi
Title: Vice President and
Treasurer
STEINBRECHER CORPORATION
By s\ R. Douglas Shute
Name: R. Douglas Shute
Title: President
(Corporate Seal)
ATTEST
s\Mitchell Mackoff
Name: Mitchell Mackoff
Title: Chief Financial Officer
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of March
__, 1996, by and among Tellabs, Inc., a Delaware corporation
("Parent"), Tiger Merger Co., a Delaware corporation and an
indirect subsidiary of Parent ("Mergerco"), and the stockholder
of Steinbrecher Corporation, a Delaware corporation (the
"Company"), named on the signature page hereto (the
"Stockholder").
WHEREAS, Parent, Mergerco and the Company are entering
into an Agreement of Merger of even date herewith (as the same
may be amended or supplemented, the "Merger Agreement") providing
for the merger (the "Merger") of Mergerco with and into the
Company upon the terms and subject to the conditions contained in
the Merger Agreement;
WHEREAS, the Stockholder owns the shares of capital
stock of the Company set forth on Annex I hereto (the "Subject
Shares"); and
WHEREAS, as a condition to their willingness to enter
into the Merger Agreement, Parent and Mergerco have requested
that the Stockholder enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements contained herein and other good and
valuable consideration, the adequacy of which is hereby
acknowledged, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Representations and Warranties of the Stockholder.
The Stockholder hereby represents and warrants to Parent and
Mergerco as follows:
(a) Authority. The Stockholder has all requisite
power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the
Stockholder and constitutes a valid and binding obligation of the
Stockholder enforceable in accordance with its terms. The
execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and
compliance with the terms hereof will not, conflict with, or
result in any violation of, or default (with or without notice or
lapse of time or both) under any provision of, any trust
agreement, loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit,
concession, franchise, license, judgment, order, notice, decree,
statute, law, ordinance, rule or regulation applicable to the
Stockholder or to the Stockholder's property or assets. No
consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality,
domestic, foreign or supranational, is required by or with
respect to the Stockholder in connection with the execution and
delivery of this Agreement or the consummation by the Stockholder
of the transactions contemplated hereby.
(b) Title. The Stockholder has good and marketable
title to the Subject Shares, free and clear of any claims, liens,
encumbrances and security interests whatsoever. The Stockholder
owns no shares of capital stock, or rights, options or warrants
to purchase shares of capital stock, of the Company except as set
forth on Annex I.
(c) No Other Rights. Except for this Agreement and
except as set forth on Schedule 5.1(f) of the Merger Agreement,
there are no voting agreements, proxies or other agreements or
instruments relating to the voting of the shares of capital stock
of the Company owned by such Stockholder.
2. Representations and Warranties of Parent and
Mergerco. Parent and Mergerco hereby represent and warrant to the
Stockholder as follows:
(a) Authority. Each of Parent and Mergerco has all
requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by Parent and
Mergerco, and the consummation of the transactions contemplated
hereby, have been duly authorized by all necessary corporate
action on the part of Parent and Mergerco. This Agreement has
been duly executed and delivered by Parent and Mergerco and
constitutes a valid and binding obligation of Parent and Mergerco
enforceable in accordance with its terms.
(b) No Conflicts. The execution and delivery of this
Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the terms hereof will
not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time or both) under any
provision of, any trust agreement, loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license, judgment,
order, notice, decree, statute, law, ordinance, rule or
regulation applicable to Parent or Mergerco or their respective
properties or assets. No consent, approval, order or
authorization of, or registration, declaration or filing with,
any court, administrative agency or commission or other
governmental authority or instrumentality, domestic, foreign or
supranational, is required by or with respect to Parent or
Mergerco in connection with the execution and delivery of this
Agreement or the consummation by Parent and Mergerco of the
transactions contemplated hereby.
3. Covenants of the Stockholder. Up to the date of
termination of the Merger Agreement, the Stockholder agrees as
follows:
(a) Vote in Favor of Merger Agreement. At any meeting
of stockholders of the Company called to vote upon the Merger and
the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval
with respect to the Merger and the Merger Agreement is sought,
the Stockholder shall vote (or cause to be voted) the Subject
Shares in favor of the Merger, the adoption by the Company of the
Merger Agreement and the approval of the terms thereof and each
of the other transactions contemplated by the Merger Agreement.
(b) Vote Against Certain Proposals. At any meeting of
stockholders of the Company or at any adjournment thereof or in
any other circumstances upon which the Stockholder's vote,
consent or other approval is sought, the Stockholder shall vote
(or cause to be voted) the Subject Shares against (i) any merger
agreement or merger (other than the Merger Agreement and the
Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or
winding up of or by the Company or any Acquisition Proposal (as
defined in the Merger Agreement) or (ii) any amendment of the
Company's certificate of incorporation or by-laws or other
proposal or transaction involving the Company or any of its
subsidiaries, which amendment or other proposal or transaction
would in any manner impede, frustrate, prevent or nullify the
Merger Agreement, the Merger or any of the other transactions
contemplated by the Merger Agreement.
