<PAGE> 1
FORM 10-K FY 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended AUGUST 27, 1995
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OR
--
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from TO
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Commission file number 0-12622
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TELCO SYSTEMS, INC
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(Exact name of registrant as specified in its charter)
Delaware 94-2178777
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
63 NAHATAN STREET, NORWOOD, MASSACHUSETTS 02062
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 551-0300
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
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
----- ------
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 }
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $115,283,000 as of November 15, 1995.
On November 15, 1995 there were 10,264,517 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(2) Portions of the definitive proxy statement (the "Definitive
Proxy Statement") required to be filed with Securities and Exchange Commission
relative to the Company's 1995 annual meeting of shareholders are incorporated
by reference into Part III.
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Item 1. Business
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General
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The Company was incorporated in California on September 7, 1972,
and reincorporated in Delaware on December 17, 1986. Its principal office is
located at 63 Nahatan Street, Norwood, Massachusetts 02062 (telephone number is
(617) 551-0300). Unless the context indicates otherwise, the terms "Company"
and "Telco Systems" refer to Telco Systems, Inc. The Company has three
operating business units. The Broadband Transmission Products Business Unit,
formerly the Fiber Optic Transmission Products Division, is referred to as
"Broadband", the Network Access Products Business Unit is referred to as
"Network Access", and the Bandwith Optimization Business Unit, formerly the
Magnalink Communications Division, is referred to as "Bandwith Optimization".
Telco Systems, Inc., is a manufacturer of broadband transmission
equipment, customer premises network access equipment, and bandwith
optimization equipment for the telecommunications industry. Its products,
which can be found most often in telephone company central offices and in
private communications networks, perform functions that range from basic
signaling and multiplexing to high-speed, high-capacity digital fiber optic
transmission. Primary customers are the Bell Operating Companies, independent
telephone companies, interexchange carriers and private network end users.
In January 1983, the Company acquired the Broadband Transmission
Products Business Unit from Raytheon Company. Sales of broadband transmission
products in fiscal year 1995 comprised about 41% of the Company's total
revenue. This business unit has approximately 210 employees at its
manufacturing facility located in Norwood, Massachusetts.
In August 1984, the Company acquired TeleBit, Inc., a manufacturer
of digital transmission systems based in Lombard, Illinois. Later, this
acquisition was merged with the Company's Voice Frequency Products Division
which together formed the Network Access Products Business Unit. The
consolidation was completed in August 1986 and was designed to focus the new
division's activities towards the customer premise network access equipment
market. Located in Fremont, California, the Network Access Products Business
Unit has approximately 183 employees. In May 1992, the Company acquired
Magnalink Communications Corporation, a developer and manufacturer of bandwith
optimization products to form the Company's Bandwith Optimization Business
Unit. These products optimize wide area network (WAN) links in LAN/WAN
applications. Located in Norwood, Massachusetts, this business unit has
approximately 26 employees.
For fiscal 1995, the Company reported sales of $89.1 million and a
net income of $.6 million. Working capital at year end amounted to $49.9
million, including cash and short term investments of $29.1 million. For a
more complete discussion of the results of operations, please refer to
Management's Discussion and Analysis of Results of Operations and Financial
Condition found on page 11 of this report.
Broadband Transmission Products
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Fiber optic systems are based on the physical property of light
which allows rapid transmission of light pulses in a coded digital format
through a glass fiber about the diameter of a human hair. To accomplish this,
a light source such as a laser or light-emitting diode is connected to the
fiber. This light source converts an electronic input signal into a series of
light pulses by blinking on and off millions of times per second. This stream
of light pulses, or bits, is the combination of many lower rate bit streams
formed using digital multiplexing techniques resulting in a very efficient,
high-capacity communications transmission mode. At the other end of the fiber,
detectors capture the light pulses and convert them back into their original
electronic form.
The advantages of fiber optic transmission systems over other
transmission systems include greater information-carrying capacity, immunity
from electrical interference, immunity from hostile environmental conditions
such as temperature and moisture, significantly lower installation costs due to
smaller size and lighter weight cable and associated electronics, and reduced
maintenance costs. In addition, since the fiber optic systems
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used by the telephone companies are usually entirely digital, they are suitable
for transmission of digitized voice, data, video, or a combination thereof.
The Company sells its broadband transmission products ($36.6
million sales in fiscal 1995) primarily to Bell Operating Companies and major
independent telephone companies either as complete systems or as stand-alone
equipment installed by the Company, third party installers, or by the Company's
customers. A complete system may include the fiber optic cable, which is not
manufactured by the Company but is purchased from a number of suppliers.
The most common application of the Company's broadband transmission
products is for distribution of fiber optic service in local loop applications
between the telephone company central office, or hubbing sites and customers'
business premises. The Company believes that such local loop applications
offer the most growth potential.
Broadband transmission products currently manufactured by the
Company can be grouped into three categories: fiber optic terminals,
multiplexers and network monitoring and control systems. The Company's
transmission products operate primarily at asynchronous transmission rates.
More advanced competitive systems operate at synchronous transmission rates to
be in compliance with Synchronous Optical Network (SONET) standards. The
Company has recently introduced a SONET compliant transmission system and has
ATM platforms in development.
FIBER OPTIC TERMINALS: These systems typically consist of digital
multiplexing and a fiber optic transmitter/receiver integrated into one
functional unit. The multiplexer portion of the terminal unit combines digital
inputs from multiple sources into one digital output. Multiplexers can be
combined in order to achieve higher transmission rates. The basic function of
the transmitter portion of a terminal is to convert electronic input into a
series of light pulses for transmission over optical fiber. The receiver
function of a terminal reconverts the light pulses received over the fiber into
digital electronic signals. To meet the various needs of the public and
private telephone networks, the Company offers products for transmitting at
different capacities.
The Company offers modular fiber optic terminals that enable the
customer to upgrade its system by adding modules as increased capacity is
required. The Company's terminals, depending on bit-rate and other design
configurations, can accommodate transmission over distances of up to 60
kilometers. Prices for a typical system are dependent on configuration and
accordingly can range from $5,000 to $30,000 per terminal.
MULTIPLEXERS: The Company also offers a digital multiplexer with an
output of 155 megabits per second which can serve as the electronic input to a
fiber optic terminal or digital microwave radio. In addition to fiber optic
terminals, these systems also connect into digital cross- connect systems.
NETWORK MONITORING AND CONTROL SYSTEMS: The Company offers a
modular computer-based system to identify failure of specific multiplexers or
terminals in the network. It also detects and reports system signal
degradation, allowing an operator to identify potential failures before they
occur and to schedule preventative maintenance.
Network Access Products
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The Company's network access products ($46.9 million sales in
fiscal 1995) are designed for the digital multiplexing of voice and data
traffic up to T1 and E1 rates. The trend towards increased use of public
network services for voice, data and video applications has created greater
demand for customer premises access multiplexers. The Company's equipment
enables integration of multiple slower-speed lines and services onto a single,
high-speed, T1/E1 access facility, ultimately saving access line charges for
end users. In addition, the Company provides a network management system which
is designed to control its intelligent transmission products. Typical prices
for network access equipment range from $5,000 to $15,000.
DIGITAL MULTIPLEXER PRODUCTS: The Company's products use digital
technology and provide over 40 different plug-in printed circuit cards to
support a large variety of voice, data, and video applications. The products
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provide conversion of analog signals into digital information, combine them
with additional digital data inputs and enable them to be processed and
transmitted at high rates of speed over cable, microwave or fiber optic
transmission systems. The Company provides a full range of products from cost
effective channel banks to very sophisticated network access servers.
NETWORK MANAGEMENT AND CONTROL SYSTEM: The Company offers a
software-based management and control system, which is designed to control the
Route-24 network access multiplexer. This system remotely manages voice and
data mix, bandwidth allocation, and selective access to special services
offered by T1 carriers. In addition, it can be used to modify the network as
user requirements change.
Bandwith Optimization Products
- ------------------------------
The Company's bandwith optimization products ($5.5 million sales in
fiscal 1995) interconnect geographically remote local area networks (LANs)
through wide area networks (WANs), with an emphasis on optimizing the
utilization of WAN links. In LAN/WAN applications, WAN links have the lowest
throughput, the highest expense, the lowest reliability, and the least
security. The Bandwith Optimization Business Unit products significantly
increase throughput via data compression; reduce expense by enabling usage of
lower-speed links; and offer features for improved redundancy, fault tolerance,
security and privacy. Typical units are in the $3,000 to $9,000 price range.
Marketing and Customers
- -----------------------
Telco Systems is engaged in a single business segment constituting
the development, manufacturing, marketing and service of electronic equipment
for the telecommunications industry. Primary users of the Company's products
are the Regional Bell Operating Companies (RBOCs), independent telephone
companies, interexchange carriers, value added resellers and private network
end users.
The Company's broadband transmission products and network access
products are generally sold to specialized common carriers and telephone
operating companies on an off-the-shelf basis. Typically, the products have
been evaluated by such customers and approved for purchase in advance. Both
network access and broadband products are manufactured by the Company based on
forecasted usage. Sales to the RBOCs accounted for 29% of sales in fiscal
1995, 37% of sales in fiscal 1994 and 38% of sales in fiscal 1993. RBOC sales
include sales to NYNEX of 17% in fiscal 1995, 21% in fiscal 1994 and 12% in
fiscal 1993. NYNEX has become a significant customer of the Broadband
Transmission Products Business Unit. A material curtailment in the NYNEX order
rate, if not offset by sales to other customers, would result in insufficient
gross margin to cover the current level of operating costs and would adversely
impact total company results. Other significant customers are Sprint which
represented 18% of sales in fiscal 1995 and 14% of sales in fiscal 1994. No
other customer accounted for more than 10% of sales in any of the three years.
The Company markets its products primarily through its own sales
force, as well as interexchange carriers and distributors. Installation is
primarily performed by third party providers. The Company has technical
support and applications engineering personnel and offers training of customer
personnel.
Orders and Backlog
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In fiscal 1995, the Company received orders totaling $87.3 million.
Of this amount, $35.5 million was for broadband transmission products, $46.1
was for network access products, and $5.7 million was for bandwith optimization
products. Firm backlog shippable within a twelve-month period was
approximately $5.5 million at the end of fiscal 1995, compared to approximately
$7.3 million at the end of fiscal 1994. Broadband transmission products
comprised 7% of the backlog for fiscal year 1995 and 23% for fiscal 1994.
Network access products represented 85% of backlog in 1995 and 73% of backlog
in 1994. The Company's order trend is characterized by short
customer-scheduled delivery cycles. Accordingly, a substantial portion of
sales in each fiscal quarter are derived from orders booked in the quarter. In
the Company's experience, its backlog at a given time is not necessarily
indicative of prospective sales volume. In addition to the short delivery
cycles, customers may revise scheduled delivery dates or revise product
configuration.
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Competition
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The Company competes in its markets based upon price/performance
advantages offered by a number of its products, certain product features, and
its ability to meet customer delivery requirements on a timely basis. Most of
the Company's competitors have greater financial, technological and personnel
resources than the Company. The Company's competitors in the fiber optic
communications systems market are predominantly large, full-line, integrated
manufacturers of telecommunications equipment, such as AT&T, Fujitsu, Northern
Telecom Limited, Alcatel, NEC and ADC. Many of these competitors have
introduced newer SONET transmission products which the telephone operating
companies are deploying in public networks. The availability of such SONET
products by competitors provides a distinct product advantage for them in
certain customer applications. The Company's principal competitors with
respect to the network access product area include Newbridge Networks, Tellabs
and Coastcomm. Primary competitors for bandwith optimization products are
Fastcom and Symplex.
Research and Development
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In the broadband transmission product area, the Company is
concentrating its research and development efforts on new products for use in
the local loop distribution portion of the telephone network. Development
efforts are continuing at a high level for a family of SONET-compatible
products employing ATM (Asynchronous Transfer Mode) technology. In the network
access product area, development programs continue for enhancements of the
Company's Route-24 intelligent access multiplexer and advanced network
management systems as well as new products such as the Access30 CSU/DSU and
Access60 Integrated Access Device. Development programs in the internetworking
area concentrate on enhancements to the bridge/router and data compression
product lines. Programs for new products are based on market analysis and
estimates of customer demand which are subject to continuing change.
Therefore, there can be no assurance that sales of such products will meet
current expectations.
Spending on research and development activities of $18.2 million
represented 20% of sales in fiscal 1995. This compares with $16.0 million in
fiscal 1994 and $15.6 million in fiscal 1993 which represented 16% and 19% of
sales in each year, respectively. The Company's overall spending for research
and development is expected to remain at a high level in fiscal 1996 to meet
schedules for SONET products, new network access products and enhancements to
internetworking products.
From time to time the Company has employed consultants to perform
research and development functions. The Company plans to continue this
practice as a means of augmenting its internal research and development
capabilities.
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Employees
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As of August 27, 1995, the Company had 436 employees, of whom 122
were in sales, sales support and marketing, 94 in product development, 169 in
manufacturing and 51 in administration. The Company believes its success in
achieving its business objectives is largely dependent upon its ability to
attract and retain qualified engineering and marketing personnel and other
industry specialists. Such personnel are generally in short supply, and
competition to recruit and retain them is intense. The Company considers its
employee relations to be excellent and is not a party to any collective
bargaining agreement.
Manufacturing
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The Company's manufacturing process primarily involves the assembly
of electronic components onto custom-designed printed circuit boards,
incorporating these boards into larger system packages, and testing the
finished products to assure their proper functioning in accordance with
customers' specifications. Most components used in the process are standard
electrical, electronic and mechanical parts available from many suppliers. The
Company does, however, currently depend on various single sources to supply
certain custom-designed components used in its products. To balance single
source dependence, the Company will maintain higher inventory levels or seek to
qualify secondary sources where appropriate.
Approximately 85% of the Company's network access equipment is
manufactured by a subcontractor at facilities in Malaysia and Singapore.
Inspection, final test and system assembly is performed at the Company's
Fremont, California facility. Approximately 20% of the Company's broadband
transmission products are manufactured by a subcontractor in Singapore.
Inspection, final test and system assembly is performed at the Company's
Norwood, Massachusetts facility. The Company presently maintains a favorable
relationship with these vendors and does not presently anticipate any
difficulties that would prevent timely procurement of scheduled product. As a
backup to these principal sub-contractors, the Company maintains an in-house
ability to manufacture these products.
Although the Company has not experienced significant difficulty in
obtaining desired quantities from any of its single sources or other vendors,
business could be adversely affected if components used in its products were
not available on a timely basis.
Regulatory and Legislative Matters
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Regulations of the Federal Communications Commission affect various
products of the Company. Certain regulations require that products which
reside on a customer's premises and interconnect the public switched network
meet certain standards to prevent harm to the network. Other regulations limit
the levels of electromagnetic radiation which may emanate from an electronic
device located on a customer's premise. The Company currently complies with
these regulations and sees no problem in complying with these regulations in
the future. Changes in existing laws and regulations which govern the
telecommunication industry could affect the business of the Company.
Patents
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The Company currently holds several patents and has patent
applications pending approval. Management believes, however, that timely
implementation of technological advances, responsiveness to market
requirements, depth of technical expertise and a high level of customer service
and support are more important to its success than patent rights.
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Corporate Officers of Registrant
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<TABLE>
Following is a list of the Company's corporate officers, including
persons who may be deemed executive officers of the Company within the meaning
of item 401 (b) of Regulation S-K under the Securities Exchange Act of 1934.
(indicated with an asterisk (*))
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
*John A. Ruggiero 59 Chief Executive Officer
*William B. Smith, Ph.D. 51 President and Chief Operating Officer
Robert J. Bauer 54 Vice President, International Business Development
*Daniel A. DiPietro 57 Vice President, Corporate Controller
Kenneth J. Hamer Hodges 50 Vice President, Chief Technical Officer
Richard J. Nardone 47 Vice President, Human Resources
*Surya R. Panditi 36 Vice President, General Manager
Access Products Group
*Anand Parikh 36 Vice President, Market Development and
Business Planning
*Bill Waters 43 Vice President, North American Sales
</TABLE>
Mr. Ruggiero has been Chief Executive Officer since 1994. Prior
to that he was Chief Operating Officer since 1993 and Executive Vice
President, Chief Financial Officer and Secretary since 1986.
Dr. Smith joined the Company as President and Chief Operating
Officer in 1995. Prior to that he was Senior Vice President of US West, Inc.
and President of US West Advanced Technologies since 1991. Prior to that, he
was Executive Director of AT&T Bell Laboratories since 1986.
Mr. DiPietro joined the Company in 1992 as Vice President and
Corporate Controller. Prior to that he held various financial management and
control positions at Bank of Boston (a multinational financial institution)
from 1990 to 1991, and at Computervision Corporation (a manufacturer of
hardware/software products and computer systems) including Corporate
Controller, Vice President-Accounting and Director-Management Reporting.
Mr. Panditi has been Vice President, General Manager of the Access
Products Group since 1995 and Vice President, General Manager of the Bandwith
Optimization Business Unit (formerly the Magnalink Communications Division)
since 1994. Prior to that Mr. Panditi held various marketing, sales and
management positions with UB Networks (formerly Ungerman-Bass, Inc.) a
manufacturer of network equipment and software, for nine years, most recently
as General Manager of the Access/One Business Unit.
Mr. Parikh joined the Company as Vice President of Market
Development and Business Planning in 1995. Prior to that he was with
Lightstream Corporation in Billerica, Massachusetts as Vice President,
Strategic Business Development since 1994 and Vice President, Marketing since
1993. Prior to that, he was General Manager of the Broadband Networks Business
Unit of UB Networks (formerly Ungerman Bass)
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Vice President, Strategic Business Development since 1994 and Vice President,
Marketing since 1993. Prior to that, he was General Manager of the Broadband
Networks Business Unit of UB Networks (formerly Ungermena Bass) a manufacturer
of network equipment and software, since 1991. Prior to that, he held various
senior management positions at Digital Equipment Corp. for nine years.
Mr. Waters has been Vice President of North American Sales since
1995 and was Vice President, Network Access Division Sales since 1993. Prior
to that, he was Vice President, Western Area Sales for Racal Datacom (a
manufacturer of data communications equipment) for four years.
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Item 2. Properties
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The Company's corporate offices are located in Norwood,
Massachusetts in combination with the manufacturing, sales and engineering
facilities of the Broadband Transmission Business Unit and the Bandwith
Optimization Business Unit.
The Company has facilities at two locations. The Company leases a
216,000 square foot manufacturing, research and administration facility in
Norwood, Massachusetts, that is owned by a limited partnership in which the
Company has a 50% partnership interest. The lease commenced on December 16,
1985, for an original term of 13 years with an option to extend the term for
three successive periods of five years each. Effective January 1, 1994, the
lease was modified through a lease amendment which extended the lease term to
January 31, 2004, and deleted the lease extension provisions. Approximately
60% of this facility is utilized by the Company. Excess costs associated with
idle portions of the facility have been included in the restructuring charge
recorded by the Company in fiscal 1993. On November 11, 1994, the Network
Access Business Unit entered into a tentative agreement for the lease of an
85,000 square foot manufacturing, research and administration facility in
Fremont, California. The expected occupancy of the new facility will occur in
November 1995. The Network Access Business Unit currently leases a 62,000
square foot manufacturing, research and administration facility in Fremont,
California. This lease has been extended by the landlord until the
aforementioned new facility is available for occupancy.
The Company leases additional facilities, primarily for sales and
sales support in California, Georgia, Kansas, Texas, Hong Kong and Belgium
under one to five-year leases, each facility being between 1,000 and 5,000
square feet. The Company believes that its present facilities are adequate for
its current level of operations.
The Company owns substantially all of its equipment.
Item 3. Legal Proceedings
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There are no material legal proceedings to which the Company is a
party or of which any of its properties is the subject.
Item 4. Submission of Matters to a Vote of Securities Holders
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No matters were submitted to a vote of security holders of the
Company through solicitation of proxies or otherwise, during the fourth quarter
of fiscal 1995.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
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<TABLE>
Telco Systems' common stock is traded on the NASDAQ National Market under the
symbol "TELC." The quarterly price ranges for the Company's common stock are
as follows:
<CAPTION>
Fiscal Year
-------------
1994 1995
---- ----
High Low High Low
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<S> <C> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . 18 11 5/8 10 3/4 8
Second Quarter . . . . . . . . . . . . . . . . 17 3/4 12 1/2 10 3/4 7 7/8
Third Quarter . . . . . . . . . . . . . . . . 13 5/8 9 5/8 15 3/8 9
Fourth Quarter . . . . . . . . . . . . . . . . 14 9 5/8 15 1/4 10 1/8
</TABLE>
The Company has never declared or paid any dividends on its common stock
and does not plan to pay cash dividends in the foreseeable future.
At August 27, 1995, the number of holders of the Company's common stock
was 535. The Company believes that many of its shares are held by individual
participants in security listing positions or "street names" and estimates
there are an additional 7,300 beneficial holders as of August 27, 1995.
<TABLE>
Item 6. Selected Financial Data
-----------------------
<CAPTION>
Five years ended August 27, 1995
1995 1994 1993 1992 1991
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Backlog . . . . . . . . . . . . . . $ 5,527 $ 7,251 $ 6,714 $ 3,146 $ 8,562
Sales . . . . . . . . . . . . . . . . 89,070 100,470 83,222 96,661 102,725
Net income (loss)* . . . . . . . . . 628 4,770 (16,285) 5,909 10,120
Earnings (loss) per share . . . . . . $ .06 $ .48 $ (1.75) $ .62 $ 1.08
Average shares and
equivalents (thousands) . . . . . . . . 10,345 9,858 9,300 9,567 9,406
Year-end employment . . . . . . . . . . 436 443 442 478 442
Balance Sheet
Working capital . . . . . . . . . . . . $ 49,915 $ 43,210 $ 36,989 $ 52,318 $ 48,750
Total assets . . . . . . . . . . . . . 82,439 82,202 80,551 88,932 83,200
Long-term liabilities . . . . . . . . . 3,490 4,443 7,852 5,615 7,295
Total shareholders' equity . . . . . . $ 67,405 $ 61,548 $ 54,872 $ 70,695 $ 61,419
<FN>
* 1995 Net income includes $420 of restructuring credits;.1993 net loss
includes $13,605 of restructuring costs. The Company has never declared or
paid any dividends on its common stock.
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
FISCAL 1995 COMPARED WITH FISCAL 1994
Sales for fiscal 1995 decreased 11% to $89.1 million compared with $100.5
million in fiscal 1994. This decrease was principally related to a lower level
of shipments of broadband transmission products and network access products and
was partially offset by an increase in shipments of bandwidth optimization
products.
Sales of broadband transmission products amounted to $36.6 million in
fiscal 1995, a decrease of 21% compared with fiscal 1994. The Company
experienced a decline in demand for its principal FOX and 828 families of
broadband transmission products as customers increased deployment of
competitive synchronous optical network transmission (SONET) products. The
Company's new SONET product is presently planned for initial customer shipments
in calendar 1996. Sales to Regional Bell Operating Companies (RBOCs)
represented 58% and 60% of broadband transmission product sales in fiscal 1995
and fiscal 1994, respectively. Approximately 80% of the Company's sales of
these products continued to be for provision of high bandwidth fiber optic
services in the feeder or distribution section of the public telephone network.
Sales of network access products decreased 6% to $46.9 million compared
with $50.0 million in fiscal 1994. A lower level of shipments of the
Company's DCB-24 and Route 24 access multiplexers resulted from increased
competition in the low end of the access products market.
Sales of bandwidth optimization products increased 41% to $5.5 million.
The increase in sales resulted from increased customer acceptance for the
Company's local and wide area network (LAN/WAN) optimizer products in both the
domestic and international marketplaces.
Total Company orders booked during fiscal 1995 amounted to $87.3 million
which reflected a decrease of 14% compared with fiscal 1994. The backlog of
unfilled orders was $5.5 million at year end compared with $7.3 million at the
previous year end. The Company's order trend is characterized by short
customer-scheduled delivery cycles. As a result, a substantial portion of
sales in each fiscal quarter is derived from orders booked during the quarter.
The Company's major customers include telephone operating companies and
interexchange carriers. The RBOCs and major telephone companies accounted for
35% of sales in fiscal 1995 and 43% of sales in fiscal 1994. The major
interexchange carriers represented 23% of total sales in fiscal 1995 and 19% of
total sales in fiscal 1994.
Net income for the year amounted to $.6 million or $.06 per share compared
with $4.8 million or $.48 per share in fiscal 1994. Lower net income was
principally related to lower sales levels and increased spending for research
and development, offset in part by higher interest income.
Gross profit in fiscal 1995 was $40.5 million or 45.5% of sales. In
comparison, fiscal 1994 gross profit was $44.7 million or 44.5 % of sales.
Most significant to the lower gross profit amount was the reduced sales volume,
somewhat offset by an improvement in gross margin percent principally due to
favorable product mix.
The Company continued heavy investment for next generation products with
research and development expense of $18.2 million in fiscal 1995, an increase
of 14% compared with fiscal 1994. Spending for research and development
represented 20% of sales in fiscal 1995, compared with 16% in fiscal 1994. The
Company expects research and development expense to remain at a high level in
fiscal 1996 as spending continues for ATM/SONET products, feature additions to
existing products and product modifications for international applications.
Sales, marketing and administration expense was $22.9 million in fiscal
1995, approximately the same level as fiscal 1994. During fiscal 1995,
existing resources were realigned to focus on strategic business initiatives
and planning for opportunities in the international marketplace.
The fiscal 1993 restructuring charge of $13.6 million associated with the
reorganization of the Broadband Transmission Products Business Unit encompassed
a reduction in employment, consolidation of facilities, and the write-down of
certain assets (see Note 8 to Consolidated Financial Statements). At the end
of fiscal 1995, the status of the excess facilities was
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unchanged from fiscal 1993. Costs relating to the vacated space of $1.1
million and $1.4 million were charged to the restructuring reserve in fiscal
1995 and fiscal 1994, respectively. Final disposition of certain assets
previously written down resulted in a gain of $.4 million, which was reported
as a restructuring credit in the fiscal 1995 results of operations.
Amortization expense was $.8 million in both fiscal 1995 and 1994.
Amortization expense relates to the acquisition of the fiber optic products
area in 1983, certain channel bank products in 1984 and the acquisition of
Magnalink Communications Corporation in 1992.
Interest expense of $.2 million in fiscal 1994 related to the remaining
balance of 11% convertible subordinated notes which were paid in full during
the fourth quarter of fiscal 1994.
Interest income was $1.6 million and $.8 million in fiscal 1995 and fiscal
1994, respectively. This increase resulted from higher interest rates earned
on a higher level of cash equivalents and short-term investments.
Income tax expense in fiscal 1995 was not provided due to the utilization
of operating losses and tax credits not previously benefited. In fiscal 1994,
income tax expense was $.7 million, which represented an effective rate of
12.7% .
In March 1995, the Financial Accounting Standards Board issued FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", which specifies rules for asset impairment determination.
The Company will adopt FAS 121 in fiscal 1996 and believes that adoption will
not have a significant effect on its financial statements.
FISCAL 1994 COMPARED WITH FISCAL 1993
Sales for fiscal 1994 increased 21% to $100.5 million compared with $83.2
million in fiscal 1993. Sales of network access products increased 41% to
$50.0 million compared with $35.4 million in fiscal 1993. This increase
resulted from increased market demand for T1 network service and the effects of
broader distribution channels. Sales of broadband transmission products
increased 4% to $46.5 million as a result of increased sales of the Company's
FOX and 828 transmission products. Sales of bandwidth optimization products of
$3.9 million in fiscal 1994 reflected an increase of 32% compared with fiscal
1993. This increase resulted from new customers and sales channels for the
Company's LAN/WAN Optimizer products.
New orders booked in fiscal 1994 totaled $101.7 million, an increase of 16%
compared with fiscal 1993. The backlog of unfilled orders at year-end amounted
to $7.3 million compared with $6.7 million at the end of fiscal 1993. The
Company's major customers include telephone operating companies and
interexchange carriers. The RBOCs and major telephone companies accounted for
43% of sales in both fiscal 1994 and fiscal 1993. The major interexchange
carriers represented 19% of total sales in fiscal 1994 and 13% of total sales
in fiscal 1993.
Net income for fiscal 1994 was $4.8 million or $.48 per share compared with
a net loss of ($16.3 million) or ($1.75) per share in fiscal 1993. The return
to profitability in fiscal 1994 was due principally to higher sales of network
access products, an improved gross profit percent, and reduced operating
expenses in the Broadband Transmission Products Business Unit due to
restructuring actions taken in fiscal 1993.
The gross profit percent in fiscal 1994 increased to 44.5% of sales
compared with 41.0% in fiscal 1993. The improvement in the gross percentage in
fiscal 1994 resulted from higher sales volumes, product cost reductions and, in
the broadband transmission business, reduced manufacturing costs due to
restructuring actions taken in fiscal 1993.
Research and development expense was $16.0 million in fiscal 1994 and $15.6
million in fiscal 1993. Spending increased for the development of ATM/SONET
multiplexers and other broadband transmission products and for intelligent
network access multiplexers and bandwidth optimization products.
Sales, marketing and administration expenses were $23.1 million in fiscal
1994 compared with $22.4 million in fiscal 1993 which represented an increase
of 3%. Higher spending in fiscal 1994 included increased expenditures for
product line management and expanded selling and marketing activities for new
products.
12
<PAGE> 13
Amortization expense was $.8 million in both fiscal 1994 and fiscal 1993.
Amortization expense relates to the acquisition of the broadband transmission
products area in 1983, certain channel bank products in 1984 and the
acquisition of Magnalink Communications Corporation in 1992.
Interest expense was $.2 million in fiscal 1994, compared with $.6 million
in fiscal 1993. Interest expense relates to primarily to $10.0 million of 11%
convertible subordinated notes issued in January of 1985, which were paid in
full during the third quarter of fiscal 1994.
Interest income was $.8 million in fiscal 1994, compared with $.7 million
in fiscal 1993. This increase resulted from higher interest rates earned on a
higher level of cash equivalents and short-term investments.
Income taxes in fiscal 1994 were provided at an effective tax rate of 12.7%
for financial statement purposes, reflecting the utilization of operating
losses and tax credits not previously benefited. A tax benefit of 10% was
taken against the loss in fiscal 1993. This benefit was less than the 35.6%
effective tax rate in the prior year due primarily to the deferral to future
periods of tax benefits relating to the 1993 restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $2.9 million in fiscal 1995,
resulting in a year end total of $29.1 million. The increase of $2.9 million
essentially reflects a net inflow of $5.2 million attributable to the proceeds
and related tax benefits from employee stock plans and $5.0 million from lower
accounts receivable, partially offset by higher inventories and lower accounts
payable due to the reduced sales volume in the second half of the year.
Working capital at August 27, 1995 was $49.9 million compared with $43.2
million at August 28, 1994. The current ratio increased to 5.3 at the end of
fiscal 1995 versus 3.7 at the previous year end.
The Company maintains a $10.0 million line of credit with the Bank of
Boston which is available until September 30, 1996. Under the facility,
borrowings may be made at the bank's prime rate plus one half percent.
Although the Company had no borrowings against the line in fiscal 1995,
approximately $1.1 million has been reserved to support various guarantees in
effect at August 27, 1995.
Management believes that cash and short-term investments of $29.1 million
and funds provided by continuing operations will be adequate to satisfy
operating cash requirements for the foreseeable future.
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate a change to this practice in the foreseeable future.
13
<PAGE> 14
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Financial Schedules Page
------------------------------------------------------------------ ----
<S> <C>
Report of Ernst & Young LLP Independent Auditors 15
Consolidated Statements of Operations 16
Consolidated Balance Sheets 17
Consolidated Statements of Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Supplementary Data (Unaudited) 27
Consolidated Financial Statement Schedules: 28
Schedule II-Valuation and Qualifying Accounts
(All other schedules for which provision is made in
Regulation S-X are not required or are inapplicable and
therefore have been omitted.)
</TABLE>
14
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Telco Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Telco Systems, Inc. as of August 27, 1995, and August 28, 1994 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 27, 1995. Our audits also
included the financial statement schedule listed in the index at Item 14 (a).