(c) No Sale, Transfer or Other Agreements. The
Stockholder agrees not to (i) other than by operation of law,
sell, transfer, pledge, assign or otherwise dispose of, or enter
into any contract, option or other arrangement (including any
profit sharing arrangement) with respect to the sale, transfer,
pledge, assignment or other disposition of, the Subject Shares to
any person other than Mergerco or Mergerco's designee or (ii)
enter into any voting arrangement, whether by proxy, voting
agreement or otherwise, in connection, directly or indirectly,
with any Acquisition Proposal.
(d) No Solicitation. The Stockholder shall not, nor
shall it permit any investment banker, attorney or other adviser
or representative of the Stockholder to, (i) directly or
indirectly solicit, initiate or encourage the submission of, any
Acquisition Proposal or (ii) directly or indirectly participate
in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal.
(e) Irrevocable Proxy. In the event that the
Stockholder shall breach its covenants set forth in this Section
3, the Stockholder (without any further action on the
Stockholder's part) shall be deemed to have hereby irrevocably
appointed Parent as the attorney and proxy of the Stockholder
pursuant to the provisions of Section 212 of the Delaware General
Corporation Law, with full power of substitution, to vote
(including by execution of any written consent or otherwise) all
of the Subject Shares that the Stockholder is entitled to vote at
any meeting of stockholders of the Company (whether annual or
special and whether or not an adjourned or postponed meeting) or
in connection with any consent in lieu of any such meeting, as
set forth in Sections 3(a) and 3(b); provided, that in any such
vote or other action pursuant to such proxy, Parent shall not
have the right (and such proxy shall not confer the right) to
vote to reduce the consideration to be paid in exchange for the
Subject Shares in the Merger or to otherwise modify or amend the
Merger Agreement to reduce the rights or benefits of the Company
or any stockholders of the Company (including the Stockholder)
under the Merger Agreement or to reduce the obligations of Parent
and/or Mergerco thereunder;
THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND
COUPLED WITH AN INTEREST. The Stockholder hereby revokes,
effective upon the execution and delivery of the Merger Agreement
by the parties thereto, all other proxies and powers of attorney
with respect to the Subject Shares that the Stockholder may have
heretofore appointed or granted, and no subsequent proxy or power
of attorney (except in furtherance of the Stockholder's
obligations under this Section 3) shall be given or written
consent executed (and if given or executed, shall not be
effective) by the Stockholder with respect to the matters
described in Sections 3(a) and 3(b) so long as this Agreement
remains in effect.
(f) Other Voting Agreements. The Stockholder agrees
that, during the term of this Agreement, such Stockholder will
not become a party to or cause such Stockholder's Subject Shares
to become subject to any voting agreement or other agreement
relating to the voting of such Stockholder's Subject Shares,
except for this Agreement or any amendment hereto.
(4) Further Assurances. The Stockholder will, from
time to time, execute and deliver, or cause to be executed and
delivered, such additional or further transfers, assignments,
endorsements, consents and other instruments as Parent or
Mergerco may reasonably request for the purpose of effectively
carrying out the transactions contemplated by this Agreement.
(5) Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by
any of the parties without the prior written consent of the other
parties, except that Mergerco may assign, in its sole discretion,
any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned subsidiary of
Parent. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
(6) Termination. This Agreement shall terminate upon
the termination of the Merger Agreement.
(7) General Provisions.
(a) Expenses. Except as set forth in Merger
Agreement, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense.
(b) Amendments. This Agreement may not be amended
except by an instrument in writing signed by each of the parties
hereto.
(c) Notice. All notices and other communications
hereunder shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing
proof of delivery) to the parties at the following addresses (or
at such other address for a party as shall be specified by like
notice):
(i) if to Parent or Mergerco, to:
c/o Tellabs International, Inc.
1000 Remington Boulevard
Bolingbrook, Illinois 60440
Attention: President
and to:
Tellabs Operations, Inc.
4961 Indiana Avenue
Lisle, Illinois 60532
Attention: General Counsel
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Thomas A. Cole
Imad I. Qasim
(ii) if to the Stockholder, to the address set forth on
Annex I hereto.
with a copy to:
Foley, Hoag & Eliot
One Post Office Square
Boston, Massachusetts 02109
Attention: David R. Pierson
(d) Interpretation. When a reference is made in this
Agreement to Sections, such reference shall be to a Section to
this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation".
(e) Counterparts. This Agreement may be executed in
two or more counterparts, all of which shall be considered one
and the same agreement, and shall become effective when one or
more of the counterparts have been signed by each of the parties
and delivered to the other party, it being understood that each
party need not sign the same counterpart.
(f) Entire Agreement; No Third-Party Beneficiaries.
This Agreement (including the documents and instruments referred
to herein) (i) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and
(ii) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
(g) Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of
Delaware without regard to any applicable conflicts of law.
8. Stockholder Capacity. No person executing this
Agreement who is or becomes during the term hereof a director or
officer of the Company makes any agreement or understanding
herein in his or her capacity as such director or officer. Each
Stockholder executes this Agreement solely in his or her capacity
as the record holder and beneficial owner of, or the trustee of a
trust whose beneficiaries are the beneficial owners of, such
Stockholder's Subject Shares and nothing herein shall limit or
affect any actions taken by a Stockholder in his or her capacity
as an officer or director of the Company to the extent
specifically permitted by the Merger Agreement.