These financial statements and schedule 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 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Telco Systems, Inc. at August 27, 1995, and August 28, 1994, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended August 27, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial statements
taken as a whole, present fairly, in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
October 12, 1995
15
<PAGE> 16
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS Telco Systems, Inc.
<CAPTION>
Three years ended August 27, 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C>
Sales
Broadband transmission products . . . . . . . . . . $36,626 $46,549 $44,840
Network access products . . . . . . . . . . . . . . 46,946 50,025 35,425
Bandwidth optimization products . . . . . . . . . . 5,498 3,896 2,957
------- ---------- -------
89,070 100,470 83,222
------ -------- ------
Costs and expenses
Cost of products sold . . . . . . . . . . . . . . . 48,559 55,768 49,139
Research and development . . . . . . . . . . . . . 18,207 15,955 15,551
Sales, marketing and administration . . . . . . . . 22,945 23,082 22,444
Restructuring costs (credit) . . . . . . . . . . . (420) -- 13,605
Amortization of intangible assets . . . . . . . . . 783 824 830
Interest expense . . . . . . . . . . . . . . . . . -- 225 558
Interest income . . . . . . . . . . . . . . . . . . (1,632) (845) (740)
------- -------- --------
88,442 95,009 101,387
------ ------- --------
Income (loss) before income taxes . . . . . . . . . 628 5,461 (18,165)
Income tax provision (benefit) . . . . . . . . . . -- 691 ( 1,880)
---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . $ 628 $ 4,770 $(16,285)
========= ======= =========
Average shares and equivalents . . . . . . . . . . 10,345 9,858 9,300
Net income (loss) per share . . . . . . . . . . . . $ .06 $ .48 $ (1.75)
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
<TABLE>
CONSOLIDATED BALANCE SHEETS TELCO SYSTEMS, INC.
<CAPTION>
August 27, 1995 and August 28, 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . $ 18,208 $ 15,262
Short-term investments . . . . . . . . . . . . . . . . . . . 10,895 10,946
Accounts receivable, less allowance for
doubtful accounts of $649 in 1995
($797 in 1994) . . . . . . . . . . . . . . . . . . . . . . 10,047 15,064
Refundable income taxes . . . . . . . . . . . . . . . . . . 1,251 -- -
Inventories, net . . . . . . . . . . . . . . . . . . . . . . 18,473 15,244
Other current assets . . . . . . . . . . . . . . . . . . . . 2,585 2,905
------- -------
Total current assets . . . . . . . . . . . . . . . . . 61,459 59,421
------- -------
Plant and equipment, at cost . . . . . . . . . . . . . . . . . . 41,720 39,861
Less accumulated depreciation . . . . . . . . . . . . . . . 31,114 27,745
------- -------
Net plant and equipment . . . . . . . . . . . . . . . . 10,606 12,116
------- -------
Intangible and other assets, less accumulated
amortization of $10,292 in 1995
($9,249 in 1994) . . . . . . . . . . . . . . . . . . . . . . . . 10,374 10,665
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 82,439 $ 82,202
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 3,952 $ 5,519
Payroll and related liabilities . . . . . . . . . . . . . . 2,628 3,436
Other accrued liabilities . . . . . . . . . . . . . . . . . 4,964 7,256
------- -------
Total current liabilities . . . . . . . . . . . . . . . 11,544 16,211
------- -------
Restructuring and other long-term liabilities . . . . . . . . . . 3,490 4,443
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding . . . . . . . . . . -- --
Common stock, $.01 par value, 24,000,000
shares authorized; shares outstanding:
10,230,624 at August 27, 1995;
9,649,051 at August 28, 1994 . . . . . . . . . . . . . . 102 96
Capital in excess of par value . . . . . . . . . . . . . . . 71,566 66,343
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (4,263) (4,891)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . 67,405 61,548
-------- --------
Total liabilities and shareholders'equity . . . . . . . . . $ 82,439 $ 82,202
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY TELCO SYSTEMS, INC.
<CAPTION>
Three years ended August 27, 1995
- ----------------------------------------------------------------------------------------------------------------------
Retained
Common Stock Capital in earnings
------------ excess of (accumulated
Shares Amount par value deficit) Total
------ ------ ---------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, August 30, 1992 . . . . . . . . . 9,236,571 $ 92 $ 63,979 $ 6,624 $ 70,695
--------- ----- -------- ------- --------
Net loss for year . . . . . . . . . . . . . (16,285) (16,285)
Issuance of common stock:
Employee stock purchase plan . . . . . . 53,535 1 267 268
Exercise of stock options . . . . . . . . 55,554 194 194
---------- -------- ------- ---------- -------
Balance, August 29, 1993 . . . . . . . . . 9,345,660 93 64,440 (9,661) 54,872
--------- ------ ------ ------- ------
Net income for year . . . . . . . . . . . . 4,770 4,770
Issuance of common stock:
Employee stock purchase plan . . . . . . 53,105 389 389
Exercise of stock options . . . . . . . . 250,286 3 1,514 1,517
---------- ------- ----- ----------- -------
Balance, August 28, 1994 . . . . . . . . . 9,649,051 96 66,343 (4,891) 61,548
--------- ------ ------ --------- -------
Net income for year . . . . . . . . . . . . 628 628
Issuance of common stock: . . . . . . . . .
Employee stock purchase plan . . . . . . 56,005 1 504 505
Exercise of stock options . . . . . . . . 525,568 5 4,719 4,724
------------ ------ --------- ------------ ----------
Balance, August 27, 1995 . . . . . . . . . 10,230,624 $102 $ 71,566 $ (4,263) $ 67,405
========== ==== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS TELCO SYSTEMS, INC.
<CAPTION>
Three years ended August 27, 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash Flows from Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 628 $ 4,770 $ (16,285)
Depreciation and amortization . . . . . . . . . . . . . 4,982 5,330 5,537
Restructuring costs (credit) . . . . . . . . . . . . . . (420) -- 13,605
Change in assets and liabilities
Accounts receivable, net . . . . . . . . . . . . . . . . 5,017 (4,051) 2,356
Refundable income taxes . . . . . . . . . . . . . . . . (1,251) 2,060 (2,060)
Inventories, net . . . . . . . . . . . . . . . . . . . . (3,229) 2,335 (3,039)
Other current assets . . . . . . . . . . . . . . . . . . 320 (529) (803)
Other assets . . . . . . . . . . . . . . . . . . . . . . (924) (128) (1,311)
Accounts payable and other current liabilities . . . . . (4,401) 2,271 1,824
Restructuring liabilities . . . . . . . . . . . . . . . (469) (3,176) (784)
Long-term liabilities . . . . . . . . . . . . . . . . . (330) (120) (552)
------- --------- ---------
Net cash provided by (used in) operating activities . . . (77) 8,762 (1,512)
------- --------- ---------
Cash Flows from Investing Activities
Additions to plant and equipment, net . . . . . . . . . (2,257) (2,248) (7,832)
Purchase of short-term investments . . . . . . . . . . . (29,665) (15,692) --
Maturities of short-term investments . . . . . . . . . . 29,716 4,746 --
------- -------- --------
Net cash (used in) investing activities . . . . . . . . (2,206) (13,194) (7,832)
-------- --------- ---------
Cash Flows from Financing Activities
Proceeds and related tax benefits from sale of common
shares under employee stock plans . . . . . . . . . . 5,229 1,906 462
Payments on long-term debt . . . . . . . . . . . . . . -- (4,000) (2,000)
------- -------- --------
Net cash provided by (used in) financing activities . . 5,229 (2,094) (1,538)
------- -------- --------
Increase (decrease) in cash and equivalents . . . . . . . . 2,946 (6,526) (10,882)
Cash and equivalents at beginning of year . . . . . . . . . 15,262 21,788 32,670
-------- -------- --------
Cash and equivalents at end of year . . . . . . . . . . . . $ 18,208 $ 15,262 $ 21,788
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 299 $ 550
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 1,235 $ 544 $ 647
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The financial statements consolidate the accounts
of Telco Systems, Inc., and its subsidiaries (the Company). Intercompany
accounts and transactions have been eliminated. The Company's fiscal year is
the 52- or 53-week period ending on the last Sunday in August. Certain amounts
reported in prior years have been reclassified to be consistent with the
current year's presentation.
The Company has 50% limited partnership interests in two real estate
partnerships which are accounted for by the equity method of accounting. The
aggregate net investment in these partnerships on the accompanying balance
sheets is not material (See Note 7).
In March 1995, the Financial Accounting Standards Board issued FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". This rule specifies when assets should be reviewed for
impairment, how to determine and measure impairment loss and what disclosures
are required. The Company will adopt FAS 121 in fiscal 1996 and believes that
adoption will not have a significant effect on its financial statements.
REVENUE RECOGNITION Revenues from product sales are recognized at
time of shipment to customer.
PRODUCT WARRANTY Expected future product warranty liability is provided
for when the product is sold.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS In fiscal 1995, the
Company adopted FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", which had no material impact on the Company's financial position
or results of operations. In accordance with FAS 115, the Company classifies
all of its marketable securities as available-for-sale securities. These
securities are stated at their fair value. There are currently no unrealized
holding gains and losses. The Company considers all highly liquid investments
with maturity of 91 days or less to be cash equivalents. Those instruments
with maturities greater than 91 days and less than twelve months are classified
as short-term investments. Cash equivalents and short-term investments are
carried at market, and consist of U.S. Government securities, bank certificates
of deposit and corporate issues. All securities mature within twelve months.
INVENTORIES Inventories are stated at the lower of cost or market. The
cost of products sold is based on standard costs, which approximate actual
costs as determined by the first-in, first-out method.
<TABLE>
Inventories at fiscal year end were as follows:
<CAPTION>
1995 1994
------------------------
(in thousands)
<S> <C> <C>
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,101 $ 6,656
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,060 2,305
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,312 6,283
------------------------
$18,473 $15,244
========================
</TABLE>
PLANT AND EQUIPMENT Additions to plant and equipment are recorded at cost.
Depreciation is determined by using the straight-line method over the estimated
useful lives of the assets -- three to eight years. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
life or the lease term.
<TABLE>
Plant and equipment, at cost, at fiscal year end were as follows:
<CAPTION>
1995 1994
------------------------
(in thousands)
<S> <C> <C>
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,154 $28,743
Furniture and leasehold improvements . . . . . . . . . . . . . . . . . . . . . 11,566 11,118
------------------------
$41,720 $39,861
========================
</TABLE>
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 (continued)
INTANGIBLE AND OTHER ASSETS Intangible assets arising in connection with
business acquisitions were $8,922,000 and $9,749,000 at August 27, 1995 and
August 28, 1994, respectively. They are amortized over lives ranging from
seven to twenty-five years using the straight-line method, with an average
remaining life of 11.8 years. Software development costs are capitalized after
a product's technological feasibility has been established. At August 27,
1995 and August 28, 1994, intangible and other assets included $279,000 and
$547,000, respectively, of software development costs. Amortization of
software development costs is provided using the straight-line method over an
estimated economic life of three years. During the three fiscal years ended
1995, related amortization expense charged to cost of goods sold was $273,000,
$44,000, and $115,000, respectively.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and accounts receivable. The Company's
temporary cash investments, which are principally limited to U.S. Government
securities and bank certificates of deposit, are subject to minimal risk. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure
is limited.
EARNINGS (LOSS) PER SHARE Earnings (loss) per share is based on the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive. Fully diluted earnings per share did not differ significantly from
primary earnings per share in any year.
NOTE 2 DESCRIPTION OF BUSINESS
The Company is engaged in a single business segment constituting the
development, manufacturing, and marketing of broadband transmission products,
network access products, and bandwidth optimization products for the
telecommunications industry. Regional Bell Operating Companies (RBOC),
independent telephone companies, and interexchange carriers are the primary
users of the Company's products. Sales to the RBOCs accounted for 29% of sales
in fiscal 1995, 37% of sales in fiscal 1994, and 38% of sales in fiscal 1993.
RBOC sales include sales to NYNEX of 17% in fiscal 1995, 21% in fiscal 1994 and
12% in fiscal 1993. Sprint represented 18% of sales in fiscal 1995 and 14% of
sales in fiscal 1994.
NOTE 3 INCOME TAXES
<TABLE>
<CAPTION>
The components of the provision (benefit) for income taxes were as follows:
Fiscal Year
1995 1994 1993
-------------------------------------------------
Federal (in thousands)
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . . $(821) $1,321 $(1,280)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 821 (730) (690)
</TABLE>
<TABLE>
<CAPTION>
State
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . . -- 100 90
--------------------------------------------------
$ -- $ 691 $(1,880)
==================================================
</TABLE>
Effective August 30, 1993, the Company adopted FAS 109 "Accounting for
Income Taxes." Prior years' financial statements have not been restated,
accordingly, the amounts shown for 1993 reflect income tax accounting under FAS
96. The cumulative effect of adoption was not material to the Company's
financial position or results of operations.
At August 27, 1995, and August 28, 1994, the Company had a net deferred
tax asset of $1,105,000 and $1,926,000, respectively. FAS 109 requires that a
valuation reserve be established up if it is "more likely than not" that
realization of the tax benefits will not occur. The valuation allowance was
$6,709,000 at August 27, 1995. The net change in the valuation allowance for
deferred tax assets was a decrease of $162,000 in fiscal 1995, and a decrease
of $114,000 in fiscal 1994, related to the use of previously unbenefited
losses.
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 3 (continued)
For financial reporting and income tax purposes, the Company had unused
research and development tax credit carryovers of $2.7 million at August 27,
1995, which expire from fiscal years 1998 through 2010.
The provision (benefit) for income taxes differs from the amount computed
using the statutory rate as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
1995 1994 1993
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate . . . . . . . . . . . . . . . . $ 214 $1,857 $(6,441)
Previously unbenefited deferred items . . . . . . . . . . . . . . . . (566) -- --
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 267 280 289
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (810) (493)
Loss benefited at lower alternative minimum tax rate . . . . . . . . . -- -- 1,114
Benefit of loss carryforward . . . . . . . . . . . . . . . . . . . . . -- (730) --
State income taxes, net of federal tax benefits . . . . . . . . . . . . -- 66 60
Loss producing no current tax benefit . . . . . . . . . . . . . . . . . -- -- 3,179
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 28 412
----- ------ -------
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . $ -- $ 691 $(1,880)
===== ====== =======
</TABLE>
<TABLE>
The components of deferred tax assets and liabilities at fiscal year end are as follows:
<CAPTION>
1995 1994
----------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,403 $ 3,991
Inventory and other reserves . . . . . . . . . . . . . . . . . . . . . 3,675 3,600
Federal tax credit carryforward . . . . . . . . . . . . . . . . . . . . 2,700 2,250
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 425
----------------------------
9,082 10,266
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . (6,709) (6,871)
----------------------------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . 2,373 3,395
----------------------------
Deferred tax liabilities
Accelerated tax deduction . . . . . . . . . . . . . . . . . . . . . . 1,110 1,016
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . 198 470
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (17)
---------------------------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . 1,268 1,469
-------------------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,105 $ 1,926
========================
</TABLE>
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC,
NOTE 3 (continued)
The following is a summary of the components of deferred tax under FAS 96
applicable to fiscal 1993:
<TABLE>
<CAPTION>
Fiscal Year
1993
------------------
(in thousands)
<S> <C>
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,217)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 200
Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
-------
$ (690)
=======
</TABLE>
NOTE 4 ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities at fiscal year end were as follows:
1995 1994
-------------------------
(in thousands)
<S> <C> <C>
Warranty and rework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 772 $ 930
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,295 1,562
All other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897 4,764
-------------------------
$ 4,964 $ 7,256
=========================
</TABLE>
NOTE 5 LINE OF CREDIT
The Company has a $10 million line of credit with the Bank of Boston.
Under the facility, which expires September 30, 1996, borrowings may be made at
the bank's prime rate plus one half of one percent. During fiscal 1995 and
fiscal 1994, the Company had no borrowing under the line of credit and had no
other short-term bank debt outstanding. Portions of the line have been
reserved to support various guarantees including the loan discussed in Note 7,
leaving unreserved credit of $8.9 million available at August 27, 1995.
NOTE 6 LONG-TERM LIABILITIES
During fiscal 1994, the Company repaid $4.0 million of 11% convertible
subordinated notes which included a $2.0 million prepayment to fully extinguish
the debt. There was no prepayment premium due for payments made during the
final year of the notes.
At August 27, 1995, and August 28, 1994, restructuring and other long-term
liabilities include $2.9 million and $3.5 million, respectively, of
restructuring costs discussed in Note 8. Amounts relating to real estate
partnership matters were $.6 million and $.9 million at August 27, 1995, and
August 28, 1994, respectively.
NOTE 7 LEASE COMMITMENTS
The Company leases a 216,000 square-foot manufacturing, research and
administration facility in Norwood, Massachusetts, from a limited partnership
in which the Company has a 50% interest. Neither the Company nor the other
partners have made or anticipate making any substantial capital contributions
or advances to the partnership. Under the partnership agreement, the Company,
in addition to its 50% interest, is entitled to a priority payment (which would
proportionately increase with an increase in the property value) out of the
proceeds of any sale or future refinancing of the property.
NOTE 7 (continued)
The lease with the partnership commenced on December 16, 1985, for a term
of 13 years with an option to extend the term for three successive periods of
five years each. Effective January 1, 1994, the original lease was modified
through a lease amendment which extended the lease term to January 31, 2004,
and deleted the lease extension provisions. Commencing on January 1, 1994, the
gross rent payable is $1.5 million annually through January 31,1999. For the
remainder of the lease term ending January 31, 2004, gross rent payable is $1.7
million annually. In the pre-amended lease, the gross rent payable was $2.5
million annually.
23
<PAGE> 24
The Company has issued a $900,000 guarantee on a bank loan to a second
limited partnership. This partnership has granted a 100% security interest and
collateral assignment to the Company in a parcel of undeveloped land owned by
the partnership. The land, comprised of approximately 7.5 acres, is adjacent to
the Company's leased facility in Norwood, Massachusetts. The Company believes
the value of the land is adequate to satisfy any obligation under the
guarantee.
The Company leases other facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2005. The
Company is required to pay property taxes, insurance and normal maintenance
costs. Certain of the lease agreements provide for five-year renewal options,
and future lease payments could increase based on the Consumer Price Index.
<TABLE>
Minimum annual lease commitments under non-cancelable operating leases for
facilities and equipment as of August 27, 1995 are set forth in the following
table. Amounts relating to excess facilities included herein have been accrued
as discussed in Note 8:
<CAPTION>
Fiscal Year Net Lease Payments
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,542
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,507
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,625
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,715
Beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,666
--------
$ 24,586
========
</TABLE>
Rent expense under operating leases was $2.4 million in fiscal 1995, $3.0
million in fiscal 1994, and $3.1 million in fiscal 1993.
<TABLE>
NOTE 8 RESTRUCTURING COSTS
In the fourth quarter of fiscal 1993, the Company restructured its
broadband transmission products business unit due to lower sales of certain
products and to increase focus on its SONET (synchronous) product program.
Activities were restructured, divisional employment was reduced by
approximately 25%, and facilities were consolidated.
<CAPTION>
Restructuring charges totalling $13.6 million were recognized in fiscal 1993 as follows:
(in thousands)
<S> <C>
Excess facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,543
Write-down of assets to net realizable value . . . . . . . . . . . . . . . . . . . . . . 5,477
Employee severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,144
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
-------
$13,605
=======
</TABLE>
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEM TELCO SYSTEMS, INC.
NOTE 8 (continued)
The reserve for excess facilities costs was established for future cash
expenditures relating to unoccupied space. These costs include primarily lease
payments, utilities, maintenance, security and other related expenses, net of
anticipated rental income to be derived from the vacant space for the remaining
lease term. In fiscal 1995 and 1994, actual expenses relating to the excess
facilities were $1.1 million and $1.4 million, respectively. These amounts
have been reduced by $.2 million of sublet income in both years. Disposition
of all other restructuring costs reserved in fiscal 1993 has been completed,
consistent with original estimates, except the reevaluation of inventory
previously written down resulted in a restructuring credit of $.4 million which
was included in the fiscal 1995 results of operations. As of August 27, 1995,
the remaining restructuring reserve of $4.2 million was for excess facility
costs.
<TABLE>
NOTE 9 EMPLOYEE BENEFIT PLANS
Under the Company's 1980 Stock Option Plan, the 1988 Non-Qualified Stock
Option Plan, and the 1990 Stock Option Plan (the Plans), officers, directors,
and key employees have been granted options to purchase shares of the Company's
common stock at a price equal to the market value at the date of grant.
Options normally become exercisable ratably over a 48 month period, commencing
six months from the date of grant, and expire after ten years. At August 27,
1995, 1,139,051 shares of common stock were reserved for issuance under the
Plans. A summary of the activity in the stock option plans for fiscal 1995,
1994, and 1993 is presented as follows:
<CAPTION>
Available Options Outstanding Option Price
--------------------
Stock Option Plans For Options Non-qualified Incentive Per Share
----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Balance at August 30, 1992 . . . . . . . . . 188,608 1,050,293 1,000 $ 1.30 - $17.125
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (177,250) 177,250 -- $6.125 - $ 9.00
Authorized under 1990 plan . . . . . . . . . 500,000 -- --
Exercised . . . . . . . . . . . . . . . . . . -- (54,554) (1,000) $ 1.30 - $ 7.75
Canceled . . . . . . . . . . . . . . . . . . 57,431 (57,431) -- $3.375 - $14.375
Expired . . . . . . . . . . . . . . . . . . . (17,775) -- --
-------------------------------------------------------------------
Balance at August 29, 1993 . . . . . . . . . 551,014 1,115,558 -- $2.125 - $17.125
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (527,500) 527,500 -- $8.375 - $ 14.50
Exercised . . . . . . . . . . . . . . . . . . -- (250,286) -- $2.125 - $ 11.25
Canceled . . . . . . . . . . . . . . . . . . 143,922 (143,922) -- $3.375 - $17.125
Expired . . . . . . . . . . . . . . . . . . . (500) -- --
-------------------------------------------------------------------
Balance at August 28, 1994 . . . . . . . . . 166,936 1,248,850 -- $2.125 - $15.875
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (395,456) 395,456 -- $9.875 - $16.750
Authorized under 1990 plan . . . . . . . . . 250,000 -- --
Exercised . . . . . . . . . . . . . . . . . . -- (525,568) -- $2.125 - $ 15.50
Canceled . . . . . . . . . . . . . . . . . . 159,439 (159,439) -- $3.375 - $16.250
Expired . . . . . . . . . . . . . . . . . . . (1,167) -- --
-------------------------------------------------------------------
Balance at August 27, 1995 . . . . . . . . . 179,752 959,299 -- $ 2.25 - $ 16.75
===================================================================
</TABLE>
At August 27, 1995, August 28, 1994, and August 29, 1993, there were
413,495 shares, 729,480 shares, and 657,354 shares exercisable, respectively.
NOTE 9 (continued)
Under the Company's 1983 Employee Stock Purchase Plan, eligible employees
may purchase shares of common stock through payroll deductions (up to a maximum
of 10% of their salary) at a price equal to 85% of the lower of the stock's
fair market value at the beginning or at the end of each six month offering
period. There were 54,747 shares issuable under the Plan for fiscal 1995 of
which 28,838 were outstanding at August 27, 1995. For fiscal 1994 and 1993,
53,105 and 53,535 shares, respectively, were issued under the Plan. At August
27, 1995, 158,504 shares of common stock were reserved for issuance under the
Plan.
Under the Company's Savings Plan, a defined contribution savings plan
under the provisions of Internal Revenue Code Section 401(k), the Company
contributes up to 3% of base pay to a fund which is held by a trustee. All
employees are
25
<PAGE> 26
eligible to participate in the plan and are entitled, upon termination or
retirement, to receive their vested portion of the savings fund assets. The
unvested portion remains in the Plan and is used to reduce future Plan expense.
Total Plan expense was $525,000 in fiscal 1995, $503,000 in fiscal 1994, and
$490,000 in fiscal 1993.
26
<PAGE> 27
<TABLE>
SUPPLEMENTARY DATA
QUARTERLY INFORMATION
TELCO SYSTEMS, INC.
Quarterly financial information (unaudited) is as follows:
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1995 (Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . $26,217 $22,877 $20,656 $19,320
Gross profit . . . . . . . . . . . . . . . . . $11,835 $10,812 $ 9,596 $ 8,268
Net income (loss) . . . . . . . . . . . . . . . $ 1,544 $ 1,255 $ (940) * $(1,231)
Net income (loss) per share . . . . . . . . . . $ .15 $ .12 $ (.09) $ (.12)
1994
Sales . . . . . . . . . . . . . . . . . . . . $22,219 $24,245 $26,040 $27,966
Gross profit . . . . . . . . . . . . . . . . . $ 9,267 $10,697 $11,840 $12,898
Net income . . . . . . . . . . . . . . . . . . $ 266 $ 820 $ 1,600 $ 2,084
Net income per share . . . . . . . . . . . . . $ .03 $ .08 $ .16 $ .21
<FN>
* Fourth quarter 1995 net loss includes $420 restructuring credit
</TABLE>
27
<PAGE> 28
<TABLE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<CAPTION>
Three Years Ended August 27, 1995
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Allowance for Doubtful Accounts:
Balance at beginning of period . . . . . . . . . . $ 797 $ 806 $1,539
Charges to costs and expenses . . . . . . . . . . . 63 220 51
Deductions . . . . . . . . . . . . . . . . . . . . (211) (229) (784)
---------------------------------------
Balance at end of period . . . . . . . . . . . . . $ 649 $ 797 $ 806
=======================================
Warranty and Rework Reserve:
Balance at beginning of period . . . . . . . . . . $ 930 $ 969 $1,225
Charges to costs and expenses . . . . . . . . . . . 432 182 560
Deductions . . . . . . . . . . . . . . . . . . . . (590) (221) (816)
---------------------------------------
Balance at end of the period . . . . . . . . . . . $ 772 $ 930 $ 969
=======================================
</TABLE>
28
<PAGE> 29
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Incorporated by reference from the Definitive Proxy Statement, with
the exception that information regarding the executive officers of Telco
Systems, Inc. is contained in Item 1 Part I on page 7 of this report.
Item 11. Executive Compensation
----------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management of
Telco Systems, Inc.
-----------------------------------------------------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Incorporated by reference from the Definitive Proxy Statement.
29
<PAGE> 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
See index to Consolidated Financial Statements at page 14.
(a) 2. Financial Statement Schedules
-----------------------------
See index to Consolidated Financial Statements at page 14.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3. Exhibits
--------
Management contracts and compensatory plans or
agreements required to be filed as exhibits pursuant to
item 14(a) (3) of Form 10-K are identified by asterisks
(*).
3.1 Certificate of Incorporation of Telco Systems, Inc. (1)
3.2 Bylaws of Telco Systems, Inc., as amended. (2)
3.3 Form of Common Stock Certificate. (2)
10.3 Telco Systems, Inc. Employee Stock Purchase Plan, as
amended through July, 1991 (4)*
10.4 Amendment to Telco Systems, Inc. Employee Stock Purchase
Plan, adopted August, 1991. (6)*
10.5 Telco Systems, Inc. 1988 Non-Statutory Stock Option Plan,
as amended. (6)*
10.8 Partnership Agreement relating to facilities of Telco
Systems Fiber Optics Corporation located at 63 Nahatan
Street, Norwood, Massachusetts, dated August 29, 1985.
(5)
10.23 Lease of facilities of Telco Systems Fiber Optics
Corporation located at 63 Nahatan Street, Norwood,
Massachusetts, dated December 12, 1985. (7)
10.35 Agreement between the Registrant and John A. Ruggiero
dated October 4, 1989. (3)*
10.38 Telco Systems, Inc. 1990 Stock Option Plan, as amended.
(8)*
10.39 Lease dated May 3, 1990 between the Registrant and
Pactel Properties for facilities located at 4305 Cushing
Parkway, Fremont, California (5)
10.40 Stock Purchase Agreement between Registrant and
Magnalink Communications Corporation dated May 29, 1992.
(7)
30
<PAGE> 31
10.42 Amendment to lease of facility located at 63 Nahatan
Street, Norwood, MA dated January 1, 1994. (8)
10.43 Separation Agreement between Registrant and Howard C.
Salwen dated September 19, 1994. (Schedules omitted.)
(8)*
10.44 Stock Purchase Agreement and Registration Rights
Agreement between the Registrant and Unitech Telecom,
Inc. dated March 29, 1995
10.45 Amendments one and two to lease of facility in Fremont,
California between the Registrant and Riggs National
Bank of Washington D.C. as trustee of the Multi-Employer
Property Trust, (successor to Pactel Properties) dated
April 12, 1995 and May 8, 1995, respectively.
10.46 Agreement between the Registrant and John A. Ruggerio
dated March 15, 1995.*
10.47 Agreement between the Registrant and William B. Smith
dated February 2, 1995.*
10.48 Agreement between the Registrant and William B. Smith
dated March 6, 1995.*
22.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule
Notes: (1) Incorporated by reference to Exhibit 3.1 to
Appendix II of the definitive proxy statement of
the Company dated November 20, 1986 relating to the
Annual Meeting of Shareholders on December 17,
1986.
(2) Incorporated by reference to Exhibits 3.2 and 3.3,
respectively, to the Registrant's Report on Form
10-K for its fiscal year ended August 30, 1987.
(3) Incorporated by reference to Exhibit 10.35, to the
Registrant's Report on Form 10-K for its fiscal
year ended August 27, 1989.
(4) Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 (File No. 33-26976).
(5) Incorporated by reference to Exhibits 10.8 and
10.39, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 26,
1990.
(6) Incorporated by reference to Exhibits 10.4 and
10.5, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 25,
1991.
(7) Incorporated by reference to Exhibits 10.23 and
10.40, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 30,
1992.
(8) Incorporated by reference to Exhibit 10.38, 10.42
and 10.43 Registrant's Report on Form 10-K for its
fiscal year ended August 28, 1994.
(b) Reports on Form 8-K
-------------------
There were no reports filed on Form 8-K during the fourth quarter
of fiscal 1995.
31
<PAGE> 32
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.
Dated: November 16, 1995 TELCO SYSTEMS, INC.
/s/ John A. Ruggiero
--------------------------------
By John A. Ruggiero
Chief Executive Officer/Director
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 date indicated.
<TABLE>
<S> <C> <C>
/s/ John A. Ruggiero Chief Executive Officer/Director Nov. 16, 1995
- ------------------------- Principal Financial Officer -------------
John A. Ruggiero Date
/s/ William B. Smith President and Chief Operating Nov. 16, 1995
- ------------------------- Officer/Director -------------
William B. Smith Date
/s/ Daniel A. DiPietro Vice President and Nov. 16, 1995
- ------------------------- Corporate Controller, -------------
Daniel A. DiPietro Principal Accounting Officer Date
/s/ Dean C. Campbell Director Nov. 16, 1995
- ------------------------- -------------
Dean C. Campbell Date
/s/ Sheldon Horing Director Nov. 16, 1995
- ------------------------- -------------
Sheldon Horing Date
/s/ Steward Flaschen Director Nov. 16, 1995
- ------------------------- -------------
Steward Flaschen Date
</TABLE>
<PAGE> 33
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.44 Stock Purchase Agreement and Registration Rights Agreement
between the Registrant and Unitech Telecom, Inc. dated March 29, 1995
10.45 Amendments one and two to lease of facility in Fremont, California
between the Registrant and Riggs National Bank of Washington D.C.
as trustee of the Multi-Employer Property Trust, (sucessor to Pactel
Properties) dated April 12, 1995 and May 8, 1995, Respectively..