9. Enforcement. The parties agree that irreparable
damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any
court of the United States located in the State of Delaware or in
a Delaware state court, this being in addition to any other
remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit such
party to the personal jurisdiction of any Federal court located
in the State of Delaware or any Delaware state court in the event
any dispute arises out of this Agreement or any of the
transactions contemplated hereby, (ii) agrees that such party
will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, (iii)
agrees that such party will not bring any action relating to this
Agreement or any of the transactions contemplated hereby in any
court other than a Federal court sitting in the State of Delaware
or a Delaware state court and (iv) waives any right to trial by
jury with respect to any claim or proceeding related to or
arising out of this Agreement or any of the transactions
contemplated hereby.
IN WITNESS WHEREOF, each of Parent, Mergerco and the
Stockholder has caused this Agreement to be signed by its officer
thereunto duly authorized as of the date first written above.
TELLABS, INC.
By: ______________________________
Name:
Title:
TIGER MERGER CO.
By: ______________________________
Name:
Title:
[STOCKHOLDER]
By: ______________________________
Name:
Title:
INDEMNITY ESCROW AGREEMENT
This INDEMNITY ESCROW AGREEMENT (the "Indemnity
Agreement"), is dated as of _______ __, 1996 among Tellabs, Inc.,
a Delaware corporation ("Parent"), __________ and __________
(the "Stockholder Representatives"), and The First National Bank
of Chicago, as indemnity and escrow agent (the "Indemnity
Agent").
W I T N E S S E T H:
WHEREAS, Steinbrecher Corporation, a Delaware
corporation (the "Company), Tiger Merger Co., a Delaware
corporation ("Mergerco"), and Parent are parties to that certain
Agreement of Merger, dated as of March __, 1996 (the "Merger
Agreement"), pursuant to which Mergerco shall be merged with and
into the Company (the "Merger"), with the Company being the
surviving corporation (as such, the "Surviving Corporation");
WHEREAS, the stockholders of the Company have approved
the Merger Agreement;
WHEREAS, under the Merger Agreement all Parent Group
Members (as defined in the Merger Agreement) shall be
indemnified, held harmless and reimbursed as provided in Article
XI of the Merger Agreement;
WHEREAS, to ensure that funds will be available to
indemnify, hold harmless and reimburse the Parent Group Members
as required by Article XI of the Merger Agreement, Section 3.7 of
the Merger Agreement provides that in connection with the Merger,
$2,500,000 from the amounts payable under Article III thereof
(the "Indemnity Amount") shall be deposited with the Indemnity
Agent in an escrow account established pursuant to this Indemnity
Agreement and held, invested and subsequently disbursed in
accordance with the terms of this Indemnity Agreement (such
Indemnity Amount, together with any interest earned and gains
received thereon (net of any payment to Parent pursuant to
Paragraph 5(b)) being herein collectively referred to as the
"Indemnity Fund").
WHEREAS, the Merger Agreement provides for the
Stockholder Representatives to act in accordance herewith in
connection with this Indemnity Agreement and the indemnification
obligations contained in the Merger Agreement; and
WHEREAS, the Indemnity Agent has agreed to hold the
Indemnity Amount pursuant to the terms of this Indemnity
Agreement;
NOW, THEREFORE, in consideration of the mutual promises
and covenants herein contained, the parties hereto agree as
follows:
1. Definitions.
Capitalized terms used but not defined herein shall
have the meanings set forth in the Merger Agreement.
2. Deposit and Use of Indemnity Amount.
(a) Immediately after the Effective Time, the
Indemnity Amount shall be deposited by Parent in escrow with the
Indemnity Agent.
(b) Immediately after receipt from Parent of the
Indemnity Amount, the Indemnity Agent shall confirm to the Parent
and the Stockholder Representatives such receipt in writing.
(c) The Indemnity Agent agrees to hold, invest and
disburse the Indemnity Fund and to act as Indemnity Agent in
accordance with the terms, conditions and provisions of this
Indemnity Agreement.
3. Disposition of Indemnity Amount.
(a) Each Parent Group Member shall be entitled to
receive payment directly from the Indemnity Agent out of the
Indemnity Fund in the amount which, at any time and from time to
time, such Parent Group Member is entitled to be indemnified,
reimbursed and held harmless from the Indemnity Fund as provided
in Article XI of the Merger Agreement, in each case in accordance
with the following provisions.
(i) If any Parent Group Member (individually or
collectively, the "Claiming Party") wishes to make a claim
for indemnification from the Indemnity Fund with respect to
Losses or Expenses, the Claiming Party shall so notify the
Indemnity Agent in writing (the "Claim Notice") of the facts
giving rise to such claim for indemnification under the
Merger Agreement. The Claim Notice shall be accompanied by
a certificate of the Claiming Party attesting to the
Claiming Party's contemporaneous delivery of a duplicate
copy of the Claim Notice to the Stockholder Representatives.
Such Claim Notice shall describe in reasonable detail (to
the extent then known) such Losses or Expenses and the
method of computation of such Losses or Expenses and contain
a reference to the provisions of the Merger Agreement in
respect of which such Loss or Expense shall have occurred.