10.46 Agreement between the Registrant and John A. Ruggerio dated March 15, 1995
10.47 Agreement between the Registrant and William B. Smith dated February 2, 1995
10.48 Agreement between the Registrant and William B. Smith dated March 6, 1995
22.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors as
to incorporation by reference.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.44
STOCK PURCHASE AGREEMENT
THIS AGREEMENT made as of the 29th day of March, 1995, by and among
Unitech Telecom, Inc., a Delaware corporation (the "CORPORATION"); Technology
Funding Venture Partners IV, An Aggressive Growth Fund, L.P., a Delaware
limited partnership ("TFVP IV"); Technology Funding Venture Partners V, An
Aggressive Growth Fund, L.P., a Delaware limited partnership ("TFVP V"); Telco
Systems, Inc., a Delaware corporation ("TELCO"), Dr. Pehong Chen, an individual
residing in California and Variamat Resources Sdn. Bhd., a Malaysian
corporation, ("Variamat"), Ding Cho Hee, an individual residing in Malaysia,
William Wittmeyer, an individual (and member of the Board of Directors of the
Corporation) residing in California, and Malaysian Technology Development
Corp., a Malaysian corporation ("MTDC") (the foregoing being hereinafter
sometimes referred to individually as an INVESTOR and collectively as the
"INVESTORS").
WHEREAS, the Investors wish to purchase from the Corporation, and the
Corporation wishes to sell to the Investors, certain shares of the
Corporation's Series A Convertible Preferred Stock, $.01 par value per share
("SERIES A PREFERRED STOCK" or "PREFERRED STOCK"), as described below;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereby agree as follows:
SECTION 1. CERTIFICATE OF AMENDMENT. Immediately prior to the execution and
delivery of this Agreement, the Corporation filed with the Secretary of State
of Delaware a Certificate of Amendment (the "CERTIFICATE OF AMENDMENT"), a copy
of which is attached hereto as EXHIBIT 1, to its Certificate of Incorporation,
as previously amended (the Certificate of Incorporation of the Corporation, as
previously amended and as further amended by the Certificate of Amendment and
in effect on the date hereof being hereinafter referred to as the "CERTIFICATE
OF INCORPORATION"), for the purpose of increasing and amending the authorized
capital stock of the Corporation and setting forth the designations and the
powers, preferences and rights, and the qualifications, limitations and
restrictions thereof, granted to or imposed upon each class of stock of the
Corporation and the holders thereof, including the Preferred Stock.
SECTION 2. PURCHASE AND SALE OF THE PREFERRED STOCK.
(a) The Corporation agrees to sell to each Investor, and
each Investor, severally and not jointly, agrees to purchase from the
Corporation, at the Closing (as hereinafter defined) and upon the terms and
conditions hereinafter set forth, the
<PAGE> 2
number of shares of Series A Preferred Stock set forth opposite the name of
such Investor on the Schedule of Investors attached hereto as EXHIBIT 2.
(b) The purchase price for the shares of Preferred Stock
to be sold pursuant to this Agreement (the "SHARES") shall be $8.00 per share.
SECTION 3. DELIVERY OF THE SHARES AND OTHER DOCUMENTS.
(a) The closing (the "CLOSING") hereunder with respect to
the transactions with the Investors contemplated hereby shall take place at
the offices of the Corporation as hereinafter provided simultaneously with the
execution and delivery of this Agreement.
(b) At the Closing, the Corporation shall deliver to each
Investor a stock certificate, registered in the name of such Investor,
representing the number of Shares purchased by such Investor at such Closing as
set forth opposite the name of such Investor on the Schedule of Investors
attached hereto. Delivery to each Investor shall be made against receipt by
the Corporation of the full amount of the purchase price for the Shares being
purchased by such Investor as follows:
(i) in the case of the Investors other than
TFVP IV, TFVP V and Variamat, by any combination of certified or official bank
check payable to the order of the Corporation or wire transfer to the
Corporation's account at Bank of Canton of California, 743 Washington Street,
San Francisco, California 94108, Telephone No. (415) 421-5215, ABA No.
121002259, Account No. 02703-046 (the "Bank") or such other payment form by an
Investor as shall be agreed to in writing by the Corporation, such Investor and
counsel to the Investors as set forth in Section 9 hereof, it being agreed that
a promissory note substantially in the form attached hereto as EXHIBIT 3 shall
be such an acceptable form of payment of up to $1,000,000 of purchase price to
be paid by MTDC;
(ii) in the case of each of TFVP IV and TFVP
V, by payment of $275,000 by any combination certified or official bank check
payable to the order of the Corporation or wire transfer to the Corporation's
account at the Bank, and by payment of the remaining $100,000 of purchase
price due from such Investor by surrender for cancellation in full of the
secured convertible promissory note of the Corporation dated May 31,
-2-
<PAGE> 3
1994 issued to such Investor (provided that accrued interest on the notes shall
be paid at the Closing by the Corporation); and
(iii) in the case of Variamat, by
cancellation of outstanding indebtedness (and surrender for cancellation of the
promissory note of the Corporation evidencing such indebtedness), by the
Corporation to Variamat in the amount of $100,000, which indebtedness was
incurred during 1995.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The Corporation
hereby represents and warrants to the Investors as follows:
4.1 ORGANIZATION. The Corporation is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own and lease its
properties, to carry on its business as currently conducted and as proposed to
be conducted and to carry out the transactions contemplated hereby. The
Corporation is duly qualified as a foreign corporation and is in good standing
in all such other jurisdictions (which jurisdictions are listed in EXHIBIT 4.1)
in which the current conduct of its business or its ownership or leasing of
property requires such qualification and in which the failure so to qualify or
so to be in good standing would have a materially adverse effect on the
Corporation's operations or financial condition. EXHIBIT 4.1 contains true,
complete and accurate copies of the Certificate of Incorporation and the
By-Laws, amended to date, of the Corporation (the "BY-LAWS").
4.2 CAPITALIZATION. The entire authorized capital stock of the
Corporation consists of:
(a) 2,500,000 shares of Common Stock, $.01 par value per
share (the "COMMON STOCK"), of which (i) 1,243,378 shares have been validly
issued and are outstanding, fully paid and nonassessable; (ii) no shares
are held as treasury shares; (iii) 162,994 shares have been reserved for
issuance upon the exercise of options granted to employees; (iv) 72,728 shares
have been reserved for issuance upon exercise of warrants previously issued to
TFVP IV and TFVP V, (the "TFI WARRANTS"); and (v) 500,000 shares have been
reserved for issuance upon conversion of the Preferred Stock; and
(b) 500,000 shares of Series A Preferred Stock, of which
(i) prior to the Closing, no shares were issued and outstanding; and
(ii) 481,250 shares will be held by the Series A
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Investors after the Closing and will, upon issuance in accordance with this
Agreement, have been validly issued and be outstanding, fully paid and
nonassessable.
EXHIBIT 4.2 contains a list of all holders of Common Stock and options,
warrants or rights to purchase Common Stock from the Corporation, in each case
including the number of shares Of Common Stock held by, or subject to purchase
pursuant to the exercise of any option, warrant or right held by, each such
holder. Except as set forth in EXHIBIT 4.2, there are no oustanding shares of
capital stock of the Corporation or warrants, options, agreements, convertible
securities or other commitments pursuant to which the Corporation is or may
become obligated to issue any shares of its capital stock or other securities
of the Corporation. Except as set forth in EXHIBIT 4.2, the number of shares
of capital stock, if any, reserved for issuance in connection with securities
described in the immediately preceding sentence is not subject to adjustment by
reason of the issuance of the Shares or the shares of Common Stock issuable
upon conversion of the Shares (the "RESERVED SHARES"). Except as set forth in
EXHIBIT 4.2 or pursuant to this Agreement, there are no preemptive or similar
rights to purchase or otherwise acquire shares of capital stock of the
Corporation pursuant to any provision of law, the Certificate of Incorporation
or the By-Laws or any agreement to which the Corporation is a party and, except
as set forth in the Certificate of Incorporation, there is no agreement,
restriction or encumbrance with respect to the sale or voting of any shares of
the Corporation's capital stock (whether outstanding or issuable upon
conversion or exercise of outstanding securities). To the best knowledge of
the Corporation, the Corporation has not violated the Securities Act of 1933,
as amended (the "SECURITIES ACT"), or any state blue sky or securities law in
connection with the issuance of any shares of Common Stock or other securities
prior to the date hereof.
4.3 EQUITY INVESTMENTS. Except as set forth in EXHIBIT 4.3, the
Corporation does not currently have any subsidiaries or own any capital stock
or other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity. (Any such
subsidiary, or corporation, association, trust, partnership, joint venture or
other entity in which the Corporation, directly or indirectly, owns any capital
stock or other proprietary interest is hereinafter sometimes referred to as a
"SUBSIDIARY"). EXHIBIT 4.3 sets forth all material agreements and commitments
relating to the Corporation's relationship to such Subsidiaries and copies of
their respective charters and by-laws or other comparable
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organizational documents. No stockholder, director, officer or employee of the
Corporation nor any "associate" (as defined in the rules and regulations
promulgated under the Securities Exchange Act of 1934 (the "EXCHANGE ACT")) of
any such person owns any capital stock or other proprietary interest, directly
or indirectly, in any such Subsidiary, other than the indirect interest of the
stockholders of the Corporation in any such Subsidiary arising by virtue of
their ownership of capital stock of the Corporation.
4.4 FINANCIAL STATEMENTS. Attached as EXHIBIT 4.4A are the audited
balance sheets of the Corporation as of December 31, 1992 and 1993, and the
related audited statements of operations, stockholders' equity and cash flows
for the years ending December 31, 1992 and 1993, in each case including the
notes thereto and certified by Coopers & Lybrand, independent certified public
accountants. Attached as EXHIBIT 4.4B are the unaudited balance sheet of the
Corporation as of November 30, 1994 (the "BALANCE SHEET"), and the related
unaudited statements of operations, stockholders equity and cash flows for the
11-month period ended November 30, 1994. (November 30, 1994 is hereinafter
sometimes referred to as the "BALANCE SHEET DATE"). All such financial
statements present fairly the financial position and results of operations of
the Corporation as of the dates and for the periods indicated in accordance
with generally accepted accounting principles applied on a consistent basis,
subject in the case of the unaudited financial statements to normal year-end
audit adjustments.
4.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth in
EXHIBIT 4.5 or as reflected in the Balance Sheet, at the Balance Sheet Date (a)
the Corporation had no material liabilities of any nature (matured or
unmatured, fixed or contingent); (b) all reserves established by the
Corporation and set forth in the Balance Sheet were adequate; and (c) there
were no loss contingencies (as such term is used in Statement of Financial
Accounting Standards No. 5 issued by the Financial Accounting Standards Board
in March 1975) which were not adequately disclosed in the Balance Sheet as
required by such Statement No. 5.
4.6 ABSENCE OF CHANGES. Except as shown on EXHIBIT 4.6, since
December 31, 1993 there has not been any material adverse change in the
financial condition, results of operations, assets, liabilities or business of
the Corporation. Except as shown on EXHIBIT 4.6, since the Balance Sheet Date
there has not been (a) any material asset or property of the Corporation made
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subject to a lien of any kind, (b) any waiver of any valuable right of the
Corporation, or the cancellation of any material debt or claim held by the
Corporation, (c) any payment of dividends on, or other distribution with
respect to, or any direct or indirect redemption or acquisition of, any shares
of the capital stock of the Corporation, or any agreement or commitment
therefor, (d) any mortgage, pledge, sale, assignment or transfer of any
tangible or intangible assets of the Corporation, except in the ordinary course
of business, (e) any loan by the Corporation to, or any loan to the Corporation
from, any officer, director, employee or stockholder of the Corporation, or any
agreement or commitment therefor, (f) any damage, destruction or loss (whether
or not covered by insurance) materially and adversely affecting the assets,
property or business of the Corporation, or (g) any change in the accounting
methods or practices followed by the Corporation.
4.7 ENCUMBRANCES. Except as set forth in EXHIBIT 4.7, the
Corporation has good title to all of its property and assets, real, personal or
mixed, tangible or intangible, free and clear of all liens, security interests,
charges and other encumbrances of any kind.
4.8 BURDENSOME RESTRICTIONS. The Corporation is not obligated under
any contract or agreement (including without limitation any long-term lease,
forward purchase contract, futures contract or covenant not to compete) or
subject to any charter or other corporate restriction which materially
restricts, or in the future (so far as the Corporation can reasonably foresee)
may reasonably be expected to materially restrict, its ability to conduct its
business, or which materially and adversely affects, or in the future (so far
as the Corporation can reasonably foresee) may reasonably be expected to
materially and adversely affect, its financial condition, results of
operations, assets, liabilities, business or prospects.
4.9 INTELLECTUAL PROPERTY RIGHTS. Except in each case as set forth
IN EXHIBIT 4.9:
(a) to the best of its knowledge, the Corporation owns,
possesses, has the right to use and has the right to bring actions for
the infringement of all Intellectual Property Rights (as hereinafter defined)
necessary or required for the conduct of its business as presently conducted or
as proposed to be conducted, which Intellectual Property Rights are identified
in said EXHIBIT 4.9;
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(b) to the best of its knowledge, no royalties or
other amounts are payable by the Corporation to other persons by reason of the
ownership or use of said Intellectual Property Rights; and
(c) to the best of its knowledge, no product marketed
or sold or proposed to be marketed or sold by the Corporation violates
or will violate any license or infringes or will infringe any Intellectual
Property Rights of another. The Corporation has not received any notice that
any of such Intellectual Property Rights or the operation or proposed operation
of the Corporation's business conflicts or will conflict with the rights of
others.
As used herein, the term "INTELLECTUAL PROPERTY RIGHTS" means all patents,
trademarks, service marks, trade names, copyrights, inventions, trade secrets,
proprietary processes and formulae, applications for patents, trademarks,
service marks and copyrights, and other industrial and intellectual property
rights.
4.10 LITIGATION. There is no action, suit, claim, proceeding or
investigation, at law, in equity or otherwise, now pending, or, to the best
knowledge of the Corporation, threatened against or affecting the Corporation
(or, to the best knowledge of the Corporation, any of its officers, directors
or management employees to the extent that such action, suit, claim, proceeding
or investigation arises out of or relates to any such person's work for or
relationship to the Corporation) and, except as otherwise disclosed hereunder,
the Corporation has no actual knowledge of facts which it believes are likely
to be the basis of future litigation that would have a material adverse effect
on the Corporation.
4.11 NO DEFAULTS. The Corporation is not in violation or breach
of, or in default under, any provision of (a) the Certificate of Incorporation
or By-Laws, (b) any material note, indenture, mortgage, lease, contract,
purchase order or other instrument, document or agreement to which the
Corporation is a party or by which it or any of its property is bound or
affected or (c) to the best of its knowledge, any material ruling, writ,
injunction, order, judgment or decree of any court, administrative agency or
other governmental body. To the best knowledge of the Corporation, there
exists no condition, event or act which after notice, lapse of time, or both,
could constitute violation or breach of, or a default under, any of the
foregoing.
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4.12 EMPLOYEES. Except as modified by case law and applicable
statute, all of the Corporation's material employment contracts and agreements
with persons providing employment, consulting and other services to the
Corporation are terminable at will. The Corporation is not subject to any
collective bargaining agreement with respect to any of its employees, has no
current material labor problems or disputes and has in effect no "employee
pension benefit plan" (as defined in the Employee Retirement Income Security
Act of 1974 as amended) or stock-related employee benefit plan (other than the
Corporation's stock option plans, if any, as described in EXHIBIT 4.15). To the
best knowledge of the Corporation, no third party may assert any valid claim
against the Corporation, any Investor, or any Designated Person (as hereinafter
defined) with respect to the continued employment by the Corporation of any of
the present officers or employees of, or consultants to, the Corporation
(collectively, the "DESIGNATED PERSONS"). Each Designated Person and the
Corporation have agreed not to use any information which the Corporation or any
Designated Person would be prohibited from using under any prior agreements or
arrangements or under any laws, including, without limitation, laws applicable
to unfair competition, trade secrets or proprietary information.
4.13 TAXES. The Corporation has filed all federal, state, local
and foreign tax returns which are required to be filed by it and all such
returns are true and correct in all material respects. The Corporation has
paid all taxes pursuant to such returns or pursuant to any assessments received
by it or which it is obligated to withhold from amounts owing to any employee,
creditor or third party, except, in each case, for those which are not yet due
and payable pursuant to such returns. To the best knowledge of the
Corporation, the income tax returns of the Corporation have never been audited
by state or federal authorities. The Corporation has not waived any statute of
limitations with respect to any tax assessment or deficiency. Neither the
Corporation nor, to the best of its knowledge, any of its stockholders, has
ever filed (a) a consent pursuant to Section 1372 of the Internal Revenue Code
of 1986, as amended (the "Code"), that the Corporation be taxed as an S
Corporation or (b) a consent pursuant to Section 341(f) of the Code, relating
to collapsible corporations.
4.14 INTENTIONALLY OMITTED.
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4.15 AGREEMENTS. Except as set forth in EXHIBIT 4.15, the
Corporation is not a party to any material written or oral contract not made in
the ordinary course of business and, whether or not made in the ordinary course
of business, the Corporation is not a party to any material written or oral (a)
contract with any labor union; (b) contract for the future purchase of fixed
assets or for the future purchase of materials, supplies or equipment
materially in excess of normal operating requirements; (c) contract for the
employment of any officer, individual employee or other person or any contract
with any person on a consulting basis; (d) bonus, pension, profit-sharing,
retirement, stock purchase, stock option, hospitalization, medical insurance or
similar plan, contract or understanding in effect with respect to employees or
any of them or the employees of others; (e) agreement or indenture relating to
the borrowing of money or to the mortgaging, pledging or otherwise placing a
lien on any assets of the Corporation; (f) guaranty of any obligation for
borrowed money or otherwise; (g) lease or agreement under which the Corporation
is lessee of or holds or operates any property, real or personal, owned by any
other party; (h) lease or agreement under which the Corporation is lessor of or
permits any third party to hold or operate any property, real or personal,
owned or controlled by the Corporation; (i) license or lease agreement with
respect to any Intellectual Property Rights; (J) agreement or other commitment
for capital expenditures in excess of $25,000; (k) contract, agreement or
commitment under which the Corporation is obligated to pay any broker's fees,
finder's fees or any such similar fees, to any third party; or (1) any other
contract, agreement or arrangement which is material to the business of the
Corporation. Except as set forth in EXHIBIT 4.15, the Corporation is not
actively engaged in any negotiations of any such contract, agreement or
arrangement. The Corporation has furnished, to the Investors true and correct
copies of all such agreements and other documents requested by the Investors or
their authorized representatives.
4.16 COMPLIANCE. To the best of its knowledge, the Corporation has
(a) in all material respects complied with all federal, state, local or foreign
laws, statutes, ordinances, rules, regulations and orders applicable to its
business, including without limitation the United States Export Administration
Act and all rules and regulations thereunder, and (b) all federal, state, local
and foreign governmental licenses, registrations and permits material to or
necessary for the conduct of its business, and such licenses, registrations and
permits are in full force and effect and there have been no violations in
respect of any such licenses, registrations or permits. No
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proceeding is pending or, to the best knowledge of the Corporation, threatened,
to revoke or limit any thereof. Neither the Corporation nor, to the best
knowledge of the Corporation, any of its present officers, directors or
principal stockholders has ever been convicted of a felony. Neither the
Corporation nor, to the best knowledge of the Corporation, any such person is
now or ever has been subject to any governmental decree or order prohibiting it
or him from engaging in specified business activities. To the best knowledge
of the Corporation, there is no pending criminal investigation of any nature
whatsoever into the activities of the Corporation, nor (to the best knowledge
of the Corporation) its officers, directors or principal stockholders.
4.17 INSURANCE. The Corporation maintains insurance against loss,
damage and other hazards and risks and liabilities of the kind customarily
insured against by companies similarly situated, with financially sound and
reputable insurers and in such policy amounts, and such customary deductibles,
as is reasonably adequate to protect the Corporation against material loss or
damage. Without limiting the generality of the foregoing, the Corporation
maintains liability insurance against loss or damage to it for bodily injury or
death in or about any premises occupied by it, and against loss or damage to it
or bodily injury or death or injury to property occurring by reason of the
operation by any of its employees of any motor vehicle on the Corporation's
behalf in amounts customary for companies similarly situated.
4.18 AUTHORIZATION OF THIS AGREEMENT AND RELATED DOCUMENTS. The
execution, delivery and performance by the Corporation of this Agreement and
the Registration Rights Agreement of even date herewith by and among the
Corporation and the Investors (the "REGISTRATION RIGHTS AGREEMENT") have been
duly authorized by all requisite corporate action. This Agreement and the
Registration Rights Agreement have been duly executed and delivered on behalf
of the Corporation and constitute the valid and binding obligations of the
Corporation, enforceable in accordance with their respective terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors, rights and the application of equitable
principles in any action, legal or equitable). The execution, delivery and
performance of this Agreement and the Registration Rights Agreement and the
issuance, sale and delivery of the Shares and the Reserved Shares and
compliance with the provisions hereof and thereof by the Corporation do not and
will not, with or without the passage of time or the giving
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of notice or both, (a) violate any provision of law, statute, ordinance, rule
or regulation or any ruling, writ, injunction, order, judgment or decree of any
court, administrative agency or other governmental body or (b) conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Corporation
under, the Certificate of Incorporation or By-Laws or any note, indenture,
mortgage, lease, contract, purchase order or other instrument, document or
agreement to which the Corporation is a party or by which it or any of its
property is bound or affected, except such violations, conflicts, breaches or
defaults as would not individually or in the aggregate have a material adverse
effect on the Corporation.
4.19 AUTHORIZATION OF SHARES. The issuance, sale and delivery by
the Corporation of the Shares has been duly authorized by all requisite
corporate action, and when so issued, sold, delivered and paid for in
accordance with the terms hereof, the Shares will be validly issued and
outstanding and not subject to preemptive or any other similar rights of the
stockholders of the Corporation or others and the Shares will be fully paid and
nonassessable.
4.20 AUTHORIZATION OF RESERVED SHARES. The issuance, sale and
delivery by the Corporation of the Reserved Shares has been duly authorized by
all requisite corporate action of the Corporation, and the Reserved Shares have
been duly reserved for issuance upon conversion of all or any of the Shares,
and when so issued and delivered in accordance with the terms of the
Certificate of Amendment, the Reserved Shares will be validly issued and
outstanding, fully paid and nonassessable, and not subject to preemptive or any
other similar rights of the stockholders of the corporation or others.
4.21 RELATED TRANSACTIONS. Except as set forth in EXHIBIT 4.21, no
current or former stockholder, director, officer or employee of the Corporation
nor any "associate" (as defined in the rules and regulations promulgated under
the Exchange Act) of any such person, is currently, or since the date of
inception of the Corporation has been, directly or indirectly, a party to any
transaction (other than as an employee) with the Corporation or any Subsidiary
providing for the furnishing of services by, or rental of real or personal
property from, or otherwise requiring cash payments to, any such person.
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4.22 OFFEREES. The Corporation has not, either directly or through
any agent, offered any Shares or securities convertible into or exercisable for
Common Stock or Preferred Stock or any security or securities similar to any
thereof, for sale to, or solicited any offers to buy any Shares, or securities
convertible into or exercisable for Common Stock or Preferred Stock, or any
such similar security or securities from, or otherwise approached or negotiated
in respect thereof with, any person or entity other than the Investors and a
limited number of, to the best knowledge of the Corporation, institutional or
sophisticated investors, but in any event not more than 25 persons or entities,
including the Investors.
4.23 USE OF PROCEEDS.
(a) The proceeds received by the Corporation from
the sale of the Shares shall be used by the Corporation only for general
corporate purposes, including working capital, funding operating losses,
capital expenditures and funding accrued compensation as provided in Section
4.23(b).
(b) The Corporation shall be restricted from
making payments of accrued compensation existing as of the date hereof
("Accrued Compensation") whether from proceeds of this financing or otherwise
to the founders and employees of the Corporation, except in accordance with the
following and subject to the approval of the Board of Directors of the
Corporation:
(i) During 1995, the Corporation may pay Accrued
Compensation in an aggregate amount of up to $194,325
to Hong Liang Lu, Peter Wang and Charles Xue (the
"FOUNDERS"), such payments to be made only by applying
such payments from time to time during the year, at
the respective Founders' election, to the exercise of
stock options of the Corporation outstanding on the
date hereof, all as set forth in EXHIBIT 4.23;
(ii) In addition, during 1995, the Corporation may pay to
each of the Founders Accrued Compensation in an amount
equal to up to 10% of the aggregate Accrued
Compensation paid to such Founder pursuant to clause
(i) above in order to permit such Founder to pay FICA
liabilities arising from the receipt by such Founder
of Payable Accrued Compensation;
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(iii) In addition, during 1996, the Corporation may pay to
each of the Founders Accrued Compensation in an amount
equal to up to 30% of the aggregate Accrued
Compensation paid to such Founder pursuant to clause
(i) above in order to permit such Founder to pay
income tax liabilities arising from the receipt by
such Founder of Payable Accrued Compensation; and
(iv) At any time, the Corporation may pay to persons other
than the Founders a cumulative aggregate amount of up
to $50,000.
The balance of accrued compensation shall continue to be outstanding and shall
not accrue interest. Payment of such balance shall be withheld until such time
as the Corporation effects its initial public offering, there is an acquisition
(by whatever means) of the Corporation, or other liquidity event approved by
the two Directors elected by the holders of the Preferred Stock. The
Corporation represents that the individuals to whom such accrued compensation
is owed have agreed to the provisions set forth herein and in EXHIBIT 4.23,
which sets forth the accrued compensation and unpaid salaries as of the
Closing.
4.24 NO GOVERNMENTAL CONSENT OR APPROVAL REQUIRED. No
authorization, consent, approval or other order of, declaration to, or filing
with, any United States (federal, state or local) governmental agency or body
is required for or in connection with the valid and lawful authorization,
execution and delivery by the Corporation of this Agreement or the Registration
Rights Agreement, in connection with the valid and lawful authorization,
issuance, sale and delivery of the Shares or in connection with the valid and
lawful authorization, reservation, issuance, sale and delivery of the Reserved
Shares, except such exemptive filings under applicable securities laws as are
required to be made, and shall be made, following the Closing or such exemptive
filings under applicable securities laws as shall have been made prior to and
are in effect on and as of the Closing.
4.25 REGISTRATION RIGHTS. Except as contemplated by the
Registration Rights Agreement, no person has any right to cause the Corporation
to effect the registration under the Securities Act of any shares of Common
Stock or any other securities of the Corporation.
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4.26 BROKERS. Except as set forth in EXHIBIT 4.15, neither the
Corporation nor any of its officers, directors, employees or stockholders has
employed any broker or finder in connection with the transactions contemplated
by this Agreement and no person or entity will have, as a result of the
transactions contemplated by this Agreement, any right to, interest in or valid
claim against or upon the Corporation for any commission, fee or other
compensation as a finder or broker because of any act or omission by the
Corporation or any agent of the Corporation.
4.27 INVENTION AND NON-DISCLOSURE AGREEMENTS. Except as set forth
in EXHIBIT 4.27, each current United States employee of the Corporation who has
or is proposed to have access to confidential and/or proprietary information of
the Corporation is a signatory to, and is bound by, an agreement with the
Corporation relating to non-disclosure of confidential and proprietary
information, patent and invention assignment and non-solicitation of employees,
a copy of the form of which agreements is attached hereto as EXHIBIT 4.27.
4.28 EXEMPTIONS FROM SECURITIES LAWS. Subject to the accuracy of
the representations and warranties of the Investors set forth in Section 5
hereof, the provisions of Section 5 of the Securities Act are inapplicable to
the offering, issuance, sale and delivery of the Shares and the Reserved
Shares, and no consent, approval, qualification or registration or filing under
any state securities or blue sky laws is required in connection therewith,
except such exemptive filings as are required to be made, and shall be made,
following the Closing, or such exemptive filings as shall have been made prior
to and are in effect on and as of the Closing.
4.29 ABSENCE OF CERTAIN PAYMENTS. Neither the Corporation nor, to
the best knowledge of the Corporation, any director, officer, agent, employee
or other person acting on the Corporation's behalf has used any funds of the
Corporation for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, or made any direct or indirect
unlawful payments to government officials or employees from corporate funds, or
established or maintained any unlawful or unrecorded funds, or violated any
provisions of the Foreign Corrupt Practices Act of 1977 or any rules or
regulations promulgated thereunder.
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4.30 ISSUANCE TAXES. All taxes, if any, imposed on the Corporation
in connection with the sale, issuance and delivery of the Shares and the
Reserved Shares have been or will be fully satisfied by the Corporation.
4.31 ENVIRONMENTAL COMPLIANCE.
(a) There are no claims, investigations, litigation or
administrative proceedings pending or, to the best knowledge of the
Corporation, threatened, or judgments or orders, relating to any hazardous
substances, hazardous wastes, discharges, emissions or other forms of
environmental pollution relating in any way to any facility now or previously
used or occupied by the Corporation or otherwise relating to the business of
the Corporation under any federal, state, local or foreign statute, rule or
regulation applicable to the Corporation.
(b) To the best knowledge of the Corporation, no
hazardous or toxic substances, within the meaning of applicable federal, state,
local or foreign statutes, rules and regulations, are currently stored or
otherwise located on real estate owned or leased by the Corporation or, to the
best knowledge of the Corporation, on adjacent parcels of real estate to the
extent that the same might contaminate or affect the Corporation or the real
estate owned or leased by it.
4.32 DISCLOSURE. Neither this Agreement nor any other document,
certificate or statement furnished to the Investors by or on behalf of the
Corporation in connection with the transactions contemplated by this Agreement
when read or considered together contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they are or were made, not misleading. To the best knowledge of the
Corporation, there is no fact which materially adversely affects or in the
future may (so far as it can now reasonably foresee) materially adversely
affect the business, operations, affairs, prospects, condition, properties or
assets of the Corporation which has not been set forth in this Agreement or in
the other documents, certificates or statements furnished to the Investors by
or on behalf of the Corporation.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
(a) Each Investor, severally and not jointly, represents
and warrants to the Corporation as follows:
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(i) Such Investor is acquiring the Shares for its
own account, for investment and not for, with a view to, or in connection with
any distribution or public offering thereof within the meaning of the
Securities Act.
(ii) Such Investor understands that the Shares have
not been, and the Reserved Shares will not be, registered under the Securities
Act or any state securities law, by reason of their issuance in a transaction
exempt from the registration requirements of the Securities Act and such laws,
and that they must be held indefinitely unless they are subsequently registered
under the Securities Act and such laws or a subsequent disposition thereof is
exempt from registration. Such Investor acknowledges that the certificates for
the Shares and the Reserved Shares shall bear legends to such effect.
(iii) Such Investor has sufficient knowledge and
experience in business and financial matters and with respect to investment in
securities of privately held companies so as to enable it to analyze and
evaluate the merits and risks of the investment contemplated hereby and is able
to bear the economic risk of such investment, including a complete loss of the
investment.
(iv) Such Investor acknowledges that such Investor
has made detailed inquiry concerning the Corporation, its business and its
personnel and that the officers of the Corporation have made available to such
Investor any and all written information which it has requested and have
answered to such Investor's satisfaction all inquiries made by such Investor.
(v) Such Investor understands that the exemption
from registration afforded by Rule 144 (the provisions of which are known to
such Investor) promulgated by the Securities and Exchange Commission (the
"COMMISSION") under the Securities Act depends upon the satisfaction of various
conditions, that such exemption is not currently available and that, if
applicable, Rule 144 affords the basis for sales only in limited amounts.
(vi) Unless otherwise indicated in writing by such
Investor to the Corporation, such Investor is an "accredited investor" within
the definition of that term set forth in the Securities Act Rule 501(a).
(vii) Such Investor has not employed any broker or
finder in connection with the transactions contemplated by this Agreement.
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<PAGE> 17
(b) In addition to the representations and warranties
contained in Section 5(a), each of Variamat, Ding Cho Hee and MTDC represents
and warrants to the Corporation that such Investor has satisfied itself as to
the full observance of the laws of such Investor's jurisdiction in connection
with any invitation to subscribe for the Shares or any use of this Agreement,
including (i) the legal requirements of such Investor's jurisdiction for the
purchase of the Shares, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may be required,
and (iv) the income tax and other tax consequences, if any, which may be
relevant to the purchase, holding, redemption, sale, or transfer of the Shares.