If the Claiming Party is not Parent, the Claim Notice must
be accompanied by a certificate from Parent confirming that
the Claiming Party is a Parent Group Member. Subject to
Paragraph 3(a)(ii), the Indemnity Agent shall, on the
twentieth (20th) business day after receipt of a Claim
Notice with respect to any claim for indemnification the
amount of which is specified therein, pay or deliver to the
Claiming Party, for its account the Indemnity Fund or a
portion thereof specified in the Claim Notice. Payment
shall be delivered as specified in the Claim Notice.
(ii) At the time of delivery of any Claim Notice to the
Indemnity Agent, a duplicate copy of such Claim Notice shall
be delivered to the Stockholder Representatives.
Notwithstanding the provisions of Paragraph 3(a)(i), the
Indemnity Agent shall not make any payment of the Indemnity
Fund or any portion thereof with respect to a Claim Notice
if during the twenty (20) business days after the Indemnity
Agent's receipt of such Claim Notice (the "Response Period")
the Stockholder Representatives shall have delivered to the
Indemnity Agent a written objection to the claim made in the
Claim Notice (an "Objection"). At the time of delivery of
any Objection to the Indemnity Agent, a duplicate copy of
such Objection shall be delivered to the Claiming Party.
(iii) If the Indemnity Agent does not receive an
Objection within the Response Period with respect to any
claim for indemnification the amount of which is specified,
then the Stockholder Representatives shall be deemed to have
acknowledged the correctness of such claim for the full
amount thereof as specified in the Claim Notice, and the
Indemnity Agent, shall deliver to the Claiming Party out of
the Indemnity Fund cash in the amount specified in the Claim
Notice, or the balance thereof if less than the amount so
specified in the Claim Notice, as set forth in Paragraph
3(a)(i).
(iv) Upon receipt of an Objection during the applicable
Response Period, the Indemnity Agent shall (1) deliver to
the Claiming Party cash out of the Indemnity Fund, in an
amount equal to that portion, if any, of the Claim which is
not disputed by the Stockholder Representatives and (2)
shall designate and segregate out of the Indemnity Fund the
amount subject to the Claim which is disputed by the
Stockholder Representatives. Thereafter, the Indemnity
Agent shall not dispose of that remaining portion of the
Indemnity Fund subject to the Claim until the Indemnity
Agent shall have received a certified copy of the final
decision of the arbitrators as contemplated by Paragraph (v)
immediately below with respect to the Claim or Claims set
forth in the Claim Notice, or the Indemnity Agent shall have
received a copy of a written agreement between the Claiming
Party and the Stockholder Representatives resolving such
dispute and setting forth the amount, if any, of the Claim
which such Claiming Party is entitled to receive. The
Indemnity Agent will pay the Claiming Party out of the
Indemnity Fund the amount that the Claiming Party is
entitled to receive as set forth in such arbitration
decision after the expiration of ten (10) business days from
the receipt of such decision or, in the event that the
amount to which the Claiming Party is entitled is
established pursuant to an agreement between the Claiming
Party and the Stockholder Representatives, as soon as
possible after the Indemnity Agent's receipt of such
agreement. Copies of any written agreement between the
Stockholder Representatives and the Claiming Party
confirming that the Claiming Party is entitled to a portion
but not all of the amount claimed by the Claiming Party may
be filed by the Claiming Party with the Indemnity Agent,
with the effect set forth in the preceding sentence as to
the agreed amount, but no such agreement or filing thereof
shall operate as a waiver of the Claiming Party's rights as
to the disputed amount, including without limitation its
right to recover the same, and any final decision of the
arbitrators that the Claiming Party is entitled to receive
the disputed amount may be filed with the Indemnity Agent
and shall, when filed with the Indemnity Agent, be acted on
as set forth above.
(v) If the Claiming Party and the Stockholder
Representatives do not resolve a dispute regarding a Claim
within thirty (30) days after the delivery of an Objection,
either the Claiming Party or the Stockholders
Representatives may, by written notice to the other, demand
arbitration of the matter; and in such event the matter
shall be settled by arbitration conducted by three
arbitrators. Within fifteen (15) days after such written
notice is sent, the Claiming Party and the Stockholders
Representatives shall each select one arbitrator, and the
two arbitrators so selected shall select a third arbitrator.
The decision of the arbitrators as to the validity and
amount of any Claim shall be binding, and conclusive upon
the parties, and the Indemnity Agent shall be entitled to
act in accordance with such decision and make or withhold
payments out of the Indemnity Fund in accordance therewith.
Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such
arbitration shall be held in Chicago, Illinois under the
commercial rules then in effect of the American Arbitration
Association. The non-prevailing party to an arbitration
shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association,
and the expenses, including without limitation, attorneys'
fees and costs, reasonably incurred by the other party to
the arbitration. In the case of the Stockholder
Representatives, any such payment shall be made from the
Indemnity Fund.
(b) The Indemnity Agent shall not dispose of all or
any portion of the Indemnity Fund other than as provided in this
Indemnity Agreement.