Such Investor's subscription and payment for, and such Investor's continued
beneficial ownership of the Shares, will not violate any applicable securities
or other laws of such Investor's jurisdiction.
SECTION 6. CONDITIONS PRECEDENT TO CLOSING BY THE INVESTORS. The obligation of
each Investor to purchase and pay for the Shares at the Closing is subject to
the satisfaction, or waiver by each Investor, of the following conditions
precedent at or before the Closing:
(a) CORPORATE PROCEEDINGS. All corporate and
other proceedings to be taken and all waivers and consents to be obtained in
connection with the transactions contemplated by this Agreement shall have been
taken or obtained and all documents incident to such transactions shall be
satisfactory in form and substance to the Investors and their counsel, who
shall have received all such originals or certified or other copies of such
documents as they may reasonably request.
(b) REPRESENTATIONS AND WARRANTIES CORRECT. The
representations and warranties made by the Corporation in Section 4 hereof
shall be true and correct when made, and shall be true and correct at the time
of the Closing, with the same force and effect as if they had been made at and
as of the time of the Closing.
(c) COMPLIANCE WITH COVENANTS. The Corporation
shall have duly complied with and performed all covenants and agreements of the
Corporation herein which are required to be complied with and performed at or
before the Closing.
(d) CERTIFICATE OF PRESIDENT. The Corporation
shall have provided to the Investors a certificate, signed by its President and
dated the date of the Closing, in form and
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substance reasonably satisfactory to the Investors and their counsel,
confirming compliance with the conditions set forth in Sections 6(a), 6(b) and
6(c).
(e) OPINION OF COUNSEL. At the Closing, each
Investor shall have received from Parker Chapin Flattau & Klimpl, LLP counsel
for the Corporation, its opinion addressed to each of the Investors, dated the
date of the Closing in the form and substance acceptable to the Investors and
their counsel.
(f) RELATED AGREEMENTS AND DOCUMENTS. At or
before the Closing, the parties thereto shall have executed and delivered the
Registration Rights Agreement and the Corporation shall have delivered to the
Investors such other documents as they shall reasonably request.
(g) BLUE SKY MATTERS. All consents, approvals,
qualifications, registrations and filings required to be obtained or effected
under any applicable state securities or "blue sky" laws in connection with the
issuance, sale and delivery of the Shares and the Reserved Shares shall have
been obtained or effected and copies of the same delivered to each of the
Investors, other than exemptive filings required to be made after the Closing
under such laws.
(h) TERMINATION OF SECURITY INTERESTS. All
security interests in the assets of the Corporation arising out of the Loan and
Security Agreements dated May 31, 1994 between the Corporation and TFVP IV and
TFVP V or the transactions contemplated thereby shall have been terminated, and
TFVP IV and TFVP V shall have executed and delivered to the Corporation UCC
termination statements with respect thereto, the receipt by the Corporation of
which termination statements shall be a condition precedent to the obligation
of the Corporation to deliver to TFVP IV and TFVP V the Shares purchased by
them at the Closing.
(i) COMPOSITION OF BOARD OF DIRECTORS. As of
immediately following the Closing, the Corporation's Board of Directors will
have an authorized number of members equal to five (5) and the following five
(5) individuals will comprise the Board of Directors: Hong Liang Lu, Charles
Xue, Peter Wang, Terry Campbell and Bill Wittmeyer.
(j) DISTRIBUTION AGREEMENTS. As a condition
precedent only with respect to the obligation of Telco to purchase and pay for
the Shares to be purchased by Telco hereunder, each of Telco and the
Corporation shall have executed and delivered
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to the other distribution agreements mutually agreeable to the parties thereto.
SECTION 7. INFORMATION RIGHTS OF INVESTORS.
7.1 ACCESS TO RECORDS. The Corporation agrees to afford to each
of the Investors and their respective employees, counsel and other authorized
representatives, as well as to each director designated by any of them, upon
reasonable prior request, free and full access, during normal business hours
and at all other reasonable times, to all books, records and properties of the
Corporation and to all officers of the Corporation and those other employees of
the Corporation having responsibility for financial or accounting matters
generally, for any reasonable purpose whatsoever.
7.2 FINANCIAL REPORTS. The Corporation agrees to furnish each of
the Investors with the following:
7.2.1. Within 30 days after the end of each month
and each fiscal quarter, an unaudited financial report of the Corporation,
which report shall be prepared in accordance with generally accepted accounting
principles consistently applied (except that the financial report may (i) be
subject to normal year-end audit adjustments neither individually nor in the
aggregate material and (ii) not contain all notes thereto which may be required
in accordance with generally accepted accounting principles) and shall be
certified by either the Chief Executive Officer or the Chief Financial Officer
of the Corporation to have been so prepared, and which shall include the
following:
(a) a statement of operations for such month or
quarter, together with a cumulative statement of operations from the first
day of the then-current fiscal year to the last day of such month or quarter;
(b) a balance sheet as of the last day of such month
or quarter;
(c) a statement of sources and application of funds and
statement of changes in working capital for such month or quarter; and
(d) a comparison between the actual figures for such
month or quarter, the comparable figures (with respect to the foregoing
clauses (a) and (b) only) for the prior year (if
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any) and the comparable figures included in the Budget (as hereinafter defined)
for such month or quarter, with an explanation of any material differences
between them.
The financial report for each fiscal quarter shall be accompanied by a
report by the Chief Executive Officer of the Corporation explaining business
developments and problems occurring during the quarter.
7.2.2. Within 120 days after the end of each fiscal
year of the Corporation, audited financial statements of the Corporation,
which shall include a statement of operations for such fiscal year and a
balance sheet as of the last day thereof, and statements of stockholders,
equity and cash flows for such fiscal year, prepared in accordance with
generally accepted accounting principles consistently applied and certified by
independent certified public accountants of recognized national standing
satisfactory to the Investors, together with such accountants' annual
management letter.
7.2.3. If for any period the Corporation shall have
any subsidiary whose accounts are consolidated with those of the Corporation,
then in respect of such period the financial statements delivered
pursuant to the foregoing Sections 7.2.1 and 7.2.2 shall be the consolidated
and consolidating financial statements of the Corporation and all such
consolidated subsidiaries.
7.2.4. Within 10 days after the close of each month,
a written report of the Chief Executive Officer or Chief Financial Officer of
the Corporation listing orders booked and sales made during the month, cash
position as of the end of the month and any significant events occurring during
the month.
7.2.5. Promptly upon becoming available:
(a) copies of all financial statements, reports,
notices, press releases, proxy statements and other documents sent by the
Corporation to its stockholders or released to the public and copies of
all regular and periodic reports, if any, filed by the Corporation with the
Commission, any securities exchange or the National Association of Securities
Dealers, Inc.; and
(b) any other financial or other information
available to management of the Corporation as any of the Investors shall have
reasonably requested on a timely basis.
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7.3 BUDGET AND OPERATING FORECAST. With respect to the fiscal year
of the Corporation beginning on January 1, 1995, the Corporation will prepare
and submit to each of the Investors by March 1, 1995 a monthly operating plan
of the Corporation, with monthly break-downs, for such fiscal year (such plan
for each fiscal year of the Corporation being hereinafter referred to as a
"BUDGET"). With respect to each fiscal year thereafter, the Corporation agrees
to prepare and submit a proposed Budget to the Board of Directors of the
Corporation and each of the Investors at least 60 days prior to the beginning
of each such fiscal year. The Budget shall be accepted as the Budget for such
fiscal year when it has been approved by the Board of Directors of the
Corporation. The Budget shall be reviewed by the Corporation periodically and
all changes therein and all material deviations therefrom which are proposed to
be made by the Corporation shall be resubmitted and approved in accordance with
procedures established by the Board of Directors, and the Corporation shall not
make any such changes or material deviations to or from the Budget without
compliance with such procedures. The Budget shall include an income statement,
balance sheet and cash flow information.
7.4 LIMITATIONS ON RIGHTS OF INVESTORS UNDER SECTION 7. The
Corporation shall provide the information required by this Section 7 to each
Investor so long as such Investor shall continue to own at least 25,000 shares
(subject to adjustment in the event of a stock split, stock dividend,
reclassification or other similar event) of Common Stock or Preferred Stock;
provided, however, that all Investors, irrespective of the number of shares
held, shall be entitled to annual financial statements as provided above in
this Section 7. The foregoing provisions of this Section 7 to the contrary
notwithstanding, the Investors shall not have any rights and the Corporation
shall not have any obligations under the foregoing provisions of this Section 7
at such time as the Common Stock is registered under Section 12 of the Exchange
Act.
7.5 RELATIONSHIP TO PREVIOUS AGREEMENTS. This Section 7 shall
supersede Sections 6.1 through 6.5 of the Loan and Security Agreements dated
May 31, 1994 between the Corporation and TFVP IV and TFVP V, and such Sections
6.1 through 6.5 shall no longer have any force or effect.
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SECTION 8. ADDITIONAL AGREEMENTS OF THE CORPORATION.
8.1 NOTICE OF MEETINGS OF THE BOARD OF DIRECTORS; PAYMENT OF
EXPENSES OF PREFERRED STOCK DIRECTOR.
(a) The Corporation shall give each Investor holding at
least 60,000 shares (subject to adjustment in the event of a stock split,
stock dividend, reclassification or other similar event) of Common Stock or
Preferred Stock not less than five (5) business days, prior written notice
(or such greater amount of prior written notice as shall be given to
directors) of each meeting of its Board of Directors and of any committee or
group exercising responsibilities comparable to those exercised by its Board
of Directors, specifying the time and place of such meeting and, to the
extent then known, the matters to be discussed thereat and inviting each such
Investor (or its representative) to attend and participate therein (without,
however, a right to vote thereat in such capacity) and (ii) furnish each such
Investor (or such representative) with copies of all notices, minutes,
consents and other materials that the Corporation provides to its directors.
Failure to give such notice shall not affect the validity of any action taken
at such meeting. Such notice may be waived by written instrument executed
before or after such meeting.
(b) The Corporation shall pay all reasonable travel and
other out-of-pocket expenses of the two directors elected solely by the
holders of Preferred Stock in connection with the attendance of such
directors at meetings of the Corporation's Board of Directors.
8.2 RIGHT OF FIRST REFUSAL.
(a) The Corporation hereby grants to each of the Investors
and any assignee of the Investors described in paragraph (i) of this
Section 8.2 (the "RIGHT HOLDER") the right of first refusal to purchase, pro
rata, all (or any part) of any New Securities (as defined in this Section 8.2)
that the Corporation may, from time to time, propose to sell or issue. Each
such Right Holder's pro rata share, for purposes of this right of first
refusal, is the ratio of (i) the number of shares of Common Stock (including
shares subject to Warrants) then held of record by, or issuable on conversion
of Preferred Stock then held of record by, such Right Holder to (ii) the sum of
the total number of shares of the Common Stock issued and outstanding plus the
total number of shares of Common Stock issuable
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upon conversion of the Preferred Stock in each case at such time (the "BASIC
AMOUNT").
(b) "NEW SECURITIES" shall mean any equity securities of
the Corporation, whether now authorized or not, and rights, options, or
warrants to purchase said equity securities, and securities of any
type whatsoever that are, or may become, convertible into said equity
securities; PROVIDED, HOWEVER, that "New Securities" does not include (i)
securities offered to the public pursuant to a registration statement filed
under the Securities Act, the gross proceeds to the Corporation from the sale
of which would equal or exceed $8,000,000; (ii) securities issued pursuant to
the acquisition of another corporation by the Corporation by merger, purchase
of substantially all of the assets, or other reorganization whereby the
Corporation acquires not less than 51% of the voting power of such corporation;
(iii) shares of Common Stock issued in exchange for consideration having a fair
market value (in the judgment of the Board of Directors) equal to the fair
market value of such Common Stock (or related options having exercise prices of
not less than fair market value at the time of grant) issued to employees,
officers or other persons performing services for the Corporation pursuant to
any stock offering, plan or arrangement approved by the Board of Directors of
the Corporation (including each of the two directors elected by the holders of
the Preferred Stock); (iv) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization by the Corporation; (v) shares
of Common Stock issued upon conversion of the Shares; or (vi) shares of Common
Stock issued upon exercise of the TFI Warrants.
(c) The Corporation shall not issue, sell or exchange,
agree to issue, sell or exchange, or reserve or set aside for issuance,
sale or exchange any New Securities unless the Corporation shall deliver
to each Right Holder a written notice of any proposed or intended
issuance, sale or exchange of New Securities (the "OFFER"), which Offer shall
(i) identify and describe the New Securities, (ii) describe the price and other
terms upon which they are to be issued, sold or exchanged, and the number or
amount of the New Securities to be issued, sold or exchanged, (iii) identify
the persons or entities to which or with which the New Securities are to be
offered, issued, sold or exchanged and (iv) offer to issue and sell to or
exchange with such Right Holder (A) such Right Holder's Basic Amount, and (B)
any additional portion of the New Securities as such Right Holder shall
indicate it will purchase or acquire should the other Right Holders subscribe
for less than their Basic Amounts
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(the "UNDERSUBSCRIPTION AMOUNT"). Each Right Holder shall have the right, for
a period of 30 days following delivery of the Offer, to purchase or acquire, at
a price and upon the other terms specified in the Offer, the number or amount
of New Securities described above. The Offer by its term shall remain open and
irrevocable for such 30-day period.
(d) To accept an Offer, in whole or in part, a Right
Holder must deliver a written notice to the Corporation prior to the end
of the 30-day period of the Offer, setting forth the portion of the Right
Holder's Basic Amount that such Right Holder elects to purchase and, if such
Right Holder shall elect to purchase all of its Basic Amount, the
Undersubscription Amount (if any) that such Right Holder elects to purchase
(the "NOTICE OF ACCEPTANCE"). If the Basic Amounts subscribed for by all Right
Holders are less than the total New Securities, then each Right Holder who has
set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amount subscribed for, the
Undersubscription Amount it has subscribed for; PROVIDED, HOWEVER, that should
the Undersubscription Amounts subscribed for exceed the difference between the
New Securities and the Basic Amounts subscribed for (the "AVAILABLE
UNDERSUBSCRIPTION AMOUNT"), each Right Holder who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Undersubscription Amount subscribed
for by such Right Holder bears to the total Undersubscription Amounts
subscribed for by all Right Holders, subject to rounding by the Board of
Directors to the extent it reasonably deems necessary.
(e) In the event that Notices of Acceptance are not
given by the Right Holders in respect of all the New Securities, the
Corporation shall have 90 days from the expiration of the period set forth in
Subsection (c) above to issue, sell or exchange all or any part of such New
Securities as to which a Notice of Acceptance has not been given by the Right
Holders (the "REFUSED SECURITIES"), but only to the offerees or purchasers and
only upon terms and conditions (including, without limitation, unit prices and
interest rates) which are described in the Offer.
(f) In the event the Corporation shall propose to sell
less than all the Refused Securities (any such sale to be in the manner
and on the terms specified in Subsection (e) above), then each Right Holder
may, at its sole option and in its sole discretion, reduce the number or amount
of the New
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Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the New Securities that the Right Holder
elected to purchase pursuant to Subsection (d) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of New Securities the
Corporation actually proposes to issue, sell or exchange (including New
Securities to be issued or sold to Right Holders pursuant to Subsection (d)
above prior to such reduction) and (ii) the denominator of which shall be the
amount of all New Securities. In the event that any Right Holder so elects to
reduce the number or amount of New Securities specified in its Notice of
Acceptance, the Corporation may not issue, sell or exchange more than the
reduced number or amount of the New Securities unless and until such securities
have again been offered to the Right Holders in accordance with Subsection (c)
above.
(g) Upon the closing of the issuance, sale or
exchange of all or less than all the Refused Securities, the Right Holders
shall acquire from the Corporation, and the Corporation shall issue to the
Right Holders, the number or amount of New Securities specified in the Notices
of Acceptance, as reduced pursuant to Subsection (f) above if the Right Holders
have so elected upon the terms and conditions specified in the Offer. The
purchase by the Right Holders of any New Securities is subject in all cases to
the preparation, execution and delivery by the Corporation and the Right
Holders of a purchase agreement relating to such New Securities reasonably
satisfactory in form and substance to the Right Holders and their respective
counsel.
(h) Any New Securities not acquired by the Right
Holders or other persons in accordance with Subsection (e) above may not be
issued, sold or exchanged until they are again offered to the Right Holders
under the procedures specified in this Agreement.
(i) This right of first refusal may be assigned, in whole
or in part, (i) to a partner, stockholder or Affiliate (as hereinafter
defined) of any Right Holder or (2) to any assignee who acquires not less than
50,000 shares of Common Stock (including in such number shares of Common Stock
issuable upon conversion of Preferred Stock), appropriately adjusted to take
account of any stock split, stock dividend, combination of shares, or the like.
(j) As used in this Section, an Affiliate of a
Right Holder shall mean any partner of the Right Holder or any person
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or entity that, directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Right
Holder.
8.3 INSURANCE. The Corporation has obtained and shall maintain,
with financially sound and responsible insurers (a) fire, casualty, product
liability and other liability insurance policies, with extended coverage, in
amounts customary for companies similarly situated; and (b) term life insurance
payable to the Corporation on the lives of Hong Lu and Peter Wang in the amount
of $1,000,000 each.
8.4 EMPLOYEE AGREEMENTS. The Corporation shall cause each person
who becomes an employee of the Corporation subsequent to the date hereof, and
who shall have or be proposed to have access to confidential or proprietary
information of the Corporation, upon the commencement of such person's
employment by the Corporation, to execute an agreement relating to matters of
non-disclosure of confidential and proprietary information and assignment of
patents, inventions and other Intellectual Property Rights in form and
substance satisfactory to the Board of Directors. The Corporation shall use
its best efforts to enforce each such agreement.
8.5 HIRING OF NEW CHIEF FINANCIAL OFFICER. The Corporation shall
promptly commence a search for a qualified Chief Financial Officer of the
Corporation, with the individual hired to be approved by the Board of
Directors, including the favorable vote of the two directors elected by the
Preferred Stock.
8.6 COMPOSITION OF THE BOARD OF DIRECTORS. The holders of the
Preferred Stock are given the power to elect two members of the Board of
Directors by their separate vote under the terms of the Corporation's
Certificate of Incorporation. It is agreed as among the Investors and the
Corporation that one such member shall be an individual designated from time to
time by TFVP IV and TFVP V and that the other individual shall be designated
from time to time by the remaining holders of the Preferred Stock. It is
understood and agreed by such parties that the right of TFVP IV and TFVP V to
so designate a member to the Board of Directors shall be conditioned upon their
continued collective ownership of at least eighty (80%) of the shares of Series
A Preferred Stock initially purchased hereunder. Additionally, the parties
contemplate reconsideration and revision of their agreement under this Section
at the time of the next significant equity round of financing is completed to
reflect appropriate Board representation among the Investors hereunder
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and of future venture capital-type investors. Additionally, the Corporation
and the Investors agree that the authorized number of Directors shall be five
(5) until changed by resolution adopted by the Board of Directors with the
favorable vote of both Directors elected solely by the Preferred Stock.
8.7 LIMITATION ON RIGHTS OF INVESTORS. The rights of Right
Holders under Section 8.2 and the Investors under Sections 8.1, 8.3, 8.4, 8.5
and 8.6 and the obligations of the Corporation under Sections 8.1 through 8.6
shall terminate and be of no effect upon and following the closing date of an
underwritten public offering of the Corporation's Common Stock pursuant to an
effective registration statement under the Securities Act in which the
aggregate gross proceeds to the Corporation from such offering are not less
than $8,000,000.
SECTION 9. FEES. Except as provided below, each party hereto shall be
responsible for and shall pay its own fees and expenses in connection with the
transactions contemplated by this Agreement. The Corporation agrees to
reimburse the Investors for the reasonable fees (up to $10,000.00) and the
expenses billed to them by Tomlinson Zisko Morosoli & Maser, as counsel to the
Investors.
SECTION 10. EXCHANGES; LOST, STOLEN OR MUTILATED CERTIFICATES. Upon surrender
by any Investor to the Corporation of a certificate or certificates
representing shares of Preferred Stock purchased or acquired by such Investor
hereunder or Reserved Shares received upon conversion of any such shares of
Preferred Stock, the Corporation at its expense shall issue in exchange
therefor, and deliver to such Investor, a new certificate or certificates
representing such shares, in such denomination or denominations as may be
requested by such Investor. Upon receipt of evidence satisfactory to the
Corporation of the loss, theft, destruction or mutilation of any certificate
representing any shares of Preferred Stock purchased or acquired by the
Investor hereunder or Reserved Shares received upon conversion of any such
shares of Preferred Stock and in case of any such loss, theft or destruction,
upon delivery of any indemnity agreement satisfactory to the Corporation, or in
case of any such mutilation, upon surrender and cancellation of such
certificate, the Corporation at its expense shall issue and deliver to such
Investor a new certificate for such shares of Preferred Stock or Reserved
Shares, of like tenor, in lieu of such lost, stolen or mutilated certificate.
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SECTION 11. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
covenants, representations and warranties of the Corporation contained herein
shall survive the Closing. Each of the Investors may rely on such covenants,
representations and warranties irrespective of any investigation made, or
notice or knowledge held by, it or any other person. ALL statements contained
in any certificate or other instrument delivered by the Corporation pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement shall constitute representations and warranties by the Corporation
under this Agreement.
SECTION 12. INDEMNIFICATION. The Corporation shall indemnify, defend and hold
the Investors harmless from and against all liabilities, losses, and damages,
together with all reasonable costs and expenses related thereto (including,
without limitation, legal and accounting fees and expenses), which would not
have been incurred if (a) all of the representations and warranties of the
Corporation herein had been true and correct when made or (b) all of the
covenants and agreements of the Corporation herein had been duly and timely
complied with and performed.
SECTION 13. REMEDIES. In case any one or more of the covenants or agreements
set forth in this Agreement shall have been breached by the Corporation, the
Investors may proceed to protect and enforce their rights either by suit in
equity or by action at law, including, but not limited to, an action for
damages as a result of any such breach or an action for specific performance of
any such covenant or agreement contained in this Agreement.
SECTION 14. SUCCESSORS AN ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, each of the parties hereto and, except as otherwise
expressly provided herein, each other person who shall become a registered
holder named in any certificate evidencing shares of Common Stock or Preferred
Stock transferred to such holder by any of the Investors or their permitted
transferees, and (except as aforesaid) their respective legal representatives,
successors and assigns.
SECTION 15. ENTIRE AGREEMENT; EFFECT ON PRIOR DOCUMENTS. This Agreement and
the other documents referred to herein or delivered pursuant hereto contain the
entire agreement among the parties with respect to the financing transactions
contemplated hereby and supersede all prior negotiations, commitments,
agreements and understandings among them with respect thereto.
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SECTION 16. NOTICES. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or duly sent by express overnight
delivery providing written receipt of delivery, charges prepaid, or by first
class registered or certified mail, postage prepaid, return receipt requested,
addressed to such party at the address set forth below or such other address as
may hereafter be designated in writing by the addressee to the addressor
listing all parties:
(i) if to the Corporation, to:
Unitech Telecom, Inc.
333 Hegenberger Road, Suite 328
Oakland, CA 94621
Attention- President
with a copy to:
Gary J. Simon, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(ii) if to the Investors, to their respective
addresses set forth on the signature page
hereof with a copy to:
Jim C. Curlett, Esq.
Tomlinson Zisko Morosoli & Maser
200 Page Mill Road
Second Floor
Palo Alto, California 94306
All such notices, requests, consents and other communications so given shall be
deemed given or served and received for all purposes (i) three (3) days after
being sent by first class registered or certified mail, (ii) one business day
after being sent by express overnight delivery, or (iii) on the date of
delivery when delivered by hand.
SECTION 17. AMENDMENTS; WAIVERS. This Agreement may be amended, and
compliance with any provision of this Agreement may be omitted or waived, by
the written agreement of the Corporation and Investors or transferees of their
rights hereunder holding eighty (80%) in voting power of the Preferred Stock
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(including Common Stock issued upon conversion thereof) held by the Investors
and such transferees.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each such counterpart shall be deemed to be an original
instrument, and all such counterparts together shall constitute but one
agreement.
SECTION 19. HEADINGS. The headings of the various sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
SECTION 20. NOUNS AND PRONOUNS. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.
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SECTION 21. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the substantive laws of the State of
California without regard to its principles of conflicts of laws.
SECTION 22. SEVERABILITY. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 23. CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR
SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE
CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE
IS SO EXEMPT.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase
Agreement under seal as of the day and year first above written.
UNITECH TELECOM, INC.
By: /s/
------------------------------
Its President
By:
------------------------------
Title: President
--------------------------
<PAGE> 32
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: By:
------------------------ ----------------------
Its Its
Address: Address:
- ------- -------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By:
------------------------ -------------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD.
By:
------------------------
Its
Address:
- --------
c/o Sabkar Holding Sdn. Bhd.
Suite 16.06
Pernas International
Jalan Sultan Ismail
50250 Kuala Lumpur, Malaysia
-31-
<PAGE> 33
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: /s/ By: /s/
------------------------ ------------------------
Its Investment Officer Its Investment Officer
By: By:
------------------------ ------------------------
Its Vice President Its Vice President
Address: Address:
- -------- --------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By:
----------------------------- -----------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD. DING CHO HEE
By:
----------------------------- -----------------------------
Its
Address: Address:
- -------- --------
c/o Sabkar Holding Sdn. Bhd. 31 Jalan BU 2/9
Suite 16.06 Bandar Utama
Pernas International 47800 Petaling Jaya
Jalan Sultan Ismail Selangor Darul Ehsan, Malaysia
50250 Kuala Lumpur, Malaysia
WILLIAM WITTMEYER MALAYSIAN TECHNOLOGY DEVELOPMENT
CORP.
By:
----------------------------- -----------------------------
-32-
<PAGE> 34
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: By:
------------------------ ------------------------
Its Its
Address: Address:
- -------- --------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By: /s/ Pehong Chen
----------------------------- -----------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD. DING CHO HEE
By:
----------------------------- -----------------------------
Its
Address: Address:
- -------- --------
c/o Sabkar Holding Sdn. Bhd. 31 Jalan BU 2/9
Suite 16.06 Bandar Utama
Pernas International 47800 Petaling Jaya
Jalan Sultan Ismail Selangor Darul Ehsan, Malaysia
50250 Kuala Lumpur, Malaysia
WILLIAM WITTMEYER MALAYSIAN TECHNOLOGY DEVELOPMENT
CORP.
By:
----------------------------- -----------------------------
-32-
<PAGE> 35
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- ----------------------
Its Its
Address: Address:
- -------- --------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By:
---------------------- ---------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD. DING CHO HEE
By:
---------------------- ---------------------------
Its
Address: Address:
- -------- --------
c/o Sabkar Holding Sdn. Bhd. 31 Jalan BU 2/9
Suite 16.06 Bandar Utama
Pernas International 47800 Petaling Jaya
Jalan Sultan Ismail Selangor Darul Ehsan, Malaysia
50250 Kuala Lumpur, Malaysia
WILLIAM WITTMEYER MALAYSIAN TECHNOLOGY DEVELOPMENT
CORP.
By:
- ---------------------------- ----------------------------
-32-
<PAGE> 36
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- ----------------------
Its Its
Address: Address:
- -------- --------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By:
-------------------------- -------------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD. DING CHO HEE
By:
-------------------------- -------------------------------
Its
Address: Address:
- -------- --------
c/o Sabkar Holding Sdn. Bhd. 31 Jalan BU 2/9
Suite 16.06 Bandar Utama
Pernas International 47800 Petaling Jaya
Jalan Sultan Ismail Selangor Darul Ehsan, Malaysia
50250 Kuala Lumpur, Malaysia
WILLIAM WITTMEYER MALAYSIAN TECHNOLOGY DEVELOPMENT
CORP.
/s/ William Wittmeyer By:
- ---------------------------- ----------------------------
-32-
<PAGE> 37
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.,
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- ----------------------
Its Its
Address: Address:
- -------- --------
2000 Alameda de las Pulgas 2000 Alameda de las Pulgas
San Mateo, California 94403 San Mateo, California 94403
TELCO SYSTEMS, INC. DR. PEHONG CHEN
By:
--------------------------- -------------------------------
Its
Address: Address:
- -------- --------
4305 Cushing Parkway 3 Lagoon Drive #350
Fremont, California 94538 Redwood City, California 94065
VARIAMAT RESOURCES SDN. BHD. DING CHO HEE
By: /s/ Ding Cho Hee
--------------------------- -------------------------------
Its
Address: Address:
- -------- --------
c/o Sabkar Holding Sdn. Bhd. 31 Jalan BU 2/9
Suite 16.06 Bandar Utama
Pernas International 47800 Petaling Jaya
Jalan Sultan Ismail Selangor Darul Ehsan, Malaysia
50250 Kuala Lumpur, Malaysia
WILLIAM WITTMEYER MALAYSIAN TECHNOLOGY DEVELOPMENT
CORP.
By: /s/
- ---------------------------- ----------------------------
-32-
<PAGE> 38
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is entered into as of March
29, 1995 by and among Unitech Telecom, Inc., a Delaware corporation (the
"CORPORATION"); Technology Funding Venture Partners IV, An Aggressive Growth
Fund, L.P., a Delaware limited partnership ("TFVP IV"); Technology Funding
Venture Partners V, an Aggressive Growth Fund, L.P., a Delaware limited
partnership ("TFVP V"); Telco Systems, Inc., a Delaware corporation ("Telco");
Dr. Pehong Chen, a California resident, and Variamat Resources Sdn. Bhd., a
Malaysian corporation, Ding Cho Hee, a Malaysian resident, William Wittmeyer, a
California resident and Malaysian Technology Development Corp., a Malaysian
corporation (the foregoing being hereinafter sometimes referred to individually
as an "INVESTOR" and collectively as the "INVESTORS").
WHEREAS, the Corporation wishes to sell to the Investors
certain shares of its Series A Convertible Preferred Stock, par value $.01 per
share ("PREFERRED STOCK"), which are convertible into shares of the
Corporation's Common Stock, par value $.01 per share ("COMMON STOCK"); and
WHEREAS, as a condition to their purchase of such Preferred
Stock, in a Stock Purchase Agreement of even date herewith (the "PURCHASE
AGREEMENT"), the Investors have required that the Corporation execute this
Agreement to provide the Investors rights to register the Common Stock into
which their Preferred Stock is convertible and certain other stock;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement, the
following terms shall have the following meanings:
(a) The term "Act" means the Securities Act of 1933,
as amended;
(b) The term "HOLDER" means any Investor and any
other person or entity holding Registrable Securities to whom the registration
rights granted in this Agreement have been transferred pursuant to Section 15
hereof;
(c) The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement in compliance with the Act and the declaration or
ordering of effectiveness of such registration statement; and
<PAGE> 39
(d) The term "REGISTRABLE SECURITIES" means (1) the
Common Stock issuable upon conversion of the Preferred Stock, (2) Common Stock
purchased by an Investor pursuant to Section 9.2 of the Purchase Agreement (or
Common Stock for or into which New Securities (as therein defined) purchased
by the Investor pursuant to such Section 9.2 may be exercised or converted),
and (3) shares of Common Stock issuable upon exercise of the Warrants dated
May 31, 1994 issued to TFVP IV and TFVP V, and (4) any Common Stock of the
Corporation issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of, such Preferred Stock or Common Stock.
In addition, for purposes of all calculations, and notices
under, and all provisions of this Agreement, where the context permits, the
term "REGISTRABLE SECURITIES" shall include securities issuable upon conversion
of the Preferred Stock, a holder of the Preferred Stock shall be deemed the
Holder of such securities and such securities shall be deemed outstanding
Registrable Securities hereunder. The foregoing notwithstanding, nothing in
this Agreement shall require the Corporation actually to register any shares of
the Preferred Stock.