4. Delivery of Indemnity Amount Upon Termination.
(a) On the first anniversary of the Effective Date
(the "Distribution Date"), the Indemnity Agent shall, subject to
the provisions of Paragraph 5 below, deliver to the Paying Agent
(as defined in the Merger Agreement) (or, if the Paying Agency
Agreement shall then have terminated, to Parent) an amount (the
"Distribution Amount") equal to (A) the amount remaining in the
Indemnity Fund, less (B) any amount designated as subject to a
Claim pursuant to a Claim Notice to the extent such Claim has not
been resolved prior to such date, less (C) any amount previously
designated in writing by the Stockholder Representatives to the
Indemnity Agent (with a copy delivered to Parent) as amounts that
should be withheld to cover their expenses incurred in connection
with their activities hereunder (to the extent the Indemnity
Agent shall then have received written notice from the
Stockholder Representatives to such effect in accordance with
Paragraph 7(c)). Upon its receipt of such Distribution Amount,
the Paying Agent or Parent, as the case may be, shall disburse
the Distribution Amount in accordance with the terms of the
Merger Agreement. Any amount retained in escrow after the
Distribution Date shall be held by the Indemnity Agent and shall
be used to indemnify the Parent Group Members subject to the
terms and conditions of this Indemnity Agreement and upon
resolution and payment out of the Indemnity Fund in satisfaction
of applicable pending Claims, any remaining amounts in escrow
shall be paid to the Stockholder Representatives with respect to
out of pocket expenses incurred by them in connection with their
activities hereunder (to the extent the Indemnity Agent shall
then have received written notice from the Stockholder
Representatives to such effect in accordance with Paragraph
7(c)), and any remaining amounts shall be distributed to the
Paying Agent (or, if the Paying Agency Agreement shall then have
terminated, to Parent), who shall disburse such portion in the
manner set forth in the preceding sentence.
(b) Upon distribution of the entire amount of the
Indemnity Fund, the Indemnity Agent shall give the Paying Agent
notice to such effect. Such notice shall be given to the
following address, or to such other address as Parent may
designate:
First Chicago Trust Company of New York
525 Washington Blvd.
Suite 4660
Jersey City, NJ 07310
Attention: Tenders & Exchanges Administration
Upon such distribution, this Indemnity Agreement shall be
terminated.
(c) At any time prior to final termination of the
Indemnity as provided in Paragraph 4(b), the Indemnity Agent
shall, if so instructed in a writing signed by Parent and the
Stockholder Representatives, release from the Indemnity Fund to
Parent or the Paying Agent, as directed, the amount of cash
specified in such writing.
5. Investments; Interest.
(a) The Indemnity Agent is hereby authorized and
directed to hold the Indemnity Fund in a segregated escrow
account and to disburse such Indemnity Fund only in accordance
with the terms of this Indemnity Agreement. From the date hereof
until the date of disbursement of the Indemnity Fund pursuant to
Paragraph 4 of this Indemnity Agreement, the Indemnity Agent is
authorized and directed to invest and reinvest the Indemnity Fund
in any of the following investments in each case pursuant to
joint instructions of the Parent and the Stockholder
Representatives: (i) readily marketable obligations maturing
within six (6) months after the date of acquisition thereof
issued by the United States of America or any agency or
instrumentality thereof; (ii) readily marketable obligations
maturing within six (6) months after the date of acquisition
thereof issued by any state or municipality within the United
States of America, or any political subdivision, agency or
instrumentality thereof, rated "A" or better by either Standard &
Poor's Corporation or Moody's Investors Service Inc.; (iii)
readily marketable commercial paper maturing within one hundred
eighty (180) days after the date of issuance thereof which has
the highest credit rating of either Standard & Poor's Corporation
or Moody's Investors Service, Inc.; or (iv) 6 month certificates
of deposit issued by any bank incorporated and doing business
pursuant to the laws of the United States of America or any state
thereof having combined capital and surplus of at least
$500,000,000. In the event the Indemnity Agent does not receive
joint instructions from Parent and the Stockholder
Representatives to invest or reinvest the Indemnity Fund or any
portion thereof, the Indemnity Agent agrees to invest and
reinvest such funds in the Prairie Institutional Treasury Prime
Cash Management Fund, or a successor or similar fund agreed to by
Parent and the Stockholder Representatives in writing, which
invests in direct obligations of, or obligations fully guaranteed
as to principal and interest by the United States Government and
repurchase agreements with respect to such securities. Interest
accruing on, and any profit resulting from, such investments
shall be added to, and become a part of, the Indemnity Fund
pursuant to this Indemnity Agreement less the payments to Parent
required under Paragraph 5(b). For purposes of this Indemnity
Agreement, "interest" on the Indemnity Fund shall include all
proceeds thereof and investment earnings with respect thereto.
The Indemnity Agent shall have full power and authority to sell
any and all securities held by it under this Indemnity Agreement
as necessary to make disbursements in cash under Paragraph 3 and
this Paragraph 4 of this Indemnity Agreement. The Indemnity
Agent, Parent, the Surviving Corporation and the Stockholder
Representatives shall not be responsible for any unrealized
profit or realized loss realized on such investments.
(b) The Indemnity Agent shall promptly pay to the
Parent from funds held hereunder at the end of each calendar
quarter and immediately prior to termination of this Indemnity
Agreement an amount equal to the product of (i) the accrued
interest and net gains earned on the investments during such
calendar quarter or during the calendar quarter in which such
termination occurs, as the case may be, and (ii) 39%.