2. REQUEST FOR REGISTRATION. At any time after
the earlier of (i) September 1, 1997 or (ii) the initial public offering of the
Common Stock, if the Corporation shall receive a written request (specifying
that it is being made pursuant to this Section 2) from the Holder or Holders of
more than thirty-three and one-third percent (33 1/3%) of the then outstanding
Registrable securities that the Corporation file a registration statement under
the Act, or a similar document pursuant to any other statute then in effect
corresponding to the Act, covering the registration of at least the lesser of
(i) at least twenty percent (20%) of the then outstanding Registrable
Securities and, (ii) Registrable Securities the expected offering price to the
public of which equals or exceeds $3,000,000, then the Corporation shall
promptly notify all other Holders of such request and shall use its best
efforts to cause all Registrable Securities that Holders have requested be
registered to be registered under the Act.
Notwithstanding the foregoing, (a) the Corporation shall not
be obligated to effect a registration pursuant to this Section 2 during the
period starting with the date sixty (60) days prior to the Corporation's
estimated date of filing of, and ending on a date three (3) months following
the effective date of, a registration statement pertaining to an underwritten
public offering of securities for the account of the Corporation, provided that
the Corporation is actively employing in good
-2-
<PAGE> 40
faith its best efforts to cause such registration statement to become effective
and that the Corporation's estimate of the date of filing such registration
statement is made in good faith; (b) the Corporation shall not be obligated to
effect a registration pursuant to this Section 2 within six (6) months after
the effective date of a prior registration under such Section; (c) if the
Corporation shall furnish to the Holders a certificate signed by the President
of the Corporation stating that in the good faith judgment of the Board of
Directors it would be materially detrimental to the Corporation or its
shareholders for a registration statement to be filed in the near future, then
the Corporation's obligation to use its best efforts to file a registration
statement shall be deferred for a period not to exceed three (3) months; and
(d) the Corporation may postpone a registration pursuant to this Section 2 for
such period of time as may be required to permit the use of regular audited
year-end figures with supplemental short period figures for a period not
exceeding six (6) months unless the Holders agree to bear the costs of any
special audit.
The Corporation shall not be obligated to effect more than one
(1) registration pursuant to this Section 2. Any request for registration under
this Section 2 must be for a firm commitment underwritten public offering to be
managed by an underwriter or underwriters of recognized national standing
reasonably acceptable to the Corporation.
3. CORPORATION REGISTRATION. Subject to Section
8 of this Agreement, if at any time the Corporation proposes to register any of
its Common Stock under the Act in connection with the public offering of such
securities for its own account or for the accounts of other shareholders,
solely for cash on a form that would also permit the registration of the
Registrable Securities, the Corporation shall, each such time, promptly give
each Holder written notice of such determination. Upon the written request of
any Holder given within thirty (30) days after mailing of any such notice by
the Corporation, the Corporation shall use its best efforts to cause to be
registered under the Act all of the Registrable Securities that each such
Holder has requested be registered; provided that the Corporation shall have
the right to postpone or withdraw any such registration effected pursuant to
this Section 3.
4. OBLIGATIONS OF THE CORPORATION. Whenever
required under Section 2, 3, or 11 to use its best efforts to effect the
registration of any Registrable Securities, the Corporation shall, as
expeditiously as reasonably possible:
-3-
<PAGE> 41
(a) Prepare and file with the Securities and Exchange
Commission ("SEC") a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become and remain effective; provided, however, that in connection with any
proposed registration intended to permit an offering of any securities from
time to time (i.e., a so-called "shelf registration"), the Corporation shall
in no event be obligated to cause any such registration to remain effective
for more than one hundred eighty (180) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act until the earlier of (i) the disposition of all
securities covered by such registration statement or (ii) 120 days after the
effective date thereof.
(c) Furnish to each selling Holder such number of copies of
each preliminary and final prospectus in conformity with the requirements of
the Act, and such other documents as such Holder may reasonably request, in
order to facilitate the disposition of Registrable Securities owned by it.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for
the distribution of the securities covered by the registration statement,
provided that the Corporation shall not be required in connection therewith or
as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, and further provided
that (anything in this Agreement to the contrary notwithstanding with respect
to the bearing of expenses) if any jurisdiction in which the securities shall
be qualified shall require that expenses incurred in connection with the
qualification of the securities in that jurisdiction be borne by selling
shareholders, then such expenses shall be payable by selling shareholders pro
rata, to the extent required by such jurisdiction.
(e) Provide a transfer agent for the Common Stock no later
than the effective date of the first registration of any Registrable Securities.
(f) Otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC.
-4-
<PAGE> 42
(g) Use its best efforts to cause all the Registrable
Securities either (i) to be listed on a national securities exchange (if
the Registrable Securities are not already so listed) and on each additional
national securities exchange on which similar securities issued by the
Corporation are then listed, if the listing of the Registrable Securities is
then permitted under the rules of such exchange, or (ii) to secure designation
of all the Registrable Securities as a Nasdaq "national market system security"
within the meaning of Rule 11Aa2-1 of the SEC or, failing that, to secure
listing on Nasdaq for the Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two (2) market makers to
register as such with respect to Registrable Securities with the National
Association of Securities Dealers, Inc.
(h) Enter into such customary agreements (including an
underwriting agreement in customary form) and take such other actions as
sellers of Registrable Securities shall reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities.
(i) Make available for inspection and copying by any seller
of Registrable Securities, by any underwriter participating in any disposition
to be effected pursuant to such registration statement and by any attorney,
accountant or other agent retained by any such seller or any such underwriter,
all pertinent financial and other records and pertinent corporate documents and
properties of the Corporation, and cause all of the Corporation's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
registration statement.
(j) Use every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of such registration statement or
of any order preventing or suspending the use of any preliminary prospectus
and, if any such order is issued, to obtain the lifting thereof at the earliest
reasonable time.
(k) Make such representations and warranties to the selling
Holders and the underwriters as are customarily made by issuers to underwriters
and selling shareholders, as the case may be, in primary underwritten public
offerings.
(l) Furnish to each selling Holder a signed counterpart of
-5-
<PAGE> 43
(i) an opinion of counsel for the Corporation,
dated the effective date of the registration statement, and
(ii) "comfort" letters signed by the Corporation's
independent public accountants who have examined and reported on the
Corporation's financial statements included in the registration statement, to
the extent permitted by the standards of the American Institute of Certified
Public Accountants, covering substantially the same matters with respect to
the registration statement (and the prospectus included therein) and (in the
case of the accountants' "comfort" letters) with respect to events subsequent
to the date of the financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' "comfort" letters delivered
to the underwriters in underwritten public offerings of securities, to the
extent that the Corporation is required to deliver or cause the delivery of
such opinion or "comfort" letters to the underwriters in an underwritten public
offering of securities.
(m) Furnish to each selling Holder a copy of all documents
filed and all correspondence from or to the SEC in connection with the
registration statement and the offering to which it relates.
(n) Use its best efforts to insure the obtaining of all
necessary approval from the National Association of Securities Dealers, Inc.
in connection with such offering.
5. FURNISH INFORMATION. It shall be a condition precedent to
the obligations of the Corporation to take any action pursuant to this
Agreement that the Holders shall furnish to the Corporation such
information regarding them, the Registrable Securities held by them, and the
intended method of disposition of such securities as the Corporation shall
reasonably request and as shall be required in connection with the action to be
taken by the Corporation.
6. EXPENSES OF DEMAND REGISTRATION. All expenses incurred in
connection with registrations pursuant to Section 2 (excluding underwriters'
discounts and commissions), including, without limitation, all registration
and qualification fees, printers', and accounting fees, fees and disbursements
of counsel for the Corporation, and the reasonable fees and disbursements of
one counsel for the selling Holders, shall be borne by the Corporation;
PROVIDED, HOWEVER, that if a registration under Section 2 is withdrawn at the
request of the selling Holders
-6-
<PAGE> 44
requesting such registration (other than as a result of information concerning
the business or financial condition of the Corporation which is made known to
the selling Holders after the date on which such registration was requested)
and if such selling Holders elect not to have such registration counted as
registration requested under Section 2, the requesting selling Holders shall
pay the registration expenses of such registration pro rata in accordance with
the number of the Registrable Securities included in such registration.
7. CORPORATION REGISTRATION EXPENSES. All expenses (excluding
underwriters' discounts and commissions) incurred in connection with a
registration pursuant to Section 3 (other than a registration on Form S-3
filed pursuant to Section 11 hereof), including, without limitation, any
additional registration and qualification fees and any additional fees and
disbursements of counsel to the Corporation that result from the inclusion of
securities held by the Holders in such registration and the reasonable fees and
disbursements of one counsel for the selling Holders, shall be borne by the
Corporation.
8. UNDERWRITING REQUIREMENTS.
-------------------------
(a) In connection with any offering involving an
underwriting of shares being issued by the Corporation, the Corporation shall
not be required to include any of the Holders' Registrable Securities in
such underwriting unless they accept the terms of the underwriting as agreed
upon between the Corporation and the underwriters selected by it, and, in
connection with any such offering under Section 3, only in such quantity as
will not exceed a limitation on the amount of securities to be underwritten,
such limitation to be reasonably determined by the underwriters' or their
representatives based on marketing factors (the "Underwriters' Limitation").
If the total amount of securities that all Holders request to be included in an
underwritten offering exceeds the Underwriters' Limitation on the amount of
securities, the Corporation shall only be required to include in the offering
so many of the securities of the selling Holders as the underwriters reasonably
believe will not exceed that limitation (the securities so included to be
apportioned pro rata among the selling Holders according to the total amount of
securities owned by said selling Holders, or in such other proportions as shall
mutually be agreed to by such selling Holders), provided that (in the case of
an offering subject to Section 3) no such reduction shall be made with respect
to any securities offered by the Corporation for its own account, and provided
further that no securities of any shareholder who is not a Holder shall be
included unless ail securities which the
-7-
<PAGE> 45
Holders and their permitted assignees have requested to be included are
included.
(b) With respect to any underwriting of shares to be
registered under Section 2 or Section 11, the Holders of a majority of the
then outstanding Registrable Securities to be included in such offering shall
have the right to designate the managing underwriter or underwriters. In all
other circumstances under such Sections and in connection with registrations
under Section 3, the Board of Directors of the Corporation shall designate the
managing underwriter or underwriters.
9. DELAY OF REGISTRATION. No Holder shall have any right to
take any action to restrain, enjoin, or otherwise delay any registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
10. INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Corporation will
indemnify and hold harmless each Holder requesting or joining in a
registration, any underwriter (as defined in the Act) for it, and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which they may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based on any untrue or alleged untrue statement of any material
fact contained in such registration statement, including, without limitation,
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading or
arise out of any violation by the Corporation of any rule or regulation
promulgated under the Act applicable to the Corporation and relating to action
or inaction required of the Corporation in connection with any such
registration; and will reimburse each such Holder, such underwriter, or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, or action, provided, however, that the indemnity agreement contained
in this Section 10(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action
-8-
<PAGE> 46
if such settlement is effected without the consent of the Corporation (which
consent shall not be unreasonably withheld or delayed) nor shall the
Corporation be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in connection with such registration statement, preliminary prospectus,
final prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by or on behalf of any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each Holder requesting
or joining in a registration will indemnify and hold harmless the Corporation,
each of its directors, each of its officers who has signed the registration
statement, each underwriter for the Corporation (within the meaning of the
Act), and each person, if any, who controls the Corporation or any such
underwriter within the meaning of the Act, against any losses, claims, damages
or liabilities to which the Corporation or any such director, officer,
controlling person or underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in such registration statement, preliminary prospectus or final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished by or on behalf of such Holder
expressly for use in connection with such registration; and will reimburse the
Corporation or any such director, officer, controlling person or underwriter
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 10(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld) and provided further
that no Holder shall have any liability under this Section
-9-
<PAGE> 47
10(b) in excess of the net proceeds actually received by such Holder in the
relevant public offering.
(c) Promptly after receipt by an indemnified party under
this Section 10 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 10, notify the indemnifying party in
writing of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties. The failure
to notify an indemnifying party promptly of the commencement of any such
action, if actually prejudicial to his ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 10, but the omission so to notify the indemnifying party will not
relieve him of any liability that he may have to any indemnified party
otherwise than under this Section 10.
11. REGISTRATIONS ON FORM S-3.
(a) If (i) the Corporation shall receive a written request
(specifying that it is being made pursuant to this Section 11) from the Holder
or Holders of more than fifteen percent (15%) of the then-outstanding
Registrable Securities that the corporation file a registration statement on
Form S-3 (or any successor form to Form S-3 regardless of its designation) for
a public offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which would equal or exceed Five
Hundred Thousand Dollars ($500,000), and (ii) the Corporation is a registrant
entitled to use Form S-3 to register such shares, then the Corporation shall
use its best efforts to cause such shares to be registered on Form S-3 (or any
successor form to Form S-3).
(b) All expenses (excluding underwriters' discounts and
commissions) incurred in connection with a registration requested pursuant to
Section 11(a), including, without limitation, all registration, qualification,
printing, and accounting fees, and fees and disbursements of one counsel for
the selling Holder or Holders and counsel to the Corporation, shall be borne by
the Corporation.
(c) Holders' rights to registration under this Section 11
are in addition to, and not in lieu of, their rights to registration under
Sections 2 and 3 of this Agreement.
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<PAGE> 48
(d) The Corporation shall not be obligated to effect more
than two registrations pursuant to this Section 11 during any period of twelve
(12) consecutive calendar months.
12. LIMITATION ON CORPORATION OFFERINGS. The Corporation shall
not register securities for sale for its own account (or, except as permitted
by Section 14, any securities other than Registrable Securities held by a
Holder) in any registration requested pursuant to Section 2 or 11 unless
permitted to do so by the written consent of the Holders of more than eighty
percent (80%) of the Registrable Securities as to which registration has been
requested. The Corporation may not cause any other registration of securities
for its own account (other than a registration effected solely to implement an
employee benefit plan) which would become effective less than ninety (90) days
after the effective date of any registration requested pursuant to Section 2 or
11 to be initiated after such requested registration.
13. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view
to making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Corporation to the public without
registration, the corporation agrees to use its best efforts to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144, at all times subsequent to
ninety (90) days after the effective date of the first registration statement
covering an underwritten public offering filed by the Corporation;
(b) file with the SEC in a timely manner all reports and
other documents required of the Corporation under the Act and the Securities
Exchange Act of 1934, as amended (the "1934 ACT"); and
(c) furnish to any Holder forthwith upon request a written
statement by the Corporation that it has complied with the reporting
requirements of Rule 144 (at any time after ninety (so) days after
the effective date of said first registration statement filed by the
Corporation), and of the Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Corporation, and such other reports and documents so
filed by the Corporation as may be reasonably requested in availing any such
Holder to take advantage of any rule or
-11-
<PAGE> 49
regulation of the SEC permitting the selling of any such securities without
registration.
14. LIMITATIONS IN CONNECTION WITH FUTURE GRANTS OF REGISTRATION
RIGHTS. Without the prior written consent of Holders that hold at least
eighty percent (80%) in voting power of Registrable Securities, the Corporation
shall not grant rights to cause the Corporation to register any of
its securities to any person or entity which are more favorable than the rights
granted to the Holders hereunder or which would interfere in any respect with
the exercise by the Holders of their rights hereunder.
15. TRANSFER OF REGISTRATION RIGHTS. The registration rights of
any Investor (and of any permitted transferee of any Investor or its permitted
transferees) under this Agreement with respect to any shares of Registrable
Securities may be Transferred to any transferee who acquires (otherwise than in
a registered public offering) such shares of Registrable Securities, provided,
however, that the Corporation is given written notice by the Holder at the time
of such transfer stating the name and address of the transferee and identifying
the securities with respect to which the rights under this Agreement are being
assigned and the transferee agrees to be bound by and executes a counterpart of
this Agreement.
16. MERGERS, ETC. The Corporation shall not, directly or
indirectly enter into any merger, consolidation or reorganization in
which the Corporation shall not be the surviving corporation unless the
proposed surviving corporation shall, prior to such merger, consolidation or
reorganization, agree in writing to assume the obligations of the Corporation
under this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to be references to the securities which the
Holders would be entitled to receive in exchange for Registrable Securities
under any such merger, consolidation or reorganization; provided, however, that
the provisions of this Agreement shall not apply in the event of any merger,
consolidation or reorganization in which the Corporation is not the surviving
corporation if the Holders of Registrable Securities are entitled to receive in
exchange therefor (i) cash, (ii) securities of the acquiring corporation which
may be immediately sold to the public without registration under the Act! or
(iii) securities of the acquiring corporation which the acquiring corporation
has agreed to register within ninety (90) days of the completion of the
transaction for resale to the public pursuant to the Act.
-12-
<PAGE> 50
17. STAND-OFF AGREEMENT. Each Holder, if requested by the
Corporation and the managing underwriter of an offering by the Corporation of
Common Stock or other securities of the Corporation pursuant to a registration
statement, shall agree not to sell publicly or otherwise transfer or dispose of
any Registrable Securities or other securities of the Corporation held by such
Holder for a specified period of time (not to exceed 90 days) following the
effective date of such registration statement; PROVIDED that:
(a) such agreement shall only apply to the first
registration statement covering Common Stock to be sold on the Corporation's
behalf to the public in an underwritten offering; and
(b) all holders holding not less than the number of shares
of Common Stock held by such Holder (including shares of Common Stock issuable
upon the conversion of Preferred Stock, or other convertible securities, or
upon the exercise of options, warrants or rights) and all officers and
directors of the Corporation enter into similar agreements.
18. MISCELLANEOUS.
(a) This Agreement states the entire agreement of the
parties concerning the subject matter hereof, and supersedes all prior
agreements, written or oral, between or among them concerning such subject
matter.
(b) This Agreement may be amended, and compliance with any
provision of this Agreement may be omitted or waived, only by the written
agreement of the Holders of at least eighty percent (80%) in voting power of
the then- outstanding Registrable Securities to be bound thereby.
(c) This Agreement shall be governed by, and construed and
enforced in accordance with, the substantive laws of the State of California
without regard to its principles of conflicts of laws.
(d) All notices hereunder shall be given in accordance with
Section 17 of the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have duly exe-
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<PAGE> 51
cuted and delivered this Registration Rights Agreement under seal as of the
date first above written.
UNITECH TELECOM, INC.
By: /s/
-----------------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING, INC., By: TECHNOLOGY FUNDING, INC.
Its Managing General Its Managing General
Partner Partner
By: /s/ By: /s/
---------------------- -----------------------
Its Investment Officer Its Investment Officer
By: /s/ By: /s/
---------------------- -----------------------
Its Vice President Its Vice President
TELCO SYSTEMS, INC.
By:
--------------------------- ---------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By:
--------------------------- ---------------------------
Its William Wittmeyer
MALAYSIAN TECHNOLOGY
DEVELOPMENT CORP.
By:
- --------------------------- ---------------------------
Ding Cho Hee Its
-14-
<PAGE> 52
waived, only by the written agreement of the Holders of at least eighty percent
(80%) in voting power of the then-outstanding Registrable Securities to be
bound thereby.
(c) This Agreement shall be governed by, and construed and
enforced in accordance with, the substantive laws of the State of California
without regard to its principles of conflicts of laws.
(d) All notices hereunder shall be given in accordance
with Section 17 of the-Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Registration Rights Agreement under seal as of the date first
above written.
UNITECH TELECOM, INC.
By: /s/
----------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC., By: TECHNOLOGY FUNDING INC.
Its Managing General Its Managing General
Partner Partner
By: /s/ By: /s/
---------------------- -----------------------
Its Its
TELCO SYSTEMS, INC.
By:
--------------------------- --------------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By: /s/
---------------------------
Its
-14-
<PAGE> 53
cuted and delivered this Registration Rights Agreement under seal as of -the
date first above written.
UNITECH TELECOM, INC.
By:
----------------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC., By: TECHNOLOGY FUNDING INC.
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- -----------------------
Its Its
TELCO SYSTEMS, INC.
By: /s/ Pehong Chen
--------------------------- --------------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By:
--------------------------- --------------------------------
Its William Wittmeyer
MALAYSIAN TECHNOLOGY
DEVELOPMENT CORP.
By:
- --------------------------- -----------------------------
Ding Cho Hee Its
-14-
<PAGE> 54
cuted and delivered this Registration Rights Agreement under seal as of the
date first above written.
UNITECH TELECOM, INC.
By:
----------------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC., By: TECHNOLOGY FUNDING INC.
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- -----------------------
Its Investment Officer Its Investment Officer
TELCO SYSTEMS, INC.
By: /s/
--------------------------- -------------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By:
--------------------------- -------------------------------
Its William Wittmeyer
MALAYSIAN TECHNOLOGY
DEVELOPMENT CORP.
By:
- ------------------------------ ---------------------------
Ding Cho Hee Its
-14-
<PAGE> 55
cuted and delivered this Registration Rights Agreement under seal as of the
date first above written.
UNITECH TELECOM, INC.
By:
----------------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC., By: TECHNOLOGY FUNDING INC.
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- -----------------------
Its Investment Officer Its Investment Officer
TELCO SYSTEMS, INC.
By:
--------------------------- -------------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By: /s/ William Wittmeyer
--------------------------- -------------------------------
Its William Wittmeyer
MALAYSIAN TECHNOLOGY
DEVELOPMENT CORP.
By:
- --------------------------- ---------------------------
Ding Cho Hee Its
-14-
<PAGE> 56
cuted and delivered this Registration Rights Agreement under seal as of the
date first above written.
UNITECH TELECOM, INC.
By:
----------------------------
Its President
TECHNOLOGY FUNDING VENTURE TECHNOLOGY FUNDING VENTURE
PARTNERS IV, AN AGGRESSIVE PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P. GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC., By: TECHNOLOGY FUNDING INC.
Its Managing General Its Managing General
Partner Partner
By: By:
---------------------- -----------------------
Its Investment Officer Its Investment Officer
TELCO SYSTEMS, INC.
By:
--------------------------- -------------------------------
Its Pehong Chen
VARIAMAT RESOURCES SDN. BHD.
By:
--------------------------- --------------------------------
Its William Wittmeyer
MALAYSIAN TECHNOLOGY
DEVELOPMENT CORP.
/s/ Ding Cho Hee By: /s/
- --------------------------- ---------------------------
Ding Cho Hee Its
<PAGE> 1
EXHIBIT 10.45
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is made and entered into April 12, 1995
by and between RIGGS NATIONAL BANK OF WASHINGTON, D.C. AS TRUSTEE OF THE MULTI-
EMPLOYER PROPERTY TRUST, A TRUST FORMED UNDER 12 C.F.R. SECTION 9.18
("LANDLORD"), AND TELCO SYSTEMS, INC., A DELAWARE CORPORATION ("Tenant").
RECITALS:
---------
A. Landlord's predecessor-in-interest, Pactel Properties, a California
Corporation, and Tenant entered into that certain Standard Triple Net
Industrial Lease dated May 3, 1990 (the "Original Lease"), covering certain
premises consisting of approximately 62,261 rentable square feet (the "Original
Premises") located in Building 10 in the project commonly known as Northport
Business Park ("Project") and more particularly known as 4305 Cushing Parkway,
Fremont, California (the "Original Building").
B. Tenant desires to expand its current operations and, in connection
therewith, Landlord and Tenant, subject to the terms and conditions contained
herein, have agreed as follows:
1. Landlord shall attempt to purchase approximately 7.58 acres of
real property located in the Project as more particularly described on EXHIBIT
A-1 attached hereto ("Underlying Real Property").
2. After acquisition of the Underlying Real Property, Landlord shall
construct a building on the Underlying Real Property of approximately 115,000
rentable square feet.
3. After acquisition of the Underlying Real Property and
construction of the new building, Tenant shall vacate the Original Premises and
occupy a portion of the new building consisting of approximately 85,000
rentable square feet as more particularly described on EXHIBIT B attached
hereto.
C. In connection with the transaction described above, Landlord and
Tenant desire to amend the Original Lease to, among other things, revise the
description of the premises, adjust the rent, extend the lease term, provide an
option for Tenant to terminate the Lease, provide a right of first refusal for
Tenant on certain additional space located within the new building, provide
Tenant an option to purchase, and to make other related changes as provided
below.
NOW, THEREFORE, for good and adequate consideration, receipt of which is
hereby acknowledged, Landlord and Tenant hereby amend the Original Lease and
agree as follows:
1. DEFINED TERMS. All capitalized terms used in this First Amendment
shall have the meanings given in the Original Lease, unless otherwise defined
herein or amended in the revised Schedule A - BASIC LEASE INFORMATION attached
hereto pursuant to Section 2 below. For purposes of this First Amendment, the
term "Lease" shall be defined herein to include the Original Lease and this
First Amendment.
1.A. EFFECTIVE DATE. Each provision of this First Amendment which
deletes, replaces, amends or revises any portion of the Original Lease, shall
not delete, replace amend or revise the Original Lease until the Effective Date
of this First Amendment, with the exception of Paragraph 3.2. DELAY IN
POSSESSION and Paragraph 47. EXPANSION OPTION/FIRST RIGHT OF REFUSAL (PRIOR TO
COMMENCEMENT DATE), both of which shall be effective upon execution hereof.
The "Effective Date" is defined as the earlier of either Tenant's occupancy of
the new building or the Commencement Date, as defined in Paragraph 4 of this
First Amendment. Notwithstanding the foregoing, this First Amendment shall be
in full force and effect and binding upon the parties immediately upon
execution.
1.B. DEFAULTS UNDER ORIGINAL LEASE. If, on the Effective Date, Tenant or
Landlord are in default under any term of the Original Lease, or there exists
any other dispute between Tenant and Landlord with respect to any right,
promise or obligation contained in the Original Lease, the terms of the
Original Lease in its unamended form, notwithstanding the changes contemplated
in this First Amendment, shall apply to such default and/or dispute.
1
<PAGE> 2
1.C. PARAGRAPH 1. DEFINITIONS. Paragraph 1.2. COMMENCEMENT DATE of the
Original Lease is hereby deleted in its entirety and replaced with the
following: Defined in Paragraph 3.1. TERM, herein.
2. SCHEDULE A - BASIC LEASE INFORMATION. SCHEDULE A - BASIC LEASE
INFORMATION, which is attached to the Original Lease, shall be deleted in its
entirety upon the Commencement Date and replaced with the revised SCHEDULE A -
BASIC LEASE INFORMATION attached to this First Amendment.
3. ACQUISITION OF UNDERLYING REAL PROPERTY. The parties hereby
acknowledge that in order to complete this transaction and construct the new
building described above, Landlord or an affiliate of Landlord must acquire the
Underlying Real Property from Calfront Associates ("Calfront").
Notwithstanding anything to the contrary contained herein, if Landlord or an
affiliate of Landlord fails for any reason to close escrow for its acquisition
of the Underlying Real Property from Calfront, this First Amendment, and the
terms and conditions contained herein, shall terminate and be of no further
force and effect and the Original Lease shall thereafter continue in full force
and effect without regard to the provisions of this First Amendment.
4. PARAGRAPH 3.1. TERM. Paragraph 3.1. TERM is hereby deleted in its
entirety and replaced with the following: This Lease shall be for the Term
specified in Schedule A, commencing on the Commencement Date. The Commencement
Date ("Commencement Date") shall occur on the later of (i) the Estimated
Commencement Date specified in Schedule A, or (ii) Substantial Completion (as
defined below) of Landlord's Work. The term Substantial Completion shall
mean the date on which the following have occurred: (x) substantial completion
of Landlord's Work in compliance with the approved Final Plans and
Specifications and substantial completion of the Building Shell in compliance
with the Building Specifications as defined in Exhibit D, and, in each case, in
compliance with applicable law and good practice in the construction industry,
excluding any changes approved by Landlord and/or Tenant or minor field changes
and excluding punch list items which do not prevent Tenant from using the
Premises for their intended use; (y) Landlord has delivered possession of the
Premises to Tenant; and (z) Landlord has delivered to Tenant a Notice of
Completion.
5. PARAGRAPH 3.2. DELAY IN POSSESSION. Paragraph 3.2 DELAY IN
POSSESSION is hereby deleted in its entirety and replaced with the following:
Notwithstanding the Estimated Commencement Date, if for any reason the
Commencement Date, as defined in Paragraph 6 of Exhibit D, does not occur on or
before October 1, 1995, Landlord shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Tenant hereunder but in such case, Tenant shall not be obligated
to pay the new Base Monthly Rent as provided in the revised Schedule A attached
hereto and Additional Rent until the Commencement Date. Provided, however, if
Landlord shall not have delivered possession of the Premises within 120 days of
the Estimated Commencement Date, either Landlord or Tenant may, by notice in
writing to the other party within ten (10) days thereafter, cancel this Lease
effective as of the date of receipt of such notice (the "Termination Date"), in
which event the parties shall be discharged from all obligations hereunder;
provided that such 120 day period shall be subject to extensions for any delays
due to acts of God, strikes, fire, weather, casualty, war, acts of governmental
bodies, inability to obtain labor or materials or other causes beyond Landlord
s reasonable control and provided that Tenant's right to cancel this Lease
after such 120 day period shall be subject to extensions for Tenant Delays, as
defined in Paragraph 6 of Exhibit D. If the Commencement Date is delayed and
neither party elects to cancel this Lease, the Expiration Date shall be
automatically extended beyond the Estimated Commencement Date by the number of
days of such delay. Notwithstanding anything to the contrary contained herein,
if, upon Substantial Completion, Landlord delivers possession of the Premises
to Tenant after the Estimated Commencement Date except as the result of Tenant
Delays as defined in EXHIBIT D or force majeure, then commencing on the actual
Commencement Date, Tenant shall receive a free rent period during which Tenant
shall be relieved of its obligation to pay Base Monthly Rent under this Lease.
Such free rent period shall be equal to the number of days between the
Estimated Commencement Date and the actual Commencement Date.
6. ORIGINAL LEASE. Notwithstanding anything to the contrary herein,
the Term of the Original Lease shall continue in full force and effect with
respect to the Original Premises until the later of (i) fifteen (15) days after
the Commencement Date, or (ii) the date which is one hundred eighty (180) days
after the Termination Date, as set forth above. Following the original
Expiration
2
<PAGE> 3
Date of the Original Lease on September 23, 1995, the Original Lease shall
continue on the same terms and conditions as applied during the month of
August, 1995, except that Base Monthly Rent shall be $46,073.14.
Notwithstanding the above, upon the Commencement Date, Tenant's obligation to
pay Base Monthly Rent and Additional Rent for the Original Premises shall cease
unless Tenant holds over beyond the period described in subsection (i), above.
7. PARAGRAPH 3.3 EARLY POSSESSION. Paragraph 3.3 EARLY POSSESSION shall
be deleted in its entirety and replaced with the following: If Landlord, after
Substantial Completion, delivers possession of the Premises to Tenant prior to
the Estimated Commencement Date, such occupancy shall be subject to all
provisions of the Lease with the exception of payment of Base Monthly Rent,
which shall be payable commencing on the Commencement Date. Tenant's early
occupancy for the purposes of conducting business in the Premises shall not
advance the Commencement Date but shall extend the Expiration Date by a period
equal to the number of days of Tenant's possession prior to the Estimated
Commencement Date.
8. PARAGRAPH 4.3 OPERATING EXPENSES.
a. The following is hereby added to the end of Paragraph 4.3 (a):
Notwithstanding anything to the contrary contained herein, Additional Rent
pertaining to any Property Management fees, whether property management is
performed by Landlord or any third party, shall not exceed 3% of the total Base
Monthly Rent and Additional Rent payable by Tenant at anytime during the Lease.