6. Liability and Compensation of Indemnity Agent.
The duties and obligations of the Indemnity Agent
hereunder shall be determined solely by the express provisions of
this Indemnity Agreement, and the Indemnity Agent shall, in
determining its duties hereunder, be under no obligation to refer
to any other documents between or among the parties related in
any way to this Indemnity Agreement, it being specifically
understood that the following provisions are accepted by all of
the parties hereto. Parent shall indemnify and hold the
Indemnity Agent harmless from and against any and all liability
and expense which may arise out of any action taken or omitted by
the Indemnity Agent in accordance with this Indemnity Agreement,
except such liability and expense as may result from the gross
negligence or willful misconduct of the Indemnity Agent. Parent
shall be entitled to be reimbursed out of the Indemnity Fund for
fifty percent (50%) of any amount that Parent is required to pay
to the Indemnity Agent pursuant to such indemnification
obligation.
(a) The Indemnity Agent shall not be liable to any
person by reason of any error of judgment or for any act done or
step taken or omitted by it, or for any mistake of fact or law or
anything which it may do or refrain from doing in connection
herewith unless caused by or arising out of its own gross
negligence or willful misconduct.
(b) The Indemnity Agent shall be entitled to rely on,
and shall be protected in acting in reliance upon, any
instructions or directions furnished to it in writing signed by
both Parent and the majority of the Stockholder Representatives
pursuant to any provision of this Indemnity Agreement and shall
be entitled to treat as genuine, and as the document it purports
to be, any letter, paper or other document furnished to it by any
Parent Group Member or the Stockholder Representatives, and
believed by the Indemnity Agent to be genuine and to have been
signed and presented by the proper party or parties. In
performing its obligations hereunder, the Indemnity Agent may
consult with counsel to the Indemnity Agent and shall be entitled
to rely on, and shall be protected in acting in reliance upon the
advice or opinion of such counsel.
(c) The Indemnity Agent shall be entitled to its
customary fee for the performance of services by the Indemnity
Agent hereunder for each year or portion thereof that any portion
of the Indemnity Fund remains in escrow and shall be reimbursed
for reasonable costs and expenses incurred by it in connection
with the performance of such services (such fees, costs and
expenses are hereinafter referred to as the "Indemnity Agent's
Compensation"). The Indemnity Agent shall render statements to
Parent setting forth in detail the Indemnity Agent's Compensation
and the basis upon which the Indemnity Agent's Compensation was
computed. The Indemnity Agent's Compensation shall be paid by
Parent.
(d) The Indemnity Agent may resign at any time by
giving sixty (60) days written notice to Parent and the
Stockholder Representatives; provided that such resignation shall
not be effective unless and until a successor Indemnity Agent has
been appointed and accepts such position pursuant to the terms of
this Paragraph 6(d). In such event, Parent and the Stockholder
Representatives shall appoint a successor Indemnity Agent or, if
Parent and the Stockholder Representatives are unable to agree
upon a successor Indemnity Agent within sixty (60) days after
such notice, the Indemnity Agent shall be entitled to appoint its
own successor, provided that such successor is a reputable
national banking association. Such appointment, whether by
Parent and the Stockholder Representatives, on the one hand, or
the Indemnity Agent, on the other hand, shall be effective on the
effective date of the aforesaid resignation (the "Indemnity
Transfer Date"). On the Indemnity Transfer Date, all right title
and interest to the Indemnity Fund, including interest thereon,
shall be transferred to the successor Indemnity Agent and this
Indemnity Agreement shall be assigned by the Indemnity Agent to
such successor Indemnity Agent, and thereafter, the resigning
Indemnity Agent shall be released from any further obligations
hereunder. The Indemnity Agent shall continue to serve until its
successor is appointed, accepts the Indemnity and receives the
transferred Indemnity Fund.
(e) The Indemnity Agent shall not have any right,
claim or interest in any portion of the Indemnity Fund except in
its capacity as Indemnity Agent hereunder.
7. Stockholder Representatives.
(a) Pursuant to the Merger Agreement, the Stockholder
Representatives are authorized to give and receive notices and
communications, to authorize delivery to Parent of all or a
portion of the Indemnity Amount in satisfaction of claims of
Parent, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and comply with orders
of courts and awards of arbitrators with respect to such claims,
and to take all actions necessary or appropriate in the judgment
of the Stockholder Representatives for the accomplishment of the
foregoing.
(b) The Stockholder Representatives shall not be
liable to any holder of Securities for any act done or omitted
under the Merger Agreement or hereunder as Stockholder
Representatives not constituting fraud or gross negligence.
(c) The Stockholder Representatives shall receive no
compensation for their services hereunder. At least five (5)
days prior to thirty (30) days after the first anniversary of the
Effective Date, the Stockholder Representatives shall deliver
notice to the Indemnity Agent and Parent setting forth the amount
of the reasonable expenses incurred by the Stockholder
Representatives in connection with their duties under the Merger
Agreement and hereunder (the "Stockholder Representatives'
Expenses"), which expenses shall be reimbursed pursuant to the
terms of Paragraph 4.1(a). Any expenses of the Stockholder
Representatives not reimbursed pursuant to Paragraph 4.1(a) shall
be reimbursed by the holders of Securities entitled to
distributions under this Indemnity Agreement on a pro rata basis.