Nothwithstanding the foregoing, Tenant shall have no obligation to perform or
to pay directly, or to reimburse Landlord for, all or any portion of the
following claims, losses, fees, charges, costs or expenses (collectively,
Costs"): (i) Costs to correct any construction defect in the Building or
Landlord's Work; (ii) Costs to respond to any claim of Hazardous Material
contamination or damage, to remove any Hazardous Material from the Building or
Underlying Real Property, and other Costs incurred in connection with any
Hazardous Material exposure or release, except to the extent caused by Tenant,
its agents, employees, invitees, contractors, customers, or any other
individual or entity related to or connected with Tenant (collectively, Tenant
s Agents"), to the extent any such Costs are caused by Tenant or Tenant s
Agents, such Costs shall be recoverable by Landlord pursuant to the indemnity
contained in Paragraph 7.1; (iii) Costs incurred to correct any damage or
destruction caused by fire, Act of God or other casualty, except as provided in
sections (x) and (y) below and in Paragraph 7. INDEMNITY; INSURANCE and
Paragraph 8. DAMAGE OR DESTRUCTION in the Lease; and (iv) Costs for annual
earthquake insurance premiums in excess of an amount equal to three times the
annual premium for Property insurance to be maintained pursuant to Paragraph
7.3 (b) of this Lease. Tenant shall not be obligated to pay any deductible or
co- insurance amounts in excess of the following: (x) with respect to the
property insurance to be maintained pursuant to Paragraph 7.3 (b) of the Lease,
any amount in excess of $50,000 per occurrence; and (y) with respect to
earthquake insurance carried pursuant to Paragraph 7.3 (c), such cost shall be
amortized over the useful life of the Building element or elements restored,
together with interest at the rate of ten percent (10%) per annum, and Tenant
shall pay an amount equal to the amortized amount with each payment of Base
Monthly Rent. In no event will the deductible amount for earthquake insurance
which is used to calculate the reimbursement amount described in the preceding
sentence exceed ten percent (10%) of the replacement cost of the Building.
b. The following is hereby added as Paragraph 4.3 (e): Not more
than once in any three (3) year period, Tenant shall have the right to request
from Landlord a list of vendors performing work for Landlord, the cost of which
is being passed on to Tenant in the form of Operating Expenses. Such list
shall also contain a breakdown of the costs incurred by Landlord for each
vendor listed thereon. Tenant shall notify Landlord in writing of such request
at least thirty (30) days prior to the end of any calendar year and Landlord
shall provide Tenant with such list at the same time as Landlord delivers to
Tenant Landlord's Expense Statement for such calendar year. If Tenant
determines that the work performed by any of the vendors on such list can be
performed by other reputable vendors at a lower cost, Tenant may suggest to
Landlord in writing the name of such other vendors and Landlord agrees to
discuss the selection of such vendors with Tenant. Notwithstanding the above,
Tenant acknowledges that the final decision with respect to choosing any vendor
shall rest solely with Landlord.
9. PARAGRAPH 5.2. COMPLIANCE WITH LAW AND RESTRICTIONS. The following
shall be added to the end of Paragraph 5.2 (a): Notwithstanding anything to
the contrary above, Tenant shall be required to comply with all covenants,
conditions and restrictions, insurance underwriter's requirements and laws,
except to the extent such compliance requires the investigation, remediation,
removal or clean-up of Hazardous Materials, unless the same were stored, used
or disposed of by
3
<PAGE> 4
Tenant or Tenant's Agents on or about the Premises, and except to the extent
such compliance requires the construction of capital improvements which would
be properly capitalized under generally accepted accounting principles.
10. PARAGRAPH 5.3. CONDITION OF PREMISES. The following shall be added
as section (c) to Paragraph 5.3. CONDITION OF PREMISES: Notwithstanding the
above, Landlord shall repair any construction defects which materially
interfere with Tenant's use of the Premises or prevents Tenant from using the
Premises for its intended purpose. Any such repair costs incurred by Landlord
shall not be passed throught to Tenant as Operating Expenses.
11. PARAGRAPH 5.4. HAZARDOUS SUBSTANCES. The following shall be added
after the word "permit" in the fifth and ninth lines of Paragraph 5.4.
HAZARDOUS SUBSTANCES: Tenant's Agents to cause or, to the extent commercially
possible, allow others to cause.
12. PARAGRAPH 6.2. TENANT'S OBLIGATIONS.
a. The following shall be added after the phrase "(unless Landlord has
elected to keep and maintain the HVAC systems" in the fourteenth line of
Paragraph 6.2 (a): and/or the roof surface.
b. The following shall be added to the end of Paragraph 6.2 (a): Tenant
shall have no responsibility to perform or construct, any repair, maintenance
or improvement to the Building, excluding Tenant's Work as described in Exhibit
D, or any alteration made by Tenant to the Premises: (i) occationed by fire,
acts of God or other casualty; (ii) required as a consequence of any violation
of covenants, conditions and restrictions, insurance underwriter's requirements
or applicable law, except as a result of any act of Tenant or Tenant's Agents;
(iii) which would properly be capitalized under generally accepted accounting
principles, unless required because of misuse by Tenant or a breach of Tenant s
obligations to maintain; (iv) which would require the investigation,
remediation, removal or clean-up of Hazardous Materials, unless the same were
stored, used or disposed of by Tenant or Tenant's Agents on or about the
Premises.
13. PARAGRAPH 6.3. ALTERATIONS. The following figure shall be deleted
from the first sentence of Paragraph 6.3. ALTERATIONS: $10,000; Such figure
shall be replaced with the following figure: $25,000.
14. PARAGRAPH 7.1. INDEMNITY. The last sentence of Paragraph 7.1.
INDEMNITY is hereby deleted in its entirety and replaced with the following:
Tenant, as a material part of the consideration to Landlord, hereby assumes all
risk of injury to Tenant's business, loss of income, damage to property or
injury to persons in, on or about the Premises arising from any cause other
than (i) Hazardous Materials existing in, on or about the Premises as of the
date hereof, or (ii) Hazardous Materials whose presence in, on or about the
Property is attributable to Landlord, its agents, employees or contractors.
Notwithstanding any other provision of this Lease, Tenant shall have no
responsibility to perform, or reimburse any cost related to, any investigation,
remediation, removal or clean up of Hazardous Materials, unless the same were
stored, used or disposed of by Tenant or Tenant's Agents in, on or about the
Property.
15. PARAGRAPH 7.3. LANDLORD'S INSURANCE. The following shall be added
after the phrase "Property Insurance covering loss or damage to the Building"
of Paragraph 7.3 (b): including the Landlord's Work.
16. PARAGRAPH 7.3. LANDLORD'S INSURANCE. The following shall be added
after the phrase "Notwithstanding the foregoing" of the second paragraph of
Paragraph 7.3 (c): provided Tenant occupies the entire Building.
17. PARAGRAPH 8.2. PARTIAL DAMAGE - INSURED LOSS. The following shall be
added after the phrase "damage to the Building" of the seventh line of
Paragraph 8.2. PARTIAL DAMAGE - INSURED LOSS: including Landlord's Work.
18. PARAGRAPH 8.3. PARTIAL DAMAGE - UNINSURED LOSS. The following shall
be added after the word "Premises" of the eighteenth line of Paragraph 8.3.
PARTIAL DAMAGE - UNINSURED LOSS: including Landlord's Work.
4
<PAGE> 5
19. PARAGRAPH 11.4. NOTICE OF ASSIGNMENT OR SUBLETTING. The second and
third sentences of Paragraph 11.4. NOTICE OF ASSIGNMENT OR SUBLETTING are
hereby replaced with the following: Landlord shall respond to Tenant's request
for consent within ten (10) business days of submission of all requested
information. For a period of ten (10) business days after such notice,
accompanied by all supporting documents, is given, Landlord shall have the
right by written notice to Tenant to terminate this Lease as of the date
specified in such notice, which date shall not be less than thirty (30) days
nor more than sixty (60) days after such notice is given. Notwithstanding the
foregoing, Landlord shall have no right to terminate this Lease as provided in
the preceding sentence if the proposed transferee is an Affiliate of Tenant, as
defined in Paragraph 11.2 of this Lease, provided that the Affiliate of Tenant
is of reasonable financial strength. Notwithstanding the previous sentence,
pursuant to Paragraph 11.2. TENANT AFFILIATE, Tenant shall remain primarily
liable to perform Tenant's obligations under this Lease.
20. PARAGRAPH 12. DEFAULTS; REMEDIES. Subsection (b) of Paragraph 12 is
hereby deleted in its entirety and replaced with the following: The failure by
Tenant to make any payment of Base Monthly Rent, Additional Rent, or any other
payment required to be made by Tenant hereunder, within three (3) business days
of the date on which it is due.
21. PARAGRAPH 14. REAL ESTATE BROKERS. The following shall be added to
the end of Paragraph 14. REAL ESTATE BROKERS: Landlord shall pay any
commission or other compensation due the brokers noted in Schedule A pursuant
to a separate written agreement.
22. PARAGRAPH 25. HOLDOVER. The phrase in the first sentence of Paragraph
25. HOLDOVER "twice the last Base Monthly Rent installment plus all" is hereby
deleted and replaced with the following: 150% of the last Base Monthly Rent
installment plus 100% of all.
23. PARAGRAPH 29. SUBORDINATION. The following is hereby added to the
end of Paragraph 29. SUBORDINATION: If a lender, upon acquisition by Landlord
of the Underlying Real Property or thereafter, requires that this Lease be
subordinate to any encumbrance created or recorded after the date of this
Lease, this Lease shall be subordinate to that encumbrance and Tenant agrees to
execute such reasonable documentation requested by such lender to effectuate
such subordination provided that Tenant obtains from such lender a written
agreement that provides substantially as follows:
"As long as Tenant is not in default under this Lease, following any
required notice and applicable grace periods, no foreclosure of, deed
given in lieu of foreclosure of, or sale under the encumbrance, shall
affect Tenant's rights under this Lease."
Tenant shall attorn to any purchaser at any foreclosure sale, or to any grantee
or transferee designated in any deed given in lieu of foreclosure which assumes
the obligations of Landlord hereunder in writing.
24. PARAGRAPH 32. SIGNS. The following is hereby added to the end of
Paragraph 32. SIGNS. Notwithstanding anything to the contrary contained herein,
Landlord shall provide, at its cost, monument signage for Tenant on Northport
Loop East. In addition, Tenant, at its cost, shall have the right to install a
large illuminated sign visible to I-880, provided that such sign (i) conforms
with the CC&R's for the Project, (ii) complies with the sign ordinances of the
City of Fremont and (iii) meets with Landlord's prior written approval, which
shall not be unreasonably withheld.
25. PARAGRAPH 43. EXHIBITS. Paragraph 43 is hereby deleted in its
entirety and replaced with the following: The following exhibits are attached
to this Lease and herein incorporated by reference: Exhibit A (Site Plan);
Exhibit A-1 (Underlying Real Property), Exhibit B (Premises); Exhibit C (Tenant
Estoppel Certificate); Exhibit D (Initial Improvements of Premises); Exhibit
D-1 (Building Specifications); Exhibit E (Rules and Regulations for Tenant s
Contractor(s)); Exhibit F (Plans and Specifications), a final set of which
shall be attached after final approval by Landlord and Tenant; Exhibit G
(Pension Plans); and Exhibit H (Rules and Regulations). Notwithstanding the
fact that Paragraph 43 of the Original Lease incorrectly referenced EXHIBIT C
as being Initial Improvements of Premises and EXHIBIT D as being "Rules and
Regulations," the Exhibits to the Original Lease are hereby deleted in their
entirety and replaced with EXHIBITS A through H attached hereto.
5
<PAGE> 6
25.A. PARAGRAPH 44. LENDER PROVISIONS. Paragraph 44 of the Original
Lease LENDER PROVISIONS is hereby deleted in its entirety and replaced with the
following:
PARAGRAPH 44. ERISA. With the exception of this Lease, neither the
Tenant nor any Tenant Affiliate is a tenant under a lease or any other tenancy
arrangement: (i) with: (a) The Riggs National Bank of Washington, D.C., as
Trustee of the Multi-Employer Property Trust; (b) the Multi-Employer Property
Trust; (c) The National Bank of Washington Multi-Employer Property Trust, the
previous name of the Multi-Employer Property Trust; (d) Alameda Industrial
Properties Joint Venture; (e) Harman International Business Campus Joint
Venture; (f) Beaverton-Redmond Tech Properties; (g) Corporate Drive Trust; (h)
Goldbelt Place Joint Venture; or (i) Boca 1515, a joint venture; or (ii)
involving any property in which the entities named in clauses (a), (b) or (c)
are known by the Tenant to have an ownership interest.
26. PARAGRAPH 45. EXTENSION OPTION. The following is hereby deleted from
section (b) of Paragraph 45. EXTENSION OPTION: Notwithstanding the above, the
Base Monthly Rent for the extension term shall in no event (be) less than the
Base Monthly Rent for the last month of the original lease term.
27. PARAGRAPH 46. OPTIONS. This paragraph in its entirety shall be
renumbered as Paragraph 50.
28. PARAGRAPH 46. TERMINATION OPTION. Tenant shall have the right to
terminate this Lease ("Option to Terminate") on the last day of the
eighty-fourth (84th) month after the Commencement Date ("Termination Date").
Tenant's Option to Terminate shall be exercisable only if (i) Tenant provides
Landlord with not less than twelve (12) nor more than eighteen (18) months
prior written notice of its intent to terminate and (ii) not less than thirty
(30) days prior to the Termination Date, Tenant pays to Landlord the
unamortized portion of the tenant improvements and the prorated portion of any
leasing commissions paid by Landlord in connection with this Lease
(collectively, "Termination Reimbursement"). In each case, the sums described
above will be amortized on a straight-line basis over the Term of the Lease,
without allowance for interest. Landlord shall provide Tenant with notice of
the amount of the preceding payments within sixty (60) days after the
Commencement Date, together with Landlord's calculation of the Termination
Reimbursement. If Tenant fails to provide Landlord with said written notice
and payment of the Termination Reimbursement in the time frame outlined above,
then Tenant's Option to Terminate shall be null and void and this Lease shall
continue in full force and effect.
29. PARAGRAPH 47. EXPANSION OPTION/FIRST RIGHT OF REFUSAL (PRIOR TO
COMMENCEMENT DATE). The following section is hereby added as Paragraph 47 of
the Lease: Anytime prior to the Commencement Date, Tenant shall have a
one-time right of first refusal ("Right of First Refusal") to lease the
adjacent approximately 30,000 square foot space ("Expansion Space") as shown on
EXHIBIT A. Upon receipt by Landlord of a bonafide offer from a third party to
lease the Expansion Space, which is acceptable to Landlord, Landlord shall give
Tenant written notice and evidence of such offer. Tenant shall have five (5)
business days from the date of such notice to provide Landlord written notice
of Tenant's election to exercise Tenant's Right of First Refusal. If Tenant
elects to exercise such Right of First Refusal, Landlord and Tenant shall enter
into an amendment of this Lease incorporating the Expansion Space into this
Lease and amending the terms of this Lease accordingly to reflect the addition
of the Expansion Space. The Expansion Space shall be incorporated into this
Lease on the same terms contained herein [including per square foot rent, term
(which shall be coterminous with this Lease) and tenant improvement costs. If
Landlord and Tenant are unable to execute a further amendment to this Lease,
mutually acceptable to both parties, incorporating the Expansion Space into the
Premises, after good faith efforts to negotiate such amendment within thirty
(30) days after Landlord's receipt of Tenant's notice to exercise or if Tenant
does not exercise such Right of First Refusal, Tenant's Right of First Refusal
shall terminate and be of no further force and effect. Tenant's Right of First
Refusal shall terminate and be of no further force and effect upon the earlier
of (i) the date that the Expansion Space is leased to any third party, or (ii)
the Commencement Date. Notwithstanding anything to the contrary contained in
this Paragraph, unless approved in writing by Tenant, Landlord shall not enter
into a lease of the Expansion Space longer than five (5) years with any third
party.
Anytime prior to the Commencement Date, Tenant shall have a one-time
option to lease ("Option to Expand") the adjacent approximately 30,000 square
foot space ("Expansion Space") as shown on EXHIBIT A. If Tenant elects to
exercise its Option to Expand, Tenant shall, prior to the
6
<PAGE> 7
Commencement Date, notify Landlord in writing of its election to exercise its
Option to Expand. Upon receipt by Landlord of written notice by Tenant to
exercise its Option to Expand, Landlord and Tenant shall enter into an
amendment of this Lease incorporating the Expansion Space into this Lease and
amending the terms of this Lease accordingly to reflect the addition of the
Expansion Space. The Expansion Space shall be incorporated into this Lease on
the same terms contained herein [including per square foot rent, term (which
shall be coterminous with this Lease) and tenant improvement costs]. If Tenant
does not exercise its Option to Expand prior to the Commencement Date or if
Landlord leases the Expansion Space to a third party, this Option to Expand
shall terminate and be of no further force and effect.
30. PARAGRAPH 48. EXPANSION/FIRST RIGHT OF REFUSAL (AFTER COMMENCEMENT
DATE). The following section is hereby added as Paragraph 48 of the Lease:
During the first six (6) months of the Term of the Lease, Tenant shall have a
one-time right of first refusal ("Right of First Refusal") to lease the
adjacent approximately 30,000 square foot space ("Expansion Space") as shown on
EXHIBIT A. Upon receipt by Landlord of a bonafide offer from a third party to
lease the Expansion Space, which is acceptable to Landlord ("Offer to Lease"),
Landlord shall give Tenant written notice of such offer and the economic terms
contained therein. Tenant shall have three (3) business days from the date of
such notice to provide Landlord written notice of Tenant's election to exercise
Tenant's Right of First Refusal. If Tenant elects to exercise such Right of
First Refusal, Tenant shall enter into a lease with Landlord for such expansion
space on the same economic terms (including rate and tenant improvement costs)
as contained in the Offer to Lease, except that (i) the term of the lease of
the Expansion Space shall be coterminous with the term of this Lease and (ii)
upon expiration of what would have been the original term of the lease for the
Expansion Space under the Offer to Lease accepted by Tenant, the base monthly
rent for the Expansion Space shall be adjusted to be equal on a square foot
basis with the Base Monthly Rent payable under this Lease and thereafter shall
be adjusted in accordance with the rent increases described on Schedule A
attached hereto. If, within thirty (30) days after Landlord's receipt of
Tenant's notice to exercise, Landlord and Tenant are unable to negotiate in
good faith a mutually acceptable amendment to this Lease incorporating the
Expansion Space into the Premises, or if Tenant does not exercise such Right of
First Refusal, Tenant's Right of First Refusal shall terminate and be of no
further force and effect. Tenant's Right of First Refusal shall terminate and
be of no further force and effect upon the earlier of (i) the date that the
Expansion Space is leased to any third party, or (ii) the first day of the
seventh (7th) month of the Term. Notwithstanding anything to the contrary
contained in this Paragraph, unless approved in writing by Tenant, Landlord
shall not enter into a lease of the Expansion Space longer than five (5) years
with any third party.
31. PARAGRAPH 49. OPTION TO PURCHASE. The following section is hereby
added as Paragraph 48 of the Lease: Tenant shall have a one-time option to
purchase the Premises, including all right, title and interest of Landlord in
the Underlying Real Property (collectively "Property"), free and clear of any
monetary liens or encumbrances except (i) any liens for then current property
taxes or supplemental taxes or (ii) any liens or other items caused to be of
record by Tenant anytime during the Term upon not less than nine (9) months
prior written notice to Landlord ("Option to Purchase"). The terms of the
Option to Purchase shall be as follows: The purchase price shall be calculated
by taking the "Blended Annual Income" over the term of the Lease and dividing
it by a capitalization rate of 8.375%. The Blended Annual Income shall be
defined as the annual effective Base Monthly Rent, or equivalent rent, due to
Landlord from all Leases in the building from the Commencement Date until the
Expiration Date of this Lease. The annual effective Base Monthly Rent, or
equivalent rent, shall be calculated in all instances on a net basis,
consistent with the terms of this Lease. In the event there is a vacancy at
the time Tenant exercises the Option to Purchase or there will be a vacancy
anytime during the Term of this Lease, then the Tenant's effective Base Monthly
Rent per square foot over the entire Term of the Lease shall be used to
determine the income from the vacant space for the period of vacancy. In the
event there is a lease of the Expansion Space, or a portion thereof, which
terminates prior to the expiration of this Lease, then for purposes of
calculating the purchase price, the Tenant's effective Base Monthly Rent per
square foot shall be used to determine the income from such space for that
period during which such space will be vacant. In addition, if the vacancy is
an unimproved space (shell condition), then the aggregate of (i) a $20.00 per
square foot tenant improvement allowance and (ii) all market leasing
commissions which would be necessary in an arm's length transaction, to lease
such vacant space shall be deducted from the purchase price.
Notwithstanding Tenant's Option to Purchase, Landlord shall have the right
to market the Property for sale at any time during the Term of this Lease
provided, however, Tenant shall have a right of first offer as follows: If
Landlord elects to market the property, Landlord shall notify Tenant
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<PAGE> 8
in writing, and Tenant shall have forty-five (45) days in which to notify
Landlord in writing of its decision to exercise the Option to Purchase in
accordance with the terms and conditions outlined above. If Tenant fails to
exercise its Option to Purchase, then Tenant shall not have the right to
exercise its Option to Purchase for a period of one (1) year beginning on the
date Landlord notifies Tenant of its intention to market the Property. If the
property is sold to an independent third party during such one (1) year period,
then Tenant's Option to Purchase shall terminate and be of no further force and
effect. If Landlord fails to sell the Property during such one (1) year
period, Tenant shall thereafter have the right to exercise its Option to
Purchase subject to the same condition concerning Landlord's right to market
contained herein.
Upon exercise of Tenant's Option to Purchase, Landlord and Tenant, for a
period of at least thirty (30) days, agree to negotiate in good faith a
purchase agreement for Tenant's acquisition of the Property from Landlord. If
Landlord and Tenant, after good faith efforts to negotiate a mutually
acceptable purchase agreement, are unable to execute a mutually acceptable
purchase agreement for Tenant's acquisition of the Underlying Real Property and
the Premises within thirty (30) days after Landlord's receipt of Tenant s
notice to exercise the Option to Purchase, Tenant's Option to Purchase shall
terminate and be of no further force and effect.
At the request of Tenant, Landlord shall deliver to Tenant a memorandum of
the Option to Purchase described herein in recordable form. It specifically is
the intent of the parties that upon expiration or termination of the Option to
Purchase without the Option to Purchase having been effectively exercised, or
termination of the Option to Purchase pursuant to this Lease or by mutual
agreement, Tenant shall have no further right to purchase the Property and no
other interest in the Property except as set forth in the Lease. If there
should at any time arise the need for a quitclaim deed or any other further
instrument to fully carry out this intent, Tenant covenants and agrees that it
shall, within five (5) days of any request therefor, duly execute, acknowledge
and deliver to Landlord such quitclaim deed or other further instrument or
instruments. The provisions of this section shall survive the termination of
this Lease.
32. PARAGRAPH 51. ANTI-DISCRIMINATION. The following is hereby added as
Paragraph 51. ANTI-DISCRIMINATION to the Lease: There shall be no
discrimination against or segregation of any person or group of persons, on
account of race, color, creed, religion, sex, marital status, national origin,
or ancestry, in the leasing, subleasing, transferring, use, occupancy, tenure
or enjoyment of the Premises, nor shall the Tenant, or any person claiming
under or through the Tenant, establish or permit any such practice or practices
of discrimination or segregation with reference to the selection, location,
number, use or occupancy of tenants, sublessees, subtenants, or vendees in the
Premises.
33. COUNTERPARTS. This First Amendment may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
constitute one and the same instrument.
34. AUTHORITY. This First Amendment has been duly authorized and
executed on behalf of Tenant and Landlord and is valid, binding and enforceable
on both parties in accordance with its terms.
35. ORIGINAL LEASE. Except as amended hereby, the terms and conditions of
the Original Lease shall remain in full force and effect in accordance with its
terms.
8
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LANDLORD:
RIGGS NATIONAL BANK OF WASHINGTON, D.C.
AS TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST,
A TRUST FORMED UNDER 12 C.F.R. SECTION 9.18
By: /s/ Judith A. Lucia
----------------------------------
Judith A. Lucia
Senior Trust Officer
TENANT:
TELCO SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ John C. Kempf
----------------------------------
John C. Kempf
Its: Vice President & Controller, NA
----------------------------------
9
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SCHEDULE A
BASIC LEASE INFORMATION
-----------------------
<TABLE>
<CAPTION>
PARAGRAPH
REFERENCE
<S> <C>
Preamble LANDLORD: Riggs National Bank of Washington,
D.C. as Trustee of the Multi-Employer
Property Trust Northport Business
Park, a National Banking Association
Preamble TENANT: Telco Systems, Inc., a Delaware
Corporation
1.3 BUILDING: Building to be constructed on lots 7 and
8 of approximately 7.58 acres located on
Northport Loop East within the project
commonly known as Northport Business
Park, Fremont, California, as shown on
the site plan attached as Exhibit A,
subject to further revision.
1.4; 2.1 PREMISES: The approximately 85,000 rentable
square feet of the larger approximately
115,000 square foot building, as shown
on the space plan attached as Exhibit B,
subject to a final set of working draw-
ings to be provided at a later date.
1.5 NET RENTABLE AREA
OF PREMISES: Approximately 85,000 rentable square
feet.
1.6 TENANT'S PERCENTAGE
SHARE: 73.913, subject to change due to
revisions in Exhibits A and B.
1.7 ESTIMATED OPERATING
EXPENSES for
calendar 1995: To be determined
ESTIMATED REAL PROPERTY
TAX for calendar 1995: To be determined
3.1 TERM: 10 years, subject to the provisions
of Paragraph 46(A). TERMINATION
OPTION.
3.1 ESTIMATED
COMMENCEMENT DATE: Eleven Months following full execution of
this First Amendment to Lease and delivery
to the parties thereof.
3.1 ESTIMATED
EXPIRATION DATE: Ten years following the Estimated
Commencement Date referenced
above.
</TABLE>
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<TABLE>
4.1 BASE MONTHLY RENT:
<CAPTION>
Monthly
Month of Term Base Rent
------------- ---------
<S> <C>
1 through 36 $55,250.00
($.65 per rentable
sq. ft.)*
37 through 72 $61,880.00
($.728 per rentable
sq. ft.)*
73 through 108 $69,305.00
($.8154 per rentable
sq. ft.)*
109 through 120 $77,621.00
($.9132 per rentable
sq. ft.)*
<FN>
*Should the Net Rentable Area of Premises change,
the per rentable sq. ft. rate shall prevail to
determine a new Monthly Base Rent. Landlord
shall survey the Premises following substantial
completion thereof, using either Kier & Wright or
a surveyor reasonably approved by both parties
and, if such survey indicates that the area of
the Premises is more or less than 85,000 rentable
square feet, measuring from the mid-point of
exterior walls, but including areas below the
dripline in the main entrance and secondary
entrance, all terms of this Lease dependent on
the area of the Premises, including Base Monthly
Rent, the tenant improvement allowance, Security
Deposit, and Tenant's Proportionate Share shall
be adjusted, which adjustment shall be set forth
in a further amendment to the Lease.
<S> <C> <C>
20 SECURITY DEPOSIT: Upon substantial completion of
Landlord's Work, Tenant shall deposit
with Landlord an amount such that
the total Security Deposit shall
increase to $77,621.00.
5.1 PERMITTED USE: General office, research and develop-
ment, light assembly, engineering,
manufacturing, testing and warehousing.
5.2 CC&R s: Declaration of Covenants Running with
the Landlord, recorded July 5, 1983 as
Instrument No. 83-117850 by Cushing
Road Investors, a California limited
partnership.
Declaration of Covenants, Conditions
and Restrictions for Northport Business
Park, recorded September 1, 1983 as
Instrument No. 83-163024 by Northport
Associates, a California limited
partnership.
Declaration of Covenants, Conditions
and Restrictions for Northport Business
Park. Owner's Association recorded on
September 1, 1983 as Instrument No.
83-163025 by Northport Associates, a
California limited partnership.
</TABLE>
11
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<TABLE>
<S> <C>
14 TENANT'S BROKER,
IF ANY: Colliers Parrish International, Inc. and
Bishop Hawk Commercial Real Estate
Commission paid per separate agreement
22 LANDLORD'S ADDRESS
FOR NOTICES: Riggs National Bank of Wash. D.C.
c/o Trammell Crow Company
1241 East Hillsdale Blvd., Suite 200
Foster City, CA 94404
WITH COPY TO: Kennedy Associates
Real Estate Counsel, Inc.
2400 Financial Center Building
Seattle, WA 98161
Attn: Daniel Bockelmann
22 TENANT'S ADDRESS
FOR NOTICES:
prior to occupancy:
4305 Cushing Parkway
Fremont, CA 94538
after occupancy:
to the Premises
24 PARKING: 3.5 non-exclusive spaces per 1000
square feet leased.
45 EXTENSION OPTION: One 5-year option at 95% of fair market
rent with no less than 6 months prior
written notice.
46 TERMINATION OPTION: On the 84th month of the Lease with no
less than 12 months prior written notice.
47 EXPANSION FIRST RIGHT
OF REFUSAL: During the first 6 months of the
Lease with 3 business days notice.
48 PURCHASE OPTION: Any time during the Lease Term with
9 months prior written notice
notwithstanding Landlord's right to
market the property for sale.
</TABLE>
12
<PAGE> 13
EXHIBIT A
SITE PLAN
13
<PAGE> 14
EXHIBIT A-1
UNDERLYING REAL PROPERTY
REAL PROPERTY in the City of Fremont, County of Alameda, State of California,
described as follows:
PARCEL ONE:
- -----------
Being a portion of Lot 7, and a portion of Lot 6, as shown upon the Map of
Tract 5048, recorded in Book 139, of Maps, at Pages 61 to 63, as described
in the Lot line adjustment recorded December 18, 1990, Series No. 90-329795,
Alameda County Records:
Being at the Southwest corner of said Lot 7, said point also being on the
Easterly right-of-way line of Northport Loop East (64 feet wide), as shown upon
said map;
Thence Northerly along the Westerly boundary line of said Lot 7, along a
curve concave to the Southwest (whose center point bears South 52 degrees 57
minutes 17 seconds West) having a radius of 532.00 feet, through a central
angle of 10 degrees 31 minutes 05 seconds, an arc length of 97.66 feet;
Thence continuing along said boundary line, North 47 degrees 33 minutes 48
seconds West, a distance of 161.39 feet;
Thence along a tangent curve concave to the Northeast having a radius of
468.00 feet, through a central angle of 31 degrees 39 minutes 22 seconds, an
arc length of 258.57 feet;
Thence along a compound curve concave to the East, having a radius of 40.00
feet, through a central angle of 3 degrees 54 minutes 05 seconds, an arc length
of 2.72 feet;
Thence departing said Westerly boundary line, North 58 degrees, 36 minutes 48
seconds East, a distance of 411.51 feet to a point on the Easterly boundary
line of said Tract No. 5048;
Thence along said Easterly boundary line, South 31 degrees 23 minutes 12
seconds East, a distance of 441.23 feet;
Thence continuing along said Easterly boundary line South 31 degrees 30
minutes 09 seconds East, a distance of 33.00 feet to the Southeastern corner
of said Lot 7;
Thence departing said Tract boundary line and along the Southerly line of
Lot 7, South 52 degrees 57 minutes 17 seconds West, a distance of 349.11 feet
to the point of beginning.
A.P. No. 525-1350-015-03
PARCEL TWO:
- -----------
Parcel A:
- ---------
Lot 8, Tract 5048, filed July 5, 1983, Map Book 139, Page 61, Alameda County
Records.
A.P. No. 525-1350-16
Parcel B:
- ---------
All of that land conveyed to the Northport Associates, a California limited
partnership, by Director's Deed Number DO-014525-02-01 recorded April 2, 1984,
Series No. 84-062947, Official Records of Alameda County; excepting therefrom
that portion of said Director's Deed conveyed to the City of Fremont by that
certain Deed recorded April 20, 1984, Series No. 84-077096, Official Records
of Alameda County, California.
A.P. No. 525-1350-2-2
14
<PAGE> 15
EXHIBIT B
PREMISES
(TO BE ATTACHED)
15
<PAGE> 16
EXHIBIT C
TENANT ESTOPPEL CERTIFICATE
TO: The Riggs National Bank of Washington, D.C., as Trustee of the
Multi-Employer Property Trust
c/o Kennedy Associates Real Estate Counsel, Inc.
2400 Financial Center Building
1215 Fourth Avenue
Seattle, Washington 98161
THIS IS TO CERTIFY:
1. That the undersigned is the Tenant under that certain Lease dated
____ ________, and, if applicable, amended on ______________, by and between
Riggs National Bank of Washington, D.C. As Trustee Of The Multi-Employer
Property Trust, A Trust Formed Under 12 C.F.R. section 9.18. ("Landlord"), and
the undersigned ("Tenant") covering those certain premises located as shown on
the drawing made part of the Lease (the "Premises").
2. That said Lease is in full force and effect and, except as
noted in Paragraph 1 above, has not been modified, changed, altered or
amended in any respect, and is the only lease or agreement between the
Tenant and the Landlord affecting the Premises.
3. To the best of Tenant's knowledge, the information set forth
below is true and correct:
(a) Square footage of the Premises: _________________________________
(b) Annual rent as of the Commencement of Lease: $___________________
(c) Current annual rent (if different than
at commencement): $______________________________________________
(d) Commencement date of Lease: ____________________________________
(e) Lease termination date: _________________________________________
(f) Rent paid to and including: ____________________________________
(g) Security deposit: $_____________________________________________
(h) Prepaid rent for and in amount of: $____________________________
(i) Free rent period: ________________ to ________________________
(j) Amount of current monthly escrow payment obligations with
respect to taxes, insurance, and Common Area Maintenance
charges under the Lease:
Taxes: $ _____________
Insurance: $ _____________
Common Area Maintenance Charges: $ _____________
(k) Dates through which Tenant has paid monthly escrow payments
and Common Area Maintenance charges:
Escrow Payment for Taxes: _______________
Escrow Payment for Insurance: _______________
Common Area Maintenance Charges: _______________
4. DELETE IF TENANT HAS NOT OCCUPIED THE PREMISES: Tenant now occupies
the Premises, accepts the Premises in their current condition subject only
to those punch list items listed in EXHIBIT A, if any, and is not aware of any
defect in the Premises except as described in EXHIBIT A, if any.
4. DELETE IF TENANT HAS OCCUPIED THE PREMISES: Tenant does not occupy
the Premises. The status of the plans and specifications for and the
construction of Tenant Improvements is described in EXHIBIT A. Tenant is
familiar with the Tenant Improvement work done to date and is not aware of
any defect in such work, except as described in EXHIBIT A.
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<PAGE> 17
5. No rent has been paid in the current month other than as
disclosed in Paragraph 3. No free rent or other concessions, benefits, or
inducements other than as specified in the Lease have been granted to Tenant
or undertaken by the Landlord.
6. Tenant has not been granted any renewal, expansion or purchase
options and has not been granted any rights of first refusal except as
disclosed in writing in the Lease.
7. Neither Tenant nor to the best of Tenant's knowledge, Landlord is
in breach of the Lease and there has not occurred any event, act,
omission or condition which by notice or lapse of time or both or otherwise,
will result in any breach by Tenant or to the best of Tenant's knowledge, by
Landlord. As of the date hereof and except as set forth in the Lease, the
undersigned is entitled to no credit, offset or deduction in rent. Tenant
knows of no liabilities or obligations of Landlord which have accrued but are
unsatisfied under the Lease as of the date of this Certificate.
8. To the best of Tenant's knowledge, there are no actions,
whether voluntary or otherwise, pending against the undersigned under the
bankruptcy laws or other laws for the relief of debtors of the United States or
any state thereof.
9. With the exception of this Lease and except as otherwise
disclosed in writing to Landlord, neither the Tenant nor any affiliate of the
Tenant is a tenant under a lease or any other tenancy arrangement (i) with (a)
The Riggs National Bank of Washington, D.C., as Trustee of the
Multi-Employer Property Trust; (b) the Multi-Employer Property Trust; (c)
The National Bank of Washington Multi-Employer Property Trust, the previous
name of the Multi-Employer Property Trust; (d) Alameda Industrial Properties
Joint Venture; (e) Harman International Business Campus Joint Venture; (f)
Beaverton-Redmond Tech Properties; (g) Corporate Drive Corporation as trustee
of the Corporate Drive Nominee Realty Trust; (h) Goldbelt Place Joint
Venture; or (i) Boca 1515, joint venture; or (ii) involving any property in
which the entities named in clauses (a), (b) or (c) are known by the Tenant
to have an ownership interest.
DATED this _________ day of ____________, 19_.
TENANT:
TELCO SYSTEMS, INC.,
A DELAWARE CORPORATION
By: _________________________
Name: _______________________
Its: ________________________
(Tenant to attach EXHIBIT A to Tenant Estoppel Certificate, LIST OF
DEFECTS, if necessary.)
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EXHIBIT D
INITIAL IMPROVEMENTS OF PREMISES
1. LANDLORD'S WORK
---------------
1.1 Landlord, at its expense and through its general contractor,
shall construct the Building Shell and common areas as more particularly
described on Exhibit A, hereto attached. The scope of such construction
shall include: the Building shell, roof, all exterior windows and doors,
fire sprinklers at the roof line, skylights, utilities and services to the
Building exterior, all of which shall be built in accordance with the
building specifications attached hereto, as Exhibit D-1 ("Building
Specifications") and the parking lot, common areas and landscaping
1.2 Landlord, through its general contractor, shall furnish and
install within the Premises those items of general construction ("Landlord's
Work") shown on the plans and specifications finally approved by Landlord and
Tenant (the "Final Plans and Specifications"), in compliance with all
applicable codes and regulations.
2. COST OF LANDLORD'S WORK
-----------------------
2.1 As its contribution to the cost of Landlord's Work, Landlord
shall provide to Tenant a tenant improvement allowance of up to a maximum of
$1,700,000 (based on $20.00 per rentable square foot as specified in the
Lease) ("Tenant Improvement Allowance"). Tenant shall pay the cost of all
Landlord's Work which has been approved by Tenant as provided in Paragraphs
2.1 and 2.2 below subject to changes described in Paragraph 2.5, and which
exceeds the Tenant Improvement Allowance with the exception of those items
specified in 1.1 above, subject to the following: In the event Tenant
does not use the entire Tenant Improvement Allowance, Landlord shall refund
the remaining amount (not to exceed a total refund of $3.00 per square foot)
to Tenant over the Lease Term. Such refund shall take the form of a
reduction in Base Monthly Rent. In the event the tenant improvement costs
exceed the Tenant Improvement Allowance, Tenant shall have the option to
either pay for the improvements upon completion or have Landlord amortize
the overage amount (not to exceed a total of $3.00 per square foot) over the
Lease Term as additional Rent at an interest rate of 10%, annually. All
amounts over $23.00 per square foot shall be paid by Tenant as provided in
section 7.1, below.
2.2 After the parties have approved the Final Plans and
Specifications and prior to commencing Landlord's Work, Landlord shall select
not less than three (3) general contractors approved by Landlord to bid on
Landlord's Work. Landlord shall notify Tenant in writing of Landlord s
approved contractors. Within three (3) business days after receipt of
Landlord's list of approved contractors, Tenant shall submit to Landlord
the name of one (1) general contractor to bid on Landlord's Work, which
contractor and subcontractors shall use only union labor and shall be
signatory to an appropriate collective bargaining agreement of the AFL- CIO.
Landlord's three (3) approved contractors and Tenant's approved contractor
shall be defined herein collectively as "Approved Contractors".
Thereafter, Landlord shall solicit bids from the Approved Contractors. Upon
receipt of bids from all of the Approved Contractors, Landlord shall notify
Tenant and deliver to Tenant copies of all such bids. Within (10) business
days after Tenant's receipt of copies of the bids, Landlord and Tenant shall
mutually attempt to select the general contractor to perform Landlord's Work.
If Landlord and Tenant are unable to select a general contractor mutually
acceptable to both parties within such ten (10) day period, Tenant and
Landlord shall promptly consult with each other as necessary to (i) rebid
Landlord's Work, (ii) negotiate the cost of Landlord's Work or (iii)
redesign the Final Plans and Specifications to reduce the cost of
Landlord's Work. After the parties agree upon the appropriate course of
action, Landlord shall, if necessary, rebid Landlord's Work. Upon receipt of
the new bids, Landlord shall notify Tenant and deliver to Tenant copies of
all such new bids. Within ten (10) business days after Tenant's receipt of
copies of the new bids, Landlord and Tenant shall attempt to select a
general contractor mutually acceptable to both parties to perform Landlord's
Work. If Landlord and Tenant are unable to select a general contractor
mutually acceptable to both parties within such ten (10) day period, Landlord
shall select the general contractor from those contractors rebidding. Tenant
shall have no obligation to pay any portion of the cost of Landlord's Work
in excess of the amount approved as set forth in this Paragraph 2.2, plus
the costs of any change orders approved by Tenant or otherwise described in
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<PAGE> 19
Paragraph 2.5 below. As used herein, the term "cost of Landlord's Work" shall
mean those costs and expenses incurred by Landlord to construct Landlord's
Work, including, but not limited to:
(i) All costs paid to general contractors and subcontractors for
labor, material, permits, bonds and the like relating to the
interiors of the Premises.
(ii) Construction management costs not to exceed 5% of the cost
of Landlord's Work;
(iii) Architectural, engineering and other design fees, if any;
(iv) Plans, drawings and printing costs;
(v) Insurance premiums;
(vi) Cost of any reasonably required reports, surveys or studies;
(vii) the cost of utility connections, installation of utility
facilities and meters and user installation or hook-up fees;
(viii) Cost of labor, material and overhead for change orders
approved by Landlord in accordance with this Exhibit D and minor
field changes;
(ix) All governmental fees and development impact fees, including
fees for permits, charges and costs of obtaining governmental
approvals;
(x) Recording costs and filing fees; and
(xi) All other costs reasonably incurred by Landlord in connection
with construction of Landlord's Work, provided that no
compensation will be payable for any services rendered by
Landlord in connection with the performance of Landlord's Work,
except as expressly approved by Tenant in accordance with
Paragraph 2.1 and 2.2(ii) above.
The cost of constructing Landlord's Work shall not include the
following: (i) all costs and expenses relating to the items specified in
1.1, above; (ii) wages, labor and overhead for overtime and premium time; or
(iii) interest and fees for construction financing.
2.3 Landlord's obligation to perform Landlord's Work shall not
require Landlord to incur overtime costs and expenses and shall be subject to
unavoidable delays due to acts of God, governmental restrictions, strikes,
labor disturbances, shortages of material or supplies and any other cause or
even beyond Landlord's reasonable control.
2.4 Tenant shall promptly pay Landlord the excess of the cost
of Landlord's Work over the Tenant Improvement Allowance following the
Commencement Date and within twenty (20) days after receipt by Tenant of a
statement therefor.
2.5 It is understood and agreed by Tenant that any minor changes
from any plans and specifications that may be reasonably necessary during
construction of the Premises shall not affect, change or invalidate this
Lease and shall not require Tenant's consent. Any material changes to
the Final Plans and Specifications shall require Tenant's written
consent. Tenant shall attempt to approve or disapprove any changes to the
Final Plans and Specifications within 24 hours after receipt of any such
request from Landlord; provided, however, if Tenant fails to notify Landlord
within 72 hours after receipt of any such request from Landlord, Tenant shall
be deemed to have consented to such change.
3. PLANS AND SPECIFICATIONS
------------------------
3.1 Landlord, through its architect and engineer, shall furnish
all architectural and engineering plans and specifications ("Plans and
Specifications") required for the construction of Landlord's Work. Tenant,
at its own expense, shall within 20 days of the date of Lease execution
provide instructions to Landlord's architect and engineer sufficient to
enable Landlord's architect and engineer to complete Plans and Specifications.
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<PAGE> 20
3.2 All Plans and Specifications are subject to Tenant's and
Landlord's approval, which shall not be unreasonably withheld. Tenant shall
approve all Plans and Specifications, whether preliminary or Final, within 5
days of submission to Tenant by Landlord.
4. TENANT'S WORK
-------------
4.1 Any items or work not shown in the approved Final Plans
and Specifications, such as telephone service, furnishings or floor covering,
for which Tenant contracts separately (hereinafter "Tenant's Work"), shall
be subject to Landlord's policies and schedules and shall be conducted in
such a way as not to hinder, cause any disharmony with, or delay work in
the Building. Tenant's suppliers, contractors, workmen and mechanics
shall be subject to approval by Landlord, which shall not be unreasonably
withheld or delayed, prior to the commencement of their work and shall
be subject to Landlord's administrative control while performing their
work. Landlord shall coordinate with Tenant's representative the
scheduling of Tenant's Work. Prior to commencement of Landlord s
Work, Tenant shall notify Landlord with respect to any special
scheduling requirements of Tenant in connection with the installation of
Tenant's Work. If at any time any supplier, contractor, workman or
mechanic performing Tenant's Work hinders or delays any other work in the
Building or performs any work which may or does impair the quality, integrity
or performance of any portion of the Building, Tenant shall take all steps
necessary to bring an end to the delay or hindrance, and the contractor in
question shall not recommence Tenant's Work until reasonable steps have been
taken to avoid further delay or hindrance, provided that the parties
acknowledge that Tenant will be required to employ union labor, as defined
in Paragraph 2.2, herein, in performing Tenant's Work, with the exception of
labor hired for network cabling for personal and mainframe computer systems
and related items. Tenant shall reimburse Landlord for any repairs or
corrections of Landlord's Work or of Tenant's Work or of any portion of the
Building caused by or resulting from the work of any supplier, contractor,
workman or mechanic with whom Tenant contracts. Tenant shall bear the cost of
Landlord's expenses resulting from the performance of Tenant's Work,
including, without limitation, the cost of hoisting, cleaning, security,
administration and coordination by Landlord or Landlord's contractor.
Tenant shall reimburse Landlord for Landlord's reasonable costs for design
reviews and approvals and reviews of construction progress, and for the cost
of all utilities and the services provided by Landlord to or for the Premises
during the performance of Tenant's Work. Landlord shall provide access to
Tenant's suppliers, contractors, workmen and mechanics so as to achieve
timely completion and occupancy of the Premises. Tenant will have no less
than five (5) and no more that ten (10) business days access to the Premises
to install cable before drywall is installed.
5. [RESERVED]
6. COMPLETION DATE
---------------
6.1 Landlord shall, when construction progress so permits, notify
Tenant in advance of the approximate date on which Landlord's Work will be
substantially completed and will notify Tenant when Landlord's Work is in
fact substantially completed which latter notice shall constitute delivery
of possession of the Premises to Tenant. If any dispute shall arise as
to whether the Premises are substantially completed and ready for Tenant s
occupancy, a certificate furnished by an independent architect mutually
agreed by Landlord and Tenant certifying the date of substantial completion
shall be conclusive. If Landlord shall be delayed in substantially completing
said work as a result of any of the following ("Tenant Delays"):
(a) Tenant's failure to furnish complete and timely
instructions or approvals,
(b) Tenant's failure to formally approve (a) Schematic
Design by 12/13/94 and (b) Design Drawings by 1/12/95, provided that Tenant
has had at least five (5) business days to review each (a) and (b),
(c) Tenant's changes to any Plans and Specifications after
approval thereof,
(d) Tenant's request for materials, finishes or installations
other than Landlord's Building standard except as expressly provided in
approved Plans and Specifications, or
(e) Hindrance or disruption of the work of Landlord s
contractor resulting from Tenant's Work,
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then the Commencement Date under the Lease shall be advanced by the number of
days of such delay. Subject to the provisions above relating to delays in the
Estimated Commencement Date, Landlord will be responsible for delivering
the Premises (including building shell and Tenant Improvements as defined in
Exhibits A, B and D) to Tenant.
6.2 Except as expressly provided below or otherwise in the
Lease, failure of Landlord to deliver possession of the Premises within the
time and in the condition provided for in the Lease will not give rise to any
claim for damages by Tenant against Landlord or Landlord's contractor. If
Landlord fails to deliver the Premises in the condition as provided for
under this Lease, Landlord shall promptly correct any such deficiencies,
excluding any immaterial deficiencies which do not prevent Tenant from using
the Premises for their intended use. If Landlord fails to correct such
deficiencies within a reasonable time, Tenant may pursue its legal remedies
against Landlord.
7. PAYMENT
-------
7.1 Tenant shall pay to Landlord all amounts due from or payable
by Tenant under the terms of this Exhibit D within 20 days following
delivery of Landlord's invoice therefor following completion of Landlord s
Work, and the provisions of Section 4 of the Lease with respect to late
charges and interest on late payments shall apply as to interest payable on
amounts not paid within such period.
8. TIME PERIODS
------------
8.1 All time periods referred to in this Exhibit D shall be
computed on a calendar basis with no allowance for holidays, weekends or other
customs.
9. BASE BUILDING DESIGN
--------------------
9.1 Tenant may request changes to the Building Specifications
(as definedin Exhibit D-1). Landlord shall have no obligation to make
any such changes. If Landlord in its sole discretion shall agree to any
such change, Landlord shall prepare Plans and Specifications and obtain an
estimate of the cost for approval by Tenant. Tenant shall pay in advance
Landlord's estimate of any and all costs of such changes (including, without
limitation, the costs of labor, materials, equipment, supervision and a
management fee) subject to adjustment of costs upon completion.
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EXHIBIT D-1
<TABLE>
BUILDING SPECIFICATIONS
<S> <C>
Location: Northport Business Park
Fremont, California
Building Size: Approximately 115,717 square feet
(50% office, 50% Manufacturing/Warehouse)
Acres: 7.59 acres
Code Compliance: The design will conform to all standards specified in the
1991 Uniform Building Code. In addition, the design will meet all other
local adjustments to this code.
Structural Design: As with code compliance, the structural design will meet all the
requirements of the 1991 Uniform Building Code. The structural
components of the building will include concrete tilt-up walls, a
glue-lam panelized roof system with internal shear walls and draft
curtains, as necessary. This design should meet or exceed all lender or
insurer requirements with regards to probable maximum loss (PML)
calculations.
ADA Compliance The project will meet all Title III provisions of the
Americans With Disabilities Act as published in the Federal Register on
July 26, 1991 . This section of the act deals with public accommodation
and commercial facilities.
Parking: 463 stalls (4/1,000 s.f.)
Construction Type: Type III-N, B2 occupancy
Wall Construction: Concrete panelized tilt-up system with tex coat paint at
exterior
Truck Docks: 4 12' x 12' dual purpose (dock & grade)
2 grade knock out panels
Clear Height: 18'-0" minimum clear to underside of structural
beams/joints
Floor Loads: Conventional spread footings, 5" thick 4,000 p.s.i.
concrete slab on grade with vapor barrier
Sprinkler System: Wet - roof system meeting all local building codes
Lighting: Exterior - High pressure sodium
Skylights: Standard warehouse skylights
Doors: Exterior entrance doors: anodized aluminum frame, tempered
glass per code; glazing to be light tint, non-reflective.
Exterior exit doors: 18 gauge steel man doors with hollow metal frames.
</TABLE>
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<TABLE>
BUILDING SPECIFICATIONS - PAGE TWO
<S> <C>
Exterior Office Windows: Aluminum sections with anodized finish, glass to be
reflective 1/4" plate, vertical joints to be butt glazed.
Utility Service: Utilities stubbed into building (sewer extended through
building) Electrical Service minimum 2000 Amps, 277/480 Volts, 3
Phase
Available to each tenant space:
Gas - 1 lb. pressure with separate meters
Electric - 277/480 volts, 3 phase
Water - 2 copper
Sewer - 4 PVC
Telephone - wiring within under-slab conduit
Driveway/Truck Area: 2.5" asphalt top course at parking areas
3.5" asphalt top course at traffic areas
4" asphalt base course
4" crushed stone sub-base
95% compacted subgrade
Landscaping: Rough grading (site to balance), vertical curbs and gutters
and driveway approaches and truck wells.
Deciduous trees, evergreen plantings, and low maintenance
ground cover with fully automatic sprinkler system. Walks will be of
concrete. An exterior patio area is also planned.
</TABLE>
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EXHIBIT E
RULES AND REGULATIONS
FOR TENANT'S CONTRACTOR(S)
1. Tenant's contractor will be responsible for making arrangements with
Landlord as to time for the use of Building and equipment such as
elevators and loading areas. The delivery of materials, equipment and
supplies to the Building or Premises must be coordinated with Landlord
at least two (2) business days prior to delivery. The Building
debris box is not to be used for waste produced by Tenant's contractor.
2. Tenant's contractor shall not interfere with the Landlord's contractor
and sub-trades in any way and will cooperate fully with same.
3. All Tenant's contractor's waste and debris must be removed from the
Premises and Building regularly and promptly. All combustible waste and
debris must be stored in a covered, fire-proof container prior to removal.
4. Tenant's contractor and sub-trades shall take all precautions to ensure
the security and the site condition of the Premises and Building in which
the work is being performed, including their own tools, equipment and
materials, and are responsible for any damage caused by employees and
sub-trades to any part of the Building or Premises.
5. (reserved)
6. (reserved)
7. Tenant's contractor shall remove and properly replace underfloor duct
access covers as required for Tenant's trades and services. Any damage to
underfloor duct access coverings shall be repaired or replaced by Tenant's
contractor to the satisfaction of Landlord.
8. Tenant's contractor must provide their own fire protection equipment,
have same on premises at all times and conform to any requirements of
Landlord or Landlord's contractor regarding fire protection.
9. Tenant's contractor shall carry out all work in compliance with all
Federal, State, County and City Building Codes and applicable Acts,
Ordinances and Statutes.
10. Tenant's contractor shall provide all their own protective devices
and coverings, so as to protect the Building finishes provided by
Landlord in the Building.
11. No attachments to or use of window frames and mullions, ceiling
systems, glass, ceiling frame or Building frame, will be permitted
without the expressed written consent of Landlord.
12. All Tenant's contractors, employees and trades must be confined to the
area in which work is being performed.
13. Tenant or Tenant's contractor shall carry builder's risk insurance with
limits of not less than the amount requested by Landlord, insurance
covering loss or damage to the work during the course of construction;
worker's compensation/employer's liability insurance covering all
employees of contractor and subcontractor. All such policies shall name
Landlord and Tenant as additional insureds. A certificate of insurance
must be provided to Landlord prior to commencement of work.
14. Any construction, alteration, maintenance, repair, replacement, removal
or decoration undertaken by Tenant's contractor shall be carried out in
a good, workmanlike, and prompt manner, shall comply with applicable
statutes, laws, ordinances, regulations, rules, orders and requirements
of the authorities having jurisdiction thereof, and shall be subject to
supervision by Landlord or its employees, agents, or contractors. All
construction shall be performed in a timely manner without delays or
interruptions.
15. Tenant's contractors shall not use excessive quantities of electricity
or water and shall not shut off any water, electricity, sprinkler
systems or other services without first obtaining Landlord's express
authorization.
24
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EXHIBIT F
PLANS & SPECIFICATIONS
(TO BE ATTACHED)
25
<PAGE> 26
EXHIBIT G
PENSION PLANS
Intentionally Blank
26
<PAGE> 27
EXHIBIT H
RULES & REGULATIONS
1. Common Areas of the Facility shall not be obstructed by any of the
Tenants or used by them for any purpose other than for ingress to and
egress from their respective premises.
2. The Premises shall not be used for the storage of merchandise held for
sale to the general public or for lodging. No cooking shall be done or
permitted on the Premises (other than in cafeteria) except private use by
Tenant of Underwriters Laboratory approved equipment for brewing coffee, tea,
hot chocolate and similar beverages, and microwave oven for employee use
shall be permitted, provided that such use is in accordance with all
applicable Federal, state and municipal laws, codes and ordinances, rules and
regulations.
3. Tenant shall not occupy the Premises or permit any portion of the
Premises to be occupied for the manufacture or direct sale of liquor,
narcotics, or tobacco in any form.
4. No Tenant shall use or keep in the Premises or the Facility any
kerosene, gasoline or inflammable or combustible fluid or dangerous chemical
or radioactive substance or other dangerous material. No Tenant shall use any
method of heating or ventilation or air conditioning other than that supplied
by Landlord. No Tenant shall use or keep or permit to be used or kept any foul
or noxious gas or substance in the Premises, or permit or suffer the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Facility by reason of noise, odors or
vibrations, or interfere in any way with other Tenants or those having business
at the Facility.
5. Tenant shall not use in the Premises any machines, other than standard
office machines such as typewriters, calculators, copying machines, personal
computers and similar machines, without the prior written approval of Landlord
with the exception of those types of machines currently in use by Tenant. All
office equipment and any other device of any electrical or mechanical nature
shall be placed by Tenant in the Premises in settings approved by Landlord,
so as to absorb or prevent any vibration, noise or annoyance.
6. Tenant is responsible for cleaning all windows, inside and out.
7. No animals or birds shall be brought to or kept in the Premises or
Facility.
8. The Tenant will keep all doors opening to the exterior of the Building,
all fire doors and all smoke doors closed at all time.
9. Tenant agrees that it shall comply with all reasonable fire and
security regulations that may be issued from time to time by Landlord and
upon request Tenant also shall provide Landlord with the name of a
designated responsible employee to represent Tenant in all manners pertaining
to such fire or security regulations.
10. Tenant will not place objects on window sills or otherwise obstruct
the exterior wall window covering.
11. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name or street address of
the Building. Without the written consent of Landlord, Tenant shall not
use the name of the Facility in connection with or in promoting or
advertising the business of Tenant except as Tenant's address.
12. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the
agreements, covenants, conditions and provisions of the Lease.
13. Landlord reserves the right to make such other rules and regulations as in
its judgment may from time to time be needed for the safety, care and
cleanliness of the Facility and for the preservation of good order therein.
27
<PAGE> 28
14. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular Tenant or Tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in
favor of any other Tenants or Tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations against any or all Tenants of the
Facility.
15. Tenant shall be liable to Landlord and to each other Tenant of the
Facility for any loss, cost, expense, damage or liability, including attorneys
fees, caused or occasioned by the failure of Tenant to comply with these
rules, but Landlord shall have no liability for failure or for failing or
being unable to enforce compliance therewith by any Tenant and such failure
by Landlord of non-compliance by any other Tenant shall not be a ground for
termination by Tenant of the Lease to which these rules and regulations are
attached.
28
<PAGE> 29
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (the "Second Amendment") is made and
entered into MAY 8th, 1995 by and between RIGGS NATIONAL BANK OF WASHINGTON,
D.C. AS TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST FORMED UNDER 12
C.F.R. SECTION 9.18 ("Landlord"), and TELCO SYSTEMS, INC., A DELAWARE
CORPORATION ("Tenant").
RECITALS:
---------
A. Landlord's predecessor-in-interest, Pactel Properties, a
California Corporation, and Tenant entered into that certain Standard Triple
Net Industrial Lease dated May 3, 1990 (the " Original Lease"), covering
certain premises consisting of approximately 62,261 rentable square feet
(the "Original Premises") located in Building 10 in the project commonly
known as Northport Business Park ("Project") and more particularly known
as 4305 Cushing Parkway, Fremont, California (the "Original Building").
B. Landlord and Tenant entered into that certain First Amendment To
Lease, dated March 31, 1995 (the "First Amendment"), covering certain Premises
consisting of approximately 85,000 rentable square feet (the "Premises")
located in a building to be constructed of approximately 115,000 rentable
square feet (the "Building"), and more particularly described in the First
Amendment.
C. Pursuant to Paragraph 29 of the First Amendment, Tenant has exercized
its Option to Expand the Premises to include the entire Building.
D. In connection with Tenant's exercize of its Option to Expand,
Landlord and Tenant desire to amend the Lease to, among other things, revise
the description of the Premises, adjust the rent, provide an additional
Tenant Improvement Allowance, and to make other related changes as provided
below.
NOW, THEREFORE, for good and adequate consideration, receipt of
which is hereby acknowledged, Landlord and Tenant hereby amend the Lease
and agree as follows:
1. DEFINED TERMS. All capitalized terms used in this Second Amendment
shall have the meanings given in the Original Lease, unless otherwise
defined in the First Amendment or herein. For purposes of this Second
Amendment, the term Lease shall be defined herein to include the Original
Lease, the First Amendment, and this Second Amendment.
2. SCHEDULE A - BASIC LEASE INFORMATION. SCHEDULE A - BASIC
LEASE INFORMATION, which is attached to the First Amendment shall be
deleted in its entirely upon the Commencement Date and replaced with the
revised SCHEDULE A - BASIC LEASE INFORMATION attached to this Second
Amendment.
3. EXHIBIT A. SITE PLAN. The Site Plan attached to the First
Amendment as Exhibit A is hereby deleted in its entirely and replaced with the
revised Site Plan attached to this Second Amendment as Exhibit A.
4. EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES. The first
sentence of Paragraph 2.1 of EXHIBIT D. INITIAL IMPROVEMENT OF PREMISES is
hereby deleted and replaced with the following: As its contribution to the
cost of Landlord's Work, Landlord shall provide to Tenant a tenant improvement
allowance of up to a maximum of $2,314,340 (based upon $20.00 per rentable
square foot as specified in the Lease) ("Tenant Improvment Allowance").
5. PARAGRAPH 47. EXPANSION OPTION/FIRST RIGHT OF REFUSAL (PRIOR
TO COMMENCEMENT DATE). Paragraph 29 of the First Amendment is hereby deleted
in its entirety.
6. PARAGRAPH 48. EXPANSION/FIRST RIGHT OF REFUSAL (AFTER COMMENCEMENT
DATE). Paragraph 30 of the First Amendment is hereby deleted in its entirety.
29
<PAGE> 30
7. AUTHORITY. This Second Amendment has been duly authorized and
executed on behalf of Tenant and Landlord and is valid, binding and
enforceable on both parties in accordance with its terms.
8. ORIGINAL LEASE. Except as amended hereby and in the First Amendment,
the terms and conditions of the Original Lease shall remain in full force and
effect in accordance with its terms.
LANDLORD:
RIGGS NATIONAL BANK OF WASHINGTON, D.C.
AS TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST,
A TRUST FORMED UNDER 12 C.F.R. SECTION 9.18
By: /s/ Judith A. Lucia
---------------------------------
Judith A. Lucia
Senior Trust Officer
TENANT:
TELCO SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ John C. Kempf
---------------------------------
John C. Kempf
Vice President - Controller
30
<PAGE> 31
SCHEDULE A
BASIC LEASE INFORMATION
-----------------------
<TABLE>
<CAPTION>
PARAGRAPH
REFERENCE
<S> <C>
Preamble LANDLORD: Riggs National Bank of Washington,
D.C. as Trustee of the Multi-Employer
Property Trust Northport Business
Park, a National Banking Association
Preamble TENANT: Telco Systems, Inc., a Delaware
Corporation
1.3 BUILDING: Building to be constructed on lots 7 and
8 of approximately 7.58 acres located on
Northport Loop East within the project
commonly known as Northport Business
Park, Fremont, California, as shown on
the site plan attached as Exhibit A,
subject to further revision.
1.4; 2.1 PREMISES: The approximately 115,717 rentable
square foot building, as shown
on the space plan attached as Exhibit B,
subject to a final set of working draw-
ings to be provided at a later date.
1.5 NET RENTABLE AREA
OF PREMISES: Approximately 115,717 rentable square
feet.
1.6 TENANT'S PERCENTAGE
SHARE: 100.00.
1.7 ESTIMATED OPERATING
EXPENSES for
calendar 1995: To be determined
ESTIMATED REAL PROPERTY
TAX for calendar 1995: To be determined
3.1 TERM: 10 years, subject to the provisions
of Paragraph 46(A). TERMINATION
OPTION.
3.1 ESTIMATED
COMMENCEMENT DATE: Eleven Months following full
execution of the First Amendment
to Lease and delivery to the parties
thereof.
3.1 ESTIMATED
EXPIRATION DATE: Ten years following the Estimated
Commencement Date referenced
above.
</TABLE>
31
<PAGE> 32
4.1 BASE MONTHLY RENT:
<TABLE>
<CAPTION>
Monthly
Month of Term Base Rent
------------- ---------
<S> <C>
1 through 36 $75,216.00
($.65 per rentable
sq. ft.)*
37 through 72 $84,242.00
($.728 per rentable
sq. ft.)*
73 through 108 $94,356.00
($.8154 per rentable
sq. ft.)*
109 through 120 $105,672.00
($.9132 per rentable
sq. ft.)*
<FN>
*Should the Net Rentable Area of Premises change,
the per rentable sq. ft. rate shall prevail to
determine a new Monthly Base Rent. Landlord
shall survey the Premises following substantial
completion thereof, using either Kier & Wright or
a surveyor reasonably approved by both parties
and, if such survey indicates that the area of
the Premises is more or less than 115,717
rentable square feet, measuring from the
mid-point of exterior walls, but including areas
below the "dripline" in the main entrance and
secondary entrance, all terms of this Lease
dependent on the area of the Premises, including
Base Monthly Rent, the tenant improvement
allowance, Security Deposit, and Tenant's
Proportionate Share shall be adjusted, which
adjustment shall be set forth in a further
amendment to the Lease.