(d) Neither Parent, any Parent Group Member nor the
Indemnity Agent shall be responsible or liable for any acts or
omissions of any Stockholder Representative in such Stockholder
Representative's capacity as such, and each of them may rely on
any action or writing of majority of the Stockholder
Representatives as being binding on all Stockholder
Representatives for all purposes.
8. Taxes.
All interest and net gains earned on the Indemnity Fund
shall be accounted for by the Indemnity Agent separately from the
Indemnity Fund and shall be treated as having been received by
the Parent and included in its income for tax purposes. The
Indemnity Agent shall, consistent with such treatment, arrange
that for income tax reporting and withholding purposes Parent is
named or treated as the payee of such amounts. In this regard,
Parent shall provide the Indemnity Agent with any certification
or forms required under any applicable tax laws.
9. Representations and Warranties.
(a) Each of Parent, the Indemnity Agent and each
Stockholder Representative, to the extent any such Stockholder
Representative is a corporation or partnership, represents and
warrants to each of the other parties hereto that it is a
corporation or partnership duly organized, validly existing and
in good standing under the laws of its jurisdiction of formation;
that it has the corporate or partnership power and authority to
execute and deliver this Indemnity Agreement and to perform its
obligations hereunder; that the execution, delivery and
performance of this Indemnity Agreement by it has been duly
authorized and approved by all necessary corporate or partnership
action; that this Indemnity Agreement constitutes its legal,
valid and binding obligation, enforceable against it in
accordance with its terms; and that the execution, delivery and
performance of this Indemnity Agreement by it will not result in
a breach of or loss of rights under or constitute a default under
or a violation of any trust (constructive or other), agreement,
judgment, decree, order or other instrument to which it is a
party or it or its properties or assets may be bound.
(b) Each Stockholder Representative, to the extent
such Stockholder Representative is an individual, represents to
each of the other parties hereto that he or she has the power and
authority to execute and deliver this Indemnity Agreement and to
perform his or her obligations hereunder; that this Indemnity
Agreement constitutes his or her legal, valid and binding
obligation, enforceable against him or her in accordance with its
terms; and that the execution, delivery and performance of this
Indemnity Agreement by him or her will not result in a breach of
or loss of rights under or constitute a default under or a
violation of any trust (constructive or other), agreement,
judgment, decree, order or other instrument to which he or she is
a party or his or her properties or assets may be bound.
10. Benefit; Successor and Assigns.
This Indemnity Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and permitted assigns but shall not be assignable by
any party hereto without the written consent of all of the other
parties hereto; provided, however, that Parent may assign its
rights and delegate its obligations hereunder to any person to
whom the rights of Mergerco may be assigned under the Merger
Agreement and to any successor corporation in the event of a
merger, consolidation or transfer or sale of all or substantially
all of their respective stock or assets and that the Indemnity
Agent may assign its rights hereunder to a successor Indemnity
Agent appointed hereunder. Except for the persons specified in
the preceding sentence, this Indemnity Agreement is not intended
to confer on any person not a party hereto any rights or remedies
hereunder.
11. Notices.
All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given
or delivered when delivered personally or four days after being
mailed by registered or certified mail, return receipt requested,
or one day after being sent by private prepaid overnight courier
addressed as follows:
If to the Indemnity Agent:
The First National Bank of Chicago
One First National Plaza - Suite 0673
Chicago, Illinois 60670-0673
Attention: Corporate Trust Administrator
If to Parent or any Parent Group Member, to it:
c/o Tellabs International, Inc.
1000 Remington Boulevard
Bolingbrook, IL 60440
Attention: President
And to:
Tellabs Operations, Inc.
4951 Indiana Avenue
Lisle, IL 60532
Attention: General Counsel
With copy to:
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Attention: Thomas A. Cole
Imad I. Qasim
If to the Stockholder Representatives:
__________________
__________________
__________________
With copy to:
Foley, Hoag & Eliot
One Post Office Square
Boston, Massachusetts 02109
Attention: David R. Pierson
or such other address as the Indemnity Agent, Parent or the
Stockholder Representatives, as the case may be, shall designate
in writing to the parties hereto; provided that the Stockholder
Representatives may not specify more than one address at any
time.
12. Governing Law.
This Indemnity Agreement shall be governed by and
construed in accordance with the laws (as opposed to conflicts of
law provisions) of the State of Illinois.
13. Counterparts.
This Indemnity 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.
14. Headings.
The section headings contained in this Indemnity
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Indemnity
Agreement.
15. Partial Invalidity.
Wherever possible, each provision hereof shall be
interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such provision shall be
ineffective in the jurisdiction involved to the extent, but only
to the extent, of such invalidity, illegality or unenforceability
without invalidating the remainder of such invalid, illegal or
unenforceable provision or provisions or any other provisions
hereof, unless such a construction would be unreasonable.
16. Entire Agreement; Modification and Waiver.
This Indemnity Agreement and the Merger Agreement
embody the entire agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersede
any and all prior agreements and understandings relating to the
subject matter hereof. Notwithstanding the preceding sentence,
the parties hereto acknowledge that the Indemnity Agent is not a
party to nor is it bound by the Merger Agreement. No amendment,
modification or waiver of this Indemnity Agreement shall be
binding or effective for any purpose unless it is made in a
writing signed by the party against whom enforcement of such
amendment, modification or waiver is sought. No course of
dealing between the parties to this Indemnity Agreement shall be
deemed to affect or to modify, amend or discharge any provision
or term of this Indemnity Agreement. No delay by any party to or
any beneficiary of this Indemnity Agreement in the exercise of
any of its rights or remedies shall operate as a waiver thereof,
and no single or partial exercise by any party to or any
beneficiary of this Agreement of any such right or remedy shall
preclude any other or further exercise thereof. A waiver of any
right or remedy on any one occasion shall not be construed as a
bar to or waiver of any such right or remedy on any other
occasion.
IN WITNESS WHEREOF, the parties hereto have duly
executed this Indemnity Agreement as of the date first above
written.
THE FIRST NATIONAL BANK OF CHICAGO
By: _______________________________
Its: ______________________________
TELLABS, INC.
By: _______________________________
Its: ______________________________
_______________________________
Stockholder Representatives
_______________________________
Stockholder Representatives
Listed below are the Schedules to the Merger Agreement which have been
omitted from this exhibit. The issuer will supplementally furnish a
copy of any omitted Schedules to the Commission upon request.
Schedules
---------
- - Representations and Warranties of the Company
5.1 Organization and Capital Structure
Schedule 5.1(a)
Schedule 5.1(b)
Schedule 5.1(c)
Schedule 5.1(e)
Schedule 5.1(f)
5.2 Subsidiaries and Investments
Schedule 5.2
5.3 Authority
Schedule 5.3
5.4 Financial Statements
Schedule 5.4
5.5 Operations Since Balance Sheet Date
Schedule 5.5(a)
Schedule 5.5(b)
5.6 No Undisclosed Liabilities
Schedule 5.6
5.7 Taxes
Schedule 5.7
5.8 Availability of Assets and Legality of Use
Schedule 5.8
5.9 Governmental Permits
Schedule 5.9(a)
Schedule 5.9(b)
- - Representations and Warranties of the Company
5.11 Real Property Leases
Schedule 5.11
5.13 Personal Property
Schedule 5.13
5.14 Personal Property Leases
Schedule 5.14
5.15 Intellectual Property; Software
Schedule 5.15
5.17 Title to Property
Schedule 5.17
5.18 Employee Benefit Plans
Schedule 5.18(a)
Schedule 5.18(b)
Schedule 5.18(c)
Schedule 5.18(e)
Schedule 5.18(f)
Schedule 5.18(i)
5.19 Employee Relations
Schedule 5.19(a)
Schedule 5.19(b)
5.20 Contracts; Products Warranties
Schedule 5.20
5.21 Status of Contracts
Schedule 5.21
5.22 No Violation, Litigation or Regulatory Action
Schedule 5.22
- - Representations and Warranties of the Company
5.23 Environmental Matters
Schedule 5.23
5.24 Insurance
Schedule 5.24
5.25 Customers and Suppliers
Schedule 5.25
5.26 Budgets
Schedule 5.26
- - Representations and Warranties of the Parent and Mergerco
6.4 No Litigation or Regulatory Action
Schedule 6.4
- - Conditions Precedent to Obligations of Parent and Mergerco
9.5 Necessary Consents
Schedule 9.5
EXHIBIT 21
TELLABS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 20, 1996
State or Other
Jurisdiction of
Name Incorporation
Tellabs Operations, Inc. Delaware
Tellabs Export, Inc. Delaware
Telecommunications Laboratories, Inc. Illinois
Tellabs International, Inc. Illinois
Tellabs Singapore Private Liminted Singapore
Tellabs Communications Canada Ltd. Ontario, Canada
Tellabs (V.I.), Inc. U.S. Virgin Islands
Tellabs H.K. Ltd. Hong Kong
Tellabs NZ Limited New Zealand
Tellabs Korea, Inc. Korea
Tellabs PTY. Ltd. Australia
Tellabs Holdings Ltd. Ireland
Tellabs Ltd. Ireland
Tellabs (Ireland) Ltd. Ireland
Tellabs Research Ltd. Ireland
Tellabs U.K. Ltd. United Kingdom
Tellabs GmbH Germany
Tellabs Southern Europe, S.A. Spain
Tellabs Mexico, Inc. Delaware
Tellabs de Mexico, S.A. de C.V. Mexico
Martis Oy Finland
Tellabs AB Sweden
Tellabs SAS France
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS
We have issued our reports dated January 17, 1996, accompanying the
consolidated financial statements and schedules incorporated by reference
or included in the Annual Report of Tellabs, Inc. and Subsidiaries on Form
10-K (Exhibit 13) for the year ended December 29, 1995. We hereby
consent to the incorporation by reference of said reports in the
Registration Statements of Tellabs, Inc. on Form S-8 (File Nos. 33-48972,
33-45788 and 33-55487).
GRANT THORNTON LLP
Chicago, Illinois
March 20, 1996
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 29, 1995, INCOME STATEMENT AND BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
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