</TABLE>
<TABLE>
<S> <C> <C>
20 SECURITY DEPOSIT: Upon substantial completion of
Landlord's Work, Tenant shall deposit
with Landlord an amount such that
the total Security Deposit shall
increase to $105,672.00.
5.1 PERMITTED USE: General office, research and develop-
ment, light assembly, engineering,
manufacturing, testing and warehousing.
5.2 CC&R's: Declaration of Covenants Running with
the Landlord, recorded July 5, 1983 as
Instrument No. 83-117850 by Cushing
Road Investors, a California limited
partnership.
Declaration of Covenants, Conditions
and Restrictions for Northport Business
Park, recorded September 1, 1983 as
Instrument No. 83-163024 by Northport
Associates, a California limited
partnership.
Declaration of Covenants, Conditions
and Restrictions for Northport Business
Park. Owner's Association recorded on
September 1, 1983 as Instrument No.
83-163025 by Northport Associates, a
California limited partnership.
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
14 TENANT'S BROKER,
IF ANY: Colliers Parrish International, Inc. and
Bishop Hawk Commercial Real Estate
Commission paid per separate agreement
22 LANDLORD'S ADDRESS
FOR NOTICES: Riggs National Bank of Wash. D.C.
c/o Trammell Crow Company
1241 East Hillsdale Blvd., Suite 200
Foster City, CA 94404
WITH COPY TO: Kennedy Associates
Real Estate Counsel, Inc.
2400 Financial Center Building
Seattle, WA 98161
Attn: STEVE ROTHERT
22 TENANT'S ADDRESS
FOR NOTICES:
prior to occupancy:
4305 Cushing Parkway
Fremont, CA 94538
after occupancy:
to the Premises
24 PARKING: 3.5 non-exclusive spaces per 1000
square feet leased.
45 EXTENSION OPTION: One 5-year option at 95% of fair market
rent with no less than 6 months prior
written notice.
46 TERMINATION OPTION: On the 84th month of the Lease with no
less than 12 months prior written notice.
47 EXPANSION FIRST RIGHT
OF REFUSAL: Deleted.
48 PURCHASE OPTION: Any time during the Lease Term with
9 months prior written notice
notwithstanding Landlord's right to
market the property for sale.
</TABLE>
33
<PAGE> 34
EXHIBIT A
SITE PLAN
34
<PAGE> 1
EXHIBIT 10.46
EMPLOYMENT AND CONSULTING AGREEMENT
-----------------------------------
This Agreement is dated as of March 15, 1995 is by and between
John A. Ruggiero of 13 Commonwealth Avenue, Boston, Massachusetts (the
"Executive") and Telco Systems, Inc., a Delaware corporation with its principal
place of business at 62 Nahatan Street, Norwood Massachusetts 02062 (the
"Company").
R E C I T A L S
- - - - - - - -
The Executive is currently employed full time as chief
executive officer of the Company. It is contemplated that the Executive will
continue to be an Executive of the Company until either the Executive, or at
any time after August 25, 1996 the Company, elects to change his relationship
to that of consultant under a consulting arrangement with the Company. The
purpose of this agreement is to formalize these relationships and to provide
for the specific terms of the Executive's employment and consulting
arrangement.
1. Continued Employment.
---------------------
The Executive shall continue to be employed on a full-time
basis until such employment is terminated pursuant to the provisions of section
2 hereof. During such employment period, the Executive shall be subject to the
supervision of, and shall have such authority as is delegated to him by, the
Company's board of directors in a manner consistent with the terms of this
agreement. The Executive agrees that during such employment he will devote his
full business time, attention and energies to the business and interests of the
Company, and will faithfully, competently and to
<PAGE> 2
the best of his skill and ability serve in such capacity or capacities as he
may occupy with the Company from time to time.
2. Termination of Employment.
--------------------------
The Executive's employment by the Company under section 1
shall continue until terminated in accordance with one of the following
provisions:
2.1 VOLUNTARY TERMINATION. The Executive may terminate his
employment hereunder at any time after December 31, 1995 by giving the Company
30 days' notice of termination. Upon the effective date of such termination,
the Executive shall become a consultant to the Company under the terms of
section 4 hereof.
2.2 TERMINATION BY THE COMPANY WITHOUT CAUSE PRIOR TO AUGUST
25, 1996. The Company may terminate the Executive's employment hereunder
without cause at any time prior to August 25, 1996, upon written notice to the
Executive, which termination shall be effective immediately or on such date as
is specified in the notice. Any material reduction in the duties or title, or
compensation and benefits, of the Executive shall be deemed to be a termination
by the Company without cause under the provisions of this section 2.2;
provided, however, that a change in office of the Executive from Chief
Executive Officer to Chairman of the Board of Directors of the Company shall
not be deemed to constitute such a termination. In the event of termination
under the provisions of this section 2.2, the Executive shall forthwith become
a consultant under the consulting arrangements described in section 4 hereof,
and the Company shall make the payments described in sections 3.3 and 4.4
hereof.
-2-
<PAGE> 3
2.3 TERMINATION BY THE COMPANY WITHOUT CAUSE ON OR AFTER
AUGUST 25, 1996. The Company may terminate the Executive's employment
hereunder without cause at any time on or after August 25, 1996 upon written
notice to the Executive, which termination shall be effective immediately or on
such date as is specified in the notice. As of the effective date of such
termination of employment, the Executive shall become a consultant to the
Company under the consulting arrangements described in section 4 hereof.
2.4 TERMINATION FOR CAUSE. The Executive's employment
hereunder may be terminated by the Company at any time for cause, effective
upon written notice thereof to the Executive. For purposes of this agreement,
the term "cause" shall have the meaning as set forth in section 3(a)(iii) of
the Senior Executive Benefits Agreement dated as of October 4, 1989 between the
Company and the Executive (the "Golden Parachute Agreement"). In the event of
termination pursuant to this section 2.4, the Company shall be under no further
obligation to the Executive, under the consulting arrangements described in
section 4 or otherwise, other than to pay the Executive his then current salary
through the effective date of such termination.
2.5 TERMINATION ON DEATH OR DISABILITY. This agreement and
the Executive's employment hereunder shall terminate on the death or disability
of the Executive. For purposes of this agreement, the term "disability" shall
mean the Executive's inability by reason of illness or other physical or other
mental disability to perform the duties required by his employment hereunder
for any consecutive period of 180 calendar days, provided that notice of
-3-
<PAGE> 4
any termination by the company because of the Executive's disability shall have
been given to the Executive prior to the full resumption by him of the
performance of such duties. In the event of termination under this section
2.5, the Company shall pay to the Executive or his estate, as the case may be,
the payments described in section 3.3 hereof and the Executive's salary and
bonus prorated through the effective date of termination of employment, in full
discharge of all of the company's further obligations to the Executive
hereunder.
2.6 CHANGE OF CONTROL. This agreement shall terminate in all
respects, and be of no further force and effect, if and at such time as the
Executive shall become entitled to severance benefits under the circumstances
and as described in section 3 of the Golden Parachute Agreement.
3. COMPENSATION AND BENEFITS RELATING TO EMPLOYMENT. The provisions of this
section 3 shall apply so long as the Executive continues to be employed
pursuant to section 1 hereof.
3.1 SALARY AND BONUS. During such employment, the Executive
shall be entitled to a salary at an annual rate fixed by the Company's board of
directors, but not less than the rate in effect as of the date of this
agreement. The Executive shall during such period be entitled to full
participation in the Company's Management Incentive Plan, and pro rata
participation in such Plan for any partial year in the event that his
employment terminates during a Company fiscal year.
3.2 BENEFITS. During the period of his employment under
section 1 hereof, the Executive shall be entitled to all executive
-4-
<PAGE> 5
fringe benefits to which he is presently entitled, subject only to such changes
in such benefits as shall affect all senior executives of the Company.
3.3 SEVERANCE PAY. In the event that the Executive's
employment by the Company pursuant to section 1 is terminated by the Company
under section 2.2 or terminates under section 2.5 hereof, the Company shall pay
the Executive a severance amount equal to 1.5 times his annual salary as then
in effect, payable in equal installments bi-weekly over the one-year period
commencing with the date of termination of such employment. Such payment shall
be made notwithstanding that the Executive shall in the event of termination
under section 2.2 be concurrently being paid as a consultant under section 4
hereof.
4. CONSULTING SERVICES. The provisions of this section 4 shall apply in the
event that the Executive becomes a consultant to the Company upon termination
of his employment under section 2.1, 2.2 or 2.3 hereof.
4.1 DESCRIPTION OF SERVICES DURING FIRST YEAR. During the
first full year of the consulting period, commencing on the date of termination
of Executive's employment under section 1 hereof, the Executive shall perform
such services as shall be assigned to him by the board of directors or chief
executive officer of the Company, including without limitation performing the
duties of chief financial officer of the Company and services involving
shareholder relations and strategic planning. Such services shall be performed
at such times and places, within or outside the United States, and in such a
manner, as shall be reasonably re-
-5-
<PAGE> 6
quested by the Company; provided, however, that the Executive shall not be
required to devote more than one-half of his business time (an average of 20
hours per week) in performing consulting services during such first year.
4.2 DESCRIPTION OF SERVICES DURING SECOND YEAR. During the
second full year of the Executive's consulting services hereunder, he shall
perform such consulting and advisory services, at such times and places, as the
Executive and the Company, acting through its chief executive officer, shall
mutually agree.
4.3 ADDITIONAL CONSULTING PERIODS. The Executive shall
continue to perform consulting services for consecutive one-year periods after
the end of the second year of such services unless not less than thirty days
prior to the end of a consulting year one party shall give the other written
notice of the termination of such consulting services at the end of such
consulting year. During any such consulting year subsequent to the second
year, the Executive shall perform services on the same basis as was applicable
to the second consulting year.
4.4 COMPENSATION. As full compensation for consulting
services under sections 4.1 through 4.3 hereof, the Company shall pay the
Executive a fee for each full year of such services equal to (a) one-half of
his annual salary as of the date of the termination of his employment under
section 1 hereof, plus (b) except with respect to consulting services resulting
from the Executive's voluntary termination under section 2.1 hereof, an amount
equal to one-quarter of the Executive's target annual bonus payable under the
Company's Management Incentive Compensation Plan with respect
-6-
<PAGE> 7
to the year during which the Executive's employment terminated and his
consulting services commenced. Such annual fee shall be prorated for any
portion of a full year during which such consulting services are rendered. All
fees shall be payable in equal monthly installments in arrears. The fees
provided for in this section 4.4 shall be payable notwithstanding that the
Executive may perform no services whatsoever on behalf of the Company during a
payment period.
4.5 BENEFITS. During the period that the Executive is acting
as a consultant under this section 4, he shall receive at no cost to him the
benefits to which he is entitled pursuant to section 3.2 hereof, subject only
to such changes in such benefits as shall affect all senior executives of the
Company.
4.6 EXPENSES. The Company shall reimburse the Executive for
all reasonable out-of-pocket expenses incurred in performing consulting
services hereunder, including reasonable travel expenses. Reimbursement by the
Company as aforesaid shall occur upon submission to the Company by the
Executive of an itemized account thereof in reasonable detail.
4.7 NO AGENCY. In performing services hereunder the
Executive shall be an independent contractor and shall have no power or
authority to bind the Company or create any obligation or responsibility,
express or implied, in the name or on behalf of the Company.
4.8 STOCK OPTIONS. Each outstanding stock option held by the
Executive at the commencement of his consulting pursuant to this section 4, and
each option granted to the Executive during
-7-
<PAGE> 8
his performance of consulting services hereunder, shall continue to vest during
the period of his consulting services hereunder, and shall remain exercisable
until 30 days after the date of termination of such consulting services.
4.9 SERVICES AS A DIRECTOR. In the event and to the extent
that the Executive continues to act as a director of the Company while he is
performing consulting services under this section 4, he shall receive such fees
for services as a director as are paid to the Company's outside directors,
without any reduction of or offset to the consulting fees payable pursuant to
section 4.4 hereof.
4.10 EFFECT OF SUBSEQUENT EMPLOYMENT. In the event that the
Executive obtains full-time employment at any time during the first two years
of his consulting services hereunder, the Company shall pay the Executive an
amount equal to one-half of the aggregate consulting fees payable with respect
to the balance of such two-year period, in a single payment, and the
Executive's consulting services under this section 4 shall forthwith terminate
and neither party shall have any further obligation to the other with respect
thereto.
4.11 ILLNESS, INCAPACITY OR DEATH OF THE EXECUTIVE. In the
event that during a first two years of his consulting services hereunder, the
Executive dies or is unable to perform his services by reason of disability (as
defined in section 2.5 hereof), the Company shall continue to make payments
pursuant to section 4.4 hereof to the Executive or his estate, as the case may
be, for the balance of such two-year period.
-8-
<PAGE> 9
5. Miscellaneous.
--------------
5.1 INVALIDITY. The invalidity or unenforceability of any
provision of this agreement shall not affect the validity or enforceability of
any other provision hereof.
5.2 ENTIRE AGREEMENT. This agreement supersedes all prior
agreements, written or oral between the Executive and the Company relating the
subject matter of this agreement; provided, however, that the Golden Parachute
Agreement and the Executive's Invention, Non-disclosure and Non-competition
Agreement with the Company shall each remain in full force and effect. It is
acknowledged and agreed that the Golden Parachute Agreement shall terminate in
all respects on termination of the Executive's employment under section 1 of
this agreement.
5.3 AMENDMENTS. This agreement may not be amended or
discharged in any respect except by a writing executed by the Executive and on
behalf of the Company.
5.4 SUCCESSORS AND ASSIGNS. This agreement shall be binding
upon and inure to the benefit of the successors, assigns, executors,
administrators and personal representatives of the parties hereto.
5.5 GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of Massachusetts.
5.6 NOTICES. For purposes of this agreement, all notices and
other communications provided for herein shall be in writing and shall be
deemed been duly given when delivered, or mailed by certified mail, return
receipt requested, postage prepaid, ad-
-9-
<PAGE> 10
dressed to a party at his or its addresses as set forth on the first page of
this agreement, or to such other address that either party may furnish to the
other in accordance herewith.
5.7 WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by such other party.
5.8 BONUSES. Nothing contained in this agreement shall be
construed to prevent the Company from paying the Executive compensation in
addition to that provided for herein, in the form of bonuses or otherwise, in
the event that the board of directors of the Company shall deem it advisable to
pay such compensation. Nothing contained in this agreement shall, however, be
construed to obligate the Company to pay any such additional compensation.
IN WITNESS WHEREOF, the Executive has executed this agreement,
and the Company has caused this agreement to be executed by a duly authorized
officer, as of the date first above written.
TELCO SYSTEMS, INC.
By /S/ Dean C. Campbell
---------------------
Chairman of the Compensation
Committee,
Duly Authorized
/S/ John A. Ruggiero
-----------------------
John A. Ruggiero
-10-
<PAGE> 1
EXHIBIT 10.47
TELCO SYSTEMS, INC.
63 NAHATAN STREET
NORWOOD, MASSACHUSETTS 02062
February 2, 1995
Dr. William Smith
Boulder, Colorado
Dear Will:
This letter will set forth the agreed terms of your employment by the
Company:
POSITION President and Chief Operating Officer.
EFFECTIVE DATE February 2, 1995
EMPLOYMENT
COMMENCEMENT DATE March 6, 1995.
SALARY RATE $230,000 per annum.
MIPS 60% of salary, with a guaranteed minimum of $50,000 for
FY '95.
STOCK OPTIONS 100,000 shares, exercise price equal to market value at
date of issue, four-year vesting.
FRINGE BENEFITS Standard benefits presently available to the current
president, including health, dental and life insurance.
CHANGE OF CONTROL Separate contract providing for lump sum payment equal
to 1.5X annual salary plus latest bonus if change of
control is followed by termination or demotion;
form of contract substantially the same as that of the
current president with changes to reflect changes in
the law since 1989.
RELOCATION Standard relocation allowance and home sale/purchase
assistance (or special terms as agreed between you and
the Company).
<PAGE> 2
Dr. William Smith
February 2, 1995
Page 2
SEVERANCE If you are not appointed CEO by 3/1/96 and voluntarily
terminate by 5/31/96, total severance payments equal to
$345,000 payable in equal monthly installments over two years
from termination date.
If you are not appointed CEO by 3/1/96 and have not tendered
your resignation prior to 5/31/96, no contractual severance
payment.
If you are appointed CEO by 3/1/96 or are terminated at any
time for cause, no contractual severance payment.
If you terminate your employment voluntarily at any time
(except during the three-month period referred to above), no
contractual severance payment.
If you become employed during a severance payment period, you
will receive a lump-sum payment equal to one-half of the
Company's remaining severance obligations in full discharge
of all such remaining obligations.
We are all delighted that you have accepted this offer. If the above
accurately describes your understanding of your employment terms, please sign
and return the enclosed copy of this letter.
Very truly yours,
TELCO SYSTEMS, INC.
By /S/ John A. Ruggiero
-----------------------
John A. Ruggiero, CEO
Accepted and agreed to:
/S/ William B. Smith
- ----------------------
William Smith
<PAGE> 1
EXHIBIT 10.48
SENIOR EXECUTIVE TERMINATION BENEFITS AGREEMENT
AGREEMENT, dated as of March 6, 1995 between TELCO SYSTEMS,
INC., a Delaware corporation (the "Company"), and William B. Smith (the
"Executive").
R E C I T A L S
----------------
A. The Company considers it essential to the best interests
of the Company and its stockholders that its management be encouraged to remain
with the Company and to continue to devote full attention to the Company's
business in the event that an effort is made to obtain control of the Company
through a tender offer or otherwise. In this connection, the Company
recognizes that the possibility of a change in control and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of management personnel to the detriment of the Company and its
stockholders. Accordingly, the Company's board of directors (the "Board") has
determined that appropriate steps should be taken to reinforce and encourage
the continued attention and dedication of members of the Company's management
to their assigned duties without distraction in the fact of the potentially
disturbing circumstances arising from the possibility of a change in control of
the Company.
B. The Executive is a key executive of the Company, and the
Company believes that the Executive has made valuable contributions to the
productivity and profitability of the Company.
C. In the event that the Company receives any proposal from a
third person concerning a possible business combination with,
<PAGE> 2
or acquisition of equity securities of, the Company, the Board believes it
imperative that the Company and the Board be able to rely upon the Executive to
continue in his position and that the Company be able to receive and rely upon
his advice, if so requested, as to the best interests of the Company and its
stockholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal.
D. Should the Company receive any such proposal, in addition
to the Executive's regular duties, he may be called upon to assist in the
assessment of such proposals, advise management and the Board as to whether
such proposals would be in the best interests of the Company and its
stockholders, and to take such other actions as the Board might determine to be
appropri- ate.
NOW, THEREFORE, to assure the Company that it will have the
continued undivided attention and services of the Executive and the
availability of his advice and counsel notwith- standing the possibility,
threat or occurrence of a bid to take over control of the Company, and to
induce the Executive to remain in the employ of the Company, and for other good
and valuable consideration, the Company and the Executive agree as follows:
1. SERVICES DURING CERTAIN EVENTS
------------------------------
In the event that a third person begins a tender or exchange
offer, circulates a proxy to stockholders, or takes other steps seeking to
effect a Change in Control (as hereafter defined), the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render the
services contemplated in the recitals to this Agreement, until the third person
has abandoned
-2-
<PAGE> 3
or terminated his or its efforts to effect a Change in Control or until after
such a Change in Control has been effected.
2. CHANGE IN CONTROL
-----------------
For purposes of this Agreement, a Change in Control of the
Company shall be deemed to have taken place if: (a) a third person, including
a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934, becomes the beneficial owner of shares of any class of the Company's
stock having 40% or more of the total number of votes that may be cast for the
election of directors of the Company; or (b) the stockholders of the Company
approve a definitive agreement for the sale or other disposition of all or
substantially all of the assets of the Company, the merger or other business
combination of the Company with or into another corporation pursuant to which
the Company will not survive or will survive only as a subsidiary of another
corporation, in either case with the stockholders of the Company prior to the
merger or other business combination holding less than 50% of the voting shares
of the merged or combined companies after such merger or other business
combination, or any combination of the foregoing.
3. CIRCUMSTANCES TRIGGERING RECEIPT OF SEVERANCE BENEFITS
------------------------------------------------------
(a) The Company shall provide the Executive with the benefits
set forth in Sections 5 and 6 upon any termination of the Executive's
employment by the Company within three years following a Change in Control for
any reason except the following:
(i) Termination by reason of the Executive's death,
provided the Executive has not previously given a
valid
-3-
<PAGE> 4
Notice of Termination (as defined in Section 4)
pursuant to Subsection 3(b);
(ii) Termination by reason of the Executive's disability.
For the purposes hereof, "disability" shall be defined
as the Executive's inability by reason of illness or
other physical or mental disability to perform the
duties required by his employment for any consecutive
period of 180 calendar days, provided that notice of
any termination by the Company because of the
Executive's disability shall have been given to the
Execu- tive prior to the full resumption by him of the
performance of such duties;
(iii) Termination for cause. For the purposes hereof,
"cause" shall be defined as the willful and continued
failure of the Executive to perform substantially
his duties or action by the Executive involving
willful misfea- sance, gross negligence or the
commission of any felonious action; provided,
however, that termination for cause based on the
Executive's willful and continued failure to
substantially perform his duties shall not be
effective unless the Executive shall have received
written notice from the Board of such failure
(specifying in detail the facts and circumstances on
which the Board is relying) and a demand for
substantial performance 30 days prior to such
termination and the Board determines that the Execu-
-4-
<PAGE> 5
tive shall have failed during such 30-day period to
resume the diligent performance of his duties.
(b) The Company shall also provide the Executive with the
benefits set forth in Sections 5 and 6 upon any termination of the Executive's
employment with the Company at the option of the Executive within three years
after a Change in Control followed by the occurrence of any one of the
following events:
(i) Without the express written consent of the Executive,
the assignment of the Executive to any duties
substantially inconsistent with his positions, duties,
responsibilities or status with the Company
immediately prior to the Change in Control, a
substantial reduction of his duties or responsi-
bilities or assignment of the Executive to a business
location more than 20 miles from the regular business
location of the Executive prior to the Change in
Control, in each case as determined in good faith by
the Executive;
(ii) A reduction by the Company in the amount of the
Executive's salary as compared to that which was paid
immediately prior to the Change in Control, or any
failure to maintain or provide benefit plans covering
the Executive providing benefits at least equal to the
level of benefits paid or available to the Executive
under the Company's benefit plans immediately prior
to the Change in Control;
-5-
<PAGE> 6
(iii) The failure of the Company to obtain the assumption of
the obligation to perform this Agreement by any
successor as required by Section 11;
(iv) The failure by the Company or its stockholders, as the
case may be, to re-elect the Executive to a corporate
office held by him immediately prior to the Change in
Control or his removal from any such office including
any seat held at such time on the Board; or
(v) Any material breach by the Company of any of the
provisions of this Agreement or any material failure
by the Company to carry out any of its obligations
hereunder.
4. NOTICE OF TERMINATION
---------------------
Any termination of the Executive's employment with the Company
by the Company as contemplated by Subsection 3(a) or by the Executive as
contemplated by Subsection 3(b) shall be communicated by written Notice of
Termination to the other party. Any Notice of Termination given by the
Executive pursuant to Subsection 3(b) or given by the Company in connection
with a termination as to which the Company believes it is not obligated to
provide the Executive with the benefits set forth herein shall set forth the
effective date of termination (the "Termination Date"), the specific provision
in this Agreement relied upon and, in reasonable detail, the facts and
circumstances claimed to provide a basis for such termination.
-6-
<PAGE> 7
5. TERMINATION BENEFITS
--------------------
Subject to the conditions set forth in Sections 3 and 10, the
following benefits (subject to any applicable payroll or similar taxes required
to be withheld) shall be paid in a lump sum, or in the case of fringe benefits
shall continue to be provided, to the Executive:
(A) COMPENSATION
------------
The sum of (i) one and one-half times the Executive's
effective annual base salary as of the Termination Date plus (ii) an amount
equal to the highest annual bonus paid or payable under the Company's
Management Incentive Compensation Plan, or otherwise paid or payable to the
Executive by the Company as a bonus, with respect to any consecutive 12-month
period during the three years prior to the Termination Date.
(B) INSURANCE BENEFITS, ETC.
------------------------
The Executive's participation (including dependent
coverage) in the life, accident, disability, health and dental insurance plans,
vision care plans, and any other fringe benefits of the Company in effect
immediately prior to the Change in Control (including, but not limited to, tax
preparation service and financial planning service) shall be continued, or
equivalent benefits provided, by the Company, at no cost to the Executive, for
a period of 18 months commencing on the Termination Date.
(C) COMPANY AUTOMOBILE
------------------
The Executive shall be entitled to purchase, within 30
days after the Termination Date, the Company-owned automobile assigned to the
Executive for a purchase price equal to the
-7-
<PAGE> 8
projected book value of the vehicle as of the end of three years from the date
of its acquisition by the Company. If this option is not exercised, such
automobile shall be returned to the company at the end of such 30-day period.
6. STOCK OPTIONS
-------------
In the event of a Change in Control, each outstanding option
held by the Executive pursuant to any stock option plan of the Company shall,
without further action by the Company, accelerate and become immediately
exercisable in full not later than 15 days prior to the effective date of such
Change in Control, and shall remain exercisable until 15 days after such
effective date, without regard to the terms of the plan or of any such stock
option requiring the passage of time as a condition precedent to the right to
the exercise of the option to purchase a portion of the optioned shares. Other
terms and conditions of the applicable stock option agreements shall not be
affected by such acceleration.
7. "GROSS-UP" FOR EXCISE OR SURTAX PAYABLE
---------------------------------------
In the event that the aggregate of the payments to be made to
the Executive, and the compensation deemed to be received by the Executive,
pursuant to or by reason of the provisions of Sections 5 and 6 of this
Agreement give rise to any excise tax or surtax payable by the Executive
pursuant to Sections 280G or 4999 of the Internal Revenue Code of 1986 or any
similar federal tax law, the Company shall pay an additional amount to the
Executive so that, after payment or provision for payment of such excise tax or
surtax, the net amount realized by the Executive shall
-8-
<PAGE> 9
equal the aggregate amount payable or deemed to have been received by the
Executive under Sections 5 and 6 without regard to such excise tax or surtax.
8. EFFECT OF SUBSEQUENT EMPLOYMENT
-------------------------------
None of the benefits provided for or payable pursuant to this
Agreement shall be affected or reduced in the event that the Executive obtains
other employment after the Termination Date.
9. CONTINUING OBLIGATIONS
----------------------
In order to induce the Company to enter into this Agreement,
the Executive hereby ratifies and confirms his Invention, NonDisclosure and
Non-Competition Agreement with the Company. Without limiting the generality of
the foregoing, the Executive agrees that all documents, records, techniques,
business secrets and other information which have come into his possession from
time to time during his employment hereunder shall be deemed to be confidential
and proprietary to the Company and that he shall retain in confidence any
confidential information known to him concerning the Company and its
subsidiaries and their respective businesses so long as such information is not
publicly disclosed.
10. SUCCESSORS
----------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent that
Company would be required to perform it if no such transaction had taken place.
-9-
<PAGE> 10
Failure of the Company to obtain such agreement prior to the effective date of
any such transaction shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if he were to terminate his
employment pursuant to Subsection 3(b), except that for purposes of
implementing the foregoing, the date on which any such transaction becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as defined herein and any successor to its
business and/or assets as aforesaid which executes and delivers the agreement
provided for in this Section 10 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are payable to him hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to his designee or, if there be no such designee, to
his estate.
11. NOTICES
-------
For the purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
-10-
<PAGE> 11
If to the Executive: Dr. William B. Smith
1875 Deer Valley Road
Boulder, CO 80303
If to the Company: Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
Attention: Secretary
or to such other address as either party may have furnished to the other in
accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12. GOVERNING LAW
-------------
The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Delaware.
13. ARBITRATION
-----------
Any controversy or claim arising out of or relating to this
Agreement or the breach thereof shall be settled by arbitration to be conducted
in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators shall award costs and reasonable fees of counsel to the Executive
if the arbitrators consider the Executive to be the prevailing party in any
such arbitration proceeding.
14. MISCELLANEOUS
-------------
No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and on behalf of the Company. No waiver by
either party hereto of, or compliance
-11-
<PAGE> 12
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of the same or any other provisions or
conditions at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not set forth expressly in this
Agreement.
15. SEPARABILITY
------------
The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, all of which shall remain in full force and
effect.
16. NON-ASSIGNABILITY
-----------------
This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except as provided in Section
10. Without limiting the foregoing, the Executive's right to receive payments
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than to a person or persons
designated in writing by the Executive or a transfer by his will or by the laws
of descent or distribution, and in the event of any attempted assignment or
transfer contrary to this Section the Company shall have no liability to pay
any amount so attempted to be assigned or transferred.
-12-
<PAGE> 13
17. TERMINATION
-----------
The Company may terminate this Agreement at any time by 30
days' written notice of such termination given to the Executive; EXCEPT THAT
such termination shall not be made, and if made shall have no effect, (a)
within three years after the Change in Control in question or (b) during any
period of time when the Company has knowledge that any third person has taken
steps reasonably calculated to effect a Change in Control until, in the opinion
of the Board, the third person has abandoned or terminated his efforts to
effect a Change in Control. Any decision by the Board that the third person
has abandoned or terminated his efforts to effect a change in control shall be
conclusive and binding on the Executive.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered as of the day and year first above set forth.
TELCO SYSTEMS, INC.
By /S/John A. Ruggiero
--------------------
Chief Executive Officer
/S/William B. Smith
---------------------
William B. Smith
-13-
<PAGE> 1
<TABLE>
TELCO SYSTEMS, INC.
Subsidiaries of the Registrant
<CAPTION>
NAME JURISDICTION INCORPORATED
-------------- -------------------------
<S> <C>
Telco Security Corporation Massachusetts
Telco Systems, Ltd. United Kingdom
Telco Systems Asia/Pacific Hong Kong
TSI Exports, Ltd. Barbados
Telco Indemnity, Ltd. Bermuda
</TABLE>
Exhibit 22.1
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the registration
Statements pertaining to the Telco Systems, Inc. 1983 Employee Stock Purchase
Plan (Form S-8 No. 33-26976); the Telco Systems, Inc. 1980 Stock Option Plan
(Form S-8 Nos. 2- 94474, 33-2024 and 33-10548); the Telco Systems, Inc.
1988 Non-Statutory Stock Option Plan (Form S-8 No. 33-28295) and the 1990
Stock Option Plan (Form S-8 No. 33-42751) of our report dated October 12,
1995, with respect to the consolidated financial statements and schedules of
Telco Systems, Inc. included in the Annual Report (Form 10-k) for the year
ended August 27, 1995.
ERNST & YOUNG LLP
Boston, Massachusetts
November 16, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-27-1995
<PERIOD-END> AUG-27-1995
<CASH> 18,208
<SECURITIES> 10,895
<RECEIVABLES> 10,047
<ALLOWANCES> 649
<INVENTORY> 18,473
<CURRENT-ASSETS> 61,459
<PP&E> 41,720
<DEPRECIATION> 31,114
<TOTAL-ASSETS> 82,439
<CURRENT-LIABILITIES> 11,544
<BONDS> 0
<COMMON> 102
0
0
<OTHER-SE> 67,303
<TOTAL-LIABILITY-AND-EQUITY> 85,164
<SALES> 89,070
<TOTAL-REVENUES> 89,070
<CGS> 48,559
<TOTAL-COSTS> 88,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 628
<INCOME-TAX> 0
<INCOME-CONTINUING> 628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 628
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
